<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ARTIFICIAL LIFE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7372 04-3253298
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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FOUR COPLEY PLACE, SUITE 102
BOSTON, MASSACHUSETTS 02116
(617) 266-5542
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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EBERHARD SCHONEBURG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ARTIFICIAL LIFE, INC.
FOUR COPLEY PLACE, SUITE 102
BOSTON, MASSACHUSETTS 02116
(617) 266-5542
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPIES TO:
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ROBERT DUGGAN, ESQ. PAUL BERKOWITZ, ESQ.
PETER S. LAWRENCE, ESQ. LISA CARSTARPHEN, ESQ.
MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C. GREENBERG TRAURIG, P.A.
ONE FINANCIAL CENTER 1221 BRICKELL AVENUE
BOSTON, MASSACHUSETTS 02111 MIAMI, FLORIDA 33131
(617) 542-6000 (305) 579-0500
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED SHARE(2) PRICE(2)
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Common Stock, $.01 par value per share... 1,840,000(1) $7.00 $12,880,000
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Warrant to be issued to the Representatives of the
Underwriters upon consummation of the
Offering................ 1 -- $100
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Common Stock, $.01 par value per share(3)... 184,000 $8.40 $1,545,600
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AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTRATION FEE
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<S> <C>
Common Stock, $.01 par value per share... $3,799.60
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Warrant to be issued to the Representatives of the
Underwriters upon consummation of the
Offering................ $.03
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Common Stock, $.01 par value per share(3)... $455.95
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(1) Includes 240,000 shares that the Underwriters may purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
(3) Represents total number of shares of Common Stock issuable upon exercise of
the Warrant to be issued to the Representatives of the Underwriters.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED , 1998
PROSPECTUS
1,600,000 SHARES
[ARTIFICIAL LIFE LOGO]
ARTIFICIAL LIFE, INC.
COMMON STOCK
Of the 1,600,000 shares of Common Stock offered hereby, 1,200,000 shares
are being sold by Artificial Life, Inc. ("Artificial Life" or the "Company") and
400,000 shares are being sold by the Selling Stockholder. See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from the
sale of shares by the Selling Stockholder.
Prior to this Offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $6.00 and $7.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price.
The Company has applied for listing of the Common Stock on the Nasdaq
SmallCap Market under the symbol "ALIF."
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THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER
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Per Share............................... $ $ $ $
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Total(3)................................ $ $ $ $
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(1) Does not include additional compensation to New York Broker, Inc. and New
York Broker Deutschland AG (the "Representatives") of (a) a non-accountable
expense allowance equal to 3% of the gross proceeds of the Offering and (b)
warrants entitling the Representatives to purchase up to 160,000 shares of
Common Stock (the "Representatives' Warrants") for a period of four years
commencing one year from the date of this Prospectus at 120% of the initial
public offering price. In addition, the Company and the Selling Stockholder
have agreed to indemnify the Underwriter against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,200,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 240,000 additional shares of Common Stock solely to cover
over-allotments, if any. To the extent the option is exercised, the
Underwriters will offer the shares at the Price to Public shown above. If
all such shares are purchased, the total Price to Public, Underwriting
Discount, and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
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The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1998, at the office of New York Broker,
Inc. in Fairfax, Virginia.
NEW YORK BROKER, INC. NEW YORK BROKER DEUTSCHLAND AG
(International Manager)
The date of this Prospectus is , 1998
<PAGE> 3
GRAPHIC DESCRIPTION:
[Graphical representation of Artificial Life, Inc.'s products, applications and
user interfaces. Graph shows in a circular manner the core software technology
in the center with the software robot products (SmartBots) emanating from the
center. On the outer edge of the circle are the primary applications of the
Company's software robot products. Outside of the circle are pictures of the
Avatars, the life-like three-dimensional graphical interfaces through which most
of the SmartBots communicate with the user.]
Artificial Life, Inc. is developing software robots. The Company designs
intelligent software robots for commercial use on the Internet. These robots are
each based on the Company's Alife-SmartEngine technology.
The Alife-SmartEngine provides the bots with language understanding
capabilities. The Alife family of intelligent bots currently developed consists
of seven basic software robots.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF
THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET INCLUDING OVER-ALLOTMENT, STABILIZING AND
SHORT-COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SEE "UNDERWRITING."
The Company claims a trademark on Artificial Life(TM) ALife(TM),
ALife-WebGuide(TM), ALife-SalesRep(TM), ALife-Messenger(TM),
ALife-Portfolio-Manager(TM), ALife-Call-Center-Agent(TM),
ALife-Knowledge-Manager(TM), ALife-Personal-Tutor(TM), ALife-SmartEngine(TM),
SmartEngine(TM), SmartBot(TM), and the Company's logo. All other trade names,
trademarks or servicemarks appearing in this prospectus are the property of
their respective owners and are not the property of the Company.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Financial Statements,
including the Notes thereto, appearing elsewhere in this Prospectus. Except as
otherwise noted herein, all information in this Prospectus (i) reflects the
adoption of the Restated Certificate of Incorporation of the Company (the
"Certificate of Incorporation"), to be effected upon consummation of the
Offering, removing the Company's existing class of Non-Voting Common Stock,
increasing the authorized Common Stock to 30,000,000 shares and creating and
authorizing 5,000,000 shares of undesignated Preferred Stock, (ii) reflects the
amendment of the Company's Bylaws effective upon consummation of the Offering,
(iii) reflects a 1-for-2.44 reverse stock split of the Common Stock of the
Company effected on September 22, 1998, and (iv) assumes no exercise of the
Underwriters' over-allotment option.
THE COMPANY
Artificial Life, Inc. ("Artificial Life" or the "Company") develops,
markets and supports "intelligent" software robots ("bots"). The Company's bots,
known as "SmartBots," are software programs that the Company is developing to
automate and simplify time-consuming and complex business-related Internet
functions such as Web navigation, direct marketing, user profiling, information
gathering, messaging, knowledge management, sales response and call center
automation. The Company is also developing applications in data mining, Web-page
analysis, statistical analysis and direct marketing to support the functionality
of the SmartBot products. While each Artificial Life SmartBot can function
independently and is programmed for a particular application, customers can
combine the SmartBots to create what the Company believes is the industry's
first integrated commercial, robot-based electronic commerce ("e-commerce")
solution.
The rapidly increasing number of Web users and ubiquitous access to the
Internet, both in the United States and internationally, have resulted in the
emergence of the Internet as a new mass medium through which persons and
entities gather information, communicate, market and sell products and services,
interact and seek entertainment. However, the Company believes that the
Internet's success has also made it increasingly difficult for Internet users to
search for and locate information relevant to their interests and for companies
engaged in selling goods and services over the Internet to effectively market
and support their products and services. Artificial Life is developing its
family of SmartBot products to help address these needs.
The Company's SmartBot products are designed to communicate in natural
language and to respond "intelligently" to a user's command or inquiry, and in
some cases, to act autonomously. All of the Company's SmartBot products are
based on the Company's Alife-SmartEngine technology. The Alife-SmartEngine is
the core component that gives the Company's products the ability to converse
with its users in natural language, either by text or speech, and also to
process and respond to natural language commands or questions. The Company
believes that its products will allow people to interact with computers in a
more natural way -- similar to a conversation with a human being.
The Company believes that "intelligent" software products represent an
emerging standard in the way individuals and businesses will retrieve, present
and manipulate information on the Internet. The advent of graphical user
interfaces and window-based operating systems created a new personal computing
standard and led to significantly increased computer use because they made
computers easier to use. Users no longer had to engage in the time consuming
task of learning and accurately executing textual operating commands. Instead, a
generation of computer users operated their computers by pointing and clicking
with a "mouse." The Company believes that the introduction and adoption of
"intelligent" software programs like its SmartBots will make the Internet easier
to use through natural language communication and by freeing users from much of
the time needed to manually search for data on the Internet and then to
manipulate such data for the user's desired purpose.
3
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The Company released its first SmartBot product, the non-commercial version
of the Alife-WebGuide, in September 1998. To date, the Company has not sold any
SmartBot products but expects to commence sale of the commercial versions of the
Alife-WebGuide in the fourth quarter of 1998. The Company is presently
developing the initial versions of seven SmartBot products listed below:
- ALIFE-WEBGUIDE: This SmartBot is designed to reside on a Web site and
help users navigate the site by accepting and processing questions, such
as search queries, from users in natural language, and responding to
users in natural language. The bot engages the user in a "conversation"
through questions and answers and, upon learning of the user's interests,
is designed to display Web pages that match the content of the
"conversation" or to suggest links to other locations on the Web site.
- ALIFE-SALESREP: The Alife-SalesRep is being designed for e-commerce
retailers to use for one-to-one marketing on the Internet. Retailers will
input user profile information and product information into this
SmartBot's Knowledge Bases to deliver customer-specific, targeted sales
information via the Internet.
- ALIFE-MESSENGER: The Alife-Messenger is being designed to act as a
natural language-based automated e-mail reply and answering service. By
customizing the Alife-Messenger, a company can automate replies to
incoming e-mail queries and customer requests, thereby reducing the need
for human intermediaries.
- ALIFE-PORTFOLIO-MANAGER: This SmartBot is being developed to monitor, in
real-time, an individual's investment portfolio using criteria
established by the individual and, when such criteria have been met, or
failed to have been met, to autonomously in real-time contact the
individual by telephone, pager, e-mail or some other mode of
communication and let the individual know that trading action might be
warranted.
- ALIFE-CALL-CENTER-AGENT: The Alife-Call-Center-Agent is being designed
for call centers and help desks to be integrated with existing call
center server software to provide an automated first response to incoming
voice telephone calls or e-mail requests and to handle call center
requirements with virtually no aid from human operators.
- ALIFE-KNOWLEDGE-MANAGER: This SmartBot is being designed to extract
information contained in a company's Intranet documents, organize it and
make it more easily accessible for retrieval in order to enable companies
to more efficiently and intelligently manage the large amount of data and
documents that companies are making available on their Intranets.
- ALIFE-PERSONAL-TUTOR: The Alife-Personal-Tutor is a tutoring program
being designed to extract profile information from natural language
conversation between the bot and the student user and to automatically
adapt the difficulty and content of the lessons to the skill level of the
student based on this information.
The Company plans to offer a fully-functional "Personal" version of most of
its products to non-commercial users either free or at a low price. The Company
believes that this approach, which has been used successfully by other Internet
companies, will result in more rapid acceptance and sales of the Company's
products to commercial users. The commercial versions of the SmartBot will
include a "Professional" version for professional and small corporate users
and/or a transaction and client/server based "Enterprise" version for networked
corporate users. For the commercial versions of its SmartBot products, the
Company intends to charge a one-time licensing fee and, with respect to the
"Enterprise" version, intends to also charge a transactional fee based upon the
number of users which interact with its bots. The Company develops its SmartBot
products on widely available standard hardware and software platforms such as
Windows NT/95/98 and Internet browsers such as the Netscape
Navigator/Communicator and Microsoft Internet Explorer. The Company also expects
to offer some of the products for Unix and Macintosh computers in the
4
<PAGE> 6
future. The Company intends to release the commercial versions of the
Alife-WebGuide in the fourth quarter of 1998 and a number of its other SmartBot
products in 1999. See "Business -- Products."
The Company was incorporated in Delaware in November 1994 as Neurotec
International Corp., a wholly-owned subsidiary of Neurotec Hochtechnologie GmbH
("Neurotec GmbH"), a German multimedia and Internet solutions company owned by
Eberhard Schoneburg, Artificial Life's President, Chief Executive Officer and
Chairman, and two corporate investors: a major German retailer and an industrial
conglomerate. In July 1997, Mr. Schoneburg sold all of his shares of Neurotec
GmbH to the two remaining stockholders and contemporaneously purchased 100% of
the shares of Neurotec International Corp. from Neurotec GmbH. In August 1997,
the Company's name was changed to Artificial Life, Inc. The Company's principal
executive offices are located at Four Copley Place, Suite 102, Boston,
Massachusetts, 02116 and its telephone number is (617) 266-5542. The Company's
World Wide Web address is http://www.artificial-life.com. Information contained
on the Company's Web site shall not be deemed to be a part of this Prospectus.
RISK FACTORS
Through July 1997, the date on which Eberhard Schoneburg, the Company's
President, Chief Executive Officer and Chairman, purchased the Company from its
former German parent, the Company had engaged primarily in the provision of
software consulting services to such parent. Thereafter, the Company changed its
primary business focus from software consulting to the development, marketing
and sale of its Alife suite of SmartBot software products. Accordingly, the
Company is at an early stage of development in its new business strategy and is
therefore subject to a number of the risks inherent in establishing a new
business. Moreover, the market for "intelligent" agent-based software products
for Internet-related use is new and emerging, is rapidly evolving, has an
increasing number of entrants and will be subject to frequent and continuing
changes in technology and customer preference. To date, the Company has not sold
any of its SmartBot software products. For these reasons, the Company has no
basis to predict whether its products will perform as intended or whether
customers will accept and adopt its products in commercially significant
numbers. The Company may never sell sufficient numbers of its products to
achieve or maintain profitability. Therefore, an investment in the Company's
stock is highly speculative and subject to risk of loss. See "Risk Factors"
beginning on page 7.
5
<PAGE> 7
THE OFFERING
Common Stock offered by the Company... 1,200,000 shares
Common Stock offered by the Selling
Stockholder......................... 400,000 shares
Common Stock to be outstanding after
the Offering.......................... 9,070,574 shares(1)
Use of proceeds....................... The Company intends to use the net
proceeds of the Offering to fund
research and product development, to
expand its sales and marketing
capabilities, to establish strategic
alliances, to expand its employee
base and infrastructure and for
general corporate and working capital
purposes.
Proposed Nasdaq SmallCap Market
symbol................................ ALIF
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(1) Excludes 590,569 shares of Common Stock reserved for issuance upon the
exercise of stock options outstanding as of September 29, 1998 at a weighted
average exercise price of $3.73 per share and 160,000 shares of Common Stock
reserved for issuance upon the exercise of warrants to be sold to the
Representatives upon the consummation of the Offering at an exercise price
per share equal to 120% of the initial public offering price (the
"Representatives' Warrant").
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
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1995 1996 1997 1997 1998
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STATEMENT OF OPERATIONS DATA:
Revenue............................................ $1,217 $2,790 $1,770 $1,031 $ 449
Income (loss) from operations...................... (618) 895 41 23 (579)
Net Income (loss).................................. (396) 543 21 16 (495)
Net income (loss) per share(1)..................... $ (.07) $ .08 $ .00 $ .00 $ (.07)
Shares used in computing net income (loss) per
share(1)......................................... 5,574 6,967 6,967 6,967 6,970
</TABLE>
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AS OF JUNE 30, 1998
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PRO FORMA
ACTUAL AS ADJUSTED(2)
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BALANCE SHEET DATA:
Cash...................................................... $ 552 $10,659
Working capital........................................... 409 10,516
Total assets.............................................. 1,270 11,377
Total stockholders' equity................................ $ 333 $10,440
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(1) Net income (loss) per share is determined by dividing the net income (loss)
attributable to common stockholders by the weighted average number of Common
Stock and Common Stock equivalents outstanding during the period. See Note 2
of Notes to Financial Statements.
(2) As adjusted to give effect to the sale of 1,200,000 shares of Common Stock
offered by the Company, after deducting the underwriting discount and the
offering expenses, at an assumed initial public price of $6.50 per share and
the application of the estimated net proceeds therefrom as set forth in "Use
of Proceeds." Also gives pro forma effect to the issuance by the Company of
26,083 shares of Common Stock upon the exercise of stock options on July 31,
1998 at $3.66 per share and the sale and issuance by the Company of 824,000
shares of Common Stock on September 23, 1998 at $5.00 per share and the
receipt of $4,035,632 of net proceeds therefrom.
6
<PAGE> 8
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to other information contained in this Prospectus,
before purchasing the shares of Common Stock offered hereby. Certain statements
in this Prospectus, including statements regarding the intent, belief or current
expectations of the Company or its management with respect to, among other
things, (i) the Company's goals and operating strategies, (ii) the anticipated
release of the Company's products and (iii) the Company's plans to distribute
and market its products, as well as other statements contained herein regarding
matters that are not historical facts, constitute "forward-looking statements."
Such forward-looking statements are not guarantees of future performance and
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance and achievement of the Company, or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, but are not limited to, those discussed in the following risk
factors.
RECENT CHANGE IN STRATEGY. The Company has recently changed its primary
business focus from software consulting to the development, marketing and sale
of its Alife product suite of "intelligent" software robots (also known as
software agents). Accordingly, the Company is at an early stage of development
in its new business strategy and is subject to certain of the risks inherent in
the establishment of a new business enterprise. To address these risks, the
Company must, among other things, complete development of its software robot
products, enter into strategic partnerships, marketing and distribution
arrangements, respond to competitive developments, and attract, retain and
motivate qualified personnel. In addition, because the Company has adopted this
new business strategy, results of operations to date are not reflective of the
Company's future results of operations. The Company's decision to become a
provider of software robot products is predicated on the assumption that the
demand for such products will be large enough to permit the Company to operate
profitably. There can be no assurance that the Company's assumption will be
correct or that the Company will be able to successfully compete as a provider
of such products. If the Company's assumption is not accurate, or if the Company
is unable to compete as a provider of agent-based software products, the
Company's business, prospects, financial condition and results of operations
will be materially adversely affected.
MINIMAL REVENUES AND RECENT LOSSES; PERIOD TO PERIOD COMPARISONS; LIMITED
OPERATING HISTORY; ANTICIPATION OF CONTINUED LOSSES. Since its incorporation in
November 1994, the Company has been engaged primarily in the provision of
software consulting services and to date has generated limited revenues. Through
1997, the Company has recorded cumulative net income of $146,480 primarily
through its software consulting business. As a consequence of the Company's
recent change in business strategy, the Company expects that the substantial
majority of its future revenues will be derived from sales of its software robot
products and that revenues from its consulting business will significantly
decrease. Accordingly, past financial results do not reflect the results of the
Company's current business activities. In the six month period ended June 30,
1998, the Company incurred a net loss of $495,025. Furthermore, its limited
operating history leads the Company to believe that period-to-period comparisons
of its operating results are not meaningful and that the results for any period
should not be relied upon as an indication of future performance. The Company
faces the risks and problems associated with pursuing a new business strategy
and has a limited operating history on which to evaluate its future prospects.
Such prospects should be considered in light of the risks, expenses and
difficulties frequently encountered in the establishment of a business in a new
and emerging industry characterized by rapid technological change, a number of
potential market entrants and intense competition. The Company expects to incur
significant losses until at least the year 2000. There can be no assurance that
the Company will achieve or sustain significant revenues or become cash flow
positive or profitable in the near future or ever.
7
<PAGE> 9
DEPENDENCE ON EMERGING MARKETS; ACCEPTANCE OF THE COMPANY'S PRODUCTS. The
Company's future financial performance will depend in large part on the growth
in demand for agent-based software products, such as the Company's suite of
SmartBot products. This market is new and emerging, is rapidly evolving, is
characterized by an increasing number of market entrants and will be subject to
frequent and continuing changes in customer preferences and technology. As is
typical in new and evolving markets, demand and market acceptance for the
Company's technologies is subject to a high level of uncertainty. Because the
market for the Company's products is evolving, it is difficult to assess or
predict with any assurance the size or growth rate, if any, of this market.
There can be no assurance that a significant market for the Company's products
will develop, or that it will develop at an acceptable rate or that new
competitors will not enter the market. In addition, even if a significant market
develops for such products, there can be no assurance that the Company's
products will be successful in such market. If a significant market fails to
develop, develops more slowly than expected or attracts new competitors, or if
the Company's products do not achieve market acceptance, the Company's business,
prospects, financial condition and results of operations will be materially
adversely affected.
COMPETITION. The market for the Company's products and services is new,
evolving and growing rapidly. Competition can be expected to intensify
significantly as the market matures and the more established software companies,
such as Microsoft Corporation, become increasingly involved. Barriers to entry
are relatively insubstantial. Although the Company has not yet identified any
competitors in exactly the same areas in which it is active, there are companies
that have overlapping activities and therefore could be regarded as competition
to Artificial Life. Such firms include, among others: Brightware, Inc.;
Broadvision, Inc.; Extempo, Inc.; Haptek, Inc.; Nearlife, Inc.; Netsage Corp.;
Neuromedia, Inc. and Virtual Personalities, Inc. This list may not be complete
and may change and substantially increase over time. The Company believes that
the principal competitive factors affecting the market for the Company's
products include core technology, delivery methods, brand recognition, ease of
use and interfaces. The relative importance of each of these factors depends
upon the specific customer involved. There can be no assurance that the Company
will be able to compete effectively with respect to any of these factors.
The Company's present or future competitors may be able to develop products
comparable or superior to those offered by the Company or adapt more quickly
than the Company to new technologies or evolving customer requirements. In order
to be successful in the future, the Company must respond to technological
change, customer requirements and competitors' current products and innovations.
In particular, while the Company is currently developing products and product
enhancements that it believes address customer requirements, there can be no
assurance that the Company will successfully complete the development or
introduction of these products and product enhancements on a timely basis or
that these products and product enhancements will achieve market acceptance.
Accordingly, there can be no assurance that the Company will be able to compete
effectively in its market, that competition will not intensify or that future
competition will not have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. See
"Business -- Competition."
PRODUCT CONCENTRATION. The Company expects to derive substantially all of
its revenues from sales of its SmartBot software robot products and associated
services. Broad market acceptance of these products is critical to the Company's
future success. As a result, failure to achieve broad market acceptance, or, if
achieved, future declines in demand of these products as a result of
competition, technological change, ease of use or otherwise would have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. In addition, the Company's future financial
performance may depend in part on the successful development, introduction and
customer acceptance of future versions of the Company's software robot products,
and there can be no assurance that any such future products will achieve market
acceptance. See "Business -- Products and Services."
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PRODUCT DEFECTS AND PRODUCT LIABILITY. The Company's software robot
products are complex and could from time to time contain design defects or
software errors that could be difficult to detect and correct. The Company's
products have not yet been released for commercial use. Thus, there can be no
assurance that, despite testing by the Company, errors will not be found in the
Company's products once they are commercially released which could result in
delay in or inability to achieve market acceptance and thus could have a
material adverse impact upon the Company's business, prospects, financial
condition and results of operations.
Because the Company's software robot products can be used by its clients to
perform mission critical functions, design defects, software errors, misuse of
the Company's products, incorrect data from external sources or other potential
problems within or out of the Company's control that may arise from the use of
the Company's products could result in financial or other damages to the
Company's clients. The Company maintains limited product liability insurance.
The Company anticipates that its sales and licensing agreements with its clients
will typically contain provisions designed to limit the Company's exposure to
potential claims. Such provisions, however, may not effectively protect the
Company against such claims and the liability and costs associated therewith.
Accordingly, any such claim could have a material adverse effect upon the
Company's business, prospects, financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE. To remain competitive, the Company must
continue to enhance and improve the ease of use, responsiveness, functionality
and features of its family of SmartBot software robot products. The industry in
which the Company operates is characterized by rapid technological change,
changes in user and customer requirements and preferences, frequent new products
and service introductions embodying new technologies and the emergence of new
industry standards and practices that could render the Company's existing
products and proprietary technology and software obsolete. The Company's success
will depend, in part, on its ability to enhance its existing products, develop
new products and technology that address the increasingly sophisticated and
varied needs of its customers, and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
There can be no assurance that the Company will successfully use new
technologies or adapt its proprietary technology and products to customer
requirements or emerging industry standards. If the Company is unable, for
technical, legal, financial or other reasons, to adapt in a timely manner in
response to changing market conditions or customer requirements, the Company's
business, prospects, financial condition and results of operations would be
materially adversely affected.
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL. The Company's
performance is substantially dependent on the continued services and performance
of its senior management and other key personnel, particularly Eberhard
Schoneburg, the Company's President, Chief Executive Officer and Chairman. The
Company has entered into an employment agreement with Mr. Schoneburg, as well as
with the Company's Chief Financial Officer and Chief Technology Officer. The
Company's performance also depends upon the Company's ability to retain and
motivate its other officers and key employees. The loss of the services of any
of its executive officers or other key employees could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations. The Company's future success also depends on its ability to
identify, attract, hire, train, retain and motivate other highly skilled
software engineers and managerial and marketing personnel. There is currently a
shortage of qualified software engineers and programmers. Competition for such
personnel is intense, and there can be no assurance that the Company will be
able to successfully attract, integrate or retain sufficiently qualified
personnel. The failure to attract and retain the necessary personnel could have
a material adverse effect on the Company's business, prospects, financial
condition and results of operations. See "Business -- Employees" and
"Management."
DEPENDENCE ON THIRD PARTY CONTRACTORS. The Company intends to use
consultants to complete portions of the development work on its Alife product
suite of SmartBot software products and to assist customers in the installation
of the Company's SmartBot software products. Competition
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for such personnel is intense. There can be no assurance that the Company will
be successful in attracting or retaining such consultants. In addition, the
Company's ability to provide its software consulting services and introduce its
products is dependent, in part, on the ability of these independent consultants
to complete their engagements in a timely and cost-effective manner. In
particular, consulting resources will be required to install, support and
customize the Company's software products, including creating the content of the
Knowledge Bases. Therefore, the availability of such resources will directly
impact sales of such products. Some of these consultants will be employees of
other companies who will only be able to work on the Company's products on a
part-time basis. If the Company is not successful in attracting the necessary
consultants or if such consultants cannot complete the necessary tasks in a
timely and cost-effective manner, the Company's business, prospects, financial
condition and results of operations could be materially adversely effected.
RISKS ASSOCIATED WITH INTERNATIONAL SALES. A key component of the
Company's strategy is to expand its sales in foreign markets, especially in
Europe. The Company anticipates that it will expend significant financial and
management resources to develop programs of partnering and strategic investments
internationally. If the revenues generated by these marketing programs are
insufficient to offset the expense of establishing and maintaining such
programs, the Company's business, prospects, financial condition and results of
operations could be materially adversely affected. There can be no assurance
that the Company will be able to expand its sales in foreign markets.
The Company's international sales are subject to certain risks not inherent
in its domestic sales, including political and economic instability in foreign
markets, restrictive trade policies of foreign governments, local economic
conditions in foreign markets, potentially adverse tax consequences and the
burdens on customers of complying with a variety of applicable laws. All of such
factors may suppress demand for the Company's services and products. The impact
of such factors on the Company's business is inherently unpredictable. There can
be no assurance that such factors will not have a material adverse effect upon
the Company's revenues from international sales and, consequently, the Company's
business, prospects, financial condition and results of operations. See
"Business -- Strategy."
DEPENDENCE ON CONTINUED GROWTH OF INTERNET AND ONLINE COMMERCE. The
Company's future revenues and any future profits are in a large part dependent
upon the willingness of consumers to accept the Internet as an effective medium
of commerce and for obtaining information. The Company is especially dependent
upon the long-term acceptance and growth of online commerce. Rapid growth in the
use of and interest in online services is a recent phenomenon, and there can be
no assurance that such acceptance and use will continue to develop or that a
sufficiently broad base of consumers will adopt and continue to use the Internet
and other online services as a medium of commerce. Demand and market acceptance
for recently introduced services and products over the Internet are subject to a
high level of uncertainty. For the Company to be successful, consumers must
accept and utilize this novel way of conducting business and obtaining
information.
The Internet may not be accepted by consumers as a viable commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that online
services continue to experience significant growth in the number of users, their
frequency of use or an increase in their bandwidth requirements, there can be no
assurance that the infrastructure of the Internet and other online services will
be able to support the demands placed upon them. In addition, Internet services
could lose their viability due to delays in the development or adoption of new
standards and protocols required to handle increased levels of online activity
or due to increased government regulation. Changes in or insufficient
availability of telecommunications services to support Internet services also
could result in slower response times and adversely affect usage of the Internet
and other online services generally. If use of the Internet and other online
services does not continue to grow or grows more slowly than expected, if the
infrastructure for
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Internet services does not effectively support the growth that may occur, or if
the Internet does not become a viable commercial marketplace, the Company's
business, prospects, financial condition and results of operations would be
materially adversely affected.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS. The Company will be
relying upon trade secrets, know-how, copyrights and continuing technological
innovations to develop and maintain its competitive position. The Company seeks
to protect such information, in part, by confidentiality agreements with its
corporate partners, collaborators, employees and consultants. These agreements
provide that all confidential information developed or made known during the
course of the individual's or entity's relationship with the Company is to be
kept confidential and not be disclosed to third parties except in specific
circumstances. The Company has caused each of its employees to execute forms of
Confidentiality and Inventions Agreements which provide that, to the extent
permitted by applicable law, all inventions conceived by the individual during
the individual's employment are the exclusive property of the Company. There can
be no assurance that these agreements will not be breached, that the Company
would have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently discovered by competitors.
Further, there can be no assurance that the Company will be able to protect its
trade secrets and copyrights, or that others will not independently develop
substantially equivalent proprietary information and techniques.
The Company has no patents or patent applications pending, nor does it have
any registered copyrights. There can be no assurance that the existing or future
patents of third parties will not have an adverse effect on the ability of the
Company to continue to commercialize its products. Furthermore, there can be no
assurance that other companies will not independently develop similar products
or duplicate any of the Company's planned products or obtain patents that will
require the Company to alter its products or processes, pay licensing fees or
cease development of its planned products. The occurrence of any such event may
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations. See "Business -- Intellectual Property and
Other Proprietary Rights."
NEED FOR ADDITIONAL CAPITAL. The Company currently believes the net
proceeds of the Offering, together with the Company's existing cash, cash
equivalents, short-term investments and other cash generated from operations,
will enable the Company to maintain its current and planned operations at least
through July 2000, although there can be no assurance that the Company will not
have additional capital needs prior to such time. Delays in the completion of
software development programs are common in the industry. If the Company
experiences delays in the scheduled development of its initial SmartBot software
robot products, it may require substantial additional funds until such time as
products are completed and cash generated from sales of products and services is
sufficient to fund continued growth of the business. In the event that such
additional financing is necessary, the Company may seek to raise such funds
through public or private equity or debt financing or other means. No assurance
can be given that additional financing will be available when needed, or that,
if available, such financing will be obtained on terms acceptable to the
Company. To the extent that the Company raises additional capital by issuing
equity securities, ownership dilution will result to existing stockholders. In
the event that adequate funds are not available, the Company's business,
prospects, financial condition and results of operations may be materially
adversely affected. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results and Operations -- Liquidity and
Capital Resources."
RISKS ASSOCIATED WITH BRAND DEVELOPMENT. The Company believes that
establishing and maintaining brand identity is a critical aspect of its
strategy. Furthermore, the Company believes that brand recognition will become
increasingly important as low barriers to entry encourage competition in the
software robot industry. In order to attract and retain customers and strategic
partners, and in response to competitive pressures, the Company intends to
increase substantially its financial commitment to the creation and maintenance
of brand development. The Company plans to accomplish this, although not
exclusively, through advertising campaigns in several forms of media,
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including radio, television, print and trade shows, with a particular emphasis
on the Internet channels. If the Company does not generate a corresponding
increase in revenue as a result of its branding efforts or otherwise fails to
promote its brand successfully, or if the Company incurs excessive expenses in
an attempt to promote and maintain its brand, the Company's business, prospects,
financial condition and results of operations would be materially adversely
affected.
RISKS OF DOING BUSINESS ABROAD. The Company anticipates that some of the
consultants it may hire to complete portions of the development work on its
products may be located in foreign countries. In addition, the Company intends
to organize subsidiaries in foreign countries. As a result, the Company may be
subject to a number of risks, including, among other things, difficulties
relating to administering its business globally, managing foreign operations,
currency fluctuations, restrictions against the repatriation of earnings, export
requirements and restrictions, and multiple and possibly overlapping tax
structures. The realization of any of the foregoing could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations.
On January 1, 1999, a new currency called the "euro" is scheduled to be
adopted as the common legal currency in eleven of the fifteen member countries
of the European Union. During 2002, all European Union countries are expected to
be operating with the euro as their single currency. Uncertainty exists as to
the effect the euro will have on the marketplace. Additionally, all of the final
rules and regulations have not yet been defined and finalized by the European
Commission with regard to the euro currency. The Company cannot yet predict the
anticipated impact of the euro conversion on the Company.
DEPENDENCE ON THIRD PARTY LICENSES. The Company is designing its SmartBot
software products to recognize voice input as well as text-based input. The
voice recognition capabilities of these products will depend to a large extent
on the availability of highly accurate voice recognition software packages,
which the Company intends to license from third parties rather than develop
itself. The Company believes that the success of its products will depend to a
large extent on its ability to allow users to interact in a natural
conversational manner. There can be no assurance that the Company will be
successful in identifying third party voice recognition software which will
successfully interact with its products or that the Company will be able to
license such software products on commercially reasonable terms, or at all.
Failure by the Company to successfully identify viable voice recognition
software or enter into license agreements could materially adversely affect the
Company's business, prospects, financial condition and results of operations.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES. The Company believes that
it is not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally.
However, due to the increasing popularity and use of the Internet, it is
possible that a number of domestic and foreign laws and regulations covering
issues such as user privacy, pricing, content, copyrights, distribution and
characteristics and quality of products and services are being considered and
may be enacted. The European Community has already adopted a directive
restricting the use of personal data. The adoption of such laws or regulations
may decrease the growth in use of the Internet, which would, in turn, decrease
the demand for the Company's products and services and increase the Company's
cost of doing business. Moreover, the applicability to online services of
existing domestic and foreign laws in various jurisdictions governing issues
such as intellectual property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Any such new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to the Company's business, or
the application of existing laws and regulations to online services could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.
Tax authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in Internet commerce. New state
tax regulations may subject the Company to additional state sales and income
taxes. As some of the Company's products will be available over
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the Internet in multiple states and foreign countries, such jurisdictions may
claim that the Company is required to qualify to do business as a foreign
corporation in each such state and foreign country. The failure by the Company
to qualify as a foreign corporation in a jurisdiction where it is required to do
so could subject the Company to taxes and penalties for the failure to do so. It
is possible that the governments of other states and foreign countries also
might attempt to regulate the Company's transmissions of content on its Web
sites or prosecute the Company for violations of their laws. There can be no
assurance that violations of local laws will not be alleged or charged by state
or foreign governments, that the Company might not unintentionally violate such
law or that such laws will not be modified, or new laws enacted, in the future.
In addition, several telecommunications carriers are petitioning to have
telecommunications over the Internet regulated by the Federal Communications
Commission (the "FCC") in the same manner as other telecommunications services.
In addition, because the growing popularity and use of the Internet has burdened
the existing telecommunications infrastructure and many areas with high Internet
use have begun to experience interruptions in phone service, local telephone
carriers, such as Pacific Bell, have petitioned the FCC to regulate Internet
service providers ("ISPs") and online service providers ("OSPs") in a manner
similar to long distance telephone carriers and to impose access fees on the
ISPs and OSPs. If either of these petitions is granted, or the relief sought
therein is otherwise obtained, the costs of communicating on the Internet could
increase substantially, potentially slowing the growth in use of the Internet.
Any such new legislation or regulation or application or interpretation of
existing laws could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
INTERNET COMMERCE SECURITY RISKS. A significant barrier to electronic
commerce and communications is the secure transmission of confidential
information over public networks. The Company relies on encryption and
authentication technology licensed from third parties to provide the security
and authentication necessary to effect secure transmission of confidential
information. There can be no assurance that advances in computer capabilities,
new discoveries in the field of cryptography or other events or developments
will not result in a compromise or breach of the algorithms used by the Company
to protect data. If any such compromise of the Company's security were to occur
it could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations. The Company may be required to
expend significant capital and other resources to protect against the threat of
such security breaches or to alleviate problems caused by such breaches.
Concerns over the security of Internet transactions and the privacy of users may
also inhibit the growth of the Internet generally, and the Web in particular,
especially as a means of conducting commercial transactions. To the extent that
activities of the Company or third party contractors involve the storage and
transmission of proprietary information, security breaches could expose the
Company to a risk of loss or litigation and possible liability. There can be no
assurance that the Company's security measures will prevent security breaches or
that failure to prevent such security breaches would not have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.
YEAR 2000 COMPLIANCE. The Company uses a significant number of computer
software programs and operating systems in its internal operations. The use of
computer programs that rely on two-digit date programs to perform computations
and decision-making functions may cause computer systems to malfunction in the
Year 2000 and lead to significant business delays and disruptions. The Company
has analyzed the software applications that it uses or has developed and
believes that they are Year 2000 compliant. However, until the Year 2000
arrives, the Company cannot be absolutely certain that its analysis is correct.
The costs of any Year 2000 remedial modifications must be expensed in the year
incurred, and thus will impact the Company's earnings. The Company is currently
unable to predict the extent to which it would be vulnerable to any failure by
its clients or suppliers to remediate any Year 2000 issues on a timely basis.
The failure of a client or supplier subject to the Year 2000 to convert its
systems on a timely basis or a conversion that is incompatible with the
Company's systems could have a material adverse effect on the Company's
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business, prospects, financial condition and results of operations. In addition,
the Company's products are designed to operate with third party software and
data. The operation of the Company's existing and proposed products will be
adversely affected if such third party software and data are not Year 2000
compliant or if such third parties have not used compatible technology in
achieving compliance.
BROAD DISCRETION OF MANAGEMENT AS TO USE OF PROCEEDS. The Company intends
to use the net proceeds from this Offering (i) to fund research and product
development, (ii) to increase its sales and marketing capabilities, both
domestically and internationally, by expanding its marketing and promotional
programs, (iii) to establish strategic alliances, (iv) to make strategic
acquisitions and investments, (v) to increase its employee base and expand the
Company's infrastructure and (vi) for general corporate purposes, including
working capital. The Company may use a portion of such net proceeds to acquire
or invest in businesses, technologies, services or products that are
complementary to those of the Company. While the Company may from time to time
evaluate such potential acquisitions, investments or other transactions, the
Company currently has no understandings, commitments or agreements with respect
to any acquisitions. The Company has not determined the amounts it plans to
expend with respect to each of the expected uses or the timing of such
expenditures. Accordingly, management will have broad discretion with respect to
the expenditure of such proceeds. Purchasers of shares of Common Stock offered
hereby will be entrusting their funds to the Company's management, upon whose
judgment they must depend, with limited information concerning the specific
working capital requirements and general corporate purposes to which the funds
will ultimately be applied. See "Use of Proceeds."
CONTROL BY PRINCIPAL STOCKHOLDER. Upon completion of the Offering,
Eberhard Schoneburg, the Company's President, Chief Executive Officer and
Chairman, will beneficially own approximately 61.4% of the outstanding shares of
Common Stock (approximately 59.8% if the Underwriters' over-allotment option is
exercised in full). Accordingly, Mr. Schoneburg will retain the voting power to
exercise control over the election of members of the Board of Directors as well
as any decision whether to merge or sell the assets of the Company, adopt, amend
or repeal the Company's Certificate of Incorporation and Bylaws, or take other
actions requiring the vote or consent of the Company's stockholders. In
addition, such a concentration of ownership may have the effect of delaying or
preventing a change in control of the Company, and may also impede or preclude
transactions in which stockholders might otherwise receive a premium for their
shares over current market prices. See "Management -- Directors and Executive
Officers" and "Principal and Selling Stockholders."
POTENTIAL ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS. Upon consummation of
the Offering, the Company's Certificate of Incorporation will authorize the
Board of Directors to issue, without stockholder approval, 5,000,000 shares of
Preferred Stock with voting, conversion and other rights and preferences that
could adversely affect the voting power or other rights of the holders of Common
Stock. The issuance of Preferred Stock or of rights to purchase Preferred Stock
could be used to discourage an unsolicited acquisition proposal. In addition,
the possible issuance of Preferred Stock could discourage a proxy contest, make
more difficult the acquisition of a substantial block of the Company's Common
Stock or limit the price that investors might be willing to pay in the future
for shares of the Company's Common Stock. The Certificate of Incorporation also
provides that: (i) the affirmative vote of the holders of at least 70% of the
voting power of all of the then outstanding shares of the capital stock of the
Company, voting together as a single class, shall be required for the
stockholders to adopt, amend or repeal any provisions of the Bylaws of the
Company; (ii) stockholders of the Company may not take any action by written
consent without a meeting; (iii) the Board of Directors will be classified into
three classes with staggered terms of three years each; and (iv) members of the
Board of Directors may be removed only for cause and after reasonable notice and
an opportunity to be heard before the body proposing to remove such director.
The Company's Bylaws provide that, for nominations to the Board of Directors or
for other business to be properly brought by a stockholder before a meeting of
stockholders, the stockholder
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must first have given timely notice thereof in writing to the Secretary of the
Company. To be timely, a stockholder's notice generally must be delivered not
less than 60 days nor more than 90 days prior to the annual meeting. If the
meeting is not an annual meeting, the notice must generally be delivered not
more than 90 days prior to the special meeting and not later than the later of
60 days prior to the special meeting or ten days following the day on which
public announcement of the meeting is first made by the Company. The foregoing
provisions of the Company's Certificate of Incorporation and Bylaws could have
the effect of delaying, deterring or preventing a change in control of the
Company. Delaware law also contains provisions that may have the effect of
delaying, deterring or preventing a non-negotiated merger or other business
combination involving the Company. These provisions are intended to encourage
any person interested in acquiring the Company to negotiate with and obtain the
approval of its Board of Directors in connection with the transaction. Certain
of these provisions may, however, discourage a future acquisition of the Company
not approved by the Board of Directors in which stockholders might receive an
attractive value for their shares or that a substantial number or even a
majority of the Company's stockholders might believe to be in their best
interest. As a result, stockholders who desire to participate in such a
transaction may not have the opportunity to do so. See "Description of Capital
Stock -- Delaware Law and Certain Charter and Bylaw Provisions."
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET
PRICE. Sales of Common Stock (including Common Stock issued upon the exercise
of outstanding options) in the public market after this Offering could
materially adversely affect the market price of the Common Stock. These sales
also might make it more difficult for the Company to sell equity securities or
equity-related securities in the future at a time and price that the Company's
management deems acceptable, or at all. Upon the completion of this Offering,
the Company will have 9,070,574 shares of Common Stock outstanding, assuming no
exercise of options or the Representatives' Warrant and assuming no exercise of
the Underwriters' over-allotment option. Of these outstanding shares of Common
Stock, the 1,600,000 shares sold in this Offering will be freely tradeable,
without restriction under the Securities Act of 1933, as amended (the
"Securities Act"), unless purchased by "affiliates" of the Company, as that term
is defined in Rule 144 under the Securities Act. The remaining 7,470,574 shares
of Common Stock held by existing stockholders are "restricted securities" as
that term is defined in Rule 144 and were issued and sold by the Company in
reliance on exemptions from the registration requirements of the Securities Act.
These shares may be resold in the public market only if registered or pursuant
to an exemption from registration, such as Rule 144. All officers, directors and
certain holders of Common Stock beneficially owning, in the aggregate,
shares of Common Stock and holders of options to purchase
shares of Common Stock, have agreed, pursuant to certain lock-up
agreements, that they will not offer, sell, contract to sell, grant any option
to sell, pledge, hypothecate or otherwise dispose of, directly or indirectly,
any shares of Common Stock owned by them, or that could be purchased by them
through the exercise of options to purchase Common Stock of the Company, for a
period of one year after the date of this Prospectus without the prior written
consent of New York Broker, Inc., and, with respect to certain other
stockholders owning, in the aggregate, shares of Common Stock, for a
period of six months after the date of this Prospectus without the prior written
consent of New York Broker, Inc. Upon expiration of the lock-up agreements, all
shares of Common Stock currently outstanding will be immediately eligible for
resale, subject to the requirements of Rule 144. Immediately following the
completion of this Offering, holders of 1,287,114 shares of Common Stock will be
entitled to certain registration rights. However, pursuant to the lockup
agreements, of these shares of Common Stock may not be sold for
one year after the date of this Prospectus without the prior written consent of
New York Broker, Inc. If such holders, by exercising their rights, cause a large
number of shares to be registered and sold on the public market, such sales
could have a material adverse effect on the market price of the Company's Common
Stock. The Company intends to file a registration statement covering the
1,173,917 shares of Common Stock issuable or reserved for issuance under the
1998 Equity Incentive Plan and, upon filing, any shares subsequently issued
under such plans will be eligible for sale in the public market,
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subject to compliance with Rule 144 in the case of affiliates of the Company.
The Company is unable to predict the effect such sales may have on the then
prevailing market price of the Common Stock. See "Management -- Stock Plans,"
"Description of Capital Stock" and "Shares Eligible for Future Sale."
NO PUBLIC MARKET FOR THE COMMON STOCK; PRICE AND MARKET VOLATILITY. Prior
to the Offering there has been no public market for the Company's Common Stock,
and there can be no assurance that an active public market for the Common Stock
will develop or be sustained after the Offering. The initial offering price will
be determined by negotiation between the Company and the representatives of the
Underwriters based upon several factors. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
The market price of the Company's Common Stock is likely to be highly volatile
and could be subject to wide fluctuations in response to quarterly variations in
operating results, announcements of technological innovations or new products
introduced by the Company or its competitors, or changes in financial estimates
by securities analysts, or other events or factors. In addition, the stock
market has experienced significant price and volume fluctuations that have
particularly affected the market price of equity securities of many high
technology companies and that often have been unrelated to the operating
performance of such companies. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has often been instituted against such a company. Such litigation could result
in substantial costs and a diversion of management's attention and resources,
which would have a material adverse effect on the Company's business, prospects
financial condition and results of operations. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock. See
"Underwriting".
If shares of the Company's Common Stock are traded, they may trade at a
discount from the price paid for such shares, depending upon the market for
similar securities and other factors. No assurance can be given that a holder of
Common Stock will be able to sell the Common Stock in the future or that such
sale will be at a price equal to or higher than the price paid for such Common
Stock. No assurance can be given as to the liquidity of any trading market for
the Common Stock. The liquidity of any market for the Common Stock will depend
upon the number of holders of Common Stock, the interest of securities dealers
in making a market in the Common Stock, if any, and other factors.
COMPLIANCE WITH NASDAQ LISTING REQUIREMENTS. The Company's Common Stock
will be quoted on the Nasdaq SmallCap Market (the "SmallCap Market"). In order
to continue to be included in the SmallCap Market, a company must meet certain
maintenance criteria. Effective February 1998, the SmallCap Market maintenance
criteria require that a company must have (i) $2,000,000 in net tangible assets
or a $35,000,000 market capitalization or $500,000 of net income in two of the
last three years, (ii) a minimum bid price of $1.00 per share and (iii) a public
float of 1,000,000 shares. Failure to meet the SmallCap Market maintenance
criteria may result in the delisting of the Company's Common Stock. Trading, if
any, in the Company's Common Stock would thereafter be conducted in the
over-the-counter market. As a result of such delisting, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of, the Company's Common Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of shares of Common Stock
in this Offering will suffer an immediate and substantial dilution in the net
tangible book value of the Common Stock from the initial public offering price.
See "Dilution."
ABSENCE OF DIVIDENDS. No cash dividends have been paid on the Common Stock
to date and the Company does not anticipate paying cash dividends on the Common
Stock in the foreseeable future. See "Dividend Policy."
16
<PAGE> 18
USE OF PROCEEDS
The net proceeds from the sale of the 1,200,000 shares of Common Stock
offered by the Company, after deducting underwriting discounts and commissions
and estimated offering expenses, are estimated to be $5,976,000 ($7,411,200 if
the Underwriters' over-allotment option is exercised in full), assuming an
initial public offering price of $6.50 per share. The Company will not receive
any proceeds from the sale of the 400,000 shares of Common Stock offered by the
Selling Stockholder. See "Principal and Selling Stockholders."
The Company intends to use the net proceeds from the Offering (i) to fund
research and product development, (ii) to increase its sales and marketing
capabilities, both domestically and internationally, by expanding its marketing
and promotional programs and establishing overseas sales offices, (iii) to
establish strategic alliances, (iv) to make strategic acquisitions and
investments, (v) to increase its employee base and expand the Company's
infrastructure and (vi) for general corporate purposes, including working
capital. The Company may use a portion of such net proceeds to acquire or invest
in businesses, technologies, services or products that are complementary to
those of the Company. While the Company may from time to time evaluate such
potential acquisitions, investments, or other transactions, the Company
currently has no understandings, commitments or agreements with respect to any
acquisitions. The Company has not determined the amounts it plans to expend with
respect to each of the expected uses or the timing of such expenditures. As a
consequence, management will have the discretion to allocate the net proceeds
from this Offering. The amounts actually expended for each use may vary
significantly depending on a number of factors, including the amount of future
revenue, the amount of cash generated or used by the Company's operations, the
progress of the Company's sales and marketing efforts, the ability of the
Company to enter into collaborative arrangements, the success of the Company's
recruiting efforts, the status of competitive products and acquisition
opportunities presented to the Company. Pending such uses, the net proceeds to
the Company from this Offering will be invested in short-term, investment-grade,
interest-bearing instruments. See "Risk Factors -- Broad Discretion of
Management as to Use of Proceeds."
The Company currently believes the net proceeds of the Offering, together
with the Company's existing cash, cash equivalents, short-term investments and
other cash generated from operations, will enable the Company to maintain its
current and planned operations at least through July 2000. There can be no
assurance, however, that this will be the case. See "Risk Factors -- Need for
Additional Capital" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain future earnings, if any, to fund the development of
its business. See "Risk Factors -- Absence of Dividends."
17
<PAGE> 19
CAPITALIZATION
The following table sets forth, as of June 30, 1998, (i) the actual
capitalization of the Company, and (ii) the capitalization of the Company as
adjusted to reflect the sale of the 1,200,000 shares of Common Stock offered by
the Company at an assumed initial public offering price of $6.50 per share,
after deducting underwriting discounts and commissions and estimated offering
expenses and the application of the estimated net proceeds therefrom as set
forth in "Use of Proceeds." This table should be read in conjunction with the
Company's Financial Statements, including the Notes thereto, and other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------
PRO FORMA
ACTUAL AS ADJUSTED(1)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt.............................................. $ 500 $ 500
Stockholders' equity:
Preferred Stock, $0.01 par value, no shares authorized,
issued or outstanding, actual; 5,000,000 shares
authorized, no shares issued and outstanding as
adjusted.................................................. -- --
Common Stock, $0.01 par value, 19,000,000 shares authorized,
6,967,213 shares issued and outstanding actual; 30,000,000
shares authorized, 9,070,574 shares issued and outstanding
as adjusted(2)............................................ 69.7 90.7
Non-Voting Common Stock, $0.01 par value, 1,000,000 shares
authorized, 53,278 shares issued and outstanding actual;
no shares authorized, issued and outstanding
as adjusted............................................... .5 --
Additional paid-in capital.................................. 611.1 10,697.7
Representatives' Warrant.................................... -- .1
Accumulated deficit......................................... (348.5) (348.5)
------- ---------
Total stockholders' equity........................ $ 332.8 $10,440.0
======= =========
</TABLE>
- ---------------
(1) Also gives pro forma effect to (i) the issuance by the Company of 26,083
shares of Common Stock upon the exercise of stock options on July 31, 1998
at $3.66 per share, (ii) the sale and issuance by the Company of 824,000
shares of Common Stock on September 23, 1998 and the receipt of $4,035,632
of net proceeds therefrom, (iii) the conversion of all Non-Voting Common
Stock into shares of Common Stock on a 1-for-1 basis upon consummation of
the Offering, (iv) the adoption of the Certificate of Incorporation, to be
effective upon closing of the Offering, removing the Company's existing
class of Non-Voting Common Stock and creating a class of undesignated
Preferred Stock, and (v) the sale and issuance of the Representatives'
Warrant upon consummation of the Offering.
(2) Excludes 590,569 shares of Common Stock reserved for issuance upon the
exercise of stock options outstanding as of September 29, 1998 at a weighted
average exercise price of $3.73 per share and 160,000 shares of Common Stock
reserved for issuance upon the exercise of the Representatives' Warrant.
18
<PAGE> 20
DILUTION
The net tangible book value of the Company as of June 30, 1998, on a pro
forma basis to give effect to (i) the sale on September 23, 1998 of 824,000
shares of Common Stock and the receipt of $4,035,632 of net proceeds therefrom
and (ii) the exercise of options on July 31, 1998 to purchase 26,083 shares of
Common Stock at an exercise price of $3.66 per share, was $4,463,918 or
approximately $.57 per share. "Net tangible book value" per share represents the
total tangible assets of the Company, less total liabilities, divided by the
number of shares of Common Stock outstanding. Assuming the receipt by the
Company of the net proceeds from the sale of the Representatives' Warrant and
the 1,200,000 shares of Common Stock offered by the Company at an assumed public
offering price of $6.50 per share after deducting underwriting discounts and
commissions and estimated offering expenses, the pro forma net tangible book
value of the Company as of June 30, 1998 would have been $10,440,018, or $1.15
per share. This represents an immediate increase in the pro forma net tangible
book value of $.58 per share to existing stockholders of the Company and an
immediate dilution of $5.35 per share to new investors purchasing Common Stock
in this Offering. The following table illustrates the per share dilution to be
incurred by new investors as of June 30, 1998:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price....................... $6.50
Pro forma net tangible book value per share at June 30,
1998................................................... $.57
Increase per share attributable to new investors.......... .58
----
Pro forma net tangible book value per share after the
Offering.................................................. 1.15
-----
Dilution per share to new investors......................... $5.35
=====
</TABLE>
The following table sets forth, on a pro forma basis as set forth above, as
of June 30, 1998, the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price per
share paid by existing stockholders and by the investors purchasing shares of
Common Stock offered hereby (assuming a public offering price of $6.50 per
share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 7,870,574 86.8% $ 4,812,463 38.2% $ .61
New investors.................. 1,200,000 13.2% 7,800,000 61.8% $6.50
--------- ---- ----------- ----
Total................ 9,070,574 100% $12,612,463 100%
========= ==== =========== ====
</TABLE>
The above information excludes 590,569 shares of Common Stock reserved for
issuance upon the exercise of outstanding stock options as of September 29, 1998
at a weighted average exercise price of $3.73 per share and 160,000 shares of
Common Stock reserved for issuance upon the exercise of the Representatives'
Warrant. To the extent that such options and warrant are exercised, there will
be further dilution to new investors. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 7 of Notes to the
Financial Statements.
19
<PAGE> 21
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following data, insofar as it relates to the years 1994 through 1997,
has been derived from annual Financial Statements and Notes thereto, some of
which appear elsewhere herein. The selected balance sheet data as of December
31, 1996 and 1997, and the selected statement of operations data for the three
fiscal years ended December 31, 1997, are derived from the Company's Financial
Statements which have been audited by Wolf & Company, P.C., independent
certified public accountants, whose report appears elsewhere herein. The
selected financial data presented below at June 30, 1998 and for the six months
ended June 30, 1997 and June 30, 1998 have been derived from, and are qualified
by reference to, the Company's unaudited Financial Statements also appearing
herein. Such unaudited Financial Statements, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the results for the unaudited interim periods. The
data should be read in conjunction with the Financial Statements and the Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Prospectus. In 1998, the
Company shifted its primary business focus from software consulting to product
development, marketing and sales. As a consequence, the Company expects that the
substantial majority of its future revenues will be derived from sales of its
software robot products and that revenues from its consulting business will
significantly decrease. Accordingly, past financial results do not reflect the
results of the Company's current business activities. Furthermore, its limited
operating history leads the Company to believe that period-to-period comparisons
of its operating results are not meaningful and that the results for any period
should not be relied upon as an indication of future performance. See "Risk
Factors-Minimal Revenues; Period to Period Comparisons; Limited Operating
History; Anticipation of Continued Losses."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- ----------------
1994(1) 1995 1996 1997 1997 1998
------- ------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Application services.......................... $ -- $1,217 $2,790 $1,347 $ 914 $ 332
Other......................................... -- -- -- 423 117 117
------ ------ ------ ------ ------ ------
Total revenues......................... -- 1,217 2,790 1,770 1,031 449
------ ------ ------ ------ ------ ------
Operating expenses:
Selling, general and administrative........... 22 967 1,101 1,049 624 596
Engineering................................... -- 828 656 512 301 250
Research and development...................... -- -- -- -- -- 128
Depreciation and amortization................. -- 40 138 168 83 54
------ ------ ------ ------ ------ ------
Total operating expenses............... 22 1,835 1,895 1,729 1,008 1,028
------ ------ ------ ------ ------ ------
Income (loss) from operations.......... (22) (618) 895 41 23 (579)
Other income(expense)......................... -- (35) (15) (11) -- (7)
------ ------ ------ ------ ------ ------
Income (loss) before tax............... (22) (653) 880 30 23 (586)
Provision (benefit) for income taxes.......... -- (257) 337 9 7 (91)
------ ------ ------ ------ ------ ------
Net income (loss)...................... $ (22) $ (396) $ 543 $ 21 $ 16 $ (495)
====== ====== ====== ====== ====== ======
Net income (loss) per share(2).................. $ (.02) $ (.07) $ .08 $ .00 $ .00 $ (.07)
Shares used in computing net income (loss) per
share(2)...................................... 1,393 5,574 6,967 6,967 6,967 6,970
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, 1998
---------------------------------- -----------------------
PRO FORMA
1994(1) 1995 1996 1997 ACTUAL AS ADJUSTED(3)
------- ------ ------ ------ ------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.......................................... $43 $ 23 $ 30 $ 22 $ 552 $10,659
Working capital (deficit)..................... 28 (565) 74 167 409 10,516
Total assets.................................. 43 760 885 1085 1,270 11,377
Long-term debt................................ -- -- -- -- 500 500
Total stockholders' equity.................... 28 82 625 646 333 10,440
</TABLE>
- ---------------
(1) Initial period of operations from November 15, 1994 to December 31, 1994.
(2) Net income (loss) per share is determined by dividing the net income (loss)
attributable to common stockholders by the weighted average number of Common
Stock and Common Stock equivalents outstanding during the period. See Note 2
of Notes to Financial Statements.
(3) As adjusted to give effect to the sale of 1,200,000 shares of Common Stock
offered hereby, after deducting the underwriting discount and the offering
expenses, at an assumed initial public price of $6.50 per share and the
application of the estimated net proceeds therefrom as set forth in "Use of
Proceeds." Also gives pro forma effect to the issuance by the Company of
26,083 shares of Common Stock upon the exercise of stock options on July 31,
1998 at $3.66 per share and the sale and issuance by the Company of 824,000
shares of Common Stock on September 23, 1998 at $5.00 per share and the
receipt of $4,035,632 of net proceeds therefrom.
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements, including the Notes thereto, of the Company included elsewhere in
this Prospectus. This Prospectus contains forward-looking statements.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties. Actual
events or results may differ materially from those discussed in the
forward-looking statements as a result of various factors, including the matters
set forth in "Risk Factors."
OVERVIEW
The Company was incorporated in Delaware in November 1994 as Neurotec
International Corp., a wholly-owned subsidiary of Neurotec Hochtechnologie GmbH
("Neurotec GmbH"), a German multimedia and Internet solutions company owned by
Eberhard Schoneburg, Artificial Life's President, Chief Executive Officer and
Chairman, and two corporate investors: a major German retailer and an industrial
conglomerate. In July 1997, Mr. Schoneburg sold all of his shares of Neurotec
GmbH to the two remaining stockholders and contemporaneously purchased 100% of
the shares of Neurotec International Corp. (the "Management Buyout"). In August
1997, the Company changed its name to Artificial Life, Inc. Following the
Management Buyout, the Company's management made the strategic decision to shift
the Company's primary business focus from providing software consulting services
to designing, developing and marketing its Alife suite of SmartBot software
products.
Management's decision to shift the primary focus of the Company's business
from software consulting to product development and commercialization will
adversely affect the Company's results of operations in the near term. To date,
the Company's only source of revenue has been derived from its software
consulting services, and it has generated no revenue from the sale of its
SmartBot software products. The Company is currently expanding its research and
development, production and marketing capabilities associated with the
anticipated sale of its SmartBot products, and as a result, operating expenses
are expected to increase significantly going forward. The Company expects to
continue to incur increasing losses and generate negative cash flow from
operations until at least the year 2000. To the extent that the Company's
product development, marketing and sales efforts do not result in commercially
successful products that generate significant net sales, the Company will be
materially adversely affected. There can be no assurance that the Company will
ever generate sufficient revenues from the sale of the Company's products to
achieve or maintain profitability.
In addition, as a result of the Company's recent transition from software
consulting to product development, marketing and sales, the Company's research
and development expenditures increased significantly during the six months ended
June 30, 1998. Due to the early stage of such research and development efforts,
no software development costs were capitalized during that period. Prior to
December 31, 1997, substantially all research and development was performed by
the Company in connection with contractual software consulting services with
customers for which the Company was reimbursed. Such costs are included in
engineering expenses in the Company's financial statements through December 31,
1997.
Because the Company has shifted its business focus from software consulting
to product development, marketing and sales, results of operations to date are
not reflective of the Company's business prospects going forward. Moreover, the
Company expects to experience significant fluctuations in its future operating
results due to a variety of factors. Factors that may affect the Company's
operating results include the success of product development, market acceptance
of the Company's products, frequency and timeliness of new product releases,
success of strategic alliances, the mix of product and service sales, the
Company's response to competitive pressure
22
<PAGE> 24
and its ability to attract and retain qualified personnel. Gross profit margins
will vary from product to product and although the Company may have some ability
to affect its product mix through effective selling of high margin products, the
Company's sales mix may vary from period to period and its gross margins will
fluctuate accordingly.
RESULTS OF OPERATIONS
The Company's principal source of revenue from inception through May 1998
has been software consulting services. From inception through June 1997, the
preponderance of those revenues were generated by subcontracts issued from
Artificial Life's former parent company. Of the non-related party revenues, most
were derived from the Company's long-term consulting contract with its major
domestic client. This consulting contract started in late 1996 and concluded in
May 1998. Thereafter, the Company focused essentially all available resources on
product development. To date, the Company has not released any commercial
versions of its SmartBot products for sale.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues: Revenues for the six months ended June 30, 1998 were $449,380 as
compared to $1,031,128 for the same period of the prior year. The decrease of
$581,748, or 56.4%, resulted from the Company's decision to transition its
primary business focus from software consulting to product development and
sales.
Engineering Expenses: Engineering expenses for the six months ended June
30, 1998 were $249,789 as compared to $301,518 for the same period of the prior
year. The decrease of $51,729, or 17.2%, was directly attributable to the
reallocation of resources to research and development as a result of the
Company's change of its primary business focus from software consulting to
product development, marketing and sales.
Research and Development Expenses: Research and development expenses for
the six months ended June 30, 1998 were $128,103. Prior to 1998, substantially
all research and development was performed by the Company in connection with
contractual consulting arrangements with its customers, for which it was
reimbursed. Such costs were included in engineering expenses. Upon conclusion of
its long-term consulting contract in May 1998, the Company focused essentially
all available resources on product development. Accordingly, the Company expects
that research and development expenditures will continue to rise significantly
in the foreseeable future as the Company expands its research and development
capabilities relating to such product development.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the six months ended June 30, 1998 were $596,620 as
compared to $623,693 for the same period of the prior year. The decrease of
$27,073, or 4.3%, was directly attributable to reduced administrative, sales and
marketing staff during the Company's transition from software consulting to
product development, marketing and sales. Selling expenses (sales and marketing)
and public relations have begun, and are anticipated to continue, to increase in
anticipation of product releases and commercialization efforts.
Net Loss: The net loss for the six months ended June 30, 1998 was $495,025
as compared to net income of $16,070 for the same period of the prior year. This
decrease was directly related to the decrease in software consulting revenues
related to the Company's transition to product development, marketing and sales.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues: Revenues for the year ended December 31, 1997 were $1,770,360 as
compared to $2,789,878 for the year ended December 31, 1996. The decrease of
$1,019,518, or 36.5%, is directly
23
<PAGE> 25
attributable to the Company's discontinuing software consulting work for its
former parent after the Management Buyout.
Engineering Expenses: Engineering expenses for the year ended December 31,
1997 were $512,267 as compared to $656,086 for the year ended December 31, 1996.
The decrease of $143,819, or 21.9%, resulted primarily from the Company's
discontinuing software consulting work for its former parent after the
Management Buyout and the shift in its primary business focus away from software
consulting.
Research and Development Expenses: Research and development expenses for
the year ended December 31, 1997 were related to contractual software consulting
services for which the Company was reimbursed and were included in engineering
expenses.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the year ended December 31, 1997 were $1,048,897 as
compared to $1,101,109 for the year ended December 31, 1996. The decrease of
$52,212, or 4.7%, is attributable to reduced sales and marketing overhead
associated with the Company's reduction in contractual software consulting
services.
Net Income: Net income for the year ended December 31, 1997 was $21,065 as
compared to $543,344 for the year ended December 31, 1996. The decrease of
$522,279, or 96.1%, is attributable to the Company's discontinuing contractual
consulting services for its former parent and transitioning its primary business
focus away from software consulting.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues: Revenues for the year ended December 31, 1996 were $2,789,878 as
compared to $1,216,716 for the year ended December 31, 1995. The increase of
$1,573,162, or 129.3%, was principally attributable to the performance of
software consulting services for its former parent and other affiliates, and the
initial revenues realized from the Company's major domestic software consulting
contract.
Engineering Expenses: Engineering expenses for the year ended December 31,
1996 were $656,086 as compared to $827,471 for the year ended December 31, 1995.
The decrease of $171,385, or 20.7%, was directly attributable to reduced
engineering charges from the Company's former parent as the Company's in-house
engineering staff was in place and operational.
Research and Development Expenses: Research and development expenses for
the year ended December 31, 1996 related to contractual software consulting
services for which the Company was reimbursed and were included in engineering
expenses.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the year ended December 31, 1996 were $1,101,109 as
compared to $967,271 for the year ended December 31, 1995. The increase of
$133,838, or 13.8%, represented the addition of a Director of Sales and
Marketing along with related staff, additional administrative support staff,
increased office overhead and increased travel and consulting costs. These
increases were offset in part by the elimination of one-time start up costs
incurred in 1995.
Net Income: Net income for the year ended December 31, 1996 was $543,344
as compared to a net loss of $395,856 for the year ended December 31, 1995. The
increase in earnings of $939,200, or 237.3%, was related to several factors.
First, approximately $282,000, or 71.2%, of the 1995 net loss was related to
start-up costs that were expensed in that period. Second, charges for
engineering expenses from the Company's former parent were reduced significantly
in 1996 as the Company's engineering team was in place and operational. Finally,
because the administrative infrastructure was already established in 1995, there
were limited additional costs required to manage the Company's business in 1996.
24
<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES
From inception through the year ended December 31, 1997, the Company funded
its operations primarily through initial equity investments in 1994 and 1995
totaling $500,000 and net income from operations. Subsequent to 1997, the
Company incurred operating losses in connection with its transition from
software consulting to product development, marketing and sales. These losses
are expected to increase and have been funded to date by a long-term stockholder
loan of $500,000 and a private placement of Non-Voting Common Stock of $181,367,
the net proceeds of which the Company received in June 1998. In September 1998,
the Company raised $4,035,632 in net proceeds from a private placement of
824,000 shares of Voting Common Stock. The Company's requirements for additional
capital will depend on many factors, including but not limited to the progress
and costs associated with its research and development activities, production
costs and sales, marketing and promotional programs, and the levels of revenues
achieved through the sale of its SmartBot suite of products. The Company has
currently placed excess funds in interest bearing vehicles such as money market
accounts and certificates of deposit.
As of June 30, 1998, the Company had cash and cash equivalents of $551,591.
After giving effect to the issuance by the Company of 26,083 shares of Common
Stock upon the exercise of stock options on July 31, 1998 at $3.66 per share and
the receipt of $95,464 in net proceeds therefrom and the sale and issuance by
the Company of 824,000 shares of Common Stock on September 23, 1998 for $5.00
per share and receipt of $4,035,632 in net proceeds therefrom, the Company would
have had cash and cash equivalents as of June 30, 1998 of $4,682,687.
Effective October 10, 1995, the Company entered into a consortium agreement
(the "MIT Agreement") with the Massachusetts Institute of Technology ("MIT").
Under the MIT Agreement, MIT will conduct research projects for the "Things That
Think Consortium." The term of the agreement is for five years through October
9, 2000 but provides for early termination, with one year written notice, as
well as renewal options. The Company is obligated to pay an annual membership
fee of $125,000 under the MIT Agreement.
The Company leases office and other space and various office equipment
under various noncancelable leases. Minimum annual lease payments, exclusive of
additional operating costs, for the years ended December 31, 1998, 1999, 2000
and 2001 are $221,372, $205,725, $205,352 and $17,113, respectively.
The Company has employment agreements with certain corporate officers. The
agreements are generally one to three years in length and provide for minimum
base salaries. These agreements include severance payments under certain
conditions of approximately 50% to 300% of each officer's annual compensation.
In addition the President, Chief Executive Officer and Chairman of the Company
is entitled to receive an annual incentive bonus of 3% of the Company's profits
from operations.
The Company plans to establish in the near term subsidiaries in Germany,
the Czech Republic and the Russian Republic for which it will incur start-up
expenses.
The Company believes that the net proceeds of this Offering, together with
its current cash and cash equivalents, and other cash generated from operations
will enable the Company to maintain its current and planned operations at least
through July 2000, although there can be no assurance that the Company will not
have additional capital needs prior to such time. If cash generated from
operations is insufficient to satisfy the Company's liquidity requirements after
that time, the Company may seek to sell additional equity or debt securities or
obtain a credit facility. The sale of additional equity or convertible debt
securities could result in additional dilution to the Company's stockholders.
There can be no assurance that financing will be available in amounts or terms
acceptable to the Company, if at all. See "Risk Factors-Need for Additional
Capital."
25
<PAGE> 27
The Company has incurred interim losses through June 1998, and the Company
anticipates a loss for income tax purposes for fiscal 1998. A portion of this
loss will be available to carry forward and reduce income taxes, if any, in
future periods.
YEAR 2000
The Year 2000 issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Any of the Company's
computer programs or other information systems that have time-sensitive software
or embedded microcontrollers may recognize a date using "00" as the year 1900
rather than the Year 2000. This could result in a system failure or
miscalculations causing disruptions of operations.
The Company has completed an initial review of its information and
non-information technology systems. This review included its existing and
planned computer software and hardware. The Company believes that these systems
are Year 2000 compliant and has made an initial determination that the costs
and/or consequences associated with the Year 2000 issue are not expected to have
a material adverse effect on its business operations or future financial
condition. The Company, however, will continue to monitor the Year 2000
readiness of these systems. The Company will evaluate the need to complete a
further review, which may include soliciting and obtaining certification of Year
2000 compliance from certain third party software vendors and determining the
readiness of its significant suppliers and customers.
In addition, the Company's products are designed to operate with third
party software and data. The operations of the Company's existing and proposed
products will be adversely affected if such third party software and data are
not Year 2000 compliant or if such third parties have not used compatible
technology in achieving compliance.
To the extent that the Company's assessment is finalized without
identifying any non-compliant systems operated by the Company or by third
parties, the Year 2000 issue could have a material effect on the operations of
the Company. The Company could experience delays in the development of its
products. Once its products are developed and offered for commercial sale, the
Company could experience delays in delivering such products or could deliver
products that do not operate correctly, which could cause the Company to lose
business and even customers and could subject the Company to claims for damages.
Problems with the Year 2000 issue could also result in delays in the Company
invoicing its customers or in the Company receiving payments from them. The
severity of these possible problems would depend on the nature of the problem
and how quickly it could be corrected or an alternative implemented, which is
unknown at this time.
After completing its assessment, the Company will develop appropriate
contingency plans to address situations in which various systems of the Company,
or of third-parties with which the Company does business, are not Year 2000
compliant. Some risks of the Year 2000 issue, however, are beyond the control of
the Company and its suppliers and customers. For example, no preparations or
contingency plan will protect the Company from a downturn in economic activity
caused by the Year 2000 issue.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Union are scheduled to adopt a new currency called the "euro" as their common
legal currency (the "Euro Conversion"). The Company is currently unsure of the
potential impact that the Euro Conversion will have on its business, financial
condition and results of operations.
RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This
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statement establishes standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
Comprehensive income generally represents all changes in stockholders' equity
during the period except those resulting from investments by, or distributions
to, stockholders. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented. SFAS
No. 130 had no impact on the Company's financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that a public enterprise reports information about operating segments in
annual financial statements, and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented.
Management is currently evaluating the requirements of SFAS No. 131.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
(SOP) No. 97-2, "Software Revenue Recognition." SOP 97-2 provides guidance on
when revenue should be recognized and in what amounts for licensing, selling,
leasing or otherwise marketing computer software. SOP 97-2 is effective for
transactions entered into in fiscal years beginning after December 15, 1997. SOP
97-2 had no impact on the Company's Financial Statements.
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BUSINESS
OVERVIEW
Artificial Life, Inc. ("Artificial Life" or the "Company") develops,
markets and supports "intelligent" software robots ("bots"). The Company's bots,
known as "SmartBots," are software programs that the Company is developing to
automate and simplify time-consuming and complex business-related Internet
functions such as Web navigation, direct marketing, user profiling, information
gathering, messaging, knowledge management, sales response and call center
automation. The Company is also developing products for applications in data
mining, Web-page analysis, statistical analysis and direct marketing to support
the functionality of the SmartBot products. While each Artificial Life SmartBot
can function independently and is programmed for a particular application,
customers can combine the SmartBots to create what the Company believes is the
industry's first integrated commercial, robot-based electronic commerce
("e-commerce") solution.
The rapidly increasing number of Web users and ubiquitous access to the
Internet, both in the United States and internationally, have resulted in the
emergence of the Internet as a new mass medium through which persons and
entities gather information, communicate, market and sell products and services,
interact and seek entertainment. However, the Company believes that the
Internet's success has also made it increasingly difficult for Internet users to
search for and locate information relevant to their interests and for companies
engaged in selling goods and services over the Internet to effectively market
and support their products and services. Artificial Life is developing its
family of SmartBot products to help address these needs.
The Company's SmartBot products are designed to communicate in natural
language and to respond "intelligently" to a user's command or inquiry, and in
some cases, to act autonomously. All of the Company's SmartBot products are
based on the Company's Alife-SmartEngine technology. The Alife-SmartEngine is
the core component that gives the Company's products the ability to converse
with its users in natural language, either by text or speech, and also to
process and respond to natural language commands or questions. The
Alife-SmartEngine contains several "intelligent" modules that process and
interpret manually input or verbal natural language. These modules work together
to break down the essential components of human conversation -- detailed
knowledge of certain topics, casual talk about topics of interest ("small
talk"), short and long term memory of previously discussed topics, and some
emotional content and intentions that drive the conversation -- and use these
components to "understand" and respond to the user in a manner that is more
human-like and less machine-like than current "query-based" software. The
Company believes that its products will allow people to interact with computers
in a more natural way -- similar to a conversation with a human being.
The Company believes that "intelligent" software products represent an
emerging standard in the way individuals and businesses will retrieve, present
and manipulate information on the Internet. The advent of graphical user
interfaces and window-based operating systems created a new personal computing
standard and led to significantly increased computer use because they made
computers easier to use. Users no longer had to engage in the time consuming
task of learning and accurately executing textual operating commands. Instead, a
generation of computer users operated their computers by pointing and clicking
with a "mouse." The Company believes that the introduction and adoption of
"intelligent" software programs like its SmartBots will make the Internet easier
to use through natural language communication and by freeing users from much of
the time needed to manually search for data on the Internet and then to
manipulate such data for the user's desired purpose.
The Company released its first SmartBot product, the non-commercial version
of the Alife-WebGuide, in September 1998. To date, the Company has not sold any
SmartBot products but expects to commence sale of the commercial versions of the
Alife-WebGuide in the fourth quarter of
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1998. The Company is presently developing the initial versions of the seven
SmartBot products listed below:
- ALIFE-WEBGUIDE: This SmartBot is designed to reside on a Web site and
help users navigate the site by accepting and processing questions, such
as search queries, from users in natural language and responding to users
in natural language. The bot engages the user in a "conversation" through
questions and answers and, upon learning of the user's interests, is
designed to display Web pages that match the content of the
"conversation" or to suggest links to other locations on the Web site.
- ALIFE-SALESREP: The Alife-SalesRep is being designed for e-commerce
retailers to use for one-to-one marketing on the Internet. Retailers will
input user profile information and product information into this
SmartBot's Knowledge Bases to deliver customer-specific, targeted sales
information via the Internet.
- ALIFE-MESSENGER: The Alife-Messenger is being designed to act as a
natural language-based automated e-mail reply and answering service. By
customizing the Alife-Messenger, a company can automate replies to
incoming e-mail queries and customer requests, thereby reducing the need
for human intermediaries.
- ALIFE-PORTFOLIO-MANAGER: This SmartBot is being developed to monitor, in
real-time, an individual's investment portfolio using criteria
established by the individual and, when such criteria have been met, or
failed to have been met, to autonomously in real-time contact the
individual by telephone, pager, e-mail or some other mode of
communication and let the individual know that trading action might be
warranted.
- ALIFE-CALL-CENTER-AGENT: The Alife-Call-Center-Agent is being designed
for call centers and help desks to be integrated with existing call
center server software to provide an automated first response to incoming
voice telephone calls or e-mail requests and to handle call center
requirements with virtually no aid from human operators.
- ALIFE-KNOWLEDGE-MANAGER: This SmartBot is being designed to extract
information contained in a company's Intranet documents, organize it and
make it more easily accessible for retrieval in order to enable companies
to more efficiently and intelligently manage the large amount of data and
documents that companies are making available on their Intranets.
- ALIFE-PERSONAL-TUTOR: The Alife-Personal-Tutor is a tutoring program
being designed to extract profile information from natural language
conversation between the bot and the student user and to automatically
adapt the difficulty and content of the lessons to the skill level of the
student based on this information.
The Company plans to offer a fully-functional "Personal" version of most of
its products to non-commercial users either free or at a low price. The Company
believes that this approach, which has been used successfully by other Internet
companies, will result in more rapid acceptance and sales of the Company's
products to commercial users. The commercial versions of the SmartBot will
include a "Professional" version for professional and small corporate users
and/or a transaction and client/server based "Enterprise" version for networked
corporate users. For the commercial versions of its SmartBot products, the
Company intends to charge a one-time licensing fee, and with respect to the
"Enterprise" version, intends to also charge a transactional fee based upon the
number of users which interact with its bots. The Company develops its SmartBot
products on widely available standard hardware and software platforms such as
Windows NT/95/98 and Internet browsers such as the Netscape
Navigator/Communicator and Microsoft Internet Explorer. The Company also expects
to offer some of the products for Unix and MacIntosh computers in the future.
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INDUSTRY BACKGROUND
Computer users and businesses have rapidly adopted the Internet as a means
to gather information, communicate, transact business, interact and be
entertained, making it an important new mass medium. International Data
Corporation ("IDC"), a market research firm, estimates that the number of
Internet users exceeded 69 million in 1997, and will grow to over 320 million by
2002. The Internet enables advertisers to target advertising campaigns utilizing
sophisticated databases of information about the users of various sites and to
directly generate revenues from these users through online transactions. As a
result, the Internet has become a compelling means to advertise and market
products and services. IDC estimates that the total value of goods and services
purchased over the Internet will grow from $12 billion in 1997 to approximately
$425 billion per year by the end of 2002.
Consequently, the amount of information available on the Internet has grown
dramatically. Web sites have proliferated along with the data available on such
sites, making it more difficult and time consuming for users to find the
information they want. Users are spending a substantial portion of their on-line
time searching for the specific information, products or services they desire.
Furthermore, once an Internet user locates a desired site or sites, the user
often finds it difficult to navigate such sites. As Web technology has improved,
many Web sites have become more complex by adding new features, products,
services, chat rooms, games, and other services. It is not uncommon for one Web
site to have dozens of different options and links to other associated sites.
While it is generally true that this increase in information and choices
benefits Web users, more effective tools are needed to find information,
products and services efficiently.
For corporations offering products and services on the Internet, the
rapidly increasing number of Internet users offers benefits but also presents
challenges. For example, a company may place a description of a new product on
its Web site and then find that within a few hours, thousands of Internet users
have sent e-mail messages to learn more about the product. While the volume of
inquiries suggests that the company might ultimately generate significant
revenues from selling its new product online, responding to each of these
inquiries in a timely manner can require an expensive customer service force. A
second problem facing e-commerce companies is the dramatic increase in
competition among e-commerce sites. Numerous e-commerce sites are launched
worldwide on the Internet daily. Accordingly, e-commerce retailers must find
increasingly efficient and cost-effective ways to market their products and
services to new customers and maintain or enhance existing customer
relationships.
THE ARTIFICIAL LIFE SOLUTION
Artificial Life is developing its Alife suite of SmartBot products to
assist in solving problems relating to information retrieval, Web navigation,
sales and service support and direct marketing on the Internet. These software
robots are designed to communicate in natural language and to respond
"intelligently" to the user's command or inquiry, and in some cases, to act
autonomously.
All of the Company's SmartBot products are based on the Company's
Alife-SmartEngine technology. The Alife-SmartEngine is the core component that
gives the Company's products the ability to converse with its users in natural
language, either by text or speech, and also to process and respond to natural
language commands or questions. The Alife-SmartEngine contains several
"intelligent" modules that process and interpret manual input or verbal natural
language. These modules work together to break down the essential components of
human conversation -- detailed knowledge of certain topics, casual talk about
topics of interest ("small talk"), short and long term memory of previously
discussed topics, and some emotional content and intentions that drive the
conversation -- and use these components to "understand" and respond to the user
in a manner that is more human-like and less machine-like than current
"query-based" software. The Company believes that its products will allow people
to interact with computers in a more natural way -- similar to a conversation
with a human being.
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Historically, general natural language understanding and processing
software programs (often classified under the category "artificial
intelligence") have focused on understanding the meaning of a sentence in the
same way as a human would, so that the software program can react appropriately
to a spoken sentence or a sentence typed in at the keyboard. These programs have
had only limited success. The Alife-SmartEngine instead attempts to mimic
comprehension of a sentence by using complex pattern matching techniques to
determine the actual goals and intentions of the user. By "understanding" the
user's goals and intentions, Alife-SmartEngine-based products are being designed
to possess the ability to actively drive and maintain a conversation about
certain topics, and not merely react to the user.
The Alife-SmartEngine stores information in "Knowledge Bases," databases
which can be combined or exchanged to give the derived products differing sets
of expertise. Customers can add information to a Knowledge Base using a special
"Knowledge Capture Editor." The Alife-SmartEngine has several linked stages that
read spoken or text-based input and produce spoken or text-based output. When a
user types in text or speaks to the Alife-SmartEngine via standard voice
recognition software packages, the pre-processed speech input is routed to a
parser. The parser then converts the input from a stream of text to a series of
words and phrases. An analysis module draws on the topic information in the
memory section of the Alife-SmartEngine as well as the syntactic structure of
the sentence derived from the Knowledge Base. The major control module of the
Alife-SmartEngine is a meta-control module (the "Meta Controller") that is
essential for switching between the different speech processing modules to
process the input and prepare the appropriate response corresponding to a given
input. The Meta Controller picks a reply appropriate to the perceived intention
of the user by applying a set of rules that define the conversational strategy
of the bot. All modules communicate through the Meta Controller, which also
coordinates and balances the weighting of each of the separate modules as the
bot prepares its composite action.
Most of the Company's SmartBots communicate with the user through a
life-like three-dimensional graphical interface known as an "Avatar." Each
product comes with a standard human-like Avatar. However, the Avatar may be
customized by the customer, including using pre-existing branded icons or
displays. For instance, an e-commerce retailer of computer equipment might
customize its Avatar so that visitors to its Web site converse with a talking
computer. The Company believes that the use of an animated "talking partner"
allows people to interact with computers in a more natural and personal manner,
and that the ability of the Company's customers to customize the Avatars allows
such customers to develop or maintain brand or name recognition among visitors
to a customer's Web site.
PRODUCTS
The Company is currently developing seven basic software robots for use
individually or in various combinations. The Company presently intends to
develop three different product versions of most of its SmartBots: (i) a
"Personal" version intended for use by individual users on their personal Web
pages; (ii) a "Professional" version intended for use by professionals and small
businesses on their Web sites; and (iii) a transaction and client/server based
"Enterprise" version intended for use by large companies, institutions and
government agencies that want to integrate the bots into their existing
computing environment with enhanced and special customizable product features.
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The overall Alife product suite of SmartBots is represented by the diagram
below.
[SmartBots Flow Chart]
ALIFE-WEBGUIDE: The Company released the Personal version of this SmartBot
in September 1998. It is designed to reside on a Web site and help users
navigate the site by accepting and processing questions, such as search queries,
from users in natural language and responding to users in natural language. This
SmartBot engages the user in a "conversation" through questions and answers and,
upon learning of the user's interests, is designed to display Web pages that
match the content of the "conversation" or to suggest links to other locations
on the Web site. In an e-commerce application, the Alife-WebGuide can be
designed by the Web site host to function like a human sales associate at a
retail store, greeting customers coming through the door of the virtual store
and assisting them with advice and background information about products and
prices. This bot allows the use of a customizable animated Avatar interface.
Alife-WebGuide runs on both Netscape Navigator or Communicator 3.0 or
higher and Microsoft Internet Explorer 3.0 or higher. The Enterprise version of
the Alife-WebGuide is being designed with a client/server architecture,
requiring a Java virtual machine 1.02 or higher. The Knowledge Capture Tool and
the Statistical Tools of the Alife-WebGuide Professional and Enterprise version
are being designed to run on Microsoft Windows 95, 98 or NT. The Company
released the Personal version 1.0 of the Alife-WebGuide in September 1998 and
intends to release the Professional version 1.0 and Enterprise version 1.0 in
the fourth quarter of 1998 or the first quarter of 1999. The Company believes
that the potential market for this product includes Internet Web sites which
need or desire a more user-friendly natural language interface.
ALIFE-SALESREP: The Alife-SalesRep is being designed for e-commerce
retailers to use for one-to-one marketing on the Internet. Retailers will be
able to input user profile information and product information into this
SmartBot's Knowledge Bases to deliver customer-specific targeted sales
information on the Internet via e-mail. For example, the Alife-SalesRep can be
configured by a corporate user to utilize customer profile information to
deliver information about a specific sale or promotion to an existing or
potential customer. In this type of application, the user will typically have
the option of downloading the Alife-SalesRep Avatar to his or her computer. Once
the Avatar is resident on the user's computer, the user can access the
e-commerce retailer's Web site simply by clicking on the Avatar, which will
appear as an icon on the user's computer screen and which in many cases will
maintain a link to the host Web site.
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The Company is also designing Alife-SalesRep to engage in autonomous
action. For example, a user will download an Avatar, and the Avatar will
continue to appear on the user's start-up screen. Each time the user turns on
his computer, the Avatar, through its link to the host Web site, will
automatically download new information that the program has determined may be of
interest to the user, based upon the information in its Knowledge Bases. For
example, the user could learn from the Avatar resident on the computer that the
host company is having a sale on modems which run at faster speeds than the one
the user currently owns. The host company will have determined which modem the
user currently owns because the user had a "conversation" with the
ALife-SalesRep about the user's computer hardware. Later, the user might be
offered discounted tickets by the Avatar to an upcoming computer industry trade
show in the user's hometown at which the host will be exhibiting its products.
Alife-SalesRep is being designed to run on personal computers with
Microsoft Windows 95, 98 or NT. The Company intends to release the 1.0
Professional and Enterprise versions of Alife-SalesRep in 1999. The initial
target market for this product consists of advertising companies, companies with
direct Internet marketing activities and more generally all companies with
extensive Internet sales and marketing strategies and activities.
Although Alife-WebGuide and Alife-SalesRep are independent products, the
Company believes that potential customers will be best served by combining the
Alife-WebGuide and the Alife-SalesRep into an integrated one-to-one marketing
solution. The two products can be customized so that when a user communicates
with the Alife-WebGuide, a customer profile of the user containing the user's
interests and expectations would be generated by analyzing the natural language
communication log files generated by the Alife-WebGuide. This information would
then be used by Alife-SalesRep to initiate targeted marketing via e-mail to
contact the customer about specific product or service offerings. This
integrated one-to-one marketing solution is graphically depicted below:
[Alife-WebGuide Flow Chart]
ALIFE-MESSENGER: The Alife-Messenger is being designed to serve as a
natural language-based automated e-mail reply and answering service. By
customizing the Knowledge Bases of the Alife-Messenger, a company can automate
replies to incoming e-mail queries and customer requests. The Alife-Messenger is
being designed to work like an off-line Alife-WebGuide by selecting appropriate
answers to input queries in an "intelligent" way. However, instead of displaying
Web pages, the Alife-Messenger is being designed to automatically scan an
incoming e-mail for certain keywords and phrases, prepare a reply e-mail and
attach, as appropriate, additional information that matches what this SmartBot
determines might be useful to the user, such as relevant documents, price-lists,
and links to other Web sites. For an individual who purchases Alife-Messenger
for his Web page, it could be used as a customized e-mail "answering machine" on
the Internet. For a corporate purchaser already using Alife-SalesRep, the
Alife-Messenger could be configured to select the appropriate Alife-SalesRep to
be attached to the reply e-mails, with the goal of improving and supporting the
direct marketing channel.
The Alife-Messenger is being designed to support standard e-mail systems.
The Company intends to release the 1.0 version of the Alife-Messenger in the
first quarter of 1999. The Company
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intends to market this product to companies and institutions which need to
extensively interact with clients via e-mail or which have extensive
customer/client service programs using the Internet.
ALIFE-PORTFOLIO-MANAGER: The Alife-Portfolio-Manager is being developed to
monitor an individual's investment portfolio. The user can specify the desired
characteristics of his or her portfolio, such as particular stocks to own,
specific buy and sell thresholds for individual stocks, and desired ratios of
types of stocks. Once the user's portfolio guidelines are established, the
Alife-Portfolio-Manager will monitor the portfolio 24 hours per day and
autonomously notify the user when the user's price or ratio guidelines are not
being met through one of a variety of predefined media such as e-mail, telephone
or pager. In addition to monitoring existing investment portfolios, the Alife-
Portfolio-Manager is being designed to find other potential investments fitting
the user's specified criteria and notify the investor about any such investment
opportunities once found.
The Alife-Portfolio-Manager is being designed to run on personal computers
with Microsoft Windows 95, 98 or NT. The Company plans to release the 1.0
version of the Alife-Portfolio-Manager in the second quarter of 1999. The
Company believes that the market for this product will consist of individuals
and companies in the financial services industry, including Internet brokers, as
well as individual investors.
ALIFE-CALL-CENTER-AGENT: The Alife-Call-Center-Agent is being designed for
call centers and help desks to be integrated with existing call center server
software to provide an automated first response to incoming voice telephone
calls or e-mail requests and to handle the call center requirements virtually
unaided by human operators. The Alife-Call-Center-Agent is being designed to be
able to recognize voice input as well as text-based input such as e-mail.
However, the voice recognition capabilities of Alife-Call-Center-Agent will
depend to a large extent on the availability of highly accurate voice
recognition systems for telephones, which the Company does not develop or sell.
The Alife-Call-Center-Agent, like the Alife-Messenger, will analyze incoming
requests and prepare relevant responses, but will also interact and interface
with call center management, routing and accounting systems.
The Alife-Call-Center-Agent will require an operating platform with a Java
virtual machine. Additional software and hardware enhancements may be necessary
depending on the specific interfaces to call center operating systems. The
Company plans to release the 1.0 version of Alife-Call-Center-Agent by the end
of 1999. The Company intends to market this product directly to customers with
call centers and to call center software vendors. The following diagram
graphically depicts the operation of the ALife-Call-Center-Agent.
[Alife-Call Center Agent Flow Chart]
ALIFE-KNOWLEDGE-MANAGER: This SmartBot is being designed to extract
information contained in a company's Intranet documents, organize it and make it
more easily accessible for retrieval to enable companies to more efficiently and
intelligently manage the large amount of data and documents that companies are
making available on their Intranets. Alife-Knowledge-Manager can be configured
to allow each Intranet user to describe his own profile, background and
interests in addition to other information contained on the Intranet. Once so
configured, users can make natural language search queries about topics of
interest through the ALife-Knowledge-Manager, and the program will respond by
providing relevant information contained on the company's Intranet, including
information about other users with similar interests or areas of expertise.
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The Alife-Knowledge-Manager is being designed to run on standard OS
platforms and to provide for interfaces to standard databases and third party
document retrieval and management systems. The Company intends to release the
first versions of Alife-Knowledge-Manager in late 1999 or early 2000. The
Company plans to market this product primarily to large corporations with an
existing Intranet infrastructure.
ALIFE-PERSONAL-TUTOR: The Company is developing this SmartBot to address
certain limitations of traditional Computer-based Training ("CBT") and
Internet-based Training ("IBT") products that are currently available. Whereas
conventional CBT and IBT programs follow a pre-defined path of learning, the
Alife-Personal-Tutor is being designed to use student profile information
extracted from natural language conversation between the SmartBot and the
student user to automatically adapt the difficulty and content of the lessons to
the skill level of the student. Using the natural language capabilities of the
Alife-SmartEngine, students will be able to ask numerous questions about any
topic at any time in plain English. In addition, the Alife-Personal-Tutor is
being designed to respond to questions with additional explanatory multimedia
data (video and audio) depending on the context of the ongoing lecture between
the student and the Alife-Personal-Tutor. It will also formulate questions and
tests depending on the flow of the conversation and lesson.
The Alife-Personal-Tutor is being designed in two components and is
currently planned to be sold in two ways: (i) in several application packages
with specific content (such as science, history etc.), called "tutorials," and
(ii) as a generic tool for developing such tutorials. Both modules of the
Alife-Personal-Tutor are being designed to run on Windows 98 and NT (stand alone
versions) or on standard Internet browsers for on-line applications. The Company
intends to release the first tutorials in the first quarter of 1999 and the
generic version by the second quarter of 1999. The Company's target market for
this product is expected to be the CBT and IBT market and the general education
market.
SERVICES
The Company expects to provide consulting, maintenance, technical hotline
and support services for most or all of its products. The Company anticipates
that customers will require support for, and customized versions of, the
Company's SmartBot products or additional developments in order to tailor the
product to the customers' needs. In addition, the Company plans to provide
support for the creation and maintenance of the Knowledge Bases of its bots and
customer specific back-office tools for analyzing client profiles gathered by
its bots.
The Company anticipates that it will continue to derive a portion of its
revenues from software consulting projects. In particular, the Company expects
that it will provide custom solutions for companies seeking consulting expertise
with agent-based software programs.
COMPANY STRATEGY
The Company's objective is to become a leader in the development and
implementation of commercial software robot-based solutions to solve various
issues confronting today's Internet use. To achieve this objective, the
Company's strategy includes the following key elements:
BUILD BRAND NAME RECOGNITION. The Company is seeking to achieve rapid and
broad adoption of its products and strong brand recognition. The Company will
seek to achieve this strategy by offering "Personal" versions of its products
for non-commercial use free of charge or at a low price. The Company also
intends to embark on an aggressive promotional campaign to increase awareness of
the Artificial Life brand and the Alife family of products. The promotional
campaign is expected to involve all common media (i.e. radio, television, print
and trade shows) with a particular emphasis on Internet channels.
CREATE MULTIPLE REVENUE STREAMS. The Company believes that its growing
product line, corporate customization, product Web sites and an installed user
base will present a significant
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opportunity to develop and maintain multiple revenue streams resulting from
product sales, customization and consulting, licensing fees and potentially in
the future, advertising revenues. As these different revenue streams mature,
decisions will be made as to the expansion and contraction of existing programs
based on their success as well as the introduction of new programs.
ESTABLISH STRATEGIC ALLIANCES. The Company intends to aggressively pursue
strategic alliances to gain access to complementary technologies and
distribution channels. The Company continually evaluates relationships with
companies that offer technologies complementary to the Company's SmartBot
products (such as speech integration and high-end graphics providers). The
Company intends to use alliances wherever possible to gain economies of scale
and to allow it to focus on its core strengths while using those of its partners
to add the complementary functionality necessary to increase value to users.
EXPAND GLOBALLY. The Company believes that significant opportunities exist
to capitalize on the growth of the Internet internationally. Because the Company
was once a subsidiary of a large and well-known German multimedia and Internet
solutions company, it already has significant contacts with a number of European
businesses. The Company believes that its products can be used worldwide, and
accordingly the Company intends to initiate an international program of
partnering and strategic investment to exploit cross-marketing, co-branding and
promotional opportunities.
LEVERAGE EXISTING CUSTOMER BASE. The Company intends to cultivate its
future installed user base to gather feedback, test new product releases and
create customer loyalty. The Company plans to collect customer profile data
(through the use of a User Profile Form) for use in development of companion
products and services with the ultimate goal of developing a "community" of
loyal users who are familiar and comfortable with the Company's products. The
Company plans to allow individual users who fill out the User Profile Form to
participate in beta testing of products, information sessions, product and
corporate announcements and product focus chat forums. The Company believes that
such communication, participation and interaction will foster long-term customer
loyalty. Several types of incentives are planned to foster both the sharing of
profile information and the return of value for participation. These may take
the form of reduced user fees, if applicable, free software, contests and other
participatory programs.
EXPAND AND ENHANCE PRODUCT BASE AND TECHNOLOGY. The Company believes that
it must regularly provide new products and technologies and improve existing
ones to be successful. The Company's products utilize proprietary technologies,
including the Alife-SmartEngine. The Company's strategy is to continue to
enhance its existing technologies and develop new technologies that it can
incorporate into future product offerings. Because the Company's product lines
are being centered around core concepts and technology, the Company believes
many complementary products will be able to be developed by leveraging the
Company's existing competencies and experience into new ideas. Furthermore, the
Company believes that its overall strategy will allow it to address issues
regarding products and services in a dynamic, almost real-time basis, thereby
allowing rapid response to market feedback and developments.
MARKETING AND SALES
The Company plans to offer an initial fully-functional "Personal" version
of most of its products to individual, non-commercial users either free of
charge or at a low price. The Company believes that this approach, which has
been used successfully by other Internet companies, will result in more rapid
acceptance and sale of the Company's products to commercial users: a
"Professional" version for professional and small corporate users and/or a
transaction and client/server based "Enterprise" version for networked corporate
users. For the commercial versions of its SmartBot products, the Company intends
to charge a one-time licensing fee and, with respect to the "Enterprise"
version, intends to also charge a transactional fee based upon the number of
users which interact with its bots. This strategy has been successful in the
past for companies such as
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Netscape, which distributed free versions of its browser software, and
RealNetworks, Inc., which has brought streaming audio and video to the Internet.
The Company intends to sell the Alife-WebGuide, the Alife-Messenger and the
Alife-SalesRep via Company Web sites and through additional distribution
partners. The Company may decide to license the Professional and/or Enterprise
versions of these products for a certain period for free in order to generate
market penetration and increase demand for these commercial versions of the
Company's products.
The Company intends to enter into a strategic relationship with an
international partner already established in the call center market to market
and sell the Alife-Call-Center-Agent. The Company believes this will be
necessary because the call center software market is already highly competitive.
The Company intends to market and sell the Alife-Portfolio-Manager in
cooperation with one or more established companies in the financial services
industry and/or the online banking and trading community.
The Alife-Personal-Tutor and the Alife-Knowledge-Manager target the IBT,
CBT market and the Intranet and corporate market. Accordingly, the Company
intends to distribute and market these products in cooperation with partners
with established experience and sales channels in these growing business
segments.
The Company has not entered into any such distribution or marketing
relationship, and there can be no assurance that it will be able to do so on
terms acceptable to it, or at all.
In addition to the marketing efforts for the individual products in the
Alife product suite, the Company intends to initiate aggressive marketing
campaigns beginning in the first half of 1999 to establish recognition of the
Artificial Life brand. The marketing activities are expected to involve all
common media (radio, TV, magazines, newspapers, trade shows) with a particular
emphasis on the Internet channels. The Company will use its own products like
the Alife-SalesRep and the Alife-WebGuide to promote its products and services.
The Company will also generate marketing material using its in-house
capabilities and multi-media know-how to produce video spots and innovative
interactive advertisement techniques for the Internet.
STRATEGIC ALLIANCES
The Company is currently evaluating several strategic alliances with
companies in the United States and Europe for marketing and selling products as
well as for collaborations in product development. The closing of collaboration
agreements may influence future product development, the market direction of
certain products and the success of certain product marketing efforts. To date,
however, the Company has not entered into any such strategic alliance or
collaboration agreement, and there can be no assurance that it will be able to
enter into such strategic agreements on terms acceptable to the Company, or at
all. See "-- Marketing and Sales."
PRODUCT DEVELOPMENT
The Company believes that strong development capabilities are essential to
its future performance and the maintenance of its competitive position. Since
its formation, the Company has primarily developed its technology and products
internally. The Company is exploring the opportunity to extend the functionality
of its Alife-SmartEngine-derived products through the inclusion of third party
software and applications in the development of such products.
The Company's development organization is arranged in four groups: the Core
Technology Group, which does research and designs and develops the technologies;
the Production Group, which specifies, produces and maintains product releases;
the Quality Assurance Group, which verifies that products meet their
specifications and the Company's quality standards; and the
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<PAGE> 39
Competence Group, which focuses on rapid prototyping of new ideas, consulting
and adapting customer specific versions of the products. The Company allocates
responsibilities among the groups to optimize the time, cost and quality control
issues associated with product development.
As of September 29, 1998, there were 18 employees on the Company's
development staff. The Company estimates that its total product development
expenses for its Alife-SmartEngine product suite will significantly increase
through 1998 and thereafter as it expects to allocate substantial resources to
future research and development. Through June 30, 1998, the Company had not
incurred any capitalized software development costs from its development
efforts. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
To the extent one or more of the Company's competitors introduce products
that more fully address customer requirements, the Company's business could be
materially adversely affected. There can be no assurance that the Company will
be successful in developing and marketing enhancements to its existing products
or new products, incorporating new technology on a timely basis, or that its new
products will adequately address the changing needs of the marketplace. If the
Company is unable to develop and introduce new products or enhancements to
existing products in a timely manner in response to changing market conditions
or customer requirements, the Company's business, prospects, financial condition
and results of operations will be materially adversely affected. See "Risk
Factors -- Rapid Technological Change."
COMPETITION
The market for the Company's products and services is new, evolving and
growing rapidly. Competition can be expected to intensify significantly as the
market matures and the more established software companies, such as Microsoft
Corporation, become increasingly involved. Barriers to entry are relatively
insubstantial. The Company believes that the principal competitive factors for
companies seeking to become involved in the software robot industry are core
technology, delivery methods, brand recognition, ease of use and interfaces.
The Company uses its core technology, the Alife-SmartEngine, in a wide
variety of business areas. Although the Company has not yet identified any
competitors in exactly the same areas in which it is active, there are companies
that have overlapping activities and therefore could be regarded as competition
to Artificial Life. Such firms include, among others: Brightware, Inc.,
Broadvision, Inc., Extempo, Inc., Haptek, Inc., Nearlife, Inc., Netsage Corp.,
Neuromedia, Inc. and Virtual Personalities, Inc. This list may not be complete
and may change and substantially increase over time.
Some of the Company's existing and potential competitors have longer
operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than the
Company. Such competitors are able to engage in more thorough marketing
campaigns for their products and services, be more aggressive from a pricing
standpoint and make more attractive offers to potential employees and partners.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company will be relying upon trade secrets, know-how, copyrights and
continuing technological innovations to develop and maintain its competitive
position. The Company seeks to protect such information, in part, by
confidentiality agreements with its corporate partners, collaborators, employees
and consultants. These agreements provide that all confidential information
developed or made known during the course of the individual's or entity's
relationship with the Company is to be kept confidential and not be disclosed to
third parties except in specific circumstances. The Company has caused each of
its employees to execute forms of Confidentiality and Inventions Agreements
which provide that, to the extent permitted by applicable law, all inventions
conceived by the individual during the individual's employment will remain the
exclusive property of the Company. There can be no assurance that these
agreements will not be breached,
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<PAGE> 40
that the Company would have adequate remedies for any breach, or that the
Company's trade secrets will not otherwise become known or be independently
discovered by competitors. Further, there can be no assurance that the Company
will be able to protect its copyrights, trade secrets or that others will not
independently develop substantially equivalent proprietary information and
techniques.
The Company has no patents or patent applications pending, nor does it have
any registered copyrights. There can be no assurance that the existing or future
patents of third parties will not have an adverse effect on the ability of the
Company to continue to commercialize its products. Furthermore, there can be no
assurance that other companies will not independently develop similar products
or duplicate any of the Company's planned products or obtain patents that will
require the Company to alter its products or processes, pay licensing fees or
cease development of its planned products. See "Risk Factors -- Intellectual
Property and Other Proprietary Rights."
EMPLOYEES
As of September 29, 1998, the Company had 24 full-time employees and three
part-time interns. The Company will need to hire additional staff to accomplish
its business development goals. There can be no assurance that the Company will
be able to find, attract or retain such additional staff. See "Risk
Factors -- Dependence on Key Personnel; Need for Additional Personnel."
SUB-CONTRACTORS AND EXTERNAL HUMAN RESOURCES
To fulfill timely delivery of products, the Company is currently using
external human resources and sub-contractors to develop its products. There can
be no assurance that these external resources and sub-contractors will be
available in the future, or that the current conditions and agreements with
these contractors or resources will remain reasonable. See "Risk Factors --
Dependence on Third Party Contractors."
FACILITIES
The Company rents 7,334 square feet of office space at Four Copley Place,
Suite 102, Boston, Massachusetts 02116, USA. The 36 month lease commenced
February 1, 1998, at an annual rental of $205,332. The management of the Company
is aware of the fact that additional office space will be required in fiscal
1999 due to the planned expansion of the Company. The Company believes, however,
that it will be able to obtain any additional space in a timely manner and on
commercially reasonable terms.
LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to the Company's
knowledge, threatened against the Company.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of September 29, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Eberhard Schoneburg.................... 41 President, Chief Executive Officer and
Chairman of the Board
Bruno Gabriel.......................... 52 Director
Elmar Wohlgensinger(1)(2).............. 59 Director
Hartmut Bergmann(1)(2)................. 48 Director
Robert Pantano......................... 37 Chief Financial Officer
Klaus Kater............................ 31 Chief Technology Officer
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Eberhard Schoneburg has been President and a member of the Board of
Directors of the Company since November 1994. He was Chief Executive Officer
from November 1994 to May 1996 and from October 1997 to the present. Mr.
Schoneburg has been the Chairman of the Board of Directors of the Company since
the founding of the Company. The Company was founded in November 1994 as
Neurotec International Corp., a wholly-owned subsidiary of Neurotec
Hochtechnologie GmbH ("Neurotec GmbH"), a German multimedia and Internet
solutions company owned by Mr. Schoneburg and two corporate investors: a major
German retailer and an industrial conglomerate. Neurotec GmbH was part of the
Neurotec Group, a group of high tech companies founded in Germany by Mr.
Schoneburg in 1993. In 1997 he sold all of his shares in Neurotec GmbH to the
remaining stockholders and contemporaneously purchased 100% of the shares of the
Company from Neurotec GmbH. From 1989 to 1994 Mr. Schoneburg was a professor for
industrial applications of artificial intelligence at Fachhochschule Furtwangen,
Germany. From 1988 to 1993, he was the Chairman of the BIT Group, a group of
five German high tech companies which he founded in 1988.
Mr. Schoneburg was awarded the First Prize of the Berlin Innovation Award
in 1990 for the development of the First European Neural Compiler and again in
1992 for the development of an expert system for detecting chemical hazards for
Procter and Gamble. He has published five course books on a wide variety of
topics such as computer viruses, neural networks, evolution strategies and
genetic programming and over 60 research papers on related topics. He is also a
member of the jury of the Golden Award of Montreux.
Bruno Gabriel joined the Company's Board of Directors in September 1998.
Since 1989, Mr. Gabriel has been a management consultant to several European
companies. From 1984 to 1989, he was the Chief Executive Officer and President
of the ALSO Group, a European distributor of personal computers and computer
equipment which he founded in 1984. From 1978 to 1984, Mr. Gabriel was the Chief
Executive Officer of ADV/ORGA, a major German software and consulting company.
From 1976 until 1978, he was manager for new media at Tagesanzeiger Zurich, a
Swiss newspaper company. Mr. Gabriel began his career in 1971 as a manager for
software development at the Telekurs AG, a Swiss telecommunications company.
Elmar Wohlgensinger joined the Company's Board of Directors in September
1998. He has worked for the IHA Institute, a Swiss market research company,
since 1961 where he has been a member of the board since 1970 and President
since 1980. Mr. Wohlgensinger is a Vice President of ATAG Holding, an accounting
firm, and has been a member of ATAG Ernst & Young management, an accounting
firm, since 1991. Mr. Wohlgensinger also serves on the boards of German GFK, EKN
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<PAGE> 42
Bank Nidwalden, Schweizerische Gesellschaft Fuer Marketing and the Chamber of
Commerce of Central Switzerland.
Hartmut Bergmann has been appointed to join the Board of Directors upon
completion of the Offering pursuant to an agreement between the Company and the
Representatives. See "Underwriting." Mr. Bergmann has been Chairman of the
Management Board of New York Broker Deutschland AG since 1990. From 1976 until
he joined New York Broker Deutschland AG, he was with Hornblower Fischer AG, a
regional German brokerage firm where he was a Member of the Management Board
from 1976 through 1989. Previously he was a financial consultant with Merrill
Lynch in Germany.
Robert Pantano, the Company's Chief Financial Officer, joined the Company
in April 1995 as an accountant, was appointed Controller and Director of Human
Resources in 1996 and was promoted to his present position in September 1997.
From 1993 until joining the Company, Mr. Pantano worked as the Controller and
General Manager of Intertech International Corp., an international engineering
firm. From 1990 to 1993, he was a Principal with Global Vision International, an
international export trade consulting firm specializing in central and eastern
Europe. Mr. Pantano holds a B.A. in accounting from Bentley College.
Klaus Kater joined the Company as Chief Technology Officer in May 1998.
From December 1997 through April 1998, Mr. Kater provided consulting services to
the Company. Prior to that time, from June 1997 to December 1997, he was
Managing Director for the mediaCenter Research Institute GmbH, a German
multimedia research center and a subsidiary of Neurotec GmbH. From March 1996 to
July 1997, Mr. Kater worked as a freelance consultant, coordinating the
activities of the Wirtschaftsforderungsgesellschaft Business Development
Institute in the context of multimedia initiatives, and concurrently from 1993
to 1996, he worked for Neurotec GmbH, where he served as project manager for
chemical expert systems. From 1992 to 1993, Mr. Kater was a project manager at
Expert Informatik GmbH, where he managed a team that developed an expert system
for Procter & Gamble. From 1990 to 1992, he ran his own company Kater & Stirm
Softwareentwicklung GbR which produced and sold software for the hotel
management market. Mr. Kater holds a degree in computer science and artificial
intelligence from Fachhochschule of Furtwangen in Germany.
BOARD OF DIRECTORS
The Board of Directors of the Company will be divided into three classes as
nearly equal in number as possible upon consummation of this Offering. Each year
the stockholders will elect the members of one of the three classes to a
three-year term of office. Mr. Wohlgensinger will serve in the class whose term
expires in 1999; Mr. Gabriel will serve in the class whose term expires in 2000;
and Mr. Schoneburg will serve in the class whose term expires in 2001. Upon
consummation of the Offering, the Representatives will have the right to appoint
one member of the Board of Directors of the Company for a period of five years.
The Representatives have named Hartmut Bergmann as their appointee and he will
be elected to the class whose term expires in 2000 effective upon consummation
of the Offering.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has a Compensation Committee which makes
recommendations concerning salaries and incentive compensation for employees of
and consultants to the Company, including salaries and incentive compensation
for executive officers. Initially, the whole Board will take action on the
recommendations of the Compensation Committee and will administer the 1998
Equity Incentive Plan. The Board also has an Audit Committee, which reviews the
results and scope of audits and other services provided by the Company's
independent public accountants and matters relating to the Company's internal
control system.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Wohlgensinger and Bergmann, both non-employee directors, will
constitute the Company's Compensation Committee. No executive officer of the
Company will serve as a member of the board of directors or compensation
committee of any entity that has one or more executive officers serving as a
member of the Company's Board of Directors or Compensation Committee.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company receive $3,000 for each
meeting of the Board of Directors attended and are reimbursed for reasonable
out-of-pocket expenses incurred in attending such meetings. Non-employee
directors are also eligible for participation in the Company's 1998 Equity
Incentive Plan, and the Company may in the future grant non-qualified stock
options to non-employee directors as an incentive to join or remain on the Board
of Directors.
ADVISORY BOARD
The Company's Advisory Board consists of individuals with demonstrated
expertise in fields related to the Company's business who advise the Company
concerning long-term planning, research and development. Members also evaluate
the Company's research program, recommend personnel to the Company and advise
the Company on technology matters. The Advisory Board has advised the Company on
specific marketing, management and artistic technical issues. Advisory Board
members are compensated on a time and expenses basis and have received options
to purchase shares of Common Stock of the Company.
No member of the Advisory Board is employed by the Company, and members may
have other commitments to or consulting or advisory contracts with their
employers or other entities that may conflict or compete with their obligations
to the Company. Accordingly, such persons are expected to devote only a small
portion of their time to the Company. The members of the Company's Advisory
Board are:
<TABLE>
<CAPTION>
ADVISOR AFFILIATION EXPERTISE
- -------------------------------- ----------------------- -----------------------
<S> <C> <C>
Hermann Wolf Richter............ HWR Strategic Marketing Internet and Multimedia
Prof. Petr Vrana................ Universitat of Kassel Media Arts
Prof. Paulo Gaudino, Ph.D....... Boston University Neural Science and
Cognitive Computing
</TABLE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table sets forth certain information
with respect to compensation paid or accrued for services rendered to the
Company in all capacities for the fiscal year ended December 31, 1997 by its
present and former Chief Executive Officer (the "Named Executive Officers"). No
other executive officer of the Company earned greater than $100,000 in the
fiscal year ended December 31, 1997(1).
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION(1) YEAR SALARY($) BONUS($) COMPENSATION
- ------------------------------ ---- --------- -------- ------------
<S> <C> <C> <C> <C>
Eberhard Schoneburg
President and Chief
Executive Officer(2)................ 1997 $ 54,254 -- $22,500(3)
Pamela A. Tomkinson
Former Chief Executive
Officer(4).......................... 1997 $113,861 -- --
</TABLE>
- ---------------
(1) Neither Robert Pantano, who became the Company's Chief Financial Officer in
September 1997, nor Klaus Kater, who became the Company's Chief Technology
Officer in May 1998,
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<PAGE> 44
had total compensation which exceeded $100,000 in the fiscal year ended
December 31, 1997. However, both Mr. Pantano and Mr. Kater entered into
employment agreements with the Company on May 1, 1998, under which each will
receive an annual base salary of $100,000. See "-- Executive Employment
Agreements."
(2) Mr. Schoneburg assumed the position of Chief Executive Officer in October
1997.
(3) Consists of rent paid by the Company for an apartment occupied by Mr.
Schoneburg. The Company ceased making such payments in January 1998.
(4) Ms. Tomkinson resigned as Chief Executive Officer on October 20, 1997.
OPTION GRANTS. There were no options granted by the Company during the
fiscal year ended December 31, 1997 to any of the Named Executive Officers.
OPTION EXERCISES AND YEAR-END OPTION VALUES. The Named Executive Officers
did not exercise any options during the fiscal year ended December 31, 1997 and
did not hold any stock options at December 31, 1997.
EXECUTIVE EMPLOYMENT AGREEMENTS
Under an Executive Employment Agreement dated July 1, 1998, and amended and
restated as of September 1, 1998, the Company has agreed to employ Eberhard
Schoneburg as President, Chief Executive Officer and Chairman of the Board of
Directors for a period of three years at an initial annual base salary of
$240,000 plus an incentive bonus equal to 3% of the Company's income from
operations. The agreement also provides that the annual base salary will
increase as determined by the Board but at not less than 10% per year. If Mr.
Schoneburg is terminated without cause (including a failure to renew the
agreement) or if he terminates his employment for "good reason" (as defined in
the agreement), he will be entitled to receive a lump sum payment of one to
three times (depending upon whether such termination occurs before or after a
change of control of the Company) the sum of (i) his base salary plus (ii) the
greater of the average of his two most recent annual bonuses or his annual bonus
payable in the year of termination. The agreement also contains a non-compete
and non-solicitation provision which covers the longer of the term of his
employment or any time period during which he serves as a director of the
Company, plus a period of one year thereafter.
Pursuant to Employment Agreements dated May 1, 1998, the Company has agreed
to employ Robert Pantano as Chief Financial Officer and Klaus Kater as Chief
Technology Officer (each an "Officer" and collectively, the "Officers") for at
least eighteen months at initial annual base salaries of $100,000. The
agreements also provide that the Officers are entitled to participate in any
bonus and incentive programs that may be in effect for employees of the Company
and that the Officers' base salaries will be reviewed at least annually by the
Company's Chief Executive Officer and may be adjusted upward at such time at the
sole discretion of the Chief Executive Officer. On May 1, 1999 the Officers will
each be entitled to receive stock options with a fair market value of $25,000.
If either Officer is terminated by the Company without "cause" (as defined in
the agreements) or if he terminates his employment for "good reason" (as defined
in the agreements) he is entitled to severance pay, at the rate in effect on the
termination date, for a period of six months. The agreements also contain
non-compete and non-solicitation provisions which cover the term of the
Officer's employment plus any additional time during which the Officer is
receiving any severance benefits from the Company, as well as confidentiality
and assignment of invention and intellectual property provisions.
EMPLOYEE BENEFIT PLANS
1998 EQUITY INCENTIVE PLAN. The Company's 1998 Equity Incentive Plan (the
"Incentive Plan") was approved by the Company's Board of Directors and its
stockholders in April 1998. The Incentive Plan authorizes the grant of incentive
stock options within the meaning of Section 422 of the Internal
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<PAGE> 45
Revenue Code of 1986, as amended (the "Code"), non-qualified stock options,
stock grants and certain stock equivalents (including, but not limited to,
phantom stock, performance units, dividend equivalents and stock appreciation
rights) (collectively "stock awards"). A total of 1,200,000 shares of Common
Stock (subject to adjustment for stock splits and similar capital changes) have
been reserved for issuance under the Incentive Plan, and 26,083 shares had been
issued pursuant to stock awards granted under the Incentive Plan, 590,569 shares
were subject to outstanding options and 583,348 shares were available for future
grant. Grants of stock awards under the Incentive Plan and all questions of
interpretations with respect to the Incentive Plan are determined by the
Compensation Committee of the Board of Directors of the Company or the whole
Board of Directors, if applicable.
In the event of a change of control of the Company, the Compensation
Committee in its discretion may, at the time a stock award is made or at any
time thereafter, take one or more of the following actions: (i) provide for the
acceleration of any time period relating to the exercise or payment of a stock
award; (ii) provide for payment of cash or other property with a fair market
value equal to the amount that would have been received upon the exercise or
payment of a stock award had the stock award been exercised or paid upon the
change in control; (iii) adjust the terms of a stock award in a manner
determined by the Compensation Committee to reflect the change in control; (iv)
cause a stock award to be assumed, or new rights substituted therefor, by
another entity; or (v) make such other provision as the Compensation Committee
may consider equitable and in the best interests of the Company.
401(K) PLAN. The Company's 401(k) Profit Sharing Plan (the "401(k) Plan")
covers substantially all employees of the Company. Each year, participants may
contribute from 2% to 15% of pretax annual compensation, subject to the
statutory limit (a maximum of $10,000 in 1998). In addition, the Company makes a
matching contribution equal to 50% of each participant's elective contribution
up to a maximum of 1.5% of the participant's annual compensation. Participants
are immediately vested in their contributions plus actual earnings thereon. A
participant is 100% vested in the Company's matching contributions after five
"years of service" (as defined in the 401(k) Plan).
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION
The Delaware General Corporation Law (the "DGCL") authorizes corporations
to limit or eliminate the personal liability of directors to corporations and
their stockholders for monetary damages for breach of directors' fiduciary duty
of care. The Certificate of Incorporation of the Company limits the liability of
directors of the Company to the Company or its stockholders to the fullest
extent permitted by Delaware law. See "Description of Capital Stock -- Delaware
Law and Certain Charter and Bylaw Provisions."
The Certificate of Incorporation of the Company provides mandatory
indemnification rights to any officer or director of the Company who, by reason
of the fact that he or she is an officer or director of the Company, is involved
in a legal proceeding of any nature. Such indemnification rights include
reimbursement for expenses incurred by such officer or director in advance of
the final disposition of such proceeding in accordance with the applicable
provisions of the DGCL. Such limitation of liability and indemnification may not
apply to liabilities arising under the Federal securities laws and does not
affect the availability of equitable remedies.
There is no pending litigation or proceeding involving a director, officer,
officer, employee or agent of the Company in which indemnification by the
Company will be required or permitted. The Company is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
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<PAGE> 46
CERTAIN TRANSACTIONS
DIRECTORS AND EXECUTIVE OFFICERS
The Company was founded in November 1994 as Neurotec International Corp., a
wholly-owned subsidiary of Neurotec Hochtechnologie GmbH ("Neurotec GmbH"), a
German multimedia and Internet solutions company owned by Eberhard Schoneburg,
Artificial Life's President, Chief Executive Officer and Chairman, and two
corporate investors: a major German retailer and an industrial conglomerate. In
July 1997, Mr. Schoneburg sold all of his shares of Neurotec GmbH to the
remaining stockholders and contemporaneously purchased 100% of the shares of the
Company (Neurotec International Corp.) from Neurotec GmbH for approximately
$500,000.
On June 29, 1998, Mr. Schoneburg loaned the Company $500,000 at an annual
interest rate of 10%. The full amount of the loan, including principal and all
accumulated interest thereon, is due and payable on January 1, 2000.
In April 1997, Mr. Schoneburg agreed to forego the majority of his $240,000
annual salary as President and Chief Executive Officer until such time as
sufficient funds were available for reinstatement. During 1997, Mr. Schoneburg
was paid a total of $76,754 in salary and other compensation. See
"Management -- Executive Compensation." Beginning January 1, 1998, Mr.
Schoneburg's salary was deferred. During the time that his salary was deferred,
the Company advanced Mr. Schoneburg approximately $153,916 for living expenses.
On September 25, 1998 the Company paid Mr. Schoneburg a total of $175,385
representing 38 weeks of deferred salary. Mr. Schoneburg used the after tax
proceeds of this payment to repay the majority of the advances made to him
during the deferral period.
During 1998, the Company has paid approximately $35,200 in total cash
consideration to Bruno Gabriel, a director of the Company, for consulting
services rendered to the Company.
On June 30, 1998, Mr. Gabriel and Elmar Wohlgensinger, directors of the
Company were granted options to purchase 184,426 and 163,934 shares of Common
Stock, respectively. These options were granted in consideration of advisory
services rendered to the Company.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table and footnotes set forth certain information regarding
the beneficial ownership of the Company's Common Stock as of September 29, 1998,
and as adjusted to reflect the sale of the shares offered by the Company and the
Selling Stockholder in this Offering, by (i) persons known by the Company to be
beneficial owners of more than 5% of the outstanding shares of Common Stock,
(ii) the Selling Stockholder, (iii) the Named Executive Officers and other
executive officers, (iv) each director of the Company and (v) all current
executive officers and directors as a group:
<TABLE>
<CAPTION>
SHARES OF SHARES OF
COMMON STOCK COMMON STOCK
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
THE OFFERING(1) THE OFFERING(1)
NAME AND ADDRESS(2) OF ----------------------- SHARES -----------------------
BENEFICIAL OWNER NUMBER PERCENT(3) OFFERED NUMBER PERCENT(3)
- ---------------------- --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
Eberhard Schoneburg............ 5,967,377 75.8% 400,000 5,567,377 61.4%
Cybermind Interactive Europe
AG........................... 409,836 5.2% -- 409,836 4.5%
Am Borsigturm 48
13507 Berlin
Germany
Pamela A. Tomkinson(4)......... 0 * -- 0 *
Robert Pantano(5).............. 16,442 * -- 16,442 *
Klaus Kater(5)................. 16,442 * -- 16,442 *
Bruno Gabriel(6)............... 774,426 9.6% -- 774,426 8.4%
Elmar Wohlgensinger(5)......... 163,934 2.0% -- 163,934 1.8%
Hartmut Bergmann(7)............ 0 * -- 0 *
All current executive officers
and directors as a group (6
persons)(8).................. 6,938,621 84.1% 400,000 6,538,621 69.2%
</TABLE>
- ---------------
* Less than 1%
(1) Shares of Common Stock that an individual or group has the right to acquire
within 60 days of September 29, 1998, pursuant to the exercise of options or
warrants are deemed to be outstanding for the purposes of computing the
percentage ownership of such individual or group, but are not deemed to be
outstanding for the purpose of computing the percentage ownership of any
other person shown in the table. Except as indicated in footnotes to this
table, the Company believes that the stockholders named in this table have
sole voting and investment power with respect to all shares of Common Stock
shown to be beneficially owned by them based on information provided to the
Company by such stockholders.
(2) The address of all persons who are executive officers or directors of the
Company is: c/o Artificial Life, Inc., Four Copley Place, Suite 102, Boston,
Massachusetts, 02116.
(3) Percentage of ownership is based on 7,870,574 shares of Common Stock
outstanding on September 29, 1998 and 9,070,574 shares of Common Stock
outstanding after the completion of this Offering.
(4) Ms. Tomkinson resigned as Chief Executive Officer of the Company on October
20, 1997.
(5) Consists solely of shares subject to stock options which are currently
exercisable.
(6) Includes 184,426 shares subject to stock options which are currently
exercisable.
(7) Mr. Bergmann will become a director upon consummation of the Offering. See
"Underwriting."
(8) Includes 381,244 shares subject to stock options which are currently
exercisable.
46
<PAGE> 48
DESCRIPTION OF CAPITAL STOCK
Effective upon consummation of the Offering, the Company's authorized
capital stock will consist of 30,000,000 shares of Common Stock, par value $.01
per share ("Common Stock"), and 5,000,000 shares of Preferred Stock, par value
$.01 per share ("Preferred Stock"). Upon completion of this Offering, there will
be 9,070,574 shares of Common Stock and no shares of Preferred Stock
outstanding. As of September 29, 1998, there were 7,870,574 shares of Common
Stock outstanding, held of record by 35 stockholders. In addition, as of
September 29, 1998 there were outstanding options to purchase 590,569 shares of
Common Stock. Upon consummation of the Offering, there will be outstanding
warrants to purchase 160,000 shares of Common Stock.
COMMON STOCK
Upon consummation of the Offering, the 53,278 outstanding shares of
Non-Voting Common Stock will be automatically converted into 53,278 shares of
Voting Common Stock and the Company's Certificate of Incorporation will not
authorize the issuance of any shares of Non-Voting Common Stock in the future.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to the rights
and preferences of the holders of any outstanding Preferred Stock, the holders
of Common Stock are entitled to receive ratably such dividends as are declared
by the Board of Directors out of funds legally available therefor. In the event
of a liquidation, dissolution or winding up of the Company, holders of Common
Stock have the right to a ratable portion of assets remaining after the payment
of all debts and other liabilities of the Company, subject to the liquidation
preferences of the holders of any outstanding Preferred Stock. Holders of Common
Stock have neither pre-emptive rights nor rights to convert their Common Stock
into any other securities and are not subject to future calls or assessments by
the Company. There are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common Stock are, and the shares
offered hereby upon issuance and sale will be, fully paid and non-assessable.
The rights, preferences and privileges of the holders of Common Stock are
subject to, and may be adversely affected by, the rights of the holders of
Preferred Stock that the Company may designate and issue in the future.
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by Delaware law, without further action by the stockholders, to issue
shares of Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences,
sinking fund terms, the number of shares constituting any series and the
designation of such series. The Company believes that the Board of Directors'
power to set the terms of, and the Company's ability to issue, Preferred Stock
will provide flexibility in connection with possible financing transactions in
the future. The issuance of Preferred Stock, however, could adversely affect the
voting power of holders of Common Stock and decrease the amount of any
liquidation distribution to such holders. The presence of outstanding Preferred
Stock could also have the effect of delaying, deterring or preventing a change
in control of the Company. The Company has no present plans to issue any shares
of Preferred Stock.
REPRESENTATIVES' WARRANTS
Upon consummation of the Offering, the Representatives will be granted a
warrant to purchase 160,000 shares of Common Stock at an exercise price equal to
120% of the initial public offering price. This warrant is exercisable for a
four year period beginning on the first anniversary of the date on which this
Prospectus is declared effective by the Commission and expires on the fifth
anniversary of such date. The number of shares for which the warrant is
exercisable is subject to
47
<PAGE> 49
adjustment for stock splits, combinations or dividends and reclassifications,
exchanges or substitutions.
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
The provisions of the Certificate of Incorporation and Restated Bylaws
("the Bylaws") of the Company discussed below could make more difficult or
discourage a proxy contest or other change in the Company's management or the
acquisition or attempted acquisition of control by a holder of a substantial
amount of the Company's voting stock. It is possible that such provisions could
make it more difficult to accomplish, or could deter, transactions that
stockholders may otherwise consider to be in their best interests or those of
the Company.
The Company is subject to the anti-takeover provisions of Section 203 of
the DGCL. In general, Section 203 prohibits a Delaware corporation from engaging
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is, or the transaction
in which the person became an interested stockholder was, approved in a
prescribed manner or another prescribed exception applies. For purposes of
Section 203, a "business combination" is defined broadly to include a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and, subject to certain exceptions, an "interested
stockholder" is a person who, together with his or her affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
The Board of Directors of the Company will be divided into three classes as
nearly equal in number as possible upon consummation of the Offering. Each year
the stockholders will elect the members of one of the three classes to a
three-year term of office. Upon consummation of the Offering, Mr. Wohlgensinger
will serve in the class whose term expires in 1999; Messrs. Gabriel and Bergmann
will serve in the class whose term expires in 2000; and Mr. Schoneburg will
serve in the class whose term expires in 2001. All directors elected to the
Company's classified Board of Directors will serve until the election and
qualification of their respective successors or their earlier resignation or
removal. The Board of Directors is authorized to create new directorships and to
fill such positions so created and is permitted to specify the class to which
any such new position is assigned. The person filling such position would serve
for the term applicable to that class. The Board of Directors (or its remaining
members, even if less than a quorum) is also empowered to fill vacancies on the
Board of Directors occurring for any reason for the remainder of the term of the
class of directors in which the vacancy occurred. Members of the Board of
Directors may only be removed for cause. These provisions are likely to increase
the time required for stockholders to change the composition of the Board of
Directors. For example, in general, at least two annual meetings will be
necessary for stockholders to effect a change in a majority of the members of
the Board of Directors.
The Company's Bylaws provide that, for nominations to the Board of
Directors or for other business to be properly brought by a stockholder before a
meeting of stockholders, the stockholder must first have given timely notice
thereof in writing to the Secretary of the Company. To be timely, a
stockholder's notice generally must be delivered not less than 60 days nor more
than 90 days prior to the annual meeting. If the meeting is not an annual
meeting, the notice must generally be delivered not more than 90 days prior to
the special meeting and not later than the later of 60 days prior to the special
meeting or ten days following the day on which public announcement of the
meeting is first made by the Company. Only such business may be conducted at a
special meeting of stockholders as is brought before the meeting pursuant to the
Company's notice of meeting. The notice by a stockholder must contain, among
other things, certain information about the stockholder delivering the notice
and, as applicable, background information about the nominee or a description of
the proposed business to be brought before the meeting.
48
<PAGE> 50
The Certificate of Incorporation also requires that any action required or
permitted to be taken by stockholders of the Company must be effected at a duly
called annual or special meeting of stockholders and may not be effected by a
consent in writing. Special meetings of the stockholders may be called only by
the Board of Directors of the Company pursuant to a resolution adopted by a
majority of the total number of directors authorized.
The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless the corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage. The
Certificate of Incorporation of the Company requires the affirmative vote of the
holders of at least 70% of the outstanding voting stock of the Company, voting
together as a single class, to amend or repeal any of the provisions discussed
in this section entitled "Delaware Law and Certain Charter and Bylaw Provisions"
or to reduce the number of authorized shares of Common Stock or Preferred Stock.
Such 70% stockholder vote would be in addition to any separate class vote that
might in the future be required pursuant to the terms of any preferred stock
that might then be outstanding. Such 70% vote is also required for any amendment
to, or repeal of, the Company's Bylaws by the stockholders. The Bylaws may also
be amended or repealed by a simple majority vote of the Board of Directors.
As permitted by the DGCL, the Certificate of Incorporation provides that
directors of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for beach of the director's fiduciary duties
as a director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions, as provided in Section 174 or successor provisions of the DGCL, or
(iv) for any transaction from which the director derives an improper personal
benefit.
The Certificate of Incorporation and Bylaws of the Company provide that the
Company shall indemnify its directors and officers to the fullest extent
permitted by Delaware law (except, in some circumstances, with respect to suits
initiated by the director or officer) and advance expenses to such directors or
officers to defend any action for which rights of indemnification are provided.
In addition, the Certificate of Incorporation and Bylaws of the Company also
permit the Company to grant such rights to its employees and agents. The Bylaws
also provide that the Company may enter into indemnification agreements with its
directors and officers and purchase insurance on behalf of any person whom it is
required or permitted to indemnify. The Company believes that these provisions
will assist the Company in attracting and retaining qualified individuals to
serve as directors, officers and employees.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company 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.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company. The transfer agent's telephone number is (212)
936-5100.
49
<PAGE> 51
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no market for the Common Stock of
the Company. The Company can make no prediction as the effect, if any, that
sales of shares or the availability of shares for sale will have on the market
price of the Common Stock prevailing from time to time. Nevertheless, sales of
significant amounts of the Common Stock in the public market, or the perception
that such sales may occur, could adversely affect prevailing market prices. See
"Risk Factors -- Shares Eligible for Future Sale."
Upon completion of this Offering, the Company expects to have 9,070,574
shares of Common Stock outstanding (excluding 590,569 and 160,000 shares
reserved for issuance upon the exercise of outstanding stock options and the
Representatives' Warrant, respectively) (9,310,574 shares of Common Stock
outstanding if the Underwriters' over-allotment option is exercised in full). Of
these shares, the 1,600,000 shares offered hereby will be freely tradable
without restrictions or further registration under the Securities Act, except
for any shares purchased by "affiliates" of the Company, as that term is defined
in Rule 144 under the Securities Act ("Rule 144"), which shares will be subject
to the resale limitations imposed by Rule 144, as described below.
All of the remaining 7,470,574 shares of Common Stock outstanding will be
"restricted securities" within the meaning of Rule 144 and may not be resold in
the absence of registration under the Securities Act, except pursuant to
exemptions from such registration including, among others, the exemption
provided by Rule 144. Of the restricted securities, no shares are eligible for
sale in the public market immediately after this Offering pursuant to Rule
144(k) under the Securities Act ("Rule 144(k)"). A total of 5,567,377 restricted
securities will be eligible for sale in the public market in accordance with
Rule 144 beginning 90 days after the date of this Prospectus. Taking into
consideration the effect of the lock-up agreements described below and the
provisions of Rules 144 and 144(k), no restricted shares will be eligible for
sale until the expiration of the lock-up agreements one year after the date of
this Prospectus, subject to the provisions of Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are required to
be aggregated) whose restricted securities have been outstanding for at least
one year, including a person who may be deemed an "affiliate" of the Company,
may only sell a number of shares within any three-month period which does not
exceed the greater of (i) one percent of the then outstanding shares of the
Company's Common Stock (approximately 90,705 shares after this Offering) or (ii)
the average weekly trading volume in the Company's Common Stock in the four
calendar weeks immediately preceding such sale. Sales under Rule 144 are also
subject to certain requirements as to the manner of sale, notice and the
availability of current public information about the Company. A person who is
not an affiliate of the issuer, has not been an affiliate within three months
prior to the sale and has owned the restricted securities for at least two years
is entitled to sell such shares under Rule 144(k) without regard to any of the
limitations described above.
Beginning 90 days after the date of this Prospectus, certain shares issued
or issuable upon the exercise of options granted by the Company prior to the
date of this Prospectus will also be eligible for sale in the public market
pursuant to Rule 701 under the Securities Act ("Rule 701"). In general, Rule 701
permits resales of shares issued pursuant to certain compensatory benefit plans
and contracts, commencing 90 days after the issuer becomes subject to the
reporting requirements of the Securities and Exchange Act of 1934, as amended,
in reliance upon Rule 144, but without compliance with certain restrictions of
Rule 144, including the holding period requirements. As of September 29, 1998,
the Company has granted options covering 590,569 shares of Common Stock that
have not yet been exercised and which become exercisable at various times in the
future. Any shares of Common Stock issued upon the exercise of options, in
addition to the 701 Shares, will be eligible for sale pursuant to Rule 701.
As of September 29, 1998, the Company has also issued 26,083 shares of
Common Stock pursuant to the exercise of stock options (the "701 Shares").
50
<PAGE> 52
The executive officers and directors and certain other existing
stockholders of the Company, who beneficially own in the aggregate
shares of Common Stock and holders of options to purchase shares of
Common Stock, have agreed that they will not, without the prior written consent
of New York Broker, Inc., offer, pledge, sell, contract to sell, grant any
option to purchase or otherwise dispose of, directly or indirectly, any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock for a period of one year after the date of this
Prospectus, and, with respect to Registrable Shares to be registered
by certain holders in this Offering, for a period of six months after the date
of this Prospectus.
REGISTRATION RIGHTS
The holders of 1,287,114 shares of Common Stock (the "Registrable Shares")
issued in Private Placements in June 1998 and September 1998 have "piggyback"
registration rights to request that the Company register any of such shares in
the event that the Company proposes to register any of its securities under the
Securities Act (other than in connection with an acquisition or issuance of
stock options or pursuant to a Form S-8 (for use with certain Company employee
benefit plans), Form S-4 (for use in connection with certain business
combinations involving the Company) or comparable registration statement).
However, if such piggyback registration rights are exercised in connection with
an underwritten public offering of the Company's Common Stock, the managing
underwriter of such an offering has the right to reduce the number of such
shares to be included in such public offering. In addition, holders of Common
Stock representing 824,000 of the shares of the Registrable Shares have the
right, without limitation, to include up to an aggregate of 20% of such shares
for registration in the Offering. Holders of shares have requested the
registration of such shares in the Offering. Except for these shares, no other
Registrable Shares will form a part of the shares of Common Stock registered in
this Offering. The holders of the
Registrable Shares to be registered in this Offering have entered into six-month
lock-up agreements and the holders of of the Registrable Shares have
entered into one year lock-up agreements as described above.
All expenses incurred in connection with such registrations (other than
underwriters' discounts and commissions and stock transfer fees and expenses)
and the fees and expenses of legal counsel to the selling stockholders will be
borne by the Company.
51
<PAGE> 53
UNDERWRITING
Subject to the terms and conditions set out in the underwriting agreement,
dated , 1998, among the Company, the Selling Stockholder and the
Underwriters (the "Underwriting Agreement"), the Underwriters, acting through
New York Broker, Inc. (the "Representative") and New York Broker Deutschland AG
(the "International Manager" and together with New York Broker, Inc., the
"Representatives"), have severally agreed to purchase from the Company and from
the Selling Stockholder, the number of shares of Common Stock set forth opposite
their respective names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
New York Broker, Inc. ......................................
New York Broker Deutschland AG..............................
---------
Total............................................. 1,600,000
=========
</TABLE>
Pursuant to the Underwriting Agreement, the shares of Common Stock are
being offered and sold through two selling groups. New York Broker, Inc. is
acting as Representative for the U.S. Selling Group which is offering and
selling shares of Common Stock only in the United States. New York Broker
Deutschland AG is acting as International Manager with respect to the
International Selling Group which is offering and selling shares of Common Stock
in all countries outside of the United States.
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of Common Stock offered hereby
(other than those covered by the over-allotment option described below), if any
are purchased. The Company and the Selling Stockholder have been advised that
the Underwriters propose initially to offer the shares of Common Stock to the
public at the offering price set forth on the cover page of this Prospectus and
to certain selected dealers at such price less a concession not in excess of
$ per share. The public offering price and other selling terms may be
changed by the Representative after the initial offering to the public.
The Underwriting Agreement provides for indemnification among the Company,
the Selling Stockholder and the Underwriters against certain liabilities in
connection with this Offering, including liabilities under the Securities Act.
The Company has granted the Underwriters an option exercisable during the
30 day period after the date of this prospectus to purchase up to an aggregate
of 240,000 additional shares of Common Stock at the public offering price, less
the Underwriting discounts and commissions, for the sole purpose of covering
over-allotments, if any. To the extent that the Underwriters exercise such
option, each Underwriter will become obligated, subject to certain conditions,
to purchase approximately the same percentage of such additional shares as the
number set forth next to such Underwriter's name in the table above bears to the
total number of shares in such table, and the Company will be obligated,
pursuant to the option, to sell such shares to the Underwriters.
Upon consummation of the Offering, the Representatives will have the right
to appoint one member to the Board of Directors of the Company for a period of
five years. The Representatives have named Hartmut Bergmann as their appointee
and he will be elected to the class whose term expires in 2000. Mr. Bergmann is
Chairman of the Management Board of New York Broker Deutschland AG.
The Company has agreed to pay the Underwriters a non-accountable expense
allowance of three percent of the gross proceeds derived from the sale of the
shares of Common Stock, of which
52
<PAGE> 54
$30,000 has been paid to date. The Company has also agreed to pay all expenses
in connection with qualifying the shares of Common Stock offered hereby for sale
under the laws of such states as the Underwriters may designate, including
expenses of counsel retained for such purpose by the Underwriters. The Company
has also agreed to pay the expenses of the Selling Stockholder. In addition, the
Company has agreed to pay the fees of German and United States counsel for the
Underwriters which includes the cost of preparation of all filings with the
Securities and Exchange Commission and the Nasdaq Stock Market which fees are
customarily incurred by issuers.
The Company has agreed to sell to the Representatives and their designees
for $100 a warrant (the "Representatives' Warrant") to purchase up to 160,000
shares of Common Stock (184,000 shares if the Underwriters' over-allotment
option is exercised in full) for a period of four years commencing one year from
the date of this Prospectus at a price equal to 120% of the initial public
offering price. During the Warrant exercise term, the holders of the
Representatives' Warrant are given, at nominal cost, the opportunity to profit
from a rise in the market price of the Company's Common Stock with a resulting
dilution in the interest of other stockholders. In addition, during that period,
the terms on which the Company will be able to obtain additional capital may be
adversely affected, because the Representatives are likely to exercise the
Representatives' Warrant at a time when the Company would, in all likelihood, be
able to obtain capital by a new offering of securities on terms more favorable
than those provided in the Representatives' Warrant. Any profit realized by the
Representatives on the sale of the Representatives' Warrant or the underlying
shares of Common Stock may be deemed additional underwriting compensation. See
"Description of Capital Stock -- Representatives' Warrant."
The Company, and its officers, directors and certain other stockholders who
beneficially own shares in the aggregate, have agreed not to offer,
pledge, sell, contract to sell, grant any option to purchase or otherwise
dispose of, directly or indirectly, any shares of Common Stock, or any
securities convertible into or exchangeable or exercisable for, or any rights to
purchase or acquire, shares for a period of one year following the date of this
Prospectus without the prior written consent of the Representative which may, in
its sole discretion and at any time without notice, release all or any portion
of the shares subject to such lock-up agreements.
The Representative has advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the liability of the Underwriters
and certain selling group members to bid for and purchase the Common Stock. As
an exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., they sell a greater aggregate number of
shares of Common Stock than is set forth on the cover page of this Prospectus,
the Underwriters may reduce the short position by purchasing shares of Common
Stock in the open market. The Underwriters may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
The Underwriters may also impose a penalty bid on certain selling group
members. This means that if the Underwriters purchase Common Stock in the open
market to reduce the selling group members' short position or to stabilize the
price of the Common Stock, they may reclaim the amount of the selling concession
from the selling group members who sold those shares of Common Stock as part of
the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of a security to be higher than it
might be in the absence of such purchases.
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<PAGE> 55
The imposition of a penalty bid might also have an effect on the price of a
security to the extent that it were to discourage resales of the security.
Neither the Company nor the Representatives make any representations or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor the Representatives make any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock will
be determined by negotiations between the Company and the Representatives of the
Underwriters. Among the factors to be considered in such negotiations are
prevailing market and general economic conditions, the market capitalizations,
trading histories and stages of development of other traded companies that the
Company and the Representatives believe to be comparable to the Company, the
results of operations of the Company in recent periods, the current financial
position of the Company, estimates of business potential of the company and the
present state of the Company's development and the availability for sale in the
market of a significant number of shares of Common Stock. Additionally,
consideration will be given to the general status of the securities market, the
market conditions for new issues of securities and the demand for securities of
comparable companies at the time the Offering was made.
LEGAL MATTERS
The validity of issuance of the Common Stock offered hereby will be passed
upon for the Company by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.,
Boston, Massachusetts. Robert Duggan, a partner with Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C., also is the Secretary of the Company. Certain legal
matters in connection with this Offering will be passed upon for the
Underwriters by Greenberg Traurig, P.A., Miami, Florida.
EXPERTS
The financial statements of Artificial Life as of December 31, 1996 and
1997 and for each of the three years in the period ended December 31, 1997
included in this Prospectus have been so included in reliance on the report of
Wolf & Company, P.C., Boston, Massachusetts, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act, with respect to the Common Stock offered hereby.
As permitted by the rules and regulations of the Commission, this Prospectus,
which is part of the Registration Statement, omits certain information,
exhibits, schedules and undertakings set forth in the Registration Statement.
For further information pertaining to the Company and the Common Stock,
reference is made to such Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus as to the contents or
provisions of any documents referred to herein are not necessarily complete, and
in each instance where a copy of the document has been filed as an exhibit to
the Registration Statement, reference is made to the exhibit so filed. The
Registration Statement may be inspected without charge at the office of the
Commission at 450 Fifth Street, N.W., Washington, DC 20549. Copies of the
Registration Statement may be obtained from the Commission at prescribed rates
from the Public Reference Section of the Commission at such address, and at the
Commission's regional offices located at 7 World Trade Center, 13th Floor, New
York, New York 10048, and at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. In addition, registration statements and certain
other filings made with the Commission through its Electronic
54
<PAGE> 56
Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly available
through the Commission's site on the Internet's Word Wide Web, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent public accountants,
and will make available quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information and such other periodic
reports as the Company may determine to be appropriate or as may be required by
law or by Nasdaq.
55
<PAGE> 57
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Financial Statements:
Balance Sheets as of December 31, 1996 and 1997, and June
30, 1998 (unaudited)................................... F-3
Statements of Operations for the years ended December 31,
1995, 1996 and 1997, and for the six months ended June
30, 1997 (unaudited) and 1998 (unaudited).............. F-4
Statements of Changes in Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997, and for
the six months ended June 30, 1998 (unaudited)......... F-5
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997, and for the six months ended June
30, 1997 (unaudited) and 1998 (unaudited).............. F-6
Notes to Financial Statements............................. F-7
</TABLE>
F-1
<PAGE> 58
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Artificial Life, Inc.
Boston, Massachusetts
We have audited the accompanying balance sheets of Artificial Life, Inc.
(formerly Neurotec International Corp.) as of December 31, 1996 and 1997, and
the related statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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 Artificial Life, Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
Wolf & Company, P.C.
Boston, Massachusetts
September 10, 1998, except for
Note 2 as to which the date is
September 22, 1998 and
Note 8 as to which the date
is September 23, 1998.
F-2
<PAGE> 59
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1996 1997 1998
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 30,139 $ 22,382 $ 551,591
Accounts receivable, trade (Note 1)....................... -- 273,187 26,062
Due from officer/stockholder (Note 3)..................... -- -- 153,916
Due from former parent and affiliates (Note 3)............ 251,502 243,499 --
Refundable income taxes (Note 4).......................... 18,868 6,336 103,507
Prepaid expenses and other current assets................. 33,141 59,442 11,056
-------- ---------- ----------
Total current assets............................... 333,650 604,846 846,132
-------- ---------- ----------
Property and equipment:
Furniture and fixtures.................................... 176,128 176,128 177,435
Computer equipment........................................ 235,151 277,344 278,335
Leasehold improvements.................................... 159,334 159,334 159,334
Office equipment.......................................... 58,696 59,435 59,435
-------- ---------- ----------
629,309 672,241 674,539
Less accumulated depreciation and amortization............ 173,829 340,029 393,260
-------- ---------- ----------
455,480 332,212 281,279
-------- ---------- ----------
Other assets:
Net deferred tax asset (Note 4)........................... 51,591 49,225 49,225
Deposits and other assets (Note 7)........................ 44,610 98,219 93,623
-------- ---------- ----------
96,201 147,444 142,848
-------- ---------- ----------
$885,331 $1,084,502 $1,270,259
======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to former parent............................. $ 77,922 $ -- $ --
Accounts payable.......................................... 120,539 195,159 195,491
Due to officer/stockholder................................ -- 27,015 --
Deferred revenue.......................................... -- 116,667 --
Accrued expenses (Note 9)................................. 52,176 95,252 238,017
Net deferred tax liability (Note 4)....................... 9,279 3,929 3,929
-------- ---------- ----------
Total current liabilities.......................... 259,916 438,022 437,437
-------- ---------- ----------
Note payable -- officer/stockholder (Note 3)................ -- -- 500,000
-------- ---------- ----------
Commitments and contingencies (Note 5)
Stockholders' equity (Notes 7 and 8):
Voting common stock, $.01 par value; 19,000,000 shares
authorized, 6,967,213 shares issued and outstanding..... 69,672 69,672 69,672
Non-Voting common stock, $.01 par value; 1,000,000 shares
authorized, 53,278 shares issued and outstanding........ -- -- 533
Additional paid-in capital................................ 430,328 430,328 611,162
Retained earnings (deficit)............................... 125,415 146,480 (348,545)
-------- ---------- ----------
Total stockholders' equity......................... 625,415 646,480 332,822
-------- ---------- ----------
$885,331 $1,084,502 $1,270,259
======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 60
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------ -------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues (Note 1 and 3):
Software license agreements........ $ -- $ -- $ 233,333 $ 116,667 $ 116,667
Application services............... 1,216,716 2,789,878 1,347,089 914,461 332,713
Cancellation fee income............ -- -- 189,938 -- --
---------- ---------- ---------- ---------- ----------
Total revenues.............. 1,216,716 2,789,878 1,770,360 1,031,128 449,380
---------- ---------- ---------- ---------- ----------
Operating expenses:
Selling, general and
administrative................... 967,271 1,101,109 1,048,897 623,693 596,620
Engineering........................ 827,471 656,086 512,267 301,518 249,789
Research and development........... -- -- -- -- 128,103
Depreciation and amortization...... 39,734 137,300 167,962 82,997 54,112
---------- ---------- ---------- ---------- ----------
Total operating expenses.... 1,834,476 1,894,495 1,729,126 1,008,208 1,028,624
---------- ---------- ---------- ---------- ----------
Income (loss) from operations........ (617,760) 895,383 41,234 22,920 (579,244)
Other income (expenses):
Foreign exchange gain (loss)....... (27,386) 10,319 (5,706) 3,579 --
Interest expense................... (7,582) (24,996) (5,247) (3,399) (6,781)
---------- ---------- ---------- ---------- ----------
Income (loss) before provision
(benefit) for income taxes......... (652,728) 880,706 30,281 23,100 (586,025)
Provision (benefit) for income taxes
(Note 4)........................... (256,872) 337,362 9,216 7,030 (91,000)
---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ (395,856) $ 543,344 $ 21,065 $ 16,070 $ (495,025)
========== ========== ========== ========== ==========
Basic and diluted net income (loss)
per share (Note 2)................. $ (.07) $ .08 $ -- $ -- $ (.07)
Weighted average shares outstanding
used in per share calculation...... 5,573,770 6,967,213 6,967,213 6,967,213 6,969,568
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 61
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK (NOTE 7)
-------------------------------------
VOTING NON-VOTING ADDITIONAL RETAINED
------------------- --------------- PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT)
--------- ------- ------ ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994...... 1,393,443 $13,934 -- $ -- $ 86,066 $ (22,073)
Net Loss.......................... -- -- -- -- -- (395,856)
Issuance of Common Stock.......... 5,573,770 55,738 -- -- 344,262 --
--------- ------- ------ ---- -------- ---------
Balance at December 31, 1995...... 6,967,213 69,672 -- -- 430,328 (417,929)
Net income........................ -- -- -- -- -- 543,344
--------- ------- ------ ---- -------- ---------
Balance at December 31, 1996...... 6,967,213 69,672 -- -- 430,328 125,415
Net income........................ -- -- -- -- -- 21,065
--------- ------- ------ ---- -------- ---------
Balance at December 31, 1997...... 6,967,213 69,672 -- -- 430,328 146,480
Net loss (unaudited).............. -- -- -- -- -- (495,025)
Issuance of common stock.......... -- -- 53,278 533 180,834 --
--------- ------- ------ ---- -------- ---------
Balance at June 30, 1998.......... 6,967,213 $69,672 53,278 $533 $611,162 $(348,545)
========= ======= ====== ==== ======== =========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 62
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------- -------------------------
1995 1996 1997 1997 1998
--------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $(395,856) $ 543,344 $ 21,065 $ 16,070 $(495,025)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization............ 39,734 137,300 167,962 82,997 54,112
Unrealized foreign exchange gain......... (4,071) (5,790) -- (9,078) --
Deferred income taxes.................... (256,872) 214,560 (2,984) -- --
(Increase) decrease in deposits and other
assets................................. (42,471) (5,345) (55,371) (1,800) 3,715
(Increase) decrease in due from former
parent and affiliates.................. 59,515 (223,234) 8,003 63,476 243,499
(Increase) decrease in accounts
receivable, trade...................... -- -- (273,187) (201,648) 247,125
(Increase) decrease in refundable income
taxes.................................. (30,258) 11,390 12,532 7,030 (97,171)
(Increase) decrease in prepaid expenses
other current assets................... (32,378) (763) (26,301) (33,323) 48,386
Increase (decrease) in accounts payable
and accrued expenses................... 579,625 (421,910) 117,696 121,857 143,097
Increase (decrease) in deferred
revenue................................ -- -- 116,667 -- (116,667)
Increase (decrease) in due to/from
officer/stockholder.................... -- -- 27,015 -- (180,931)
--------- --------- --------- --------- ---------
Net cash provided (used) by operating
activities............................. (83,032) 249,552 113,097 45,581 (149,860)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment........ (386,833) (242,476) (42,932) (34,263) (2,298)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Repayment of note payable to former
parent................................... -- -- (77,922) -- --
Proceeds from note payable --
officer/stockholder...................... -- -- -- -- 500,000
Proceeds from issuance of common stock..... 400,000 -- -- -- 181,367
Payment of subscription receivables........ 50,000 -- -- -- --
--------- --------- --------- --------- ---------
Net cash provided (used) by financing
activities................................. 450,000 -- (77,922) -- 681,367
--------- --------- --------- --------- ---------
Net increase (decrease) in cash.............. (19,865) 7,076 (7,757) 11,318 529,209
Cash at beginning of period.................. 42,928 23,063 30,139 30,139 22,382
--------- --------- --------- --------- ---------
Cash at end of period........................ $ 23,063 $ 30,139 $ 22,382 $ 41,457 $ 551,591
========= ========= ========= ========= =========
Supplemental disclosure of cash flow
information:
Income taxes paid.......................... $ 8,327 $ 131,440 $ -- $ -- $ 2,000
Interest paid.............................. 7,582 24,996 5,247 3,399 6,781
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 63
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(ALL INFORMATION WITH RESPECT TO JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION, RISKS AND UNCERTAINTIES
NATURE OF OPERATIONS
Artificial Life, Inc. ("Artificial Life" or the "Company") develops,
markets and supports "intelligent" software robots ("bots"). The Company's bots,
known as "SmartBots," are software programs that the Company designs to automate
and simplify time-consuming and complex business-related Internet functions such
as Web navigation, direct marketing, user profiling, information gathering,
messaging, knowledge management, sales response and call center automation. The
Company recently changed its primary business focus from software consulting to
the development, marketing and sale of its Alife suite of SmartBot software
products. Accordingly, the Company is at an early stage of development in its
new business strategy, and is subject to a number of the risks inherent in
establishing a new business. To address these risks, the Company must, among
other things, complete development of its SmartBot software products, enter into
strategic partnership, marketing and distribution arrangements, respond to
competitive developments, and attract, retain and motivate qualified personnel.
In addition, because the Company's emerging online agent-based software
products business will require significant infusions of additional capital,
results of operations to date are not reflective of the Company's future results
of operations. The Company's decision to become a provider of software robot
products is predicated on the assumption that the demand for such products will
be large enough to permit the Company to operate profitably. There can be no
assurance that the Company's assumption will be correct or that the Company will
be able to successfully compete as a provider of such products. If the Company's
assumption is not accurate, or if the Company is unable to compete as a provider
of online agent-based software products, the Company's business, prospects,
financial condition and results of operations will be materially adversely
affected.
The Company's management has recently obtained funds to support its
operations through a combination of sources including a long-term loan from a
stockholder and private placements of Common Stock. (See Notes 3 and 7.) The
Company is also pursuing additional resources through an initial public
offering. (See Note 7.)
In 1995 and 1996, the Company was a wholly-owned subsidiary of Neurotec
Hochtechnologie GmbH, a German corporation. During 1995, all of the Company's
revenue was derived from various contracts with the Company's then parent
company and its affiliates. In 1996, approximately 91% of the Company's revenues
was derived from the Company's then parent company.
During 1997, Eberhard Schoneburg, the Company's President, Chief Executive
Officer and Chairman and a minority stockholder of the Company's former parent
company, entered into an agreement with the former parent company to sell his
interest in the former parent company to the two remaining stockholders and
contemporaneously purchase all of the outstanding shares of Neurotec
International Corp. (the "Management Buyout"). In connection with the Management
Buyout, the Company agreed not to compete in any manner with the former parent
company in Europe through the period ended December 31, 1998. Subsequent to the
Management Buyout, the Company changed its name to Artificial Life, Inc.
In 1997, approximately 60% of the Company's revenue was derived from
various contracts with the Company's former parent company and its affiliates.
As a result of the Management Buyout and the Company's changing its primary
business focus from software consulting to the development,
F-7
<PAGE> 64
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
marketing and sale of its Alife suite of SmartBot software products, the Company
is not anticipating any future revenue to be derived from its former parent (see
Note 3).
MAJOR CUSTOMER
During 1997, the Company recognized revenue from one customer amounting to
approximately $710,000, representing 40% of its total revenues. During the six
months ended June 30, 1998, the substantial majority of the Company's revenue
was derived from this same customer. Accounts receivable, trade were due
entirely from this customer at December 31, 1997 and June 30, 1998.
MANAGEMENT ESTIMATES
The process of preparing financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. These
estimates and assumptions involve the areas of collection of receivables,
contract costs, depreciation and amortization and certain accruals, among
others. Actual results could differ from those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company at June 30, 1998 and for
the six months ended June 30, 1997 and 1998, included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission for interim financial statements. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations relating to interim
financial statements. In the opinion of management, the accompanying unaudited
interim financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company at June 30, 1998, and the results of its operations and its cash flows
for the six months ended June 30, 1997 and 1998.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization of
property and equipment is calculated using the straight-line method over the
following useful lives:
<TABLE>
<CAPTION>
CLASSIFICATION ESTIMATED USEFUL LIVES
-------------- ----------------------
<S> <C>
Furniture and fixtures 7 years
Computer equipment 3-5 years
Leasehold improvements Shorter of useful life or lease term
Office equipment 5 years
</TABLE>
Expenditures for maintenance, repairs and minor renewals are charged to
expense as incurred. Betterments and major renewals are capitalized.
F-8
<PAGE> 65
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
COMPUTER SOFTWARE COSTS
Costs of developing software which are incurred beyond the point of
demonstrated technological feasibility are capitalized and, after the product is
available for general release to customers, such costs are amortized based on
the greater of the charge resulting from the straight-line method over a
three-year period or the proportion of current sales to estimated future
revenues of the product. As of June 30, 1998, no software development costs have
been capitalized by the Company as such costs were immaterial.
REVENUE RECOGNITION
The Company recognizes revenue from marketing computer software programs as
follows:
Revenues from the sale of initial "software license agreements" for
computer programs and related services are recognized upon the delivery
of the software.
Development and application services contract revenues and related costs
are recognized upon the completion of the contract or certain phases as
defined in each agreement.
There are no significant future costs associated with any of the Company's
revenue transactions. Development costs which are not required to be
capitalized, marketing and installation costs are charged to earnings as
incurred. No software development costs have been capitalized by the Company as
such costs are immaterial.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This statement establishes standards for the reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income generally represents all
changes in stockholders' equity during the period except those resulting from
investments by, or distributions to, stockholders. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997 and requires restatement of
earlier periods presented. SFAS No. 130 had no impact on the Company's financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that a public enterprise reports information about operating segments in
annual financial statements, and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented.
Management is currently evaluating the requirements of SFAS No. 131.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
(SOP) No. 97-2, "Software Revenue Recognition." SOP 97-2 provides guidance on
when revenue should be recognized and in what amounts for licensing, selling,
leasing or otherwise marketing computer software. SOP 97-2 is effective for
transactions entered into in fiscal years beginning after December 15, 1997. SOP
97-2 had no impact on the Company's Financial Statements.
F-9
<PAGE> 66
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
COMPUTATION OF NET INCOME (LOSS) PER SHARE
The Company adopted SFAS No. 128, "Computation of Earnings Per Share,"
during the year ended December 31, 1997. The provision and disclosure
requirements for SFAS No. 128 were required to be adopted for interim and annual
periods ending after December 15, 1997, with restatement of earnings per share
for prior periods. In accordance with SFAS No. 128, basic earnings per share is
computed using the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed using the weighted average
number of common shares outstanding during the period and the weighted average
dilutive common equivalent shares outstanding during the period. Common
equivalent shares consist of the incremental common shares issuable upon the
exercise of stock options and warrants (using the Treasury Stock method); common
equivalent shares are excluded from the calculation if their effect is
anti-dilutive. All common equivalent shares of the Company are not dilutive.
Therefore, diluted earnings per share is the same as basic earnings per share.
Pursuant to SEC Staff Accounting Bulletin No. 98, common stock issued for
nominal consideration, prior to the anticipated effective date of an IPO, are
required to be included in the calculation of basic and diluted net loss per
share, as if they were outstanding for all periods presented. To date, the
Company has not had any stock issuances for nominal consideration.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." As allowed under the provisions of
SFAS 123, the Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its employee stock options plans.
There are no effects on reported net income (loss) and earnings per share based
on the fair value of options and shares as prescribed by SFAS 123.
STOCK DIVIDEND, REVERSE STOCK SPLIT AND CHANGES IN AUTHORIZED STOCK
On June 10, 1998, the Company declared a dividend of 339 shares of common
stock for each share of common stock held to stockholders of record on June 10,
1998. On September 22, the Company effected a 1-for-2.44 reverse stock split and
amended the total authorized shares of Voting Common Stock to 19,000,000 shares
and Non-Voting Common Stock to 1,000,000 shares. All references in the financial
statements to shares, share prices, per share amounts, stock options and
authorized shares have been retroactively adjusted for the stock dividend,
reverse stock split and change in authorized stock. (See Note 8).
INCOME TAXES
Deferred tax assets and liabilities are recorded for temporary differences
between the financial statement and tax basis of assets and liabilities.
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. A deferred tax asset is
recorded for any net operating loss, capital loss and tax credit carryforward
for income tax purposes, to the extent their realization is more likely than
not. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities will be adjusted through the provision for income taxes.
F-10
<PAGE> 67
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. RELATED PARTY TRANSACTIONS
The Company had transactions with its former parent company and a
wholly-owned subsidiary of the former parent company, MediaCenter GmbH
("MediaCenter"), and a stockholder of the former parent company as follows:
a) The Company provided contract services to the former parent company
and to a stockholder of the former parent company on which it recorded
revenue of $1,216,716, $2,542,642 and $864,177 for the years ended December
31, 1995, 1996 and 1997. Certain contracts for services are denominated in
Deutsche Marks ("DM").
b) The Company received advances from the former parent company in the
amount of DM120,000. The advances were due on September 30, 1997 with
interest at 8.5%. The note payable of $77,922 recorded on the balance sheet
at December 31, 1996 is based on the exchange rate on that date. Interest
expense on these advances amount to $7,582, $2,029 and $5,247 for the years
ended December 31, 1995, 1996 and 1997, respectively. The advances were
repaid in 1997, see below.
c) The former parent company charged the Company for various expenses
paid on the Company's behalf and the Company charged the former parent
company and MediaCenter for various expenses paid by the Company on their
behalf. Outstanding amounts were non-interest bearing.
During 1997, in connection with the Management Buyout and the Company's
changing its primary business focus from software consulting to the development,
marketing and sale of its Alife suite of SmartBot software products, the Company
discontinued performing services for its former parent company and its
affiliates. At that time, the Company had in process several contracts for
services to be provided to the former parent company and outstanding accounts
receivable from the former parent of $160,000. In addition, the Company owed the
former parent $42,016 in accounts payable and accrued expenses, and $77,922 in
notes payable. In December of 1997, the Company and the former parent negotiated
a settlement agreement whereby the former parent agreed to forgive all
outstanding liabilities owed by the Company and make a cash payment of $230,000
in full settlement of all outstanding accounts receivable and all of its
contractual obligations to the Company. The transaction resulted in the
recognition of cancellation fee income of $189,938 in 1997. The $230,000 payment
was received in full in January 1998.
During 1997, the Company's President and Chairman opted to forego
approximately 68% of his salary amounting to approximately $164,000.
F-11
<PAGE> 68
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Amounts due from the former parent company, net and affiliates at December
31, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1996 1997
----------------------- -----------------------
SHAREHOLDER
FORMER FORMER OF FORMER
PARENT MEDIACENTER PARENT PARENT
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Settlement Agreement.............. $ -- $ -- $230,000 $ --
Contract services................. 213,370 -- -- 13,499
Reimbursements receivable......... 29,752 45,204 -- --
Reimbursements payable............ (35,168) -- -- --
Interest payable.................. (1,656) -- -- --
-------- ------- -------- -------
Total................... $206,298 $45,204 $230,000 $13,499
======== ======= ======== =======
</TABLE>
On June 29, 1998, the Company issued a note payable to an
officer/stockholder in the amount of $500,000. The note is unsecured and bears
interest at 10%. Payment of principal and accrued interest is due on January 1,
2000. (See Note 7).
The Company pays expenses on behalf of and provides cash advances to an
officer/ stockholder from time to time. Amounts outstanding are non-interest
bearing and due on demand.
4. INCOME TAXES
The income tax provision (benefit) consists of:
<TABLE>
<CAPTION>
1995 1996 1997
--------- -------- -------
<S> <C> <C> <C>
Current:
Federal....................................... $ -- $ 75,124 $ 6,700
State......................................... -- 47,678 5,500
--------- -------- -------
-- 122,802 12,200
--------- -------- -------
Deferred (prepaid):
Federal....................................... (240,766) 201,107 (2,797)
State......................................... (16,106) 13,453 (187)
--------- -------- -------
(256,872) 214,560 (2,984)
--------- -------- -------
$(256,872) $337,362 $ 9,216
========= ======== =======
</TABLE>
The difference between actual income tax expense and expected income tax
expense as computed by applying the U.S. federal income tax rate of 34% to
income before income taxes is explained as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- -------- -------
<S> <C> <C> <C>
Expected income tax provision (benefit)......... $(221,928) $299,440 $10,296
State taxes, net of federal income tax
benefit....................................... (10,630) 40,346 3,506
Surtax exemption................................ -- -- (5,753)
Other........................................... (24,314) (2,424) 1,167
--------- -------- -------
Provision (benefit) for income taxes.......... $(256,872) $337,362 $ 9,216
========= ======== =======
</TABLE>
F-12
<PAGE> 69
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to the
deferred tax assets and deferred tax liabilities at December 31, 1996 and
1997, are presented below:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Start-up costs capitalized for income tax purposes... $69,205 $46,499
Vacation accrual not deductible for income tax
purposes.......................................... 3,114 4,182
Property and equipment............................... -- 2,726
------- -------
72,319 53,407
Valuation allowance on deferred tax asset............ -- --
------- -------
72,319 53,407
------- -------
Deferred tax liabilities:
Property and equipment............................... 17,614 --
Prepaid rent deducted for income tax purposes........ 8,422 8,111
Unrealized foreign exchange gains.................... 3,971 --
------- -------
30,007 8,111
------- -------
Net deferred tax asset............................ $42,312 $45,296
======= =======
</TABLE>
There was no change in the valuation allowance on deferred tax assets in
1996 or 1997.
The provision for income taxes for the six-month periods ended June 30,
1997 and 1998 are computed based on the 1997 actual effective tax rate of 30.4%
and estimated 1998 effective tax rate of 15.5%, respectively.
5. COMMITMENTS
CONSORTIUM AGREEMENT
Effective October 10, 1995, the Company entered into a consortium agreement
with the Massachusetts Institute of Technology ("MIT"). Under the agreement, MIT
will conduct research projects for the "Things That Think Consortium." The
Consortium is an international association of corporate members who have joined
"to address the future of computation as it is increasingly imbedded in things
other than computers." The term of the agreement is for five years through
October 9, 2000. The agreement provides for early termination, with one year
written notice, as well as renewal options. The Company is obligated to pay an
annual membership fee of $125,000 under the agreement. The Company was sharing
50% of this cost with its former parent through June 1997. (See Note 3).
On August 6, 1997, the Company obtained a suspension of the contract until
February 5, 1998, at which time the contract resumed under its original terms.
The Company will be solely responsible for the $125,000 annual cost through
October 9, 2000. Total costs incurred by the Company in connection with the
agreement amounted to $60,625, $62,500, and $32,598 for the years ended December
31, 1995, 1996 and 1997, respectively, and $32,598 and $62,500 for the six month
periods ended June 30, 1997 and 1998, respectively.
F-13
<PAGE> 70
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LEASES
The Company leases office and other space and various office equipment
under various noncancelable leases. Future minimum annual lease payments,
exclusive of additional operating costs, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998................................................... $221,372
1999................................................... 205,725
2000................................................... 205,352
2001................................................... 17,113
--------
$649,562
========
</TABLE>
Rent expense for the years ended December 31, 1995, 1996 and 1997 amounted
to approximately $117,100, $231,300 and $228,300, respectively, and for the six
months ended June 30, 1997 and 1998 amounted to approximately $133,800 and
$120,200, respectively.
EMPLOYMENT CONTRACTS
The Company has employment agreements with all of its executive officers.
The agreements are generally one to three years in length and provide for
minimum salary levels. These agreements include severance payments under certain
conditions of approximately one half to three times each officer's annual
compensation. In addition the chief executive officer of the Company is entitled
to receive an annual incentive bonus of 3% of the Company's profits from
operations.
6. PROFIT SHARING PLAN
Effective October 1, 1995, the Company implemented a 401(k) profit sharing
plan for the benefit of all employees. Employees are eligible to participate
after twelve months of service and may contribute up to 15% of their
compensation subject to statutory limitations. The Company matches 50% of the
first 3% of compensation.
Profit sharing expense for the years ended December 31, 1995, 1996 and 1997
amounted to $3,028, $10,260 and $11,968, respectively, and for the six months
ended June 30, 1997 and 1998 amounted to $6,504 and $6,677, respectively.
7. STOCKHOLDERS' EQUITY
PUBLIC OFFERING
In August 1998, the Company executed a letter of intent to proceed with a
proposed initial public offering of the Company's stock (IPO). If the IPO is
consummated under the terms presently anticipated, the underwriters managing the
offering will have the right to appoint one member of the Board of Directors
after the closing of the IPO. The right to have a representative on the
Company's board extends for the term of the Warrant (defined below). The Company
has agreed to deliver a warrant (the "Warrant") to the underwriters at the
closing of the IPO equal to ten percent of the total number of shares sold
pursuant to the IPO. The Warrant is exercisable any time after one year from the
date of closing for a period of four years at a price equal to 120% of the
offering price per share. Included in deposits and other assets at June 30, 1998
is a $30,000 deposit paid to the underwriters in connection with the IPO.
F-14
<PAGE> 71
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
COMMON STOCK
At June 30, 1998 the Company had 19,000,000 authorized shares of common
stock, par value $.01, and 1,000,000 authorized shares of non-voting common
stock, par value $.01, of which 6,967,213 shares and 53,278 shares,
respectively, were outstanding. The non-voting common stock is convertible into
voting Common Stock on a one-for-one basis. Upon consummation of the Company's
proposed initial public offering, all shares of non-voting common stock will be
converted into shares of common stock.
In June 1998, the Company sold 53,278 shares of non-voting common stock and
the majority stockholder of the Company sold 409,836 shares of voting common
stock through private placements to foreign investors overseas. The shares were
sold for $3.66 per share. Expenses incurred in connection with the private
placements amounted to $13,633. As a result, the Company received net proceeds
of $181,367.
This stock was unregistered and was subject to restrictions on resale in
the United States pursuant to Regulation S promulgated under the Securities Act
of 1933, as amended. In the event of a public offering of the Company's stock,
the stockholders may request the Company to register such shares for inclusion
in the public offering. Such request is subject to certain limitations which may
be imposed by the managing underwriter of the Company's public offering. The
holders of the voting common stock have agreed, among other things, to vote the
shares in a manner consistent with any votes cast by the chairman of the
Company. This agreement will terminate upon consummation of the IPO.
Subsequent to the sale of stock by the majority stockholder, the Company
received a loan of $500,000 from the stockholder. (See Note 3).
STOCK OPTIONS
On April 1, 1998, the Company adopted the 1998 Equity Incentive Plan (the
"Plan") which provides for the issuance of both non-statutory and incentive
stock options to employees, officers, directors and consultants of the Company.
At that time the Company reserved 409,811 shares of common stock to be issued
under the Plan. Incentive stock options for 69,525 shares of common stock were
granted on May 1, 1998 with an initial exercise price of $3.66 per share, the
estimated fair market value on that date. The exercise price increases by $3.66
per share per quarter until the second anniversary of the date of grant at which
time the options are to expire.
On June 30, 1998, the Plan was amended to increase the shares reserved for
issuance under the Plan to a total of 778,688 shares; 340,164 shares of voting
common stock and 438,524 shares of non-voting common stock. All options issued
prior to June 30, 1998 were for voting common stock. Effective with the
amendment, the Company granted non-statutory stock options for 184,426 shares of
voting common stock and 362,701 shares of non-voting common stock with an
exercise price of $3.66 per share expiring on July 1, 1999. On June 30, 1998,
the Company also amended the terms of the incentive stock options issued to two
individuals on May 1, 1998 for a total of 32,884 shares of common stock to
provide that the exercise price for such options is to remain at $3.66 per share
over the life of the option.
F-15
<PAGE> 72
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock options as of June 30, 1998
and the changes during the period then ended is presented below.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------- --------------
<S> <C> <C>
Outstanding at beginning of period................. -- $ --
Granted -- price equals fair value................. 616,652 3.66
Exercised.......................................... -- --
Canceled........................................... -- --
------- -----
Outstanding at end of period....................... 616,652 $3.66
======= =====
Options exercisable at end of period............... 616,652
=======
Options available for future grants................ 162,036
=======
</TABLE>
The following table summarizes information about stock options outstanding
at June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
- ----------------------------------------------------------------------------
RANGE OF NUMBER WEIGHTED AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICE OUTSTANDING REMAINING CONTRACTUAL LIFE EXERCISE PRICE
- -------------- ----------- -------------------------- ----------------
<S> <C> <C> <C>
$3.66 616,652 1.09 years $3.66
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its Plan. Compensation cost for the Company's
Plan determined consistent with Statement of Financial Accounting Standards No.
123 is not material to the Company's financial statements.
8. SUBSEQUENT EVENT
On September 23, 1998, the Company sold 824,000 shares of voting common
stock for $5.00 per share through private placements to foreign investors.
Expenses incurred in connection with the private placements amounted to $84,368,
resulting in net proceeds of $4,035,632 being received by the Company.
The stock was unregistered and was subject to restrictions on resale in the
United States pursuant to Regulation S promulgated under the Securities Act of
1933, as amended. In the event of a public offering of the Company's stock, the
holders of 20% of the voting stock may request the Company to register such
shares for inclusion in the public offering. Such request is subject to certain
limitations which maybe imposed by the managing underwriter of the Company's
public offering, The holders of the stock have agreed, among other things, to
vote the shares in a manner consistent with any votes cast by the Chairman of
the Company. This agreement will terminate upon consummation of the IPO.
F-16
<PAGE> 73
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONCLUDED)
9. ACCRUED EXPENSES
Accrued expenses at December 31, 1996 and 1997 and June 30, 1998 consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Accrued salaries................................... $ 3,526 $ 3,657 $146,690
Accrued vacations.................................. 14,288 13,089 15,019
Accrued and withheld payroll....................... 17,876 56,082 8,395
Accrued professional fees.......................... 15,500 15,000 --
Accrued consortium fee (Note 5).................... -- -- 62,500
Other accrued expenses............................. 986 7,424 5,413
------- ------- --------
Total accrued expenses........................... $52,176 $95,252 $238,017
======= ======= ========
</TABLE>
Included in accrued salaries at June 30, 1998 is $120,000 due to the
President and Chief Executive Officer for salary, the payment of which was
voluntarily deferred by the officer. The amounts were paid subsequent to June
30, 1998.
F-17
<PAGE> 74
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY OF THE
UNDERWRITERS OR BY ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES OTHER THAN
THE COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 7
Use of Proceeds........................... 17
Dividend Policy........................... 17
Capitalization............................ 18
Dilution.................................. 19
Selected Financial Data................... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 22
Business.................................. 28
Management................................ 40
Certain Transactions...................... 45
Principal and Selling Stockholders........ 46
Description of Capital Stock.............. 47
Shares Eligible for Future Sale........... 50
Underwriting.............................. 52
Legal Matters............................. 54
Experts................................... 54
Additional Information.................... 54
Index to Financial Statements............. F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), 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 OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
SHARES
ARTIFICIAL LIFE, INC.
COMMON STOCK
[ARTIFICIAL LIFE LOGO]
-----------------------
PROSPECTUS
-----------------------
NEW YORK BROKER, INC.
NEW YORK BROKER DEUTSCHLAND AG
, 1998
------------------------------------------------------
------------------------------------------------------
<PAGE> 75
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the Registrant's expenses in connection with
the issuance and distribution of the securities being registered. Except for the
SEC Registration Fee and the National Association of Securities Dealers, Inc.
("NASD") Filing Fee, the amounts listed below are estimates:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 4,256
Nasdaq listing fee.......................................... 10,000
NASD filing fee............................................. 1,943
Blue Sky fees and expenses.................................. 13,000
Printing and engraving expenses............................. 130,000
Accounting fees and expenses................................ 60,000
Legal fees and expenses..................................... 450,000
Transfer agent and registrar fees and expenses.............. 5,000
Underwriters' non-accountable expense....................... 386,400
Miscellaneous............................................... 139,401
----------
Total............................................. $1,200,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Restated Certificate of Incorporation (the "Certificate of
Incorporation") provides that the Company shall indemnify to the fullest extent
authorized by the Delaware General Corporation Law ("DGCL"), each person who is
involved in any litigation or other proceeding because such person is or was a
director or officer of the Company or is or was serving as an officer or
director of another entity at the request of the Company, against all expense,
loss or liability reasonably incurred or suffered in connection therewith. The
Certificate of Incorporation provides that the right to indemnification includes
the right to be paid expenses incurred in defending any proceeding in advance of
its final disposition, provided, however, that such advance payment will only be
made upon delivery to the Company of an undertaking, by or on behalf of the
director or officer, to repay all amounts so advanced if it is ultimately
determined that such director is not entitled to indemnification. If the Company
does not pay a proper claim for indemnification in full within 60 days after a
written claim for such indemnification is received by the Company, the
Certificate of Incorporation and the Company's Bylaws authorize the claimant to
bring an action against the Company and prescribe what constitutes a defense to
such action.
Section 145 of the DGCL permits a corporation to indemnify any director or
officer of the corporation against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with any action, suit or proceeding brought by reason of the fact
that such person is or was a director or officer of the corporation, if such
person acted in good faith and in a manner that he reasonably believed to be in,
or not opposed to, the best interests of the corporation and, with respect to
any criminal action or proceeding, if he or she had no reason to believe his or
her conduct was unlawful. In a derivative action, (i.e., one brought by or on
behalf of the corporation), indemnification may be provided only for expenses
actually and reasonably incurred by any director or officer in connection with
the defense or settlement of such an action or suit if such person acted in good
faith and in a manner that he or she reasonably believed to be in, or not
opposed to, the best interests of the corporation, except that no
indemnification shall be provided if such person shall have been adjudged to be
liable to the corporation, unless and only to the extent that the court in which
the action or suit was
II-1
<PAGE> 76
brought shall determine that the defendant is fairly and reasonably entitled to
indemnity for such expenses despite such adjudication of liability.
Pursuant to Section 102(b)(7) of the DGCL, Article Tenth of the Certificate
of Incorporation eliminates the liability of a director to the Company or its
stockholders for monetary damages for such a breach of fiduciary duty as a
director, except for liabilities arising (i) from any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) from acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the DGCL, or (iv) from any transaction from
which the director derived an improper personal benefit.
The Company intends to obtain insurance policies insuring the directors and
officers of the Company against certain liabilities that they may incur in their
capacity as directors and officers. Under such policies, the insurers, on behalf
of the Company, may also pay amounts for which the Company has granted
indemnification to the directors or officers.
Additionally, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 hereto, which provides for indemnification by the Underwriters of
the Company, its directors and officers who sign the Registration Statement and
persons who control the Company, under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this Registration Statement, the
Company has sold the following securities that were not registered under the
Securities Act.
(a) Issuances of Capital Stock and Warrants
In November 1994 and April 1995, the Company and sold 10,000 and 40,000
shares of Common Stock, respectively (prior to a 340-for-1 stock split effected
in the form of a dividend of 339 shares for each share of the Company's Common
Stock beneficially owned on June 10, 1998 and a 1-for-2.44 reverse stock split
effected on September 22, 1998) to its sole stockholder for $10.00 per share for
total consideration of $100,000 and $400,000, respectively.
In June 1998, the Company issued and sold an aggregate of 130,000 shares of
Non-Voting Common Stock (prior to a 1-for-2.44 reverse stock split effected on
September 22, 1998) to two investors for $1.50 per share in a private placement
for aggregate gross proceeds of $195,000.
In September 1998, the Company issued and sold an aggregate of 824,000
shares of Common Stock to 23 investors for $5.00 per share in a private
placement for aggregate gross proceeds of $4,120,000.
(b) Certain Grants and Exercises of Stock Options
Pursuant to the 1998 Equity Incentive Plan, the Company had as of September
29, 1998 issued options to purchase an aggregate of 616,652 shares of Common
Stock. Options to purchase 26,083 shares of Common Stock pursuant to the
foregoing have been exercised at an exercise price of $3.66 per share and
options to purchase an aggregate of 590,569 shares of Common Stock are currently
outstanding and exercisable, at a weighted average exercise price of $3.73 per
share.
The sale and issuance 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 or Regulation S 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 such Rule
701. The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and instruments
II-2
<PAGE> 77
issued in such transactions. All recipients had adequate access, through their
relationships with the Company, to information about the Registrant.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.
*3.2 Form of Restated Certificate of Incorporation of the
Registrant to be filed prior to the closing of this
Offering.
3.3 Bylaws of the Registrant
*3.4 Form of Restated Bylaws of the Registrant to become
effective immediately prior to the closing of this Offering.
*4.1 Specimen Common Stock Certificate.
*4.2 Specimen Common Stock Purchase Warrant.
*5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. as to the legality of the shares being registered.
10.1 Form of the Registrant's Employee Confidentiality and
Inventions Agreement.
10.2 Form of Registrant's Advisory Board Confidentiality and
Inventions Agreement.
10.3 Amended and Restated Executive Employment Agreement between
the Registrant and Eberhard Schoneburg, dated as of
September 1, 1998.
10.4 Employment Agreement between the Registrant and Robert
Pantano, dated as of May 1, 1998.
10.5 Employment Agreement between the Registrant and Klaus Kater,
dated as of May 1, 1998.
10.6 Lease Agreement, dated February 6, 1995, between the
Registrant and Copley Place Associates Nominee Corporation.
10.7 Lease Amendment No. 1, dated July 27, 1995, between the
Registrant and Copley Place Associates Nominee Corporation.
10.8 Lease Amendment No. 2, dated February 27, 1997, between the
Registrant and Copley Place Associates Nominee Corporation.
10.9 Consortium Agreement, dated October 10, 1995, between the
Registrant and Massachusetts Institute of Technology.
*10.10 1998 Equity Incentive Plan.
10.11 Form of Subscription Agreement, dated June 1998, between the
Registrant, Eberhard Schoneburg and the purchaser of
1,000,000 shares of Common Stock and the purchasers of an
aggregate of 130,000 shares of Non-Voting Common Stock.
10.12 Form of Subscription Agreement dated September 23, 1998
between the Registrant and the purchasers of 824,000 shares
of Common Stock.
10.13 Form of Amendment and Confidential Offering Supplement,
dated September 23, 1998.
23.1 Consent of Wolf & Company, P.C.
*23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. (See Exhibit 5.1).
24.1 Power of attorney (included on the signature page hereto).
27.1 Financial Data Schedule
99.1 Consent of Hartmut Bergmann
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described under "Item
14 -- Indemnification of Directors and Officers" above, or otherwise, the
II-3
<PAGE> 78
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. 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 Act and will be governed by the final adjudication of
such issue.
(b) 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.
(c) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(d) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;"
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-4
<PAGE> 79
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Boston,
Commonwealth of Massachusetts, on September 29, 1998.
ARTIFICIAL LIFE, INC.
By: /s/ EBERHARD SCHONEBURG
------------------------------------
Eberhard Schoneburg
President and Chief Executive
Officer
POWER OF ATTORNEY
We the undersigned officers and directors of Artificial Life, Inc., hereby
severally constitute and appoint Eberhard Schoneburg and Robert Pantano, and
each of them singly (with full power to each of them to act alone), our true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution in each of them for him and in his name, place and stead, and in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement (or any other Registration Statement
for the same offering that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933), and to file the same, with all
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 or necessary to be done in and about the premises,
as full to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them or their or his 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 by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ EBERHARD SCHONEBURG President, Chief Executive September 29, 1998
- --------------------------------------------------- Officer and Director
Eberhard Schoneburg (Principal executive
officer)
/s/ ROBERT PANTANO Chief Financial Officer September 29, 1998
- --------------------------------------------------- (Principal financial and
Robert Pantano accounting officer)
/s/ BRUNO GABRIEL Director September 26, 1998
- ---------------------------------------------------
Bruno Gabriel
/s/ ELMAR WOHLGENSINGER Director September 26, 1998
- ---------------------------------------------------
Elmar Wohlgensinger
</TABLE>
II-5
<PAGE> 80
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGES
- ----------- ----------- ------------
<C> <S> <C>
*1.1 Form of Underwriting Agreement..............................
3.1 Amended and Restated Certificate of Incorporation of the
Registrant..................................................
*3.2 Form of Restated Certificate of Incorporation of the
Registrant to be filed prior to the closing of this
Offering....................................................
3.3 Bylaws of the Registrant....................................
*3.4 Form of Restated Bylaws of the Registrant to become
effective immediately prior to the closing of this
Offering....................................................
*4.1 Specimen Common Stock Certificate...........................
*4.2 Specimen Common Stock Purchase Warrant......................
*5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. as to the legality of the shares being registered......
10.1 Form of the Registrant's Employee Confidentiality and
Inventions Agreement........................................
10.2 Form of Registrant's Advisory Board Confidentiality and
Inventions Agreement........................................
10.3 Amended and Restated Executive Employment Agreement between
the Registrant and Eberhard Schoneburg, dated as of
September 1, 1998...........................................
10.4 Employment Agreement between the Registrant and Robert
Pantano, dated as of May 1, 1998............................
10.5 Employment Agreement between the Registrant and Klaus Kater,
dated as of May 1, 1998.....................................
10.6 Lease Agreement, dated February 6, 1995, between the
Registrant and Copley Place Associates Nominee
Corporation.................................................
10.7 Lease Amendment No. 1, dated July 27, 1995, between the
Registrant and Copley Place Associates Nominee
Corporation.................................................
10.8 Lease Amendment No. 2, dated February 27, 1997, between the
Registrant and Copley Place Associates Nominee
Corporation.................................................
10.9 Consortium Agreement, dated October 10, 1995, between the
Registrant and Massachusetts Institute of Technology........
*10.10 1998 Equity Incentive Plan..................................
10.11 Form of Subscription Agreement, dated June 1998, between the
Registrant, Eberhard Schoneburg and the purchaser of
1,000,000 shares of Common Stock and the purchasers of an
aggregate of 130,000 shares of Non-Voting Common Stock......
10.12 Form of Subscription Agreement, dated September 23, 1998,
between the Registrant and the purchasers of 824,000 shares
of Common Stock.............................................
10.13 Form of Amendment and Confidential Offering Supplement,
dated September 23, 1998....................................
23.1 Consent of Wolf & Company, P.C. ............................
*23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. (See Exhibit 5.1)......................................
24.1 Power of attorney (included on the signature page hereto)...
27.1 Financial Data Schedule.....................................
99.1 Consent of Hartmut Bergmann.................................
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ARTIFICIAL LIFE, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation")
is Artificial Life, Inc.
2. The certificate of incorporation of the Corporation, as amended
and restated, is hereby amended by striking out the first
paragraph of Article Fourth thereof and by substituting in lieu of
said first paragraph of Article Fourth the following two new
paragraphs:
"FOURTH. The total number of shares of stock which the
Corporation shall have authority to issue is twenty million
(20,000,000) shares of Common Stock, $0.01 par value per share
("Common Stock"), consisting of (i) nineteen million
(19,000,000) shares of Voting Common Stock and (ii) one
million (1,000,000) shares of Non-Voting Common Stock.
Each share of Common Stock of the Corporation issued and
outstanding or held in the treasury of the Corporation as of
the time and date this amendment becomes effective (the
"Effective Time") is hereby reclassified and changed into
.409836 shares of Common Stock, $0.01 par value per share, of
the Corporation, and each stock certificate for shares of
Common Stock of the Corporation as of the Effective Time shall
represent the number of shares of Common Stock obtained by
dividing the number of shares of Common Stock represented by
such certificate immediately prior to the Effective Time by
2.44."
3. The amendment of the certificate of incorporation, as amended and
restated, herein certified has been duly adopted and written
consent has been given in accordance with the provisions of
Sections 228 and 242 of the General Corporation Law of the State
of Delaware. Prompt written notice of the adoption of the
amendment herein certified has been given to those stockholders
who have not consented in writing thereto, as provided in Section
228 of the General Corporation Law of the State of Delaware.
<PAGE> 2
Signed on this 22nd day of September, 1998.
Artificial Life, Inc.
By: /s/ Eberhard Schoneburg
Eberhard Schoneburg, President
2
<PAGE> 3
AMENDED AND RESATED
CERTIFICATE OF INCORPORATION
OF
ARTIFICIAL LIFE, INC.
JUNE 10, 1998
Artificial Life, Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the Delaware General Corporation Law (the
"DGCL"), does hereby certify that the sole Director of the Corporation by
written consent of the sole Director on June 10, 1998, and the sole stockholder
of the Corporation by written consent of the sole stockholder of the Corporation
on June 10, 1998, approves and adopted, pursuant to SECTIONS 228 AND 242 of the
DGCL, this Amended and Restated Certificate of Incorporation of the Corporation.
The Certificate of Incorporation of the Corporation was originally filed with
the Secretary of State of Delaware on November 15, 1994, under the name of
Neurotec International Corp., and subsequently amended on each of February 9,
1995, June 13, 1995 and August 19, 1997. The Corporation hereby certifies as
follows:
FIRST. The name of the Corporation is Artificial Life, Inc.
SECOND. The address of the Corporation's registered office in the State
of Delaware is 1013 Centre Road, City of Wilmington, County of New Castle, State
of Delaware, 19805, and the name of its registered agent at such address is
Corporation Service Company.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware and specifically, without limiting the generality
of the foregoing, to engage generally in the business of software development in
the areas of artificial intelligence, neural networks and multimedia.
FOURTH. The total number of shares of stock which the Corporation shall
have authority to issue is twenty million five hundred thousand (20,500,000)
shares of Common
3
<PAGE> 4
Stock, $0.01 par value per share ("Common Stock"), consisting of (i) nineteen
million three hundred thousand (19,300,000) shares of Voting Common Stock and
(ii) one million two hundred thousand (1,200,000) shares of Non-Voting Common
Stock.
The following is a statement of the designations and the powers,
privileges and rights, and the qualifications, limitations or restrictions
thereof in respect of each class of capital stock of the Corporation.
COMMON STOCK.
1. General. The voting, dividend and liquidation rights of the holders
of the Voting Common Stock are as follows.
2. Voting. The holders of the Voting Common Stock are entitled to one
vote for each share held at all meetings of shareholders (and written actions in
lieu of meetings). There shall be no cumulative voting. The number of authorized
shares of Voting Common Stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by affirmative vote of the holders of
a majority of the stock of the Corporation entitled to vote, irrespective of the
provisions of Section 242(b)(2) of the DGCL. Except as otherwise requried by
applicable law, the holders of Non-Voting Common Stock shall not have any voting
rights and shall be deemed for all purposes to be non-voting stock; and further
provided that the number of authorized shares of Non-Voting Common Stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of all shares
of capital stock of the Corporation then outstanding and entitled to vote
thereon, voting together as a single class, irrespective of the provisions of
Section 242 of the General Corporation Law of the state of Delaware that would
otherwise require a vote of the holders of Non-Voting Common Stock as a separate
class.
3. Dividends. Dividends may be declared and paid on the Common Stock
from funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
4. Liquidation. Upon the dissolution or liquidation of the Corporation,
whether voluntary or involuntary, holders of Common Stock will be entitled to
receive all assets of the Corporation available for distribution to its
shareholders, subject to any preferential rights of any then outstanding
Preferred Stock.
4
<PAGE> 5
5. Automatic Conversion. Each share of Non-voting Common Stock shall
automatically be converted into one share of Voting Common Stock upon the
closing of a firm commitment underwritten public offering pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
covering the offer and sale of Common Stock for the account of the Corporation
to the public with gross proceeds to the Corporation of not less than
$10,000,000 and where the Company will thereafter be listed on the NASDAQ
National Market System, the New York Stock Exchange or the American Stock
Exchange.
FIFTH. The corporation is to have perpetual existence.
SIXTH. Election of directors need not be by written ballot unless the
by-laws of the Corporation shall so provide.
SEVENTH. The Board of Directors of the Corporation is expressly
authorized to adopt, amend or repeal the by-laws of the corporation.
EIGHTH. A director shall not be personally liable to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent that the elimination or limitation of liability
is not permitted under the Delaware General Corporation Law as in effect when
such liability is determined. No amendment or repeal of this provision shall
deprive a director of the benefits hereof with respect to any act or omission
occurring prior to such amendment or repeal.
NINTH. The Corporation shall, to the fullest extent permitted by the
General Corporation Law of the State of Delaware, as amended from time to time,
indemnify each person who was or is a party or is threatened to be made a party
to any threatened, pending completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was, or has agreed to become, a director or officer of the Corporation, or is or
was serving, or has agreed to serve, at the request of the Corporation, as a
director, officer or trustee of, or in a similar capacity with, another
corporation, partnership, join venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or on his behalf in
connection with such action, suit or proceeding and any appeal therefrom.
Indemnification may include payment by the Corporation of expenses in
defending an action or proceeding in advance of the final disposition of such
action or proceeding upon receipt of any undertaking by the person indemnified
to repay such payment if it is ultimately determined that such person is not
entitled to indemnification under this Article, which undertaking may be
accepted without reference to the financial ability of such person to make such
repayments.
5
<PAGE> 6
The corporation shall not indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated
by such person unless the initiation thereof was approved by the board of
directors of the corporation.
The indemnification rights provided in this Article (i) shall not be
deemed exclusive of any other rights to which those indemnified may be
entitled under any law, agreement or vote of stockholders or disinterested
directors or otherwise, and (ii) shall inure to the benefit of the heirs,
executors and administrators of such persons. The corporation may, to the
extent authorized from time to time by its board of directors, grant
indemnification rights to other employees or agents of the corporation or
other persons serving the corporation and such rights may be equivalent to,
or greater or less than, those set forth in this Article.
Any person seeking indemnification under this Article shall be
deemed to have met the standard of conduct required for such indemnification
unless the contrary shall be established.
Any amendment or repeal of the provisions of this Article shall not
adversely affect any right or protection of a director or officer of this
corporation with respect to any act or omission of such director or officer
occurring prior to such amendment or repeal.
TENTH. The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
IN WITNESS WHEREOF, Artificial Life, Inc. has caused its corporate
seal to be affixed hereto and this Amended and Restated Certificate of
Incorporation to be signed by Eberhard Schoneburg, its President, and
attested by Robert Duggan, its Secretary, this 10th day of June, 1998.
ARTIFICIAL LIFE, INC.
By:/s/ Eberhard Schoneburg
Eberhard Schoneburg, President
ATTEST:
By: /s/ Robert Duggan
Robert Duggan, Secretary
6
<PAGE> 1
EXHIBIT 3.3
BY-LAWS
OF
NEUROTEC INTERNATIONAL CORP.
ARTICLE I
STOCKHOLDERS
SECTION 1. Place of Meetings. All meetings of stockholders shall
be held at the principal office of the corporation or at such other place as
may be named in the notice.
SECTION 2. Annual Meeting. The annual meeting of stockholders for
the election of directors and the transaction of such other business as may
properly come before the meeting shall be held on such date and at such hour and
place as the directors or an officer designated by the directors may determine.
If the annual meeting is not held on the date designated therefor, the directors
shall cause the meeting to be held as soon thereafter as convenient.
SECTION 3. Special Meetings. Special meetings of the stockholders
may be called at any time by the President, the Chairman of the Board, if any,
or the Board of Directors, or by the Secretary or any other officer upon the
written request of one or more stockholders holding of record at least a
majority of the outstanding shares of stock of the corporation entitled to vote
at such meeting. Such written request shall state the purpose or purposes of the
proposed meeting. Business transacted at any special meeting of stockholders
shall be limited to matters relating to the purpose or purposes stated in the
notice of meeting of stockholders shall be limited to matters relating to the
purpose or purposes stated in the notice of meeting.
<PAGE> 2
SECTION 4. Notice of Meetings. Except where some other notice is
required by law, written notice of each meeting of stockholders, stating the
place, date and hour thereof and the purposes for which the meeting is called,
shall be given by or under the direction of the Secretary, not less than ten nor
more than sixty days before the date fixed for such meeting, to each stockholder
entitled to vote at such meeting of record at the close of business on the day
fixed by the Board of Directors as a record date for the determination of the
stockholders entitled to vote at such meeting or, if no such date has been
fixed, of record at the close of business on the day before the day on which
notice is given. Notice shall be given personally to each stockholder or left at
his or her residence or usual place of business or mailed postage prepaid and
addressed to the stockholder at his or her address as it appears upon the
records of the corporation. In case of the death, absence, incapacity or refusal
of the Secretary, such notice may be given by a person designated either by the
Secretary or by the person or persons calling the meeting or by the Board of
Directors. A waiver of such notice in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent to such notice. Attendance of a person at a meeting of
stockholders shall constitute a waiver of notice of such meeting, except when
the stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders need be
specified in any written waiver of notice. Except as required by statute, notice
of any adjourned meeting of the stockholders shall not be required.
SECTION 5. Voting List. The officer who has charge of the stock
ledger of the corporation shall prepare and make, at least ten days before every
meeting of stockholders, a
2
<PAGE> 3
complete list of the stockholders, arranged in alphabetical order, and showing
the address of each stockholder and the number of shares registered in the name
of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present. The stock ledger shall be the only evidence as to
who are the stockholders entitled to examine the stock ledger, the list required
by this section or the books of the corporation, or to vote at any meeting of
stockholders.
SECTION 6. Quorum of Stockholders. At any meeting of the
stockholders, the holders of a majority in interest of all stock issued and
outstanding and entitled to vote upon a question to be considered at the
meeting, present in person or represented by proxy, shall constitute a quorum
for the consideration of such question, but a smaller group may adjourn any
meeting from time to time. When a quorum is present at any meeting, a majority
of the stock represented thereat and entitled to vote shall, except where a
larger vote is required by law, by the certificate of incorporation, or by these
by-laws, decide any question brought before such meeting. Any election by
stockholders shall be determined by a plurality of the vote cast by the
stockholders entitled to vote at the election.
SECTION 7. Proxies and Voting. Unless otherwise provided in the
certificate of incorporation, each stockholder shall at every meeting of the
stockholders be entitled to one vote in person or by proxy for each share of the
capital stock held of record by such stockholder, but no proxy shall be voted or
acted upon after three years from its date, unless said proxy provides
3
<PAGE> 4
for a longer period. Persons holding stock in a fiduciary capacity shall be
entitled to vote the shares so held, and persons whose stock is pledged shall be
entitled to vote, unless in the transfer by the pledgor on the books of the
corporation the pledgee shall have been expressly empowered to vote thereon, in
which case only the pledgee or the pledgee's proxy may represent said stock and
vote thereon. Shares of the capital stock of the corporation belonging to the
corporation or to another corporation, a majority of whose shares entitled to
vote in the election of directors is owned by the corporation, shall neither be
entitled to vote nor be counted for quorum purposes.
SECTION 8. Conduct of Meeting. Meetings of the stockholders shall
be presided over by one of the following officers in the order of seniority and
if present and acting: the Chairman of the Board, if any, the Vice-Chairman of
the Board, if any, the President, a Vice-President, or, if none of the foregoing
is in office and present and acting, a chairman to be chosen by the
stockholders. The Secretary of the corporation, if present, or an Assistant
Secretary, shall act as secretary of every meeting, but if neither the Secretary
nor an Assistant Secretary is present the chairman of the meeting shall appoint
a secretary of the meeting.
SECTION 9. Action Without Meeting. Any action required or permitted
to be taken at any annual or special meeting of stockholders of the corporation
may be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, is signed by the holders
or by proxy for the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote on such action were present
and voted. Prompt notice of the taking of corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
4
<PAGE> 5
ARTICLE II
DIRECTORS
SECTION 1. General Powers. The business and affairs of the
corporation shall be managed by or under the direction of a Board of Directors,
who may exercise all of the powers of the corporation which are not by law
required to be exercised by the stockholders. In the event of a vacancy in the
Board of Directors, the remaining directors, except as otherwise provided by
law, may exercise the powers of the full Board until the vacancy is filled.
SECTION 2. Number; Election; Tenure and Qualification. The initial
Board of Directors shall consist of three persons and shall be elected by the
incorporator. Thereafter, the number of directors which shall constitute the
whole Board shall be fixed by resolution of the Board of Directors, but in no
event shall be less than one. Each director shall be elected by the stockholders
at the annual meeting and all directors shall hold office until the next annual
meeting and until their successors are elected and qualified, or until their
earlier death, resignation or removal. The number of directors may be increased
or decreased by action of the Board of Directors. Directors need not be
stockholders of the corporation.
SECTION 3. Enlargement of the Board. The number of the Board of
Directors may be increased at any time, such increase to be effective
immediately, by vote of a majority of the directors then in office.
SECTION 4. Vacancies. Unless and until filled by the stockholders,
any vacancy in the Board of Directors, however occurring, including a vacancy
resulting from an enlargement of the Board and an unfilled vacancy resulting
from the removal of any director for cause or
5
<PAGE> 6
without cause, may be filled by vote of a majority of the directors then in
office although less than a quorum, or by the sole remaining director. A
director elected to fill a vacancy shall hold office until the next annual
meeting of stockholders and until his or her successor is elected and qualified
or until his or her earlier death, resignation, or removal. When one or more
directors shall resign from the Board, effective at a future date, a majority of
the directors then in office, including those who have so resigned, shall have
the power to fill such vacancy or vacancies, the vote thereon to take effect
when such resignation or resignations shall become effective. If at any time
there are no directors in office, then an election of directors may be held in
accordance with the General Corporation Law of the State of Delaware.
SECTION 5. Resignation. Any director may resign at any time upon
written notice to the corporation. Such resignation shall take effect at the
time specified therein, or if no time is specified, at the time of its
receipt by the President or Secretary.
SECTION 6. Removal. Except as may otherwise be provided by the
General Corporation Law, any director or the entire Board of Directors may be
removed, with or without cause, at an annual meeting or at a special meeting
called for that purpose, by the holders of a majority of the shares then
entitled to vote at an election of directors. The vacancy or vacancies thus
created may be filled by the stockholders at the meeting held for the purpose of
removal or, if not so filled, by the directors in the manner provided in Section
4 of this Article II.
SECTION 7. Committees. The Board of Directors may, by resolution or
resolutions passed by a majority of the whole Board of Directors, designate one
or more committees, each committee to consist of one or more directors of the
corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or
6
<PAGE> 7
disqualification of any member of such committee or committees, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not such member or members constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
such absent or disqualified member.
A majority of all the members of any such committee may fix its rules of
procedure, determine its action and fix the time and place, whether within or
without the State of Delaware, of its meetings and specify what notice thereof,
if any, shall be given, unless the Board of Directors shall otherwise by
resolution provide. The Board of Directors shall have the power to change the
members of any such committee at any time, to fill vacancies therein and to
discharge any such committee, either with or without cause, at any time.
Any such committee, unless otherwise provided in the resolution of the
Board of Directors, or in these by-laws, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the corporation, and may authorize the seal of the corporation to
be affixed to all papers which may require it; but no such committee shall have
the power or authority denied it by Section 141 of the General Corporation Law
of the State of Delaware.
Each committee shall keep regular minutes of its meetings and make such
reports as the Board of Directors may from time to time request.
SECTION 8. Meetings of the Board of Directors. Regular meetings of
the Board of Directors may be held without call or formal notice at such places
either within or without the State of Delaware and at such times as the Board
may by vote from time to time determine. A regular meeting of the Board of
Directors may be held without call or formal notice immediately
7
<PAGE> 8
after and at the same place as the annual meeting of the stockholders, or any
special meeting of the stockholders at which a Board of Directors is elected.
Special meetings of the Board of Directors may be held at any place
either within or without the State of Delaware at any time when called by the
Chairman of the Board of Directors, the President, Treasurer, Secretary, or two
or more directors. Reasonable notice of the time and place of a special meeting
shall be given to each director unless such notice is waived by attendance or by
written waiver in the manner provided in these by-laws for waiver of notice by
stockholders. Notice may be given by, or by a person designated by, the
Secretary, the person or persons calling the meeting, or the Board of Directors.
No notice of any adjourned meeting of the Board of Directors shall be required.
In any case it shall be deemed sufficient notice to a director to send notice by
mail at least seventy-two hours, or by telegram at least forty-eight hours,
before the meeting, addressed to such director at his or her usual or last known
business or home address.
Directors or members of any committee designated by the directors may
participate in a meeting of the Board of Directors or such committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation by
such means shall constitute presence in person at such meeting.
SECTION 9. Quorum and Voting. A majority of the total number of
directors shall constitute a quorum, except that when a vacancy or vacancies
exist in the Board, a majority of the directors then in office (but not less
than one-third of the total number of the directors) shall constitute a quorum.
A majority of the directors present, whether or not a quorum is present, may
adjourn any meeting from time to time. The vote of a majority of the directors
8
<PAGE> 9
present at any meeting at which a quorum is present shall be the act of the
Board of Directors, except where a different vote is required or permitted by
law, by the certificate of incorporation, or by these by-laws.
SECTION 10. Compensation. The Board of Directors may fix fees for
their services and for their membership on committees, and expenses of
attendance may be allowed for attendance at each meeting. Nothing herein
contained shall be construed to preclude any director from serving the
corporation in any other capacity as an officer, agent or otherwise, and
receiving compensation therefor.
SECTION 11. Action Without Meeting. Any action required or permitted
to be taken at any meeting of the Board of Directors, or of any committee
thereof, may be taken without a meeting, and without notice, if a written
consent thereto is signed by all members of the Board of Directors, or of such
committee, as the case may be, and such written consent is filed with the
minutes of proceedings of the Board of Directors or such committee.
ARTICLE III
OFFICERS
SECTION 1. Titles. The officers of the corporation shall consist of
a President, a Secretary, a Treasurer, and such other officers with such other
titles as the Board of Directors shall determine, including without limitation a
Chairman of the Board, a Vice-Chairman of the Board, and one or more
Vice-Presidents, Assistant Treasurers, or Assistant Secretaries.
SECTION 2. Election and Term of Office. The officers of the
corporation shall be elected annually by the Board of Directors at its first
meeting following the annual meeting of
9
<PAGE> 10
the stockholders. Each officer shall hold office until his or her successor is
elected and qualified, unless a different term is specified in the vote electing
such officer, or until his or her earlier death, resignation or removal.
SECTION 3. Qualification. Unless otherwise provided by resolution
of the Board of Directors, no officer, other than the Chairman or Vice-Chairman
of the Board, need be a director. No officer need be a stockholder. Any number
of offices may be held by the same person, as the directors shall determine.
SECTION 4. Removal. Any officer may be removed, with or without
cause, at any time, by resolution adopted by the Board of Directors.
SECTION 5. Resignation. Any officer may resign by delivering a
written resignation to the corporation at its principal office or to the
President or Secretary. Such resignation shall be effective upon receipt or
at such later time as may be specified therein.
SECTION 6. Vacancies. The Board of Directors may at any time fill
any vacancy occurring in any office for the unexpired portion of the term and
may leave unfilled for such period as it may determine any office other than
those of President, Treasurer and Secretary.
SECTION 7. Powers and Duties. The officers of the corporation shall
have such powers and perform such duties as are specified herein and as may be
conferred upon or assigned to them by the Board of Directors, and shall have
such additional powers and duties as are incident to their office except to the
extent that resolutions of the Board of Directors are inconsistent therewith.
SECTION 8. President and Vice-Presidents. The President shall be
the chief executive officer of the corporation, shall preside at all meetings of
the stockholders and the Board of Directors unless a Chairman or Vice-Chairman
of the Board is elected by the Board,
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empowered to preside, and present at such meeting, shall have general and active
management of the business of the corporation and general supervision of its
officers, agents and employees, and shall see that all orders and resolutions of
the Board of Directors are carried into effect.
In the absence of the President or in the event of his or her inability or
refusal to act, the Vice-President if any (or in the event there be more than
one Vice-President, the Vice-Presidents in the order designated by the
directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the President, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
President. The Board of Directors may assign to any Vice-President the title of
Executive Vice-President, Senior Vice-President or any other title selected by
the Board of Directors.
SECTION 9. Secretary and Assistant Secretaries. The Secretary shall
attend all meetings of the Board of Directors and of the stockholders and record
all the proceedings of such meetings in a book to be kept for that purpose,
shall give, or cause to be given, notice of all meetings of the stockholders and
special meetings of the Board of Directors, shall maintain a stock ledger and
prepare lists of stockholders and their addresses as required and shall have
custody of the corporate seal which the Secretary or any Assistant Secretary
shall have authority to affix to any instrument requiring it and attest by any
of their signatures. The Board of Directors may give general authority to any
other officer to affix and attest the seal of the corporation.
The Assistant Secretary if any (or if there be more than one, the
Assistant Secretaries in the order determined by the Board of Directors of if
there be no such determination, then in the order of their election) shall, in
the absence of the Secretary or in the event of the Secretary's inability or
refusal to act, perform the duties and exercise the powers of the Secretary.
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SECTION 10. Treasurer and Assistant Treasurers. The Treasurer shall
have the custody of the corporate funds and securities, shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
corporation and shall deposit all moneys and other valuable effects in the name
and to the credit of the corporation in such depositories as may be designated
by the Board of Directors. The Treasurer shall disburse the funds of the
corporation as may be ordered by the Board of Directors or the President, taking
proper vouchers for such disbursements, and shall render to the President and
the Board of Directors, at its regular meetings, or whenever they may require
it, an account of all transactions and of the financial condition of the
corporation.
The Assistant Treasurer if any (or if there be more than one, the
Assistant Treasurers in the order determined by the Board of Directors or if
there be no such determination, then in the order of their election) shall, in
the absence of the Treasurer or in the event of his or her inability or refusal
to act, perform the duties and exercise the powers of the Treasurer.
SECTION 11. Bonded Officers. The Board of Directors may require any
officer to give the corporation a bond in such sum and with such surety or
sureties as shall be satisfactory to the Board of Directors upon such terms and
conditions as the Board of Directors may specify, including without limitation a
bond for the faithful performance of the duties of such officer and for the
restoration to the corporation of all property in his or her possession or
control belonging to the corporation.
SECTION 12. Salaries. Officers of the corporation shall be entitled
to such salaries, compensation or reimbursement as shall be fixed or allowed
from time to time by the Board of Directors.
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ARTICLE IV
STOCK
SECTION 1. Certificates of Stock. One or more certificates of stock,
signed by the Chairman or Vice-Chairman of the Board of Directors or by the
President or Vice-President and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary, shall be issued to each stockholder
certifying, in the aggregate, the number of shares owned by the stockholder in
the corporation. Any or all signatures on any such certificate may be
facsimiles. In case any officer, transfer agent or registrar who shall have
signed or whose facsimile signature shall have been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same effect
as if he or she were such officer, transfer agent or registrar at the date of
issue.
Each certificate for shares of stock which are subject to any restriction
on transfer pursuant to the certificate of incorporation, the by-laws,
applicable securities laws, or any agreement among any number of shareholders or
among such holders and the corporation shall have conspicuously noted on the
face or back of the certificate either the full text of the restriction or a
statement of the existence of such restriction.
SECTION 2. Transfers of Shares of Stock. Subject to the
restrictions, if any, stated or noted on the stock certificates, shares of stock
may be transferred on the books of the corporation by the surrender to the
corporation or its transfer agent of the certificate representing such shares
properly endorsed or accompanied by a written assignment or power of attorney
properly executed, and with such proof of authority or the authenticity of
signature as the
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corporation or its transfer agent may reasonably require. The corporation shall
be entitled to treat the record holder of stock as shown on its books as the
owner of such stock for all purposes, including the payment of dividends and the
right to vote with respect to that stock, regardless of any transfer, pledge or
other disposition of that stock, until the shares have been transferred on the
books of the corporation in accordance with the requirements of these by-laws.
SECTION 3. Lost Certificates. A new certificate of stock may be
issued in the place of any certificate theretofore issued by the corporation and
alleged to have been lost, stolen, destroyed, or mutilated, upon such terms in
conformity with law as the Board of Directors shall prescribe. The directors
may, in their discretion, require the owner of the lost, stolen, destroyed or
mutilated certificate, or the owner's legal representatives, to give the
corporation a bond, in such sum as they may direct, to indemnify the corporation
against any claim that may be made against it on account of the alleged loss,
theft, destruction or mutilation of any such certificate, or the issuance of any
such new certificate.
SECTION 4. Record Date. The Board of Directors may fix in advance a
record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders or to express consent to corporate action
in writing without a meeting, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock, or for the
purpose of any other lawful action. Such record date shall not be more than 60
nor less than 10 days before the date of such meeting, nor more than 60 days
prior to any other action to which such record date relates.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next
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<PAGE> 15
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held. Unless otherwise fixed by the Board of Directors, the record date for
determining stockholders entitled to express consent to corporate action in
writing without a meeting, when no prior action by the Board of Directors is
necessary, shall be the day on which the first written consent is expressed. The
record date for determining stockholders for any other purpose shall be at the
close of business on the day on which the Board of Directors adopts the
resolution relating to such purpose.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
SECTION 5. Fractional Share Interests. The corporation may, but
shall not be required to, issue fractions of a share. If the corporation does
not issue fractions of a share, it shall (1) arrange for the disposition of
fractional interests by those entitled thereto, (2) pay in cash the fair value
of fractions of a share as of the time when those entitled to receive such
fractions are determined, or (3) issue scrip or warrants in registered or bearer
form which shall entitle the holder to receive a certificate for a full share
upon the surrender of such scrip or warrants aggregating a full share. A
certificate for a fractional share shall, but scrip or warrants shall not unless
otherwise provided therein, entitle the holder to exercise voting rights, to
receive dividends thereon, and to participate in any of the assets of the
corporation in the event of liquidation. The Board of Directors may cause scrip
or warrants to be issued subject to the conditions that they shall become void
if not exchanged for certificates representing full shares before a specified
date, or subject to the conditions that the shares for which scrip or warrants
are
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<PAGE> 16
exchangeable may be sold by the corporation and the proceeds thereof distributed
to the holders of scrip or warrants, or subject to any other conditions which
the Board of Directors may impose.
SECTION 6. Dividends. Subject to the provisions of the certificate
of incorporation, the Board of Directors may, out of funds legally available
therefor, at any regular or special meeting, declare dividends upon the common
stock of the corporation as and when they deem expedient.
ARTICLE V
INDEMNIFICATION AND INSURANCE
SECTION 1. Indemnification. The corporation shall; to the extent
permitted by the certificate of incorporation, as amended from time to time,
indemnify each person whom it may indemnify pursuant thereto.
SECTION 2. Insurance. The corporation shall have power to purchase
and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against such person and incurred by such person in any such
capacity or arising out of such person's status as such, whether or not the
corporation would have the power to indemnify such person against such liability
under the provisions of the General Corporation Law of the State of Delaware.
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<PAGE> 17
ARTICLE VI
GENERAL PROVISIONS
SECTION 1. Fiscal Year. Except as otherwise designated from time
to time by the Board of Directors, the fiscal year of the corporation shall
begin on the first day of October and end on the last day of September.
SECTION 2. Corporate Seal. The corporate seal shall be in such form
as shall be approved by the Board of Directors. The Secretary shall be the
custodian of the seal. The Board of Directors may authorize a duplicate seal to
be kept and used by any other officer.
SECTION 3. Certificate of Incorporation. All references in these
by-laws to the certificate of incorporation shall be deemed to refer to the
certificate of incorporation of the corporation, as in effect from time to time.
SECTION 4. Execution of Instruments. The Chairman and Vice-Chairman
of the Board of Directors, if any, the President, any Vice-President, and the
Treasurer shall have power to execute and deliver on behalf and in the name of
the corporation any instrument requiring the signature of an officer of the
corporation, including deeds, contracts, mortgages, bonds, notes, debentures,
checks, drafts, and other orders for the payment of money. In addition, the
Board of Directors may expressly delegate such powers to any other officer or
agent of the corporation.
SECTION 5. Voting of Securities. Except as the directors may
otherwise designate, the President or Treasurer may waive notice of, and act as,
or appoint any person or persons to act as, proxy or attorney-in-fact for this
corporation (with or without power of substitution) at any meeting of
stockholders or shareholders of any other corporation or organization the
securities of which may be held by this corporation.
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SECTION 6. Evidence of Authority. A certificate by the Secretary,
or an Assistant Secretary, or a temporary secretary, as to any action taken by
the stockholders, directors, a committee or any officer or representative of the
corporation shall, as to all persons who rely on the certificate in good faith,
be conclusive evidence of that action.
SECTION 7. Transactions with Interested Parties. No contract or
transaction between the corporation and one or more of the directors or
officers, or between the corporation and any other corporation, partnership,
association, or other organization in which one or more of the directors or
officers are directors or officers, or have a financial interest, shall be void
or voidable solely for that reason, or solely because the director or officer is
present at or participates in the meeting of the Board of Directors or a
committee of the Board of Directors which authorizes the contract or transaction
or solely because the vote of any such director is counted for such purpose, if:
(1) The material facts as to the relationship or interest and as to the
contract or transaction are disclosed or are known to the Board of Directors or
the committee, and the Board or committee in good faith authorizes the contract
or transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or
(2) The material facts as to the relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the corporation as of the
time it is authorized, approved or ratified by the Board of Directors, a
committee of the Board of Directors, or the stockholders.
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Common or interested directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
SECTION 8. Books and Records. The books and records of the
corporation shall be kept at such places within or without the State of Delaware
as the Board of Directors may from time to time determine.
ARTICLE VII
AMENDMENTS
SECTION 1. By the Board of Directors. These by-laws may be altered,
amended or repealed or new by-laws may be adopted by the affirmative vote of a
majority of the directors present at any regular or special meeting of the Board
of Directors at which a quorum is present.
SECTION 2. By the Stockholders. These by-laws may be altered,
amended or repealed or new by-laws may be adopted by the affirmative vote of the
holders of a majority of the shares of the capital stock of the corporation
issued and outstanding and entitled to vote at any regular meeting of
stockholders, or at any special meeting of stockholders provided notice of such
alteration, amendment, repeal or adoption of new by-laws shall have been stated
in the notice of such special meeting.
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EXHIBIT 10.1
FORM OF
ARTIFICIAL LIFE, INC.
EMPLOYEE CONFIDENTIALITY AND INVENTIONS AGREEMENT
In consideration of my employment or continued employment by Artificial
Life, Inc., a Delaware corporation, or any of its predecessors, successors or
subsidiaries (collectively, the "Company"), and for other valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, I
agree as follows:
CONFIDENTIALITY
I understand that the Company continually obtains and develops valuable
proprietary and confidential information concerning its business, business
relationships and financial affairs (the "Confidential Information") which may
become known to me in connection with my employment. By way of illustration, but
not limitation, Confidential Information may include Inventions (as hereafter
defined), trade secrets, technical information, know-how, research and
development activities of the Company, product and marketing plans, customer and
supplier information and information disclosed to the Company or to me by third
parties of a proprietary or confidential nature or under an obligation of
confidence. Confidential Information is contained in various media, including
without limitation, patent applications, computer programs in object and/or
source code, flow charts and other program documentation, manuals, plans,
drawings, designs, technical specifications, laboratory notebooks, supplier and
customer lists, internal financial data and other documents and records of the
Company. Confidential Information also includes any knowledge of developments,
ways of business, etc., which may in themselves be generally known but whose use
by the Company is not generally known.
I acknowledge that all Confidential Information, whether or not in writing
and whether or not labeled or identified as confidential or proprietary, is and
shall remain the exclusive property of the Company or the third party providing
such information to me or the Company. I agree that during the term of my
employment and thereafter, I shall use, publish and disclose Confidential
Information only in the performance of my duties for the Company and in
accordance with Company policy with respect to the protection of Confidential
Information. I agree not to use or disclose such Confidential Information for my
own benefit or for the benefit of any other person or business entity.
I agree to exercise my best efforts to protect the confidentiality of
Confidential Information in my possession. Upon the termination of my
employment, or at any time upon the Company's request, I shall return
immediately to the Company any and all materials containing any Confidential
Information then in my possession or under my control.
Confidential Information shall not include information which (a) is or
becomes generally known within the Company's industry through no fault of mine;
(b) was known to me at the time it was disclosed as evidenced by my written
records at the time of disclosure; (c) is lawfully and in good faith made
available to me by a third party who did not derive it from the Company and who
imposes no obligation of confidence on me; or (d) is required to be disclosed by
a governmental authority or by order of a court of competent jurisdiction,
provided that such
1
<PAGE> 2
disclosure is subject to all applicable governmental or judicial protection
available for like material and reasonable advance notice is given to the
Company.
ASSIGNMENT OF INVENTIONS
I agree promptly to disclose to the Company any and all ideas, concepts,
discoveries, inventions, developments, original works of authorship, software
programs, software and systems documentation, trade secrets, technical data and
know-how that are conceived, devised, invented, developed or reduced to practice
or tangible medium by me, under my direction or jointly with others during any
period that I am employed or engaged by the Company, whether or not during
normal working hours or on the premises of the Company, which relate, directly
or indirectly, to the business of the Company and arise out of my employment
with the Company (collectively, "Inventions").
I hereby assign to the Company all of my right, title and interest to the
Inventions and any and all related patent rights, copyrights and applications
and registrations therefor. During and after my employment, I shall cooperate
with the Company, at the Company's expense, in obtaining proprietary protection
for the Inventions and I shall execute all documents which the Company shall
reasonably request in order to perfect the Company's rights in the Inventions. I
hereby appoint the Company my attorney to execute and deliver any such documents
on my behalf in the event I should fail or refuse to do so within a reasonable
period following the Company's request. I understand that, to the extent this
Agreement shall be construed in accordance with the laws of any state which
limits the assignability to the Company of certain employee inventions, this
Agreement shall be interpreted not to apply to any such invention which a court
rules or the Company agrees is subject to such state limitation.
I acknowledge that all original works of authorship made by me within the
scope of my employment which are protectible by copyright are intended to be
"works made for hire", as that term is defined in Section 101 of the United
States Copyright Act of 1976 (the "Act"), and shall be the property of the
Company and the Company shall be the sole author within the meaning of the Act.
If the copyright to any such copyrightable work shall not be the property of the
Company by operation of law, I will, without further consideration, assign to
the Company all of my right, title and interest in such copyrightable work and
will cooperate with the Company and its designees, at the Company's expense, to
secure, maintain and defend for the Company's benefit copyrights and any
extensions and renewals thereof on any and all such work. I hereby waive all
claims to moral rights in any Inventions.
I further agree to assign to the United States government all my right,
title and interest in and to any and all Inventions whenever such full title is
required to be in the United States by a contract between the Company and the
United States or any of its agencies.
I further represent that the attached Schedule A contains a complete list
of all inventions made, conceived or first reduced to practice by me, under my
direction or jointly with others prior to my employment with the Company ("Prior
Inventions") and which are not assigned to the Company hereunder. If there is no
such Schedule A attached or if there is nothing listed on it, I represent that
there are no such Prior Inventions.
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<PAGE> 3
OTHER AGREEMENTS
I hereby represent to the Company that, except as may be identified on
Schedule B, I am not bound by any agreement or any other previous or existing
business relationship which conflicts with or prevents the full performance of
my duties and obligations to the Company (including my duties and obligations
under this or any other agreement with the Company) during my employment.
I understand that the Company does not desire to acquire from me any trade
secrets, know-how or confidential business information I may have acquired from
others. Therefore, I agree that during my employment with the Company I will not
improperly use or disclose any proprietary information or trade secrets of any
former or concurrent employer, or any other person or entity with whom I have an
agreement or to whom I owe a duty to keep such information in confidence. Those
persons or entities with whom I have such agreements or to whom I owe such a
duty are identified on Schedule B. If there is no Schedule B attached, or if
there is nothing listed on it, I represent that there are no such agreements or
person or entities.
I agree that during my employment and for a period of one year after the
termination or cessation of my employment for any reason, I shall not directly
or indirectly recruit, solicit or hire any employee of the Company, or induce or
attempt to induce any employee of the Company to discontinue his or her
employment relationship with the Company.
NO RIGHT TO CONTINUED EMPLOYMENT
I understand that this Agreement does not constitute a contract of
employment or create an obligation on the part of the Company to continue my
employment with the Company. I understand that my employment is "at will" and
that my obligations under this Agreement shall not be affected by any change in
my position, title or function with, or compensation, by the Company.
NOTIFICATION OF NEW EMPLOYER
In the event that I leave the employ of the Company, I hereby grant
consent to notification by the Company to my new employer about my rights and
obligations under this Agreement.
3
<PAGE> 4
GENERAL
In the event that any one or more of the provisions contained herein
shall, for any reason, be held to be invalid, illegal, or unenforceable in any
respect, such invalidity, illegality, or unenforceability shall not affect any
other provisions of this Agreement, and all other provisions shall remain in
full force and effect. If any of the provisions of this Agreement is held to be
excessively broad, it shall be reformed and construed by limiting and reducing
it so as to be enforceable to the maximum extent permitted by law.
No delay or omission by the Company in exercising any right under this
Agreement will operate as a waiver of that or any other right. No waiver or
consent given by the Company on any occasion will be construed as a bar to or
continuing waiver of any right on any other occasion.
I acknowledge that the restrictions contained in this Agreement are
necessary for the protection of the business and goodwill of the Company and are
reasonable for such purpose. I agree that any breach of this Agreement by me
will cause irreparable damage to the Company and that in the event of such
breach, the Company shall be entitled, in addition to monetary damages and to
any other remedies available to the Company under this Agreement and at law, to
equitable relief, including injunctive relief, and to payment by myself of all
costs incurred by the Company in enforcing of the provisions of this Agreement,
including reasonable attorneys' fees.
This Agreement shall be construed as a sealed instrument and shall in all
events and for all purposes be governed by, and construed in accordance with,
the laws of the Commonwealth of Massachusetts without regard to any choice of
law principle that would dictate the application of the laws of another
jurisdiction.
I HAVE READ ALL OF THE PROVISIONS OF THIS AGREEMENT AND I UNDERSTAND, AND
AGREE TO, EACH OF SUCH PROVISIONS.
Date (Signature)____________________________
Print Name:___________________________
4
<PAGE> 5
SCHEDULE A
PRIOR INVENTIONS
[Initial One]
__________ No Prior Inventions
__________ The following is a complete list of all Prior Inventions:
- ----------------------
If I am claiming any Prior Inventions above, I agree that, if in the course of
my employment with the Company, I incorporate into a Company product, process or
machine a Prior Invention owned by me or in which I have an interest, the
Company shall automatically be granted and shall have a non-exclusive,
royalty-free, irrevocable, transferrable, perpetual world-wide license to make,
have made, modify, use and sell such Prior Invention as part of, or in
connection with, such product, process or machine.
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<PAGE> 6
SCHEDULE B
PRIOR COMMITMENTS
[Initial One]
________ No agreements or obligations to other persons or entities.
________ The following is a complete list of all persons or entities to whom
I have obligations and/or with whom I have an agreement:
6
<PAGE> 1
EXHIBIT 10.2
FORM OF
ARTIFICIAL LIFE, INC.
ADVISORY BOARD CONFIDENTIALITY AND INVENTIONS AGREEMENT
In consideration of my appointment to the Advisory Board by Artificial
Life, Inc., a Delaware corporation, or any of its predecessors, successors or
subsidiaries (collectively, the "Company"), and for other valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, I
agree as follows:
CONFIDENTIALITY
I understand that the Company continually obtains and develops valuable
proprietary and confidential information concerning its business, business
relationships and financial affairs (the "Confidential Information") which may
become known to me in connection with my services as an advisor. By way of
illustration, but not limitation, Confidential Information may include
Inventions (as hereafter defined), trade secrets, technical information,
know-how, research and development activities of the Company, product and
marketing plans, customer and supplier information and information disclosed to
the Company or to me by third parties of a proprietary or confidential nature or
under an obligation of confidence. Confidential Information is contained in
various media, including without limitation, patent applications, computer
programs in object and/or source code, flow charts and other program
documentation, manuals, plans, drawings, designs, technical specifications,
laboratory notebooks, supplier and customer lists, internal financial data and
other documents and records of the Company. Confidential Information also
includes any knowledge of developments, ways of business, etc., which may in
themselves be generally known but whose use by the Company is not generally
known.
I acknowledge that all Confidential Information, whether or not in writing
and whether or not labelled or identified as confidential or proprietary, is and
shall remain the exclusive property of the Company or the third party providing
such information to me or the Company. I agree that during the term of my
services as an advisor and thereafter, I shall use, publish and disclose
Confidential Information only in the performance of my duties for the Company
and in accordance with Company policy with respect to the protection of
Confidential Information. I agree not to use or disclose such Confidential
Information for my own benefit or for the benefit of any other person or
business entity.
I agree to exercise my best efforts to protect the confidentiality of
Confidential Information in my possession. Upon the termination of my status as
an advisor, or at any time upon the Company's request, I shall return
immediately to the Company any and all materials containing any Confidential
Information then in my possession or under my control.
Confidential Information shall not include information which (a) is or
becomes generally known within the Company's industry through no fault of mine;
(b) was known to me at the time it was disclosed as evidenced by my written
records at the time of disclosure; (c) is lawfully and in good faith made
available to me by a third party who did not derive it from the Company and who
imposes no obligation of confidence on me; or (d) is required to be disclosed by
a governmental authority or by order of a court of competent jurisdiction,
provided that such
<PAGE> 2
disclosure is subject to all applicable governmental or judicial protection
available for like material and reasonable advance notice is given to the
Company.
ASSIGNMENT OF INVENTIONS
I agree promptly to disclose to the Company any and all ideas, concepts,
discoveries, inventions, developments, original works of authorship, software
programs, software and systems documentation, trade secrets, technical data and
know-how that are conceived, devised, invented, developed or reduced to practice
or tangible medium by me, under my direction or jointly with others during any
period that I am retained or engaged by the Company, whether or not during
normal working hours or on the premises of the Company, which relate, directly
or indirectly, to the business of the Company and arise out of my status as an
advisor to the Company (collectively, "Inventions").
I hereby assign to the Company all of my right, title and interest to the
Inventions and any and all related patent rights, copyrights and applications
and registrations therefor. During and after my service as an advisor, I shall
cooperate with the Company, at the Company's expense, in obtaining proprietary
protection for the Inventions and I shall execute all documents which the
Company shall reasonably request in order to perfect the Company's rights in the
Inventions. I hereby appoint the Company my attorney to execute and deliver any
such documents on my behalf in the event I should fail or refuse to do so within
a reasonable period following the Company's request. I understand that, to the
extent this Agreement shall be construed in accordance with the laws of any
state which limits the assignability to the Company of certain employee
inventions, this Agreement shall be interpreted not to apply to any such
invention which a court rules or the Company agrees is subject to such state
limitation.
I acknowledge that all original works of authorship made by me within the
scope of my work as an advisor which are protectible by copyright are intended
to be "works made for hire", as that term is defined in Section 101 of the
United States Copyright Act of 1976 (the "Act"), and shall be the property of
the Company and the Company shall be the sole author within the meaning of the
Act. If the copyright to any such copyrightable work shall not be the property
of the Company by operation of law, I will, without further consideration,
assign to the Company all of my right, title and interest in such copyrightable
work and will cooperate with the Company and its designees, at the Company's
expense, to secure, maintain and defend for the Company's benefit copyrights and
any extensions and renewals thereof on any and all such work. I hereby waive all
claims to moral rights in any Inventions.
I further agree to assign to the United States government all my right,
title and interest in and to any and all Inventions whenever such full title is
required to be in the United States by a contract between the Company and the
United States or any of its agencies.
I further represent that the attached Schedule A contains a complete list
of all inventions made, conceived or first reduced to practice by me, under my
direction or jointly with others prior to my appointment to the Advisory Board
of the Company ("Prior Inventions") and which are not assigned to the Company
hereunder. If there is no such Schedule A attached or if there is nothing listed
on it, I represent that there are no such Prior Inventions.
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OTHER AGREEMENTS
I hereby represent to the Company that, except as may be identified on
Schedule B, I am not bound by any agreement or any other previous or existing
business relationship which conflicts with or prevents the full performance of
my duties and obligations to the Company (including my duties and obligations
under this or any other agreement with the Company) during my service as an
advisor.
I understand that the Company does not desire to acquire from me any trade
secrets, know-how or confidential business information I may have acquired from
others. Therefore, I agree that during my service as an advisor with the Company
I will not improperly use or disclose any proprietary information or trade
secrets of any former or concurrent employer, or any other person or entity with
whom I have an agreement or to whom I owe a duty to keep such information in
confidence. Those persons or entities with whom I have such agreements or to
whom I owe such a duty are identified on Schedule B. If there is no Schedule B
attached, or if there is nothing listed on it, I represent that there are no
such agreements or person or entities.
I agree that during my service as an advisor and for a period of one year
after the termination or cessation of my service as an advisor for any reason, I
shall not directly or indirectly recruit, solicit or hire any employee of the
Company, or induce or attempt to induce any employee of the Company to
discontinue his or her employment relationship with the Company.
NO RIGHT TO CONTINUED EMPLOYMENT
I understand that this Agreement does not constitute a contract of
employment or create an obligation on the part of the Company to continue my
engagement with the Company. I understand that my engagement is "at will" and
that my obligations under this Agreement shall not be affected by any change in
my position, title or function with, or compensation, by the Company.
NOTIFICATION OF NEW EMPLOYER
In the event that I leave the services of the Company, I hereby grant
consent to notification by the Company to my new employer about my rights and
obligations under this Agreement.
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GENERAL
In the event that any one or more of the provisions contained herein
shall, for any reason, be held to be invalid, illegal, or unenforceable in any
respect, such invalidity, illegality, or unenforceability shall not affect any
other provisions of this Agreement, and all other provisions shall remain in
full force and effect. If any of the provisions of this Agreement is held to be
excessively broad, it shall be reformed and construed by limiting and reducing
it so as to be enforceable to the maximum extent permitted by law.
No delay or omission by the Company in exercising any right under this
Agreement will operate as a waiver of that or any other right. No waiver or
consent given by the Company on any occasion will be construed as a bar to or
continuing waiver of any right on any other occasion.
I acknowledge that the restrictions contained in this Agreement are
necessary for the protection of the business and goodwill of the Company and are
reasonable for such purpose. I agree that any breach of this Agreement by me
will cause irreparable damage to the Company and that in the event of such
breach, the Company shall be entitled, in addition to monetary damages and to
any other remedies available to the Company under this Agreement and at law, to
equitable relief, including injunctive relief, and to payment by myself of all
costs incurred by the Company in enforcing of the provisions of this Agreement,
including reasonable attorneys' fees.
This Agreement shall be construed as a sealed instrument and shall in all
events and for all purposes be governed by, and construed in accordance with,
the laws of the Commonwealth of Massachusetts without regard to any choice of
law principle that would dictate the application of the laws of another
jurisdiction.
I HAVE READ ALL OF THE PROVISIONS OF THIS AGREEMENT AND I UNDERSTAND, AND
AGREE TO, EACH OF SUCH PROVISIONS.
Date (Signature)____________________________
Print Name:___________________________
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SCHEDULE A
PRIOR INVENTIONS
[Initial One]
____ No Prior Inventions
____ The following is a complete list of all Prior Inventions:
- ----------------------
If I am claiming any Prior Inventions above, I agree that, if in the course of
my engagement with the Company, I incorporate into a Company product, process or
machine a Prior Invention owned by me or in which I have an interest, the
Company shall automatically be granted and shall have a non-exclusive,
royalty-free, irrevocable, transferrable, perpetual world-wide license to make,
have made, modify, use and sell such Prior Invention as part of, or in
connection with, such product, process or machine.
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SCHEDULE B
PRIOR COMMITMENTS
[Initial One]
________ No agreements or obligations to other persons or entities.
________ The following is a complete list of all persons or entities to whom
I have obligations and/or with whom I have an agreement:
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EXHIBIT 10.3
AMENDED AND RESTATED
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT (this
"Agreement") is entered into as of the 1st day of September 1998, by and between
Artificial Life, Inc., a Delaware corporation, with its principal office at Four
Copley Place, Suite 102, Boston, Massachusetts, 02116 (the "Company") and Prof.
Eberhard Schoneburg, an individual residing in Luzern, Switzerland (the
"Executive").
WHEREAS, the Executive entered into that certain Executive Employment
Agreement dated as of July 1, 1998 (the "Original Employment Agreement");
WHEREAS, the Company and the Executive mutually desire to amend and
restate the Original Employment Agreement;
WHEREAS, the Company desires the benefit of the experience, supervision
and services of the Executive and desires to employ the Executive upon the terms
and conditions set forth herein; and
WHEREAS, the Executive is willing and able to accept such employment on
such terms and conditions.
NOW, THEREFORE, in consideration of the covenants and the mutual
agreements contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Executive hereby agree as follows:
1. Employment. The Company shall employ the Executive and the
Executive agrees to be employed by the Company as its (i) President and Chief
Executive Officer and (ii) Chairman of the Board of Directors ("Chairman")
throughout the term hereof on the terms and conditions provided below. The
Executive hereby accepts such employment.
2. Duties and Powers.
a. Executive shall serve as President, Chief Executive Officer and
Chairman and shall have such responsibilities, duties and authority as is
customary to such positions, including, without limitation, general supervision
and control over, and responsibility for, the general management and operation
of the Company and its subsidiaries, including the performance of all duties
incident thereto, and using his full and best efforts to accomplish:
(1) Subject to the oversight of the Board of Directors,
development and implementation of the Company's business
strategy, including specifically the preparation of annual and
long-term business and budgeting plans for the Company.
<PAGE> 2
(2) Identification, recruitment, training, motivation and
supervision of all subordinate management personnel.
(3) Pursuit of additional acquisition opportunities for the
Company.
(4) Expansion of the market for the Company's products and
services.
(5) Reporting regularly to the Board of Directors of the Company
in a reasonable manner as reasonably determined by the Board
of Directors in consultation with the Executive.
(6) In addition to the foregoing, the Executive shall perform such
other duties and services which are customary to the positions
held or which the Executive considers to be in the best
interests of the Company.
b. The Executive shall have the following powers in connection with the
fulfillment of the duties set forth in Section 2(a) above:
(1) Subject to the reasonable oversight of the Board of Directors,
the power to develop and implement the Company's business strategy.
(2) Subject to the final authority of the Board of Directors (except
as described below in subsection (3) of this Section 2(b)), the ability to
determine the actions to be taken and the contracts to be entered into by
the Company.
(3) The Executive shall have the authority to commit the Company to
contracts involving amounts of $2,000,000 or less without the requirement
of prior approval from the Board of Directors; provided, however, that the
Executive may commit the Company to any contract contemplated by the
Company's business plan or any other strategic document approved by the
Board of Directors.
(4) The Executive shall have the authority to hire and dismiss all
employees of the Company, including subordinate officers, which authority
may be delegated to subordinates in the Executive's discretion.
(5) Subject to the ultimate authority of the Board of Directors, the
Executive shall have such other powers as are (i) commensurate with the
position of Chief Executive Officer and (ii) otherwise necessary to
perform the duties set forth in Section 2(a) above.
c. The Company acknowledges and agrees that in performing his duties and
responsibilities as Chief Executive Officer, Executive may, for extended periods
of time, be required to execute his duties and responsibilities from outside the
United States because the Executive resides in Switzerland and because the
Company believes that Europe and other
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markets will be important to develop and that it will be advantageous to have
technical and other services performed in countries where the cost of such
services is lower than in the United States.
3. Best Efforts of the Executive. The Executive shall (i) devote such of
his business time to the management of the business and affairs of, and to the
furtherance of the interests of, the Company as is reasonably necessary, and
(ii) devote the necessary and appropriate amount of time and perform to the
highest standard of care in performing his services. The Executive shall perform
all of his duties hereunder in a diligent and proper manner and shall abide by
and carry out the written and reasonable policies, procedures and instructions
of the Company as attached or as agreed to in the future or as determined by the
Board of Directors.
4. Term of Employment. Subject to Section 6 hereof, the Executive's
employment and appointment hereunder shall be for a term commencing on the date
hereof and expiring on September 1, 2001, unless extended or earlier terminated
as provided in accordance with the terms hereof (the "Term") On September 1,
2001, and each anniversary thereof, the Term shall be automatically extended for
an additional period of one (1) year, unless the Executive or the Company shall
have given notice to the other at least sixty (60) days prior to the end of the
then current Term indicating that the Term will not be so extended.
5. Compensation. Subject to Sections 7 and 8 hereof, in consideration of
the performance by the Executive of his duties hereunder, during the Term and
any applicable severance period the Company shall pay or provide to the
Executive the following compensation and benefits which the Executive agrees to
accept in full satisfaction for his services, it being understood that necessary
withholding taxes, FICA contributions and any other standard Company deductions
shall be deducted from such compensation:
(a) Base Salary. The Executive shall receive an initial base salary
equal to Two Hundred Forty Thousand Dollars ($240,000) per annum, which base
salary shall be paid in arrears in equal biweekly installments. The amount of
such base salary shall be reviewed yearly with a view to increases based on
performance; provided, however, that the minimum increase per annum shall be ten
percent (10%). Base Salary will increase during the prior calendar year in any
event each January 1 by the amount of increases in the Consumer Price Index, for
All Urban Consumers, U.S. City Average (as published by the U.S. Department of
Labor, Bureau of Labor Statistics).
(b) Bonus. The Executive shall be entitled to participate in any
bonus program which is made available to executive officers of the Company.
Executive shall also receive as an additional bonus an amount per annum equal to
three percent (3%) of the Company's net profits from operations for such year.
(c) Bereavement Leave. The Executive shall be entitled to
bereavement leave in accordance with the Company policy from time to time, but
not less than the entitlement in effect on the date of this Agreement.
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(d) Vacation; Sick Days. The Executive shall be entitled to four (4)
weeks paid vacation per calendar year; ten (10) paid sick days per calendar
year, five (5) paid personal days per calendar year and holidays accorded
employees of the Company from time to time, but at least those accorded
employees of the Company on. the date of this Agreement.
(e) Insurance Coverages and Pension Plans. The Executive shall be
entitled to such insurance, pension and all other benefits as are generally made
available by the Company to its executive officers from time to time.
(f) Specific Guaranteed Benefits. Notwithstanding the provisions set
forth above the following benefits or their equivalent will be provided to
Executive by the Company or paid for by the Company during the Term and during
any applicable severance period in accordance with the provisions of Section
7(d):
(i) noncontributory health and dental insurance coverage for
Executive and his family under a health insurance plan equivalent in all
material respects to the Company's health plan as it. exists on the date hereof
(not including retiree medical benefit coverage);
(ii) life and dismemberment insurance coverage for Executive
equivalent to the highest insurance benefits provided under the Company's
present insurance or any successor insurance from time to time; provided in no
event will the Company be liable for such insurance benefits to the Executive;
and
(iii) short term and long term disability insurance coverage
for Executive with coverage at least as good as the best coverage offered by the
Company from time to time during the term hereof
(g) Health and Dental Insurance to Age 65. If the Term hereof and
any applicable severance period should expire prior to the Executive's 65th
birthday, the Company shall continue to provide or arrange to continue to
provide Executive at Executive's expense, with health and dental insurance
coverage, substantially equivalent to the coverage specified in subsection (f)
above.
(h) Expense Reimbursement. The Company shall reimburse Executive for
all reasonable expenses incurred by him in the course of performing his duties
under this Agreement which are consistent with the Company's policies in effect
from time to time with respect to travel, entertainment and other business
expenses, subject to the Company's requirements with respect to reporting and
documentation of such expenses.
6. Termination.
(a) Termination by the Company with Cause. The Company shall have
the right at any time to terminate the Executive's employment hereunder upon the
occurrence of any of the following events (any such termination being referred
to as a termination for "Cause"): (i)
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willful, substantial and continued failure or neglect by the Executive, to
follow the reasonable directions of the Board, after notice thereof specifically
identifying the deficiency, and a reasonable opportunity to take remedial action
which resolves the issue, (ii) disloyalty, gross negligence, dishonesty or
breach of fiduciary duty to the Company; (iii) the commission of an act of
embezzlement or fraud; (iv) the willful disregard of the rules or policies of
the Company which results in direct or indirect loss, damage or injury to the
Company which is material to the Company; (v) the willful unauthorized
disclosure of any trade secret or confidential information of the Company to a
third party which is material and thereby harms the interests of the Company; or
(vi) the willful commission of an act which constitutes unfair competition with
the Company or which induces any customer or supplier to breach a contract with
the Company. For purposes of this subsection, no act, or failure to act on, the
Executive's part shall be deemed "willful" unless done, or omitted to be done,
by him not in good faith and without the reasonable belief that his action or
omission was in the best interest of the Company. Notwithstanding the foregoing,
the Executive shall not be deemed to have been terminated for Cause unless and
until there shall have been delivered to him a copy of a resolution duly adopted
by the affirmative vote of not less than three-quarters (3/4) of the entire
membership of the Board at a meeting of the Board called and held for such
purpose (after reasonable notice to the Executive and an opportunity for him,
together with his counsel, to be heard before the Board), finding that in the
good faith opinion of the Board the Executive was guilty of conduct set forth
above in this subsection and specifying the particulars thereof in detail.
(b) Termination by Company for Death or Disability. The Company
shall have the right at any time to terminate the Executive's employment
hereunder upon the Executive's inability to perform his duties hereunder by
reason of any mental, physical or other disability for a period of at least six
(6) consecutive months or until such earlier time as the Executive's eligibility
is confirmed and he commences to receive payments under the Company's long-term
disability policy. The Executive's employment hereunder shall also terminate
automatically upon the death of the Executive.
(c) Termination by Company Without Cause. The Company shall have the
right at any time to terminate the Executive's employment hereunder for any
other reason without Cause upon ninety (90) days prior written notice to the
Executive.
(d) Voluntary Termination by Executive. The Executive shall be
entitled to terminate his employment hereunder upon thirty (30) days prior
written notice to the Company. Any such termination shall be treated as a
termination by the Company for "Cause" under Section 7.
(e) Constructive Termination by the Executive. The Executive shall
be entitled to terminate his employment hereunder upon the occurrence of a
Constructive Termination. Any such termination shall be treated as a termination
by the Company without cause. For this purpose, a "Constructive Termination"
shall mean:
(i) the material diminution in the requirements of the
Executive's employment other than as expressly contemplated by this Agreement;
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(ii) any other material change in such position, including
titles, authority or responsibilities from those contemplated by Sections 1 and
2 of this Agreement;
(iii) any reduction in the Executive's annual base salary
as set from year to year upon a renewal or otherwise;
(iv) any change in the Executive's reporting
responsibilities;
(v) any removal of the Executive as President, Chief
Executive Officer, or Chairman of the Company;
(vi) any material breach of this Agreement by the Company or
any material breach by the Company of its obligations under any other agreement
with the Executive or of any other duty or obligation owed to the Executive,
including but not limited to those with respect to any stock options granted or
bonus payable to the Executive;
(vii) conditioning any nontermination or renewal of this
Agreement on any revision of this Agreement which is material and adverse to
the Executive;
(viii) the occurrence of a "Change of Control" (as defined in
Section 8(a)) by means of a sale by the Company of substantially all of its
assets in which the purchaser does not assume the obligations and liabilities of
the Company under this Agreement.
(ix) a liquidation or dissolution of the Company.
The Executive's right to terminate his employment pursuant to this
subsection shall not be affected by his incapacity due to physical or mental
illness. The Executive's continued employment shall not constitute consent to,
or a waiver of rights with respect to, any circumstance constituting
Constructive Termination hereunder.
(f) Notice of Termination. Any termination of the Executive's
employment hereunder (other than upon the death of the Executive) shall be
communicated by Notice of Termination to the other party hereto given in
accordance with this Section 6 (if applicable) and Section 11. For purposes of
this Agreement, a "Notice of Termination" means a written notice which (i)
indicates the specific termination provision in this Agreement relied upon, (ii)
if the termination is by the Company for Cause or by the Executive for
Constructive Termination, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and is otherwise in accordance with
the terms of Section 6(a) or 6(e), as the case may be, and (iii) sets forth the
date on which such termination shall be effective, which date shall be no sooner
than permitted by the applicable Section, but in no event less than thirty (30)
days after the giving of such notice (the "Date of Termination"). The failure by
any party to set forth in the Notice of Termination any fact or circumstance
which contributes to a showing of Cause or Constructive Termination shall
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<PAGE> 7
not waive any right of such party hereunder or preclude such party from
asserting such fact or circumstance in enforcing its rights hereunder.
(g) Notwithstanding the provisions of Section 6(f) above, if at any
time prior to fifteen (15) days after any Notice of Termination is given, or, if
later, prior to the Date of Termination (as determined without regard to this
proviso), the party receiving such Notice of Termination notifies the other
party that a dispute exists concerning the termination, the Date of Termination
shall be the date on which the dispute is finally determined, either by mutual
written agreement of the parties or by a binding arbitration award; and provided
further that the Date of Termination shall be extended by a notice of dispute
only if such notice is given in good faith and the party giving such notice
pursues the resolution of such dispute with reasonable diligence. During the
pendency of any such dispute, (i) the Executive shall not be required to report
for work or otherwise continue to perform his duties with the Company, and (ii)
the Company will continue to pay to the Executive his full compensation in
effect when the notice giving rise to the dispute was given (including, but not
limited to, base salary) and continue the Executive and his dependents as a
participant in all compensation, benefit and insurance plans in which he or they
were participating when the notice giving rise to the dispute was given, until
the dispute is finally resolved in accordance with this Subsection. Amounts paid
under this Subsection are in addition to all other amounts due under this
Agreement and shall not be offset against or reduce any other amounts due under
this Agreement.
7. Effect of Termination of Employment Prior to a Change of Control.
(a) With Cause. If the Executive's employment is terminated for
Cause, the Executive's salary and other benefits specified in Section 5 shall
cease on the Date of Termination, except that he will be paid all other amounts
to which he was entitled prior to the Date of Termination under the retirement,
benefit, insurance and compensation programs required to be provided by Section
5(e) at the time such payments are payable under such plans.
(b) Death. If the Executive's employment is terminated by the death
of the Executive (pursuant to Section 6(b) the Executive's compensation provided
in Section 5 shall be paid to the Executive's estate as follows:
(i) the Executive's then current base salary shall continue to
be paid through the last day of the month during which such termination occurred
and for six (6) months thereafter; and
(ii) the Executive's estate shall be entitled to a pro-rata
portion of any bonus payment referenced in Section 5(b) hereof with respect to
the fiscal year in which such termination shall occur (such pro-ration to be
based upon (A) the results actually achieved by the Company for the full fiscal
year and (B) the actual number of days of active employment during such fiscal
year).
(iii) the Executive's estate shall be paid all other amounts
to which he was entitled prior to the date of termination under the retirement,
benefit, insurance, and
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compensation programs required to be provided by Section 5 at the time such
payments are payable under such plans.
(c) Disability.
(i) if the Executive's employment is terminated as a result of
disability, the Executive's base salary shall continue until the monthly
benefits specified in Section 5(f)(iii) are confirmed and actually commence to
be paid and such payments shall continue to be available to the Executive to the
extent provided in the long term disability insurance plan to which the
Executive is entitled under this Agreement.
(ii) the Executive's estate shall be entitled to a pro-rata
portion of any bonus payment referenced in Paragraph (b) hereof with respect to
the fiscal year in which such termination shall occur (such pro-ration to be
based upon (A) the results actually achieved by the Company for the full fiscal
year and (B) the actual number of days of active employment during such fiscal
year).
(iii) the Executive's estate shall be paid all other amounts
to which he was entitled prior to the date of termination under the retirement,
benefit, insurance, and compensation programs required to be provided by Section
5 at the time such payments are payable under such plans.
(d) Without Cause or Upon Constructive Termination. If the
Executive's employment is terminated by the Company without Cause (pursuant to
Section 6(a)) or by the Executive upon the occurrence of a Constructive
Termination (pursuant to Section 6(e)), the Executive's compensation provided in
Section 5 shall be paid as follows:
(i) the Company shall pay the Executive his full base salary
through the Date of Termination at the rate in effect at the time Notice of
Termination is given, plus all other amounts to which he is entitled under any
retirement, benefit, insurance and compensation plans of the Company required to
be provided by Section 5, at the time such payments are due, except as otherwise
provided in this Agreement.
(ii) in lieu of any further salary payments to the Executive
for periods subsequent to the Date of Termination, the Company shall pay as a
severance payment to the Executive in six equal, consecutive monthly
installments, an aggregate severance payment (together with the payments
provided in the paragraphs below, (the "Severance Payments') equal to his annual
rate of base salary in effect immediately prior to the Date of Termination and
the greater of (a) the average of the last two annual bonuses (annualized in the
case of any bonus paid with respect to a partial year) earned by him preceding
the Date of Termination, or (b) the annual bonus (annualized in the case of any
bonus paid with respect to a partial year) earned by him for the year in which
the Termination occurs;
(iii) for a six (6) month period after such termination, the
Company shall arrange to provide, at its cost, the Executive and his dependents
with the benefits set forth
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in Section 5. Benefits otherwise receivable by the Executive pursuant to this
Subsection (iii) shall be reduced to the extent comparable benefits are actually
received by him from a subsequent employer during the six (6) month period
following the Date of Termination, and any such benefits actually received by
him shall be reported to the Company; and
(iv) at the request of Executive, continuing participation in
the Company's 401(k) Plan, if any, during the severance period. It is understood
that if this request is made, the payments described in Section 7(a)(ii) above
shall be made as accelerated salary continuation payments, although the
obligation of the employee to perform services shall be waived. In this event,
all references to termination of employment shall mean the point in time when
performance of duties and responsibilities ceases.
8. Effect of Termination After a Change of Control.
(a) For purposes of this Section, a "Change in Control" shall mean a
change in control of the Company of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
whether or not the Company is in fact required to comply therewith; provided,
that, without limitation, such a change in control shall be deemed to have
occurred if:
(i) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act), other than the Company, any trustee or other
fiduciary holding securities under an employee benefit plan of the Company or a
corporation owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing 30% or
more of the combined voting power of the Company's then outstanding securities;
(ii) during any period of twenty-four (24) consecutive months
(not including any period prior to the date of this Agreement), individuals who
at the beginning of such period constitute the Board and any new director whose
election by the Board or nomination for election by the Board or by the
stockholders of the Company was approved by a vote of at least two-thirds (2/3)
of the directors then still in office who either were directors at the beginning
of such period or whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority thereof; or
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than (i) a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least 50% of the combined voting securities of the Company
or such surviving entity outstanding immediately after such merger or
consolidation or (ii) a merger or consolidation effected to implement a
recapitalization of the
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Company (or similar transaction) in which no "person" (as hereinabove defined)
acquires 30% or more of the combined voting power of the Company's then
outstanding securities; or
(iv) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company' assets.
(b) If any of the events described in Subsection 8 (a) hereof
constituting a Change in Control shall have occurred, upon the subsequent
termination of his employment during the term of this Agreement the Executive
shall be entitled to receive the benefits described in Section 7(d) except that
the Severance Payment referred to in Section 7(d)(ii) shall continue for a
period of eighteen months, unless such termination is (A) because of the
Executive's death or Disability, (B) by the Company for Cause, or (C) by the
Executive other than for reasons constituting a Constructive Termination. In the
event termination is because of (A), (B) or (C) immediately above, the
provisions of Section 7 shall apply.
(c) Upon any Change of Control, regardless of whether the
Executive's employment terminates, any options held by the Executive to purchase
securities of the Company shall become fully vested and exerciseable.
9. Agreement Not to Compete.
(a) Except in the case of a termination without cause or a
constructive termination, the Executive hereby agrees that during the
Non-Competition Period (as defined below), he will not, directly or indirectly;
alone or as a partner, joint venturer, officer, director, employee, consultant,
agent, independent contractor or stockholder of any company or other business
entity, engage (for anyone other than the Company) in any Competitive
Enterprise. For the purpose hereof, "Competitive Enterprise" is defined as
activities involving the provision of services and/or products to any of the
Company's existing customers that are substantially similar to those provided by
the Company. The ownership by the Executive of not more than five percent (5%)
of the shares of stock of any corporation having a class of equity securities
actively traded on a national securities exchange or -on The Nasdaq Stock Market
shall not be deemed, in and of itself, to violate the prohibitions of this
Section 9(a). The "Non-Competition Period" is (a) the longer of the Executive's
employment hereunder or time period which he serves as a director of the Company
plus (b) a period of one (1) year thereafter.
(b) The Executive agrees during any applicable Non-Competition
Period not to take any action having the purpose or effect of interfering with
or otherwise damaging in any material respect the Company's business
relationship with any of its principal vendors.
(c) The Executive agrees that during an applicable Non-Competition
Period, he shall not, other than in connection with employment for the Company,
directly or indirectly, knowingly, employ, or knowingly permit any company or
business organization directly or indirectly controlled by the Executive to
employ (i) any person entitled to receive a base salary of
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at least $40,000, who in either case, is employed by the Company at any time
during the Non-Competition Period, or in any manner seek to induce any such
person to leave his or her employment with the Company, unless such person has
been involuntarily discharged by the Company.
(d) If a court determines that the foregoing restrictions are too
broad or otherwise unreasonable under applicable law, including with respect to
time or space, the court is hereby requested and authorized by the parties
hereto to revise the -foregoing restrictions to include the maximum restrictions
allowed under the applicable law.
(e) For purposes of this Section 9, the "Company" refers to the
Company and any of its subsidiaries, subdivisions or affiliates.
10. Other Activities. Nothing herein shall be construed as preventing the
Executive from engaging in other business activities, provided that (i) they are
not prohibited by Section 9(a); (ii) they do not interfere in any material
respect with the performance of his duties as President, Chief Executive Officer
and Chairman; and (iii) they do not violate any of his fiduciary duties to the
Company`. In pursuing these activities, the Executive shall not use the assets
of the Company, shall not make representations on behalf of the Company, and
shall have no authority to bind or act as agent for the Company or its employees
for any purpose.
11. Notices. All notices or other communications hereunder shall be in
writing and shall be deemed to have been duly given (a) when delivered
personally, (b) upon confirmation of receipt when such notice or other
communication is sent by facsimile or telex, (c) one day after delivery to an
overnight delivery courier, or (d) on the fifth day following the date of
deposit in the United States mail if sent first class, postage prepaid, by
registered or certified mail. The addresses for such notices shall be as
follows:
(a) For notices and communications to the Company:
Artificial Life, Inc.
Four Copley Place, Suite 102
Boston. MA 02116
Attention: Board of Directors
with a copy to:
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, MA 02111
Facsimile: (617) 542-2241
Attention: Robert Duggan, Esq.
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(b) For notices and communications to the Executive:
Prof. Eberhard Schoneburg
218 Commonwealth Avenue
Boston, MA 02116
with a copy to:
Wolgang K. Meding
Busing, Muffelman & Theye
60323 Frankfurt Am Main
Freiherr-Vom-Stein-Str. 11
Germany
Any party hereto may, by notice to the other, change its address for receipt of
notices hereunder.
12. Governing Law. This Agreement shall be construed under and
governed by the laws of the Commonwealth of Massachusetts, without reference
to its conflicts of law principles.
13. Amendment; Waiver. This Agreement may be amended, modified,
superseded, cancelled, renewed or extended, and the terms hereof may be waived,
only by a written instrument executed by all of the parties hereto or, in the
case of a waiver, by the party waiving compliance. The failure of any party at
any time or times to require performance of any provision hereof shall in no
manner affect the right at a later time to enforce the same. No waiver by any
party of the breach of any term or covenant contained in this Agreement, whether
by conduct or otherwise, in any one or more instances, shall be deemed to be, or
construed as, a further or continuing waiver of any such breach or a waiver of
the breach of any other term or covenant contained in this Agreement.
14. Successors and Assigns. Except as set forth herein this Agreement
shall be binding upon the Executive, without regard to the duration of his
employment by the Company or reasons for the cessation of such employment, and
inure to the benefit of his administrators, executors, heirs and assigns,
although the obligations of the Executive are personal and may be performed only
by him. This Agreement shall also be binding upon and inure to the benefit of
the Company and its subsidiaries, successors and assigns, including any
corporation with which or into which the Company or its successors may be merged
or which may succeed to their assets or business.
15. Counterparts. This Agreement may be executed in two counterparts,
each of which shall be deemed an original but which together shall constitute
one and the same instrument.
16. Attorneys' Fees. In the event that any action is brought to enforce
any of the provisions of this Agreement, or to obtain money damages for the
breach thereof, and such action results in the award of a judgment for money
damages or in the granting of any injunction in
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favor of one of the parties to this Agreement, all expenses, including
reasonable attorneys' fees, shall be paid by the nonprevailing party. In the
event any such action is brought and the action does not result in the award of
a judgment for money damages or in the granting of any injunction in favor of
the party bringing such action, such party shall pay to the successful defending
party all expenses, including reasonable attorney's fees, incurred by such party
in defending against such action.
17. Equitable Relief. The Executive expressly agrees that breach of any
provision of Section 9 of this Agreement would result in irreparable injuries to
the Company, that the remedy at law for any such breach will be inadequate and
that upon breach of such provisions, the Company, in addition to all other
available remedies, shall be entitled as a matter of right to injunctive relief
in any court of competent jurisdiction without the necessity of proving the
actual damage to the Company.
18. Entire Agreement. This Agreement, including the exhibits and
schedules hereto, constitutes the entire understanding of the parties hereto
with respect to the subject matter hereof and supersedes all prior
negotiations, discussions, writings and agreements between them.
19. Arbitration. In the event of a dispute regarding a termination for
constructive cause or termination arising under this Agreement, the parties
agree to submit the same to arbitration in Boston, Massachusetts in accordance
with the rules of the American Arbitration Association. Any award shall be
enforceable in a court of competent jurisdiction.
20. Indemnification. The Company shall indemnify the Executive to the
extent presently provided in its Bylaws. The Executive agrees to promptly
notify the Company of any actual or threatened claim arising out of or as a
result of his employment with the Company.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
THE COMPANY:
ARTIFICIAL LIFE, INC.
By: /s/ Eberhard Schoneburg
---------------------------
Name: Eberhard Schoneburg
Title: Chief Executive Officer
THE EXECUTIVE:
/s/ Eberhard Schoneburg
-------------------------------
Eberhard Schoneburg
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EXHIBIT 10.4
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (the "Agreement"), dated as of May 1, 1998,
between Artificial Life, Inc., a Delaware corporation, with its principal office
at Four Copley Place, Suite 102, Boston, Massachusetts, 02116 (the "Company"),
and Robert E. Pantano, an individual residing at 10 Prospect Street, Franklin,
Massachusetts 02038, (the "Employee").
WHEREAS, the Company desires to employ the Employee and the Employee
desires to be employed upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the Company and the Employee hereby agree as follows:
SECTION 1. Employment; Employment Period.
(a) The Company hereby agrees to employ the Employee, and the Employee
hereby accepts such employment by the Company as the Company's Chief Financial
Officer for the period commencing on the date hereof (the "Commencement Date")
and continuing until terminated in accordance with the terms hereof (the
"Employment Period"). The Employment Period shall be at least eighteen (18)
months unless terminated earlier pursuant to the termination provisions set
forth in Section 5.
(b) The Employee shall report directly to the Chief Executive Officer
of the Company and shall have the responsibilities, duties and authority
commensurate with the position of Chief Financial Officer of the Company, and
shall engage in such other services and responsibilities as may be prescribed by
the Chief Executive Officer of the Company or his designees from time to time.
(c) The principal location at which the Employee will perform his
duties will be the Company's principal office currently located at the address
first set forth above.
SECTION 2. Salary; Bonus; Expenses.
(a) During the Employment Period, the Company will pay a salary to the
Employee (the "Base Salary"), payable in substantially equal installments in
accordance with the Company's payroll practices for its employees as in effect
from time to time. The Base Salary shall initially be at the annual rate of One
Hundred Thousand Dollars ($100,000.00) per annum. Commencing on January 1, 1999,
the Base Salary will be reviewed at least annually by the Company's Chief
Executive Officer at the time that the Company reviews the salaries of its other
employees and may be adjusted upward at such time in the discretion of the Chief
Executive Officer.
(b) In each year during the Employment Period, the Employee shall be
entitled to participate in bonus and incentive programs as in effect for
employees of the Company from time to time.
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(c) The Employee shall be reimbursed by the Company for reasonable
travel, entertainment, lodging, meal and other business expenses incurred by the
Employee in connection with performing his services hereunder in accordance with
the Company's policies as in effect from time to time.
SECTION 3. Equity Participation. In each year during the Employment
Period, the Employee shall be entitled to participate in all stock option plans
and equity participation plans as the Company may make available to its
employees from time to time. It is agreed that the Employee shall receive stock
options on May 1, 1999 with a value of $25,000, provided that he is still
employed by the Company on that date. The value of the stock options shall be
based on the difference between the exercise price and the fair market value of
the Company's Common Stock on May 1, 1999.
SECTION 4. Benefits; Vacations. In connection with the Employee's
employment hereunder, the Employee will be entitled during the Employment Period
to the following additional benefits:
(a) At the Company's expense such fringe benefits as the Company may
provide from time to time for its employees, including, without limitation,
family health insurance coverage and life insurance coverage (the "Fringe
Benefits"); and
(b) Vacation time in each calendar year determined in accordance with
the Company's vacation policies for its employees as in effect from time to
time, prorated in any calendar year during which the Employee is employed
hereunder for less than the entire such year in accordance with the number of
days in such calendar year for which he is so employed. The Employee shall also
be entitled to all paid holidays and personal days given by the Company to its
employees.
SECTION 5. Termination.
(a) Termination by the Company. The Employee's employment may be
terminated at any time (i) by the Company for Cause (as hereinafter defined) by
a notice to the Employee, specifying the Cause therefor, such notice to be
effective immediately unless otherwise stated in such notice, which date of
effectiveness shall be the Termination Date therefor, (ii) by the Company
without Cause at any time after the expiration of eighteen (18) months from the
Commencement Date; by notice to the Employee, effective sixty (60) days after
the date of such notice or as the Employee and the Company may otherwise agree,
which date of effectiveness shall be the Termination Date therefor, (iii) upon
the death of the Employee, or (iv) for the Disability (as hereinafter defined)
of the Employee in accordance with Paragraph 5(c).
(b) Definition of Cause. For purposes of this Agreement, the term
"Cause" shall mean (i) the engaging by the Employee in intentional misconduct
which is injurious to the Company monetarily or otherwise, (ii) the material
violation by the Employee of any provision of this Agreement, (iii) the
conviction of the Employee of a felony by a court of competent jurisdiction or
(iv) the commission by the Employee of any act of fraud or embezzlement relating
to the property of the Company and/or the services provided hereunder. In making
any determination that Cause exists under this Paragraph 5(b), the Board of
Directors shall act fairly and in utmost good faith and shall give the Employee
an opportunity to appear and be heard at a meeting of the Board of Directors or
any committee thereof.
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(c) Termination upon Disability. If the Employee becomes disabled
during the Employment Period so that he is unable to perform his obligations
hereunder for reasons involving physical or mental illness or physical injury
(i) for a period of one hundred eighty (180) consecutive days or (ii) for any
periods aggregating one hundred eighty (180) days or more in any twelve (12)
consecutive month period ("Disability"), then the term of the Employee's
employment hereunder may be terminated by the Company within sixty (60) days
after the expiration of said one hundred eighty (180) day period or periods
aggregating one hundred eighty (180) days, as the case may be, said termination
to be effective upon written notice to the Employee, which date shall be the
Termination Date therefor. Any determination that the Employee is totally
disabled such that he is unable to perform his obligations hereunder for reasons
involving physical or mental illness or physical injury shall be determined by
the Company's Board of Directors, acting in good faith, such determination to be
final and binding upon the parties hereto.
(d) Termination by the Employee. The Employee's employment may be
terminated by him at any time after expiration of eighteen (18) months from the
Commencement Date (i) by written notice to the Company, which notice shall be
effective sixty (60) days after the giving of such notice, or earlier if the
Company so elects, which date shall be the Termination Date therefor, or (ii) by
written notice for Good Reason (as hereinafter defined), effective upon giving
such notice, which date shall be the Termination Date therefor. As used herein,
"Good Reason" shall mean any of the following:
(i) The Company's removal of the Employee from the position of
Chief Financial Officer of the Company, provided that such failure is
not in connection with a termination of the Employee's employment
hereunder by the Company in accordance with Paragraph 5(a);
(ii) A material diminution by the Company of the Employee's
authority, functions, duties or responsibilities as Chief Financial
Officer of the Company, provided that such material diminution is not
in connection with a termination of the Employee's employment hereunder
in accordance with Paragraph 5(a), and provided further that the
Employee shall provide any notice of termination pursuant to this
Section 5(d)(ii) within one hundred and eighty (180) days of when the
Employee becomes aware of such diminution;
(iii) A Change of Control (as hereinafter defined), by means
of a sale by the Company of substantially all of its assets in which
the purchaser does not assume the obligations and liabilities of the
Company under this Agreement or by means of a liquidation or
dissolution of the Company, provided that the Employee shall provide
any notice of termination pursuant to this Section 5(d)(iii) within one
hundred and eighty (180) days of such Change of Control; or
(iv) A failure by the Company to comply with any material
provision of this Agreement which failure has not been cured within
thirty (30) days after notice of such non-compliance has been given by
the Employee to the Company, provided that the Employee
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shall provide any notice of termination pursuant to this Section
5(d)(iv) within one hundred and eighty (180) days after the end of such
thirty (30) day period.
(e) Severance Compensation.
(i) In the event the Employee's employment hereunder is
terminated by a notice given by the Company without Cause or by the
Employee for Good Reason, the Employee shall be entitled to payment of
severance pay by means of the continuation of the payment by the
Company of the Employee's Base Salary and Fringe Benefits at the rate
in effect on the applicable Termination Date for a period of six (6)
months after the applicable Termination Date.
(ii) If the Employee voluntarily terminates his employment
hereunder for other than a Good Reason, or if the employment of the
Employee hereunder is terminated either by the death or Disability of
the Employee, the Employee (or his estate) shall continue to be
entitled to payment of accrued compensation as provided in Section 5(f)
and shall also be entitled to payment for, or to take, any vacation
days that have accrued as of the applicable Termination Date. Any such
payment shall be made within a reasonable time after the applicable
Termination Date.
(iii) In the event the Company terminates the Employee's
employment hereunder for Cause, the Employee shall be entitled to no
further compensation, bonus or Fringe Benefits under this Agreement
after the applicable Termination Date.
(f) Accrued Compensation. In the event of any termination of the
Employee's employment for any reason, the Employee (or his estate) shall be paid
such portions of his Base Salary as have accrued by virtue of his employment
during the period prior to termination and have not yet been paid, together with
the amount of any bonus earned and awarded to the Employee that has not yet been
paid and any amounts for expense reimbursement which have been properly incurred
or which the Company has become obligated to pay in accordance with the
provisions hereof prior to termination and have not yet been paid. Such amounts
shall be paid within a reasonable time after the Termination Date. For the
purposes of this Section 5(f), if termination of the Employee's employment is by
the Company for Cause or by the Employee without a Good Reason the bonus earned
and awarded shall not include the accrued pro rata portion of any bonus that
would have been earned if such termination had not occurred and if such
termination is for any other reason the bonus earned and awarded shall include
the accrued pro rata portion of any bonus that would have been earned if such
termination had not occurred.
SECTION 6. Effect of Change of Control. In the event of a Change of
Control (as hereinafter defined (i) this Agreement shall survive the Change of
Control, and (ii) any options held by the Employee to purchase securities of the
Company shall become fully vested and exercisable. As used herein, a "Change of
Control" means that any of the following events has occurred:
(a) The stockholders or the Board of Directors shall have approved any
consolidation or merger of the Company pursuant to which the holders of the
Company's shares of Common Stock
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<PAGE> 5
immediately prior to such merger or consolidation would not be the holders
immediately after such merger or consolidation of at least 51% of the voting
power entitled to be cast at elections for Directors of the Company;
(b) The stockholders or the Board of Directors shall have approved any
sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all or substantially all of the assets of the Company;
or
(c) The liquidation or dissolution of the Company or the Company
ceasing to do business.
FOR PURPOSES OF SECTIONS 7 AND 8 HEREIN, THE TERM "COMPANY" SHALL INCLUDE ALL OF
THE COMPANY'S DIRECT OR INDIRECT SUBSIDIARIES, IF ANY.
SECTION 7. Confidentiality and Proprietary Information.
(a) Acknowledgment of the Employee. The Employee acknowledges that (i)
the Company has developed and will develop its Proprietary Information (defined
below) and Intellectual Property (defined below) over a substantial period of
time and at a substantial expense, and its Proprietary Information and
Intellectual Property are integral to the goodwill of the Company, (i) during
the Employment Period, the Employee may develop or become aware of Proprietary
Information and/or Intellectual Property, and (iii) protection of the
Proprietary Information and Intellectual Property is necessary to conduct the
Company's business, and the Company is and shall at all times remain the sole
owner of the Company's Proprietary Information and Intellectual Property.
(b) Confidentiality. The Employee shall at all times, both during and
after any termination of the Employment Period, maintain in confidence and not
utilize the Proprietary Information or the Intellectual Property of the Company,
and/or technology or proprietary information of others under confidential
evaluation by the Company, except in performing services for the Company
pursuant to the Employee's employment. Maintaining such Proprietary Information
and Intellectual Property in confidence shall include refraining from disclosing
such Proprietary Information or Intellectual Property to any third party (except
when appropriate for the furtherance of the business of the Company or when duly
and specifically authorized to do so), and refraining from using such
Proprietary Information or Intellectual Property for the account of the Employee
or for any other person or business entity. The Employee will not file patents
based on the Company's technology or confidential information, nor seek to make
improvements thereon, without the Company's written approval. The Employee
agrees not to make any copies of the Proprietary Information or Intellectual
Property of the Company (except when appropriate for the furtherance of the
business of the Company or when duly and specifically authorized to do so) and
promptly upon request, whether during or after the period of employment by the
Company, to return to the Company any and all originals and copies of
documentary, machine-readable or other elements or evidence of any such
Proprietary Information, Intellectual Property and other information of any kind
relating to the present or potential business of the Company that may be in the
Employee's possession or under the Employee's control.
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<PAGE> 6
(c) Rights to Inventions and Intellectual Property. In connection with
the Employee's employment by the Company, whether or not the Employee is then
retained by the Company, the Employee may, alone or with others, during working
hours and otherwise and by use of the Company's facilities or otherwise,
produce, develop, create, invent, conceive or reduce to practice Inventions
(defined below) and Intellectual Property related to the business of the
Company. The Employee shall maintain and furnish to the Company complete and
current records of all such Inventions and Intellectual Property and disclose to
the Company in writing any such Inventions and Intellectual Property. The
Employee agrees that all such Inventions and Intellectual Property conceived
and/or reduced to writing, drawings or practice during the Employment Period or
within six (6) months of the termination of the Employment Period are and shall
be the exclusive property of the Company, and that the Company may use or pursue
them without restriction or additional compensation. The Employee (i) hereby
assigns, sets over and transfers to the Company all of the Employee's right,
title and interest in and to such Inventions and Intellectual Property, (ii)
agrees that Employee and the Employee's agents shall, during and after the
period the Employee is retained by the Company, cooperate fully in obtaining
patent, trademark, service mark, copyright or other proprietary protection for
such Inventions and Intellectual Property, all in the name of the Company (but
at Company expense), and, without limitation, shall execute all requested
applications, assignments and other documents in furtherance of obtaining such
protection or registration and confirming full ownership by the Company of such
Inventions and Intellectual Property, and (iii) shall, upon leaving the Company,
provide to the Company in writing a full, signed statement of all Inventions and
Intellectual Property in which Employee participated prior to termination of the
Employee's employment by the Company. The Employee hereby designates the Company
as the Employee's agent, and grants to the Company a power of attorney with full
substitution, which power of attorney shall be deemed coupled with an interest,
for the purposes of effecting the foregoing assignments from the Employee to the
Company.
(d) Definitions. For purposes of this Agreement, the following terms
shall have the following respective meanings:
"Intellectual Property" means any Invention, writing, trade name,
trademark, service mark or any other material registered or otherwise protected
or able to be protected under state, federal, or foreign patent, trademark,
copyright, or similar laws.
"Inventions" means ideas, discoveries, inventions, developments and
improvements, whether or not reduced to practice and whether or not patentable
or otherwise within the definition of Intellectual Property.
"Proprietary Information" means any scientific, technical, trade or
business secrets of the Company and any scientific, technical, trade or business
materials that are treated by the Company as confidential or proprietary,
including, but not limited to, Inventions belonging to the Company and
confidential information obtained by or given to the Company about or belonging
to its suppliers, licensors, licensees, partners, affiliates, customers,
potential customers or others. The definition of "Proprietary Information"
herein shall not include any information (i) which is in the public domain,
provided such information is not in the public domain as a consequence of
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disclosure by the Employee in violation of this Agreement, (ii) which becomes
available to the Employee on a non-confidential basis from a source that is
entitled to disclose it on a non-confidential basis or (c) which was on or
before that date of employment in any capacity or before the date of this
Agreement in the Employee's possession as evidenced by the Employee's written
records or independently developed by the Employee after termination of the
Employee's employment without utilization of confidential information gained
from the Company.
SECTION 8. Non-Competition and Non-Solicitation.
(a) Non-Competition Covenant. The Employee covenants and agrees that
during the Restricted Covenant Period (as defined below), the Employee shall
not, whether for the Employee's own account or for any other person or
organization other than the Company, (i) manage, operate, control, assist
(directly or indirectly), or participate in the management, operation or control
of, or (ii) serve as a Director, officer, partner, employee or consultant of, or
own more than five percent of the outstanding voting securities of any
enterprise which, within the Restricted Area (as that term is defined below), is
engaged in any business competitive with the business engaged in by the Company
prior to the time that the Employee's employment is terminated or set forth in a
written strategic plan adopted by the Board of Directors or the Board's Employee
Committee in good faith of which the Employee has knowledge prior to such
termination.
(b) Non-Solicitation of Employees. The Employee further agrees that
during the Restricted Covenant Period the Employee will not knowingly, directly
or indirectly, (a) solicit the employment of any employee of the Company who was
such at any time during the last twelve (12) months of the Employee's employment
with the Company, or (b) induce any employee of the Company to leave the employ
of the Company, unless in each case the Employee obtains the prior written
consent of the Company.
(c) Definitions. For the purposes of this Section 8, the term
"Restricted Covenant Period" shall mean the period commencing on the date hereof
and terminating on the later of: (a) the termination of the Employee's
employment or (b) the end of any period during which the Employee is paid his
Base Salary pursuant to Section 5(e). For the further purposes of this Section
5, the term "Restricted Area" shall mean the United States and Europe.
SECTION 9. Remedies. Without intending to limit the remedies which may
be available to the Company, the Employee acknowledges that any breach by the
Employee of any of the provisions of this Agreement may result in material
irreparable injury to the Company for which there is no adequate remedy at law,
that it will not be possible to measure damages for such injury precisely, and
that, in the event of such a breach or a threat thereof, the Company shall be
entitled, in addition to monetary damages and to any other remedies available to
the Company, to equitable relief, including injunctive relief, and to payment by
the Employee of all costs incurred by the Company in enforcement against the
Employee of the provisions of this Agreement, including reasonable attorneys'
fees. The Employee further acknowledges and agrees that, in addition to the
remedies that the Company may seek and obtain pursuant to this Section 9, the
period during which
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the covenants contained in this Agreement apply shall be extended by any periods
during which the Employee is in violation of any of such covenants.
SECTION 10. Additional Representations of the Employee. The Employee
represents and warrants to the Company that the Employee is not bound by the
provisions of any agreement with a current or former employer which would
prohibit or limit the Employee's ability to render services to the Company as
herein provided. The Employee also represents to the Company that he will not
disclose to the Company, or use for the benefit of the Company, any trade
secrets or confidential information now or hereafter in the possession of the
Employee which is the property of any other party, provided, however, that the
Employee will make every diligent effort to use all information which is at his
disposal and which is not subject to enforceable confidentiality agreements to
aid the Company in achieving its goals.
SECTION 11. Disclosures Regarding Employment. The Employee acknowledges
that the Company may, during the course of his employment hereunder or
thereafter, receive inquiries concerning the Employee's character, fitness or
performance as an employee. The Employee authorizes the Company to release to
any person or organization making such inquiry such information concerning the
Employee's character, fitness or performance as an employee and agrees to
indemnify and to hold the Company harmless from any liability whatsoever arising
from the Company's disclosure of such information.
SECTION 12. Notices. All notices and other communications hereunder
shall be in writing, and shall be either (i) delivered by hand, (ii) sent by
overnight courier, or (iii) sent by registered or certified mail, return receipt
requested, postage prepaid (a) if to the Employee, at his residence address
first set forth above, and (b) if to the Company, at its principal office as
first set forth above, or to such other persons or addresses as the parties
hereto may specify by a written notice in accordance with this Section 11 from
time to time. All notices and other communications hereunder shall be deemed to
have been given either (i) if by hand, at the time of the delivery thereof to
the receiving party at the address of such party as set forth above, (ii) if
sent by overnight courier, on the next business day following the day such
notice is delivered to the courier service, or (iii) if sent by registered or
certified mail, on the fifth (5th) business day following the day such mailing
is made, except in any case for a notice of a change of address, which will not
be effective until receipt.
Section 13. Waivers and Consents. The terms and provisions of this
Agreement may be waived, or consent for the departure therefrom granted, only by
a written document executed by the party entitled to the benefits of such terms
or provisions. No waiver or consent shall be deemed to be or shall constitute a
waiver or consent with respect to any other terms or provisions of this
Agreement, whether or not similar. Each such waiver or consent shall be
effective only in the specific instance and for the purpose for which it was
given, and shall not constitute a continuing waiver or consent.
SECTION 14. Headings. The headings contained in this Agreement are for
reference purposes only and shall in no way affect the meaning or interpretation
of this Agreement.
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SECTION 15. Agreement Complete; Amendments. This Agreement, together
with the Confidentiality Agreement, represents the entire agreement of the
parties with respect to the subject matter hereof and thereof and supersedes all
prior agreements, written or oral, with respect thereto. This Agreement may not
be amended, supplemented, canceled or discharged except by a written instrument
executed by both of the parties hereto, provided, however, that the immediately
foregoing provision shall not prohibit the termination of rights and obligations
under this Agreement which termination is made in accordance with the terms of
this Agreement.
SECTION 16. Severability. If any provision of this Agreement shall be
deemed invalid or unenforceable as written, this Agreement shall be construed,
to the greatest extent possible, or modified, to the extent allowable by law, in
a manner which shall render it valid and enforceable and any limitation on the
scope or duration of any such provision necessary to make it valid and
enforceable shall be deemed to be a part thereof. No invalidity or
unenforceability of any provision contained herein shall affect any other
portion of this Agreement.
SECTION 17. Benefit and Binding Nature; Assignment. This Agreement
shall be binding upon and inure to the benefit of the successors and permitted
assigns of the respective parties hereto. The Employee may not assign or
transfer any or all of his rights or obligations under this Agreement. The
Company may assign its rights and obligations hereunder to any person or entity
who succeeds to all or substantially all of the Company's business by means of a
Change of Control or otherwise or to any affiliate of the Company, defined as a
person which, directly or indirectly, controls or is controlled by or is under
common control with the Company.
SECTION 18. Governing Law. This Agreement will be governed and
construed in accordance with the law of the Commonwealth of Massachusetts
without giving effect to the conflicts of law principles thereof.
SECTION 19. Jurisdiction. The parties agree that in the event of any
dispute or claim arising out of or in connection with this Agreement, they will
submit to the exclusive jurisdiction and venue of any court of competent
jurisdiction in the Commonwealth of Massachusetts, and will comply with all
requirements necessary to give such court jurisdiction over the parties and the
controversy.
SECTION 20. Survival. The provisions of Sections 6 through 22 shall
survive the termination of the Employee's employment as continuing and separate
agreements between the parties.
SECTION 21. Interpretation. The Company and the Employee each
acknowledge and agree that this Agreement has been reviewed and negotiated by
such party and its or his counsel, who have contributed to its revision, and the
normal rule of construction, to the effect that any ambiguities are resolved
against the drafting party, shall not be employed in the interpretation of it.
SECTION 22. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original and all of which,
taken together, shall constitute one agreement.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
ARTIFICIAL LIFE, INC.
By: /s/ Eberhard Schoneburg
_________________________
Eberhard Schoneburg
Chief Executive Officer
EMPLOYEE
/s/ Robert E. Pantano
-------------------------
Robert E. Pantano
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<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (the "Agreement"), dated as of May 1, 1998,
between Artificial Life, Inc., a Delaware corporation, with its principal office
at Four Copley Place, Suite 102, Boston, Massachusetts, 02116 (the "Company"),
and Klaus Kater, an individual residing at 80 South Road, Ashby, Massachusetts
01431, (the "Employee").
WHEREAS, the Company desires to employ the Employee and the Employee
desires to be employed upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the Company and the Employee hereby agree as follows:
SECTION 1. Employment; Employment Period.
(a) The Company hereby agrees to employ the Employee, and the Employee
hereby accepts such employment by the Company as the Company's Chief Technology
Officer for the period commencing on the date hereof (the "Commencement Date")
and continuing until terminated in accordance with the terms hereof (the
"Employment Period"). The Employment Period shall be at least eighteen (18)
months unless terminated earlier pursuant to the termination provisions set
forth in Section 5.
(b) The Employee shall report directly to the Chief Executive Officer
of the Company and shall have the responsibilities, duties and authority
commensurate with the position of Chief Technology Officer of the Company, and
shall engage in such other services and responsibilities as may be prescribed by
the Chief Executive Officer of the Company or his designees from time to time,
including, but not limited to, sales, marketing and advertising activities.
(c) The principal location at which the Employee will perform his
duties will be the Company's principal office currently located at the address
first set forth above.
(d) The Employee shall devote his full business time, best efforts and
business judgment, skill and knowledge to the advancement of the interests of
the Company; however, provided that the Employee gives prior notice to and
receives prior written consent from the Company, which consent shall not
unreasonably be withheld, nothing herein shall be construed as preventing the
Employee from engaging in other business activities not prohibited by Section
8(a) hereof. In pursuing these activities, the Employee shall not use the assets
of the Company, shall not make representations on behalf of the Company, and
shall have no authority to bind or act as agent for the Company or its employees
for any purpose.
SECTION 2. Salary; Bonus; Expenses.
(a) During the Employment Period, the Company will pay a salary to the
Employee (the "Base Salary"), payable in substantially equal installments in
accordance with the Company's
<PAGE> 2
payroll practices for its employees as in effect from time to time. The Base
Salary shall initially be at the annual rate of One Hundred Thousand Dollars
($100,000.00) per annum. Commencing on January 1, 1999, the Base Salary will be
reviewed at least annually by the Company's Chief Executive Officer at the time
that the Company reviews the salaries of its other employees and may be adjusted
upward at such time in the discretion of the Chief Executive Officer.
(b) In each year during the Employment Period, the Employee shall be
entitled to participate in bonus and incentive programs as in effect for
employees of the Company from time to time.
(c) The Employee shall be reimbursed by the Company for reasonable
travel, entertainment, lodging, meal and other business expenses incurred by the
Employee in connection with performing his services hereunder in accordance with
the Company's policies as in effect from time to time.
SECTION 3. Equity Participation. In each year during the Employment
Period, the Employee shall be entitled to participate in all stock option plans
and equity participation plans as the Company may make available to its
employees from time to time. It is agreed that the Employee shall receive stock
options on May 1, 1999 with a value of $25,000, provided he is still employed by
the Company on that date. The value of the stock options shall be based on the
difference between the exercise price and the fair market value of the Company's
Common Stock on May 1, 1999.
SECTION 4. Benefits; Vacations. In connection with the Employee's
employment hereunder, the Employee will be entitled during the Employment Period
to the following additional benefits:
(a) At the Company's expense such fringe benefits as the Company may
provide from time to time for its employees, including, without limitation,
family health insurance coverage and life insurance coverage (the "Fringe
Benefits"); and
(b) Vacation time in each calendar year determined in accordance with
the Company's vacation policies for its employees as in effect from time to
time, prorated in any calendar year during which the Employee is employed
hereunder for less than the entire such year in accordance with the number of
days in such calendar year for which he is so employed. The Employee shall also
be entitled to all paid holidays and personal days given by the Company to its
employees.
SECTION 5. Termination.
(a) Termination by the Company. The Employee's employment may be
terminated at any time (i) by the Company for Cause (as hereinafter defined) by
a notice to the Employee, specifying the Cause therefor, such notice to be
effective immediately unless otherwise stated in such notice, which date of
effectiveness shall be the Termination Date therefor, (ii) by the Company
without Cause at any time after the expiration of eighteen (18) months from the
Commencement Date, by notice to the Employee, effective sixty (60) days after
the date of such notice or as the Employee and the Company may otherwise agree,
which date of effectiveness shall be the Termination Date therefor, (iii) upon
the death of the Employee, or (iv) for the Disability (as hereinafter defined)
of the Employee in accordance with Paragraph 5(c).
2
<PAGE> 3
(b) Definition of Cause. For purposes of this Agreement, the term
"Cause" shall mean (i) the engaging by the Employee in intentional misconduct
which is injurious to the Company monetarily or otherwise, (ii) the material
violation by the Employee of any provision of this Agreement, (iii) the
conviction of the Employee of a felony by a court of competent jurisdiction or
(iv) the commission by the Employee of any act of fraud or embezzlement relating
to the property of the Company and/or the services provided hereunder. In making
any determination that Cause exists under this Paragraph 5(b), the Board of
Directors shall act fairly and in utmost good faith and shall give the Employee
an opportunity to appear and be heard at a meeting of the Board of Directors or
any committee thereof.
(c) Termination upon Disability. If the Employee becomes disabled
during the Employment Period so that he is unable to perform his obligations
hereunder for reasons involving physical or mental illness or physical injury
(i) for a period of one hundred eighty (180) consecutive days or (ii) for any
periods aggregating one hundred eighty (180) days or more in any twelve (12)
consecutive month period ("Disability"), then the term of the Employee's
employment hereunder may be terminated by the Company within sixty (60) days
after the expiration of said one hundred eighty (180) day period or periods
aggregating one hundred eighty (180) days, as the case may be, said termination
to be effective upon written notice to the Employee, which date shall be the
Termination Date therefor. Any determination that the Employee is totally
disabled such that he is unable to perform his obligations hereunder for reasons
involving physical or mental illness or physical injury shall be determined by
the Company's Board of Directors, acting in good faith, such determination to be
final and binding upon the parties hereto.
(d) Termination by the Employee. The Employee's employment may be
terminated by him at any time after eighteen (18) months from the Commencement
Date (i) by written notice to the Company, which notice shall be effective sixty
(60) days after the giving of such notice, or earlier if the Company so elects,
which date shall be the Termination Date therefor, or (ii) by written notice for
Good Reason (as hereinafter defined), effective upon giving such notice, which
date shall be the Termination Date therefor. As used herein, "Good Reason" shall
mean any of the following:
(i) The Company's removal of the Employee from the position of
Chief Technology Officer of the Company, provided that such failure is
not in connection with a termination of the Employee's employment
hereunder by the Company in accordance with Paragraph 5(a);
(ii) A material diminution by the Company of the Employee's
authority, functions, duties or responsibilities as Chief Technology
Officer of the Company, provided that such material diminution is not
in connection with a termination of the Employee's employment hereunder
in accordance with Paragraph 5(a), and provided further that the
Employee shall provide any notice of termination pursuant to this
Section 5(d)(ii) within one hundred and eighty (180) days of when the
Employee becomes aware of such diminution;
(iii) A Change of Control (as hereinafter defined), by means
of a sale by the Company of substantially all of its assets in which
the purchaser does not assume the
3
<PAGE> 4
obligations and liabilities of the Company under this Agreement or by
means of liquidation or dissolution of the Company, provided that the
Employee shall provide any notice of termination pursuant to this
Section 5(d)(iii) within one hundred and eighty (180) days of such
Change of Control; or
(iv) A failure by the Company to comply with any material
provision of this Agreement which failure has not been cured within
thirty (30) days after notice of such non-compliance has been given by
the Employee to the Company, provided that the Employee shall provide
any notice of termination pursuant to this Section 5(d)(iv) within one
hundred and eighty (180) days after the end of such thirty (30) day
period.
(e) Severance Compensation.
(i) In the event the Employee's employment hereunder is
terminated by a notice given by the Company without Cause or by the
Employee for Good Reason, the Employee shall be entitled to payment of
severance pay by means of the continuation of the payment by the
Company of the Employee's Base Salary and Fringe Benefits at the rate
in effect on the applicable Termination Date for a period of six (6)
months after the applicable Termination Date.
(ii) If the Employee voluntarily terminates his employment
hereunder for other than a Good Reason, or if the employment of the
Employee hereunder is terminated either by the death or Disability of
the Employee, the Employee (or his estate) shall continue to be
entitled to payment of accrued compensation as provided in Section 5(f)
and shall also be entitled to payment for, or to take, any vacation
days that have accrued as of the applicable Termination Date. Any such
payment shall be made within a reasonable time after the applicable
Termination Date.
(iii) In the event the Company terminates the Employee's
employment hereunder for Cause, the Employee shall be entitled to no
further compensation, bonus or Fringe Benefits under this Agreement
after the applicable Termination Date.
(f) Accrued Compensation. In the event of any termination of the
Employee's employment for any reason, the Employee (or his estate) shall be paid
such portions of his Base Salary as have accrued by virtue of his employment
during the period prior to termination and have not yet been paid, together with
the amount of any bonus earned and awarded to the Employee that has not yet been
paid and any amounts for expense reimbursement which have been properly incurred
or which the Company has become obligated to pay in accordance with the
provisions hereof prior to termination and have not yet been paid. Such amounts
shall be paid within a reasonable time after the Termination Date. For the
purposes of this Section 5(f), if termination of the Employee's employment is by
the Company for Cause or by the Employee without a Good Reason the bonus earned
and awarded shall not include the accrued pro rata portion of any bonus that
would have been earned if such termination had not occurred and if such
termination is for any other reason the bonus earned and awarded shall include
the accrued pro rata portion of any bonus that would have been earned if such
termination had not occurred.
4
<PAGE> 5
SECTION 6. Effect of Change of Control. In the event of a Change of
Control (as hereinafter defined (i) this Agreement shall survive the Change of
Control, and (ii) any options held by the Employee to purchase securities of the
Company shall become fully vested and exercisable. As used herein, a "Change of
Control" means that any of the following events has occurred:
(a) The stockholders or the Board of Directors shall have approved any
consolidation or merger of the Company pursuant to which the holders of the
Company's shares of Common Stock immediately prior to such merger or
consolidation would not be the holders immediately after such merger or
consolidation of at least 51% of the voting power entitled to be cast at
elections for Directors of the Company;
(b) The stockholders or the Board of Directors shall have approved any
sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all or substantially all of the assets of the Company;
or
(c) The liquidation or dissolution of the Company or the Company
ceasing to do business.
FOR PURPOSES OF SECTIONS 7 AND 8 HEREIN, THE TERM "COMPANY" SHALL INCLUDE ALL OF
THE COMPANY'S DIRECT OR INDIRECT SUBSIDIARIES, IF ANY.
SECTION 7. Confidentiality and Proprietary Information.
(a) Acknowledgment of the Employee. The Employee acknowledges that (i)
the Company has developed and will develop its Proprietary Information (defined
below) and Intellectual Property (defined below) over a substantial period of
time and at a substantial expense, and its Proprietary Information and
Intellectual Property are integral to the goodwill of the Company, (i) during
the Employment Period, the Employee may develop or become aware of Proprietary
Information and/or Intellectual Property, and (iii) protection of the
Proprietary Information and Intellectual Property is necessary to conduct the
Company's business, and the Company is and shall at all times remain the sole
owner of the Company's Proprietary Information and Intellectual Property.
(b) Confidentiality. The Employee shall at all times, both during and
after any termination of the Employment Period, maintain in confidence and not
utilize the Proprietary Information or the Intellectual Property of the Company,
and/or technology or proprietary information of others under confidential
evaluation by the Company, except in performing services for the Company
pursuant to the Employee's employment. Maintaining such Proprietary Information
and Intellectual Property in confidence shall include refraining from disclosing
such Proprietary Information or Intellectual Property to any third party (except
when appropriate for the furtherance of the business of the Company or when duly
and specifically authorized to do so), and refraining from using such
Proprietary Information or Intellectual Property for the account of the Employee
or for any other person or business entity. The Employee will not file patents
based on the Company's technology or confidential information, nor seek to make
improvements thereon,
5
<PAGE> 6
without the Company's written approval. The Employee agrees not to make any
copies of the Proprietary Information or Intellectual Property of the Company
(except when appropriate for the furtherance of the business of the Company or
when duly and specifically authorized to do so) and promptly upon request,
whether during or after the period of employment by the Company, to return to
the Company any and all originals and copies of documentary, machine-readable or
other elements or evidence of any such Proprietary Information, Intellectual
Property and other information of any kind relating to the present or potential
business of the Company that may be in the Employee's possession or under the
Employee's control.
(c) Rights to Inventions and Intellectual Property. In connection with
the Employee's employment by the Company, whether or not the Employee is then
retained by the Company, the Employee may, alone or with others, during working
hours and otherwise and by use of the Company's facilities or otherwise,
produce, develop, create, invent, conceive or reduce to practice Inventions
(defined below) and Intellectual Property related to the business of the
Company. The Employee shall maintain and furnish to the Company complete and
current records of all such Inventions and Intellectual Property and disclose to
the Company in writing any such Inventions and Intellectual Property. The
Employee agrees that all such Inventions and Intellectual Property conceived
and/or reduced to writing, drawings or practice during the Employment Period or
within six (6) months of the termination of the Employment Period are and shall
be the exclusive property of the Company, and that the Company may use or pursue
them without restriction or additional compensation. The Employee (i) hereby
assigns, sets over and transfers to the Company all of the Employee's right,
title and interest in and to such Inventions and Intellectual Property, (ii)
agrees that Employee and the Employee's agents shall, during and after the
period the Employee is retained by the Company, cooperate fully in obtaining
patent, trademark, service mark, copyright or other proprietary protection for
such Inventions and Intellectual Property, all in the name of the Company (but
at Company expense), and, without limitation, shall execute all requested
applications, assignments and other documents in furtherance of obtaining such
protection or registration and confirming full ownership by the Company of such
Inventions and Intellectual Property, and (iii) shall, upon leaving the Company,
provide to the Company in writing a full, signed statement of all Inventions and
Intellectual Property in which Employee participated prior to termination of the
Employee's employment by the Company. The Employee hereby designates the Company
as the Employee's agent, and grants to the Company a power of attorney with full
substitution, which power of attorney shall be deemed coupled with an interest,
for the purposes of effecting the foregoing assignments from the Employee to the
Company.
(d) Definitions. For purposes of this Agreement, the following terms
shall have the following respective meanings:
"Intellectual Property" means any Invention, writing, trade name,
trademark, service mark or any other material registered or otherwise protected
or able to be protected under state, federal, or foreign patent, trademark,
copyright, or similar laws.
"Inventions" means ideas, discoveries, inventions, developments and
improvements, whether or not reduced to practice and whether or not patentable
or otherwise within the definition of Intellectual Property.
6
<PAGE> 7
"Proprietary Information" means any scientific, technical, trade or
business secrets of the Company and any scientific, technical, trade or business
materials that are treated by the Company as confidential or proprietary,
including, but not limited to, Inventions belonging to the Company and
confidential information obtained by or given to the Company about or belonging
to its suppliers, licensors, licensees, partners, affiliates, customers,
potential customers or others. The definition of "Proprietary Information"
herein shall not include any information (i) which is in the public domain,
provided such information is not in the public domain as a consequence of
disclosure by the Employee in violation of this Agreement, (ii) which becomes
available to the Employee on a non-confidential basis from a source that is
entitled to disclose it on a non-confidential basis or (c) which was on or
before that date of employment in any capacity or before the date of this
Agreement in the Employee's possession as evidenced by the Employee's written
records or independently developed by the Employee after termination of the
Employee's employment without utilization of confidential information gained
from the Company.
SECTION 8. Non-Competition and Non-Solicitation.
(a) Non-Competition Covenant. The Employee covenants and agrees that
during the Restricted Covenant Period (as defined below), the Employee shall
not, whether for the Employee's own account or for any other person or
organization other than the Company, (i) manage, operate, control, assist
(directly or indirectly), or participate in the management, operation or control
of, or (ii) serve as a Director, officer, partner, employee or consultant of, or
own more than five percent of the outstanding voting securities of any
enterprise which, within the Restricted Area (as that term is defined below), is
engaged in any business competitive with the business engaged in by the Company
prior to the time that the Employee's employment is terminated or set forth in a
written strategic plan adopted by the Board of Directors or the Board's Employee
Committee in good faith of which the Employee has knowledge prior to such
termination.
(b) Non-Solicitation of Employees. The Employee further agrees that
during the Restricted Covenant Period the Employee will not knowingly, directly
or indirectly, (a) solicit the employment of any employee of the Company who was
such at any time during the last twelve (12) months of the Employee's employment
with the Company, or (b) induce any employee of the Company to leave the employ
of the Company, unless in each case the Employee obtains the prior written
consent of the Company.
(c) Definitions. For the purposes of this Section 8, the term
"Restricted Covenant Period" shall mean the period commencing on the date hereof
and terminating on the later of: (a) the termination of the Employee's
employment or (b) the end of any period during which the Employee is paid his
Base Salary pursuant to Section 5(e). For the further purposes of this Section
5, the term "Restricted Area" shall mean the United States and Europe.
SECTION 9. Remedies. Without intending to limit the remedies which may
be available to the Company, the Employee acknowledges that any breach by the
Employee of any of the provisions of this Agreement may result in material
irreparable injury to the Company for which
7
<PAGE> 8
there is no adequate remedy at law, that it will not be possible to measure
damages for such injury precisely, and that, in the event of such a breach or a
threat thereof, the Company shall be entitled, in addition to monetary damages
and to any other remedies available to the Company, to equitable relief,
including injunctive relief, and to payment by the Employee of all costs
incurred by the Company in enforcement against the Employee of the provisions of
this Agreement, including reasonable attorneys' fees. The Employee further
acknowledges and agrees that, in addition to the remedies that the Company may
seek and obtain pursuant to this Section 9, the period during which the
covenants contained in this Agreement apply shall be extended by any periods
during which the Employee is in violation of any of such covenants.
SECTION 10. Additional Representations of the Employee. The Employee
represents and warrants to the Company that the Employee is not bound by the
provisions of any agreement with a current or former employer which would
prohibit or limit the Employee's ability to render services to the Company as
herein provided. The Employee also represents to the Company that he will not
disclose to the Company, or use for the benefit of the Company, any trade
secrets or confidential information now or hereafter in the possession of the
Employee which is the property of any other party, provided, however, that the
Employee will make every diligent effort to use all information which is at his
disposal and which is not subject to enforceable confidentiality agreements to
aid the Company in achieving its goals.
SECTION 11. Disclosures Regarding Employment. The Employee acknowledges
that the Company may, during the course of his employment hereunder or
thereafter, receive inquiries concerning the Employee's character, fitness or
performance as an employee. The Employee authorizes the Company to release to
any person or organization making such inquiry such information concerning the
Employee's character, fitness or performance as an employee and agrees to
indemnify and to hold the Company harmless from any liability whatsoever arising
from the Company's disclosure of such information.
SECTION 12. Notices. All notices and other communications hereunder
shall be in writing, and shall be either (i) delivered by hand, (ii) sent by
overnight courier, or (iii) sent by registered or certified mail, return receipt
requested, postage prepaid (a) if to the Employee, at his residence address
first set forth above, and (b) if to the Company, at its principal office as
first set forth above, or to such other persons or addresses as the parties
hereto may specify by a written notice in accordance with this Section 11 from
time to time. All notices and other communications hereunder shall be deemed to
have been given either (i) if by hand, at the time of the delivery thereof to
the receiving party at the address of such party as set forth above, (ii) if
sent by overnight courier, on the next business day following the day such
notice is delivered to the courier service, or (iii) if sent by registered or
certified mail, on the fifth (5th) business day following the day such mailing
is made, except in any case for a notice of a change of address, which will not
be effective until receipt.
Section 13. Waivers and Consents. The terms and provisions of this
Agreement may be waived, or consent for the departure therefrom granted, only by
a written document executed by the party entitled to the benefits of such terms
or provisions. No waiver or consent shall be deemed to be or shall constitute a
waiver or consent with respect to any other terms or provisions of this
8
<PAGE> 9
Agreement, whether or not similar. Each such waiver or consent shall be
effective only in the specific instance and for the purpose for which it was
given, and shall not constitute a continuing waiver or consent.
SECTION 14. Headings. The headings contained in this Agreement are for
reference purposes only and shall in no way affect the meaning or interpretation
of this Agreement.
SECTION 15. Agreement Complete; Amendments. This Agreement, together
with the Confidentiality Agreement, represents the entire agreement of the
parties with respect to the subject matter hereof and thereof and supersedes all
prior agreements, written or oral, with respect thereto. This Agreement may not
be amended, supplemented, canceled or discharged except by a written instrument
executed by both of the parties hereto, provided, however, that the immediately
foregoing provision shall not prohibit the termination of rights and obligations
under this Agreement which termination is made in accordance with the terms of
this Agreement.
SECTION 16. Severability. If any provision of this Agreement shall be
deemed invalid or unenforceable as written, this Agreement shall be construed,
to the greatest extent possible, or modified, to the extent allowable by law, in
a manner which shall render it valid and enforceable and any limitation on the
scope or duration of any such provision necessary to make it valid and
enforceable shall be deemed to be a part thereof. No invalidity or
unenforceability of any provision contained herein shall affect any other
portion of this Agreement.
SECTION 17. Benefit and Binding Nature; Assignment. This Agreement
shall be binding upon and inure to the benefit of the successors and permitted
assigns of the respective parties hereto. The Employee may not assign or
transfer any or all of his rights or obligations under this Agreement. The
Company may assign its rights and obligations hereunder to any person or entity
who succeeds to all or substantially all of the Company's business by means of a
Change of Control or otherwise or to any affiliate of the Company, defined as a
person which, directly or indirectly, controls or is controlled by or is under
common control with the Company.
SECTION 18. Governing Law. This Agreement will be governed and
construed in accordance with the law of the Commonwealth of Massachusetts
without giving effect to the conflicts of law principles thereof.
SECTION 19. Jurisdiction. The parties agree that in the event of any
dispute or claim arising out of or in connection with this Agreement, they will
submit to the exclusive jurisdiction and venue of any court of competent
jurisdiction in the Commonwealth of Massachusetts, and will comply with all
requirements necessary to give such court jurisdiction over the parties and the
controversy.
SECTION 20. Survival. The provisions of Sections 6 through 22 shall
survive the termination of the Employee's employment as continuing and separate
agreements between the parties.
9
<PAGE> 10
SECTION 21. Interpretation. The Company and the Employee each
acknowledge and agree that this Agreement has been reviewed and negotiated by
such party and its or his counsel, who have contributed to its revision, and the
normal rule of construction, to the effect that any ambiguities are resolved
against the drafting party, shall not be employed in the interpretation of it.
SECTION 22. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original and all of which,
taken together, shall constitute one agreement.
10
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
ARTIFICIAL LIFE, INC.
By: /s/ Eberhard Schoneburg
________________________
Eberhard Schoneburg
Chief Executive Officer
EMPLOYEE
/s/ Klaus Kater
________________________
Klaus Kater
11
<PAGE> 1
EXHIBIT 10.6
COPLEY PLACE
BOSTON, MASSACHUSETTS
OFFICE LEASE
to
NEUROTEC INTERNATIONAL CORP.,
a Delaware corporation
FROM THE OFFICE OF:
Goulston & Storrs, P.C.
400 Atlantic Avenue
Boston, Massachusetts 02110-3333
<PAGE> 2
OFFICE LEASE
COPLEY PLACE
BOSTON, MASSACHUSETTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. BASIC DATA ...................................................................................... 4
2. HABENDUM; TERM. ........................................................................................ 6
3. POSSESSION. ............................................................................................ 7
4. BASE RENT ...................................................................................... 7
5. ADDITIONAL RENT. ....................................................................................... 7
A. Definitions.................................................................................... 8
(i) "Base Year"........................................................................... 8
(ii) "Base Year Operating Expenses"........................................................ 8
(iii) "Calendar Year"....................................................................... 8
(iv) "Tenant's Proportionate Share"........................................................ 8
(v) "Taxes"............................................................................... 8
(vi) "Operating Expenses".................................................................. 9
B. Expense Adjustment............................................................................ 10
C. Adjustment For Services Not Rendered by Landlord.............................................. 11
6. USE OF PREMISES. ....................................................................................... 11
7. CONDITION OF PREMISES................................................................................... 12
8. SERVICES. ...................................................................................... 12
A. List of Services............................................................................... 12
B. Billing for Electricity........................................................................ 13
C. Interruption of Services....................................................................... 14
D. Charges for Services........................................................................... 14
E. Energy Conservation............................................................................ 15
9. REPAIRS: HAZARDOUS MATERIALS........................................................................... 15
</TABLE>
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<TABLE>
<S> <C>
10. ADDITIONS AND ALTERATIONS............................................................................... 16
11. COVENANT AGAINST LIENS.................................................................................. 20
12. INSURANCE. ............................................................................................. 20
A. Waiver of Subrogation.......................................................................... 20
B. Coverage....................................................................................... 20
C. Avoid Action Increasing Rates.................................................................. 20
13. FIRE OR CASUALTY. ...................................................................................... 22
14. WAIVER OF CLAIMS - INDEMNIFICATION...................................................................... 23
15. NON WAIVER. ............................................................................................ 24
16. CONDEMNATION. .......................................................................................... 24
17. ASSIGNMENT AND SUBLETTING............................................................................... 24
18. SURRENDER OF POSSESSION................................................................................. 26
19. HOLDING OVER. .......................................................................................... 27
20. ESTOPPEL CERTIFICATE.................................................................................... 27
21. SUBORDINATION. ......................................................................................... 28
22. CERTAIN RIGHTS RESERVED BY LANDLORD..................................................................... 28
23. RULES AND REGULATIONS................................................................................... 30
24. LANDLORD'S REMEDIES..................................................................................... 30
25. EXPENES OF ENFORCEMENT.................................................................................. 32
26. COVENANT OF QUIET ENJOYMENT............................................................................. 32
27. SECURITY DEPOSIT. ...................................................................................... 33
28. REAL ESTATE BROKER...................................................................................... 34
29. UNDERLYING LEASES....................................................................................... 34
</TABLE>
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<TABLE>
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30. NOTICE TO MORTGAGEE AND GROUND LESSOR................................................................... 34
31. ASSIGNMENT OF RENTS..................................................................................... 35
32. PERSONAL PROPERTY TAXES................................................................................. 35
33. MISCELLANEOUS. ......................................................................................... 35
A. Rights Cumulative.............................................................................. 36
B. Interest....................................................................................... 36
C. Terms. ...................................................................................... 36
D. Binding Effect................................................................................. 36
E. Lease Contains All Terms....................................................................... 36
F. Delivery for Examination....................................................................... 36
G. No Air Rights.................................................................................. 36
H. Modification of Lease.......................................................................... 36
I. Substitution of Other Premises................................................................. 36
J. Transfer of Landlord's Interest................................................................ 37
K. Landlord's Title............................................................................... 37
L. Prohibition Against Recording.................................................................. 37
M. Covenants and Conditions....................................................................... 37
N. Covenants and Conditions....................................................................... 37
O. Only Landlord/Tenant Relationship.............................................................. 37
P. Application of Payments........................................................................ 38
Q. Definition of Landlord......................................................................... 38
R. Time of Essence................................................................................ 38
S. Governing Law.................................................................................. 38
T. Partial Invalidity............................................................................. 38
U. Size of Premises............................................................................... 38
V. Payment Under Protest.......................................................................... 38
34. NOTICES. ............................................................................................... 38
35. LIMITATION ON LANDLORD'S LIABILITY...................................................................... 40
36. LANDLORD'S DESIGNATED AGENT............................................................................. 40
EXHIBIT A. PLAN OF PREMISES...................................................................... 42
EXHIBIT B. INTENTIONALLY OMITTED................................................................. 43
EXHIBIT C. RULES AND REGULATIONS................................................................. 44
EXHIBIT D. CLEANING SPECIFICATIONS............................................................... 48
EXHIBIT E. MEASUREMENT STANDARDS................................................................. 54
</TABLE>
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<PAGE> 5
OFFICE LEASE
COPLEY PLACE
BOSTON, MASSACHUSETTS
THIS INSTRUMENT is an Agreement of Lease in which the Landlord and the
Tenant are the parties hereinafter named, and which relates to space in the
Office Section of Copley Place (hereinafter referred to as the "Office Section")
located at 100 Huntington Avenue, Boston, Suffolk County, Massachusetts (the
project known as Copley Place, including without limitation the hotel portions
thereof, plazas, pedestrian bridges, service areas and all other common areas,
together with all present and future easements, additions, improvements, air
rights and other rights appurtenant thereto, is hereinafter referred to as the
"Property"), subject to the covenants, terms, provisions and conditions of this
Lease. The "Office Section" means that portion of the building (the "Building")
located at the aforesaid address consisting of seven (7) levels of office areas
containing approximately 845,000 square feet of rentable floor area. The
Building also contains retail shopping, restaurant, parking and other
facilities, which are not included within the Office Section. The building does
not, however, include the hotel or residential portions of the Property or the
pedestrian bridges.
In consideration thereof, Landlord and Tenant covenant and agree as
follows:
1. BASIC DATA. .
The Following sets forth basic data and, where appropriate, constitutes
definitions of the terms hereinafter listed.
Date: February 6, 1995
Landlord: COPLEY PLACE ASSOCIATES NOMINEE
CORPORATION, a Delaware nominee corporation
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<TABLE>
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Present Mailing Address of Landlord: c/o JMB Properties Urban Company
Suite 600
Four Copley Place
Boston, Massachusetts 02116
Tenant: NEUROTEC INTERNATIONAL CORP., a Delaware corporation
Present mailing Address of Tenant: Suite 102
Four Copley Place
Boston, Massachusetts 02116
and
Ehlesstrasse 15
D-88046
Friedrichshafen, Germany
Commencement Date: February 6, 1995, or the date on which Tenant takes occupancy of
the premises or any portion thereof, whichever is the first to
occur.
Termination Date: January 31, 1998, unless sooner terminated as provided in this
Lease.
Base Rent: At the rate of Ninety-Nine Thousand Seven Hundred Eighty-Seven and
50/100 Dollars ($99,787.50) per annum, equal monthly installments
of Eight Thousand Three Hundred Fifteen and 63/100 Dollars
($8,315.63) (computed on the basis of $22.50 per rentable square
foot per annum at 4,435 rentable square feet of space). (See
Paragraph 4)
Base Year: The Calendar year 1994.
Base Year Operating Expenses: The amount of Operating Expenses incurred with respect to the Base
Year.
Tenant's proportionate Share: 0.55% (computed on the basis of 95% occupancy).
Use: General office purposes, storage and uses accessory and incidental
thereto.
</TABLE>
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<TABLE>
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Premises: That portion of the Office Section designated on the plan attached
hereto as Exhibit A and commonly described as approximately 4,435
rentable square feet (RSF), consisting of the Skylobby of Four
Copley Place. Excepted and excluded from the Premises are the roof
or ceiling, the floor and all perimeter walls of the Premises,
except the inner surfaces thereof, but the entry doors to the
Premises are not excluded from the Premises and are a part thereof
for all purposes: and Tenant agrees that Landlord shall have the
right to place in the Premises (but in such manner as to reduce to
a minimum interference with Tenant's use of the Premises) utility
lines, pipes and the like, to serve premises other than the
Premises, and to replace and maintain and repair such utility
lines, pipes and the like, in, over and upon the Premises.
Common Areas: Those portions of the Property not leased to any tenant. but for
the benefit of the Property and its tenants, such as landscaped
areas, malls, pedestrian walkways and bridges, restrooms, service
areas and the like.
Security Deposit: Twenty-Four Thousand Nine Hundred Forty-Six and 89/100 ($24,946.89)
Broker: Whittier Partners
</TABLE>
2. HABENDUM; TERM.
To have and to hold the Premises for the term commencing on the
Commencement Date and ending on the Termination Date, and the right to use the
Common Areas during such term in common with others entitled thereto. The Term
of this Lease (hereinafter referred to as the "Term") shall commence on the
Commencement Date specified in Paragraph 1 hereof and end on the Termination
Date specified in Paragraph 1 hereof unless sooner terminated as provided
herein.
In addition, Tenant shall have the right during the Term to use two (2)
non-reserved parking spaces in the garage located within and serving the
Property, subject to payment by Tenant to Landlord for such use at the
prevailing rate therefor charged by Landlord from time to time (the "Parking
Rate"). Further, upon Tenant's written request therefor, Landlord agrees to
provide to Tenant two (2) additional non-reserved parking spaces (the "At-Will
Parking Spaces") in the garage located within and serving the Property, subject
to payment by Tenant to Landlord for such use at the Parking Rate: provided,
however, that both Landlord and Tenant shall have the right to terminate
Tenant's right to use up to two (2) of such spaces by giving at least thirty
3
<PAGE> 8
(30) days' written notice to the other party of the election so to do. Upon
notice of termination by either party, the right of Tenant to use the At-Will
Parking Spaces terminates. All payments by Tenant to Landlord for the use of
such parking spaces shall be additional rent hereunder, and in the event of
non-payment thereof by the Tenant, Landlord shall have all of the rights and
remedies with respect thereto as would accrue to the Landlord for non-payment of
Base Rent hereunder.
3. POSSESSION.
A. In the event the Premises shall not be substantially completed and
ready for occupancy on the Commencement Date or in the event Landlord is unable
to deliver possession on such date by reason of the holding over or retention of
possession by any tenant or occupant, or for any other reason, this Lease shall
nevertheless continue in force and effect. The obligation of Tenant to begin
paying Rent shall commence on the Commencement Date. The Premises shall be
substantially complete and ready for occupancy if only insubstantial details of
construction, decoration or mechanical adjustments remain to be done. Landlord's
architect or interior space planner for the Building shall determine whether the
Premises are substantially completed and ready for occupancy and such
determination shall be final and conclusive on Tenant.
B. If Tenant shall enter the Premises or any part thereof prior to the
Commencement Date (which Tenant may not do without Landlord's prior written
consent), such entry shall be at Tenant's sole risk and without interference to
any work then being performed in the Building by Landlord or other tenants or
occupants, and all of the covenants and conditions of this Lease shall be
binding upon the parties hereto with respect to such whole or part of the
Premises.
C. The occurrence of any of the events described in this Paragraph 3
shall not be deemed to accelerate or defer the Termination Date.
4. BASE RENT
Tenant shall pay to Landlord or Landlord's agent without notice or
demand at the present mailing address of Landlord, or at such other place as
Landlord may from time to time designate in writing, in coin or currency which,
at the time of payment, is legal tender for private or public debts in the
United States of America, the Base Rent specified in Paragraph 1 hereof in the
equal monthly installments specified in Paragraph 1 hereof in advance on or
before the first day of each and every month during the Term, without any
abatement, counterclaim, set-off or deduction whatsoever. Notwithstanding the
foregoing sentence, Tenant shall pay the first full monthly installment at the
time of execution of this Lease. If the Term commences other than on the first
day of a month or ends other than on the last day of the month, the Base Rent
for such month shall be prorated. The prorated Base Rent for the portion of the
month in which the Term commences shall be paid on the first day of the first
full month during the Term.
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<PAGE> 9
5. ADDITIONAL RENT.
In addition to paying the Base Rent specified in Paragraph 4 hereof,
Tenant shall pay as "Additional Rent" the amounts determined pursuant to
Sub-Paragraphs B and C inclusive, of this Paragraph 5. The Base Rent and the
Additional Rent are sometimes herein collectively referred to as the "Rent'. All
amounts due under this Paragraph as Additional Rent shall be payable for the
same periods and in the same manner, time and place as the Base Rent, without
any abatement, counterclaim, set-off or deduction whatsoever. Without limitation
on other obligations of Tenant which shall survive the expiration of the Term,
the obligations of Tenant to pay the Additional Rent provided for in this
Paragraph 5 shall survive the expiration of the Term. For any partial Calendar
Year, Tenant shall be obligated to pay only a pro rata share of the Additional
Rent, based on the number of days of the Term falling within such Calendar Year.
A. Definitions. As used in this Paragraph 5, the terms:
(i) "Base Year" shall mean the calendar year specified in
Paragraph 1 hereof.
(ii) "Base Year Operating Expenses" shall mean the sum
specified in Paragraph 1 hereof.
(iii) "Calendar Year" shall mean each calendar year in
which any part of the Term falls, through and
including the year in which the Term expires.
(iv) "Tenant's Proportionate Share" shall mean the
percentage specified in Paragraph 1 hereof, being the
percentage calculated by dividing the rentable area
contained in the Premises by 802.750 (being 95% of
the rentable square foot area of the Office Section),
rentable area to be determined by Landlord on a
uniform basis for the tenants of the Office Section.
(v) "Taxes" shall mean all real estate taxes and
assessments, special or otherwise, levied or assessed
upon or with respect to the Building or any part
thereof and Common Areas which Landlord determines in
its sole judgment to be for the benefit of the
Building and ad valorem taxes for any personal
property of Landlord used in connection therewith.
Should the Commonwealth of Massachusetts, or any
political subdivision thereof, or any other
governmental authority having jurisdiction over the
Building, (a) impose a tax, assessment, charge or
fee, which Landlord shall be required to pay, by way
of substitution for or as a supplement to such real
estate taxes and ad valorem personal property taxes,
or (b) impose an income or franchise tax or a tax on
rents in substitution for or as a supplement to a tax
levied against the Building or any part thereof
and/or the personal property used in connection with
the Building or any part thereof, all such taxes,
assessments, fees or charges (hereinafter defined as
"in lieu of taxes") shall be deemed to constitute
Taxes hereunder. Taxes shall also
5
<PAGE> 10
include, in the year paid, all fees and costs
incurred by Landlord in seeking to obtain a reduction
of, or a limit on the increase in, any Taxes,
regardless of whether any reduction or limitation is
obtained. Except as hereinabove provided with regard
to "in lieu of taxes", Taxes shall not include any
inheritance, estate, succession, transfer, gift,
franchise, net income or capital stock tax.
(vi) "Operating Expenses" shall mean (a) Taxes and (b) all
expenses, costs and disbursements of every kind and
nature, paid or incurred by Landlord in operating,
owning, managing, leasing, repairing and maintaining
the Office Section, the Building, the Property and
their appurtenances as such Taxes, expenses, costs
and disbursements are allocated to the Office Section
by the Landlord in its sole judgment or as the same
are incurred directly in the operation of Office
Section, including but without limitation: premiums
for fire, casualty, liability and such other
insurance as Landlord may from time to time maintain;
security expenses; compensation and all fringe
benefits, workmen's compensation insurance premiums
and payroll taxes paid by Landlord to, for or with
respect to all persons engaged in operating,
maintaining, or cleaning; steam, water, sewer,
electric, gas, telephone, and other utility charges
not billed directly to tenants by Landlord or the
utility; expenses incurred in connection with the
central plant furnishing heating, ventilating and air
conditioning to the Office Section (and to the
Building and the Property where and to the extent the
expenses of the Building and the Property are
otherwise allocable to the Office Section), which
expenses may include a fee paid to the operator of
such central plant; costs of lighting, ventilating,
(including maintaining and repairing ventilating fans
and fan rooms) making routine repairs to and
maintenance of underground roadways (and the access
ramps servicing such roadways) and railroad platforms
and railroad rights of way (including track); costs
of repairing and maintaining fire protection systems
relating to the underground roadways, access ramps,
railroad platforms and railroad rights of way; costs
of building and cleaning supplies and equipment
(including rental); cost of maintenance, cleaning and
repairs; cost of snow plowing or removal, or both,
and care of interior and exterior landscaping;
payments to independent contractors under contracts
for cleaning, operating, management, maintenance and
repair (which payments may be to affiliates of
Landlord); all other expenses paid in connection with
cleaning, operating, management, maintenance and
repair, including reasonable reserves for the
replacement of capital improvements and equipment
contained in and/or used in connection with
operations; costs of any capital improvements
completed after the Base Year as reasonably amortized
by Landlord, with interest on the unamortized amount
at the rate of the greater of (i) 12% per annum or
(ii) 2% per annum above the base rate of interest
charged from time to time by
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<PAGE> 11
The First National Bank of Boston (but in no event at
a rate which is more than the highest lawful rate
allowable in The Commonwealth of Massachusetts), to
the extent the cost of the particular capital
improvement exceeds the amount of the unused reserve,
if any, for the replacement thereof previously
included in Operating Expenses and insurance
proceeds, if any, received by Landlord on account of
damage to the particular capital improvement;
increases in ground rent or similar payments, if any
(determined for the applicable Calendar Year on an
accrual basis). Operating Expenses shall not,
however, include the following:
a. Costs of alterations of any tenant's
premises for a particular tenant and
not for the benefit of the Office
Section or any group of tenants
therein;
b. Principal or interest payments on
loans secured by mortgages or trust
deeds on the Building and/or on the
Property;
c. Leasing commission, attorneys' fees,
costs and disbursements and other
expenses incurred in connection with
negotiations or disputes with tenants,
other occupants, or prospective
tenants or occupants;
d. Renovating or otherwise improving,
decorating, painting or redecorating
space for tenants or other occupants
of the Property;
e. Costs incurred due to violation by
Landlord or any tenant of the terms
and conditions of any lease;
f. Overhead and profit increment paid to
subsidiaries or affiliates of Landlord
for services on or to the Property, to
the extent only that the cost of such
services exceed competitive costs of
such services were they not so
rendered by a subsidiary or affiliate;
g. All items and services for which
Tenant is separately charged,
reimburses Landlord or pays third
persons;
h. Advertising and promotional
expenditures;
i. Any fines or penalties incurred due to
violations by Landlord of any
governmental rule or authority; and
7
<PAGE> 12
j. Any costs whatsoever related to any
expansion of the Building.
If less than 95% of the Office Section's rentable area shall have been
occupied by tenant(s) at any time during any Calendar Year, Operating Expenses
shall be determined for such Calendar Year to be an amount equal to the like
expense which would normally be expected to be incurred had such occupancy been
95% throughout such Calendar Year.
B. Expense Adjustment. Tenant shall pay to Landlord or Landlord's agent
as Additional Rent, a sum ("Expense Adjustment Amount") equal to the amount by
which (i) the product of (a) Tenant's Proportionate Share and (b) Operating
Expenses (subject to adjustment pursuant to Paragraph 5C hereof) incurred with
respect to each Calendar Year exceeds (ii) Base Year Operating Expenses. The
Expense Adjustment Amount with respect to each Calendar Year shall be paid in
monthly installments, in an amount estimated from time to time by Landlord and
communicated by written notice to Tenant, which estimate may be revised to
reflect, without limitation, increases in Taxes during any period. Landlord
shall cause to be kept books and records showing Operating Expenses in
accordance with an appropriate system of accounts and accounting practices
consistently maintained. Following the close of each Calendar Year. Landlord
shall cause the amount of the Expense Adjustment Amount for such Calendar Year
to be computed based on Operating Expenses for such Calendar Year and Landlord
shall deliver to Tenant a statement of such amount and Tenant shall pay any
deficiency to Landlord as shown by such statement within thirty (30) days after
receipt of such statement. If the total of the estimated monthly installments
paid by Tenant during any Calendar Year exceed the actual Expense Adjustment
Amount due from Tenant for such Calendar Year, at Landlord's option such excess
shall be either credited against payments next due hereunder or refunded by
Landlord, provided Tenant is not then in default hereunder. Delay in computation
of the Expense Adjustment Amount or failure to deliver a statement of such
amount shall not be deemed a default hereunder or a waiver of Landlord's right
to collect the Expense Adjustment Amount. In computing the Expense Adjustment
Amount, the following provisions relating to Taxes shall be applicable: The
amount of any refund of Taxes received by Landlord shall be credited against
Taxes for the Calendar Year in which such refund is received; provided, however,
that in the event Landlord receives a refund of Taxes after the termination date
(as the same may be accelerated or extended as provided elsewhere in this Lease)
which refund relates to a Calendar Year during the Term hereof, the amount of
such refund fairly allocable to Tenant shall be refunded to Tenant by Landlord
(net of Tenant's allocated share of the cost of obtaining such refund and the
cost, if any, of making such refund); and further provided that if Tenant
expands into space formerly occupied by other tenants, which expansion space
becomes subject to this Lease, Tenant shall not be entitled to any refund or
credit in connection with a refund or abatement of Taxes for periods prior to
Tenant's occupancy of such expansion space. All references to Taxes "for" a
particular Calendar Year shall be deemed to refer to Taxes due and payable
during such Calendar Year without regard to when such Taxes are assessed or
levied.
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<PAGE> 13
C. Adjustment For Services Not Rendered by Landlord. Tenant
acknowledges that if Landlord is not furnishing any particular work or service
the cost of which, if performed by Landlord would be included in Operating
Expenses, to any tenant who has undertaken to perform such work or service in
lieu of the performance thereof by Landlord, Operating Expenses shall be deemed
for the purpose of determining the Expense Adjustment Amount to be increased by
an amount equal to the additional Operating Expenses which would reasonably have
been incurred during such period by Landlord if it had at its own expense
furnished such work or service to such tenant.
6. USE OF PREMISES.
Tenant shall use and occupy the Premises in accordance with law; and
solely as an office for the type of business specified in Paragraph 1 hereof and
for no other purpose or purposes.
7. CONDITION OF PREMISES.
The Premises are demised to Tenant and Tenant accepts the same "as-is"
and, except as hereinafter expressly provided, all work necessary to prepare the
Premises for Tenant's occupancy shall be performed at Tenant's sole cost and
expense, in accordance with the applicable provisions of this Lease. Tenant's
taking possession of any portion of the Premises shall be conclusive evidence
that such portion of the Premises was in good order and satisfactory condition
when Tenant took possession excluding items of damage caused by Tenant or its
agents, independent contractors or suppliers. No promise of Landlord to alter,
remodel or improve the Premises, the Office Section or the Building and no
representation by Landlord or its agents respecting the condition of the
Premises, the Office Section or the Building have been made to Tenant or relied
upon by Tenant other than as may be contained in this Lease or in any written
amendment hereto signed by Landlord and Tenant; provided, however, that Landlord
agrees to perform the following work on the Premises:
a. Landlord shall shampoo and repair, as necessary, the carpet in
the Premises at Landlord's sole cost and expense:
b. Landlord shall construct one additional interior wall within
the Premises, the cost of which shall be payable by Tenant to
Landlord in twelve (12) equal monthly installments over the
first twelve (12) months of the term of this Lease, each of
which monthly payments shall be due and payable from Tenant to
Landlord together with each monthly payment of Base Rent, as
Additional Rent hereunder, and in the event of non-payment
thereof by the Tenant, the Landlord shall have all of the
rights and remedies with respect thereto as would accrue to
the Landlord for non-payment of Base Rent hereunder. Landlord
and Tenant agree to execute an instrument memorializing the
amount of the costs of this construction and the monthly
payments for the repayment thereof promptly after Landlord
receives Tenant's written notice as aforesaid.
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<PAGE> 14
8. SERVICES.
A. List of Services.
Landlord shall provide the following services, the costs of which are
included within Operating Expenses and the quality and quantity of which are not
less than those customarily provided by landlords of first-class office
buildings in the greater Boston, Massachusetts metropolitan area, on all days
during the Term, except Sundays and holidays, unless otherwise stated, and
subject to all governmental rules, regulations and guidelines applicable
thereto:
(i) Heating and air conditioning in the Premises during
the normal heating and air conditioning seasons, from
Monday through Friday, during the period from 8 a.m.
to 6 p.m. and on Saturday during the period from 8
a.m. to 1 p.m. Tenant will pay for all heating and
air conditioning requested and furnished prior to or
following such hours at rates to be established from
time to time by Landlord. Requests for any additional
services shall be in writing and delivered to
Landlord not later than 2 p.m. of the previous day.
(ii) Adequate electrical wiring and facilities for
standard building lighting fixtures provided by
Landlord and for Tenant's incidental uses (it being
understood that Tenant is to bear the cost of
replacement of all lamps, tubes, ballasts and
starters for lighting fixtures in the Premises);
provided that (a) the connected electrical load for
lighting and incidental use equipment does not exceed
an average of three watts per square foot of the
Premises: (b) the electricity so furnished for
incidental uses will be at a nominal 120 volts and no
electrical circuit for the supply of such incidental
use will have a current capacity exceeding 20
amperes; and (c) such electricity will be used only
for equipment and accessories normal to office usage.
If Tenant's requirements for electricity for lighting
and incidental uses are in excess of those set forth
in the preceding sentence, Landlord reserves the
right to require Tenant to install the conduit,
wiring and other equipment necessary to supply
electricity for such excess incidental use
requirements at Tenant's expense.
(iii) City water from the regular Building outlets for
drinking, lavatory and toilet purposes.
(iv) Janitorial services as delineated in Exhibit D
attached hereto.
(v) Window washing of the inside and outside of windows
in the Building's perimeter walls as may be situated
in the Premises as delineated in Exhibit D attached
hereto.
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<PAGE> 15
(vi) Non-exclusive automatic passenger elevator service at
all times.
(vii) Non-exclusive freight elevator service subject to
scheduling by Landlord.
B. Billing for Electricity.
(i) Separate Metering. In the event that Landlord in its
sole discretion makes arrangements with the utility
company supplying electricity to the Premises for
separate metering and billing. Tenant shall pay (as
hereinafter described) for the use of all electrical
service to the Premises (other than the electrical
service necessary for Landlord to fulfill its
obligation to provide heating and air conditioning as
provided in Paragraph 8A(i) hereof). Tenant shall be
billed directly by such utility company and Tenant
agrees to pay each bill promptly in accordance with
its terms. In the event that for any reason Tenant
cannot be billed directly, Landlord shall forward
each bill received by it with respect to the Premises
to Tenant which Tenant shall pay promptly in
accordance with its terms.
(ii) Lack of Separate Metering. If the Premises are not
separately metered for any reason. Tenant shall pay
Landlord as further Additional Rent, in monthly
installments at the time prescribed for monthly
installments, a pro rata share of the cost of
electricity for the Office Section as estimated by
Landlord from time to time in Landlord's sole
discretion.
C. Interruption of Services.
Tenant agrees that Landlord shall not be liable in damages, by
abatement of Rent or otherwise, for failure to furnish or delay in furnishing
any service, or for any diminution in the quality or quantity thereof, when such
failure or delay or diminution is occasioned, in whole or in part, by repairs,
renewals, or improvements, by any strike, lockout or other labor trouble, by
inability to secure electricity, gas, water, or other fuel at the Building after
reasonable effort so to do, by any accident or casualty whatsoever, by act or
default of Tenant or other parties, or by any other cause beyond Landlord's
reasonable control; and such failures or delays or diminution shall never be
deemed to constitute an eviction or disturbance of Tenant's use and possession
of the Premises or relieve Tenant from paying Rent or performing any of its
obligations under this Lease; provided, however, that if, as a result of the
negligence or willful misconduct of Landlord or its agents, there is an
interruption or discontinuance in the furnishing of any of said services which
directly results in Tenant's inability to operate its business at the Premises
for a period in excess of three (3) consecutive days after Tenant notifies
Landlord of such inability, Tenant's Rent obligations under this Lease shall
abate from the end of such period until the earlier to occur of (i) the date on
which said services are restored or (ii) the date on which Tenant resumes the
operation of its business in the Premises; and provided further that if, as a
result of the negligence or willful misconduct of Landlord or its agents, there
is an interruption or discontinuance in the furnishing of any of said services
which directly results in Tenant's inability to operate its
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<PAGE> 16
business at the Premises for a period in excess of thirty (30) consecutive days
after Tenant notifies Landlord of such inability. Tenant shall have the right to
terminate this Lease by giving written notice of such termination to Landlord at
any time after the expiration of such 30-day period but before the restoration
of said services.
D. Charges for Services.
Charges for any service for which Tenant is required to pay, from time
to time hereunder, including but not limited to hoisting services or after hours
lighting, heating or air conditioning shall be due and payable at the same time
as the installment of Rent with which they are billed, or if billed separately,
shall be due and payable as further Additional Rent within ten (10) days after
such billing. If Tenant shall fail to make payment for any such services,
Landlord may, without notice to Tenant, in addition to any and all other
remedies available under this Lease or otherwise, discontinue any or all of such
services and such discontinuance shall not be deemed to constitute an eviction
or disturbance of Tenant's use and possession of the Premises or relieve Tenant
from paying Rent or performing any of its other obligations under this Lease.
E. Energy Conservation.
Notwithstanding anything to the contrary in this Paragraph 8 or
elsewhere in this Lease. Landlord shall have the right to institute such
policies, programs and measures as may be necessary or desirable, in Landlord's
discretion, for the conservation and/or preservation of energy or energy related
services if consistent with similar programs instituted generally in first-class
office buildings in Boston, or as may be required to comply with any applicable
codes, rules and regulations, whether mandatory or voluntary.
9. REPAIRS: HAZARDOUS MATERIALS.
Tenant will, at Tenant's own expense, keep the Premises, including all
improvements, fixtures and furnishings therein, in good order, repair and
condition at all times during the Term, and Tenant shall promptly and adequately
repair all damage to the Premises and replace or repair all damaged or broken
glass, fixtures and appurtenances, under the supervision and subject to the
approval of Landlord, and within any reasonable period of time specified by
Landlord. If Tenant does not do so, Landlord may, but shall not be obligated to,
make such repairs and replacements, and Tenant shall pay Landlord the cost
thereof, including a percentage of the cost thereof (to be uniformly established
for the Office Section) sufficient to reimburse Landlord for all overhead,
general conditions, fees and other costs or expenses arising from Landlord's
involvement with such repairs and replacements forthwith upon being billed for
same. Landlord may, but shall not be required to enter the Premises at all
reasonable times (and at any time in emergency situations) to make such repairs,
alterations, improvements and additions to the Premises, to the Office Section
or the Building or to any equipment located in the Office Section or the
Building as Landlord shall desire or deem necessary or as Landlord may be
required to do by governmental authority or court order or decree.
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Tenant shall not (either with or without negligence) cause or permit
the escape, disposal or release of any biologically or chemically active or
hazardous substances, or materials (collectively the "Hazardous Materials").
Tenant shall not allow the storage or use of Hazardous Materials in any manner
not sanctioned by law or by the highest standards prevailing in the industry for
the storage and use of such Hazardous Materials, nor allow to be brought into
the Building any Hazardous Materials except to use in the ordinary course of
Tenant's business, and then only after written notice is given to Landlord of
the identity of Hazardous Materials. Without limitation, Hazardous Materials
shall include those described in the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et
seq., the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section
6901 et seq., any applicable state or local laws and the regulations adopted
under these acts. If any lender or governmental agency shall ever require
testing to ascertain whether or not there has been any release of Hazardous
Materials, then the reasonable costs thereof shall be reimbursed by Tenant to
Landlord upon demand as additional charges if such requirement applies to the
Premises. In addition, Tenant shall execute affidavits, representations and the
like from time to time at Landlord's request concerning Tenant's best knowledge
and belief regarding the presence of Hazardous Materials on the Premises. In all
events, Tenant shall indemnify Landlord in the manner elsewhere provided in this
Lease from any release of Hazardous Materials on the Premises occurring while
Tenant is in possession or elsewhere if caused by Tenant or persons acting under
Tenant.
Landlord represents and warrants that, to the best of Landlord's
knowledge as of the date of this Lease (i) no leak, spill, release, discharge,
emission or disposal of Hazardous Materials has occurred on the Premises or
(apart from de minimis amounts of any such materials used for cleaning or
maintenance purposes or in connection with the operation of loading docks) the
Common Areas, (ii) the Premises do not contain any Hazardous Materials and (iii)
the public areas of the Building (excluding all portions thereof leased or
leasable to tenants) comply with all applicable building codes and other
governmental requirements and with the Americans with Disabilities Act of 1990.
In the event that any such leak, spill, release, discharge, emission or disposal
of Hazardous Materials shall occur on the Premises or (apart from de minimis
amounts of such materials used for cleaning and maintenance purposes or in
connection with the operation of loading docks) the Common Areas as result of
any act or omission of Landlord, or in the event that the public areas of the
Building (excluding all portions thereof leased or leasable to tenants) do not
comply with all applicable building codes and other governmental requirements
and with the Americans With Disabilities Act of 1990, Landlord shall take any
and all actions necessary to bring the Premises, the Common Areas and/or the
public areas of the Building (excluding all portions thereof leased or leasable
to tenants) into compliance with applicable law, building codes, other
governmental requirements and the Americans with Disabilities Act of 1990, as
the case may be.
The within covenants shall survive the expiration or earlier
termination of the Term.
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10. ADDITIONS AND ALTERATIONS.
A. Tenant shall not, without the prior written consent of Landlord,
make any alterations, improvements or additions to the Premises. Landlord's
refusal to give said consent shall be conclusive. If Landlord consents to said
alterations, improvements or additions, it may impose such conditions with
respect thereto as Landlord deems appropriate, including, without limitation,
requiring Tenant to furnish Landlord with security for the payment of all costs
to be incurred in connection with such work, insurance against liabilities which
may arise out of such work, and plans and specifications plus permits necessary
for such work, requiring Tenant to perform such work at times designated by
Landlord. The work necessary to make any alterations, improvements or additions
to the Premises, whether prior to or subsequent to the Commencement Date, shall
be done at Tenant's expense by employees of or contractors hired by Landlord
except to the extent Landlord gives its prior written consent to Tenant's hiring
its own contractors. It is understood that Landlord's consent to the hiring by
Tenant of Tenant's own contractors may be withheld if Landlord's permitting such
hiring might reasonably be expected to adversely affect other construction in
the Building or might reasonably be expected to result in an interruption of
services provided to tenants of the Building. Tenant shall promptly pay to
Landlord or Tenant's contractors, as the case may be, when due, the cost of all
such work and of all decorating required by reason thereof, Tenant shall also
pay to Landlord a percentage of the cost of such work (such percentage to be
established on a uniform basis for the Office Section) sufficient to reimburse
Landlord for all overhead, general conditions, fees and other costs and expenses
arising from Landlord's involvement with such work. In connection with seeking
Landlord's approval, Tenant shall provide to Landlord plans and specifications
regarding proposed alterations, additions or improvements, as Landlord shall
reasonably require, and Tenant shall, in addition to all other expenses which
Tenant is obligated to pay to Landlord hereunder, pay to Landlord the expense
incurred by Landlord in connection with the review of such information. Upon
completion of such work Tenant shall deliver to Landlord, if payment is made
directly to contractors, evidence of payment, contractors' affidavits and full
and final waivers of all liens for labor, services or materials, all in form
satisfactory to Landlord. Tenant shall defend and hold Landlord, Landlord's
lessor, any mortgagee, the MTA (hereinafter defined), the Property and the
Building harmless from all costs, damages, liens and expenses related to such
work. All work done by Tenant or its contractors pursuant to Paragraphs 9 or 10
shall be done in a first-class workmanlike manner using only good grades of
materials and shall comply with all insurance requirements and all applicable
laws and ordinances and rules and regulations of governmental departments or
agencies.
B. All alterations, improvements and additions to the Premises, whether
temporary or permanent in character, made or paid for by Landlord or Tenant,
shall without compensation to Tenant become Landlord's property at the
termination of this Lease by lapse of time or otherwise and shall, unless
Landlord requests their removal (in which case Tenant shall remove the same as
provided in Paragraph 18), be relinquished to Landlord in good condition,
ordinary wear excepted.
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Tenant may install, maintain, replace, remove or use any communications
or computer wires, cables and related devices (collectively the "Lines") at the
Property in or serving the Premises, provided: (a) Tenant shall obtain
Landlord's prior written consent, use an experienced and qualified contractor
approved in writing by Landlord, and comply with all of the other provisions of
Paragraph 10A, (b) any such installation, maintenance, replacement, removal or
use shall not interfere with the use of any then existing Lines at the Building,
(c) an acceptable number of spare Lines and space for additional Lines shall be
maintained for existing and future occupants of the Building, as determined in
Landlord's reasonable opinion, (d) if Tenant at any time uses any equipment that
may create an electromagnetic field exceeding the normal insulation ratings or
ordinary twisted pair riser cable or cause radiation higher than normal
background radiation, the Lines therefor (including riser cables) shall be
appropriately insulated to prevent such excessive electromagnetic fields or
radiation, (e) as a condition to permitting the installation of new Lines,
Landlord may require that Tenant remove existing Lines located in or serving the
Premises, (f) Tenant's rights shall be subject to the rights of any regulated
telephone company, and (g) Tenant shall pay all costs in connection therewith.
Landlord reserves the right to require that Tenant remove any Lines located in
or serving the Premises which are installed in violation of these provisions, or
which are at any time in violation of any laws, ordinances, rules or regulations
or represent a dangerous or potentially dangerous condition (whether such Lines
were installed by Tenant or any other party), within three (3) days after
written notice.
Landlord may (but shall not have the obligation to): (i) install new
Lines at the Building, (ii) create additional space for Lines at the Property,
and (iii) reasonably direct, monitor and/or supervise the installation,
maintenance, replacement and removal of, the allocation and periodic
re-allocation of available space (if any) for, and the allocation of excess
capacity (if any) on, any Lines now or hereafter installed at the Building by
Landlord, Tenant or any other party (but Landlord shall have no right to monitor
or control the information transmitted through such Lines). Such rights shall
not be in limitation of other rights that may be available to Landlord by law or
otherwise. If Landlord exercises any such rights, Landlord may charge Tenant for
the costs attributable to Tenant, or may include those costs and all other costs
in Operating Expenses under Paragraph 5A(vi) (including without limitation,
costs for acquiring and installing Lines and risers to accommodate new Lines and
spare Lines, any associated computerized system and software for maintaining
records of Line connections, and the fees of any consulting engineers and other
experts); provided, any capital expenditures included in Operating Expenses
hereunder shall be amortized (together with reasonable finance charges) as
provided in Paragraph 5A(vi).
Notwithstanding anything to the contrary in this Lease, Landlord
reserves the right to require that Tenant remove any or all Lines installed by
or for Tenant within or serving the Premises upon termination of this Lease,
provided Landlord notifies Tenant prior to or within thirty (30) days following
such termination. Any Lines not required to be removed pursuant to this Article
shall, at Landlord's option, become the property of Landlord (without payment by
Landlord). If Tenant fails to remove such Lines as required by Landlord, or
violates any other provision of this Paragraph, Landlord may, after twenty (20)
days written notice to Tenant, remove such Lines or remedy such other violation,
at Tenant's expense (without limiting Landlord's other remedies available under
this Lease or applicable Law). Tenant shall not,
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without the prior written consent of Landlord in each instance, which shall not
be unreasonably withheld, grant to any third party a security interest or lien
in or on the Lines, and any such security interest or lien granted without
Landlord's written consent shall be null and void. Except to the extent arising
from the intentional or negligent acts of Landlord or Landlord's agents or
employees, Landlord shall have no liability for damages arising from, and
Landlord does not warrant that the Tenant's use of any Lines will be free from
the following (collectively called "Line Problems"): (x) any eavesdropping or
wire-tapping by unauthorized parties, (y) any failure of any Lines to satisfy
Tenant's requirements, or (z) any shortages, failures, variations,
interruptions, disconnections, loss or damage caused by the installation,
maintenance, replacement, use or removal of Lines by or for other tenants or
occupants at the Building, by any failure of the environmental conditions or the
power supply for the Building to conform to any requirements for the Lines or
any associated equipment, or any other problems associated with any Lines by any
other cause. Under no circumstances shall any Line Problems be deemed an actual
or constructive eviction of Tenant, render Landlord liable to Tenant for
abatement of Rent, or relieve Tenant from performance of Tenant's obligations
under this Lease; provided, however, that if, as a result of the negligence or
willful misconduct of Landlord or its agents, there is a Line Problem which
directly results in Tenant's inability to operate its business at the Premises
for a period in excess of three (3) consecutive days after Tenant notifies
Landlord of such inability, Tenant's Rent obligations under this Lease shall
abate from the end of such period until the earlier to occur of (i) the date on
which said Line Problem is rectified or (ii) the date on which Tenant resumes
the operation of its business in the Premises; and provided further, that if, as
a result of the negligence or willful misconduct of Landlord or its agents there
is a Line Problem which directly results in Tenant's inability to operate its
business at the Premises for a period in excess of thirty (30) consecutive days
after Tenant notifies Landlord of such inability, Tenant shall have the right to
terminate this Lease by giving written notice of such termination to Landlord at
any time after the expiration of such 30-days period but before the date on
which said Line Problem is rectified. Landlord in no event shall be liable for
damages by reason of loss of profits, business interruption or other
consequential damage arising from any Line Problems.
11. COVENANT AGAINST LIENS.
Tenant has no authority or power to cause or permit any lien or
encumbrance of any kind whatsoever, whether created by act of Tenant, operation
of law or otherwise, to attach to or be placed upon the Property, the Building
or the Premises, or to affect any estate or interest of Landlord, Landlord's
lessor, any mortgage or the MTA. Tenant covenants and agrees not to suffer or
permit any lien of mechanics, materialmen or others to be placed against the
Property, the building or the Premises, or to affect any estate or interest of
Landlord, Landlord's lessor, any mortgagee or the MTA, with respect to work or
services claimed to have been performed for or materials claimed to have been
furnished to Tenant or the Premises, and, in case of any such lien attaching or
notice of any lien, or claim therefor being asserted, Tenant covenants and
agrees to cause same to be immediately released and removed of records. In the
event that such lien is not immediately released and removed, Landlord, at its
sole option, may take all action necessary to release and remove such lien
(without any duty to investigate the validity thereof) and Tenant shall
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promptly upon notice reimburse Landlord for all sums, costs and expenses
(including reasonable attorneys' fees) incurred by Landlord in connection
therewith.
12. INSURANCE.
A. Waiver of Subrogation.
Landlord and Tenant each hereby waive any and every claim for recovery
from the other for any and all loss of or damages to the Building or the
Premises or to the contents thereof, which loss or damage is covered by valid
and collectible physical damage insurance policies, to the extent that such loss
or damage is recoverable under said insurance policies. Inasmuch as this mutual
waiver will preclude the assignment of any such claim by subrogation (or
otherwise) to an insurance company (or any other person), Landlord and Tenant
each agree to give to each insurance company which has issued, or in the future
may issue, to it policies of physical damage insurance, written notice of the
terms of this mutual waiver, and to have said insurance policies properly
endorsed, if necessary, to prevent the invalidation of said insurance coverage
by reason of said waiver. Tenant's waiver of subrogation as hereinabove set
forth shall also run to the benefit of and extend to Landlord's lessor and the
MTA.
B. Coverage
Tenant shall purchase and maintain insurance during the entire Term for
the benefit of Tenant, Landlord, Landlord's lessor, any mortgagee and the MTA
(as their respective interests may appear) with terms, coverages and in
companies satisfactory to Landlord, and with such increases in limits as
Landlord may from time to time request, but initially Tenant shall maintain the
following coverages in the following amounts:
(i) Commercial General Liability Insurance covering
Tenant, Landlord, Landlord's lessor, the MTA and
Landlord's management agent for claims of bodily
injury, personal injury and property damage arising
out of Tenant's operations, assumed liabilities or
use of the Premises, for limits of liability not less
than:
Bodily Injury and Property $3,000,000 each occurrence
Damage Liability $3,000,000 annual aggregate
Personal Injury Liability $3,000,000 annual aggregate
0% Insured's participation
(ii) Comprehensive Automobile Insurance covering all
owned, non-owned and hired automobiles of Tenant
including the loading and unloading of any automobile
with limits of liability not less than:
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Bodily Injury and Property $3,000,000 each person
Damage Liability. $3,000,000 each accident
(iii) Physical Damage Insurance covering all additions,
improvements and alterations to the Premises which
are beyond the building standard tenant improvements
provided by Landlord and all office furniture, trade
fixtures, office equipment, merchandise and all other
items of Tenant's property on the Premises. Such
insurance shall be written on an "all risks" of
physical loss or damage basis, for the full
replacement cost value of the covered items and in
amounts that meet any coinsurance clauses of the
policies of insurance.
Tenant shall, prior to the commencement of the Term, furnish to
Landlord certificates evidencing such coverage, which certificates shall state
that such insurance coverage may not be changed or canceled without at least
thirty (30) days prior written notice to Landlord and Tenant and shall name
Landlord and Landlord's management agent as additional insureds.
C. Avoid Action Increasing Rates.
Tenant shall comply with all applicable laws and ordinances, all orders
and decrees of court and all requirements of other governmental authorities
having jurisdiction over the Building and of the applicable rating bureau, and
shall not, directly or indirectly, make any use of the Premises which may
thereby be prohibited or be dangerous to person or property or which may
jeopardize any insurance coverage or may increase the cost of insurance or
require additional insurance coverage. If by reason of the failure of Tenant to
comply with the provisions of this Paragraph 12C, (i) any insurance coverage is
jeopardized Landlord may, in addition to all other remedies which may be
available to Landlord, terminate this Lease or (ii) insurance premiums are
increased, Landlord shall have the option either to terminate this Lease or to
require Tenant to make immediate payment of the increased insurance premium.
13. FIRE OR CASUALTY.
A. Paragraph 9 hereof notwithstanding, if the Premises or the access
thereto shall be damaged by fire or other casualty and if such damage does not
render all or a material portion of the Premises untenantable and if the
Premises, the Office Section or the Building are not substantially damaged (as
hereinafter defined), then Landlord shall, subject to building and zoning laws
then applicable, repair and restore the same with reasonable promptness, subject
to reasonable delays for insurance adjustments and delays caused by matters
beyond Landlord's reasonable control, but shall not be obligated to expend
therefor an amount in excess of the proceeds of insurance recovered with respect
thereto. If all or a material portion of the Premises are rendered untenantable
by fire or other casualty, or if the Premises, the Office Section or the
Building are substantially damaged by fire or other casualty (the term
"substantially damaged' meaning damage of such a character that the same cannot,
in ordinary course, reasonably be
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expected to be repaired within ninety (90) days from the time that repair work
would commence), then, in either such case, Landlord shall have the right to
terminate this Lease by giving notice of Landlord's election so to do not later
than the earlier of (i) thirty (30) days after Landlord has ascertained all
information sufficient for Landlord to determine whether or not to terminate
this Lease, including, without limitation, the amount of insurance proceeds
which are available to Landlord for restoration, or (ii) ninety (90) days
following the occurrence of such damage. In the event Landlord gives such
termination notice, this Lease shall terminate (with appropriate proration(s) of
Rent being made for Tenant's possession of the tenantable portion of the
Premises after the date of such damage) as of the date specified in such notice
(but in no event sooner than thirty (30) days after the date of such notice)
with the same force and effect as if the date specified were the date originally
established as the expiration date hereof. Further, in the event this Lease is
not terminated by Landlord, Landlord shall not be obligated to restore any
portion of the Office Section or the Building outside of the Premises which is
not necessary for reasonable access to and egress from the Premises, but if
Landlord elects not to restore such damaged or destroyed portions of the Office
Section or the Building, Landlord shall so notify Tenant within ninety (90) days
after the date of such damage or destruction, in which case Tenant shall have an
option to terminate this Lease, exercisable by written notice delivered by
Tenant to Landlord within thirty (30) days following Tenant's receipt of written
notice from Landlord of Landlord's election not to restore such damaged or
destroyed portions. If Landlord fails to give such notice to Tenant within one
hundred eighty (180) days after the date of such damage, Tenant shall have the
right to terminate this Lease by giving written notice of such termination to
Landlord at any time after the expiration of such 180-day period. Except as
otherwise provided below, Rent shall abate on those portions of the Premises as
are, from time to time, untenantable as a result of such damage.
B. Notwithstanding anything to the contrary herein set forth. Landlord
shall have no duty pursuant to this Paragraph 13 to repair or restore any
portion of the alterations, additions or improvements in the Premises or the
decorations thereto except to the extent that such alterations, additions,
improvements and decorations were provided by Landlord, at Landlord's cost, at
the beginning of the Term. If Tenant desires any other or additional repairs or
restoration and if Landlord consents thereto, the same shall be done at Tenant's
sole cost and expense subject to all of the provisions of Paragraph 9 hereof.
Tenant acknowledges that Landlord shall be entitled to the full proceeds of any
insurance coverage, whether carried by Landlord or Tenant, for damage to
alterations, additions, improvements or decorations provided by Landlord either
directly or through an allowance to Tenant.
14. WAIVER OF CLAIMS - INDEMNIFICATION.
To the extent not prohibited by law, Landlord, its partners, its
managing agent, Landlord's lessor, any mortgagee, the MTA and their respective
officers, agents, servants and employees shall not be liable for any damage
either to person or property or resulting from the loss of use thereof sustained
by Tenant or by other persons due to the Building or any part thereof or any
appurtenances thereof becoming out of repair, or due to the happening of any
accident or event in or about the Office Section, the Premises or the Building,
or due to any act or neglect of
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any tenant or occupant of the Office Section, the Building or of any other
person or entity. This provision shall apply particularly, but not exclusively,
to damage caused by gas, electricity, snow, frost, steam, sewage, sewer gas or
odors, fire, water, noise, vibration, fumes or by the bursting or leaking of
pipes, faucets, sprinklers, plumbing fixtures and windows, and shall apply
without distinction as to the person whose act or neglect was responsible for
the damage and whether the damage was due to any of the causes specifically
enumerated above or to some other cause of an entirely different kind. Tenant
further agrees that all personal property upon the Premises, or upon loading
docks, receiving and holding areas, or freight elevators of the Building shall
be at the risk of Tenant only, and that Landlord shall not be liable for any
loss or damage thereto or theft thereof. Without limitation of any other
provisions hereof, Tenant agrees to defend, protect, indemnify and save harmless
Landlord, Landlord's lessor, any mortgagee and the MTA from and against all
liability to third parties which arose (or which were claimed to have arisen)
within or without the Premises or out of acts or omissions of Tenant and its
servants, agents, employees, contractors, suppliers, workers and invitees.
15. NONWAIVER.
No waiver of any provision of this Lease shall be implied by any
failure of Landlord or Tenant to enforce any remedy on account of the violation
of such provision, even if such violation be continued or repeated subsequently,
and no express waiver shall affect any provision other than the one specified in
such waiver and that one only for the time and in the manner specifically
stated. No receipt of moneys by Landlord from Tenant after the termination of
this Lease shall in any way alter the length of the Term or of Tenant's right of
possession hereunder or after the giving of any notice shall reinstate, continue
or extend the Term or affect any notice given Tenant prior to the receipt of
such moneys, it being agreed that after the service of notice or the
commencement of a suit or after final judgment for possession of the Premises,
Landlord may receive and collect any Rent due, and the payment of said Rent
shall not waive or affect said notice, suit or judgment.
16. CONDEMNATION.
If the Property, the Building or any portion thereof shall be taken or
condemned by any competent authority for any public or quasi-public use or
purpose (a "taking"), or if the configuration of any roadway, street, alley, or
railroad line adjacent to or beneath the Building is changed by any competent
authority and such taking or change in configuration makes it necessary or
desirable to remodel or reconstruct the Building or any part thereof, Landlord
shall have the right, exercisable at its sole discretion, to cancel this Lease
upon not less than ninety (90) days notice prior to the date of cancellation
designated in the notice. No money or other consideration shall be payable by
Landlord to Tenant for the right of cancellation and Tenant shall have no right
to share in the condemnation award or in any judgment for damages caused by such
taking or change in configuration.
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17. ASSIGNMENT AND SUBLETTING.
A. Tenant shall not, without the prior written consent of Landlord (i)
assign, convey or mortgage this Lease or any interest hereunder; (ii) permit to
occur or exist any assignment of this Lease, or any lien upon Tenant's interest,
voluntarily or by operation of law; (iii) sublet the Premises or any part
thereof; or (iv) permit the use of the Premises by any parties other than Tenant
and its employees. Any such action on the part of Tenant shall be void and of no
effect. Landlord's consent to any assignment, subletting or transfer or
Landlord's election to accept any assignee, subtenant or transferee as the
tenant hereunder and to collect rent from such assignee, subtenant or transferee
shall not release Tenant or any subsequent tenant from any covenant or
obligation under this Lease. Landlord's consent to any assignment, subletting or
transfer shall not constitute a waiver of Landlord's right to withhold its
consent to any future assignment, subletting, or transfer. If Tenant is a
corporation and if at any time during the Term the person or persons who own a
majority of its voting shares at the time of the execution of this Lease cease
to own a majority of such shares, Tenant shall so notify Landlord, and Landlord
may terminate this Lease by notice to Tenant given not later than ninety (90)
days thereafter. This provision shall not apply whenever Tenant is a corporation
the outstanding voting stock of which is listed on a recognized security
exchange. For the purposes of this provision, stock ownership shall be
determined in accordance with Section 544 of the Internal Revenue Code of 1986,
as amended through December 31, 1989, and the regulations thereunder, and the
term "voting stock" shall refer to shares of stock regularly entitled to vote
for the election of directors of the corporation. Notwithstanding the foregoing,
if Tenant is not then in default under this Lease beyond any applicable notice
and cure period, Landlord will not unreasonably withhold, condition or delay its
consent to the assignment of this Lease or the subletting of the whole or any
portion of the Premises by Tenant provided (and it shall be a condition of the
validity of any such assignment or subletting) without limitation that (i) in
the case of an assignment, such assignee shall first agree directly with
Landlord to assume and be bound by all of the obligations of Tenant hereunder,
including without limitation the obligations to pay rent and other charges, the
covenant against further assignment and the obligation to use the Premises only
for the purpose set forth in Paragraph 1 hereof, or (ii) in the case of a
subletting, such sublessee shall agree to be bound by and subject to all of the
obligations of Tenant hereunder with respect to the whole or such portion of the
Premises as may be sublet. Further, Landlord shall have the right to review and
approve the document used to effectuate such assignment or subletting, and
Tenant shall in any event furnish Landlord with a fully executed original of
such document within thirty (30) days after its full execution.
B. Notwithstanding anything to the contrary herein contained,
Landlord's consent need not be obtained by Tenant for any assignment of this
Lease or subletting of the whole or any portion of the Premises by Tenant to a
corporation that controls Tenant ("Parent"), to a corporation controlled by
Tenant ("Subsidiary") or to a corporation under common control with Tenant
("Affiliate"), or to an entity acquiring all or substantially all of the stock
or assets of Tenant by way of merger, consolidation or sale, provided (and it
shall be a condition of the validity of any such assignment or subletting) that
such Parent, Subsidiary, Affiliate or resulting or acquiring entity, as the case
may be, shall (i) in the case of an assignment, first agree directly
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with Landlord to assume and be bound by all of the obligations of Tenant
hereunder, including, without limitation, the obligations to pay Rent and other
charges, the covenant against further assignment and the obligation to use the
Premises only for the purpose set forth in Paragraph 1 hereof, or (ii) in the
case of a subletting, agree to be bound by and subject to all of the obligations
of Tenant hereunder with respect to the whole or such portion of the Premises as
may be sublet. Further, Tenant shall furnish Landlord with a fully executed
original of the document used to effectuate such assignment or subletting, which
shall comply with the requirements of this Paragraph 17B, within thirty (30)
days after its full execution. If Tenant requests Landlord's consent to assign
this Lease or sublet all or any portion of the Premises, in addition to
withholding its consent, Landlord shall have the option, exercisable by written
notice to Tenant given within thirty (30) days after receipt of such request, to
terminate this Lease for the entire Premises, in the case of an assignment or
subletting of the whole, and for the portion of the Premises, in the case of a
subletting of a portion. In the event that Landlord exercises such right to
terminate, Landlord shall be entitled to recover possession of and Tenant shall
surrender the whole or such portion of the Premises on the later of (i) the
proposed date for possession by such assignee or subtenant, or (ii) ninety (90)
days after the date of Landlord's notice of termination to Tenant. In the event
of termination in respect of a portion of the Premises, the portion so
eliminated shall be delivered to Landlord in good order and condition and
thereafter, to the extent necessary in Landlord's judgment, Landlord, at its own
cost and expense, may have access to and may make modification to the Premises
so as to make such portion a self-contained rental unit with access to common
areas, elevators and the like, Base Rent and Tenant's Proportionate Share shall
be adjusted according to the extent of the Premises for which the Lease is
terminated. Without limitation of the rights of Landlord hereunder in respect
thereto, if there is any assignment of this Lease by Tenant or a subletting of
the whole of the Premises by Tenant at a rent which, in either case, exceeds the
rent payable hereunder by Tenant, or if there is a subletting of a portion of
the Premises by Tenant at a rent in excess of the subleased portion's pro rata
share of the rent payable hereunder by Tenant, then Tenant shall pay to
Landlord, as additional rent, forthwith upon Tenant's receipt of each
installment of any such excess rent, the full amount of any such excess rent.
The provisions of this paragraph shall apply to each and every assignment of the
Lease and each and every subletting of all or a portion of the Premises, whether
to a subsidiary or controlling corporation or any other person, firm or entity,
in each case on the terms and conditions set forth herein. Each request by
Tenant for permission to assign this Lease or to sublet the whole or any part of
the Premises shall be accompanied by a warranty by Tenant as to the amount of
rent to be paid to Tenant by the proposed assignee or sublessee. For the
purposes of this Paragraph 1 7B, the term "rent" shall mean all Base Rent,
Additional Rent or other payments and/or consideration payable by one party to
another related to the use and occupancy of all or a portion of the Premises.
18. SURRENDER OF POSSESSION.
Upon the expiration of the Term or upon the termination of Tenant's
right of possession to all or a portion of the Premises, whether by lapse of
time or at the option of Landlord as herein provided. Tenant shall forthwith
quietly and peaceably surrender the Premises or portion thereof to Landlord in
good order, repair and condition, ordinary wear, fire and other casualty damage
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and any damage caused by Landlord excepted, and shall, if Landlord so requires,
restore the Premises or portion thereof to the condition existing at the
beginning of the Term. Any interest of Tenant in the alterations, improvements
and additions to the Premises made or paid for by Landlord or Tenant shall,
without compensation to Tenant, become, at Landlord's option, Landlord's
property at the termination of this Lease by lapse of time or otherwise and if
such option is exercised such alterations, improvements and additions shall be
relinquished to Landlord in good condition, ordinary wear excepted. Landlord
shall inform Tenant at the time Landlord approves any such alteration,
improvement or addition as to whether or not Landlord shall exercise such
option. If Landlord does not exercise such option with respect to any such
alteration, improvement or addition, Tenant's restoration obligation referred to
above shall be applicable. Within seven (7) days prior to the termination of the
Term or of Tenant's right of possession Tenant shall remove office furniture,
trade fixtures, office equipment and all other items of Tenant's property on the
Premises Tenant shall pay to Landlord upon demand the cost of repairing any
damage to the Premises and to the Building caused by any removal required
hereunder. If Tenant shall fail or refuse to remove any such property from the
Premises, Tenant shall be conclusively presumed to have abandoned the same, and
title thereto shall thereupon pass to Landlord without any cost either by
set-off, credit, allowance or otherwise, and Landlord may at its option accept
the title to such property or, at Tenant's expense, may (i) remove the same or
any part in any manner that Landlord shall choose, repairing any damage to the
Premises caused by such removal, and (ii) store, destroy or otherwise dispose of
the same without incurring liability to Tenant or any other person.
19. HOLDING OVER.
In addition to performing all of Tenant's other obligations hereunder,
Tenant shall pay to Landlord an amount as Rent equal to the greater of (i) the
monthly market rental rate for a term of not less than one (1) year for similar
premises in the Building without regard to concessions such as tenant
improvement allowance and free rent, if any, or (ii) the sum of one hundred
fifty percent (150%) of one-twelfth the Base Rent and one hundred fifty percent
(150%) of one-twelfth the Additional Rent paid by Tenant during the previous
Calendar Year herein provided, such amount to be paid monthly during each month
or portion thereof for which Tenant shall retain possession of the Premises or
any part thereof after the termination of the Term or of Tenant's right of
possession, whether by lapse of time or otherwise, and also shall pay all
damages sustained by Landlord, whether direct or consequential, on account
thereof. The provisions of this Paragraph 19 shall not be deemed to limit or
constitute a waiver of any other rights or remedies of Landlord provided herein
or at law.
20. ESTOPPEL CERTIFICATE.
Tenant agrees that, from time to time upon not less than ten (10)
business days prior request by Landlord, Landlord's lessor or any mortgagee,
Tenant or Tenant's duly authorized representative having knowledge of the
following facts will deliver to Landlord a statement in writing certifying (i)
that this Lease is unmodified and in full force and effect (or if there have
been modifications, a description of such modifications and that the Lease as
modified is in full
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force and effect); (ii) the dates to which Rent and other charges have been
paid; (iii) that Landlord is not in default under any provision of this Lease,
or, if in default, the nature thereof in detail; (iv) that the Premises have
been delivered to Tenant by Landlord and accepted by Tenant; (v) that there are
no proceedings pending against Tenant which have been adversely decided and
which would affect Tenant's obligations under this Lease; (vi) that Tenant has
not made a claim against Landlord which has not been resolved or satisfied; and
(vii) such further matters as may be requested by Landlord, it being intended
that any such statement may be relied upon by any prospective assignee of
Landlord, any mortgagee or prospective mortgagee of the Building, any
prospective assignee of any such mortgagee, or any prospective and/or subsequent
purchaser or transferee of all or a part of Landlord's interest in the Property,
the Office Section or the Building or any other person having an interest
therein. Tenant shall execute and deliver whatever instruments may be required
for such purposes, and in the event Tenant fails so to do within ten (10) days
after demand in writing, Tenant shall be considered in default under this Lease.
21. SUBORDINATION.
This Lease and all rights of Tenant hereunder are subject and
subordinate to any mortgage or mortgages, blanket or otherwise, made by Landlord
and which do now or may hereafter affect the Property or the Building and to any
and all renewals, modifications, consolidations, replacements and extensions
thereof, and to any ground or other lease, or similar instrument now or
hereafter placed against the Building. It is the intention of the parties that
this provision be self-operative and that no further instrument shall be
required to effect such subordination of this Lease. Tenant shall, however, upon
demand at any time or times execute, acknowledge and deliver to Landlord without
expense to Landlord, any and all instruments that may be necessary or proper to
subordinate this Lease and all rights of Tenant hereunder to any such mortgage
or mortgages or to confirm or evidence such subordination. Tenant covenants and
agrees, in the event any proceedings are brought for the foreclosure of any such
mortgage, to attorn, without any deductions or set-offs whatsoever, to the
purchaser upon any such foreclosure sale if so requested to do by such
purchaser, and to recognize such purchaser as the Landlord under this Lease.
Tenant agrees to execute and deliver at any time and from time-to-time, upon the
request of Landlord or of any holder of such mortgage or of such purchaser, any
instrument which, in the sole judgment of such requesting party, may be
necessary or appropriate in any such foreclosure proceeding or otherwise to
evidence such attornment. Tenant hereby irrevocably appoints Landlord and the
holder of such mortgage, or either of them, the attorney-in-fact of Tenant to
execute and deliver any such instrument for and on behalf of Tenant. 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, or the obligations of Tenant
hereunder in the event any such foreclosure proceeding is brought, prosecuted or
completed. Tenant and Landlord further agree that if so requested by any
mortgagee of Landlord, this Lease shall be made superior to any such mortgage
and that they will execute such documents as may be required by such mortgagee
to effect the superiority of this Lease to such mortgage.
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22. CERTAIN RIGHTS RESERVED BY LANDLORD.
Landlord shall have the following rights (but not obligations), each of
which Landlord may exercise without notice to Tenant and without liability to
Tenant for damage or injury to property, person or business on account of the
exercise thereof, and the exercise of any such rights shall not be deemed to
constitute an eviction or disturbance of Tenant's use or possession of the
Premises and shall not give rise to any claim for set-off or abatement of Rent
or any other claim:
(i) To change the Building's name or street address.
(ii) To install, affix and maintain any and all signs on
the exterior and on the interior of the Building.
(iii) To decorate or to make repairs, alterations,
additions, or improvements, whether structural or
otherwise, in and about the Building, or any part
thereof, and for such purposes, upon reasonable prior
notice to Tenant, to enter upon the Premises, and
during the continuance of any of said work, to
temporarily close doors, entryways, public space and
corridors in the Building and to interrupt or
temporarily suspend services or use of facilities,
all without affecting any of Tenant's obligations
hereunder, so long as the Premises are reasonably
accessible and usable. Landlord agrees to use
reasonable efforts in the exercise of such rights to
minimize any interference with Tenant's occupancy of
the Premises and the conduct of the business thereon.
(iv) To furnish door keys for the entry door(s) in the
Premises at the commencement of this Lease and to
retain at all times, and to use in appropriate
instances, keys to all doors within and into the
Premises. Tenant agrees to purchase only from
Landlord additional duplicate keys as required, to
change no locks, and not to affix locks on doors
without the prior written consent of Landlord.
Notwithstanding the provisions for Landlord's access
to Premises. Tenant relieves and releases Landlord of
all responsibility arising out of theft, robbery,
pilferage and personal assault. Upon the expiration
of the Term or of Tenant's right of possession,
Tenant shall return all keys to Landlord and shall
disclose to Landlord the combination of any safes,
cabinets or vaults left in the Premises.
(v) To designate and approve all window coverings used in
the Building.
(vi) To approve the weight, size and location of safes,
vaults and other heavy equipment and articles in and
about the Premises and the Building so as not to
exceed the legal live load per square foot designated
by the
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structural engineers for the Building, and to require
all such items and furniture and similar items to be
moved into or out of the Building and Premises only
at such times and in such manner as Landlord shall
direct in writing. Tenant shall not install or
operate machinery or any mechanical devices of a
nature not directly related to Tenant's ordinary use
of the Premises without the prior written consent of
Landlord. Movements of Tenant's property into or out
of the Building or the Premises and within the
Building are entirely at the risk and responsibility
of Tenant, and Landlord reserves the right to require
permits before allowing any property to be moved into
or out of the Building or the Premises.
(vii) To establish security policies and other controls for
the purpose of regulating all property and packages,
both personal and otherwise, to be moved into or out
of the Building and Premises and all persons using
the Building both during and after normal office
hours.
(viii) To regulate delivery and service of supplies and the
usage of the loading docks, receiving areas and
freight elevators.
(ix) To show the Premises to prospective tenants at
reasonable times (upon not less than 24 hours prior
oral or written notice) and, if vacated or abandoned,
to show the Premises at any time, and to prepare the
Premises for re-occupancy.
(x) To erect, use and maintain pipes, ducts, wiring and
conduits, and appurtenances thereto, in and through
the Premises at reasonable locations.
(xi) To enter the Premises at any reasonable time (upon
not less than 24 hours prior oral or written notice,
except in emergencies, when no such notice need be
given) to inspect the Premises.
(xii) To grant to any person or to reserve unto itself the
exclusive right to conduct any business or render any
service in the Building. If Landlord elects to make
available to tenants in the Building any services or
supplies, or arranges a master contract therefor,
Tenant agrees to obtain its requirements, if any,
therefor from Landlord or under any such contract,
provided that the charges therefor are reasonable.
23. RULES AND REGULATIONS.
Tenant agrees to observe the rules and regulations for the Building
attached hereto as Exhibit C and made a part hereof. Landlord shall have the
right from time to time to prescribe additional rules and regulations which, in
its judgment, may be desirable for the use, entry, operation and management of
the Premises, the Office Section and the Building, each of which
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rules and regulations and any amendments thereto shall become a part of this
Lease. Tenant shall comply with all such rules and regulations; provided,
however, that such rules and regulations shall not contradict or abrogate any
right or privilege herein expressly granted to Tenant.
24. LANDLORD'S REMEDIES.
If default shall be made in the payment of the Rent or any installment
thereof or in the payment of any other sum required to be paid by. Tenant under
this Lease or under the terms of any other agreement between Landlord and Tenant
and such default shall continue for five (5) days after written notice to
Tenant, or if default shall be made in the observance or performance of any of
the other covenants or conditions in this Lease which Tenant is required to
observe and perform and such default shall continue for twenty (20) days after
written notice to Tenant, or if a default involves a hazardous condition and is
not cured by Tenant immediately upon written notice to Tenant, or if the
interest of Tenant in this Lease shall be levied on under execution or other
legal Process, or if any voluntary petition in bankruptcy or for corporate
re-organization or any similar relief shall be filed by Tenant, or if any
involuntary petition in bankruptcy shall be filed against Tenant under any
federal or state bankruptcy or insolvency act and shall not have been dismissed
within ninety (90) days from the filing thereof, or if a receiver shall be
appointed for Tenant or any of the property of Tenant by any court and such
receiver shall not have been dismissed within thirty (30) days from the date of
his appointment, or if Tenant shall make and assignment for the benefit of
creditors, or if Tenant shall admit in writing Tenant's inability to meet
Tenant's debts as they mature, then Landlord may treat the occurrence of any one
or more of the foregoing events as a breach of this Lease, and thereupon at its
option may, without notice or any demand of any kind to Tenant or any other
person, have any one or more of the following described remedies in addition to
all other rights and remedies provided at law or in equity or elsewhere herein:
(i) Landlord may terminate this Lease and the Term
created hereby and shall give Tenant written notice
of Landlord's election to do so and the effective
date thereof (the "Effective Date"), in which event
Landlord may forthwith repossess the Premises and
shall be entitled to recover, forthwith as liquidated
damages, in addition to any other sums or damages for
which Tenant may be liable to Landlord, a sum of
money equal to the present value (such present value
to be computed on the basis of a per annum discount
rate equal to 100 basis points below the effective
annual yield on U.S. Treasury obligations which could
be purchased on the business day next succeeding the
Effective Date and mature closest to the Termination
Date) of the Rent provided to be paid by Tenant for
the balance of the Term over the present value of the
fair market rental value of the Premises, after
deduction from the present value of such fair market
rental value of all anticipated expenses of
reletting. Should the present value of the fair
market rental value of the Premises, after deduction
of all anticipated expenses of reletting, for the
balance of the Term exceed the present value of the
Rent provided to be paid by Tenant for the balance of
the Term,
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Landlord shall have no obligation to pay to Tenant
the excess or any part thereof or to credit such
excess or any part thereof against any other sums or
damages for which Tenant may be liable to Landlord.
(ii) Landlord may terminate this Lease and the Term as
provided in (i) above and forthwith repossess the
Premises and shall be entitled to recover forthwith,
in addition to any other sums or damages for which
Tenant may be liable to Landlord, a sum of money
equal to amounts then due and the present value
(computed as aforesaid) of all or a portion of the
Rent and other sums to become due under this Lease
for all or a part of the period from the Effective
Date to the Termination Date. Furthermore, Landlord
shall have the right from time to time to recover
from Tenant, and Tenant shall remain liable for all
Rent which would have been due, other than Rent
accelerated and paid pursuant to the foregoing
sentence, and any other sums thereafter accruing as
they become due under this Lease during the period
from the Effective Date to the Termination Date. In
any such case, Landlord may (but shall be under no
obligation to, except as required by law) relet the
Premises or any part thereof for the account of
Tenant, for such rent, from time to time (which may
be for a term extending beyond the Term of this
Lease), and upon such terms as Landlord in Landlord's
sole discretion shall determine, and Landlord shall
not be required to accept any tenant offered by
Tenant or to observe any instructions given by Tenant
relative to such reletting. Also, in any such case,
Landlord may change the locks or other entry devices
of the Premises and make repairs, alterations and
additions in or to the Premises and redecorate same
to the extent deemed by Landlord necessary or
desirable, and Tenant shall upon written demand pay
the cost thereof together with Landlord's expenses of
reletting, including without limitation, brokerage
commissions payable to Landlord's agent or to others.
Landlord may collect the rents from any such
reletting and apply the same to the payment of
expenses of reentry, redecoration, repair and
alterations and the expenses of reletting and the
excess or residue remaining to the payment of Rent
and other sums in this Lease provided to be paid by
Tenant and not theretofore paid by acceleration or
otherwise, and any such excess or residue shall
operate only as an offsetting credit against the
amount of Rent and other sums then due and owing or,
at Landlord's option, shall be refunded to Tenant to
the extent paid as a result of acceleration or shall
be applied as an offsetting credit against Rent and
other sums thereafter becoming due and payable
hereunder; provided that in no event shall Tenant be
entitled to a credit on its indebtedness to Landlord
or refunds of amounts accelerated in excess of the
aggregate of the amount paid as a result of
acceleration and the amount would have been payable
by Tenant for the period for which the credit to
Tenant is being determined, had no default occurred.
No such reentry, repossession, repairs, alterations,
additions or reletting shall
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operate to release Tenant in whole or in part from
any of Tenant's obligations hereunder, and Landlord
may, at any time and from time to time, sue and
recover judgment for any deficiencies from time to
time remaining after the application from time to
time of the proceeds of any such reletting.
(iii) Landlord, without thereby waiving such default, may
cure the same for the account and at the expense of
Tenant, without notice in a case of emergency, as
determined by Landlord in its sole discretion, or in
case of correction of a dangerous or hazardous
condition, and in any other case if such default
continues after ten (10) days from the date of the
giving by Landlord to Tenant of written notice of
such default or of intention to cure. Bills for any
expense incurred by Landlord in connection with any
such performance by Landlord shall be for the account
of Tenant, and shall be due and payable in accordance
with the terms of said bills, and if not paid when
due, the amounts thereof shall become immediately due
and payable as Additional Rent under this Lease.
25. EXPENSES OF ENFORCEMENT.
In the event either party institutes legal proceedings against the
other for breach of or interpretation of any of the terms, conditions or
covenants of this Lease, the unsuccessful party by final unappealed or
non-appealable order, judgment or decree in such proceedings shall pay any and
all costs and expenses incurred by the prevailing party in enforcing or
establishing its rights hereunder, including without limitation court costs and
reasonable attorneys' fees.
26. COVENANT OF QUIET ENJOYMENT.
Landlord covenants that Tenant, on paying the Rent, charges for
services and other payments herein reserved and on keeping, observing and
performing all the other terms, covenants, conditions, provisions and agreements
herein contained on the part of Tenant to be kept, observed and performed shall,
during the Term, peaceably and quietly have, hold and enjoy the Premises subject
to the terms, covenants, conditions, provisions and agreements hereof, without
hindrance or ejection by any persons lawfully claiming by, through or under
Landlord, the foregoing covenant of quiet enjoyment being in lieu of any other
covenant, expressed or implied.
27. SECURITY DEPOSIT.
Tenant hereby deposits with Landlord the sum of the Security Deposit
specified in Paragraph 1 hereof (hereinafter referred to as "Collateral"), as
security for the prompt, full and faithful performance by Tenant of each and
every provision of this Lease and of all obligations of Tenant hereunder.
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A. If Tenant fails to perform any of its obligations hereunder,
Landlord may use, apply or retain the whole or any part of the Collateral for
the payment of (i) any Rent or other sums of money which Tenant may not have
paid when due, (ii) any sum expended by Landlord on Tenant's behalf in
accordance with the provisions of this Lease, and/or (iii) any sum which
Landlord may expend or be required to expend by reason of Tenant's default,
including, without limitation, any damage or deficiency in or from the reletting
of the Premises as provided in Paragraph 24. The use, application or retention
of the Collateral, or any portion thereof, by Landlord shall not prevent
Landlord from exercising any other right or remedy provided by this Lease or by
law (it being intended that Landlord shall not first be required to proceed
against the Collateral) and shall not operate as a limitation on any recovery to
which Landlord may otherwise be entitled. If any portion of the Collateral is
used, applied or retained by Landlord for the purposes set forth above, Tenant
agrees, within ten (10) days after written demand therefor is made by Landlord,
to deposit cash with Landlord in an amount sufficient to restore the Collateral
to its original amount.
B. If Tenant shall fully and faithfully comply with all of the
provisions of this Lease, the Collateral, or any balance thereof, shall be
returned to Tenant without interest after the expiration of the Term or upon any
later date after which Tenant has vacated the Premises. In the absence of
evidence satisfactory to Landlord of any permitted assignment of the right to
receive the Collateral, or of the remaining balance thereof, Landlord may return
the same to the named Tenant herein regardless of one or more assignments of
Tenant's interest in this Lease or the Collateral. In such event, upon the
return of the Collateral, or the remaining balance thereof to the named Tenant,
Landlord shall be completely relieved of liability under this Paragraph 27 or
otherwise with respect to the Collateral.
C. Tenant acknowledges that Landlord has the right to transfer or
mortgage its interest in the Premises and the Building and in this Lease and
Tenant agrees that in the event of any such transfer or mortgage, Landlord shall
have the right to transfer or assign the Collateral to the transferee or
mortgagee. Upon such transfer or assignment, Landlord shall thereby be released
by Tenant from all liability or obligation for the return of such Collateral and
Tenant shall look solely to such transferee or mortgagee for the return of the
Collateral, such transferee or mortgagee having no greater obligations in
respect of the Collateral than the Landlord had.
28. REAL ESTATE BROKER.
The Tenant represents that Tenant has dealt with (and only with) the
Broker specified in Paragraph 1 hereof as broker in connection with this Lease,
and that insofar as Tenant knows, no other broker negotiated this Lease or is
entitled to any commission in connection therewith, Tenant agrees to indemnify,
defend and hold harmless Landlord its employees and agents from and against any
claims made by any broker or finder other than the Broker named above for a
commission or fee in connection with this Lease or any sublease hereunder, but
nothing herein shall be construed as permitting any such sublease, provided that
Landlord has not in fact retained such broker or finder.
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29. UNDERLYING LEASES.
Landlord is the lessee of the air rights premises within which the
Building is constructed pursuant to that certain Sublease (the "Sublease") dated
September 1, 1982 by and between a predecessor of Urban Investment and
Development Co. ("Urban"), as lessor. Urban is the lessee of said air rights
premises and other adjacent air rights premises which collectively are referred
to as Copley Place, pursuant to that certain Amended and Restated Lease (the
"Underlying Lease") dated January 31, 1980 by and between Urban and the
Massachusetts Turnpike Authority ("MTA"), as lessor.
Landlord hereby gives notice to Tenant that it supports the Affirmative
Action and Resident Preference goals set forth in Paragraph 6 of Schedule D to
the Underlying Lease and in Attachment C to the City of Boston's Urban
Development Action Grant application for Copley Place, and encourages Tenant to
pursue such goals in Tenant's own employment practices. In connection with
hiring to fill permanent jobs at the Premises, Tenant shall not discriminate
against any employee or applicant for employment because of race, color,
religious creed, national origin, age or sex. Tenant shall comply to the extent
applicable, with Title VII of the U.S. Civil Rights Act and M.G.L. c.151B with
respect to employment at the Premises.
30. NOTICE TO MORTGAGEE AND GROUND LESSOR.
After receiving notice from any person, firm or other entity that it
holds a mortgage which includes the Premises, the Building or the Office Section
as part of the mortgaged premises, or that it is the ground lessor under a
ground lease (which term shall include the Underlying Lease and the Sublease)
with Landlord, as ground lessee, which includes the Premises, the Building or
the Office Section as part of the demised premises, no notice from Tenant to
Landlord shall be effective unless and until a copy of the same is given to such
holder or ground lessor, and the curing of any of Landlord's defaults by such
holder or ground lessor shall be treated as performance by Landlord. Such holder
or ground lessor shall be given such reasonable time as may be necessary to
effect such cure or to foreclose the mortgage or terminate the ground lease, as
the case may be. For the purposes of Paragraph 21, this Paragraph 30, Paragraph
31 and Paragraph 34, the term "mortgage" includes a mortgage on a leasehold
interest of Landlord (but not one on Tenant's leasehold interest).
31. ASSIGNMENT OF RENTS.
With reference to any assignment by Landlord of Landlord's interest in
this Lease, or the rents payable hereunder, conditional in nature or otherwise,
which assignment is made to the holder of a mortgage or ground lease (which term
shall include the Underlying Lease and the Sublease) on property which includes
the Premises, the Building or the Office Section, Tenant agrees:
(i) that the execution thereof by Landlord, and the
acceptance thereof by the holder of such mortgage, or
the ground lessor, shall never be treated as an
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assumption by such holder or ground lessor of any of
the obligations of Landlord hereunder, unless such
holder, or ground lessor, shall, by notice sent to
Tenant, specifically otherwise elect; and
(ii) that, except as aforesaid, such holder or ground
lessor shall be treated as having assumed Landlord's
obligations hereunder only upon a foreclosure of such
holder's mortgage and the taking of possession of the
Premises, or in the case of a ground lessor, the
assumption of Landlord's position hereunder by such
ground lessor. In no event shall the acquisition of
title to the Building and the land on which the same
is located by a purchaser which, simultaneously
therewith, leases the entire Building or such land
back to the seller thereof be treated as an
assumption, by operation of law or otherwise, of
Landlord's obligations hereunder, but Tenant shall
look solely to such seller-lessee, and its successors
from time to time in title, for performance of
Landlord's obligations hereunder. In any such event,
this Lease shall be subject and subordinate to the
lease to such seller. For all purposes, such
seller-lessee, and its successors in title, shall be
the landlord hereunder unless and until Landlord's
position shall have been assumed by such
purchaser-lessor.
32. PERSONAL PROPERTY TAXES.
Tenant shall pay all taxes which may be lawfully charged, assessed, or
imposed upon all fixtures and equipment of every type and also upon all personal
property in the Premises, and Tenant shall pay all license fees which may
lawfully be imposed upon the business of Tenant conducted upon the Premises.
33. MISCELLANEOUS.
A. Rights Cumulative. All rights and remedies of Landlord under this
Lease shall be cumulative and none shall exclude any other rights and remedies
allowed by law.
B. Interest. All payments becoming due under this Lease and remaining
unpaid when due shall bear interest until paid at the rate of the greater of (i)
eighteen percent (18%) per annum or (ii) two percent (2%) per annum above the
prime rate of interest charged from time to time by The First National Bank of
Boston (but in no event at a rate which is more than the highest rate which is
at the time lawful in the Commonwealth of Massachusetts).
C. Terms. The necessary grammatical changes required to make the
provisions hereof apply either to corporations or partnerships or individuals,
men or women, as the case may require, shall in all cases be assumed as though
in each case fully expressed.
D. Binding Effect. Each of the provisions of this Lease shall extend to
and shall, as the case may require, bind or inure to the benefit not only of
Landlord and of Tenant, but also of
32
<PAGE> 37
their respective successors or assigns, provided this clause shall not permit
any assignment by Tenant contrary to the provisions of Paragraph 17 hereof. All
indemnities, covenants and agreements of Tenant contained herein shall inure to
the benefit of Landlord's agents and employees.
E. Lease Contains All Terms. All of the representations and obligations
of Landlord are contained herein and in the Exhibits attached hereto, and no
modification, waiver or amendment of this Lease or of any of its conditions or
provisions shall be binding upon Landlord unless in writing signed by Landlord
or by a duly authorized agent of Landlord empowered by a written authority
signed by Landlord.
F. Delivery for Examination. Submission of this Lease for examination
shall not bind Landlord in any manner, and no lease or obligations of Landlord
shall arise until this instrument is signed by both Landlord and Tenant and
delivery is made to each.
G. No Air Rights. No rights to any view or to light or air over any
property, whether belonging to Landlord or any other person, are granted to
Tenant by this Lease.
H. Modification of Lease. If any lender requires, as a condition to its
lending funds the repayment of which is to be secured by a mortgage or trust
deed on the Premises and Building or either, that certain modifications be made
to this Lease, which modifications will not require Tenant to pay any additional
amounts or otherwise change materially the rights or obligations of Tenant
hereunder, Tenant shall, upon Landlord's request, execute appropriate
instruments effecting such modifications.
I. Substitution of Other Premises. At any time hereafter, Landlord may
(upon thirty (30) days prior notice) substitute for the Premises other premises
in the Building (herein referred to as the "New Premises") provided that the New
Premises shall be usable for Tenant's purpose and comparable to the Premises in
size; and if Tenant is already in occupancy of the Premises, then in addition
Landlord shall pay the expenses of Tenant's moving from the Premises to the New
Premises and for improving the New Premises so that they are substantially
similar to the Premises. Such move shall be made during evenings, weekends or
otherwise so as to incur the least inconvenience to Tenant. If the New Premises
are not the same size as the Premises, there shall be a proportionate adjustment
in Base Rent.
J. Transfer of Landlord's Interest. Tenant acknowledges that Landlord
has the right to transfer its interest in the Premises, the Office Section and
the Building and in this Lease, and Tenant agrees that in the event of any such
transfer and the assumption of all of Landlord's prospective obligations by the
transferee, Landlord shall automatically be released from all prospective
liability under this Lease and Tenant agrees to look solely to such transferee
for the performance of such obligations hereunder. Tenant further acknowledges
that Landlord may assign its interest in this Lease to a mortgage lender as
additional security and agrees that such an assignment shall not release
Landlord from its obligations hereunder and that Tenant shall continue to look
to Landlord for the performance of its obligations hereunder.
33
<PAGE> 38
K. Landlord's Title. Landlord's title is and always shall be paramount
to the title of Tenant. Nothing herein contained shall empower Tenant to commit
or engage in any act which can, shall or may encumber the title of Landlord.
L. Prohibition Against Recording. Neither this Lease, nor any
memorandum, affidavit or other writing with respect thereto, shall be recorded
by Tenant or by anyone acting through, under or on behalf of Tenant, and the
recording thereof in violation of this provision shall make this Lease null and
void at Landlord's election.
M. Covenants and Conditions. The captions of paragraphs and
subparagraphs are for convenience only and shall not be deemed to limit,
construe, affect or alter the meaning of such paragraphs or subparagraphs.
N. Covenants and Conditions. All of the covenants of Tenant hereunder
shall be deemed and construed to be "conditions", if Landlord so elects, as well
as "covenants" as though the words specifically expressing or importing
covenants and conditions were used in each separate instance.
O. Only Landlord/Tenant Relationship. Nothing contained in this Lease
shall be deemed or construed by the parties hereto or by any third party to
create the relationship of principal and agent, partnership, joint venturer or
any association between Landlord and Tenant, it being expressly understood and
agreed that neither the method of computation of Rent nor any act of the parties
hereto shall be deemed to create any relationship between Landlord and Tenant
other than the relationship of landlord and tenant.
P. Application of Payments. Landlord shall have the right to apply
payments received from Tenant pursuant to this Lease (regardless of Tenant's
designation of such payments) to satisfy any obligations of Tenant hereunder, in
such order and amounts as Landlord in its sole discretion may elect.
Q. Definition of Landlord. All indemnities, covenants and agreements of
Tenant contained herein which inure to the benefit of Landlord shall be
construed to also inure to the benefit of Landlord's agents and employees.
R. Time of Essence. Time is of the essence of this Lease and each of
its provisions.
S. Governing Law. Interpretation of this Lease shall be governed by the
law of the Commonwealth of Massachusetts.
T. Partial Invalidity. If any term, provision or condition contained in
this Lease shall, to any extent, be invalid or unenforceable, the remainder of
this Lease (or the application of such term, provision or condition to persons
or circumstances other than those in respect of which it is invalid or
unenforceable) shall not be affected thereby, and each and every other term,
34
<PAGE> 39
provision and condition of this Lease shall be valid and enforceable to the
fullest extent possible permitted by law.
U. Size of Premises. The size of Premises will be determined on the
basis of the standards set forth in Exhibit E attached hereto. With regard to
Base Rent, Operating Expenses, and with regard to all other payments which are
computed based upon the rentable area of the Premises, it is understood that the
amounts payable as set forth in this Lease are predicated upon assumed rentable
area set forth in this Lease. Not later than ninety (90) days after the
Commencement Date, an exact measurement of the rentable area of the Premises
shall be made in accordance with Exhibit E, and if said measurement shall
indicate rentable area different from that recited in this Lease, Landlord and
Tenant shall promptly execute a supplemental instrument adjusting the amounts
payable hereunder to conform to the exact measurements. Such adjustments shall
be made by multiplying the amount subject to adjustment by a fraction, the
numerator of which is the actual rentable area of the Premises and the
denominator of which is the rentable area of the Premises originally set forth
herein. Any payment due from either party to the other as a result of any
adjustments made hereunder shall be paid promptly upon rendition of a statement
by the party entitled to additional Rent, or Rent refund, as the case may be.
V. Payments Under Protest. Any payments to be made by either party
under this Lease which are disputed may be made under protest without a waiver
of claim by providing clear notice of such protest and adequate information as
to the basis of such claim.
34. NOTICES.
All notices to be given under this Lease shall be in writing and either
hand delivered; delivered by reputable overnight courier if sent to Germany;
delivery acknowledged by recipient; or deposited in the United States mail,
certified or registered mail with return receipt requested, postage prepaid,
addressed as follows:
A. If to Landlord:
c/o JMB Properties Urban Company
Suite 600
Four Copley Place
Boston, Massachusetts 02116
Attn: Building Manager
with copies to:
JMB Properties Urban Company
Suite 1300
900 North Michigan Avenue
Chicago, Illinois 60611-1575
Attn: Law Department
35
<PAGE> 40
B. If to Tenant:
NeuroTec International Corp.
Suite ___
Four Copley Place
Boston, Massachusetts 02116
Attn: _______________________
with copies to:
NeuroTec Hochtechnologie GMBH
Ehlesstrasse 15
D-88046
Friedrichshafen
Germany
or to such other person or such other address designated by notice sent by
Landlord or Tenant and as provided in Paragraph 30 of this Lease.
After receiving notice from any person, firm or other entity that it
holds a mortgage which includes the Building as part of the mortgaged premises,
no notice from Tenant to Landlord shall be effective unless and until a copy of
the same is given to such holder, and the curing of any of Landlord's defaults
by such holder shall be treated as performance by Landlord. Such holder shall be
given such reasonable time as may be necessary to effect such cure or to
foreclose the mortgage, as the case may be. For the purposes of Paragraph 21,
Paragraph 30, Paragraph 31 and this Paragraph 34, the term "mortgage" includes a
mortgage on a leasehold interest of Landlord (but not one on Tenant's leasehold
interest).
Notice by mail shall be deemed to have been given as of the date of
mailing as aforesaid, but for purposes of computing the period during which a
party may cure notice shall be deemed to have been given two (2) business days
after mailing. Notice by hand delivery or reputable overnight courier shall be
deemed to have been given at the time of delivery.
35. LIMITATION ON LANDLORD'S LIABILITY.
It is expressly understood and agreed by Tenant that none of Landlord's
covenants, undertakings or agreements are made or intended as personal
covenants, undertakings or agreements by Landlord or its partners, and any
liability for damage or breach or nonperformance by Landlord shall be
collectible only out of Landlord's interest in the Building and no personal
liability is assumed by, nor at any time may be asserted against, Landlord or
its partners or any of its or their directors, officers, agents, employees,
legal representatives, successors or assigns, all such liability, if any, being
expressly waived and released by Tenant. The provisions of this
36
<PAGE> 41
Paragraph 35 shall expressly be applicable to and inure to the benefit of
Landlord's successors and assigns. In no event shall Landlord or its constituent
partners be liable for any incidental or consequential damages in connection
with its obligations under, or any action taken by Landlord or its constituent
partners in connection with, this Lease.
36. LANDLORD'S DESIGNATED AGENT.
It is expressly understood and agreed by Tenant that the provisions of
this Lease may be enforced on behalf of Landlord by an agent designated by
Landlord for such purpose, and such enforcement shall be equally effective
whether in the name of Landlord or such agent.
LANDLORD:
COPLEY PLACE ASSOCIATES NOMINEE CORPORATION
By: __________________________________
Its Vice President
Hereunto duly authorized
TENANT:
NEUROTEC INTERNATIONAL CORP.
By: __________________________________
Its _________________
Hereunto duly authorized
37
<PAGE> 42
EXHIBIT "A".
PLAN OF PREMISES
4 COPLEY PLACE FLOOR PLAN
A-1
<PAGE> 43
EXHIBIT "B"
INTENTIONALLY OMITTED
B-1
<PAGE> 44
EXHIBIT C TO COPLEY PLACE OFFICE LEASE
FOR
BOSTON, MASSACHUSETTS
RULES AND REGULATIONS
RULES AND REGULATIONS. Tenant agrees to observe the rights reserved to
Landlord in the Lease and agrees, for itself, its employees, agents, clients,
customers, invitees and guests, to comply with the following rules and
regulations and with such reasonable modifications thereof and additions thereto
as Landlord may make, from time to time, for the Building.
(a) Any sign, lettering, picture, notice, or advertisement
installed within Tenant's Premises (including but not limited
to Tenant identification signs on doors to the Premises) which
is visible outside of the Premises shall be installed at
Tenant's cost and in such manner, character and style as
Landlord may approve in writing. No sign, lettering, picture,
notice or advertisement shall be placed on any outside window
or in any position so as to be visible from outside the
Building or from any atrium or lobbies of the Building.
(b) Tenant shall not use the name of the Building or use pictures
or illustrations of the Building in advertising or other
publicity, without the prior written consent of Landlord.
(c) Tenant, its customers, invitees, licensees, and guests shall
not obstruct sidewalks, entrances, passages, courts,
corridors, vestibules, halls, elevators and stairways in and
about the Building. Tenant shall not place objects against
glass partitions or doors or windows or adjacent to any open
common space which would be unsightly from the Building
corridors or from the exterior of the Building, and will
promptly remove the same upon notice from Landlord.
(d) Tenant shall not make noises, cause disturbances, create
vibrations, odors or noxious fumes or use or operate any
electrical or electronic devices or other devices that emit
sound, waves or are dangerous to other tenants and occupants
of the Building or that would interfere with the operation of
any device or equipment or radio or television broadcasting or
reception from or within the Building or elsewhere, or with
the operation of roads or highways in the vicinity of the
Building and shall not place or install any projections,
antennae, aerials or similar devices inside or outside of the
Premises.
(e) Tenant shall not make any room-to-room canvass to solicit
business from other tenants in the Building, and shall not
exhibit, sell or offer to sell, use, rent or exchange any item
or services in or from the Premises unless ordinarily embraced
within Tenant's use of the Premises as specified in its lease.
C-1
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(f) Tenant shall not waste electricity or water and agrees to
cooperate fully with Landlord to assure the most effective
operation of the Building's heating and air conditioning and
shall refrain from attempting to adjust any controls. Tenant
shall keep public corridor doors closed.
(g) Door keys for doors in the Premises will be furnished at the
commencement of the Lease by Landlord. Tenant shall not affix
additional locks on doors and shall purchase duplicate keys
only from Landlord. When the Lease is terminated, Tenant shall
return all keys to Landlord and will provide to Landlord the
means of opening any safes, cabinets or vaults left in the
Premises.
(h) Tenant assumes full responsibility for protecting its space
from theft, robbery and pilferage, which includes keeping
doors locked and other means of entry to the Premises closed
and secured.
(i) Peddlers, solicitors and beggars shall be reported to the
office of the Building or as Landlord otherwise requests.
(j) Tenant shall not install nor operate machinery or any
mechanical devices of a nature not directly related to
Tenant's ordinary use of the Premises without the written
permission of Landlord.
(k) No person or contractor not employed by Landlord shall be used
to perform window washing, cleaning, decorating, repair or
other work in the Premises.
(l) Tenant shall not, and Tenant shall not permit or suffer anyone
to:
(1) Cook in the Premises;
(2) Place vending or dispensing machines of any kind in
or about the Premises;
(3) At any time sell, purchase or give away, or permit
the sale, purchase or gift of, food in any form;
(m) Tenant shall not:
(1) Use the Premises for lodging, manufacturing or for
any immoral or illegal purposes.
(2) Use the Premises to engage in the manufacture or sale
of, or permit the use of, any spirituous, fermented,
intoxicating or alcoholic beverages on the Premises.
C-2
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(3) Use the Premises to engage in the manufacture or sale
of, or permit the use of, any illegal drugs on the
Premises.
(n) In no event shall any person bring into the Building
inflammables such as gasoline, kerosene, naphtha and benzene,
or explosives or firearms or any other article of
intrinsically dangerous nature. If by reason of the failure of
Tenant to comply with the provisions of this paragraph, any
insurance premium payable by Landlord for all or any part of
the Building shall at any time be increased above normal
insurance premiums for insurance not covering the items
aforesaid, Landlord shall have the option to either terminate
the Lease or to require Tenant to make immediate payment for
the whole of the increased insurance premium.
(o) Tenant shall comply with all applicable federal, state and
municipal laws, ordinances and regulations and building rules,
and shall not directly or indirectly make any use of the
Premises which may be prohibited thereby or which shall be
dangerous to person or property or shall increase the cost of
insurance or require additional insurance coverage.
(p) If Tenant desires signal, communication, alarm or other
utility or service connection installed or changed, the same
shall be made at the expense of Tenant, with approval and
under direction of Landlord.
(q) Bicycles shall not be permitted in the Building in other than
Landlord designated locations.
(r) Tenant shall cooperate and participate in all security
programs affecting the Building.
(s) In the event Landlord allows one or more tenants in the
Building to do any act prohibited herein, Landlord shall not
be precluded from denying any other tenant the right to do any
such act.
(t) Tenant, or the employees, agents, servants, visitors or
licensees of Tenant shall not at any time place, leave or
discard any rubbish, paper, articles, or objects of any kind
whatsoever outside the doors of the Premises or in the
corridors or passageways of the Building. No animals or birds
shall be brought or kept in or about the Building.
(u) Landlord shall have the right to prohibit any advertising by
Tenant which, in Landlord's opinion, tends to impair the
reputation of the Building or its desirability for offices,
and, upon written notice from Landlord, Tenant will refrain
from or discontinue such advertising.
C-3
<PAGE> 47
(v) Tenant shall not mark, paint, drill into, or in any way deface
any part of the Building or the Premises. No boring, driving
of nails or screws, cutting or stringing of wires shall be
permitted, except with the prior written consent of Landlord,
and as Landlord may direct. Tenant shall not install any
resilient tile or similar floor covering in the Premises
except with the prior approval of Landlord. The use of cement
or other similar adhesive material is expressly prohibited.
(w) Landlord shall have the right to limit or control the number
and format of listings on the main Building directory.
(x) Tenant may move in to the Premises only during non-business
hours and shall coordinate with Landlord and Landlord's
Management Company for proper move-in procedures.
C-4
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EXHIBIT D
COPLEY PLACE
CLEANING SPECIFICATIONS
- --------------------------------------------------------------------------------
I. CLEANING - TENANT'S AREAS
A. NIGHTLY - MONDAY THRU FRIDAY HOLIDAYS EXCLUDED
- --------------------------------------------------------------------------------
1. DUST MOP, ALL STONE, CERAMIC, TILE, TERRAZZO, AND OTHER TYPES OF
UNWAXED FLOORING, USING A TREATED MOP.
2. DUST MOP ALL VINYL, ASBESTOS, ASPHALT, RUBBER AND SIMILAR TYPES OF
FLOORING, USING A TREATED MOP. THIS INCLUDES REMOVAL OF GUM AND OTHER
SIMILAR SUBSTANCES USING A SCRAPING DEVICE.
3. VACUUM ALL CARPETED AREAS.
4. DUST MOP ALL PRIVATE AND PUBLIC STAIRWAYS AND VACUUM IF CARPETED.
5. HAND DUST AND WIPE CLEAN ALL HORIZONTAL SURFACES INCLUDING FURNITURE,
FILE CABINETS, FIXTURES, AND WINDOW SILLS, USING A CHEMICALLY TREATED
DUST CLOTH. PAPERS ON DESK SHALL REMAIN UNDISTURBED.
6. DUST AND SANITIZE ALL TELEPHONES USING A DISINFECTANT SOLUTION.
7. REMOVE FINGER MARKS FROM ALL PAINTED SURFACES NEAR LIGHT SWITCHES,
ENTRANCE DOORS, ETC.
8. REMOVE ALL GUM AND FOREIGN MATTER ON SIGHT.
9. EMPTY AND CLEAN ALL WASTE RECEPTACLES AND REMOVE WASTE PAPER AND WASTE
MATERIALS TO A DESIGNATED AREA. REPLACE LINERS IN EACH RECEPTACLE.
10. DAMP DUST INTERIORS OF ALL WASTE DISPOSAL RECEPTACLES AND WASH AS
NECESSARY.
D-1
<PAGE> 49
11. CLEAN AND SANITIZE USING A DISINFECTANT SOLUTION, ALL WATER FOUNTAINS
AND WATER COOLERS. SINKS/FLOORS ADJACENT TO SINKS/FOUNTAINS TO BE
WASHED NIGHTLY.
12. SPOT MOP FLOORS FOR SPILLAGES, ETC.
13. EMPTY AND DAMP CLEAN ALL ASH TRAYS AND SCREEN ALL SAND URNS.
14. REMOVE FINGER MARKS AND DUST DOORS OF ELEVATOR HATCHWAYS.
15. CLEAN ALL LOW LEDGES, SHELVES, BOOKCASES, CHAIR RAILS, TRIM, PICTURES,
CHARTS, ETC., WITHIN REACH.
16. CLEAN SINKS, TOILETS, AND RELATED PLUMBING FIXTURES.
17. CLEAN MIRRORS, METALWORK, AND GLASS TABLE TOPS.
18. UPON COMPLETION OF WORK, ALL SLOP SINKS ARE TO BE THOROUGHLY CLEANED
AND ALL CLEANING EQUIPMENT AND SUPPLIES STORED NEATLY IN LOCATIONS
DESIGNATED BY THE OFFICE OF THE BUILDING.
19. ALL CLEANING OPERATIONS SHALL BE SCHEDULED SO THAT A MINIMUM OF LIGHTS
ARE TO BE LEFT ON AT ANY TIME. UPON COMPLETION OF CLEANING ALL LIGHTS
ARE TO BE TURNED OFF. ALL ENTRANCE DOORS ARE TO BE KEPT LOCKED DURING
THE CLEANING OPERATION.
B. WEEKLY
- --------------------------------------------------------------------------------
1. HAND DUST ALL DOOR LOUVERS AND OTHER VENTILATING LOUVERS WITHIN REACH.
2. DUST ALL BASEBOARDS.
3. MOVE AND VACUUM UNDERNEATH ALL FURNITURE THAT CAN BE MOVED.
4. IN HIGH TRAFFIC AREAS, DAMP MOP IF NECESSARY AND APPLY SPRAY BUFFING
SOLUTION IN A FINE MIST AND BUFF WITH A SYNTHETIC PAD.
5. BUFF TRAFFIC AREAS AND PIVOT POINTS.
6. DAMP MOP ALL NON-CARPETED AND PUBLIC STAIRWAYS.
D-2
<PAGE> 50
7. WIPE CLEAN ALL BRIGHT WORK.
8. CLEAN INTERIOR GLASS PARTITIONS AND DOORS.
9. DUST ALL CHAIR RAILS.
C. QUARTERLY
- --------------------------------------------------------------------------------
1. VACUUM UPHOLSTERED FURNITURE.
2. MACHINE SCRUB FLOORING.
3. WASH AND APPLY ONE COAT OF APPROVED FLOOR FINISH TO COMPOSITION
FLOORING.
4. DUST ALL VERTICAL SURFACES SUCH AS WALLS, FURNITURE, PARTITIONS, AND
SURFACES NOT REACHED IN NIGHTLY CLEANING.
5. DUST EXTERIOR OF LIGHTING FIXTURES.
6. WASH ALL BASEBOARDS.
7. STRIP ALL RESILIENT FLOORING USING DILUTED STRIPPING SOLUTION. MACHINE
SCRUB FLOOR USING PAD TO REMOVE ALL FLOOR FINISH. THOROUGHLY RINSE WITH
CLEAR WATER AND APPLY TWO COATS OF FLOOR FINISH.
- --------------------------------------------------------------------------------
II. LAVATORIES
A. NIGHTLY - MONDAY THRU FRIDAY
- --------------------------------------------------------------------------------
1. POLICE LAVATORIES DURING THE DAY WITH MATRON OR PORTER TO PICK UP WASTE
AND REPLENISH MATERIALS.
2. CLEAN, SANITIZE (USING DISINFECTANT SOLUTION), AND POLISH ALL VITREOUS
FIXTURES INCLUDING TOILET BOWLS, URINALS, AND WASH BASINS.
3. SWEEP AND WASH FLOORING WITH APPROVED GERMICIDAL SOLUTION.
D-3
<PAGE> 51
4. WASH AND POLISH MIRRORS, POWDER SHELVES, DISPENSERS, HAND DRYERS,
BRIGHT WORK, INCLUDING FLUSHOMETERS, PIPING, AND TOILET SEAT HINGES.
5. CLEAN AND SANITIZE BOTH SIDES OF TOILET SEATS.
6. EMPTY ALL CONTAINERS AND DISPOSAL UNITS AND INSERT NEW LINERS WHERE
REQUIRED.
7. WASH AND SANITIZE (USING A DISINFECTANT SOLUTION) EXTERIOR OF ALL
CONTAINERS.
8. EMPTY, CLEAN, AND SANITIZE ALL SANITARY NAPKIN DISPOSAL UNITS.
9. DUST AND SPOT WASH, WHERE NECESSARY, PARTITIONS, TILE WALLS,
DISPENSERS, CEILINGS, LIGHTS, SWITCHES AND RECEPTACLES.
10. REFILL ALL DISPENSERS TO NORMAL LIMITS INCLUDING NAPKINS, SOAP, TISSUE,
TOWELS, ETC.
11. VACUUM ENTIRE CARPETED AREAS, IF ANY.
12. REMOVE ALL RUBBISH.
B. WEEKLY
- --------------------------------------------------------------------------------
1. WET MOP ALL TILE FLOORS AND WASH BASEBOARDS.
2. MACHINE SCRUB FLOORS, HAND BRUSH CORNERS, AND HAND BRUSH TOILET EDGES
WITH APPROVED GERMICIDAL DETERGENT SOLUTION.
C. MONTHLY
- --------------------------------------------------------------------------------
1. WASH ALL PARTITIONS, TILE WALLS, AND ENAMEL SURFACES WITH APPROVED
GERMICIDAL DETERGENT SOLUTION.
D. QUARTERLY
- --------------------------------------------------------------------------------
1. DUST ALL HVAC GRILLS AND LOUVERS.
E. OTHER
D-4
<PAGE> 52
- --------------------------------------------------------------------------------
1. CLEANING OF COMPUTER ROOMS AND KITCHENS WILL BE THE RESPONSIBILITY OF
INDIVIDUAL TENANTS.
- --------------------------------------------------------------------------------
III. PUBLIC CORRIDORS, STAIRWELLS, AND SERVICE AREAS:
A. NIGHTLY
- --------------------------------------------------------------------------------
1. VACUUM AND SPOT CLEAN CARPETING.
2. SWEEP AND DAMP MOP PUBLIC AREA CONCRETE FLOORS.
3. SWEEP AND DAMP MOP PUBLIC STAIRWELLS AND LANDINGS.
4. CLEAN BASEBOARDS OF SCUFFS AND MARKS.
5. EMPTY AND CLEAN ASHTRAYS AND SAND URNS.
6. CLEAN ALL DIRECTORIES AND LOBBY SECURITY CONSOLE.
7. CLEAN CORRIDOR GLASS AND METAL WORK.
8. SPOT CLEAN WALLS, CEILINGS, LIGHTS, ETC.
9. REMOVE TRASH TO COMPACTOR.
10. CLEAN TELEPHONES, TELEPHONE BOOTH AREAS AND MAIL DROPS.
11. KEEP SLOP SINKS, CLOSETS, SUPPLY ROOMS, AND OTHER JANITORIAL AREAS IN A
CLEAN CONDITION.
12. KEEP ELECTRICAL AND TELEPHONE CLOSETS CLEAN AND FREE OF STORAGE.
13. CLEAN AND SANITIZE ALL PUBLIC DRINKING FOUNTAINS.
14. SWEEP AND WASH ALL FLOORS IN PUBLIC LOBBY.
15. CLEAN AND VACUUM CARPETING IN PASSENGER ELEVATOR CABS AND SPOT CLEAN AS
NECESSARY.
D-5
<PAGE> 53
16. DUST AND WIPE CLEAN WALLS, DOORS AND METAL WORK ON ALL PASSENGER
ELEVATORS.
17. CLEAN FLOORS AND WALLS OF SERVICE ELEVATORS.
18. CLEAN AND REMOVE ANY DEBRIS FROM CEILING FIXTURES IN PASSENGER
ELEVATORS.
19. WASH ALL LOBBY WALK OFF MATS.
B. WEEKLY
- --------------------------------------------------------------------------------
1. CLEAN ALL DOOR VENTS.
2. DUST ALL VERTICAL SURFACES WITHIN REACH.
C. MONTHLY
- --------------------------------------------------------------------------------
1. DRY SHAMPOO ALL LOBBY CARPETING.
D. QUARTERLY
- --------------------------------------------------------------------------------
1. STEAM CLEAN ALL LOBBY CARPETING.
2. VACUUM ALL CEILING GRILLS AND AIR LOUVERS.
- --------------------------------------------------------------------------------
IV. WINDOW CLEANING
- --------------------------------------------------------------------------------
1. WINDOWS WILL BE CLEANED AS NECESSARY, BUT NOT LESS THAN THE FOLLOWING
FREQUENCIES:
EXTERIOR OF EXTERIOR GLASS - NOT LESS THAN 5 TIMES/YEAR.
INTERIOR OF EXTERIOR GLASS - NOT LESS THAN 2 TIMES/YEAR.
EXTERIOR OF INTERIOR GLASS - NOT LESS THAN 1 TIMES/YEAR.
INTERIOR OF INTERIOR GLASS - NOT LESS THAN 2 TIMES/YEAR.
D-6
<PAGE> 54
EXHIBIT E
MEASUREMENT STANDARDS
I. Measurement Standards - Single Tenancy Floors. Three steps, in sequence, are
to be followed to determine the Total Rentable Area: (i) compute gross area,
(ii) deduct certain areas, and (iii) add applicable share of areas to be
apportioned (see paragraph C below).
A. Gross Area: The gross area of a floor shall be the entire area
within the exterior walls. If the exterior wall consists in
whole or part of windows, fixed clear glass or other
transparent material, the measurement along the entire such
wall shall be taken to a line established by the vertical plan
of the inside of the glass or other transparent material. If
it consists solely of a nontransparent material, the
measurement shall be taken to the inside surface of the outer
building wall. If a floor has no exterior wall within the
property line, measurements shall be taken to the property
line. If a floor has no full-height enclosure wall,
measurement shall be taken to the edge of the floor slab.
B. Deductions from Gross Area: The following non-rentable
building areas with one-half of their enclosing walls are to
be deducted.
1. Public elevator shafts and associated elevator
machine rooms.
2. Required egress stairways.
3. Areas within the gross area which are to be
apportioned pursuant to paragraph (C) below.
C. Areas to be apportioned ("Attributable Area"):
1. Common facilities including, without limitation, all
heating, ventilating, air conditioning, mechanical,
electrical, cooling tower, telephone and other
service floors, rooms or areas, containing equipment
or supplies (exclusive of any tenant special air
conditioning or mechanical area or facilities) and
all public lobbies (including monumental stair and/or
escalator), loading and other common service areas,
throughout and within the Building including one-half
of their enclosing walls, are to be apportioned.
2. Whenever the height of any room or space used for a
heating, ventilating, air conditioning, mechanical,
or electrical facility above the ground floor shall
exceed the average story height in the Building by
more than 25 percent, then the floor area of such
room or space shall be determined by multiplying the
actual floor area by the percentage that the height
of the
E-1
<PAGE> 55
room or space exceeds the average story height, and
adding the area so determined to the actual floor
area of such room or space; however, if any such
rooms or spaces penetrate the next higher floor, then
the entire area of such room or space on both floors
shall be apportioned under this paragraph (C).
II. Measurement Standards - Multiple Occupancy Floors. The sum of the Total
Rentable Area for two or more tenants on a floor shall be the Total Rentable
Area for that floor as computed in the manner for single tenancy floors. Three
steps are to be followed to determine the Total Rentable Area for each tenant on
a multiple occupancy floor: (i) compute the Net Rentable Area for such floor
pursuant to (a) below, (ii) compute the Net Rentable Area for each tenant
pursuant to (b) below, and (iii) multiply the Total Rentable Area of such floor
by a fraction whose numerator is the Net Rentable Area for such tenant and whose
denominator is the Net Rentable Area for such floor.
A. Net Rentable Area for Any Floor: The Net Rentable Area shall
be the gross area as described for single tenancy floors less
the entire core area (measured to the finished enclosing walls
thereof, but excluding any part of the core rented to a
tenant) and corridors (measured to the corridor side of the
finished enclosing walls of the corridor).
B. Net Rentable Area for Each Tenant: Exterior walls are to be
measured as described in the procedure for gross area.
Demising walls between tenants are to be equally divided.
Corridor walls to the finished corridor side are to be
included in the Net Rentable Area of each tenant.
III. Rentable Calculation. Rentable Area is determined by measuring usable area
(assuming all full floor occupants) and multiplying by 1.165.
E-2
<PAGE> 1
EXHIBIT 10.7
LEASE AMENDMENT NO. 1
THIS LEASE AMENDMENT NO. 1 is made and entered into as of the 27th day of
July, 1995 by and between COPLEY PLACE ASSOCIATES NOMINEE CORPORATION, a
Delaware nominee corporation (the "Landlord"), and NEUROTEC INTERNATIONAL CORP.,
a Delaware corporation (the "Tenant").
WITNESSETH:
WHEREAS, Landlord and Tenant have heretofore entered into a certain lease
dated as of February 6, 1995 (the "Lease"), demising a portion of the Skylobby
of Four Copley Place containing approximately 4,435 rentable square feet (the
"Premises") in Copley Place, located in Boston, Massachusetts (the "Building");
WHEREAS, the Tenant desires to expand into additional adjacent premises of
approximately Two Thousand Eight Hundred Ninety-Nine (2,899) rentable square
feet on the Skylobby level of Four Copley Place; and
WHEREAS, the parties desire to amend the Lease as hereinafter set forth.
NOW, THEREFORE, in consideration of the promises and the mutual covenants
and agreements herein contained, the receipt and sufficiency of which are hereby
acknowledged, the Landlord and Tenant hereby agree as follows:
1. Effective August 1, 1995, the Lease is amended as follows:
a. The section of Paragraph 1 of the Lease captioned "Base Rent" is hereby
deleted in its entirety and replaced with the following words and figures:
Base Rent: At the rate of One Hundred Sixty-Five Thousand Fifteen
and 00/100 Dollars ($165,015.00) per annum, in equal monthly
installments of Thirteen Thousand Seven Hundred Fifty-One and 25/100
Dollars ($13,751.25) per month (Calculated at the rate of $22.50 per
square foot at 7,334 rentable square feet of space) (See Paragraph
4).
b. The section of Paragraph 1 of the Lease captioned "Tenant's
Proportionate Share" is hereby deleted in its entirety and replaced with
the following words and figures:
Tenant's Proportionate Share: 0.91% (computed on the basis of 95%
occupancy).
<PAGE> 2
c. In the section of Paragraph 1 of the Lease captioned "Premises",
the figure "4,435" is hereby deleted and replaced with the figure
"7,334".
d. The section of Paragraph 1 of the Lease captioned "Security
Deposit" is hereby deleted in its entirety and replaced with the
following words and figures:
Security Deposit: Thirty Thousand Three Hundred Eighty-two
and 52/100 ($30,382.52).
e. The following paragraph is hereby added to the Lease as Paragraph
37:
37. CONSTRUCTION ALLOWANCE
As long as Tenant is not in default under the Lease, Landlord
shall pay to the Tenant the sum of Fourteen Thousand Four
Hundred Ninety-Five and 00/100 Dollars ($14,495.00) as the
Landlord's contribution towards additional improvements to the
Premises (the "Tenant Improvements") within five (5) days
after the last to occur of the following: (1) Tenant taking
possession of the Premises and commencing payment of Base
Rent; (2) Tenant providing Landlord with a certificate
executed by Tenant's architect and/or general contractor to
the effect that the Tenant Improvements have been
substantially completed and that Tenant has paid all amounts
due with respect to the construction of such Tenant
Improvements; and (3) Tenant providing Landlord with lien
waivers from Tenant's general contractor and each of the
subcontractors with respect to all work performed under their
respective contracts.
2. Exhibit A to the Lease is hereby deleted and replaced with Exhibit A
attached hereto.
3. Any term contained in this Lease Amendment No. 1 having an initial
capital letter and not otherwise defined herein shall have the meaning assigned
to it in the Lease.
4. Landlord and Tenant hereby acknowledge to each other that the Lease, as
amended hereby, is and remains in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have caused this document to
be executed as of the date first above written.
2
<PAGE> 3
TENANT: LANDLORD:
NEUROTEC INTERNATIONAL CORP. COPLEY PLACE ASSOCIATES
NOMINEE CORPORATION
By: /s/ Pamela A. Tomkinson By: /s/ illegible signature
------------------------ ----------------------------------
Its Vice President Its Vice President
Hereunto duly authorized Hereunto duly authorized
ATTEST:
BY:_____________________________
Its:_________________________
3
<PAGE> 4
EXHIBIT A
Floor Plan
4
<PAGE> 1
EXHIBIT 10.8
LEASE AMENDMENT NO. 2
THIS LEASE AMENDMENT NO. 2 is made and entered into as of the 27th day of
February, 1997 by and between COPLEY PLACE ASSOCIATES NOMINEE CORPORATION, a
Delaware nominee corporation (the "Landlord"), and NEUROTEC INTERNATIONAL CORP.,
a Delaware corporation (the "Tenant").
WITNESSETH:
WHEREAS, Landlord and Tenant have heretofore entered into a certain lease
dated as of February 6, 1995, demising a portion of the Skylobby of Four Copley
Place containing approximately 4,435 rentable square feet in Copley Place,
located in Boston, Massachusetts (the "Building"), which lease was amended by
Lease Amendment No. 1 dated July 27, 1995 increasing the premises demised by the
lease by approximately 2,899 rentable square feet on the Skylobby level of Four
Copley Place effective August 1, 1995 (the lease dated February 6, 1995 as so
amended being herein referred to as the "Lease");
WHEREAS, the termination date of the Lease is January 31, 1998; and
WHEREAS, the Tenant desires to extend the Term of the Lease for an
additional three (3) years and the Landlord is willing to amend the Lease to so
extend the term on the further terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the promises and the mutual covenants
and agreements herein contained, the receipt and sufficiency of which are hereby
acknowledged, the Landlord and Tenant hereby agree as follows:
1. The Lease is amended so that the termination date shall be January 31,
2001, unless sooner terminated as provided in the Lease.
2. Effective February 1, 1998, the subheading "Base Rent" under Paragraph
1. Basic Data of the Lease shall be deleted and there shall be inserted in lieu
thereof the following:
Base Rent: At the rate of Two Hundred Five Thousand Three Hundred
Fifty-Two and 00/100 Dollars ($205,352.00) per annum, in equal
monthly installments of Seventeen Thousand One Hundred Twelve and
67/100 Dollars ($17,112.67) per month (calculated at the rate of
$28.00 per square foot at 7,334 rentable square feet of space) (See
Paragraph 4).
3. Landlord and Tenant hereby acknowledge to each other that the Lease, as
amended hereby, is and remains in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have caused this document to be
executed as of the date first above written.
<PAGE> 2
EXHIBIT 10.8
TENANT: LANDLORD:
NEUROTEC INTERNATIONAL CORP. COPLEY PLACE ASSOCIATES
NOMINEE CORPORATION
By: /s/ Pamela A. Tomkinson By: Overseas Management, Inc.
------------------------------ a Delaware Corporation, Agent
Its: CEO
-----------------------------
Hereunto duly authorized
By:/s/ Paul Grant
----------------------------
Paul Grant
Its:
---------------------------
ATTEST:
By: /s/ Robert E. Pantano
----------------------------
Its: Controller
----------------------------
<PAGE> 1
EXHIBIT 10.9
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
OFFICE OF SPONSORED PROGRAMS
CONSORTIUM AGREEMENT between the MASSACHUSETTS INSTITUTE OF TECHNOLOGY,
hereinafter referred to as "MIT" and NEUROTEC INTERNATIONAL CORP., hereinafter
referred to as "the Member."
WHEREAS, MIT and the Member have a mutual interest in the advancement of
technology and wish to interact in a program of research ranging from
fundamental to concentrated or focused research; and
WHEREAS, MIT and the Member view such interactions as conducive to the
ultimate aims of technology transfer; and
WHEREAS, the program contemplated by this agreement will further the
instructional and research objectives of MIT in a manner consistent with its
status as a non-profit, tax-exempt, educational institution.
NOW, THEREFORE, the parties hereto agree as follows:
1. STATEMENT OF WORK. MIT agrees to use its best efforts to conduct the
research projects collectively known as the "Things That Think (TTT)
Consortium" as outlined in the Prospectus dated July 1, 1995, which is
attached as Exhibit 1.
2. THE TTT CONSORTIUM. (a) The TTT Consortium is an international
association of corporate members from Europe, the Americas and the Far
East.
(b) The purpose of the TTT Consortium is to address the future of
computation as it is increasingly imbedded in things other than computers.
Many scientific, engineering, design-oriented, and human oriented problems
revolve around the notion of putting sophisticated computing and
communication into everyday artifacts. The critical work required to do
this can be cast into two broad categories: substrate technologies and
application testbeds.
Three levels of substrate technologies are seen:
- SENSING THINGS: materials and devices to enable formerly
passive objects to detect, manipulate, transmit, and
deliver information about their environment.
- THINKING LINKS: hardware and software protocols to permit
these things to communicate among themselves and with
distributed information servers and consumers.
- UNDERSTANDING THINGS: the high-level tools required to make
these objects aware of and sensitive to human intentions
and emotions.
<PAGE> 2
The application area includes of course the "things" themselves, and
involves all aspects of making and using them: developing new design and
fabrication methods, exploring the ways they interact with each other and
with people, and understanding their role in a broader sociological
context. We plan to cross our 3 substrate research areas -- Sensing
Things, Thinking Links, Understanding Things -- with 4 testbeds, each
testbed representing an ongoing or nascent effort in the MIT Media
Laboratory which offers a plausible context for testing, evaluating,
proving out concepts and prototypes. These application testbeds are:
- Expressive Tools
- Thinking Toys
- The "Universal Remote"
- Making Things
(c) Each of the corporate members will execute two copies of this standard
consortium agreement with MIT. All of these agreements will be similar,
except for the membership fees (see Article 8) and payment schedules.
(d) A decision by a new Media Lab Sponsor to join the TTT Consortium as a
Charter Member requires advising MIT in writing on or before 5:00 PM EDT,
Monday, July 31, 1995.
(e) After 5:00 PM EDT, Monday, July 31, 1995, new members, up to an
initial membership level of forty (40), may join the TTT Consortium up to
October 10, 1995, subject to the following considerations. MIT will
formally notify the then current members of the identity of any
prospective member, whereupon any current member has up fifteen (15)
business days to register any objection to the admission of the
prospective member. While, ordinarily, objection by any current member
will be sufficient cause not to admit any prospective member, the final
decision to admit or not will rest with the Consortium Chairman.
(f) Within the first six months of the Consortium, new memberships will be
retroactive to the start date of the Consortium and new members may be
required to pay a late entry premium, with the amount of such premium to
be determined by the Consortium Chairman.
(g) At the discretion of the Consortium Chairman:
(i) Any current member of the Media Lab's Media Technology Group
(MTG) may convert their current MTG Agreement to a regular
five-year TTT Consortium Agreement.
(ii) Any current member of the Media Lab's Special Fund Group
may opt to re-direct a fraction (amounting to at least
$100,000/year) to the TTT
2
<PAGE> 3
Consortium and become a Consortium Member for the balance of
the period of their current contract. Such members who wish to
continue in TTT must negotiate a renewal no less than one year
before the expiration of their current agreement and/or in
accordance with the renewal schedule in Article 10.
(iii) Any current Directed Research Sponsor of the Consortium's
co-principal investigators may opt to re-direct at least
$100,000/year of their support to the TTT Consortium and
become a Consortium Member for the balance of the period of
their current contract. Such members who wish to continue in
TTT must negotiate a renewal no less than one year before the
expiration of their current agreement and/or in accordance
with the renewal schedule in Article 10.
Any current Media Lab sponsor who exercises the options described above,
on or before October 10, 1995, will be considered a Charter TTT Member.
(h) Each Member will designate to MIT two individuals authorized to act on
its behalf; one for contract purposes (see Article 16) and the other to
serve on the Program Committee as described in Article 3. At the Member's
discretion, one individual may serve in both capacities. The Neurotec
International Corp. designees will be:
For Contract Purposes
Prof. Eberhard Schoneburg
Director, President and CEO
Neurotec International Corp.
For Program Committee
Mr. Kevin T. Cavanaugh
Manager, Research and Development
Neurotec International Corp.
3. PROGRAM COMMITTEE. (a) The Program Committee will include one
representative designated by each member company. Serving on and chairing
the Program Committee will be the Consortium Chairman, Nicholas P.
Negroponte. Also serving on the Program Committee will be the three
Co-Principal Investigators -- Professors Neil A. Gershenfeld, Michael J.
Hawley and Tod Machover -- and the Program Manager, Dr. Richard A. Bolt.
(b) The Program Committee will establish guidelines for reviewing and
approving research plans. The Program Committee will review all proposed
research plans submitted through the Consortium Chairman and will select
for funding those research projects of greatest interest.
3
<PAGE> 4
(c) The progress of each selected research project in this program will be
reviewed for the Program Committee at regular two-day meetings held twice
a year and conducted by the Consortium Chairman.
4. RESEARCH PLANS. (a) The day-to-day research agenda of the TTT Program will
be determined by the collective vision of the Consortium members, matched
against the Media Laboratory's ability to innovate in the areas
encompassed by that vision. Operationally, this will involve the regular
review of research plans by the Program Committee pursuant to Article 3
above and the authorization and funding of selected research projects.
(b) All research plans will be submitted through the Consortium Chairman,
who will present them to the Program Committee in accordance with the
guidelines established by the Committee.
(c) Research plans may be proposed by any of the Consortium members in
which case the Consortium Chairman and the Principal Investigators will
attempt to identify interested Media Laboratory researchers. Research
plans may also be proposed to the Consortium Chairman by any of the Media
Laboratory investigators.
5. SUPERVISION. (a) Each selected research project will be supervised by
designated key MIT personnel under the overall coordination of the
Consortium Chairman and the Co-Principal Investigators. Direct project
supervision will be furnished by the Co-Principal Investigators as well
as an ensemble of Associate Principal Investigators initially comprised
of: Mr. Walter Bender; Professors Justine Cassell, Hiroshi Ishii,
Marvin Minsky, Seymour Papert, Rosalind Picard, Alex Pentland and
Mitchel Resnick.
(b) Nothing herein contained shall be deemed to create a joint venture or
partnership between the parties hereto. Each party hereto shall conduct
its efforts pursuant to this Agreement as an independent contractor and
not as an agent or employee of the other party. Subject to the provisions
of Articles 3 and 4, MIT shall have complete and sole control over the
direction of each research project authorized under this agreement.
6. VISITING PRIVILEGES. Sponsors who join the TTT Consortium will have the
opportunity to participate in the Media Laboratory's well-developed
procedures for collaboration and technology transfer between academia and
industry. These include one or two major intentional symposia each year,
visits between Lab researchers and the sponsor companies, and joint
development projects.
Two TTT Consortia Program meetings are planned each year at MIT. In
addition, each participating company will be entitled to a one-day visit
annually to the Laboratory for a special company day designed in
consultation with that company, and addressed to that particular company's
interests and needs.
7. PERIOD OF PARTICIPATION. The Member's membership in the Consortium shall
be for the five year period beginning October 10, 1995 through October 9,
2000 and shall
4
<PAGE> 5
be subject to renewal only by mutual agreement of the parties in
accordance with Article 10.
8. MEMBERSHIP FEES. The Member, as its share of the Consortium expenses, will
pay to MIT each year during the five year term the sum of $125,000 as a
Media Laboratory Consortia Member, Directed Research sponsor with lab-wide
intellectual property rights.
The funds will be used by MIT for the direct and indirect costs of the
Consortium program.
The intellectual property rights referred to in this Article are described
in Attachment A, "Intellectual Property Rights of Media Laboratory
Sponsors" effective November 30, 1988, Revised January 1, 1993 with notes
as of October 1, 1993.
9. PAYMENT. Payments, in U.S. dollars net of taxes or impost of any kind,
shall be made to MIT by the Member, quarterly, in advance following
receipt of invoices submitted by MIT with the first payment due upon
execution and the next payment due on or before January 10, 1996.
10. RENEWALS. TTT is expected to continue for at least the next ten years and
the Members participation in the Consortium may be renewed for a
subsequent five-year term with an annual renewal cost based on the date of
renewal. Early renewals will be encouraged by lower annual membership
rates for earlier renewals.
<TABLE>
<CAPTION>
Renewal Cost per Year Renewal Cost per Year
Renewal by Date -- for 5 year Affiliate for 5 year Member
(after x years membership) Extension (2000 to 2005) Extension (2000 to 2005)
-------------------------- ------------------------ ------------------------
<S> <C> <C>
by October 10, 1998-- (after 3 years) $100,000/year $125,000/year
by October 10, 1999-- (after 4 years) $125,000/year $150,000/year
by October 10, 2000 -- (after 5 years) $150,000/year $175,000/year
</TABLE>
11. TERMINATION. The Member may elect not to continue participation in this
Consortium upon written notice to MIT of one year prior to the date of
intended withdrawal. MIT may terminate the program upon written notice to
the Members if conditions preclude continuation of the program and in such
case uncommitted fees shall be returned to the Member on a pro rata basis.
12. PUBLICATIONS. MIT will be free to publish the results of research under
this Agreement.
13. COPYRIGHTS. Title to and the right to determine disposition of all
copyrightable works first developed under this Agreement shall remain
with MIT, provided, however, that MIT shall grant to the Member an
irrevocable, royalty-free, non-transferable, non-exclusive right and
license to use, reproduce, display, distribute and perform all such
copyrightable materials published by MIT except that this right and
license shall not
5
<PAGE> 6
apply to computer software and its programming documentation developed
under the research program, which are covered in Article 14.
14. PATENTS AND COMPUTER SOFTWARE. MIT shall grant to the Member
royalty-free rights to any intellectual property developed under the
TTT Consortium -- specifically those rights defined for a "Consortia
Member or "Consortia Affiliate" in "Intellectual Property Rights of
Media Laboratory Sponsors" (Attachment A). In addition, depending on
their class of membership, they will receive rights to all other
intellectual property at the Media Laboratory under the terms defined
for that class of membership.
15. USE OF NAMES. Neither party will use the name or trademarks of the other
in any advertising or other form of publicity without the written
permission of the other; in the case of MIT, that of the Director of the
News Office.
16. NOTICES. Any notices required to be given or which shall be given under
this Agreement shall be in writing delivered by first class mail (air mail
if not domestic), addressed to the parties as follows:
<TABLE>
<CAPTION>
MASSACHUSETTS INSTITUTE NEUROTEC INTERNATIONAL
OF TECHNOLOGY CORP.
<S> <C>
Ms. Julie Norris Prof. Eberhard Schoneberg
Director, Office of Sponsored Programs Director, President and CEO
Massachusetts Institute of Technology Neurotec International Corp.
77 Massachusetts Avenue Four Copley Place, Sky Lobby, Suite 102
Cambridge, MA 02139 Boston, MA 02116
Phone # 617-253-2492 Phone # 617-266-5542
Fax #617-253-4734 Fax # 617-266-5779
</TABLE>
In the event notices, statements and payments required under this
Agreement are sent by certified or registered mail by one party to the
other party at its above address, such notices shall be deemed to have
been given as of the date so mailed. In the event such notices are not
given by certified or registered mail, they shall be deemed to have been
given as of the date received.
17. ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit
of the parties hereto and the successors to substantially the entire
business and assets of the respective parties hereto. This Agreement shall
not be assignable by either party without the prior written consent of the
other party; any attempted assignment is void.
6
<PAGE> 7
18. GOVERNING LAW. The validity and interpretation of this Agreement and the
legal relations of the parties to it shall be governed by the laws of the
Commonwealth of Massachusetts and the United States.
19. GOVERNING LANGUAGE. In the event that a translation of this Agreement is
prepared and signed by the parties for the convenience of the Member, this
English language version shall be the official version and shall govern if
there is conflict between the two.
20. EXPORT CONTROLS. It is understood that MIT is subject to United States
laws and regulations controlling the export of technical data, computer
software, laboratory prototypes and other commodities (including the
Arms Export Control Act, as amended, and the Export Administration Act
of 1979), and that its obligations hereunder are contingent on
compliance with applicable U.S. export laws and regulations. The
transfer of certain technical data and commodities may require a
license from the cognizant agency of the United States Government
and/or written assurances by the Member that the Member will not
re-export data or commodities to certain foreign countries without
prior approval of the cognizant government agency. While MIT agrees to
cooperate in securing any license which the cognizant agency deems
necessary in connection with this Agreement, MIT cannot guarantee that
such licenses will be granted.
21. FORCE MAJEURE. MIT shall not be responsible to the Member for failure
to perform any of the obligations imposed by this Agreement, where such
failure shall be occasioned by fire, flood, explosion, lightning,
windstorm, earthquake, subsidence of soil, failure or destruction, in
whole or in part, of machinery or equipment or failure of supply of
materials, discontinuity in the supply of power, governmental
interference, civil commotion, riot, war, strikes, labor disturbance,
transportation difficulties, labor shortage or any cause beyond the
reasonable control of MIT.
22. ENTIRE AGREEMENT. Unless otherwise specified, this Agreement embodies
the entire understanding between MIT and the Member for this project,
and any prior or contemporaneous representations, either oral or
written, are hereby superseded. No amendments or changes to this
Agreement, including, without limitation, changes in the statement of
work, total estimated cost, and period of performance, shall be
effective unless made in writing and signed by authorized
representatives of the parties.
7
<PAGE> 8
MASSACHUSETTS INSTITUTE NEUROTEC INTERNATIONAL CORP.
OF TECHNOLOGY
By: /s/ Philip J. Keohan By: /s/ Eberhard Schoneburg
------------------------- ----------------------------
Philip J. Keohan Prof. Eberhard Schoneburg
Title: Comptroller, Financial Operations Title: Director, President and CEO
Date: August 18, 1995 Date: October 1, 1995
8
<PAGE> 1
EXHIBIT 10.11
FORM OF
REGULATION S SUBSCRIPTION AGREEMENT
ARTIFICIAL LIFE, INC.
Voting and Non-Voting
Common Stock
Artificial Life, Inc.
Four Copley Place, Suite 102
Boston, MA 02116
USA
Gentlemen:
This Regulation S Subscription Agreement is made by and between
Artificial Life, Inc., a Delaware corporation (the "Company") (or, if
applicable, Eberhard Schoneburg, the Company's President and Chief Executive
Officer and Chairman of its Board of Directors (the "Chairman")), and the
undersigned prospective purchaser (the "Investor"), who is subscribing hereby to
purchase shares of either Voting or Non-Voting Common Stock, $.01 par value per
share, of the Company. The Voting Shares and the Non-Voting shares are sometimes
collectively referred to herein as the "Shares." The terms governing the
Investor's subscription for the Shares are set forth herein and in the
Confidential Business Plan of Artificial Life, Inc. and the accompanying
Offering Supplement (collectively, the "Offering Materials") distributed to a
limited number of selected persons resident and physically located outside the
United States in connection with the offering of the Shares, a copy of which has
been received by the Investor. Each Investor's subscription for Shares is being
made in reliance upon the provisions of Regulation S ("Regulation S"), as
promulgated under the Securities Act of 1933, as amended (the "Securities Act").
In addition, the sales of Voting Shares from the Chairman, the Company and the
Chairman are completing this transaction as a private re-sale. The terms of the
offering and the Shares are more fully described in the Offering Materials.
In consideration of the Company's (or, if applicable, the Chairman's)
agreement to sell Shares to the undersigned upon the terms and conditions set
forth in the Offering Materials, the Investor agrees and represents as follows:
A. SUBSCRIPTION
1. Subject to the terms of this Subscription Agreement, the Investor
hereby irrevocably subscribes for and agrees to purchase Shares, the number and
type (Voting or Non-Voting) of which is indicated on the signature page hereto
(the "Subscription"). Simultaneously with the delivery of the combined signature
page to this Subscription Agreement, the Stockholders Agreement and the
Questionnaire referred to below, (the "Combined Signature Page"), the Investor
shall deliver to the Company the appropriate completed questionnaire (the
"Questionnaire").
<PAGE> 2
2. The Investor hereby acknowledges receipt of a copy of the Offering
Materials and hereby specifically accepts and adopts each and every term of the
offering stated therein and agrees to be bound thereby upon (a) the execution
and delivery by the Investor to the Company of the Combined Signature page to
this Subscription Agreement, the Stockholders Agreement and the appropriate
completed Questionnaire and (b) acceptance by the Company of the Investor's
Subscription.
B. REPRESENTATIONS, WARRANTIES AND COVENANTS
The Investor hereby represents and warrants to, and agrees with the
Company, as follows:
(1) The Investor understands that the Shares are being offered
and sold to it in reliance on specified exemptions from the registration
requirements of the United States federal and state securities laws and that the
Company (and the Chairman) is relying upon the truth and accuracy of, and the
Investor's compliance with, the representations, warranties, agreements,
acknowledgements and understandings set forth herein in order to determine the
availability of such exemptions and the eligibility of the Investor to acquire
the Shares. The Investor understands that the Shares have not been registered
under the Securities Act and are being offered and sold pursuant to an exemption
from registration contained in the Securities Act, based in part upon the
representations of Investor contained herein.
(2) The Investor is purchasing the Shares for its own account
or for an account with respect to which it exercises sole investment discretion.
The investor or the holder of such account is a purchaser that is not a "US
person" (as that term is defined in Rule 902(o) of Regulation S) and at the time
of receipt of the Offering Materials and execution of this Subscription
Agreement it was located outside the United States for purposes of Regulation S.
The re-sale of the Shares has not been pre-arranged with any buyer located in
the United States. The Investor is not a "Distributor" as that term is defined
in Rule 902(c) of Regulation S.
(3) The Shares have not been and will not be registered under
the Securities Act and may not be offered or sold in the United States or to, or
for the account or benefit of, US persons, except as permitted below.
(4) The Investor will not offer, resell, pledge or otherwise
transfer Shares except (a) in an offshore transaction in accordance with Rule
903 or 904 of Regulation S or (b) pursuant to an exemption from registration
under the Securities Act, in each case in accordance with any applicable
securities laws of any state of the United States or any other jurisdiction.
(5) The Investor covenants that neither it nor any affiliate
nor any other person or entity acting on its or their behalf has the intention
of entering or will enter until the first anniversary of the date of its
purchase of the Shares any put option, short position or similar instrument or
position with respect to the Shares, or use the Shares at any time to settle any
put option, short position, or other similar instrument or position entered into
prior to execution of this Agreement.
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(6) Neither the Investor nor any person or entity acting on
the Investor's behalf has conducted or will conduct any "directed selling
efforts" as that term is defined in Rule 902(b) of Regulation S or has conducted
or will conduct any general solicitation relating to the offer and sale of the
Shares. The Investor knows of no public solicitation or advertisement of an
offer in connection with the issuance and sale of the Shares.
(7) The Investor has been furnished with, and has carefully
read, the Offering Materials, this Subscription Agreement, the Stockholders
Agreement and any documents that have been made available to the Investor upon
request (to the extent the Investor deemed necessary or appropriate). The
Investor is familiar with the business and operations of the Company and
understands and has evaluated the merits and risks of a purchase of the Shares.
The Investor has been given ample opportunity to ask of and receive answers from
Company officials concerning the terms and conditions of the offering and to
obtain additional information necessary to verify the accuracy of the
information contained in the Offering Materials, as amended, and the Company and
the Chairman have made available to the Investor all documents and information
that the Investor has requested relating to an investment in the Shares. The
Investor has not received or been furnished with any information, statement or
representation, oral or written, which varies in any material way from the
information presented and the statements made in the Offering Materials. The
Investor has carefully considered and has, to the extent the Investor believes
such discussion necessary, discussed with the Investor's professional, legal,
tax, accounting and financial advisors the suitability of an investment in the
Shares and has determined that the Shares being subscribed for by the Investor
are a suitable investment for the Investor.
(8) The Investor recognizes that an investment in the Company
involves substantial risk. The Investor has read and understands all of the risk
factors related to the purchase of the Shares including, but not limited to,
those set forth under the caption "Risk Factors" in the Offering Materials.
(9) The Investor: (i) has a pre-existing personal or business
relationship with the Company or any of its officers, directors or controlling
persons or (ii) by reason of the Investor's business or financial experience or
the business or financial experience of the Investor's professional advisors who
are unaffiliated with and who are not compensated by the Company, directly or
indirectly, can be reasonably assumed to have the capacity to protect the
Investor's interests in connection with the investment in the Shares.
(10) The Investor or the Investor's purchaser representative,
as the case may be, has such knowledge and experience in financial, tax, and
business matters so as to enable the Investor to utilize the information made
available to the Investor in connection with the offering of the Shares to
evaluate the merits and risks of an investment in the Shares and to make an
informed investment decision with respect thereto.
(11) This Subscription Agreement has been duly authorized,
executed and delivered by the Investor and is a valid and binding obligation of
the Investor, enforceable against the Investor in accordance with its terms.
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<PAGE> 4
(12) The information presented and the statements made by the
Investor in the Questionnaire completed and delivered to the Company and the
Chairman with this Subscription, including, without limitation, the information
relating to the Investor's income and net worth, are complete and accurate as of
this date and may be relied upon by the Company and the Chairman in determining
whether to accept this Subscription.
(13) The Investor, if a corporation, partnership (general or
limited), trust or other similar entity, has not been formed, organized,
reorganized, expanded or altered for the specific purpose of acquiring the
Shares or for the purpose of investing in any Regulation S securities.
(14) The Investor shall indemnify and hold harmless the
Company, the Chairman and any officer, director, partner, employee, agent or
controlling person of the Company who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of or
arising from any actual or alleged misrepresentation or misstatement of facts or
omission to represent or state facts made by the Investor to any such party
concerning the Investor or the Investor's financial position in connection with
the offering or sale of the Shares including, without limitation, any such
misrepresentation, misstatement or omission contained in the Questionnaire
submitted by the Investor, against losses, liabilities and expenses for which
the Company or any officer, director, partner, employee, agent or controlling
person of the Company has not otherwise been reimbursed (including attorneys'
fees, judgments, fines and amounts paid in settlement) actually and reasonably
incurred by such person or entity in connection with such action, suit or
proceeding.
C. UNDERSTANDINGS
The Investor understands, acknowledges and agrees with the Company and
the Chairman as follows:
(1) The Subscription may be rejected, in whole or in part, by
the Company in its sole and absolute discretion, at any time before the closing
of the Offering, notwithstanding prior receipt by the Investor of notice of
acceptance of the Investor's Subscription.
(2) The Subscription is and shall be irrevocable by the
Investor until the closing of the sale of all shares being offered except that
the Investor shall have no obligation hereunder in the event that the
Subscription is not accepted for any reason on or prior to the final closing of
the Offering on June 30 or any extension thereof.
(3) No United States or state agency has made any finding or
determination as to the accuracy or adequacy of the Offering Materials or as to
the fairness of the terms of this offering for investment, nor any
recommendation or endorsement of the Shares.
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<PAGE> 5
(4) Except as set forth in Section D of this Subscription
Agreement, the Company is not under any obligation to register the Shares on
behalf of the Investor or to assist the Investor in complying with any exemption
from registration therefor. The Investor further acknowledges that neither the
Company nor any registrar will register any transfer of the Shares not made in
accordance with paragraph B above.
(5) All assumptions, estimates and budgets set forth in the
Offering Materials have been included therein for purposes of illustration only,
and no assurance is given that actual results will correspond with the results
contemplated by the various estimates, budgets and assumptions set forth
therein.
(6) The Investor acknowledges that the information contained
in the Offering Materials is confidential and non-public and agrees that all
such information shall be kept in confidence by the Investor and neither used by
the Investor to the Investor's personal benefit (other than in connection with
this Subscription) nor disclosed to any third party for any reason; provided,
however, that this obligation shall not apply to any such information which (a)
is part of the public knowledge or literature and readily accessible on the date
hereof; (b) becomes part of the public knowledge or literature and readily
accessible by publication (except as a result of a breach of this provision); or
(c) is received from third parties (except third parties who disclose such
information in violation of any confidentiality agreements including, without
limitation, any subscription agreement they may have entered into with the
Company).
(7) The Investor acknowledges that all certificates for the
Shares shall bear the following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT") AND THESE SECURITIES MAY NOT BE OFFERED,
SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (A) IN AN OFFSHORE TRANSACTION IN
ACCORDANCE WITH RULE 903 OR 904 OF REGULATION S UNDER THE SECURITIES ACT OR (B)
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, IN EACH
CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES OR ANY OTHER JURISDICTION.
D. REGISTRATION RIGHTS
1. As used herein, "Holder" shall refer to the Investor or the
Investor's assigns. "Restricted Securities" shall refer to the Shares.
2. (i) If the Company at any time proposes, for any reason, to register
any of its equity securities under the Securities Act (other than pursuant to a
registration statement on Forms S-8, S-4 or similar or successor forms), it
shall each such time promptly give written notice to the Holder of its intention
to do so. Within 30 days after receipt of any such notice of the Company, the
Holder may request the Company to register Restricted Securities, which request
shall specify the number of Restricted Securities intended to be sold or
disposed of by
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<PAGE> 6
such Holder and shall state the intended method of disposition of such
Restricted Securities by the prospective selling Holder. Except as hereinafter
provided, the Company shall include Restricted Securities in the registration
statement, all to the extent requisite to permit the sale or other disposition
(in accordance with the intended methods thereof, as aforesaid) by the Holder.
If such registration statement becomes effective, the Company shall keep said
registration statement current for a period of nine (9) months.
(ii) Notwithstanding the foregoing, in the event that any
registration statement under Section D(2)(i) covers, in whole or in part, an
underwritten public offering of securities of the Company and the managing
underwriter advises the Company in writing that market factors (including,
without limitation, the aggregate number of shares of Common Stock requested to
be registered, the general condition of the market, and the status of the
persons proposing to sell securities pursuant to the registration) require a
limitation of the number of shares of selling stockholders to be included in the
offering or in such registration statement, some or all of such Restricted
Securities (as required by the underwriter) shall be excluded from the
registration statement. The Holder shall not in any event be subject to
exclusion from registration on a pro rata basis greater than that applicable to
the officers and directors of the Company.
(iii) The Holder hereby agrees that, in the event Holder holds
at least five percent (5%) of the aggregate number of shares of Common Stock
deemed to be outstanding immediately before the effective date of the
registration statement for a public offering of securities of the Company
(including any convertible securities or upon the exercise of options, warrants
or other rights), and if so requested by the Company and the managing
underwriter (if any), such Holder shall agree not to sell or otherwise transfer
any Restricted Securities or other securities of the Company during the 180-day
period following the effective date of a registration statement of the Company
filed under the Securities Act; provided that all Holders holding not less than
five percent (5%) of the aggregate number of shares of Common Stock outstanding
(including any convertible securities or upon the exercise of options, warrants
or other rights) and all officers and directors of the Company enter into
similar agreements.
(iv) In connection with any Registration Statement to be filed
herein, the Company shall:
(a) Furnish to Holder such number of copies of
such registration statement and of each such amendment or supplement thereto (in
each case including all exhibits), including a preliminary prospectus, in
conformity with the requirements of the Securities Act;
(b) Use its best efforts to register or qualify
the Restricted Securities covered by such registration statement under the
securities or blue sky laws of such jurisdictions as the number of shares
initially proposed to be registered is qualified.
(c) Notify each seller of Restricted Securities
covered by such registration statement, at any time when a prospectus relating
thereto covered by such registration statement is required to be delivered under
the Securities Act of the happening of any event as a
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<PAGE> 7
result of which the Registration Statement, the prospectus or any document
incorporated therein by reference, 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 and at the request of
such seller, prepare and furnish to such seller a post-effective amendment or
supplement to the registration statement or the related prospectus or any
document incorporated therein by reference or file any other required document
so that, as thereafter delivered to the purchasers of such shares, such
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading;
(v) All expenses incurred by the Company in complying with its
obligations under Section D hereof, including, without limitation, all
registration and filing fees, fees and expenses of complying with securities and
blue sky laws (not to exceed five (5) states), printing expenses and fees and
disbursements of counsel and of independent certified public accountants of the
Company shall be paid by the Company; provided, however, that all selling
commissions and stock transfer taxes applicable to Restricted Securities covered
by the registration effected hereof, and Holder's counsel fees, shall be borne
by the Holders.
(vi) Indemnification
(a) In the event of any registration of any
Restricted Securities under the Securities Act pursuant to this Section D, the
Company shall indemnify and hold harmless the seller of such shares, each
underwriter of such shares, if any, each broker or any other person acting on
behalf of such seller and each other person, if any, who controls any of the
foregoing persons, within the meaning of the Securities Act, against any losses,
claims, damages or liabilities (including reasonable attorneys' fees), joint or
several, to which any of the foregoing persons may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
registration statement under which such Restricted Securities were registered
under the Securities Act, final prospectus contained therein, any document
incorporated by reference therein or any amendment or supplement thereto, or any
document prepared and/or furnished by the Company incident to the registration
or qualification of any Restricted Securities pursuant to Section D hereof,
provided, however, that the Company shall not be liable in any such case to the
extent that such loss, claim, damage or liability arises out of or is based upon
an untrue statement or alleged untrue statement or omission or alleged omission
of a material fact made in said registration statement, said prospectus or said
amendment or supplement or any document incident to the registration or
qualification of any Restricted Securities pursuant to Section D hereof in
reliance upon and in conformity with written information furnished to the
Company through an instrument duly executed by such seller or such underwriter
specifically for use in the preparation thereof or arises out of information
relating to any of the foregoing prior to the sale hereby as reflected in
documents, exhibits and financial statements delivered hereunder.
(b) Before Restricted Securities held by any
prospective seller shall be included in any registration pursuant to Section D,
such prospective seller and any underwriter
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<PAGE> 8
acting on its behalf shall have agreed to indemnify and hold harmless (in the
same manner and to the same extent as set forth in the preceding paragraph (a)
of this Section D(vi)) the Company, each director of the Company, each officer
of the Company who shall sign such registration statement and any person who
controls the Company within the meaning of the Securities Act, with respect to
any untrue statement or omission of a material fact from such registration
statement, any preliminary prospectus or final prospectus contained therein, or
any amendment or supplement thereto, if such untrue statement or omission of a
material fact was made in reliance upon and in conformity with written
information furnished to the Company through an instrument duly executed by such
seller or such underwriter specifically for use in the preparation of such
registration statement, final prospectus or amendment or supplement. The
foregoing shall not affect the indemnification obligation of paragraph (a) of
Section D(vi) hereof.
(c) Promptly after receipt by an indemnified
party of notice of the commencement of any actions involving a claim referred to
in Section D(vi)(a) or Section D(vi)(b) of this Section (vi), such indemnified
party will, if a claim in respect thereof is made against an indemnifying party,
give written notice to the latter of the commencement of such action. In case
any such action is brought against an indemnified party, the indemnifying party
will be entitled to participate in and to assume the defense thereof, jointly
with any other indemnified party similarly notified to the extent that it may
wish, with counsel reasonably satisfactory to such indemnified party, and after
notice from indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party shall not be responsible for
any legal or other expenses subsequently incurred by the indemnified party in
connection with the defense thereof; provided, however, that if any indemnified
party shall have reasonably concluded that there may be one or more legal
defenses available to such indemnified party which are different from or
additional to those available to the indemnifying party, or that such claim or
litigation involves or could have an effect upon matters beyond the scope of the
indemnity agreement provided in this Section D, the indemnifying party shall
reimburse such indemnified party for that portion of the fees and expenses of
counsel retained by the indemnified party which are reasonably related to the
matters covered by the indemnify agreement provided in this Section D.
(d) The failure to notify an indemnifying party
of the commencement of any such action, if materially prejudicial to the ability
of the indemnifying party to defend such action, shall relieve such indemnifying
party of any liability to the indemnified party under this Section D, but the
omission so to notify the indemnifying party will not relieve the indemnifying
party of any liability that it may have to any indemnified party otherwise than
under this Section D(vi).
The indemnifying party shall not make any settlement
of any claims indemnified against hereunder without the written consent of the
indemnified party or parties, which consent shall not be unreasonably withheld.
(e) If the indemnification otherwise provided
for in Section D(vi) is unavailable to or insufficient to hold harmless an
indemnified party under subsection D(vi)(a) or D(vi)(b) above in respect of any
losses, claims, damages or liabilities (or actions in respect
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<PAGE> 9
thereof) referred to therein, each indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative benefits received from the
offering by the Company, the holders of Restricted Securities and any
underwriter; but if such allocation is not permitted by applicable law or if the
indemnified party failed to give the notice required under Section D(vi)(c)
above, each indemnifying party shall contribute to such amount paid or payable
by such indemnified party in such proportions as are appropriate to reflect not
only such relative benefits but also relative fault of the Company, the holders
of Restricted Securities and any underwriter in connection with the statements
or omission which resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The parties agree that the relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or omission or alleged untrue statement of a material fact
relates to information supplied by the Company, the holders of Restricted
Securities or underwriter and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission;
that it would not be just and equitable if contribution pursuant to such
agreement were determined by pro rata allocation or by any other method of
allocation which does not take into account the equitable consideration referred
to above in Section D(vi)(a) that the amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions in
respect thereof), referred to above in Section D(vi)(a) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim;
that the holders of Restricted Securities shall not be required to contribute
any amount in excess of the dollar amount by which the proceeds to be received
by such holders from the sale of their respective Restricted Shares exceeds the
amount of damages such holders of Restricted Securities would have otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission, and no underwriter shall be required to contribute
any amount in excess of the amount by which the total price at which the shares
or securities underwritten by it and distributed to the public were offered to
the public exceeds the amount of any damages which such underwriter has
otherwise been required to pay by reason of any untrue or alleged untrue
statement or omission or alleged omission; and that no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
(vi) Holder Information. Each Holder shall provide the Company
or any underwriter with such documentation and information as is generally
customary to be provided by a seller of registered securities and such other
information as the Company may reasonably request.
(vii) Rule 144. Notwithstanding any other provision herein,
the provisions of this Section D shall not be applicable to the extent a Holder
may sell shares pursuant to Rule 144 promulgated under the Securities Act.
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E. MISCELLANEOUS
1. Capitalized terms used in this Subscription Agreement, if not
otherwise defined herein, shall have the respective meanings attributed to such
terms in the Offering Materials. All pronouns and any variations thereof used
herein shall be deemed to refer to the masculine, feminine, impersonal, singular
or plural as the identity of the persons or person may require.
2. Neither this Subscription Agreement nor any provision hereof shall
be waived, modified, changed, discharged, terminated, revoked or cancelled
except by an instrument in writing signed by the party against whom any waiver,
modification, change, discharge, termination, revocation or dissolution is
sought.
3. Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
or sent by registered or certified mail (or its equivalent in the Investor's
jurisdiction of residence), return receipt requested, if to the Investor, at its
address set forth in the Questionnaire submitted by the Investor; if to the
Company, at the address of the Company first above written, or to such party at
such other address furnished by notice given in accordance with this Section E.
4. Failure of the Company to exercise any right or remedy under this
Subscription Agreement or any other agreement between the Company, the Chairman
and the Investor, or otherwise, or delay by the Company in exercising such right
or remedy, will not operate as a waiver thereof.
5. The Investor and the Company agree that the Company and the Chairman
is entitled to rely upon the representations and agreements of the Investor made
herein and in the Questionnaire.
6. This Subscription Agreement shall be enforced, governed and
construed in all respects in accordance with the laws of the State of Delaware,
as such laws are applied by Delaware courts to agreements entered into and to be
performed in Delaware by and between residents of Delaware, and shall be binding
upon the Investor, the Investor's heirs, estate, legal representatives,
successors and assigns and shall inure to the benefit of the Company and the
Chairman and their successors and assigns. In the event that any provision of
this Subscription Agreement is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall be deemed inoperative to the
extent that it may conflict therewith and shall be deemed modified to conform
with such statute or rule of law. Any provision hereof which may prove invalid
or unenforceable under any law shall not affect the validity or enforceability
of any other provision hereof.
7. This Subscription Agreement constitutes the entire agreement among
the parties hereto with respect to the subject matter thereof and may be amended
only by a writing executed by all parties hereto.
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F. EXECUTION OF AGREEMENT BY POWER OF ATTORNEY
THE INVESTOR ACKNOWLEDGES THAT THE INVESTOR HAS SIGNED THIS
SUBSCRIPTION AGREEMENT ON THE INVESTOR'S OWN BEHALF, AND NOT BY POWER OF
ATTORNEY, UNLESS SUCH POWER OF ATTORNEY EXPRESSLY PROVIDES FOR THE FURTHER
DELEGATION OF SUCH POWER OF ATTORNEY BY THE HOLDER THEREOF, AND IN SUCH EVENT,
THE INVESTOR REPRESENTS THAT ATTACHED HERETO IS A TRUE AND COMPLETE COPY OF SUCH
POWER OF ATTORNEY.
G. SIGNATURE
The signature page to this Subscription Agreement is contained as part
of the applicable Subscription Materials, entitled "Signature Page to Regulation
S Subscription Agreement, Shareholders Agreement and Questionnaire," located at
the front of this Subscription Package.
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EXHIBIT 10.12
FORM OF
REGULATION S SUBSCRIPTION AGREEMENT
ARTIFICIAL LIFE, INC.
VOTING COMMON STOCK
Artificial Life, Inc.
Four Copley Place, Suite 102
Boston, MA 02116
USA
Gentlemen:
This Regulation S Subscription Agreement is made by and between
Artificial Life, Inc., a Delaware corporation (the "Company"), and the
undersigned prospective purchaser (the "Investor"), who is subscribing hereby to
purchase shares of either Voting or Non-Voting Common Stock, $.01 par value per
share, of the Company (the "Shares"). The terms governing the Investor's
subscription for the Shares are set forth herein and in the Confidential
Business Plan of Artificial Life, Inc. and the accompanying Offering Supplement
(collectively, the "Offering Materials") distributed to a limited number of
selected persons resident and physically located outside the United States in
connection with the offering of the Shares, a copy of which has been received by
the Investor. Each Investor's subscription for Shares is being made in reliance
upon the provisions of Regulation S ("Regulation S"), as promulgated under the
Securities Act of 1933, as amended (the "Securities Act"). The terms of the
offering and the Shares are more fully described in the Offering Materials.
In consideration of the Company's agreement to sell the Shares to the
undersigned upon the terms and conditions set forth in the Offering Materials,
the Investor agrees and represents as follows:
A. SUBSCRIPTION
1. Subject to the terms of this Subscription Agreement, the Investor
hereby irrevocably subscribes for and agrees to purchase Shares, the number of
which is indicated on the signature page hereto (the "Subscription").
Simultaneously with the delivery of the combined signature page to this
Subscription Agreement, the Stockholders Agreement and the Questionnaire
referred to below, (the "Combined Signature Page"), the Investor shall deliver
to Palmer & Dodge LLP, counsel to the Company, the appropriate completed
questionnaire (the "Questionnaire") and payment by wire transfer of the
subscription price for the Shares.
<PAGE> 2
The Combined Signature Page and Questionnaire should be sent to:
Palmer & Dodge LLP
One Beacon Street
Boston, MA 02108
Attention: Robert Duggan, Esq.
The purchase price for the Shares should be sent by wire transfer to:
Federal Reserve Bank (FedWire)
ABA #011000028
STATE ST BOS/CUST/BC99/CA0006
A/C Palmer & Dodge LLP
F/B/O Artificial Life, Inc.
Attn. Athena Hartwell
2. The Investor hereby acknowledges receipt of a copy of the Offering
Materials and hereby specifically accepts and adopts each and every term of the
offering stated therein and agrees to be bound thereby upon (a) the execution
and delivery by the Investor to the Company of the Combined Signature page to
this Subscription Agreement, the Stockholders Agreement and the appropriate
completed Questionnaire and (b) acceptance by the Company of the Investor's
Subscription.
B. REPRESENTATIONS, WARRANTIES AND COVENANTS
The Investor hereby represents and warrants to, and agrees with the
Company, as follows:
(1) The Investor understands that the Shares are being offered
and sold to it in reliance on specified exemptions from the
registration requirements of the United States federal and state
securities laws and that the Company (and the Chairman) is relying upon
the truth and accuracy of, and the Investor's compliance with, the
representations, warranties, agreements, acknowledgments and
understandings set forth herein in order to determine the availability
of such exemptions and the eligibility of the Investor to acquire the
Shares. The Investor understands that the Shares have not been
registered under the Securities Act and are being offered and sold
pursuant to an exemption from registration contained in the Securities
Act, based in part upon the representations of Investor contained
herein.
(2) The Investor is purchasing the Shares for its own account
or for an account with respect to which it exercises sole investment
discretion. The investor or the holder of such account is a purchaser
that is not a "US person" (as that term is defined in Rule 902(o) of
Regulation S) and at the time of receipt of the Offering Materials and
execution of this Subscription Agreement it was located outside the
United States for purposes of Regulation S. The re-sale of the Shares
has not been pre-arranged with any buyer located in the United States.
The Investor is not a "Distributor" as that term is defined in Rule
902(c) of Regulation S.
(3) The Shares have not been and will not be registered under
the Securities Act and may not be offered or sold in the United States
or to, or for the account or benefit of, US persons, except as
permitted below.
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(4) The Investor will not offer, resell, pledge or otherwise
transfer Shares except (a) in an offshore transaction in accordance
with Rule 903 or 904 of Regulation S or (b) pursuant to an exemption
from registration under the Securities Act, in each case in accordance
with any applicable securities laws of any state of the United States
or any other jurisdiction.
(5) The Investor covenants that neither it nor any affiliate
nor any other person or entity acting on its or their behalf has the
intention of entering or will enter until the first anniversary of the
date of its purchase of the Shares any put option, short position or
similar instrument or position with respect to the Shares, or use the
Shares at any time to settle any put option, short position, or other
similar instrument or position entered into prior to execution of this
Agreement.
(6) Neither the Investor nor any person or entity acting on
the Investor's behalf has conducted or will conduct any "directed
selling efforts" as that term is defined in Rule 902(b) of Regulation S
or has conducted or will conduct any general solicitation relating to
the offer and sale of the Shares. The Investor knows of no public
solicitation or advertisement of an offer in connection with the
issuance and sale of the Shares.
(7) The Investor has been furnished with, and has carefully
read, the Offering Materials, this Subscription Agreement, the
Stockholders Agreement and any documents that have been made available
to the Investor upon request (to the extent the Investor deemed
necessary or appropriate). The Investor is familiar with the business
and operations of the Company and understands and has evaluated the
merits and risks of a purchase of the Shares. The Investor has been
given ample opportunity to ask of and receive answers from Company
officials concerning the terms and conditions of the offering and to
obtain additional information necessary to verify the accuracy of the
information contained in the Offering Materials, as amended, and the
Company and the Chairman have made available to the Investor all
documents and information that the Investor has requested relating to
an investment in the Shares. The Investor has not received or been
furnished with any information, statement or representation, oral or
written, which varies in any material way from the information
presented and the statements made in the Offering Materials. The
Investor has carefully considered and has, to the extent the Investor
believes such discussion necessary, discussed with the Investor's
professional, legal, tax, accounting and financial advisors the
suitability of an investment in the Shares and has determined that the
Shares being subscribed for by the Investor are a suitable investment
for the Investor.
(8) The Investor recognizes that an investment in the Company
involves substantial risk. The Investor has read and understands all of
the risk factors related to the purchase of the Shares including, but
not limited to, those set forth under the caption "Risk Factors" in the
Offering Materials.
(9) The Investor: (i) has a pre-existing personal or business
relationship with the Company or any of its officers, directors or
controlling persons or (ii) by reason of the Investor's business or
financial experience or the business or financial experience of the
Investor's professional advisors who are unaffiliated with and who are
not compensated by the Company, directly or indirectly, can be
reasonably assumed to have the capacity to protect the Investor's
interests in connection with the investment in the Shares.
(10) The Investor or the Investor's purchaser representative,
as the case may be, has such knowledge and experience in financial,
tax, and business matters so as to enable the Investor to utilize the
information made available to the Investor in connection with the
offering of the Shares
3
<PAGE> 4
to evaluate the merits and risks of an investment in the Shares and to
make an informed investment decision with respect thereto.
(11) This Subscription Agreement has been duly authorized,
executed and delivered by the Investor and is a valid and binding
obligation of the Investor, enforceable against the Investor in
accordance with its terms.
(12) The information presented and the statements made by the
Investor in the Questionnaire completed and delivered to the Company
with this Subscription, including, without limitation, the information
relating to the Investor's income and net worth, are complete and
accurate as of this date and may be relied upon by the Company in
determining whether to accept this Subscription.
(13) The Investor, if a corporation, partnership (general or
limited), trust or other similar entity, has not been formed,
organized, reorganized, expanded or altered for the specific purpose of
acquiring the Shares or for the purpose of investing in any Regulation
S securities.
(14) The Investor shall indemnify and hold harmless the
Company, the Chairman and any officer, director, partner, employee,
agent or controlling person of the Company who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of or arising from any actual or alleged
misrepresentation or misstatement of facts or omission to represent or
state facts made by the Investor to any such party concerning the
Investor or the Investor's financial position in connection with the
offering or sale of the Shares including, without limitation, any such
misrepresentation, misstatement or omission contained in the
Questionnaire submitted by the Investor, against losses, liabilities
and expenses for which the Company or any officer, director, partner,
employee, agent or controlling person of the Company has not otherwise
been reimbursed (including attorneys' fees, judgments, fines and
amounts paid in settlement) actually and reasonably incurred by such
person or entity in connection with such action, suit or proceeding.
C. UNDERSTANDINGS
The Investor understands, acknowledges and agrees with the Company and
the Chairman as follows:
(1) The Subscription may be rejected, in whole or in part, by
the Company in its sole and absolute discretion, at any time before the
closing of the Offering, notwithstanding prior receipt by the Investor
of notice of acceptance of the Investor's Subscription.
(2) The Subscription is and shall be irrevocable by the
Investor until the closing of the sale of all shares being offered
except that the Investor shall have no obligation hereunder in the
event that the Subscription is not accepted for any reason on or prior
to the final closing of the Offering on June 30 or any extension
thereof.
(3) No United States or state agency has made any finding or
determination as to the accuracy or adequacy of the Offering Materials
or as to the fairness of the terms of this offering for investment, nor
any recommendation or endorsement of the Shares.
(4) Except as set forth in Section D of this Subscription
Agreement, the Company is not under any obligation to register the
Shares on behalf of the Investor or to assist the Investor in
4
<PAGE> 5
complying with any exemption from registration therefor. The Investor
further acknowledges that neither the Company nor any registrar will
register any transfer of the Shares not made in accordance with
paragraph B above.
(5) All assumptions, estimates and budgets set forth in the
Offering Materials have been included therein for purposes of
illustration only, and no assurance is given that actual results will
correspond with the results contemplated by the various estimates,
budgets and assumptions set forth therein.
(6) The Investor acknowledges that the information contained
in the Offering Materials is confidential and non-public and agrees
that all such information shall be kept in confidence by the Investor
and neither used by the Investor to the Investor's personal benefit
(other than in connection with this Subscription) nor disclosed to any
third party for any reason; provided, however, that this obligation
shall not apply to any such information which (a) is part of the public
knowledge or literature and readily accessible on the date hereof; (b)
becomes part of the public knowledge or literature and readily
accessible by publication (except as a result of a breach of this
provision); or (c) is received from third parties (except third parties
who disclose such information in violation of any confidentiality
agreements including, without limitation, any subscription agreement
they may have entered into with the Company).
(7) The Investor acknowledges that all certificates for the
Shares shall bear the following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT") AND THESE SECURITIES MAY NOT BE
OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (A) IN AN
OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR 904 OF REGULATION S
UNDER THE SECURITIES ACT OR (B) PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH
ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY
OTHER JURISDICTION.
D. REGISTRATION RIGHTS
1. As used herein, "Holder" shall refer to the Investor or the
Investor's assigns. "Restricted Securities" shall refer to the Shares.
2. (i) If the Company at any time proposes, for any reason, to register
any of its equity securities under the Securities Act (other than pursuant to a
registration statement on Forms S-8, S-4 or similar or successor forms), it
shall each such time promptly give written notice to the Holder of its intention
to do so. Within 30 days after receipt of any such notice of the Company, the
Holder may request the Company to register Restricted Securities, which request
shall specify the number of Restricted Securities intended to be sold or
disposed of by such Holder and shall state the intended method of disposition of
such Restricted Securities by the prospective selling Holder; provided, however,
that the number of Shares to be registered by all prospective selling Holders
shall, in accordance with the LOI (as defined in the Offering Materials) and any
underwriting agreement entered into thereunder, not exceed 200,000 shares in the
aggregate or 20% of such Holder's Shares in any instance. Such right is subject
in its entirety to the terms of the LOI and any underwriting agreement and is
granted to the Holder on the condition that such Holder agrees to sign an
agreement not to dispose of any such Shares in any way for a period of six
months after the effective date of such registration statement and the remainder
of their Shares
5
<PAGE> 6
for a period of one year after the effective date, or such longer period as may
be required by Nasdaq as a condition for listing. Except as hereinafter
provided, the Company shall include Restricted Securities in the registration
statement, all to the extent requisite to permit the sale or other disposition
(in accordance with the intended methods thereof, as aforesaid) by the Holder.
If such registration statement becomes effective, the Company shall keep said
registration statement current for a period of nine (9) months.
(ii) Notwithstanding the foregoing, in the event that any
registration statement under Section D(2)(i) covers, in whole or in part, an
underwritten public offering of securities of the Company and the managing
underwriter advises the Company in writing that market factors (including,
without limitation, the aggregate number of shares of Common Stock requested to
be registered, the general condition of the market, and the status of the
persons proposing to sell securities pursuant to the registration) require a
limitation of the number of shares of selling stockholders to be included in the
offering or in such registration statement, some or all of such Restricted
Securities (as required by the underwriter) shall be excluded from the
registration statement.
(iii) The Holder hereby agrees that, in the event Holder holds
at least five percent (5%) of the aggregate number of shares of Common Stock
deemed to be outstanding immediately before the effective date of the
registration statement for a public offering of securities of the Company
(including any convertible securities or upon the exercise of options, warrants
or other rights), and if so requested by the Company and the managing
underwriter (if any), such Holder shall agree not to sell or otherwise transfer
any Restricted Securities or other securities of the Company during the 180-day
period following the effective date of a registration statement of the Company
filed under the Securities Act; provided that all Holders holding not less than
five percent (5%) of the aggregate number of shares of Common Stock outstanding
(including any convertible securities or upon the exercise of options, warrants
or other rights) and all officers and directors of the Company enter into
similar agreements.
(iv) In connection with any Registration Statement to be filed
herein, the Company shall:
(a) Furnish to Holder such number of copies of
such registration statement and of each such amendment or supplement thereto (in
each case including all exhibits), including a preliminary prospectus, in
conformity with the requirements of the Securities Act;
(b) Use its best efforts to register or qualify
the Restricted Securities covered by such registration statement under the
securities or blue sky laws of such jurisdictions as the number of shares
initially proposed to be registered is qualified.
(c) Notify each seller of Restricted
Securities covered by such registration statement, at any time when a prospectus
relating thereto covered by such registration statement is required to be
delivered under the Securities Act of the happening of any event as a result of
which the Registration Statement, the prospectus or any document incorporated
therein by reference, 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 and at the request of such seller, prepare and
furnish to such seller a post-effective amendment or supplement to the
registration statement or the related prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of such shares, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading;
(v) All expenses incurred by the Company in complying with its
obligations under Section D hereof, including, without limitation, all
registration and filing fees, fees and expenses of
6
<PAGE> 7
complying with securities and blue sky laws (not to exceed five (5) states),
printing expenses and fees and disbursements of counsel and of independent
certified public accountants of the Company shall be paid by the Company;
provided, however, that all selling commissions and stock transfer taxes
applicable to Restricted Securities covered by the registration effected hereof,
and Holder's counsel fees, shall be borne by the Holders.
(vi) Indemnification
(a) In the event of any registration of any
Restricted Securities under the Securities Act pursuant to this Section D, the
Company shall indemnify and hold harmless the seller of such shares, each
underwriter of such shares, if any, each broker or any other person acting on
behalf of such seller and each other person, if any, who controls any of the
foregoing persons, within the meaning of the Securities Act, against any losses,
claims, damages or liabilities (including reasonable attorneys' fees), joint or
several, to which any of the foregoing persons may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
registration statement under which such Restricted Securities were registered
under the Securities Act, final prospectus contained therein, any document
incorporated by reference therein or any amendment or supplement thereto, or any
document prepared and/or furnished by the Company incident to the registration
or qualification of any Restricted Securities pursuant to Section D hereof,
provided, however, that the Company shall not be liable in any such case to the
extent that such loss, claim, damage or liability arises out of or is based upon
an untrue statement or alleged untrue statement or omission or alleged omission
of a material fact made in said registration statement, said prospectus or said
amendment or supplement or any document incident to the registration or
qualification of any Restricted Securities pursuant to Section D hereof in
reliance upon and in conformity with written information furnished to the
Company through an instrument duly executed by such seller or such underwriter
specifically for use in the preparation thereof or arises out of information
relating to any of the foregoing prior to the sale hereby as reflected in
documents, exhibits and financial statements delivered hereunder.
(b) Before Restricted Securities held by any
prospective seller shall be included in any registration pursuant to Section D,
such prospective seller and any underwriter acting on its behalf shall have
agreed to indemnify and hold harmless (in the same manner and to the same extent
as set forth in the preceding paragraph (a) of this Section D(vi)) the Company,
each director of the Company, each officer of the Company who shall sign such
registration statement and any person who controls the Company within the
meaning of the Securities Act, with respect to any untrue statement or omission
of a material fact from such registration statement, any preliminary prospectus
or final prospectus contained therein, or any amendment or supplement thereto,
if such untrue statement or omission of a material fact was made in reliance
upon and in conformity with written information furnished to the Company through
an instrument duly executed by such seller or such underwriter specifically for
use in the preparation of such registration statement, final prospectus or
amendment or supplement. The foregoing shall not affect the indemnification
obligation of paragraph (a) of Section D(vi) hereof.
(c) Promptly after receipt by an indemnified
party of notice of the commencement of any actions involving a claim referred to
in Section D(vi)(a) or Section D(vi)(b) of this Section (vi), such indemnified
party will, if a claim in respect thereof is made against an indemnifying party,
give written notice to the latter of the commencement of such action. In case
any such action is brought against an indemnified party, the indemnifying party
will be entitled to participate in and to assume the defense thereof, jointly
with any other indemnified party similarly notified to the extent that it may
wish, with counsel reasonably satisfactory to such indemnified party, and after
notice from indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party shall not be
7
<PAGE> 8
responsible for any legal or other expenses subsequently incurred by the
indemnified party in connection with the defense thereof; provided, however,
that if any indemnified party shall have reasonably concluded that there may be
one or more legal defenses available to such indemnified party which are
different from or additional to those available to the indemnifying party, or
that such claim or litigation involves or could have an effect upon matters
beyond the scope of the indemnity agreement provided in this Section D, the
indemnifying party shall reimburse such indemnified party for that portion of
the fees and expenses of counsel retained by the indemnified party which are
reasonably related to the matters covered by the indemnify agreement provided in
this Section D.
(d) The failure to notify an indemnifying
party of the commencement of any such action, if materially prejudicial to the
ability of the indemnifying party to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
D, but the omission so to notify the indemnifying party will not relieve the
indemnifying party of any liability that it may have to any indemnified party
otherwise than under this Section D(vi).
The indemnifying party shall not make any settlement
of any claims indemnified against hereunder without the written consent of the
indemnified party or parties, which consent shall not be unreasonably withheld.
(e) If the indemnification otherwise provided
for in Section D(vi) is unavailable to or insufficient to hold harmless an
indemnified party under subsection D(vi)(a) or D(vi)(b) above in respect of any
losses, claims, damages or liabilities (or actions in respect thereof) referred
to therein, each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is appropriate
to reflect the relative benefits received from the offering by the Company, the
holders of Restricted Securities and any underwriter; but if such allocation is
not permitted by applicable law or if the indemnified party failed to give the
notice required under Section D(vi)(c) above, each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportions as are appropriate to reflect not only such relative benefits but
also relative fault of the Company, the holders of Restricted Securities and any
underwriter in connection with the statements or omission which resulted in such
losses, claims, damages or liabilities (or actions in respect thereof), as well
as any other relevant equitable considerations. The parties agree that the
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or omission or alleged
untrue statement of a material fact relates to information supplied by the
Company, the holders of Restricted Securities or underwriter and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission; that it would not be just and equitable if
contribution pursuant to such agreement were determined by pro rata allocation
or by any other method of allocation which does not take into account the
equitable consideration referred to above in Section D(vi)(a) that the amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions in respect thereof), referred to above in
Section D(vi)(a) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim; that the holders of Restricted Securities
shall not be required to contribute any amount in excess of the dollar amount by
which the proceeds to be received by such holders from the sale of their
respective Restricted Shares exceeds the amount of damages such holders of
Restricted Securities would have otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission, and no
underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the shares or securities underwritten by it
and distributed to the public were offered to the public exceeds the amount of
any damages which such underwriter has otherwise been required to pay by reason
of any untrue or alleged untrue statement or omission or alleged omission; and
that no person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities
8
<PAGE> 9
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation.
(vi) Holder Information. Each Holder shall provide the Company
or any underwriter with such documentation and information as is generally
customary to be provided by a seller of registered securities and such other
information as the Company may reasonably request.
(vii) Rule 144. Notwithstanding any other provision herein,
the provisions of this Section D shall not be applicable to the extent a Holder
may sell shares pursuant to Rule 144 promulgated under the Securities Act.
E. MISCELLANEOUS
1. Capitalized terms used in this Subscription Agreement, if not
otherwise defined herein, shall have the respective meanings attributed to such
terms in the Offering Materials. All pronouns and any variations thereof used
herein shall be deemed to refer to the masculine, feminine, impersonal, singular
or plural as the identity of the persons or person may require.
2. Neither this Subscription Agreement nor any provision hereof shall
be waived, modified, changed, discharged, terminated, revoked or cancelled
except by an instrument in writing signed by the party against whom any waiver,
modification, change, discharge, termination, revocation or dissolution is
sought.
3. Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
or sent by registered or certified mail (or its equivalent in the Investor's
jurisdiction of residence), return receipt requested, if to the Investor, at its
address set forth in the Questionnaire submitted by the Investor; if to the
Company, at the address of the Company first above written, or to such party at
such other address furnished by notice given in accordance with this Section E.
4. Failure of the Company to exercise any right or remedy under this
Subscription Agreement or any other agreement between the Company, the Chairman
of its Board of Directors (the "Chairman") and the Investor, or otherwise, or
delay by the Company in exercising such right or remedy, will not operate as a
waiver thereof.
5. The Investor and the Company agree that the Company and the Chairman
is entitled to rely upon the representations and agreements of the Investor made
herein and in the Questionnaire.
6. This Subscription Agreement shall be enforced, governed and
construed in all respects in accordance with the laws of the State of Delaware,
as such laws are applied by Delaware courts to agreements entered into and to be
performed in Delaware by and between residents of Delaware, and shall be binding
upon the Investor, the Investor's heirs, estate, legal representatives,
successors and assigns and shall inure to the benefit of the Company and the
Chairman and their successors and assigns. In the event that any provision of
this Subscription Agreement is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall be deemed inoperative to the
extent that it may conflict therewith and shall be deemed modified to conform
with such statute or rule of law. Any provision hereof which may prove invalid
or unenforceable under any law shall not affect the validity or enforceability
of any other provision hereof.
9
<PAGE> 10
7. This Subscription Agreement constitutes the entire agreement among
the parties hereto with respect to the subject matter thereof and may be amended
only by a writing executed by all parties hereto.
F. EXECUTION OF AGREEMENT BY POWER OF ATTORNEY
THE INVESTOR ACKNOWLEDGES THAT THE INVESTOR HAS SIGNED THIS
SUBSCRIPTION AGREEMENT ON THE INVESTOR'S OWN BEHALF, AND NOT BY POWER OF
ATTORNEY, UNLESS SUCH POWER OF ATTORNEY EXPRESSLY PROVIDES FOR THE FURTHER
DELEGATION OF SUCH POWER OF ATTORNEY BY THE HOLDER THEREOF, AND IN SUCH EVENT,
THE INVESTOR REPRESENTS THAT ATTACHED HERETO IS A TRUE AND COMPLETE COPY OF SUCH
POWER OF ATTORNEY.
G. SIGNATURE
The signature page to this Subscription Agreement is contained as part
of the applicable Subscription Materials, entitled "Signature Page to Regulation
S Subscription Agreement, Shareholders Agreement and Questionnaire," located at
the front of this Subscription Package.
10
<PAGE> 1
EXHIBIT 10.13
Copy No.:_______________ Name:________________________
FORM OF
AMENDMENT AND CONFIDENTIAL OFFERING SUPPLEMENT
DATED SEPTEMBER 23, 1998
ARTIFICIAL LIFE, INC.
PRIVATE OFFERING OF UP TO
1,000,000 SHARES OF VOTING COMMON STOCK
This Amendment and Confidential Offering Supplement relates to the
offering (the "Offering") of an aggregate of up to 1,000,000 shares (the
"Shares") of Voting Common Stock, par value $0.01 per share (the "Common
Stock"), of Artificial Life, Inc. (the "Company"), at a price of $5.00 per
share, and has been prepared to amend and supplement certain provisions set
forth in the Offering Materials (as defined in the Subscription Agreement
between you and the Company executed in connection with the Offering) and
related Questionnaire, as further described below. All capitalized terms used
herein and not otherwise defined shall have the meanings ascribed to them in the
applicable Offering Materials.
I. Amendments
1. The cover page of each of the Offering Supplement, the
Confidential Business Plan and the Subscription Package shall
each be amended to include the following legend at the bottom
of each such cover page:
"THE SHARES OFFERED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND
MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES OR TO U.S.
PERSONS (OTHER THAN DISTRIBUTORS) UNLESS SUCH SHARES ARE
REGISTERED UNDER THE ACT, OR AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE ACT IS AVAILABLE. IN
ADDITION, HEDGING TRANSACTIONS INVOLVING THE SHARES MAY NOT BE
CONDUCTED UNLESS IN COMPLIANCE WITH THE ACT."
2. The term "U.S. person" as used in the Questionnaire, the
Subscription Agreement and the Offering Supplement shall be
amended to have the meaning as defined in Rule 902(k) of
Regulation S under the Securities Act of 1933, as amended (the
"Act").
3. The terms "directed selling efforts" and "Distributor" as used
in the Subscription Agreement shall be amended to have the
meanings as defined in Rules 902(c) and 902(d) of Regulation S
under the Act, respectively.
<PAGE> 2
4. The legend provided under Section C(7) of the Subscription
Agreement, which every stock certificate evidencing the Shares
is to bear, shall be deleted in its entirety and replaced with
the following:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE
OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN
ACCORDANCE WITH THE PROVISIONS OF REGULATION S PROMULGATED
UNDER THE ACT, PURSUANT TO REGISTRATION UNDER THE ACT, OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE
ACT. IN ADDITION, HEDGING TRANSACTIONS INVOLVING THESE
SECURITIES MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE
ACT."
II. Supplemental Agreements
1. In addition to the terms, conditions, agreements,
representations and covenants set forth or contained in the
Offering Materials and the Questionnaire, the following
agreements are made:
a. The Investor agrees not to engage in hedging
transactions with regard to the Shares unless in
compliance with the Act.
b. The Company and the Investor agree and acknowledge
that the Company is required to refuse to register
any transfer of the Shares not made in accordance
with the provisions of Regulation S promulgated under
the Act, pursuant to registration under the Act or
pursuant to an available exemption from registration.
III. Ratification and Confirmation
1. Except as set forth above, the terms, conditions, agreements,
representations and covenants set forth or contained in the
Offering Materials and the Questionnaire are hereby ratified
and confirmed in all respects and continue in full force and
effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment and
Confidential Offering Supplement as of this ____ day of September, 1998.
ARTIFICIAL LIFE, INC.: INVESTOR:
By:___________________________ ____________________________
Prof. Eberhard Schoneburg
2
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement on Form S-1 and Prospectus
of Artificial Life, Inc. of our report dated September 10, 1998, except for
Note 2 as to which the date is September 22, 1998 and Note 8 as to which the
date is September 23, 1998, on the balance sheets of Artificial Life, Inc. as
of December 31, 1997 and 1996, and the related statements of operations,
changes in stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997 and to the use of our name and the
statements with respect to us, as appearing under the heading "Experts" in the
Prospectus.
/s/ Wolf & Company, P.C.
Wolf & Company, P.C.
Boston, Massachusetts
September 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 JUN-30-1998
<EXCHANGE-RATE> 1 1
<CASH> 22 552
<SECURITIES> 0 0
<RECEIVABLES> 273 26
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 605 846
<PP&E> 672 674
<DEPRECIATION> 340 393
<TOTAL-ASSETS> 1,085 1,270
<CURRENT-LIABILITIES> 438 437
<BONDS> 0 500
0 0
0 0
<COMMON> 70 70
<OTHER-SE> 576 263
<TOTAL-LIABILITY-AND-EQUITY> 1,085 1,270
<SALES> 0 0
<TOTAL-REVENUES> 1,770 449
<CGS> 0 0
<TOTAL-COSTS> 1,729 1,029
<OTHER-EXPENSES> 6 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5 7
<INCOME-PRETAX> 30 (586)
<INCOME-TAX> 9 (91)
<INCOME-CONTINUING> 21 (495)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 21 (495)
<EPS-PRIMARY> 0 (.07)
<EPS-DILUTED> 0 (.07)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
CONSENT
The undersigned, who has agreed to serve as a member of the Board of
Directors of Artificial Life, Inc. (the "Company") upon completion of its
initial public offering of securities, hereby grants the Company consent to use
his/her name in its Registration Statement on Form S-1 in respect of such
securities and all amendments, including post-effective amendments, to the
Registration Statement (or any other Registration Statement for the same
offering that is to be effective upon filling pursuant to Rule 462(b) under the
Securities Act of 1933).
Dated: September 28, 1998
/s/ HARTMUT BERGMAN
-----------------------------
HARTMUT BERGMANN
