<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-64619
PROSPECTUS
1,600,000 SHARES
[ARTIFICIAL LIFE LOGO]
ARTIFICIAL LIFE, INC.
COMMON STOCK
Of the 1,600,000 shares of Common Stock offered hereby, 1,400,000 shares are
being sold by Artificial Life, Inc. ("Artificial Life" or the "Company") and
200,000 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. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. The Common Stock has been
approved for listing on the Nasdaq SmallCap Market under the symbol "ALIF."
Concurrently with this Offering, the Company is registering 164,800 shares
of Common Stock for future sales by certain stockholders of the Company (the
"Registering Stockholders"). This is the maximum number of shares that the
Company is obligated to register pursuant to the Company's agreement to register
20% of the 824,000 shares of Common Stock held in the aggregate by the
Registering Stockholders. However, these shares are subject to a lock-up
agreement with New York Broker, Inc. and may not be sold, without the consent of
New York Broker, Inc., until 180 days after the date of this Prospectus. See
"Concurrent Registration" and "Underwriting."
The Company will not receive any proceeds from the sale of shares by the
Registering Stockholders. The Company is paying all costs incurred in the
registration of the shares of Common Stock being registered on behalf of the
Registering Stockholders but is paying only a portion of the costs incurred in
the registration of the shares to be sold by the Selling Stockholder.
------------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER(2)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............................... $8.50 $0.68 $7.82 $7.82
- ----------------------------------------------------------------------------------------------------------------------------
Total(3)................................ $13,600,000 $1,088,000 $10,948,000 $1,564,000
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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)
a warrant entitling the Representatives to purchase up to 160,000 shares of
Common Stock (the "Representatives' Warrant") 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 and the Selling Stockholder
estimated at $1,113,750 and $86,250, respectively ($1,027,500 and $172,500,
respectively, if the Underwriters' over-allotment option is exercised in
full).
(3) The Company and the Selling Stockholder have granted to the Underwriters a
30-day option to purchase up to 40,000 and 200,000 additional shares of
Common Stock, respectively, 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 Discounts and Commissions, Proceeds to Company
and Proceeds to Selling Stockholder will be $15,640,000, $1,251,500,
$11,260,800 and $3,128,000, respectively. See "Underwriting."
------------------------
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 December 22, 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 December 17, 1998
<PAGE> 2
OUTSIDE GATE
[Color work: The Company name Artificial Life, Inc. appears on top center of the
page, directly above a caption that reads "We give the Web a pulse!" The caption
is underscored with a pulse line.] [The face of an avatar showing its brain
appears on the left side of the page. A wire grid portion of the face merges
with a globe of the earth.]
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 uses the following as trademarks: 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), We give the Web a pulse(TM),
www.artifical-life.com(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.
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INSIDE GATEFOLD
[Color work: Artificial Life SmartBots[TM] name appears vertically on
the left edge of the gatefold.] [On the left side of the page, the
following goals and/or applications of the SmartBots[TM] are stated: Improve
Web Navigation, Personalize the Web with SmartBots[TM], Direct Marketing and
Enable E-Commerce. Integrated with the goals is a graphic of an avatar's face
with personalized features, a wire grid hand pressing a doorbell and a computer
where a wire grid hand is protruding from the screen holding a credit card.]
[To the center right of the gatefold is a circular diagram depicting that the
Company's planned products (which have not yet been released for commercial
sale) are based on a central core technology, the Alife Smart Engine[TM]. The
center of the circular diagram delineates a wire grid face emerging into a full
face.] [Beginning with the left side of the circular diagram, caption reads
"Alife SmartEngine[TM] is the core component that gives SmartBots[TM] the
ability to converse with users in natural language. The SmartEngine[TM] stores
information in "knowledge bases" that can be exchanged to provide bots with
different sets of expertise." Moving in a clockwise direction, each of the
Company's planned products is depicted by an illustrated representation and a
caption. The graphics of the first planned product Alife-SalesRep[TM] depicts
an avatar discussing the features of an automobile. The graphics of the second
planned product Alife-Personal-Tutor[TM] depicts an avatar teaching the German
language. The graphics of the third planned product
Alife-Call-Center-Agent[TM] portrays an avatar receptionist.] [On the right
side of the circular diagram is a graphic of the WebGuide[TM] 1.0 Professional
product representative] [Continuing in a clockwise direction, the graphics of
the fourth planned product Alife-Portfolio-Manager[TM] depicts an avatar on the
telephone with a ticker tape background. The graphics of the fifth planned
product Alife-Knowledge-Manager[TM] portrays an avatar in an electronic
library. The graphics of the sixth planned product Alife-Messenger[TM]
illustrates a telephone, a pager, a palm-pilot and an avatar.] [Each page of
the inside gatefold has the following disclosure: TO DATE, THE COMPANY HAS
RELEASED ONLY ONE OF ITS PRODUCTS FOR COMMERCIAL SALE. THE COMPANY EXPECTS TO
RELEASE THE REMAINDER OF ITS PRODUCTS FOR COMMERCIAL SALE IN 1999 AND 2000.
THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL SUCCEED IN COMMERCIALIZING ITS
PLANNED PRODUCTS.]
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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 Amended and 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 will function
independently and will be programmed for a particular application, customers
will be able to combine the SmartBots to create what the Company believes will
be the industry's first integrated commercial, robot-based electronic commerce
("e-commerce") solution. In addition, the Company provides software consulting
services to corporations and other entities seeking software solutions,
particularly in the field of "intelligent" software programs.
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 being 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
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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. The Company released its first
commercial product, the "Professional" version of the ALife-WebGuide, in
November 1998 and expects to release the "Enterprise" version of the
ALife-WebGuide for commercial sale in the first quarter of 1999. 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 products
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 is developing its
SmartBot products on widely available standard hardware and software platforms
such as Windows NT/95/98 and
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Internet browsers such as the Netscape Navigator/Communicator and Microsoft
Internet Explorer. The Company released the Professional version of the
ALife-WebGuide in November 1998 and intends to release the Enterprise version in
the first quarter of 1999 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 (the "Management
Buyout"). 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 support of its ALife suite of SmartBot software products. Accordingly, the
Company is in the initial phase of rolling out its software products and is
subject to certain risks inherent in launching new products. 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. The Company has only recently commenced sale 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.
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THE OFFERING
Common Stock offered by the Company... 1,400,000 shares
Common Stock offered by the Selling
Stockholder......................... 200,000 shares
Common Stock to be outstanding after
the Offering.......................... 9,270,574 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.
Nasdaq SmallCap Market symbol......... ALIF
- ---------------
(1) Excludes 755,569 shares of Common Stock reserved for issuance upon the
exercise of stock options outstanding as of December 10, 1998 at a weighted
average exercise price of $4.38 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(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------------- --------------------------------------------
YEARS ENDED PERIOD FROM PERIOD FROM PERIOD FROM NINE MONTHS
DECEMBER 31, JANUARY 1 TO JULY 4 TO JULY 4 TO ENDED
--------------- JULY 3, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997 1997 1998
------ ------ ------------- ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................ $1,217 $2,790 $1,043 $ 537 $ 366 $ 449
Income (loss) from
operations........... (618) 895 18 (128) 37 (1,284)
Net Income (loss)...... (396) 543 13 44 24 (1,304)
Net income (loss) per
share(2)............. $ (.07) $ .08 $ .00 $ .01 $ .00 $ (.19)
Shares used in
computing net income
(loss) per share(2).. 5,574 6,967 6,967 6,967 6,967 7,013
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
---------------------------
ACTUAL AS ADJUSTED(3)
------ -----------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash...................................................... $2,606 $12,561
Working capital........................................... 2,471 12,426
Total assets.............................................. 3,410 13,244
Total stockholders' equity................................ $2,559 $12,393
</TABLE>
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(1) In connection with the Management Buyout on July 4, 1997, the Company has
presented its assets at fair value as of the date of such change in control
and has presented separately operations prior to the Management Buyout
(Predecessor) and subsequent to the Management Buyout (Successor). See Note
1 of Notes to Financial Statements.
(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 the 1,400,000 shares of Common
Stock offered by the Company, after deducting the underwriting discounts and
the estimated offering expenses, at the initial public offering price of
$8.50 per share and the application of the net proceeds therefrom as set
forth in "Use of Proceeds."
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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 achievements 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
support of its ALife product suite of "intelligent" software robots (also known
as software agents). Accordingly, the Company is in the initial phase of rolling
out its software products and is subject to certain risks inherent in launching
new products. To address these risks, the Company must, among other things,
complete development of its software robot products, enter into strategic
relationships, 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 develop, market and support 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
July 3, 1997, the Company had recorded cumulative net income in predecessor
operations of $138,084 primarily through its software consulting business, a
significant majority of which business was with the Company's former parent
company and affiliates thereof and ceased shortly after the Management Buyout on
July 4, 1997. As a consequence of the Company's recent change in its primary
business focus from software consulting to the development, marketing and
support of its ALife suite of SmartBot software products, the Company expects
that an increasing percentage of its future revenues will be derived from sales
and services associated with its software robot products and that revenues from
its consulting business, as a percentage of gross revenues, will significantly
decrease over time. Accordingly, past financial results do not reflect the
results of the Company's current business activities. In the nine month period
ended September 30, 1998, the Company incurred a net loss of $1,303,983.
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 launching new
products in a new and emerging industry characterized by rapid technological
change, a number of potential market entrants and intense competition. The
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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.
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: Autonomy, Inc.; Big
Science Company; Brightware, Inc.; Broadvision, Inc.; Digital Marketing
Concepts, Inc.; Extempo, Inc.; General Magic, Inc.; GK Intelligent Systems,
Inc.; Haptek, Inc.; Intellix A/S; Kinetoscope, Inc.; Microsoft Corporation;
Netsage Corp.; Neuromedia, Inc.; Nuance, Inc.; SRA International, 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 an increasing
percentage 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
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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."
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 effect 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 only limited product liability
insurance, and such insurance may likely not be adequate to effectively protect
the Company against product liability claims and the costs and expenses
associated therewith. 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 technologies 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 develop, license or
acquire and implement 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 Robert Pantano, its Chief Financial Officer, and Klaus Kater, its Chief
Technology Officer. The Company does not maintain key man life insurance on any
of its senior management or key personnel. 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
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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 suite of
SmartBot software products and to assist customers in the installation and
support of the Company's SmartBot software products. Competition 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 affected.
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 and its President, Chief Executive Officer and Chairman are
subject to a non-competition agreement with Neurotec GmbH which prohibits them
from competing in certain internet commerce and multimedia development
activities in Europe through December 31, 1998. To the extent that the Company
is unable to pursue business opportunities in these areas that would otherwise
exist, the Company's business, prospects, financial condition and results of
operations could be materially adversely affected.
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
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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 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
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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
substantially increase 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, 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 have a material adverse effect
on 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, 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
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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 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
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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
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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000."
BROAD DISCRETION OF MANAGEMENT AS TO USE OF PROCEEDS. The Company expects
to use the net proceeds of the Offering (i) to establish strategic alliances and
joint ventures, (ii) to fund research and product development, (iii) to make
strategic acquisitions and investments, (iv) to increase its sales and marketing
capabilities, both domestically and internationally, by expanding its marketing
and promotional programs, (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. Such acquisitions or investments, if
made, will be made at the sole discretion of the Company's management and do not
require a stockholder vote. 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 estimated the allocation of the net proceeds of
the Offering for each of the aforementioned purposes based upon the current
status of its operations and anticipated business needs. It is possible,
however, that the application of such funds will differ considerably from the
estimates set forth in "Use of Proceeds" due to a number of factors, including,
the amount of future revenues, 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. 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 62.2% of the outstanding shares of
Common Stock (approximately 58.5% if the Underwriters' over-allotment option is
exercised in full). Additionally, prior to September 25, 1998, Mr. Schoneburg,
as sole director of the Company, approved certain transactions between the
Company and related entities. See "Certain Transactions." Accordingly, although
the Company intends to submit such transactions to the independent members of
the Board of Directors, Mr. Schoneburg will retain the
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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, 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) so long as
Eberhard Schoneburg directly or beneficially owns at least a majority of the
outstanding shares of capital stock then entitled to vote at an election of the
directors, members of the Board of Directors may be removed from office at any
time with or without cause by the affirmative vote of the holders of a majority
of the outstanding shares of capital stock then entitled to vote, but if at any
time Mr. Schoneburg shall cease to directly or beneficially own at least a
majority of the outstanding shares of capital stock then entitled to vote at an
election of the directors, members of the Board of Directors may be removed from
office only for cause by the affirmative vote of the holders of a majority of
the outstanding shares of capital stock then entitled to vote (a director may be
removed for cause only after a reasonable notice and opportunity to be heard by
the stockholders). 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. 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
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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 9,270,574 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 7,670,574 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, 7,457,774
shares of Common Stock and holders of options to purchase 566,072 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, 164,800 shares of Common Stock, for a period of 180 days 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. The holders of 1,287,114 shares of Common Stock
(the "Registrable Shares") are entitled to certain "piggyback" registration
rights. However, pursuant to the lockup agreements, 1,074,314 of the Registrable
Shares 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. Concurrently with this offering,
the Company is registering an aggregate of 164,800 of the Registrable Shares on
behalf of the Registering Stockholders; however, such shares may not be sold,
without the consent of New York Broker, Inc., until 180 days after the date of
this Prospectus. 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, 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."
BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS AND RELATED PARTIES. The
completion of this Offering will provide significant benefits to the current
stockholders of the Company, including certain of its directors and officers.
The Company will not receive any of the gross proceeds from the sale of shares
by the Selling Stockholder (the Company's President, Chief Executive Officer and
Chairman), which will be approximately $1.7 million (for which he paid $14,000),
based upon the initial public offering price of $8.50 per share (approximately
$3.4 million (for which he paid $28,000) if the Underwriters' over-allotment
option is exercised in full). The completion of this Offering will also create a
public market for the Common Stock and thereby is likely to substantially
increase the market value of the Common Stock held by current stockholders in
the Company over their original purchase price. Upon the closing of this
Offering, based upon the initial public offering price of $8.50 per share, the
difference between the aggregate purchase price paid by the Company's current
stockholders (excluding management and the Selling Stockholder) for their shares
and the aggregate market value of such shares will be approximately $5.0 million
and the
16
<PAGE> 18
difference between the aggregate purchase price paid or payable by the Company's
directors and officers for their shares and shares subject to options held by
them and the aggregate market value of such shares will be approximately $55.0
million.
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 was
determined by negotiation between the Company and the Representatives based upon
several factors. See "Underwriting" for a discussion of the factors 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, the 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 immediate and substantial dilution in net tangible
book value of $7.16 per share, or 84%, 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."
17
<PAGE> 19
USE OF PROCEEDS
The net proceeds from the sale of the 1,400,000 shares of Common Stock
offered by the Company, after deducting underwriting discounts and commissions
and estimated offering expenses, are estimated to be $9,834,250 ($10,233,300 if
the Underwriters' over-allotment option is exercised in full), based on the
initial public offering price of $8.50 per share. The Company will not receive
any proceeds from the sale of the 200,000 shares of Common Stock offered by the
Selling Stockholder. See "Principal and Selling Stockholders."
The Company expects to use the net proceeds of the Offering as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
USE OF PROCEEDS APPROXIMATE AMOUNT NET PROCEEDS
- --------------- ------------------ -------------
<S> <C> <C>
Joint ventures and strategic alliances..................... $2,500,000 25.4%
Research and development of ALife product line............. 2,250,000 22.9%
Marketing and sales........................................ 1,750,000 17.8%
Acquisitions and investments............................... 1,250,000 12.7%
Expansion of facilities.................................... 500,000 5.1%
Addition and expansion of hardware, software and
information systems...................................... 500,000 5.1%
Addition of personnel...................................... 250,000 2.5%
General corporate and working capital...................... 834,250 8.5%
---------- -----
Total................................................. $9,834,250 100.0%
========== =====
</TABLE>
Joint ventures and strategic alliances. The Company is presently in
discussions with two potential joint venture partners regarding the
establishment of e-commerce and Internet banking joint ventures in 1999. If the
Company were to successfully conclude agreements with each of these parties, the
Company would allocate up to $2.5 million of the proceeds of this Offering to
the purchase of minority interests in such joint ventures. To date, the parties
have not reached any understanding or agreement in connection with such joint
ventures. There can be no assurance that either proposed joint venture will be
consummated. See "Business -- Strategic Alliances and Joint Ventures."
Research and development of ALife product line. The Company expects to use
approximately $2,250,000 of the net proceeds of the Offering to fund the
continued research and development of its ALife suite of SmartBot products.
Marketing and sales. The Company expects to use approximately $1,750,000
to market and sell its SmartBot products. The Company intends to use such
proceeds to establish strategic distribution and marketing relationships and to
initiate marketing campaigns on all common media to establish recognition of the
ALife brand. See "Business -- Marketing and Sales."
Acquisitions and investments. The Company expects to use approximately
$1,250,000 of the net proceeds to acquire or invest in businesses, technologies,
services or products that are complementary to those of the Company. The Company
currently has no understandings, commitments or agreements with respect to any
such acquisitions, and there can be no assurance that such agreements will be
entered into.
Expansion of facilities. The Company is aware that it will require
additional office space due to the planned expansion of the Company, and it
expects to use approximately $500,000 of the net proceeds for lease expenses and
leasehold improvements. See "Business -- Facilities."
Addition and expansion of hardware, software and information systems. The
Company expects that it will use approximately $500,000 of the net proceeds to
fund the expansion of its hardware, software and information systems in order to
support its planned growth in personnel.
18
<PAGE> 20
Addition of personnel. The Company will need to hire additional staff to
accomplish its business development goals. Accordingly, the Company anticipates
using approximately $250,000 of the net proceeds to fund the expansion of its
employee base. See "Business -- Employees."
General corporate and working capital. The balance of approximately
$834,250 will be used by the Company for general corporate purposes, including
working capital.
The foregoing represents the Company's estimate of the allocation of the
net proceeds of the Offering based upon the present status of its current
operations and anticipated business needs. It is possible, however, that the
application of such funds will differ considerably from the estimates set forth
herein due to a number of factors, including, the amount of future revenues, 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. Accordingly, the Company may find it necessary or
advisable to reallocate some of the proceeds within the categories noted above.
Pending the aforementioned uses of the proceeds, the Company will invest the
proceeds 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."
19
<PAGE> 21
CAPITALIZATION
The following table sets forth, as of September 30, 1998, (i) the actual
capitalization of the Company, and (ii) the capitalization of the Company as
adjusted to reflect the sale of the Representatives' Warrant and the 1,400,000
shares of Common Stock offered by the Company at the initial public offering
price of $8.50 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>
SEPTEMBER 30, 1998
-------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt.............................................. $ 500.0 $ 500.0
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,
7,817,296 shares issued and outstanding actual; 30,000,000
shares authorized, 9,270,574 shares issued and outstanding
as adjusted(2)............................................ 78.2 92.7
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.................................. 4,728.6 14,548.9
Subscriptions and notes receivable from stockholders........ (988.7) (988.7)
Representatives' Warrant.................................... -- .1
Accumulated deficit......................................... (1,260.0) (1,260.0)
-------- ---------
Total long-term debt and stockholders' equity..... $3,058.6 $12,893.0
======== =========
</TABLE>
- ---------------
(1) Also gives effect to (i) the conversion of all Non-Voting Common Stock into
shares of Common Stock on a 1-for-1 basis upon consummation of the Offering
and (ii) 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.
(2) Excludes 755,569 shares of Common Stock reserved for issuance upon the
exercise of stock options outstanding as of December 10, 1998 at a weighted
average exercise price of $4.38 per share and 160,000 shares of Common Stock
reserved for issuance upon the exercise of the Representatives' Warrant.
20
<PAGE> 22
DILUTION
The net tangible book value of the Company as of September 30, 1998 was
$2,558,592 or approximately $.33 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 1,400,000 shares of Common Stock offered by the Company at the
initial public offering price of $8.50 per share after deducting underwriting
discounts and commissions and estimated offering expenses, the net tangible book
value of the Company as of September 30, 1998 would have been $12,392,942, or
$1.34 per share. This represents an immediate increase in the net tangible book
value of $1.01 per share to existing stockholders of the Company and an
immediate dilution of $7.16 (or 84%) 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 September 30, 1998:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price............................... $8.50
Net tangible book value per share at September 30, 1998... $.33
Increase per share attributable to new investors.......... 1.01
----
Net tangible book value per share after the Offering........ 1.34
-----
Dilution per share to new investors......................... $7.16
=====
</TABLE>
The following table sets forth, as of September 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 (based on the
initial public offering price of $8.50 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 84.9% $ 4,811,078 28.8% $ .61
New investors.................. 1,400,000 15.1% 11,900,000 71.2% $8.50
--------- ----- ----------- -----
Total................ 9,270,574 100.0% $16,711,078 100.0%
========= ===== =========== =====
</TABLE>
The above information excludes 755,569 shares of Common Stock reserved for
issuance upon the exercise of outstanding stock options as of December 10, 1998
at a weighted average exercise price of $4.38 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.
21
<PAGE> 23
SELECTED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following data, insofar as it relates to the years 1994 through 1997,
has been derived from Financial Statements and Notes thereto, some of which
appear elsewhere herein. The selected balance sheet data as of December 31,
1996, July 3, 1997 and December 31, 1997, and the selected statement of
operations data for the years ended December 31, 1995 and 1996 and the periods
January 1, 1997 to July 3, 1997 and July 4, 1997 to 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 September 30,
1998 and for the period July 4, 1997 to September 30, 1997 and for the nine
months ended September 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, including 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 support. As a consequence, the Company expects that
an increasing percentage of its future revenues will be derived from sales of
its software robot products and that revenues from its consulting business, as a
percentage of gross revenues, will significantly decrease over time.
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 and Recent Losses; Period to Period Comparisons; Limited Operating
History; Anticipation of Continued Losses."
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
--------------------------------------- --------------------------------------------------
PERIOD FROM PERIOD FROM PERIOD FROM NINE MONTHS
YEARS ENDED DECEMBER 31, JANUARY 1 JULY 4 JULY 4 ENDED
------------------------- TO JULY 3, TO DECEMBER 31, TO SEPTEMBER 30, SEPTEMBER 30,
1994(2) 1995 1996 1997 1997 1997 1998
------- ------ ------ ----------- --------------- ---------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Application services............. $ -- $1,217 $2,790 $ 926 $ 420 $ 366 $ 332
Other............................ -- -- -- 117 117 -- 117
------ ------ ------ ------ ------ ------ -------
Total revenues............ -- 1,217 2,790 1,043 537 366 449
------ ------ ------ ------ ------ ------ -------
Operating expenses:
Selling, general and
administrative................. 22 967 1,101 634 415 226 1,076
Engineering...................... -- 828 656 307 205 81 309
Research and development......... -- -- -- -- -- -- 274
Depreciation and amortization.... -- 40 138 84 45 22 74
------ ------ ------ ------ ------ ------ -------
Total operating
expenses................ 22 1,835 1,895 1,025 665 329 1,733
------ ------ ------ ------ ------ ------ -------
Income (loss) from
operations.............. (22) (618) 895 18 (128) 37 (1,284)
Other income(expense).............. -- (35) (15) -- 179 (11) (20)
------ ------ ------ ------ ------ ------ -------
Income (loss) before
tax..................... (22) (653) 880 18 51 26 (1,304)
Provision (benefit) for income
taxes............................ -- (257) 337 5 7 2 --
------ ------ ------ ------ ------ ------ -------
Net income (loss)......... $ (22) $ (396) $ 543 $ 13 $ 44 $ 24 $(1,304)
====== ====== ====== ====== ====== ====== =======
Net income (loss) per share(3)..... $ (.02) $ (.07) $ .08 $ .00 $ .01 $ .00 $ (.19)
Shares used in computing net income
(loss) per share(3).............. 1,393 5,574 6,967 6,967 6,967 6,967 7,013
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------------------------------------- ------------------------------------------
AS OF DECEMBER 31, AS OF JULY 3, AS OF SEPTEMBER 30, 1998
------------------------- ------------- AS OF DECEMBER -------------------------
1994(2) 1995 1996 1997 31, 1997 ACTUAL AS ADJUSTED(4)
------- ------ ------ ------------- -------------- ------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash...................... $43 $ 23 $ 30 $ 38 $ 22 $2,606 $12,561
Working capital
(deficit)............... 28 (565) 74 132 171 2,471 12,426
Total assets.............. 43 760 885 1,023 974 3,410 13,244
Long-term debt............ -- -- -- -- -- 500 500
Total stockholders'
equity.................. $28 $ 82 $625 $ 638 $540 $2,559 $12,393
</TABLE>
- ---------------
(1) In connection with the Management Buyout on July 4, 1997, the Company has
presented its assets at fair value as of such date of the change in control
and has presented separately operations prior to the Management Buyout
(Predecessor) and subsequent to the Management Buyout (Successor). See Note
1 of Notes to Financial Statements.
(2) Initial period of operations from November 15, 1994 to December 31, 1994.
(3) 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.
(4) As adjusted to give effect to the sale of the 1,400,000 shares of Common
Stock offered hereby, after deducting the underwriting discount and the
estimated offering expenses, at the initial public offering price of $8.50
per share and the application of the net proceeds therefrom. See "Use of
Proceeds."
23
<PAGE> 25
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 the "Overview" section hereof and 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.
As a result of a change in control of the Company in connection with the
Management Buyout, the Company has presented its assets and liabilities
subsequent to July 3, 1997 to reflect the purchase price paid for the stock of
the Company. This treatment is consistent with "push down" accounting as
promulgated by the Securities and Exchange Commission ("SEC"). The results of
operations for the Company for 1997 have been separately presented to reflect
the results of operations prior to the Management Buyout, as Predecessor
operations, and for the period subsequent to the Management Buyout, as Successor
operations. In Management's opinion, the purchase price of the Company's stock
in the Management Buyout reflected the fair value of the Company at such time.
The difference between the Company's net book value at July 4, 1997 and the
fair value has been recorded as a reduction of the Company's net deferred tax
asset and long-term assets, resulting in a new depreciation basis for financial
statement purposes for such assets. As of July 4, 1997, the stockholder's equity
section reflects cumulative earnings prior to the Management Buyout as paid-in
capital. As a result, retained earnings at December 31, 1997 reflects the
results of operations of the Company only from the date of the Management
Buyout.
The only difference in accounting policies utilized in the presentation of
the Successor and Predecessor financial statements is the estimated useful lives
utilized in the depreciation of property and equipment, as described in Note 2
of Notes to Financial Statements.
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 the development, marketing and support of its
ALife suite of SmartBot software products. Management's decision to shift the
primary business focus of the Company has had and will likely continue to have
an adverse effect on the Company's results of operations in the near term. The
Company expects that an increasing percentage of its future revenues will be
derived from sales and services associated with its SmartBot software products
and that revenues from its consulting business, as a percentage of gross
revenues, will significantly decrease over time. To date, the Company's major
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
24
<PAGE> 26
Company's product development, marketing and sales efforts do not result in
commercially successful products that generate significant net revenues, 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 or associated services to achieve or maintain profitability.
In addition, as a result of the Company's recent transition in its primary
business focus from software consulting to product development, marketing and
support, the Company's research and development expenditures increased to
$274,045 for the nine months ended September 30, 1998 from zero for the same
period in 1997. This increase is due to the fact that prior to 1998, all
research and development expenditures were related to consulting services for
which the Company was reimbursed by its customers and thus, such expenditures
are included in engineering expenses in the Company's financial statements
through December 31, 1997. Conversely, during 1998, due to the Company's shift
in business focus, the Company had most of its employees engaged in the research
and development of its SmartBot products.
Because the Company has shifted its primary business focus from software
consulting to product development, marketing and support, 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, the
amount of software consulting undertaken in the future, 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 and its ability to attract and retain qualified
personnel. Gross profit margins will vary from product to product and between
products and services and although the Company may have some ability to affect
its products and services mix, 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
was from the provision of software consulting services. From inception through
July 3, 1997, the preponderance of those revenues were generated by subcontracts
issued from Artificial Life's former parent company and affiliates thereof, all
of which revenues ceased shortly after the Management Buyout. 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.
During the fourth quarter of 1997, the Company began evaluating the
addition of software product development to its core business of providing
software consulting services. The Company commenced software development plans
while it continued to provide software consulting services under its existing
contracts and to seek new consulting contracts. In the first quarter of 1998,
the Company began software development activities while continuing to service
its one existing consulting contract. During this time the Company limited its
efforts in seeking new consulting contracts as it began to shift its primary
business focus to software development. During the second quarter of 1998, when
the Company's major domestic consulting contract ended, the Company focused a
substantial portion of its available resources on product development. To date,
the Company has not released any commercial versions of its SmartBot products
for sale.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO PERIOD FROM JULY 4, 1997 TO
SEPTEMBER 30, 1997
Note: The September 30, 1997 period only includes activity from July 4,
1997, approximately 3 months, as a result of the Management Buyout (see above).
Revenues: Revenues for the nine months ended September 30, 1998 were
$449,380 as compared to $365,654 for the period from July 4, 1997 to September
30, 1997. The increase of
25
<PAGE> 27
$83,726 or 22.9% is attributable to a software license sale by the Company to
its primary domestic client and to the difference in the length of the reporting
periods.
Engineering Expenses: Engineering expenses generally consist of salary and
payroll tax expenses, training, consulting, subcontracting and other expenses
incurred to develop and fulfill the engineering requirements of the products and
services from which the Company derives its revenues. Engineering expenses for
the nine months ended September 30, 1998 were $308,897 as compared to $81,228
for the period from July 4, 1997 to September 30, 1997. The increase of $227,669
or 280.3% is primarily attributable to the difference in the length of the
reporting periods and the increased activity with the Company's primary domestic
client in 1998.
Research and Development Expenses: Research and development expenses
consist of expenses similar in nature to engineering expenses except that such
expenses typically relate to new products and activities that will generate
revenue at some future date. Research and development expenses for the nine
months ended September 30, 1998 were $274,045 as compared to $0 for the period
from July 4, 1997 to September 30, 1997. This increase is directly related to
the fact that all research and development expenses for periods prior to 1998
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 expenses consist of
salary and payroll tax expenses of marketing personnel and costs relating to
marketing materials, promotional videos, advertising and public relations
activities. General and administrative expenses consist of salary and payroll
tax expenses of administrative personnel, rent, legal and accounting fees and
costs associated with employee benefits, supplies, communications and travel.
Selling, general and administrative expenses for the nine months ended September
30, 1998 were $1,076,697 as compared to $225,380 for the period from July 4,
1997 to September 30, 1997. The increase of $851,317 or 377.7% was attributable
to the difference in the length of the reporting periods and increased costs in
1998 including public relations ($61,475), amortized costs of promotional videos
($13,568) and travel and entertainment ($110,271).
Net Loss: Net loss for the nine months ended September 30, 1998 was
$1,303,983 as compared to net income of $24,377 for the period from July 4, 1997
to September 30, 1997. This decrease of $1,328,360 or 5,449.2% was directly
related to the decrease in software consulting revenues related to the Company's
transition of its primary business focus to product development, marketing and
support.
PERIOD FROM JULY 4, 1997 THROUGH DECEMBER 31, 1997 COMPARED TO PERIOD FROM
JANUARY 1, 1997 THROUGH JULY 3, 1997
Revenues: Revenues for the period from July 4, 1997 through December 31,
1997 were $537,008 as compared to $1,043,414 for the period from January 1, 1997
through July 3, 1997. The decrease of $506,406 or 48.5% is directly attributable
to the Company's discontinuing software consulting work for its former parent
after the Management Buyout.
Engineering Expenses: Engineering expenses for the period from July 4,
1997 through December 31, 1997 were $205,069 as compared to $307,198 for the
period from January 1, 1997 through July 3, 1997. The decrease of $102,129 or
33.2% resulted primarily from the Company's discontinuing software consulting
work for its former parent after the Management Buyout.
Research and Development Expenses: Research and development expenses for
the period from July 4, 1997 through December 31, 1997 and the period from
January 1, 1997 through July 3, 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 period from July 4, 1997 through December 31,
1997 were $415,072 as compared to $633,825 for the period from January 1, 1997
through July 3, 1997. The decrease of $218,753 or 34.5% is
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attributable to reduced overhead associated with the Company's reduction in
contractual consulting services after the Management Buyout.
Net Income: Net income for the period ended December 31, 1997 was $43,940
as compared to $12,669 for the period from January 1, 1997 through July 3, 1997.
The increase of $31,271 or 246.8% is attributable to the settlement income
received from the former parent and a reduction in depreciation expense as a
result of reflecting long-term assets at fair value subsequent to the Management
Buyout, offset by the reduction in consulting services revenue from the former
parent.
PERIOD FROM JANUARY 1, 1997 THROUGH JULY 3, 1997 COMPARED TO YEAR ENDED
DECEMBER 31, 1996
Note: The 1997 period includes the activity from January 1, 1997 through
July 3, 1997 only, approximately 6 months, as a result of the Management Buyout
(see above).
Revenues: Revenues for the period from January 1, 1997 through July 3,
1997 were $1,043,414 as compared to $2,789,878 for the year ended December 31,
1996. The decrease of $1,746,464 or 62.6% is attributable to the shortened
period resulting from the Management Buyout and a reduction in consulting
service contracts with the former parent partially offset by an increase in
revenues from its major domestic customer.
Engineering Expenses: Engineering expenses for the period from January 1,
1997 through July 3, 1997 were $307,198 as compared to $656,086 for the year
ended December 31, 1996. The decrease of $348,888 or 53.2% is directly
attributable to the shortened period resulting from the Management Buyout and a
reduction in consulting service contracts with the former parent.
Research and Development Expenses: Research and development expenses for
the period from January 1, 1997 through July 3, 1997 and the year ended December
31, 1996 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 period from January 1, 1997 through July 3, 1997
were $633,825 as compared to $1,101,109 for the year ended December 31, 1996.
The decrease of $467,284 or 42.4% is primarily attributable to the shortened
period resulting from the Management Buyout.
Net Income: Net income for the period from January 1, 1997 through July 3,
1997 was $12,669 as compared to $543,344 for the year ended December 31, 1996.
The decrease of $530,675 or 97.7% is attributable to the reduction in consulting
service contracts with the former parent.
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. The Company had sales to its former parent and affiliates of
$2,757,253 in 1996 compared to $1,216,716 for 1995.
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. Engineering expenses as a
percentage of revenues decreased to 23.5% in 1996 from 68.0% in 1995. This
percentage decrease was due to the fact that substantially all engineering
charges in 1995 were in the form of charges from the Company's former parent and
outside contractors which were at significantly higher rates than those
generated by the Company internally in 1996.
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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 ($60,124), additional administrative support
staff ($45,070), 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, outside charges for
engineering expenses from the Company's former parent and independent
consultants were reduced significantly in 1996 to $49,349 from $472,027 for 1995
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.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had cash and cash equivalents of
$2,606,195. From inception through July 3, 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 July 3, 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, a private placement of Non-Voting Common Stock of $181,367,
the net proceeds of which the Company received in June 1998 and a private
placement of 824,000 shares of Common Stock which raised $4,034,247 in net
proceeds. As of September 30, 1998, $895,000 was still to be received, and
therefore is reflected in the Financial Statements and summary and selected
financial information contained in this Prospectus as subscriptions receivable
from stockholders rather than as cash. Since such date, the remaining $895,000
has been received by the Company. 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, establishment of foreign
operations 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.
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
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the Company is entitled to receive an annual incentive bonus of 3% of the
Company's profits from operations. See "Management -- Executive Employment
Agreements."
In October, 1998 the Company transferred to an escrow account in
Switzerland approximately $390,000 for the establishment of its European
headquarters in Luzern, Switzerland. Also, the Company plans to establish in the
near term a research and development subsidiary in the Russian Republic for
which it will incur start-up expenses.
The Company is presently in discussions with two potential joint venture
partners regarding the establishment of e-commerce and Internet banking joint
ventures in 1999. If the Company were to successfully conclude agreements with
each of these parties, the Company would allocate up to $2.5 million of the
proceeds of this Offering to the purchase of minority interests in such joint
ventures. To date, the parties have not reached any understanding or agreement
in connection with such joint ventures. There can be no assurance that either
proposed joint venture will be consummated. See "Business -- Strategic Alliances
and Joint Ventures."
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 on
terms acceptable to the Company, if at all. See "Risk Factors-Need for
Additional Capital."
The Company has incurred interim losses through September 1998, and the
Company anticipates a loss for income tax purposes for fiscal 1998. 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, though not necessarily final, review
of its information and non-information technology systems. This initial review,
the costs of which were not material, 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 and will take additional review or remedial action if
it deems it necessary to do so. During the remainder of 1998 and 1999, 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. At this time, however, the Company does not have a
specific plan for further review, assessing third party vendor systems,
assessing the readiness of significant suppliers and customers, or taking
remedial action, nor does the Company know the amount or material nature of
expenditures it may incur in doing so. Nevertheless, the Company does not
currently expect to experience Year 2000 problems as its computer hardware is
generally no more than two years old and it has the latest version of computer
software programs.
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
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compatible technology in achieving compliance. The Company at this time does not
have specific plans for determining the Year 2000 readiness of third party
software and data.
To the extent that the Company's assessment is completed 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 any additional assessment, the Company plans to develop
during 1999 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 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
will function independently and will be programmed for a particular application,
customers will be able to combine the SmartBots to create what the Company
believes will be the industry's first integrated commercial, robot-based
electronic commerce ("e-commerce") solution. In addition, the Company provides
software consulting services to corporations and other entities seeking software
solutions, particularly in the field of "intelligent" software programs.
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 being 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.
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The Company released its first SmartBot product, the non-commercial version
of the ALife-WebGuide, in September 1998. The Company released its first
commercial product, the Professional version of the ALife-WebGuide, in November
1998 and intends to release the Enterprise version of the ALife-WebGuide for
commercial sale in the first quarter of 1999. 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 is developing 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
them 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
the Professional version 1.0 in November 1998 and intends to release the
Enterprise version 1.0 in 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.
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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 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 third 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
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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.
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.
CONSULTING AND PRODUCT 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.
Historically, the Company has derived substantially all of its revenues
from software consulting services provided to a small number of customers.
During the year ended December 31, 1997, consulting services provided to the
Company's two largest customers, Neurotec Hochtechnologie GmbH (its former
parent company) and Passkey Systems, Inc., accounted for approximately 60% and
40% of the Company's total revenues, respectively. For the year ended December
31, 1996, services provided to Neurotec Hochtechnologie GmbH accounted for
approximately 99% of the Company's total revenues. For the year ended December
31, 1995, the Company derived all of its revenues from consulting services
provided to Neurotec Hochtechnologie GmbH. All revenues derived from software
consulting services to the Company's former parent ceased shortly after the
Management Buyout. Although the Company has shifted its primary business focus
from software consulting to product development, marketing and support, 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 software solutions for companies seeking consulting expertise with
agent-based software programs. In the near term, the Company believes that a
significant percentage of its revenues may be derived from software consulting
services, although the
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Company has not entered into any contracts or arrangements for such services to
date. See "-- Strategic Alliances and Joint Ventures".
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 objective 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 its future
installed user base will present a significant 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 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
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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 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 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 AND JOINT VENTURES
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
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development. For example, the Company is currently seeking to enter into a
collaboration that will provide it with access to speech recognition software to
enable this aspect of its SmartBot products. See "Risk Factors -- Dependence on
Third Party Licensing." The closing of collaboration agreements may influence
future product development, the market direction of certain products and the
success of certain product marketing efforts.
The Company is presently in preliminary discussions with an international
retailer regarding a possible joint venture in the field of e-commerce, pursuant
to which the Company would make an initial investment for a minority interest in
the joint venture. As part of the transaction, the Company would provide
products and software consulting services to the joint venture and receive
payments therefor, and would also receive a percentage of the revenues of the
joint venture. If final specifications can be determined and definitive
agreements can be reached, activities associated with the potential joint
venture would commence in early 1999. To date, the parties have not reached an
understanding, nor have they entered into a letter of intent, memorandum of
understanding or any other agreement in connection with the joint venture.
The Company is also engaged in discussions with an international financial
institution regarding the establishment of a joint venture in the field of
Internet banking, pursuant to which the Company would make an initial
investment, with further investments to occur over a three-year period, for a
minority interest in the joint venture. As part of the transaction, the Company
would provide products and software consulting services to the joint venture and
receive payments therefor, and would also receive a percentage of the revenues
of the joint venture. To date, the parties have not reached an understanding nor
have they entered into a letter of intent, memorandum of understanding or any
other agreement in connection with the joint venture.
To date, the Company has not entered into any strategic alliance,
collaboration or joint venture, and there can be no assurance that it will be
able to do so on terms acceptable to the Company, or at all. See "-- Marketing
and Sales" and "Risk Factors -- Dependence on Third Party Licences."
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 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 December 10, 1998, there were 20 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 September 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
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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: Autonomy, Inc.; Big
Science Company; Brightware, Inc.; Broadvision, Inc.; Digital Marketing
Concepts, Inc.; Extempo, Inc.; General Magic, Inc.; GK Intelligent Systems,
Inc.; Haptek, Inc.; Intellix A/S; Kinetoscope, Inc.; Microsoft Corporation;
Netsage Corp.; Neuromedia, Inc.; Nuance, Inc.; SRA International, 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 commit operating resources to product
development and enhancement, 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, 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
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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 December 10, 1998, the Company had 28 full-time employees and two
part-time interns. Of the Company's 28 full-time employees, 8 are involved in
sales, marketing and administrative functions and 20 are involved in research
and development. 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."
The Company's employees are not represented by any labor unions. The
Company considers its relations with its employees to be good.
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 December 10, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Eberhard Schoneburg.................... 42 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......................... 38 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 Switzerland, a 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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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 systems.
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<PAGE> 47
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 programs, 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,
46
<PAGE> 48
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
47
<PAGE> 49
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, 755,569 shares
were subject to outstanding options and 418,348 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,
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.
48
<PAGE> 50
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 two stockholders for approximately $1,027,000 and contemporaneously
purchased 100% of the shares of the Company (Neurotec International Corp.) from
Neurotec GmbH for approximately $500,000. See "Note 1 of Notes to Financial
Statements."
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.
Prior to the date of the Management Buyout, Mr. Schoneburg received fixed
compensation payments of $5,000 each month with additional compensation, if any,
determined by the former parent based on the level of activities dedicated by
Mr. Schoneburg to the Company versus other subsidiaries of the former parent.
Beginning January 1, 1998, Mr. Schoneburg's salary was deferred. During the
time that his salary was deferred, the Company made net advances to Mr.
Schoneburg of approximately $273,000 for living and personal 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 a portion of the advances made to him during
the deferral period.
Prior to the time that they became directors of the Company in September
1998, Bruno Gabriel and Elmar Wohlgensinger provided consulting services to the
Company. During that time, Messrs. Gabriel and Wohlgensinger advised the Company
on strategic and logistical issues regarding the establishment of business
opportunities outside the United States. In consideration for such services, in
1998 Mr. Gabriel was paid an aggregate of $70,100 by the Company and on June 30,
1998, Messrs. Gabriel and Wohlgensinger were granted options to purchase 184,426
and 163,934 shares of Common Stock, respectively. These options are exercisable
immediately for a period of one year at an exercise price of $3.66 per share.
In September 1998, the Company raised gross proceeds of $4,120,000 by
completing a private placement of 824,000 shares of Common Stock with 23
investors at a price of $5.00 per share. Mr. Wohlgensinger, a director of the
Company, purchased 80,000 shares of Common Stock in this private placement for
an aggregate purchase price of $400,000.
Future material transactions and loans will be made or entered into on
terms that are no less favorable to the issuer than those that could be obtained
from unaffiliated third parties, and any forgiveness of loans will be approved
by a majority of the issuer's independent directors who do not have an interest
in the transaction and who have access, at the issuer's expense, to issuer's or
independent counsel.
49
<PAGE> 51
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 December 10, 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(4)............. 5,967,377 75.8% 200,000 5,767,377 62.2%
Cybermind Interactive Europe AG.... 409,836 5.2% -- 409,836 4.4%
Am Borsigturm 48
13507 Berlin
Germany
Pamela A. Tomkinson(5)............. 0 * -- 0 *
Robert Pantano(6).................. 41,442 * -- 41,442 *
Klaus Kater(6)..................... 41,442 * -- 41,442 *
Bruno Gabriel(7)................... 774,426 9.6% -- 774,426 8.2%
Elmar Wohlgensinger(8)............. 243,934 3.0% -- 243,934 2.6%
Hartmut Bergmann(9)................ 0 * -- 0 *
All current executive officers and
directors as a group (6
persons)(10)..................... 7,068,621 85.1% 200,000 6,868,621 70.8%
</TABLE>
- ---------------
* Less than 1%
(1) Shares of Common Stock that an individual or group has the right to
acquire within 60 days of December 10, 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 December 10, 1998 and 9,270,574 shares of Common Stock
outstanding after the completion of this Offering.
(4) If the Underwriters exercise the over-allotment option to purchase up to
200,000 shares from Mr. Schoneburg in full, Mr. Schoneburg will
beneficially own 5,567,377 shares of Common Stock, or 58.5% of the
outstanding Common Stock, after this Offering.
(5) Ms. Tomkinson resigned as Chief Executive Officer of the Company on
October 20, 1997.
(6) Consists solely of shares subject to stock options which are currently
exercisable.
(7) Includes 184,426 shares subject to stock options which are currently
exercisable.
(8) Includes 163,934 shares subject to stock options, which are currently
exercisable.
(9) Mr. Bergmann will become a director upon consummation of the Offering. See
"Underwriting."
(10) Includes 431,244 shares subject to stock options which are currently
exercisable.
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<PAGE> 52
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 9,270,574 shares of Common Stock and no shares of Preferred Stock
outstanding. As of December 10, 1998, there were 7,870,574 shares of Common
Stock outstanding, held of record by 35 stockholders. In addition, as of
December 10, 1998 there were outstanding options to purchase 755,569 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
51
<PAGE> 53
adjustment for stock splits, combinations or dividends and reclassifications,
exchanges or substitutions. See "Underwriting."
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 Registrable Shares have the right, without
limitation, to register up to an aggregate of 20% of such shares concurrently
with the Offering. The Company has registered 164,800 of the Registrable Shares
on behalf of the Registering Stockholders. 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 164,800 Registrable Shares being registered
concurrently herewith have entered into 180 day lock-up agreements and the
holders of 1,074,314 of the Registrable Shares have entered into one year
lock-up agreements. See "Concurrent Registration."
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 selling stockholders will be borne
by the Company.
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
52
<PAGE> 54
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. So long as Eberhard
Schoneburg, the Company's President, Chief Executive Officer and Chairman,
directly or beneficially owns at least a majority of the outstanding shares of
capital stock then entitled to vote at an election of the directors, members of
the Board of Directors may be removed from office at any time with or without
cause by the affirmative vote of the holders of a majority of the outstanding
shares of capital stock then entitled to vote. However, if at any time Mr.
Schoneburg shall cease to directly or beneficially own at least a majority of
the outstanding shares of capital stock then entitled to vote at an election of
the directors, members of the Board of Directors may be removed from office only
for cause by the affirmative vote of the holders of a majority of the
outstanding shares of capital stock then entitled to vote. A director may be
removed for cause only after a reasonable notice and opportunity to be heard by
the stockholders. These provisions are likely to increase the time required for
stockholders to change the composition 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.
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
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<PAGE> 55
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.
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<PAGE> 56
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 to 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 9,270,574
shares of Common Stock outstanding (excluding 755,569 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 7,670,574 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 5,767,377 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 92,705 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 December 10, 1998,
the Company has granted options covering 755,569 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 (as defined below), will be eligible for sale
pursuant to Rule 701.
As of December 10, 1998, the Company has also issued 26,083 shares of
Common Stock pursuant to the exercise of stock options (the "701 Shares").
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<PAGE> 57
The executive officers and directors and certain other existing
stockholders of the Company, who beneficially own in the aggregate 7,457,774
shares of Common Stock and holders of options to purchase 566,072 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 164,800 Registrable Shares (as defined below)
to be registered on behalf of the Registering Stockholders, for a period of 180
days after the date of this Prospectus.
The holders of 1,287,114 shares of Common Stock are entitled to certain
"piggyback" registration rights (the "Registrable Shares"). Registration of such
shares under the Securities Act would result in such shares becoming fully
tradeable without restriction (except for shares purchased by affiliates of the
Company) immediately upon effectiveness of such registration. However, pursuant
to the lock-up agreements, 1,074,314 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. Concurrently with the Offering, the Company is
registering an aggregate of 164,800 shares of Common Stock for sale by the
Registering Stockholders; however, such shares may not be sold, without the
consent of New York Broker, Inc., until 180 days after the date of this
Prospectus. See "Concurrent Registration."
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<PAGE> 58
CERTAIN U.S. TAX CONSEQUENCES TO GERMAN STOCKHOLDERS
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the acquisition, ownership and disposition of Common
Stock by a holder that, for U.S. federal income tax purposes, is not a "United
States person" and that, for purposes of the income tax treaty between the
United States and Germany (the "Treaty"), is a resident of Germany (a "German
Holder"). This discussion is based upon U.S. federal tax law and on the Treaty
now in effect, each of which is subject to change, possibly retroactively. For
purposes of this discussion, a "United States person" means a beneficial owner
of Common Stock that is a citizen or resident of the United States; a
corporation or partnership created or organized in the United States or under
the law of the United States or of any State or the District of Columbia (except
as may be provided otherwise by Treasury regulations); an estate whose income is
includible in gross income for U.S. federal income tax purposes regardless of
its source; or a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more U.S.
trustees have the authority to control all substantial decisions of the trust.
The Treaty provides that a person is a resident of Germany if that person is,
under the laws of Germany, liable to tax in Germany by reason of domicile,
residence, place of management, place of incorporation or any other criterion of
a similar nature, provided that a person who is liable to tax in Germany in
respect only of income from sources in Germany or capital situated therein is
not a resident of Germany, and income derived or paid by a partnership, estate
or trust is treated as the income of a resident of Germany only to the extent it
is subject to tax in Germany as the income of a resident, either in its hands or
in the hands of its partners or beneficiaries.
This discussion does not consider any specific facts or circumstances that
may apply to a particular German Holder. Each prospective investor is urged to
consult his tax adviser regarding the U.S. federal tax consequences of
acquiring, holding and disposing of Common Stock, as well as any tax
consequences that may arise under the laws of any foreign, state, local or other
taxing jurisdiction.
DIVIDENDS
Pursuant to the Treaty, a dividend paid to a German Holder generally will
be subject to withholding of U.S. federal income tax at the rate of 15% or, in
the case of a German Holder that is a company that owns at least ten percent of
the Company's voting shares, five percent, in lieu, in each case, of a 30%
statutory rate of withholding that otherwise would apply. However, if the
dividend is effectively connected with the conduct of trade or business in the
United States through a permanent establishment of the German Holder in the
United States, the dividend will be subject to the U.S. federal income tax on
net income that applies to U.S. persons generally, and if the German Holder
provides the Company with the appropriate Internal Revenue Service form, the
dividend will not be subject to withholding. In addition to the tax on net
income, in the case of a German Holder that is a corporation, the dividend will
be subject to the U.S. branch profits tax (which, in general, is imposed on a
foreign corporation on the deemed repatriation from the United States of
effectively connected earnings and profits) at the rate set forth above that
applies to the German Holder on dividends received by the German Holder.
Under current law, dividends paid to an address in a country outside the
United States are presumed to be paid to a resident of that country (unless the
payer has knowledge to the contrary) for purposes of the U.S. withholding tax
and, under the current interpretation of U.S. Treasury regulations, for purposes
of determining the applicability of a tax treaty rate. Under new U.S. Treasury
regulations that go into effect on January 1, 2001, a German Holder who wishes
to claim the benefit of the Treaty (and avoid backup withholding, as discussed
below) will be required to satisfy applicable certification and other
requirements.
GAIN ON DISPOSITION
A German Holder generally will not be subject to U.S. federal income tax on
gain recognized on a sale or other disposition of Common Stock unless (i) the
gain is effectively connected with the
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<PAGE> 59
conduct of trade or business by the German Holder within the United States
through a permanent establishment in the United States, (ii) in the case of any
German Holder who is a nonresident alien individual and holds the Common Stock
as a capital asset, the holder is present in the United States for 183 or more
days in the taxable year and certain other requirements are met or (iii) the
Company is or, within the preceding five years, was a "United States real
property holding corporation" for U.S. federal income tax purposes (in which
case the gain realized by a German Holder generally will be treated as
effectively connected with trade or business conducted in the United States and
subject to withholding, but, if the Company's stock is regularly traded within
the meaning of section 897 of the Code on an established securities market, only
in the case of a German Holder that owns or, within the preceding five years,
owned more than five percent of the Company's stock). The Company believes that
it is not currently a United States real property holding corporation. Gain
described in clause (i) or (iii) above will be subject to the U.S. federal
income tax on net income that applies to U.S. persons generally and, in the case
of a German Holder that is a corporation, to the U.S. branch profits tax. A
German Holder described in clause (ii) above will be subject to a 30% tax on the
gain derived from the sale, which may be offset by U.S. source capital losses
recognized in the same taxable year (even though the individual is not a
resident of the United States).
FEDERAL ESTATE TAX
Pursuant to the estate tax treaty between the United States and Germany,
Common Stock owned or treated as owned by an individual who is not a citizen or
domiciliary of the United States and who is a domiciliary of Germany on the date
of death will not be included in that individual's estate for U.S. federal
estate tax purposes, unless the Common Stock forms part of the business property
of a permanent establishment of that individual situated in the United States.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the Internal Revenue Service and to
each German Holder the amount of dividends paid to, and the tax withheld with
respect to, that holder. The information also may be made available to the tax
authorities of Germany.
Under current law, backup withholding generally will not apply to dividends
that are paid to a German Holder at an address outside the United States (unless
the payer has knowledge that the payee is a United States person) and that are
subject to the withholding of U.S. tax. Under new Treasury regulations that go
into effect on January 1, 2000, however, a German Holder will be subject to
backup withholding of tax, at the rate of 31% (rather than the rates of
withholding prescribed by the Treaty), unless applicable certification
requirements are met.
Payment of the proceeds of a sale of Common Stock by or through a U.S.
office of a broker is subject to both backup withholding and information
reporting unless the beneficial owner certifies under penalties of perjury that
it is not a United States person or otherwise establishes an exemption. In
general, backup withholding and information reporting will not apply to a
payment made outside the United States of the proceeds of a sale of Common Stock
by or through a foreign office of a broker. However, the U.S. information
reporting requirements (but not backup withholding) will apply to a payment of
disposition proceeds outside the United States if (i) the payment is made
through an office outside the United States of a broker that, for U.S. federal
income tax purposes, is a United States person, a controlled foreign corporation
or a foreign person that derives 50% or more of its gross income for a specified
period from the conduct of trade or business in the United States, and (ii) the
broker fails to maintain documentary evidence in its records that the beneficial
owner is not a United States person and certain other conditions are met, or
that the beneficial owner otherwise is entitled to an exemption.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against the holder's U.S. federal income tax liability
provided the required information is provided to the Internal Revenue Service.
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<PAGE> 60
UNDERWRITING
Subject to the terms and conditions set out in the underwriting agreement,
dated December 16, 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. ...................................... 152,551
New York Broker Deutschland AG.............................. 1,447,449
---------
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
$0.425 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 and the Selling Stockholder have granted the Underwriters an
option exercisable during the 30 day period after the date of this Prospectus to
purchase up to 40,000 and 200,000 additional shares of Common Stock,
respectively, 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 and the Selling Stockholder will be obligated,
pursuant to the option, to sell such shares to the Underwriters. If the
Underwriters exercise this option but not in full, the shares to be sold by the
Selling Stockholder pursuant to such option will be purchased by the
Underwriters prior to any shares to be sold by the Company pursuant to such
option.
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
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<PAGE> 61
$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 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 Representative's
Warrant is restricted from sale, transfer, assignment or hypothecation for a
period of one year from the date of this Prospectus, except to officers of New
York Broker, Inc. pursuant to the applicable rules and regulations of the
National Association of Securities Dealers, Inc.
The Company, and its officers, directors and certain other stockholders who
beneficially own 7,457,774 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 and, with
respect to certain other stockholders owning, in the aggregate, 164,800 shares
of Common Stock, for a period of 180 days after the date of the Prospectus
without the prior written consent of the Representative. The Representative 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.
New York Broker, Inc. has advised the Company that it does not intend to
confirm sales to any account over which it exercises discretionary authority.
However, New York Broker Deutschland AG may sell up to approximately 62,000
shares to accounts over which it exercises 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
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<PAGE> 62
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. 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
predictions 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 representations 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 was
determined by negotiations between the Company and the Representatives of the
Underwriters. Among the factors considered in such negotiations were 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 believed 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
was 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.
CONCURRENT REGISTRATION
Concurrently with this Offering, the Company is registering 164,800 shares
of Common Stock for future sales by the Registering Stockholders. Each
Registering Stockholder is free to offer and sell his or her shares of Common
Stock at such time, in such manner, and at such prices as he or she shall
determine. However, these shares are subject to a lock-up agreement with New
York Broker, Inc. and may not be sold, without the consent of New York Broker,
Inc., until 180 days after the date of this Prospectus.
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.("Mintz Levin"), Boston, Massachusetts. Robert Duggan, a partner with Mintz
Levin, is the Secretary of the Company. On November 10, 1998, the Company
granted Mr. Duggan, another partner in Mintz Levin and an affiliate of Mintz
Levin options to purchase 50,000, 15,000 and 35,000 shares of Common Stock,
respectively. The options are exercisable immediately for a period of two years
at an exercise price of $6.50 per share. 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, July
3, 1997 and December 31, 1997 and for the years ended December 31, 1995 and 1996
and for the periods January 1, 1997 to July 3, 1997 and July 4, 1997 to 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.
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<PAGE> 63
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") 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 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.
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<PAGE> 64
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Financial Statements:
Balance Sheets as of December 31, 1996, July 3, 1997
(Predecessor), December 31, 1997, and September 30,
1998 (unaudited) (Successor)........................... F-3
Statements of Operations for the years ended December 31,
1995 and 1996, for the periods January 1, 1997 to July
3, 1997 (Predecessor) and July 4, 1997 to December 31,
1997, and for the period July 4, 1997 to September 30,
1997 (unaudited) and for the nine months ended
September 30, 1998 (unaudited) (Successor)............. F-4
Statements of Changes in Stockholders' Equity for the
years ended December 31, 1995 and 1996, for the periods
January 1, 1997 to July 3, 1997 (Predecessor) and July
4, 1997 to December 31, 1997, and for the nine months
ended September 30, 1998 (unaudited) (Successor)....... F-5
Statements of Cash Flows for the years ended December 31,
1995 and 1996, for the periods January 1, 1997 to July
3, 1997 (Predecessor) and July 4, 1997 to December 31,
1997, and for the period July 4, 1997 to September 30,
1997 (unaudited) and for the nine months ended
September 30, 1998 (unaudited) (Successor)............. F-6
Notes to Financial Statements............................. F-7
</TABLE>
F-1
<PAGE> 65
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, July 3, 1997
(Predecessor) and December 31, 1997 (Successor), and the related statements of
operations, changes in stockholders' equity and cash flows for the years ended
December 31, 1995 and 1996, and the periods ended July 3, 1997 (Predecessor) and
December 31, 1997 (Successor). 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, July 3, 1997 and December 31, 1997, and the results of its
operations and its cash flows for the years ended December 31, 1995 and 1996,
and for the periods ended July 3, 1997 and December 31, 1997, in conformity with
generally accepted accounting principles.
Wolf & Company, P.C.
Boston, Massachusetts
November 16, 1998
F-2
<PAGE> 66
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
BALANCE SHEETS
(NOTE 1)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------- ----------------------------
DECEMBER 31, JULY 3, DECEMBER 31, SEPTEMBER 30,
1996 1997 1997 1998
------------ ---------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash.............................................. $ 30,139 $ 37,936 $ 22,382 $2,606,195
Accounts receivable, trade (Note 1)............... -- 206,673 273,187 --
Due from officer/stockholder (Note 3)............. -- 3,802 -- 172,773
Due from former parent and affiliates (Note 3).... 251,502 191,377 243,499 --
Refundable income taxes (Note 4).................. 18,868 13,333 6,336 8,336
Prepaid expenses and other current assets......... 33,141 63,403 59,442 35,342
-------- ---------- -------- ----------
Total current assets........................ 333,650 516,524 604,846 2,822,646
-------- ---------- -------- ----------
Property and equipment:
Furniture and fixtures............................ 176,128 176,128 80,276 105,643
Computer equipment................................ 235,151 272,458 178,975 301,466
Leasehold improvements............................ 159,334 159,334 33,406 33,406
Office equipment.................................. 58,696 58,785 27,443 27,443
-------- ---------- -------- ----------
629,309 666,705 320,100 467,958
Less accumulated depreciation and amortization.... 173,829 257,316 45,066 118,962
-------- ---------- -------- ----------
455,480 409,389 275,034 348,996
-------- ---------- -------- ----------
Other assets:
Net deferred tax asset (Note 4)................... 51,591 51,591 -- --
Deferred costs in connection with initial public
offering (Note 7)............................... -- -- -- 121,380
Deposits and other assets......................... 44,610 45,529 94,392 116,974
-------- ---------- -------- ----------
96,201 97,120 94,392 238,354
-------- ---------- -------- ----------
$885,331 $1,023,033 $974,272 $3,409,996
======== ========== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to former parent..................... $ 77,922 $ 68,844 $ -- $ --
Accounts payable.................................. 120,539 209,459 195,159 271,203
Due to officer/stockholder........................ -- -- 27,015 --
Deferred revenue.................................. -- -- 116,667 --
Accrued expenses (Note 9)......................... 52,176 97,367 95,252 80,201
Net deferred tax liability (Note 4)............... 9,279 9,279 -- --
-------- ---------- -------- ----------
Total current liabilities................... 259,916 384,949 434,093 351,404
-------- ---------- -------- ----------
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 in 1996 and 1997 and 7,817,296
shares issued and outstanding in 1998........... 69,672 69,672 69,672 78,173
Non-Voting common stock, $.01 par value; 1,000,000
shares authorized, 53,278 shares issued and
outstanding..................................... -- -- -- 533
Additional paid-in capital........................ 430,328 430,328 426,567 4,728,611
Subscriptions and notes receivable from
stockholders (Note 8)........................... -- -- -- (988,682)
Retained earnings (deficit)....................... 125,415 138,084 43,940 (1,260,043)
-------- ---------- -------- ----------
Total stockholders' equity.................. 625,415 638,084 540,179 2,558,592
-------- ---------- -------- ----------
$885,331 $1,023,033 $974,272 $3,409,996
======== ========== ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 67
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
STATEMENTS OF OPERATIONS
(NOTE 1)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------------------- --------------------------------------------
YEARS ENDED PERIOD FROM PERIOD FROM PERIOD FROM NINE MONTHS
DECEMBER 31, JANUARY 1 JULY 4 TO JULY 4 TO ENDED
----------------------- TO JULY 3, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997 1997 1998
---------- ---------- ----------- ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues (Note 1):
Former Parent and
Affiliates (Note 3):
Application
Services.......... $1,216,716 $2,757,253 $ 666,229 $ 197,948 $ 197,888 $ --
---------- ---------- ---------- ---------- ---------- -----------
Trade:
Software license
agreements........ -- -- 116,667 116,667 -- 116,667
Application
services.......... -- 32,625 260,518 222,393 167,766 332,713
---------- ---------- ---------- ---------- ---------- -----------
-- 32,265 377,185 339,060 167,766 449,380
---------- ---------- ---------- ---------- ---------- -----------
Total
revenues..... 1,216,716 2,789,878 1,043,414 537,008 365,654 449,380
---------- ---------- ---------- ---------- ---------- -----------
Operating expenses:
Selling, general and
administrative...... 967,271 1,101,109 633,825 415,072 225,380 1,076,697
Engineering -- former
parent (Note 3)..... 324,027 49,349 39,168 -- -- --
Engineering -- other... 503,444 606,737 268,030 205,069 81,228 308,897
Research and
development......... -- -- -- -- -- 274,045
Depreciation and
amortization........ 39,734 137,300 84,368 45,066 22,085 73,896
---------- ---------- ---------- ---------- ---------- -----------
Total operating
expenses..... 1,834,476 1,894,495 1,025,391 665,207 328,693 1,733,535
---------- ---------- ---------- ---------- ---------- -----------
Income (loss) from
operations............ (617,760) 895,383 18,023 (128,199) 36,961 (1,284,155)
Other income (expenses):
Cancellation fee
income (Note 3)..... -- -- -- 189,938 -- --
Foreign exchange gain
(loss).............. (27,386) 10,319 3,579 (9,285) (9,285) --
Interest expense...... (7,582) (24,996) (3,399) (1,848) (937) (19,828)
---------- ---------- ---------- ---------- ---------- -----------
Income (loss) before
provision (benefit)
for income taxes...... (652,728) 880,706 18,203 50,606 26,739 (1,303,983)
Provision (benefit) for
income taxes (Note
4).................... (256,872) 337,362 5,534 6,666 2,362 --
---------- ---------- ---------- ---------- ---------- -----------
Net income (loss)....... $ (395,856) $ 543,344 $ 12,669 $ 43,940 $ 24,377 $(1,303,983)
========== ========== ========== ========== ========== ===========
Basic and diluted net
income (loss) per
share (Note 2)........ $ (0.07) $ 0.08 $ -- $ 0.01 $ -- $ (0.19)
Weighted average shares
outstanding used in
per share
calculation........... 5,573,770 6,967,213 6,967,213 6,967,213 6,967,213 7,013,295
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 68
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(NOTE 1)
<TABLE>
<CAPTION>
COMMON STOCK (NOTE 7)
-------------------------------------
VOTING NON-VOTING ADDITIONAL SUBSCRIPTIONS RETAINED
------------------- --------------- PAID-IN AND NOTES EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE (DEFICIT)
--------- ------- ------ ------ ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR
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........................... -- -- -- -- -- -- 12,669
--------- ------- ------ ---- ---------- ---------- -----------
Balance at July 3, 1997.............. 6,967,213 69,672 -- -- 430,328 -- 138,084
SUCCESSOR
Fair value adjustments related to the
Management Buyout and change in
control (Note 1)................... -- -- -- -- (3,761) -- (138,084)
Net income........................... -- -- -- -- -- -- 43,940
--------- ------- ------ ---- ---------- ---------- -----------
Balance at December 31, 1997......... 6,967,213 69,672 -- -- 426,567 -- 43,940
Net loss (unaudited)................. -- -- -- -- -- -- (1,303,983)
Issuance of common stock............. 850,083 8,501 53,278 533 4,302,044 (988,682) --
--------- ------- ------ ---- ---------- ---------- -----------
Balance at September 30, 1998........ 7,817,296 $78,173 53,278 $533 $4,728,611 $ (988,682) $(1,260,043)
========= ======= ====== ==== ========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 69
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
STATEMENTS OF CASH FLOWS
(NOTE 1)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------------------ ---------------------------------------------
YEARS ENDED PERIOD FROM PERIOD FROM PERIOD FROM NINE MONTHS
DECEMBER 31, JANUARY 1 JULY 4 TO JULY 4 TO ENDED
--------------------- TO JULY 3, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997 1997 1998
--------- --------- ------------ ------------ ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................... $(395,856) $ 543,344 $ 12,669 $ 43,940 $ 24,377 $(1,303,983)
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Depreciation and amortization..... 39,734 137,300 84,368 45,066 22,085 73,896
Unrealized foreign exchange (gain)
loss............................ (4,071) (5,790) (9,078) -- 9,078 --
Deferred income taxes............. (256,872) 214,560 -- -- -- --
(Increase) decrease in deposits
and other assets................ (42,471) (5,345) (1,800) (53,571) 3,383 (22,582)
(Increase) decrease in due from
former parent and affiliates.... 59,515 (223,234) 60,125 (52,122) (56,931) 243,499
(Increase) decrease in accounts
receivable, trade............... -- -- (206,673) (66,514) (88,183) 273,187
(Increase) decrease in refundable
income taxes.................... (30,258) 11,390 5,535 6,997 2,362 (2,000)
(Increase) decrease in prepaid
expenses and other current
assets.......................... (32,378) (763) (30,262) 3,961 48,871 24,100
Increase (decrease) in accounts
payable and accrued expenses.... 579,625 (421,910) 134,111 (16,415) 39,097 60,993
Increase (decrease) in deferred
revenue......................... -- -- -- 116,667 -- (116,667)
Increase (decrease) in due to/from
officer/stockholders............ -- -- (3,802) 30,817 (6,681) (199,788)
--------- --------- --------- -------- -------- -----------
Net cash provided (used) by
operating activities............ (83,032) 249,552 45,193 58,826 (2,542) (969,345)
--------- --------- --------- -------- -------- -----------
Cash flows from investing activities:
Purchases of property and
equipment......................... (386,833) (242,476) (37,396) (5,536) (1,241) (147,858)
--------- --------- --------- -------- -------- -----------
Cash flows from financing activities:
Repayment of note payable to former
parent............................ -- -- -- (68,844) -- --
Proceeds from note payable --
officer/stockholder............... -- -- -- -- -- 500,000
Deferred costs in connection with
initial public offering........... -- -- -- -- -- (121,380)
Proceeds from issuance of common
stock............................. 400,000 -- -- -- -- 3,322,396
Payment of subscription
receivables....................... 50,000 -- -- -- -- --
--------- --------- --------- -------- -------- -----------
Net cash provided (used) by
financing activities............ 450,000 -- -- (68,844) -- 3,701,016
--------- --------- --------- -------- -------- -----------
Net increase (decrease) in cash....... (19,865) 7,076 7,797 (15,554) (3,783) 2,583,813
Cash at beginning of period........... 42,928 23,063 30,139 37,936 37,936 22,382
--------- --------- --------- -------- -------- -----------
Cash at end of period................. $ 23,063 $ 30,139 $ 37,936 $ 22,382 $ 34,153 $ 2,606,195
========= ========= ========= ======== ======== ===========
Supplemental disclosure of cash flow
information:
Income taxes paid................... $ 8,327 $ 131,440 $ -- $ -- $ -- $ 2,000
Interest paid....................... 7,582 24,996 3,399 1,848 937 8,520
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
During the period ended September 30, 1998, the Company issued Common Stock.
As of September 30, 1998, $895,000 was still unpaid and included in
subscriptions and notes receivable from stockholders.
Also during the period ended September 30, 1998, stock options were
exercised and the Company received notes receivable in the amount of $93,682
(Note 8).
See accompanying notes to financial statements.
F-6
<PAGE> 70
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND PERIODS JANUARY 1, 1997 TO
JULY 3, 1997 AND JULY 4, 1997 TO DECEMBER 31, 1997
(ALL INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION, RISKS AND UNCERTAINTIES
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
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 support of its ALife suite of SmartBot software
products. As a consequence of the Company's recent change in its primary
business focus, the Company expects that an increasing percentage of its future
revenues will be derived from sales and services associated with its software
robot products and that revenues from its consulting business will, as a percent
of gross revenues, significantly decrease over time.
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. The Company is also pursuing
additional resources through an initial public offering. (See Notes 3 and 7.)
In 1995 and 1996, the Company was a wholly-owned subsidiary of Neurotec
Hochtechnologie GmbH, a German corporation. Neurotec Hochtechnologie GmbH has
two other wholly-owned subsidiaries other than the Company and conducts
operations in Germany. 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 99% of the Company's revenues was derived
from the Company's then parent company.
On July 4, 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 10% interest in the former parent company for DM 1,800,000,
approximately $1,027,000, in cash to the two remaining equal stockholders and
contemporaneously purchase all of the outstanding shares of Neurotec
International Corp. for DM 850,000, approximately $485,000, in cash (the
"Management Buyout").
The Company was founded in November 1994, by the former parent company with
a total capital investment of $500,000 in cash. Net book value of the Company at
the date of the Management Buyout, including cumulative earnings since inception
of $138,084, amounted to $638,084.
F-7
<PAGE> 71
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As a result of a change in control of the Company in connection with the
Management Buyout, the Company has presented its assets and liabilities
subsequent to July 3, 1997 to reflect the purchase price paid for the stock of
the Company. This treatment is consistent with "push down" accounting as
promulgated by the SEC.
The results of operations for the Company for 1997 have been separately
presented to reflect the results of operations prior to the Management Buyout,
as Predecessor operations, and for the period subsequent to the Management
Buyout, as Successor operations. In Management's opinion, the purchase price of
the Company's stock in the Management Buyout reflected the fair value of the
Company at that time.
The difference between the Company's net book value at July 4, 1997 and the
purchase price has been recorded as a reduction of the Company's net deferred
tax asset and long-term assets, resulting in a new depreciation basis for
financial statement purposes for such assets. As of July 4, 1997, the
stockholder's equity section reflects cumulative earnings prior to the
Management Buyout as paid-in capital. As a result, retained earnings at December
31, 1997 reflects the results of operations of the Company only from the date of
the Management Buyout.
The only difference in accounting policies utilized in the presentation of
the Successor and Predecessor financial statements is the estimated useful lives
utilized in the depreciation of property and equipment, as described in Note 2.
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.
During the periods January 1, 1997 to July 3, 1997 and July 4, 1997 to
December 31, 1997, approximately 64% and 37%, respectively, 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, 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 the periods January 1, 1997 to July 3, 1997 and July 4, 1997 to
December 31, 1997, the Company recognized revenue from one customer amounting to
approximately $377,000 and $333,000, respectively, representing 36% and 62%,
respectively, of its total revenues. During the nine months ended September 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 July 3, 1997 and December 31, 1997.
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.
F-8
<PAGE> 72
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company at September 30, 1998 and
for the period July 4, 1997 to September 30, 1997 and for the nine months ended
September 30, 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 September 30, 1998, and the results of its operations and its cash flows for
the period July 4, 1997 to September 30, 1997 and for the nine months ended
September 30, 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>
ESTIMATED USEFUL LIVES
-------------------------------------
CLASSIFICATION PREDECESSOR SUCCESSOR
-------------- ----------- ---------
<S> <C> <C>
Furniture and fixtures 7 years 5 years
Computer equipment 3-5 years 3 years
Leasehold improvements Lease term Lease term
Office equipment 5 years 4 years
</TABLE>
Expenditures for maintenance, repairs and minor renewals are charged to
expense as incurred. Betterments and major renewals are capitalized.
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 September 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.
F-9
<PAGE> 73
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
The Company adopted SFAS No. 128, "Computation of Earnings Per Share,"
during 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.
F-10
<PAGE> 74
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
3. RELATED PARTY TRANSACTIONS
The Company had transactions with its former parent company and
wholly-owned subsidiaries of the former parent company, MediaCenter GmbH
("MediaCenter") and IST Intelligent Safety Technologies GmbH ("IST"), and a
stockholder of the former parent company as follows:
a) The Company provided contract services to the former parent
company, IST and to a stockholder of the former parent company on which it
recorded revenue of $1,216,716, $2,757,253, $666,229 and $197,948 for the
years ended December 31, 1995 and 1996 and the periods January 1, 1997 to
July 3, 1997 and July 4, 1997 to December 31, 1997, respectively. 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 and $68,844 recorded on the
balance sheets at December 31, 1996 and July 3, 1997 are based on the
exchange rates on those dates. Interest expense on these advances amount to
$7,582, $7,271, $3,399 and $1,848 for the years ended December 31, 1995 and
1996 and the periods from January 1, 1997 to July 3, 1997 and July 4, 1997
to December 31, 1997, respectively. The advances were repaid in 1997 (see
below).
c) The former parent charged the Company for engineering services
rendered. These costs amounted to $324,027, $49,349 and $39,168 for the
years ended December 31, 1995 and 1996 and the period from January 1, 1997
to July 3, 1997, respectively. No services were rendered by the former
parent after the Management Buyout (see Note 1).
F-11
<PAGE> 75
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
d) 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 as follows:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
---------------------------------------- ------------
PERIOD FROM PERIOD FROM
YEARS ENDED DECEMBER 31 JANUARY 1 JULY 4 TO
------------------------ TO JULY 3, DECEMBER 31,
1995 1996 1997 1997
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Expenses paid by former parent on
Company's behalf:
Startup costs.................. $281,921 $ -- $ -- $ --
Travel and promotion........... 115,153 6,915 -- --
-------- -------- ------- -------
$397,074 $ 6,915 $ -- $ --
======== ======== ======= =======
Expenses paid by the Company on
behalf of the former parent:
Consortium Agreement (Note
5).......................... $ -- $ 62,500 $46,875 $ --
Engineering costs.............. -- 22,447 8,873 --
Travel and promotion........... -- 20,506 1,497 --
-------- -------- ------- -------
$ -- $105,453 $57,245 $ --
======== ======== ======= =======
Expenses paid by the Company on
behalf of the MediaCenter:
Legal fees..................... $ -- $ 22,303 $ -- $ --
Travel and promotion........... -- 15,789 -- --
Equipment...................... -- 7,600 -- --
-------- -------- ------- -------
$ -- $ 45,692 $ -- $ --
======== ======== ======= =======
</TABLE>
The Company was charged interest on overdue amounts of $17,016 in 1996. No
interest was charged in 1995 and 1997.
In 1997, subsequent to the Management Buyout, and as a result of unresolved
disputes between the Company and its former parent in connection with existing
contractual obligations of the former parent, 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 $119,938 in
notes payable, accounts payable and accrued expenses. 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.
Compensation paid to the Company's President, Chief Executive Officer and
Chairman amounted to $151,296, $200,439, $54,254 and $22,500 for the years ended
December 31, 1995 and 1996 and the periods January 1, 1997 to July 3, 1997 and
July 4, 1997 to December 31, 1997, respectively. In 1998, the Company's
President, Chief Executive Officer and Chairman entered into an employment
agreement with the Company at an annual salary of $240,000. (See Note 5.)
F-12
<PAGE> 76
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Net amounts due from the former parent company and affiliates at December
31, 1996, July 3, 1997 and December 31, 1997 consist of the following:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------------------------------------------- ----------------------
DECEMBER 31, 1996 JULY 3, 1997 DECEMBER 31, 1997
---------------------- ---------------------- ----------------------
SHAREHOLDER SHAREHOLDER
FORMER FORMER OF FORMER FORMER OF FORMER
PARENT MEDIACENTER PARENT PARENT PARENT PARENT
-------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Settlement
Agreement.......... $ -- $ -- $ -- $ -- $230,000 $ --
Contract services.... 213,370 -- -- 155,718 -- 13,499
Reimbursements
receivable......... 29,752 45,204 55,151 -- -- --
Reimbursements
payable............ (35,168) -- (19,492) -- -- --
Interest payable..... (1,656) -- -- -- -- --
-------- ------- -------- -------- -------- -------
Total...... $206,298 $45,204 $ 35,659 $155,718 $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). Interest accrued during the period ended September 30, 1998
amounted to $12,740 on the note payable.
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>
PREDECESSOR SUCCESSOR
----------------------------------------- -----------------
YEARS ENDED DECEMBER 31, PERIOD FROM PERIOD FROM
------------------------- JANUARY 1 TO JULY 4 TO
1995 1996 JULY 3, 1997 DECEMBER 31, 1997
----------- ---------- ------------ -----------------
<S> <C> <C> <C> <C>
Current:
Federal........................... $ -- $ 75,124 $ 3,039 $3,661
State............................. -- 47,678 2,495 3,005
--------- -------- ------- ------
-- 122,802 5,534 6,666
--------- -------- ------- ------
Deferred (prepaid):
Federal........................... (240,766) 201,107 -- --
State............................. (16,106) 13,453 -- --
--------- -------- ------- ------
(256,872) 214,560 -- --
--------- -------- ------- ------
$(256,872) $337,362 $ 5,534 $6,666
========= ======== ======= ======
</TABLE>
F-13
<PAGE> 77
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
PREDECESSOR SUCCESSOR
----------------------------------------- -----------------
YEARS ENDED DECEMBER 31, PERIOD FROM PERIOD FROM
------------------------- JANUARY 1 TO JULY 4 TO
1995 1996 JULY 3, 1997 DECEMBER 31, 1997
----------- ---------- ------------ -----------------
<S> <C> <C> <C> <C>
Expected income tax provision
(benefit)......................... $(221,928) $299,440 $ 6,189 $ 17,206
State taxes, net of federal income
tax benefit....................... (10,630) 40,346 1,647 1,983
Surtax exemption.................... -- -- (3,458) (2,295)
Change in valuation reserve on
deferred tax assets............... -- -- -- (12,532)
Other............................... (24,314) (2,424) 1,156 2,304
--------- -------- ------- --------
Provision (benefit) for income
taxes.......................... $(256,872) $337,362 $ 5,534 $ 6,666
========= ======== ======= ========
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities at December 31, 1996, July 3, 1997 and
December 31, 1997, are presented below:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
---------------------- ------------
DECEMBER 31, JULY 3, DECEMBER 31,
1996 1997 1997
------------ ------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Start-up costs capitalized for income tax purposes..... $69,205 $69,205 $ 46,499
Vacation accrual not deductible for income tax
purposes............................................ 3,114 3,114 4,182
Property and equipment................................. -- -- 27,292
------- ------- --------
72,319 72,319 77,973
Valuation allowance on deferred tax asset.............. -- -- (69,862)
------- ------- --------
72,319 72,319 8,111
------- ------- --------
Deferred tax liabilities:
Property and equipment................................. 17,614 17,614 --
Prepaid rent deducted for income tax purposes.......... 8,422 8,422 8,111
Unrealized foreign exchange gains...................... 3,971 3,971 --
------- ------- --------
30,007 30,007 8,111
------- ------- --------
Net deferred tax asset.............................. $42,312 $42,312 $ --
======= ======= ========
</TABLE>
There was no change in the valuation allowance on deferred tax assets for
the years ended December 31, 1995 and 1996 and the period January 1, 1997 to
July 3, 1997. The change in the
F-14
<PAGE> 78
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
valuation allowance on deferred tax assets for the period July 4, 1997 to
December 31, 1997 is as follows:
<TABLE>
<S> <C>
Balance at beginning of period............................ $ --
Increase in valuation allowance on existing deferred tax
assets due to Management Buyout (Note 1)............... 42,312
Increase in valuation allowance on deferred tax assets
arising from revaluation of assets due to Management
Buyout (Note 1)........................................ 40,082
Decrease in valuation allowance due to change in deferred
tax assets during the period........................... (12,532)
--------
$ 69,862
========
</TABLE>
The provision for income taxes for the period July 4, 1997 to September 30,
1997 is computed based on an effective tax rate of 8.8%. No benefit has been
recorded in 1998 due to a 100% valuation allowance provided on the deferred tax
asset related to net operating loss carryforwards generated during the period.
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 and 1996 and the period January 1, 1997 to July 3, 1997, respectively,
and $93,750 for the nine month period ended September 30, 1998. There was no
expense for the period July 4, 1997 to September 30, 1997 due to the contract
suspension.
F-15
<PAGE> 79
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 and 1996, and the
periods January 1, 1997 to July 3, 1997 and July 4, 1997 to December 31, 1997
amounted to approximately $117,100, $231,300, $135,900 and $92,400,
respectively, and for the period July 4, 1997 to September 30, 1997 and the nine
months ended September 30, 1998 amounted to approximately $57,100 and $196,500,
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 and 1996 and
the periods January 1, 1997 to July 3, 1997 and July 4, 1997 to December 31,
1997 amounted to approximately $3,000, $7,000, $4,800 and $3,700, respectively,
and for the period July 4, 1997 to September 30, 1997 and the nine months ended
September 30, 1998 amounted to approximately $1,200 and $7,000, 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 (the "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
F-16
<PAGE> 80
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. As of September 30, 1998,
the Company had incurred costs of $121,380 in connection with the IPO.
COMMON STOCK
At September 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 based on
arms-length negotiations with unrelated parties. 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.
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 $85,753,
resulting in net proceeds of $4,034,247 being received by the Company. (See Note
8.)
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 may be 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.
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
F-17
<PAGE> 81
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 September 25, 1998, the Plan was amended to increase the shares reserved
for issuance under the Plan to a total of 1,200,000 shares; 761,476 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.
All options presently granted under the Plan were immediately exercisable
on the grant date. The vesting of future option grants will be established by
the Company's Board of Directors or a duly authorized committee thereof.
A summary of the status of the Company's stock options as of September 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 3.73
Exercised.......................................... (26,083) 3.66
Canceled........................................... -- --
------- -----
Outstanding at end of period....................... 590,569 $3.73
======= =====
Options exercisable at end of period............... 590,569
=======
Options available for future grants................ 583,348
=======
</TABLE>
The following table summarizes information about stock options outstanding
at September 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-$7.32 590,569 .81 years $3.73
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its Plan.
See also Note 10.
8. SUBSCRIPTIONS AND NOTES RECEIVABLE FROM STOCKHOLDERS
On September 23, 1998, the Company sold 824,000 shares of common stock for
net proceeds of $4,034,247. (See Note 7.) As of September 30, 1998, $895,000 of
this amount had not been received. In October, all amounts were subsequently
received.
F-18
<PAGE> 82
ARTIFICIAL LIFE, INC.
(FORMERLY NEUROTEC INTERNATIONAL CORP.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the exercise of stock options on July 31, 1998, the
Company received notes receivable in the amount of $93,682. The notes are due in
biweekly installments through July 31, 2000 with interest at 9%.
9. ACCRUED EXPENSES
Accrued expenses at December 31, 1996, July 3, 1997, December 31, 1997 and
September 30, 1998 consist of the following:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------------------- -----------------------------
DECEMBER 31, JULY 3, DECEMBER 31, SEPTEMBER 30,
1996 1997 1997 1998
------------ ------- ------------ -------------
<S> <C> <C> <C> <C>
Accrued salaries.............. $ 3,526 $62,629 $ 3,657 $ 39,730
Accrued vacations............. 14,288 25,211 13,089 23,523
Accrued and withheld payroll
taxes....................... 17,876 6,474 56,082 3,409
Accrued professional fees..... 15,500 -- 15,000 --
Accrued interest on note
payable to officer/
stockholder (Note 3)........ -- -- -- 12,740
Other accrued expenses........ 986 3,053 7,424 799
------- ------- ------- --------
Total accrued expenses...... $52,176 $97,367 $95,252 $ 80,201
======= ======= ======= ========
</TABLE>
10. SUBSEQUENT EVENTS
On October 1, 1998, the Company granted incentive stock options for 65,000
shares of common stock at an exercise price of $6.50 per share.
In connection with the future establishment of its European headquarters in
Luzern, Switzerland the Company transferred approximately $390,000 into an
escrow account in Switzerland on October 16, 1998.
On November 10, 1998, the Company granted non-statutory stock options for
100,000 shares of common stock at an exercise price of $6.50 per share.
F-19
<PAGE> 83
INSIDE BACK COVER
[Color work: "Alife-WebGuide[TM] 1.0 Professional" brand name appears
vertically on the left edge of the page. On the top center of the page reads
the heading "SmartBot[TM] Solutions for the Web." The top left corner of the
page discloses the following: TO DATE, THE COMPANY HAS RELEASED ONLY ONE OF ITS
PRODUCTS FOR COMMERCIAL SALE. THE COMPANY EXPECTS TO RELEASE THE REMAINDER OF
ITS PRODUCTS FOR COMMERCIAL SALE IN 1999 AND 2000. THERE CAN BE NO ASSURANCE
THAT THE COMPANY WILL SUCCEED IN COMMERCIALIZING ITS PLANNED PRODUCTS. On the
left side of the page is the WebGuide[TM] product representative. To the right
of the representative are three screen shots of the Knowledge Editor. At the
bottom of the page, a graphic of the WebGuide[TM] CD-ROM is shown. Below the
illustration of the CD-ROM is a description of certain potential uses for the
WebGuide[TM].]
<PAGE> 84
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS 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........................... 18
Dividend Policy........................... 19
Capitalization............................ 20
Dilution.................................. 21
Selected Financial Data................... 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 24
Business.................................. 31
Management................................ 44
Certain Transactions...................... 49
Principal and Selling Stockholders........ 50
Description of Capital Stock.............. 51
Shares Eligible for Future Sale........... 55
Certain U.S. Tax Consequences to German
Stockholders............................ 57
Underwriting.............................. 59
Concurrent Registration................... 61
Legal Matters............................. 61
Experts................................... 61
Additional Information.................... 62
Index to Financial Statements............. F-1
</TABLE>
UNTIL JANUARY 11, 1999 (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.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
1,600,000 SHARES
ARTIFICIAL LIFE, INC.
COMMON STOCK
[ARTIFICIAL LIFE LOGO]
-----------------------
PROSPECTUS
-----------------------
NEW YORK BROKER, INC.
NEW YORK BROKER DEUTSCHLAND AG
DECEMBER 17, 1998
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------------------------------------------------------
