<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 1998
REGISTRATION NO. 333-56545
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
SCIENTIFIC LEARNING CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8200 94-3234458
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
1995 UNIVERSITY AVENUE, SUITE 400
BERKELEY, CA 94704
(510) 665-9700
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
SHERYLE J. BOLTON
CHIEF EXECUTIVE OFFICER
SCIENTIFIC LEARNING CORPORATION
1995 UNIVERSITY AVENUE SUITE 400
BERKELEY, CA 94704
(510) 665-9700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
JEFFREY S. ZIMMAN NORA L. GIBSON
JULIA L. DAVIDSON RANDALL M. LAKE
JODIE M. BOURDET BARBARA SKAGGS GALLAGHER
ISOBEL A. JONES BROBECK, PHLEGER & HARRISON LLP
COOLEY GODWARD LLP SPEAR STREET TOWER
ONE MARITIME PLAZA, 20TH FLOOR ONE MARKET
SAN FRANCISCO, CA 94111 SAN FRANCISCO, CA 94105
(415) 693-2000 (415) 442-0900
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) SHARE (2) PRICE (2) FEE (3)
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value per share.... 2,760,000 shares $14.00 $38,640,000 $11,399
</TABLE>
(1) Includes 360,000 shares of Common Stock which the Underwriters may purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 under the Securities Act of
1933.
(3) Of such amount, $10,178 has been paid.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE
- --------------------------------------------------------------------------------
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 17, 1998
2,400,000 SHARES
[LOGO]
COMMON STOCK
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING OFFERED BY
SCIENTIFIC LEARNING CORPORATION (THE "COMPANY"). PRIOR TO THIS OFFERING (THIS
"OFFERING"), THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE
COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL
BE BETWEEN $12.00 AND $14.00 PER SHARE. SEE "UNDERWRITING" FOR A DISCUSSION OF
THE FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
THE COMPANY HAS APPLIED TO HAVE THE COMMON STOCK APPROVED FOR QUOTATION ON THE
NASDAQ NATIONAL MARKET UNDER THE SYMBOL "SCIL."
SEE "RISK FACTORS" COMMENCING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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- ----------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
PER SHARE..................................... $ $ $
TOTAL (3)..................................... $ $ $
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</TABLE>
(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY, ESTIMATED AT $750,000.
(3) THE COMPANY AND THE SELLING STOCKHOLDERS HAVE GRANTED TO THE UNDERWRITERS A
30-DAY OPTION TO PURCHASE UP TO 166,342 AND 193,658 ADDITIONAL SHARES OF
COMMON STOCK, RESPECTIVELY, SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. IF THE
UNDERWRITERS EXERCISE THIS OPTION IN FULL, THE TOTAL PRICE TO PUBLIC,
UNDERWRITING DISCOUNT, PROCEEDS TO COMPANY AND PROCEEDS TO SELLING
STOCKHOLDERS WILL BE $ , $ , $ AND $ ,
RESPECTIVELY. SEE "UNDERWRITING."
THE SHARES OF COMMON STOCK ARE OFFERED BY THE SEVERAL UNDERWRITERS NAMED
HEREIN, SUBJECT TO RECEIPT AND ACCEPTANCE BY THEM AND SUBJECT TO THEIR RIGHT TO
REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE
CERTIFICATES REPRESENTING SUCH SHARES WILL BE MADE AGAINST PAYMENT THEREFOR AT
THE OFFICE OF NATIONSBANC MONTGOMERY SECURITIES LLC ON OR ABOUT , 1998.
--------------------------
NationsBanc Montgomery Securities LLC
BancAmerica Robertson Stephens
Pacific Growth Equities, Inc.
, 1998
<PAGE>
INSIDE FRONT COVER OF PROSPECTUS: [Contains a collage of three photographs
of children using Fast ForWord, one of which also shows a speech and language
professional assisting the child. Text in the upper left corner of the page
states "Language Takes Us Everywhere-TM-" and the Fast ForWord logo appears in
the bottom right corner.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. THESE TRANSACTIONS MAY BE EFFECTED ON
THE NASDAQ NATIONAL MARKET OR OTHERWISE AND, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION
CONTAINED IN THIS PROSPECTUS: (i) GIVES EFFECT TO THE CONVERSION OF ALL OF THE
COMPANY'S PREFERRED STOCK INTO COMMON STOCK ON A ONE-FOR-ONE BASIS PRIOR TO
COMPLETION OF THIS OFFERING AND (ii) ASSUMES THAT THE UNDERWRITERS'
OVER-ALLOTMENT OPTION IS NOT EXERCISED. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
MAY DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS PROSPECTUS. FACTORS THAT MAY
CAUSE OR CONTRIBUTE TO SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN "RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
PROSPECTUS.
THE COMPANY
The Company develops, markets and sells proven, neuroscience-based education
and training programs designed to increase human learning and performance. The
Company's initial product, Fast ForWord, is an intensive, computer-based
training program that focuses on improving critical pre-reading skills,
including receptive and expressive communication skills, in children with
language-based learning problems. The program, which to date has been used by
approximately 5,500 children, modifies and emphasizes characteristics of speech
and sound so that they can be more readily differentiated and processed. Through
thousands of repetitions, the program enables children to master the essential
building blocks, or "phonemes," of the English language and facilitates the
learning of other critical language skills, such as morphology (the system of
word formation), syntax and grammar, and executive function skills, such as
short-term memory and event sequencing capabilities.
The Fast ForWord program typically lasts from four to eight weeks and
consists of 100 minutes per day of training for five days per week under the
supervision of a teacher, speech and language professional, parent or other
learning facilitator trained in the use of the program. Fast ForWord measures
the child's responses during each exercise and continually adjusts and adapts
the program to challenge each individual child appropriately with customized
training. In addition, because the results from each child's Fast ForWord
exercises are compiled daily in a central database via the Internet, Fast
ForWord is able to automatically generate up-to-date performance charts and
templates, enabling the learning facilitator to monitor the child's progress on
a daily basis. Delivered through a variety of distribution channels, including
public schools, speech and language professionals in private practice and
Company-operated learning centers ("Learning Centers"), Fast ForWord is designed
to support teachers, speech and language professionals, parents and other
learning facilitators in providing a program that can be integrated with school
curricula and other language programs to assist children in overcoming
language-based learning challenges and provide a foundation for language skills
and academic learning.
Humans are born with the potential to learn any language, and one of a
child's early tasks is to learn to extract meaning from speech by identifying
its basic auditory building blocks, or phonemes. In the first 12 to 16 months of
a child's development, the brain learns to recognize the phonemes that are
relevant to the child's native language. Studies have shown that approximately
20% of children have significant reading difficulties, most of which can be
attributed to difficulty in acquiring, retaining and manipulating phonemes.
According to industry sources, 20% of all children in the United States have
significant language-based learning difficulties. Extrapolating from U.S.
Department of Commerce, Bureau of the Census data, this figure represents
approximately 8,000,000 children between the ages of four and 13. The Company
believes that approximately 800,000 children in the United States enter this
category each year and that their language-based learning problems result in
part from the inability to make reliable distinctions among certain elements of
speech.
Based upon decades of independent neuroscience research on the brain's
ability to adapt to certain stimuli, Fast ForWord uses computer-controlled,
repetitive and adaptive training exercises to modify the manner in which the
brain processes language. In formal and widely noted research studies, as
published in
3
<PAGE>
the peer-reviewed journal SCIENCE in January 1996, the Company's founding
scientists from the University of California at San Francisco ("UCSF") and
Rutgers, The State University of New Jersey ("Rutgers") demonstrated that
children with language-based learning problems could significantly improve their
language skills through such exercises. The Company has sponsored two field
trials involving approximately 1,000 children with language-based learning
problems. Participants on average achieved improvement of one to two years in
language processing and related skills after completion of the Fast ForWord
program in four to eight weeks. The Company believes that similar improvements,
if achievable at all through traditional remediation programs, have typically
required several years. In addition, Fast ForWord has successfully produced
broad results. Of those children who have completed Fast ForWord training and
have also been identified by standardized tests as having language-based
learning problems, 90% have made statistically significant gains on one or more
standardized tests of critical language skills.
The Company's goal is to establish itself as the leading provider of proven,
neuroscience-based education and training products and services focused
specifically on language-based learning problems and on other neurologically
based challenges faced by children and adults. The Company plans to
substantially increase its penetration into the over 100,000 schools in the
United States with students in kindergarten through high school by expanding its
direct marketing programs, pursuing district level school contracts and
increasing the number of schools acting as reference sites for Fast ForWord. The
Company also intends to increase its marketing directly to speech and language
professionals in private practice and parents. Furthermore, the Company intends
to develop new products based on practical applications of neuroscience
research, including additional language-based products. The Company is currently
field testing a beta version of Fast ForWord Two for children who have completed
Fast ForWord and are ready for a program that focuses on more advanced
pre-reading skills. The Company is also developing other language-based
products, including an English-as-a-Second-Language ("ESL") program for foreign
students and for adults, an adult version of Fast ForWord and an assessment or
screening test for language-based learning problems. In addition, the Company is
evaluating foreign language versions of Fast ForWord and a program to assist
stroke victims in reacquiring language skills. By adhering to proven research,
rigorously testing its products and publishing the results and communicating the
efficacy of its products and services, the Company intends to become a trusted
name in education and training.
The Company was incorporated in 1995 in the State of California under the
name "Scientific Learning Principles Corporation" and was reincorporated in 1997
in the State of Delaware under its present name. The Company commenced
operations in February 1996 and is an early stage company with a history of
operating losses. The Company's principal executive office is located at 1995
University Avenue, Suite 400, Berkeley, California 94704 and its telephone
number is (510) 665-9700.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............................. 2,400,000 shares
Common Stock to be outstanding after the Offering............... 11,671,893 shares (1)
Use of proceeds................................................. Sales and marketing, research and
product development, repayment of
indebtedness and other general
corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.......................... SCIL
</TABLE>
- --------------------------
(1) Based on the number of shares outstanding as of June 30, 1998. Excludes: (i)
1,611,498 shares of Common Stock issuable upon exercise of options and
warrants outstanding as of June 30, 1998 with a weighted average exercise
price of $0.65 per share; (ii) 2,800,000 shares of additional Common Stock
reserved for issuance under the Company's 1998 Equity Incentive Plan; (iii)
100,000 shares of Common Stock reserved for issuance under the Company's
1998 Non-Employee Directors' Stock Option Plan; and (iv) 500,000 shares of
Common Stock reserved for issuance under the Company's 1998 Employee Stock
Purchase Plan. See "Management--Employee Benefit Plans," "Certain
Transactions" and "Description of Capital Stock."
5
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31, SIX MONTHS ENDED JUNE 30,
-------------------- -------------------------
1996 1997 1997 1998
--------- --------- --------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................................................... $ -- $ 2,962 $ 689 $ 1,800
Gross profit..................................................... -- 2,013 366 1,333
Operating loss................................................... (2,611) (5,135) (2,241) (4,084)
Net loss......................................................... (2,497) (5,058) (2,190) (4,103)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------
AS ADJUSTED
ACTUAL (1)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).............................................................. $ (2,019) $ 26,247
Total assets........................................................................... 3,701 31,967
Long-term debt, including current portion.............................................. 1,090 --
Redeemable convertible preferred stock................................................. 8,002 --
Stockholders' equity (deficit)......................................................... (8,375) 27,893
</TABLE>
- --------------------------
(1) As adjusted to reflect the conversion of outstanding Preferred Stock into
5,098,252 shares of Common Stock upon completion of this Offering, the sale
of 2,400,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $13.00 per share after deducting underwriting
discounts and estimated offering expenses and the application of the
estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
(2) The Company has paid no cash dividends since its inception.
6
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER
INFORMATION SET FORTH IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE
CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE
PURCHASING ANY OF THE SHARES OF COMMON STOCK OF THE COMPANY. THIS PROSPECTUS
CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, STATEMENTS OF THE COMPANY'S PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS
PROSPECTUS SHOULD BE READ AS BEING APPLICABLE TO ALL FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THIS PROSPECTUS. FACTORS THAT MAY CAUSE OR
CONTRIBUTE TO SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
UNCERTAINTY OF MARKET ACCEPTANCE. The Company's future success is, in part,
dependent on acceptance of Fast ForWord by public schools, administrators,
teachers, speech and language professionals, parents and other learning
facilitators. Market acceptance of Fast ForWord may depend on a number of
factors, including, among others: (i) continued demonstration of efficacy and
acceptance of the Company's efficacy results; (ii) willingness of learning
facilitators to adopt new teaching and training methods; (iii) cost of the
Company's programs and of alternative remediation programs; (iv) availability of
government funding; (v) competitive developments; (vi) ability to incorporate
the Fast ForWord program into traditional school programs; (vii) evolving
technology and standards; and (viii) access to and ability to use the Internet
and required computer equipment. The inability of the Company to achieve and
maintain market acceptance, and increase the number of programs sold would
adversely affect the Company's business, financial condition and results of
operations. See "Business--Sales and Marketing."
CHALLENGES TO MARKET PENETRATION. The Company began selling Fast ForWord to
public schools in May 1997 and has not yet derived a significant amount of
revenues from sales to public schools. The Company believes that its ability to
penetrate the public school market will depend, among other things, on its
ability to attract and retain experienced sales personnel, gain access to
educators and other key public school decision-makers and convince them to
implement Fast ForWord, which represents a fundamental shift in the manner of
addressing language-based learning problems. In addition, the Company believes
that schools and teachers may find it difficult to incorporate the intensive
Fast ForWord training program, which is designed to be used for 100 minutes per
day, five days per week, into traditional school programs. The Company believes
that its success in the public schools market will, in part, depend on the
Company developing ways for teachers to more easily incorporate Fast ForWord
into traditional school programs, as to which there can be no assurance.
Fast ForWord represents a substantial change in the way speech and language
professionals operate their private practices. For example, most speech and
language professionals in private practice have not traditionally used computers
or other technology in their practices. The Company believes that to achieve
success in the private practice speech and language professional market, the
Company must, among other things, show speech and language professionals in
private practice that technology, and Fast ForWord in particular, can improve
their practices and that the related expenditure on training is a worthwhile
investment. In addition, the Company must convince speech and language
professionals that its programs are a tool which can be used to supplement their
practice, rather than a competitive threat. Furthermore, the Company believes
that in order to increase the number of programs sold through speech and
language professionals, the Company will need to demonstrate to speech and
language professionals the effectiveness of supervising multiple clients at a
time. There can be no assurance that the Company will be successful in further
penetrating the private practice speech and language professional market.
To date, the Company has had limited experience in selling Fast ForWord
directly to parents. Distribution channels involved in sales to parents may
include Learning Centers, as well as the "at-home" education market. The Company
opened its first eight Fast ForWord Learning Centers in 1998 and has had minimal
revenues to date from such centers. The success of the Learning Centers depends,
in part, on the Company's ability to: (i) identify suitable locations for the
Learning Centers and successfully negotiate
7
<PAGE>
lease or purchase agreements that are beneficial to the Company; (ii) generate
sufficient student attendance at each Learning Center; and (iii) hire and train
high-quality employees to staff each Learning Center. Additionally, the Company
believes that its ability to penetrate the parental market will depend, in part,
on its ability to develop a "remote" or "at-home" course that can be delivered
by video, CD-ROM and/or the Internet for the training of parents in the
supervision and administration of Fast ForWord. There can be no assurance that
the Company will successfully develop distance-based training programs for
parents and other learning facilitators. In addition, the Company believes that
success in selling Fast ForWord to parents will depend upon word-of-mouth
referrals among parents based on their own experiences, which the Company
expects will take considerable time to develop, and there can be no assurance
that such referrals will develop in a rapid or substantial manner, if at all.
See "Business--Sales and Marketing."
RELIANCE ON A SINGLE PRODUCT. Fast ForWord, including the training of
various professionals in the administration and supervision of the program, has
accounted for substantially all of the Company's revenues since inception, and
the Company anticipates that its revenues will continue to be substantially
derived from Fast ForWord and related programs for the foreseeable future.
Historically, the substantial majority of program revenues have been
attributable to sales to speech and language professionals in private practice,
and the Company has only recently begun to sell programs and services to public
schools. Failure to increase sales of the Company's Fast ForWord training
program and to successfully introduce additional programs would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Sales and Marketing."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY. The Company's
quarterly operating results have varied significantly in the past and are
expected to fluctuate significantly in the future as a result of a variety of
factors, many of which are beyond the Company's control. Factors that may affect
the Company's quarterly operating results include among others: (i) demand for
technology-based education and training products; (ii) size and timing of
product orders and implementation; (iii) revenue mix between products and
services; (iv) timely development, introduction and market acceptance of the
Company's existing and future products, if any; (v) pricing of the Company's
programs and services; (vi) number and timing of Learning Center openings and
closings; (vii) terms under which Learning Centers are operated; (viii)
competitive conditions; (ix) ability to attract and retain experienced
personnel; (x) availability of government funding for public schools; (xi)
public school calendars and budget cycles; (xii) number and timing of Fast
ForWord training seminars for learning facilitators; and (xiii) general economic
and market conditions. The Company's limited operating history and the emerging
nature of its market make prediction of future revenues and expenses difficult.
The Company's expense levels are based in part on its expectations as to future
revenues and to a large extent are fixed in the short term. There can be no
assurance that the Company will be able to predict its future revenues
accurately and the Company may be unable to adjust spending in a timely manner
to compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall of revenues in relation to the Company's expectations could cause
significant fluctuations in quarterly operating results, which would have an
adverse effect on the Company's business, financial condition and results of
operations.
Demand for the Company's programs and services is subject to certain
seasonal influences which can vary depending on the distribution channel being
employed. The Company does not have sufficient operating experience in its
various distribution channels to predict the overall effect of various seasonal
factors and their effect on future quarterly operating results. The Company
believes that, because of the intensive nature of Fast ForWord, demand for its
programs from speech and language professionals in private practice may be lower
during the school year than in the summer. The Company's strategy to place Fast
ForWord Learning Centers in private schools and take advantage of unused
capacity during summers may further amplify this effect. Certain of the
Company's eight current Fast ForWord Learning Centers are expected to operate
only during the summer and, to date, the Company has no contracts extending
through the school year for the five Learning Centers currently established in
private schools. To the extent the
8
<PAGE>
Company penetrates the public school market, the Company may experience
seasonality due to public school calendars and budget cycles.
Due to all of the foregoing factors, the Company's quarterly revenues and
operating results are difficult to forecast, and the Company believes that
period-to-period comparisons of its operating results will not necessarily be
meaningful and should not be relied upon as an indication of future performance.
It is likely that the Company's operating results will fall below the
expectations of the Company, securities analysts or investors in some future
quarter. In such event, the trading price of the Common Stock would likely be
materially and adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
HISTORY OF OPERATING LOSSES; LIMITED OPERATING HISTORY. The Company
commenced operations in February 1996 and began generating revenues in first
quarter 1997. Because the Company has generated limited revenues to date, it has
incurred significant operating losses and negative cash flow since inception.
The Company has an accumulated deficit of approximately $11.7 million from
inception through June 30, 1998 and expects to incur additional losses for at
least the next two years, due primarily to substantial increases in sales and
marketing and research and development expenses. There can be no assurance that
the Company will ever generate sufficient revenues to achieve or sustain
profitability or generate positive cash flow. There can be no assurance that the
Company's cash resources following this Offering will be sufficient to fund the
Company's negative cash flow and expected capital expenditures for this period.
The Company, therefore, may need to obtain additional equity or debt financing
in the future. There can be no assurance that the Company will be able to obtain
the additional financing to satisfy its cash requirements on acceptable terms or
at all.
The Company has only a limited operating history upon which to base an
evaluation of its current business and prospects. The Company's prospects must
be considered in light of the risks and uncertainties frequently encountered by
companies in the early stage of development, particularly companies in new and
rapidly evolving markets such as neuroscience-based learning products. Such
risks include, but are not limited to: the demand for technology-based learning
products; the management of growth; demand for the Company's programs and
services; the ability of the Company to penetrate its target markets; and
competition. To address these risks, the Company must, among other things:
successfully gain market acceptance for Fast ForWord, particularly in the public
school market; successfully introduce and gain market acceptance for related new
products and services; respond to competitive developments; attract, integrate,
retain and motivate qualified personnel, particularly sales and marketing
professionals; and address new or evolving technologies and standards. There can
be no assurance that the Company will be successful in addressing such risks and
the failure to do so would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
FUTURE DEPENDENCE ON GOVERNMENT FUNDING; UNCERTAINTY ASSOCIATED WITH
"PULLOUT" PROGRAMS. To date, the Company has generated limited revenues from
sales to public schools. However, the Company's future revenues are dependent,
in part, on its ability to increase revenues from public schools, which in turn
are largely dependent upon federal, state and local government funding. Federal
funding for educational technology has been made available through certain
legislation, including Title I of the Elementary and Secondary Education Act of
1965, as amended ("Title I"), and the education rate discount authorized by the
Telecommunications Act of 1996 ("E-Rate"), and many states have enacted similar
legislation. Substantial curtailments, delays or reductions in government
budgets or funding for educational software or technology would have a material
adverse effect on the Company's business, financial condition and results of
operations. Although Fast ForWord can be implemented on a school-wide basis, to
date the program has been used by students in a separate classroom using a
"pullout" approach. Many educators and policy makers are critical of programs
which use a "pullout" approach, which may inhibit acceptance of the Fast ForWord
program.
9
<PAGE>
MANAGEMENT OF GROWTH AND EXPANSION. The Company has recently experienced a
period of significant expansion. The Company's historical growth has placed, and
any further growth would place, a significant strain on the Company's
managerial, operational, financial and other resources. The Company has grown
from five employees at March 31, 1996 to 113 employees at June 30, 1998. During
this period, the Company significantly expanded its operations, introduced Fast
ForWord and opened its first Fast ForWord Learning Centers. The Company has
limited experience in opening and operating Learning Centers, and there can be
no assurance it will be successful in opening and operating additional Learning
Centers. The Company's future success will depend, in part, upon the ability of
its senior management to manage growth effectively, which will require the
Company to implement additional management information systems, to develop
further its operating, administrative, financial and accounting systems and
controls and to maintain close coordination among its accounting, finance,
marketing, sales, customer support and professional services organizations. The
failure of the Company to successfully manage its growth could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON CONTINUED PRODUCT DEVELOPMENT. The Company's future success
will depend to a significant extent on its ability to enhance its existing
programs and develop new programs, including Fast ForWord Two, a more advanced
pre-reading skills sequel to Fast ForWord, and additional products based on the
Company's proprietary technology. There can be no assurance that: (i) the
Company will be successful in developing and marketing new language-based
products, including enhancements to Fast ForWord if any, or new products that
address new market segments or respond to technological developments, evolving
industry standards or changing customer requirements; (ii) that the Company will
not experience difficulties that could delay or prevent the successful
development, introduction and sale of such new products; or (iii) such new
products will adequately meet the requirements of the marketplace and achieve
any significant degree of market acceptance. If release of any new products is
delayed or if these products fail to achieve market acceptance when released,
the Company's business, financial condition and results of operations could be
materially adversely affected. In addition, the introduction or announcement of
new product offerings, including enhancements if any, by the Company or the
Company's competitors or major hardware, systems or software vendors may cause
customers to defer or forgo purchases of the Company's products, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, the Company attempts to maintain high
standards for the demonstrated clinical efficacy of its products. The Company's
adherence to these standards could delay or inhibit the introduction of new
products. Moreover, there can be no assurance that the Company's products will
not be rendered obsolete or that the Company will have sufficient resources to
make the necessary investments or be able to develop and market the products
required to maintain its competitive position. See "Business--Research and
Development."
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's ability to compete
effectively will depend in part on its ability to develop and maintain the
proprietary aspects of its technology and operate without infringing on the
proprietary rights of others. The Company relies on a combination of patents,
trademarks, copyrights, trade secret laws, confidentiality procedures and
contractual provisions to protect its proprietary rights in its products and
technology. The Company has filed patent applications in the United States and
internationally relating to its technology, including 30 with the United States
Patent and Trademark Office ("USPTO"). Additionally, the Company is the
exclusive licensee of the technology owned by UCSF and Rutgers with respect to
the basic speech and sound modification algorithms used in Fast ForWord pursuant
to a licensing agreement (the "University License") with the Regents of the
University of California (the "Regents"). The licensed technology is the subject
of a pending patent application. There can be no assurance that any of the
Company's or its licensor's pending patent applications will result in the
issuance of any patents, or that, if issued, any such patents will offer
protection against competitors with similar technology. There can be no
assurance that any patents issued to the Company or its licensors will not be
challenged, invalidated or circumvented in the future or that the rights created
thereunder will provide a competitive advantage. The Regents may terminate the
University License if the Company violates its terms, including among others its
obligations to make payments thereunder, and fails to cure such violation within
60 days of the Regents' written notice thereof. The
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<PAGE>
Company may terminate the University License at any time by giving written
notice of its intent to do so, and the termination will take effect 60 days from
the effective date of such notice. The loss or inability to maintain the
University License could delay the Company's introduction of new products or
cause the recall of products from the market, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. In such event, even if the Company could identify and license
technology equivalent to the technology covered by the University License,
development and integration of such alternative technology would be likely to
delay the Company's product line, which would have a material adverse effect on
the Company's business, operating results and financial condition. In addition,
there can be no assurance that competitors, many of whom have substantially
greater resources than the Company and have made substantial investments in
competing technologies, will not seek to apply for and obtain patents covering
technologies that are more effective than the Company's technologies, that would
render the Company's technologies or products obsolete or uncompetitive or that
would prevent, limit or interfere with the Company's ability to make, use or
sell its products either in the United States or in international markets.
The technology industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. There can be no
assurance that the Company will not in the future become subject to patent
infringement claims and litigation or interference proceedings conducted in the
USPTO to determine the priority of inventions. The defense and prosecution of
intellectual property suits, USPTO interference proceedings and related legal
and administrative proceedings are both costly and time consuming. Litigation
may be necessary to enforce any patents issued to the Company, to protect trade
secrets or know-how owned by the Company or to determine the enforceability,
scope and validity of the proprietary rights of others. Any litigation or
interference proceedings will result in substantial expense to the Company and
significant diversion of effort by the Company's technical and management
personnel. An adverse determination in litigation or interference proceedings to
which the Company may become a party could subject the Company to significant
liabilities to third parties or require the Company to seek licenses from third
parties which may not be available on commercially reasonable terms or at all.
The Company's current products incorporate technologies which are the
subject of patents issued to, and patent applications filed by, others. The
Company has obtained licenses for certain of these technologies and may be
required to obtain licenses for others. There can be no assurance that the
Company will be able to obtain licenses for technology patented by others on
commercially reasonable terms, or at all, that it will be able to develop
alternative approaches if unable to obtain licenses or that the Company's
current and future licenses will be adequate for the operation of the Company's
business. The failure to obtain such licenses or identify and implement
alternative approaches could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company also relies upon trade secrets, technical know-how and
continuing invention to develop and maintain its competitive position, and no
assurance can be given that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its right to its trade secrets, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Intellectual Property."
RISK OF PRODUCT DEFECTS; PRODUCT CLAIMS. Software programs frequently
contain errors or failures, especially when first introduced or when new
versions are released. The Company could, in the future, lose revenues as a
result of software errors or defects. There can be no assurance that, despite
testing by the Company and by current and potential customers, errors will not
be found in new products or releases, whether before or after commencement of
commercial shipments, resulting in loss of revenue or delay in market
introduction or acceptance, diversion of development resources, damage to the
Company's reputation, or increased service and warranty costs, any of which
could have a material adverse effect upon the Company's business, financial
condition and results of operations. The Company has recently adopted a refund
policy under which the Company currently provides a refund in the event that a
child's performance on Fast ForWord indicates (based on criteria provided by the
Company in the policy) that the program is too difficult or too easy for the
child. In the school setting, the school is entitled to enroll a new
11
<PAGE>
child in the program, rather than receive a refund. While the Company does not
expect this policy to have a material effect on its operations, the Company has
limited experience with this policy, and there can be no assurance that it could
not have a material adverse effect in the future on the Company's business,
financial condition and results of operations. The Company markets products to
the public and faces an inherent business risk of financial exposure to product
liability claims. In addition, to the extent the Company provides professional
or similar services, the Company may also face a risk of exposure to
professional liability claims. The Company currently carries product and
professional liability insurance that, in general, covers product and
professional liability claims up to the policy limits. There can be no assurance
that such insurance will continue to be available to the Company at a reasonable
cost, if at all, or that such insurance will be adequate to satisfy any
liability or litigation expenses. Any claim or claims against the Company,
regardless of their merit or eventual outcome, could have a material adverse
effect on the Company's business, financial condition and results of operations.
LENGTHY SALES CYCLE. The use of the Company's programs and services
generally requires the Company to provide a significant level of education to
prospective speech and language professionals, schools, parents and other
learning facilitators regarding the use and benefits of the Company's programs
and services. In addition, the Company's programs involve a significant
commitment of time and resources, and, with respect to the public schools
market, are subject to school budget cycles. For these and other reasons, the
period between initial contact and the implementation of the Company's programs
and services may be lengthy and is subject to a number of significant delays
over which the Company has little or no control. The Company's sales cycle could
be lengthened as it targets school- and district-wide sales. Delay in the sale
or implementation of a limited number of sales transactions could have a
material adverse effect on the Company's business, financial condition and
results operations and cause the Company's operating results to vary
significantly from quarter to quarter. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business--Sales and
Marketing."
OPPOSING SCIENTIFIC THEORIES. The Company's first product, Fast ForWord, is
based on particular theories of neuroscience and language acquisition. The
Company's founders are prominent in their academic fields and are actively
involved in academic debate about their own and opposing scientific theories of
neuroscience and language acquisition. As a result, the theories on which Fast
ForWord is based have been, and are likely to be, subject to public debate and
challenges. Future publications, if any, regarding the Company's field trial
results may engender additional public debate and challenge. Although the
Company believes that the Fast ForWord program is based primarily upon
non-controversial scientific theories, some of the principles and methodologies
underlying and associated with the Company's products are opposed by certain
academicians and educators. Some of the philosophical opponents of these certain
principles and methodologies, particularly to the extent they author
publications, could influence the market for the Company's products and
services. Consequently, academic publications and debate challenging the
theories of neuroscience and language acquisition propounded by the founders and
others could significantly affect the market for the Company's programs and
services and could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Programs and
Services."
ADOPTION OF INTERNET SOLUTIONS. One of the key features of Fast ForWord is
its daily uploading and downloading of information to and from the Company's
proprietary database via the Internet. The Internet has experienced, and may
continue to experience, significant growth in the number of its users and amount
of traffic. There can be no assurance that the Internet infrastructure will
continue to support the demands placed on it by this continued growth or that
the performance or reliability of the Internet will not be adversely affected by
this continued growth. In addition, the Internet could lose its viability due to
delays in the development or adoption of new standards and protocols to handle
increased levels of activity or due to increased governmental regulation.
Changes in or insufficient availability of communications services to support
the Internet could result in slower response times and could adversely affect
their usage. If the use of the Internet, particularly within schools and among
speech and language professionals in private practice, fails to develop or
develops more slowly than expected, or if the Internet infrastructure
12
<PAGE>
does not adequately support continued growth, the Company's business, financial
condition and results of operations would be materially and adversely affected.
See "Business--Computer Technology."
COMPETITION. The educational technology market in which the Company
operates is very competitive. The Company competes primarily against providers
of traditional methods of remediation for language-based learning problems,
which typically require several years of one-on-one training for children with
identified language-based learning problems. Although the traditional approach
to language-based learning problems is fundamentally different from the approach
taken by the Company, such programs are more widely known and accepted and,
therefore, represent significant competition. In addition, the Company competes
to some extent with other companies offering educational software products to
schools and speech and language professionals in private practice and with other
operators of learning centers. Existing competitors may continue to broaden
their product lines, and potential competitors, including large software
developers and educational publishers, may enter or increase their focus on the
school market, resulting in greater competition for the Company. Moreover, the
Company expects that it will face additional competition from new entrants into
the market. Many competitors have substantially greater technical, marketing and
distribution resources than the Company. There can be no assurance that the
Company will continue to be able to market its products successfully or compete
effectively in the educational technology market. See "Business--Competition."
DEPENDENCE ON KEY PERSONNEL; ABILITY TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL. The Company's success depends to a significant extent upon the
continued active participation of certain key members of management. The loss of
one or more of these persons could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
believes that its future success will depend upon its ability to continue to
attract, motivate and retain highly-skilled managerial, sales and marketing, and
product development personnel. Competition for such personnel is intense. The
failure to attract or retain the necessary personnel, as to which there can be
no assurance, would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Employees."
YEAR 2000 COMPLIANCE. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field and cannot distinguish century dates prior to January 1, 2000 from dates
on and after January 1, 2000. These date code fields will need to distinguish
dates prior to January 1, 2000 from dates on and after January 1, 2000 dates
("Year 2000 Compliance") and, as a result, many companies' software and computer
systems may need to be upgraded or replaced in order to reach Year 2000
Compliance. Although the Company believes that its products and internal systems
are in Year 2000 Compliance, the Company utilizes third-party equipment and
software that may not be in Year 2000 Compliance. Failure of such third-party
equipment or software to be in Year 2000 Compliance could require the Company to
incur unanticipated expenses to remedy any problems, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Furthermore, the purchasing patterns of customers or potential
customers may be affected by Year 2000 Compliance issues as educational
institutions expend significant resources to correct their current systems for
Year 2000 Compliance. These expenditures may result in reduced funds available
to purchase products and services, such as those offered by the Company, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
IMPACT OF GOVERNMENT REGULATION. The Company's business is potentially
subject to or affected by a variety of federal, state and local laws and
regulations, including, without limitation laws and regulations relating to: (i)
education; (ii) licensing of speech and language professionals in private
practice and delivery of speech and language testing and remediation services;
(iii) consumer protection and anti-fraud and related protections, including the
regulation of referrals by professionals; and (iv) government funding.
Compliance with these and other laws and regulations impose additional costs on
the conduct of the Company's business, and failure to comply with such laws and
regulations, changes in such laws and regulations, or in their applicability to
the business of the Company may impose additional costs, and could materially
and adversely affect the Company's business, financial condition and results of
operations.
13
<PAGE>
While the Company has not expressly agreed to grant any distribution territory
or franchise to any person or entity and believes that it is not currently
subject to the laws regulating distributors or franchisors, in the future the
Company may make such distribution or franchise arrangements, or may be deemed
to have made such arrangements, and could, as a result, be subject to laws
regulating distributors or franchisors. Such regulation could materially and
adversely affect the Company's business, financial condition and results of
operations. In addition, while the Company has been advised on an unofficial
basis by officials of the United States Food and Drug Administration ("FDA")
that Fast ForWord is an educational tool not subject to FDA regulation, there
can be no assurance that the FDA will not make a contrary determination in the
future with respect to Fast ForWord or other products under development by the
Company. Such regulation could, among other effects, impose numerous additional
requirements on the marketing of the Company's products, cause delays in
bringing products to market, prevent the introduction of products or necessitate
their withdrawal, any of which could materially and adversely affect the
Company's business, financial condition and results of operations.
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS. Following the completion
of this Offering, the Company's executive officers and directors and their
respective affiliates will beneficially own approximately 60.8% of the
outstanding Common Stock (59.2% if the Underwriters exercise their
over-allotment option in full). As a result, these stockholders, by acting in
concert, will be able to exercise significant influence over all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. Such concentration of ownership may also
have the effect of delaying, preventing or deterring a change in control of the
Company. In addition, in connection with the issuance of Series B Preferred
Stock and warrants to purchase Series C Preferred Stock, the Company entered
into an agreement that requires the Company, following the completion of this
Offering and as long as Warburg Pincus Ventures, L.P. ("Ventures") owns at least
10% or 20% of the outstanding Common Stock, to nominate and use its best efforts
to elect one or two individuals, respectively, designated by Ventures for
election to the Board of Directors. See "Certain Transactions," "Principal and
Selling Stockholders" and "Description of Capital Stock--Board Representation
Rights."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to this
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 this Offering. The initial offering price will be
determined by negotiation among the Company and the Underwriters based upon
several factors and may bear no relation to the price at which the Common Stock
will trade after this Offering. For a discussion of the factors taken into
account in determining the initial public offering price, see "Underwriting."
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 the timing of future
product releases, if any, by the Company, variations in the Company's annual or
quarterly financial results or those of its competitors, changes by financial
research analysts in their estimates of the future earnings of the Company,
conditions in the economy in general or in the Company's industry in particular,
unfavorable publicity or changes in applicable laws and regulations affecting
the Company or the educational technology industry or other events or factors,
many of which are beyond the Company's control. In addition, the stock market
has experienced significant price and volume fluctuations that have affected the
market prices of educational technology companies and that often have been
unrelated or disproportionate to the operating performance of such companies.
These broad market fluctuations may adversely affect the market price of the
Company's Common Stock. In the past, following periods of volatility in the
market price of a company's stock, securities class action litigation has
occurred against that company. Such litigation could result in substantial costs
and would, at a minimum, divert management's attention and resources, which
could have a material adverse effect of the Company's business, financial
position and results of operations. Any adverse determination in such litigation
could also subject the Company to significant liabilities.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of shares in
the public market following this Offering could have a material adverse effect
on the market price of the Common Stock. Immediately following this Offering,
the Company will have 11,671,893 shares of Common Stock outstanding assuming no
exercise of the Underwriters' over-allotment option and no exercise of
outstanding options or warrants
14
<PAGE>
after June 30, 1998. Of these shares, all the shares sold in this Offering will
be freely tradable without restrictions or further registration under the
Securities Act of 1933, as amended (the "Securities Act"). The remaining
9,271,893 shares of Common Stock will be "restricted securities" as defined by
Rule 144 ("Rule 144") adopted under the Securities Act. These shares may be sold
in the public market only if registered or if they qualify for an exemption from
registration under Rule 144 or Rule 701 ("Rule 701") adopted under the
Securities Act. The Company is unable to predict the effect that future sales
made under Rule 144, Rule 701 or otherwise will have on the market price of the
Common Stock prevailing at that time. In addition, following closing of this
Offering the Company intends to register shares of Common Stock issuable upon
the exercise of stock options granted under the Company's stock option plans.
After the effective date of such registration, shares issued upon the exercise
of stock options generally will be available for sale in the public market. The
Company, its executive officers and directors and certain stockholders
beneficially owning in the aggregate 8,932,932 shares of Common Stock have
agreed, subject to certain limited exceptions, not to offer, sell, contract to
sell, grant any option to purchase or otherwise dispose of any shares of Common
Stock, without the prior written consent of NationsBanc Montgomery Securities
LLC, for a period of 180 days after the first day any of the Common Stock to be
sold in this Offering is released by the Underwriters for sale to the public.
Any shares subject to these lock-up agreements may be released at any time by
NationsBanc Montgomery Securities LLC, with or without notice. The holders of
approximately 3,678,571 shares of Common Stock are entitled to certain
registration rights with respect to such shares. See "Shares Eligible for Future
Sale" and "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of Common Stock in this
Offering will experience immediate and substantial dilution of $10.61 per share.
To the extent outstanding options or warrants to purchase Common Stock are
exercised or the Company issues additional shares of Common Stock, they may
experience further dilution. See "Dilution."
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. The Company's
Amended and Restated Certificate of Incorporation (the "Restated Certificate")
authorizes the Board of Directors to issue up to 1,000,000 shares of Preferred
Stock and to determine the price, rights, preferences and privileges, including
voting rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The Restated Certificate and Amended and
Restated Bylaws (the "Restated Bylaws"), among other things, require that
stockholder actions occur at duly called meetings of the stockholders, do not
permit cumulative voting in the election of directors and require advance notice
of stockholder proposals and director nominations. Additionally, the Restated
Certificate provides for a classified Board of Directors and specifies that the
authorized number of directors may be changed only by resolution of the Board of
Directors. Amendment of these provisions requires the vote of stockholders
holding at least two-thirds of the Company's outstanding shares. Certain
provisions contained in the Company's charter documents and certain applicable
provisions of Delaware law could serve to depress the Company's stock price or
discourage a hostile bid in which stockholders could receive a premium for their
shares. In addition, these provisions could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company, or delay, prevent or deter a merger, acquisition or tender
offer in which the Company's stockholders could receive a premium for their
shares, a proxy contest for control of the Company or other change in the
Company's management. See "Description of Capital Stock."
UNSPECIFIED USE OF PROCEEDS; MANAGEMENT DISCRETION. The Company intends to
use a portion of the net proceeds to repay the outstanding balances under its
existing bank lines of credit, estimated to be approximately $2.0 million upon
completion of this Offering. In addition, the Company plans to substantially
increase sales and marketing expenses and research and development expenses,
which are expected to be funded in part by gross profits and in part by use of a
portion of the net proceeds of this Offering. The actual amount and timing of
such expenditures will depend on business and market developments. The Company
intends to use the remaining net proceeds for general corporate purposes,
including working capital. As a result, the Company will have significant
discretion as to the use of the net proceeds of this Offering. See "Use of
Proceeds."
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,400,000 shares of
Common Stock offered by the Company, at an assumed initial public offering price
of $13.00 per share, are estimated to be approximately $28,266,000 ($30,227,000
if the Underwriters' over-allotment option is exercised in full), after
deducting underwriting discounts and estimated offering expenses payable by the
Company.
The Company expects to use the net proceeds of this Offering for working
capital and other general corporate purposes, capital expenditures and repayment
of certain indebtedness. In particular, the Company intends to use a portion of
the net proceeds to repay the outstanding balances under its existing bank lines
of credit, estimated to be approximately $2.0 million upon completion of this
Offering. Such borrowings were used primarily to fund operating losses and in
connection with equipment financing. In addition, the Company expects to use
approximately $1.5 million of such proceeds for capital expenditures during the
remainder of 1998. Further, the Company currently expects to use a portion of
the net proceeds of this Offering to fund incremental sales and marketing
initiatives and increased research and product development efforts. The actual
amount and timing of such expenditures will depend on business and market
developments, including those discussed under "Risk Factors." Pending such uses,
the net proceeds of this Offering will be invested in short-term,
interest-bearing, investment grade securities. See "Risk Factors--Unspecified
Use of Proceeds; Management Discretion."
The Company has a $3.0 million unsecured line of credit with BankBoston N.A.
which expires in May 1999. Borrowings under the line of credit bear interest, at
the election of the Company, at the bank's base rate, or the adjusted LIBOR plus
1.75%, and are guaranteed by Ventures. The Company also has two lines of credit
with Silicon Valley Bank in the amounts of $400,000 and $450,000 to finance
equipment purchases through June 1998 and August 1998, respectively. Borrowings
under these lines of credit bear interest at the bank's prime rate plus 3% and
are due in monthly installments through June 1999 and August 2000, respectively.
Borrowings are secured by substantially all of the Company's assets, excluding
intellectual property.
If the Underwriters' over-allotment option is exercised, the Company will
not receive any proceeds from the sale of shares of Common Stock by the Selling
Stockholders. See "Principal and Selling Stockholders."
DIVIDEND POLICY
The Company has never paid any cash dividends on its capital stock. The
Company currently anticipates that it will retain earnings to support operations
and to finance the growth and development of the Company's business and does not
anticipate paying cash dividends for the foreseeable future. In addition, under
the Company's existing lines of credit, there are restrictions on the Company's
ability to pay dividends without consent of the lenders.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998, on an actual basis and as adjusted to reflect: (i) the sale by the
Company of the 2,400,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $13.00 per share after deducting underwriting
discounts and estimated offering expenses, and the application of the estimated
net proceeds therefrom; and (ii) the conversion of all outstanding Preferred
Stock into Common Stock upon completion of this Offering. This table should be
read in conjunction with the Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------------
ACTUAL AS ADJUSTED
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, including current portion........................................ $ 1,090 $ --
Redeemable convertible Preferred Stock, $0.001 par value per share; 3,678,571
shares issued and outstanding actual, no shares issued and outstanding as
adjusted........................................................................ $ 8,002 $ --
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value per share; 7,000,000 shares authorized
(including 4,700,000 shares designated as redeemable convertible Preferred
Stock); 1,419,681 shares issued and outstanding actual; 1,000,000 shares
authorized, no shares issued and outstanding as adjusted..................... 2,355 --
Common Stock, $0.001 par value per share; 17,500,000 shares authorized;
4,173,641 shares issued and outstanding actual; 50,000,000 shares authorized,
11,671,893 shares issued and outstanding as adjusted (1)..................... 1,851 40,474
Deferred compensation (2)........................................................ (923) (923)
Accumulated deficit.............................................................. (11,658) (11,658)
-------------- --------------
Total stockholders' equity (deficit)........................................... (8,375) 27,893
-------------- --------------
Total capitalization......................................................... $ 717 $ 27,893
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------
(1) Based on the number of shares outstanding as of June 30, 1998. Excludes: (i)
1,611,498 shares of Common Stock issuable upon exercise of options and
warrants outstanding as of June 30, 1998 with a weighted average exercise
price of $0.65 per share; (ii) 2,800,000 additional shares of Common Stock
reserved for issuance under the Company's 1998 Equity Incentive Plan; (iii)
100,000 shares of Common Stock reserved for issuance under the Company's
1998 Non-Employee Directors' Stock Option Plan; and (iv) 500,000 shares of
Common Stock reserved for issuance under the Company's 1998 Employee Stock
Purchase Plan. See "Management--Employee Benefit Plans," "Certain
Transactions" and "Description of Capital Stock."
(2) See Note 5 of Notes to the Financial Statements included elsewhere in this
Prospectus.
17
<PAGE>
DILUTION
The pro forma net tangible book value (deficit) of the Company at June 30,
1998 was approximately $(373,000) or $(0.04) per share of Common Stock. Pro
forma net tangible book value (deficit) per share represents the amount of the
Company's total tangible assets less total liabilities, divided by the number of
shares of Common Stock outstanding after giving effect to the automatic
conversion of all outstanding shares of Preferred Stock into an aggregate of
5,098,252 shares of Common Stock. After giving effect to the sale by the Company
of the 2,400,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $13.00 per share after deducting the underwriting
discounts and estimated offering expenses payable by the Company and applying
the estimated net proceeds therefrom, the adjusted net tangible book value of
the Company as of June 30, 1998 would have been approximately $27.9 million, or
$2.39 per share of Common Stock. This represents an immediate increase in net
tangible book value of $2.43 per share of Common Stock to existing stockholders
and an immediate dilution in net tangible book value of $10.61 per share to new
investors purchasing shares at the assumed initial public offering price. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price............................... $ 13.00
---------
Pro forma net tangible book value (deficit) per share........... $ (0.04)
Increase per share attributable to new investors................ 2.43
---------
Net tangible book value per share, as adjusted for the Offering..... 2.39
---------
Dilution per share to new investors................................. $ 10.61
---------
---------
</TABLE>
The following table summarizes as of June 30, 1998, on the pro forma basis
described above, the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
the existing stockholders and by the new investors (at an assumed initial public
offering price of $13.00 per share for shares purchased in this Offering, before
deducting underwriting discounts and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------ PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------ --------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1).......................... 9,271,893 79.4% $ 12,035,000 27.8% $ 1.30
New investors...................................... 2,400,000 20.6 31,200,000 72.2 13.00
------------ --------- ------------- ---------
Total............................................ 11,671,893 100.0% $ 43,235,000 100.0%
------------ --------- ------------- ---------
------------ --------- ------------- ---------
</TABLE>
- --------------------------
(1) If the Underwriters' over-allotment option is exercised in full, the number
of shares held by Existing Stockholders will be reduced to 9,078,235 shares,
or 75.5% of the number of shares to be outstanding after this Offering.
The foregoing table assumes no exercise of outstanding stock options and
warrants and excludes: (i) 1,611,498 shares of Common Stock issuable upon
exercise of options and warrants outstanding as of June 30, 1998 with a weighted
average exercise price of $0.65 per share; (ii) 2,800,000 additional shares of
Common Stock reserved for issuance under the Company's 1998 Equity Incentive
Plan; (iii) 100,000 shares of Common Stock reserved for issuance under the
Company's 1998 Non-Employee Directors' Stock Option Plan; and (iv) 500,000
shares of Common Stock reserved for issuance under the Company's 1998 Employee
Stock Purchase Plan. See "Capitalization," "Management--Employee Benefit Plans,"
"Certain Transactions" and "Description of Capital Stock." To the extent that
options or warrants are exercised, there will be further dilution to new
investors.
18
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth certain historical financial data for the
Company as of and for the years ended December 31, 1996 and 1997 and as of and
for the six months ended June 30, 1997 and 1998. The Company commenced
operations in February 1996. The historical financial data as of and for the
years ended December 31, 1996 and 1997 were derived from the Financial
Statements of the Company that have been audited by Ernst & Young LLP,
independent auditors, and that are included elsewhere in this Prospectus and are
qualified by reference to such financial statements and the notes thereto. The
historical financial data as of and for the six months ended June 30, 1997 and
1998 were derived from unaudited financial statements included elsewhere in this
Prospectus. In the opinion of management, the historical financial data as of
and for the six months ended June 30, 1997 and 1998 have been prepared on the
same basis as the audited financial statements and include all adjusting entries
(consisting only of normal recurring adjustments) necessary to present fairly
the information set forth herein. The historical financial data presented herein
are not necessarily indicative of the results of operations for any future
period and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Programs................................................................ $ -- $ 2,249 $ 330 $ 1,572
Services................................................................ -- 713 359 228
--------- --------- --------- ---------
Total revenues........................................................ -- 2,962 689 1,800
Cost of revenues:
Programs................................................................ -- 481 124 293
Services................................................................ -- 468 199 174
--------- --------- --------- ---------
Total cost of revenues................................................ -- 949 323 467
--------- --------- --------- ---------
Gross profit.............................................................. -- 2,013 366 1,333
Operating expenses:
Sales and marketing..................................................... 164 2,646 873 2,361
Research and development................................................ 1,514 1,965 809 1,316
General and administrative.............................................. 933 2,537 925 1,740
--------- --------- --------- ---------
Total operating expenses.............................................. 2,611 7,148 2,607 5,417
--------- --------- --------- ---------
Operating loss............................................................ (2,611) (5,135) (2,241) (4,084)
Interest income (expense), net............................................ 70 162 51 (19)
Other income (expense), net............................................... 44 (85) -- --
--------- --------- --------- ---------
Net loss.................................................................. $ (2,497) $ (5,058) $ (2,190) $ (4,103)
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro forma basic and diluted net loss per share (1)........................ $ (0.60) $ (0.44)
--------- ---------
--------- ---------
Shares used in computing pro forma net loss per share (1)................. 8,436 9,227
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997 JUNE 30, 1998
--------- --------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)...................................................... $ 3,562 $ 1,569 $ (2,019)
Total assets................................................................... 4,306 4,456 3,701
Long-term debt, including current portion...................................... 35 330 1,090
Redeemable convertible preferred stock......................................... 4,002 8,002 8,002
Stockholders' equity (deficit)................................................. (85) (5,064) (8,375)
</TABLE>
- --------------------------
(1) The pro forma net loss per share data gives effect to the conversion of all
outstanding shares of Preferred Stock into 5,098,252 shares of Common Stock
upon completion of this Offering. See Note 1 of Notes to Financial
Statements included elsewhere in this Prospectus for a further explanation
of the number of pro forma shares used in per share calculations.
(2) The Company has paid no cash dividends since its inception.
19
<PAGE>
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 "SELECTED FINANCIAL
DATA" AND THE COMPANY'S FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED
ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION,
STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS
PROSPECTUS. FACTORS THAT MAY CAUSE OR CONTRIBUTE TO SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," AS WELL AS THOSE
DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company commenced operations in February 1996, and, until April 1997, it
devoted substantially all of its efforts to developing its Fast ForWord program,
performing a field trial, recruiting and training personnel, establishing
relationships with and training teachers and speech and language professionals,
and raising capital. Since the commercial launch of Fast ForWord in April 1997,
the Company has also devoted efforts to sales and marketing activities. The
Company has an accumulated deficit of $11.7 million from inception through June
30, 1998 and expects to incur additional losses for at least the next two years,
due primarily to substantial increases in sales and marketing and research and
development expenses. The Company expects that losses will fluctuate from
quarter to quarter and that such fluctuations may be substantial.
REVENUES. The Company derives revenues from program sales and service fees.
Program revenues are derived from the sale of Fast ForWord programs, which are
generally sold for $850 per child, except where the Company has negotiated
reference site or volume discounts in connection with large sales. The Company
believes that per program revenue generally will decrease in the future as the
Company makes more large sales and grants a greater number of individually
negotiated volume discounts in connection with such sales. Revenues on sales of
Fast ForWord are recognized over the average duration of the program. Service
revenues are derived from the Company's Fast ForWord training seminars for
learning facilitators and from services provided to customers of the Company's
Learning Centers. Revenues from seminars are recognized when the seminar is
held. Revenues from Learning Center services are recognized over the average
duration of the program. The Company only recently began operating Learning
Centers and revenues to date have been minimal. Cancellations and refunds are
allowed in limited circumstances, and such amounts have not been significant.
Provisions are made for cancellations and refunds as revenue is recorded.
The Company's revenues have been derived exclusively from the sale of Fast
ForWord programs and related seminars and services. While the Company is
developing additional products based upon its proprietary technology and
neuroscience expertise, there can be no assurance that it will be successful in
doing so. In addition, to date the substantial majority of the Company's sales
of Fast ForWord have been through speech and language professionals. In the
future, the Company intends to focus a substantial part of its sales and
marketing efforts on public schools and on direct sales to parents through
Learning Centers. Given the limited historical experience of the Company selling
Fast ForWord to schools and operating Learning Centers, there can be no
assurance that the Company will be successful in these strategies. Furthermore,
due to lengthy school budget cycles, possible delays related to government
funding and the inherent complexity of selling to schools and school districts,
the Company expects that its sales cycle could be significantly longer than that
experienced historically as it increasingly focuses on sales to this market. As
a result, the Company may have limited visibility on its future revenues, and
such revenues may fluctuate substantially.
COST OF REVENUES. Cost of revenues consists of program costs and service
costs. Program costs consist of costs associated with the Fast ForWord program,
including royalties, manufacturing, packaging, documentation, fulfillment,
Internet hosting and technical support costs. Service costs consist primarily of
the costs of providing the Company's training seminars, including personnel,
materials, facilities, travel and Learning Center service costs. Such costs of
revenues are generally recognized as incurred. The Company
20
<PAGE>
generally recognizes significantly higher gross margins on its program sales
than on its service sales. As a result of these factors, the Company expects
that gross margins will fluctuate due to changes in the mix between program
revenues and service revenues.
OPERATING EXPENSES. The Company's operating expenses consist of sales and
marketing expenses, research and development expenses and general and
administrative expenses. Sales and marketing expenses principally consist of
salaries and compensation paid to employees engaged in sales and marketing
activities, advertising and promotional materials, public relations costs,
telemarketing and travel. Research and development expenses principally consist
of salaries and compensation paid to employees and consultants engaged in
research and product development activities, product testing, and software and
equipment costs. The Company expenses all software development costs associated
with a product until technological feasibility is established, after which time
all such costs are capitalized until the product is available for commercial
release and are amortized over the estimated lives of the related products.
Technological feasibility is deemed established upon completion of a working
version. To date, capitalizable software development costs have been
insignificant and have been charged to research and development expense. General
and administrative expenses principally consist of salaries and compensation
paid to employees and consultants other than those engaged in research and
development and sales and marketing activities, facilities and related
depreciation, in-house and outside legal and accounting fees and related costs,
and travel.
The Company recorded deferred compensation of $508,000 during the year ended
December 31, 1997 and $798,000 during the six months ended June 30, 1998,
representing the difference between the exercise price and the deemed fair value
of certain of the Company's stock options granted to employees. These amounts
are being amortized by charges to operations over the vesting periods of the
individual stock options. Such amortization amounted to $124,000 for the year
ended December 31, 1997 and $259,000 for the six months ended June 30, 1998. The
remaining aggregate deferred compensation of $923,000 will be amortized over the
vesting period of the options (generally five years). Additionally, the Company
expects to record charges to operations of approximately $454,000 in third
quarter of 1998, in connection with warrants to purchase 100,000 shares of the
Company's Common Stock. Such warrants were issued to Ventures in June 1998 in
connection with the stockholder's guarantee of the Company's new $3.0 million
line of credit. The Company intends to repay borrowings under the line of credit
from the proceeds of this Offering.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data for the Company expressed as a percentage of revenues (unless otherwise
noted). The Company commenced operations, and was in the development stage, in
1996. As a result, there were no revenues, cost of revenues or gross profits in
1996.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, ----------------------------
1997 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Programs............................................................. 75.9% 47.9% 87.3%
Services............................................................. 24.1 52.1 12.7
------ ------ ------
Total revenues..................................................... 100.0 100.0 100.0
Cost of revenues:
Programs (1)......................................................... 21.4 37.6 18.6
Services (2)......................................................... 65.6 55.4 76.3
------ ------ ------
Total cost of revenues............................................. 32.0 46.9 25.9
------ ------ ------
Gross margin........................................................... 68.0% 53.1% 74.1%
------ ------ ------
------ ------ ------
</TABLE>
- --------------------------
(1) Program costs are expressed as a percentage of program revenues.
(2) Service costs are expressed as a percentage of service revenues.
21
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
REVENUES. Revenues increased to $1.8 million in the six months ended June
30, 1998 from $689,000 in the comparable period in 1997. This increase was
primarily attributable to an increase in program revenues from $330,000 to $1.6
million, resulting from increased sales of Fast ForWord, which was commercially
released in April 1997. This revenue increase was partially offset by a decline
in service revenues from $359,000 to $228,000, resulting from the Company's
planned decrease in the number of seminars offered to learning facilitators as
the Company shifted its seminar strategy to focus on fewer, more extensive
seminars.
COST OF REVENUES. Cost of revenues increased to $467,000 in the six months
ended June 30, 1998 from $323,000 in the comparable period in 1997. This
increase was primarily attributable to higher cost of revenues associated with
increased sales of Fast ForWord. As a percentage of revenues, costs of revenue
declined from 46.9% to 25.9% primarily because program revenues, which typically
have significantly lower costs as a percentage of revenues, represented a higher
proportion of total revenues. As a percentage of program revenue, costs of
program revenue declined from 37.6% to 18.6% due primarily to initial product
launch costs in the 1997 period. Costs of service revenue increased from 55.4%
to 76.3% of service revenues as a result of the added costs per session of more
extensive seminars for learning facilitators and startup costs associated with
Learning Centers.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$2.4 million in the six months ended June 30, 1998 from $873,000 in the
comparable period in 1997. This increase was primarily attributable to increased
personnel costs resulting from the expansion of its sales and marketing force
and to a lesser extent to increased direct mail, travel and promotional
materials costs. The Company expects to substantially increase sales and
marketing expenses in the future as it increases its sales and marketing efforts
for Fast ForWord and any future products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $1.3 million in the six months ended June 30, 1998 from $809,000 in
the comparable period in 1997. This increase was primarily attributable to
personnel costs resulting from the expansion of its research and development
staff. The Company expects to substantially increase research and development
expenses in the future as it continues to refine Fast ForWord and develop
additional products based upon its proprietary technology and neuroscience
expertise.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $1.7 million in the six months ended June 30, 1998 from $925,000 in
the comparable period in 1997. This increase was primarily attributable to
personnel costs and facilities costs related to the Company's move to a new
headquarters facility in September 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Revenues were $3.0 million in 1997 and were primarily
attributable to the introduction of training seminars in January 1997 and the
commercial release of Fast ForWord in April 1997. The Company was in the
development stage during 1996 and did not have revenues.
COST OF REVENUES. Cost of revenues was $949,000 in 1997 and was primarily
attributable to costs associated with providing training seminars and costs of
the Fast ForWord program. The Company was in the development stage during 1996
and did not have revenues or associated costs. As a percentage of program
revenues, program costs were 21.4%. Services costs were 65.6% of services
revenue.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $2.6
million in 1997 consisting primarily of personnel costs, direct mail costs,
public relations costs, telemarketing service costs, advertising and other
promotional materials and services. The Company was in the development stage
during 1996 and did not incur significant sales and marketing expenses.
22
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $2.0 million in 1997 from $1.5 million in 1996. This increase was
primarily attributable to increased personnel and to a lesser extent to
consulting, software and equipment-related costs. Research and development
expenses in 1996 included $554,000 associated with entering into the University
License.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $2.5 million in 1997 from $933,000 in 1996. This increase was
primarily attributable to personnel costs and facilities costs related to the
Company's move to a new headquarters facility in September 1997.
PROVISION FOR INCOME TAXES. The Company recorded no provision for income
taxes in the years ended December 31, 1996 and 1997 as it incurred losses during
such periods. At December 31, 1997, the Company had net operating loss
carryforwards and research credit carryforwards for federal income tax purposes
of approximately $6,600,000 and $85,000, respectively. The net operating loss
carryforwards will expire in years 2011 through 2012. Utilization of the net
operating losses may be subject to a substantial annual limitation, due to the
ownership change limitations provided by the Internal Revenue Code of 1986. The
annual limitation may result in the expiration of net operating losses before
utilization. At December 31, 1996 and 1997, the Company had approximately $1.0
million and $3.0 million, respectively, of deferred tax assets, comprised
primarily of net operating loss carryforwards. Realization of deferred tax
assets is dependent upon future earnings, if any, the timing and amount of which
are uncertain. Accordingly, the net deferred tax assets have been fully offset
by a valuation allowance.
QUARTERLY RESULTS OF OPERATIONS
The Company's quarterly operating results have varied significantly in the
past and are expected to fluctuate significantly in the future as a result of a
variety of factors, many of which are beyond the Company's control. Factors that
may affect the Company's quarterly operating results include among others: (i)
demand for technology-based education and training products; (ii) size and
timing of product orders and implementation; (iii) revenue mix between products
and services; (iv) timely development, introduction and market acceptance of the
Company's existing and future products, if any; (v) pricing of the Company's
programs and services; (vi) number and timing of Learning Center openings and
closings; (vii) terms under which Learning Centers are operated; (viii)
competitive conditions; (ix) ability to attract and retain experienced
personnel; (x) availability of government funding for public schools; (xi)
public school calendars and budget cycles; (xii) number and timing of Fast
ForWord training seminars for learning facilitators; and (xiii) general economic
and market conditions. The Company's limited operating history and the emerging
nature of its market make prediction of future revenues and expenses difficult.
The Company's expense levels are based in part on its expectations as to future
revenues and to a large extent are fixed in the short term. There can be no
assurance that the Company will be able to predict its future revenues
accurately and the Company may be unable to adjust spending in a timely manner
to compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall of revenues in relation to the Company's expectations could cause
significant fluctuations in quarterly operating results, which would have an
adverse effect on the Company's business, financial condition and results of
operations.
Demand for the Company's programs and services is subject to certain
seasonal influences which can vary depending on the distribution channel being
employed. The Company does not have sufficient operating experience in its
various distribution channels to predict the overall effect of various seasonal
factors and their effect on future quarterly operating results. The Company
believes that, because of the intensive nature of Fast ForWord, demand for its
programs from speech and language professionals in private practice may be lower
during the school year than in the summer. The Company's strategy to place Fast
ForWord Learning Centers in private schools and take advantage of unused
capacity during summers may further amplify this effect. Certain of the
Company's eight current Fast ForWord Learning Centers are expected to operate
only during the summer and, to date, the Company has no contracts extending
through the school year for the five Learning Centers currently established in
private schools. To the extent the
23
<PAGE>
Company penetrates the public school market, the Company may experience
seasonality due to public school calendars and budget cycles.
Due to all of the foregoing factors, the Company's quarterly revenues and
operating results are difficult to forecast, and the Company believes that
period-to-period comparisons of its operating results will not necessarily be
meaningful and should not be relied upon as an indication of future performance.
LIQUIDITY AND CAPITAL RESOURCES
From inception through June 30, 1998, the Company used approximately $7.9
million of cash for operating activities, resulting primarily from operating
losses of $11.7 million and increases in accounts receivable of $318,000,
partially offset by increases in deferred compensation of $1.3 million and
accounts payable of $718,000 and depreciation and amortization charges of $1.0
million. Accounts receivable increased from insignificant balances at December
31, 1996 and 1997 to $318,000 at June 30, 1998 as a result of increased sales to
schools. Deferred revenue increased from an insignificant amount at December 31,
1996 to $342,000 at December 31, 1997 to $1.6 million at June 30, 1998,
primarily as a result of increased sales of Fast ForWord programs for which
revenue is recognized over the average duration of the program. Accounts payable
increased from $115,000 at December 31, 1996 to $419,000 at December 31, 1997 to
$718,000 at June 30, 1998 as a result of increased levels of operations.
During this same period, the Company used $2.2 million for investing
activities, consisting principally of the acquisition of computer equipment,
furniture and fixtures. These cash needs have been primarily financed through
the sale of equity securities and borrowings under the Company's existing bank
lines of credit. The Company currently anticipates paying down all indebtedness
under its existing bank lines of credit from the proceeds of this Offering. As
of June 30, 1998, the Company had cash and cash equivalents of $1.0 million.
In June 1998, the Company obtained a $3.0 million unsecured line of credit
with BankBoston N.A. which expires in May 1999. Borrowings under the line of
credit bear interest, at the election of the Company, at the bank's base rate,
or the adjusted LIBOR plus 1.75% (7.41% at June 30, 1998), and are guaranteed by
Ventures. The Company has two lines of credit with Silicon Valley Bank in the
amounts of $400,000, which was used to fund equipment purchases during 1997, and
$450,000 to finance equipment purchases through August 1998. Borrowings under
these lines of credit bear interest at the bank's prime rate plus 3.0% (11.5% at
June 30, 1998) and are due in monthly installments through June 1999 and August
2000, respectively. Borrowings are secured by substantially all of the Company's
assets, excluding intellectual property. Outstanding borrowings and amounts
available for borrowing under all of these bank lines of credit at June 30, 1998
amounted to $1.1 million and $2.6 million, respectively. The Company intends to
use a portion of the net proceeds of this Offering to repay the outstanding
balances under its existing bank lines of credit, estimated to be approximately
$2.0 million, upon completion of this Offering. The estimated increase in
outstanding borrowings from June 30, 1998 to completion of the Offering is
attributable to the funding of operating losses and additional equipment
purchases.
The Company believes that funds generated from operations together with the
net proceeds from this Offering and available borrowings under its existing
lines of credit will be sufficient to finance its anticipated operating losses,
planned capital expenditure requirements and internal growth through 1999. The
Company does not believe that it will be necessary to raise additional funds to
operate the business in the next six months because the net proceeds of this
Offering, revenues and available credit are expected to be sufficient to meet
anticipated sales and marketing expenses, research and development expenses,
other working capital needs and capital expenditures during such period.
However, there can be no assurance that the Company's cash resources following
this Offering will be sufficient to fund the Company's negative cash flow and
expected capital expenditures through 1999. The Company, therefore, may need to
obtain additional equity or debt financing in the future. There can be no
assurance that the Company will be able to obtain the additional financing to
satisfy its cash requirements on acceptable terms or at all.
24
<PAGE>
BUSINESS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
DISCUSSED IN THIS PROSPECTUS. FACTORS THAT MAY CAUSE OR CONTRIBUTE TO SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS,"
AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company develops, markets and sells proven, neuroscience-based education
and training programs designed to increase human learning and performance. The
Company's initial product, Fast ForWord, is an intensive, computer-based
training program that focuses on improving critical pre-reading skills,
including receptive and expressive communication skills in children with
language-based learning problems. The program modifies and emphasizes
characteristics of speech and sound so that they can be more readily
differentiated and processed. Through thousands of repetitions, the program
enables children to master the essential building blocks, or phonemes, of the
English language and facilitates the learning of other critical language skills,
such as morphology (the system of word formation), syntax and grammar, and
executive function skills, such as short-term memory and event sequencing
capabilities. In addition, because the results from each child's Fast ForWord
exercises are compiled daily in a central database via the Internet, Fast
ForWord is able to automatically generate up-to-date performance charts and
templates, enabling the learning facilitator to monitor the child's progress on
a daily basis. Fast ForWord measures the child's response to each exercise and
continually adjusts and adapts the program to challenge each individual child
appropriately with customized training. Fast ForWord is designed to support
teachers, speech and language professionals, parents and other learning
facilitators in providing a program that can be integrated with school curricula
and other language programs to assist children in overcoming language-based
learning challenges and provide a foundation for language skills and academic
learning.
Based upon decades of independent neuroscience research on the brain's
ability to adapt to certain stimuli, Fast ForWord uses computer-controlled,
repetitive and adaptive training exercises to modify the manner in which the
brain processes language. The Fast ForWord program typically lasts from four to
eight weeks and consists of 100 minutes per day of training for five days per
week under the supervision of a teacher, speech and language professional,
parent or other learning facilitator trained in the use of the program. In
Company-sponsored field trials involving approximately 1,000 children with
language-based learning difficulties, participants on average achieved
improvement of more than 1.5 years in language processing and related skills
after completion of the Fast ForWord program. The Company believes that similar
improvements, if achievable at all through traditional remediation programs,
have typically required several years. In addition, Fast ForWord has
successfully produced broad results. Of those children who have completed Fast
ForWord training and have also been identified by standardized tests as having
language-based learning problems, 90% have made statistically significant gains
on one or more standardized tests of critical language skills.
Fast ForWord is delivered through a variety of distribution channels,
including public schools, speech and language professionals in private practice
and Company-operated Learning Centers. The Company also provides seminars to
train and educate teachers, speech and language professionals, parents and other
learning facilitators in the use and applications of Fast ForWord. To date,
approximately 5,500 children have participated in the Fast ForWord program and
approximately 2,600 teachers and speech and language professionals have been
trained in administering the program.
BACKGROUND
Humans are born with the potential to learn any language, and one of a
child's early tasks is to learn to extract meaning from speech by identifying
its basic auditory building blocks or phonemes. In the first 12 to 16 months of
a child's development, the brain learns to recognize the phonemes that are
relevant to the
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child's native language. Studies have shown that approximately 20% of children
have significant reading difficulties, most of which can be attributed to
difficulty in acquiring, retaining and manipulating phonemes. Furthermore, in
reviewing studies of children with serious reading difficulties, the National
Institute of Child Health and Human Development (the "NICHD") at the National
Institutes of Health (the "NIH") found substantial evidence that these reading
difficulties result from a child's "difficulty acquiring, retaining,
manipulating and recoding the phonemes or sounds of the English language."
Children with such difficulties often have other learning challenges such as
autism and attention deficit disorder ("ADD").
According to industry sources, approximately 20% of all children in the
United States between the ages of four and 13 have significant language-based
learning difficulties. Extrapolating from U.S. Department of Commerce, Bureau of
the Census data, this figure represents approximately 8,000,000 children between
the ages of four and 13. The Company believes that approximately 800,000
children in the United States enter this category each year and that their
language-based learning problems result in part from the inability to make
reliable distinctions among certain elements of speech. This inability
frequently leads to poor language comprehension, problems in speaking and
subsequent reading problems, and is often associated with low self-esteem, poor
academic performance and behavioral problems. The NICHD at the NIH suggests
that, without early identification and intervention, language-based learning
difficulties often hinder learning and reading into adulthood unless intensive
and specialized remediation programs are provided.
The Company estimates that there are approximately 100,000 speech and
language professionals practicing in the U.S., including approximately 13,000 in
private practice, 50,000 in public schools and 37,000 working part-time or in
adult rehabilitation centers. Traditional remediation programs for language-
based learning problems typically consist of years of weekly one-on-one or
small-group phonics and other language exercises with a private or school speech
and language professional or teacher. Oral phonics exercises in traditional
programs tend to focus on the relationship between sounds and letters. In
contrast, the Company believes that a child must first be able to differentiate
sounds or phonemes before the child can understand the relationship between
sounds and letters. Frequently, traditional programs include regular oral
repetition of phonemes by the speech and language professional. However, humans
cannot stretch and emphasize the acoustics of speech and sound over thousands of
repetitions with the precision of a computer to systematically modify neural
pathways for improved language processing. Additionally, because substantial
results can typically be measured only after several years in children with
identified language-based learning problems, decisions regarding whether a
particular course of traditional intervention is appropriate for an individual
child are often based on subjective evaluations and anecdotal evidence rather
than measurable results.
The Company was founded by scientists who had spent decades researching
neuroscience and the causes of language-based learning problems at UCSF and
Rutgers. As published in the peer-reviewed journal SCIENCE in January 1996, the
scientific founders of the Company demonstrated that children with an inability
to distinguish between phonemes could rapidly learn to identify these previously
indistinguishable speech sounds and correctly reconstruct speech if trained on a
computer-based program that modifies speech through the stretching and selective
amplification of sounds. Children who received this acoustically modified speech
training achieved significantly greater gains than those who received only
normal speech in a similar computer-based format and demonstrated measurable
improvement in areas such as the ability to process rapid auditory events,
phoneme and speech discrimination and language processing and comprehension. The
founders postulated that the children's newly learned ability to distinguish and
process sounds resulted from a behaviorally induced change in the organization
of neural pathways involved in the way their brains process language. This
scientific research demonstrated a practical application of the phenomenon known
as brain plasticity, which is the brain's ability to modify the way it processes
information in response to certain stimuli. The founders established the Company
to move this
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research as rapidly as possible from laboratories into products and services
designed to improve human learning and performance.
MARKET OPPORTUNITY
In order to reach as many children with language-based learning problems as
possible, the Company intends to focus on schools with students in kindergarten
through high school ("K-12") in the United States. Based on information derived
from industry sources, the Company estimates that more than 51 million students
attended over 100,000 K-12 public and private schools in the United States in
the 1996-1997 school year. Public concern over the effectiveness of K-12 schools
in teaching essential academic skills and the rapidly growing role of technology
in the K-12 marketplace have created an increased demand for technology-based
educational programs. While total spending on education in the United States has
grown at an average of 5% per year, spending on technology in public schools in
the United States has more than doubled since the 1991-1992 school year, growing
to an estimated $4.8 billion in the 1997-98 school year. Technology spending is
projected to reach $5.4 billion for the 1998-99 school year. Such expenditures
include computers, internet connections, other technology infrastructure
components and software. The Company believes that the amount spent on language
skills software is likely to increase as more such software becomes available;
however, the Company has not been able to determine the portion of technology
expenditures that have been represented historically by language skills
software. Educators, parents and opinion leaders in the United States are
increasingly focused on improving essential academic skills of all students and,
in particular, their reading proficiency. This focus has generally contributed
to an increased demand for more effective methods to increase academic
performance, including the performance of children with language-based learning
difficulties. Schools have responded to these demands by investing in computers,
software and other educational technology, testing and other assessment programs
to measure students' progress, and professional development training to enhance
educators' effectiveness in the classroom. Forty-seven states have adopted
programs to support the use of technology in the classroom, and federal funds
have been made available for technology purchases through multiple programs,
including Title I and E-Rate. The Company believes that the increasing
commitment of educators and parents to improve essential academic performance
for all children in general and for children with language-based learning
problems in particular, combined with increased demand for technology based
programs, has created a significant opportunity for providers of computer-based
educational products and services that provide measurable results.
THE SCIENTIFIC LEARNING SOLUTION
The Company's initial product, Fast ForWord, is a proprietary, adaptive
computer-based training program for children with language-based learning
problems. The Fast ForWord program is comprised of seven intensive, animated
computer exercises lasting 20 minutes each, which students are expected to
practice for 100 minutes a day, five days a week, for four to eight weeks. Each
exercise modifies the characteristics of speech and sound so they can be
differentiated and processed by the child. Fast ForWord measures the child's
responses during each exercise and continually adjusts and adapts the program to
challenge each individual child appropriately with customized training. As the
child progresses through the program, the child's brain gradually learns how to
process language at a faster rate until the child is eventually able to hear and
process naturally spoken language. The program also facilitates the learning of
other critical language skills such as morphology, syntax and grammar and
executive function skills such as short term memory and event sequencing
capabilities. The primary advantages of the Scientific Learning solution are as
follows:
RESEARCH-BASED PROGRAM. Fast ForWord is based on twenty-five years of
research in brain plasticity and the underlying causes of language-based
learning problems. As published in the peer-reviewed journal SCIENCE in January
1996, the scientific founders of the Company demonstrated that children with an
inability to distinguish between phonemes could rapidly learn to identify these
previously indistinguishable
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speech sounds and correctly reconstruct speech if trained on a computer-based
program that modifies speech through the stretching and selective amplification
of sounds. This patent-pending research is licensed on an exclusive basis by the
Company and serves as the basis of the Fast ForWord program.
PROVEN, RAPID AND MEASURABLE RESULTS. The Company has conducted two field
trials to demonstrate the efficacy of the Fast ForWord program, which has now
been used by approximately 5,500 children. On average, children with language
problems have demonstrated one to two years of language processing improvement
on standardized tests after four to eight weeks of using Fast ForWord. Prior to
the introduction of Fast ForWord, such a level of improvement in children with
identified language-based learning problems, if possible, typically required
several years of traditional pre-reading remediation training. In addition,
because the results from each child's Fast ForWord exercises are compiled daily
in a central database via the Internet, Fast ForWord is able to automatically
generate up-to-date performance charts and templates, enabling the learning
facilitator to monitor the child's progress on a daily basis.
INTEGRATED APPROACH WITH LEARNING FACILITATORS. The Company works closely
with teachers, speech and language professionals, parents and other learning
facilitators to integrate Fast ForWord into a child's existing educational
program and to train learning facilitators in how to use Fast ForWord most
effectively. Through the Internet, Fast ForWord automatically provides learning
facilitators with performance tables and templates enabling them to establish a
baseline analysis and monitor the child's skill level on a daily basis.
Furthermore, by addressing the underlying deficits in a child's basic language
comprehension skills, the Company believes Fast ForWord enables the child to
better benefit from traditional remediation and prevention programs and allows
learning facilitators to focus on other learning challenges the child may have.
EFFECTIVE ALLOCATION OF RESOURCES. Fast ForWord helps children develop the
tools they need to learn and interact more effectively in most classroom
activities, not just language education, by improving their ability to process
language and follow oral instructions. The Company believes that by addressing
the underlying causes of language-based learning problems early, problems can be
identified and addressed at the pre-reading level. The Company further believes
that effective use of Fast ForWord in a school's curriculum decreases the number
of students who will subsequently need expensive remedial help, saving scarce
education resources which can be used for other education programs. Moreover, by
enabling teachers and speech and language professionals in public schools to
deliver individualized computer training simultaneously to multiple children,
rather than requiring one-on-one instruction, Fast ForWord enables schools to
more effectively utilize resources for remediation programs. In the private
sector, the Company believes that the use of Fast ForWord leverages the time
spent by a speech and language professional with a child, potentially resulting
in cost savings for the parent or freeing-up time or money which may then be
spent on addressing other challenges the child may have.
ENGAGING AND ADAPTIVE ANIMATION AND REWARD SYSTEM. Fast ForWord keeps
children entertained with animated characters and sound effects and has the look
and feel of a computer game. Each of the seven training exercises has a
different theme and different graphics for each level within the exercise.
Children receive on-screen animation segments as rewards for correct responses
throughout each training exercise. In addition, children collect points as they
progress through the exercises that, in some training settings, can be redeemed
for age-appropriate prizes. As the child uses the program, Fast ForWord
continually adjusts to the child's individual skill level and changes difficulty
so that, on average, the child is correct 80% of the time, which allows the
program to remain challenging and engaging while enabling the child to generate
a feeling of success and accomplishment.
GROWTH STRATEGY
The Company's goal is to establish itself as the leading provider of proven,
neuroscience-based education and training products and services focused
specifically on language-based learning problems and
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on other neurologically based challenges faced by both children and adults. Key
elements of the Company's strategy include:
EXPAND CHANNELS OF DISTRIBUTION. Although to date the substantial majority
of sales of the Fast ForWord program have been through speech and language
professionals in private practice, the Company has recently begun efforts to
significantly expand its channels of distribution. To substantially increase the
number of children with access to Fast ForWord, the Company intends to further
penetrate the over 100,000 schools in the K-12 market through an expanded direct
marketing program, pursuit of district level school contracts and an increase in
the number of schools acting as reference sites. The Company plans to continue
to increase penetration of the private practice speech and language professional
market through the expansion of its direct marketing programs and through its
training seminars. The Company also intends to market directly to parents by
increasing media awareness of its products and by direct marketing efforts from
an expanded number of Learning Centers. Furthermore, the Company intends to
pursue additional channels of distribution, including the "at-home" learning
market, which can benefit from the Company's Internet-based system of
distribution and monitoring, as well as possible alliances with others in the
after-school education and training markets.
RAPIDLY EXPAND SALES AND MARKETING EFFORTS. The Company intends to rapidly
expand its sales and marketing efforts to increase its penetration of the
school, private practice speech and language professional, Learning Center and
"at-home" learning markets. Specifically, the Company intends to: (i) hire
additional salespeople to focus exclusively on sales to the K-12 school market;
(ii) hire additional salespeople to target speech and language professionals in
private practice; (iii) pursue media coverage and publication in scientific
journals; (iv) expand support of the marketing efforts of speech and language
professionals in private practice; and (v) participate in a greater number of
trade shows and conferences.
DEVELOP ADDITIONAL NEUROSCIENCE-BASED LEARNING PRODUCTS. The Company
intends to develop and introduce new products based on practical applications of
brain plasticity research. The Company is currently field testing a beta version
of Fast ForWord Two for children who have completed Fast ForWord and are ready
for a program that focuses on more advanced pre-reading skills. The Company is
also developing other language-based products, including an ESL program for
foreign students and for adults, an adult version of Fast ForWord and an
assessment or screening test for language-based learning problems. In addition,
the Company is evaluating foreign language versions of Fast ForWord and a
program to assist stroke victims in reacquiring language skills. The Company
also is examining ways to leverage its expertise in brain plasticity research in
potential non-language-based products. The Company believes its expertise in
neuroscience and computer technology and its commitment to field testing
products to demonstrate their measurable results, position it well for the
successful introduction of new products.
BUILD A TRUSTED BRAND. The Company intends to invest in the Scientific
Learning Corporation and Fast ForWord names to increase brand awareness and
loyalty. The Company believes that establishing a trusted brand is critical to
success in the education and training markets. Specifically, the Company intends
to: (i) continue to build recognition of the Fast ForWord brand among learning
facilitators and leverage such recognition to build brand awareness of the
Company and future products such as Fast ForWord II; (ii) communicate the
Company's commitment to proven research and the commercialization of products
with measurable results; (iii) publish field test results; (iv) promote the
publication of media articles and stories regarding the Company and its
products; (v) encourage community-building through support efforts such as the
Company's Web site and chat rooms; and (vi) engage in direct marketing campaigns
to educators and other key public school decision-makers as well as to speech
and language professionals and parents. The Company believes it has already
established itself as a pioneer and leader in the commercialization of
neuroscience research applications.
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PROGRAMS AND SERVICES
BACKGROUND. Children must be able to recognize and process the phonemes
relevant to their language before they can become skilled in the understanding
and use of language and in reading. For example, in order for children to
understand or speak the word "dog," they must first recognize the three phonemes
"duh," "ah" and "guh." To read the word "dog," children must also associate such
phonemes with the three letters "d," "o" and "g." Scientific founders of the
Company working at Rutgers noted that children with language-based learning
problems often have difficulty distinguishing between closely related phonemes,
such as "bah" and "dah." With these particular phonemes, the "b" and "d" sounds
are succeeded by the identical "ah" sound after approximately 40 milliseconds.
Spoken language is made up of numerous, frequent and rapid sound transitions
such as this. Independently-conducted longitudinal research has found that
children who have difficulty distinguishing among related phonemes have problems
understanding and using language. The NICHD at the NIH has found that there is a
strong correlation between these language-based learning problems and
difficulties in learning to read.
The scientific founders of the Company working at UCSF noted that the human
brain changes in response to stimuli, a trait known as brain plasticity. Their
work demonstrated that specific adaptive training techniques drive the brain to
change over time, adjusting how it processes information and thereby permitting
more rapid learning.
Bringing together their work at Rutgers and UCSF, the scientific founders
discovered that with the help of computers, the rapid acoustic changes within
speech sounds could be slowed, emphasized and then differentiated by children
with language-based learning problems. Through thousands of repetitions of
individualized exercises focused on important aspects of speech and language,
these children could gradually master natural speech sounds and develop other
critical language and executive skills. The scientists postulated that the
children's newly learned ability to distinguish and process sounds resulted from
a fundamental change in the organization of neural pathways involved in the way
their brains process language. This theory differs from research by others which
postulates that a particular area of the brain processes language, that speech
and non-speech sounds are processed differently and that auditory processing
problems are not a primary cause of most language learning difficulties. The
Company believes that the manner in which the brain processes speech and
language is not yet fully understood. When the Company refers to Fast ForWord as
proven, it refers to the fact that the program has proven results and not that
it "proves" any particular theory of the manner in which the brain functions.
See "Risk Factors-- Opposing Scientific Theories."
THE FAST FORWORD PROGRAM. Fast ForWord is an intensive, computer-based
training program, which has the look and feel of a computer game and is
comprised of seven training exercises--three exercises for sounds and four for
words. In the three sound exercises, complex auditory information is presented
in a variety of pre-word formats using different frequencies, time durations and
phonemes. The four word exercises consist of words presented either in isolation
or within sentences with various levels of linguistic complexity. The words and
sentences used in these exercises have been electronically modified to expand
and enhance the rapidly changing phonetic elements within natural speech. As a
child's skill level advances, the exercises become increasingly more difficult,
driving him or her continually to increase his or her rate of speech processing,
which in turn leads to more normal speech perception. At the highest level of
each exercise, the child is presented with natural, unmodified speech.
Throughout each training exercise, the program adjusts to the child's individual
skill level so that the child is making correct responses approximately 80% of
the time. This adjustment is designed to keep the program challenging and
engaging for the child, while allowing the child to generate a feeling of
success and accomplishment and avoid repetitive failure, which can be
discouraging and detrimental to learning.
Fast ForWord is designed to keep children engaged and entertained with
animated characters and sound effects, and its game-like format provides the
thousands of repetitions necessary to improve a child's language skills. Each of
the seven exercises has a different theme and different graphics for each level
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within the exercise. Children receive on-screen animation segments as rewards
for correct responses throughout each 20-minute training exercise. In addition,
children collect points as they progress through the exercises that, in certain
training settings, can be redeemed for age-appropriate prizes ranging from small
toys to video game cartridges. The Fast ForWord program is designed to be used
for 100 minutes per day, five days a week for four to eight weeks. Extensive
pilot and field testing of Fast ForWord has shown that students with
language-based learning problems show language processing gains of one to two
years on average upon completion of this intensive program. Additionally, based
on extensive interviews with parents and teachers, children who have completed
the Fast ForWord program are generally reported to have shown substantial
improvements in both self-esteem and behavior as their communication skills
improve.
Results from each child's Fast ForWord exercises are uploaded daily via the
Internet to the Company's proprietary database for analysis and comparison with
the child's progress to date. The Fast ForWord program automatically creates
performance charts and templates in various discrete learning areas which can be
downloaded through the Internet by learning facilitators, enabling them to
monitor the performance of the one or many children under their supervision over
the course of the training program. These charts and templates can also be used
by the facilitator to provide parents and children with measurable results of
the child's progress.
Fast ForWord is designed to be a separate supplemental course of training
that complements a child's regular learning schedule. The program is suitable
for schools, clinics, learning centers, and private or group training with
speech and language professionals. In each case, a Fast ForWord-trained teacher,
speech and language professional or other learning facilitator introduces Fast
ForWord to the child, initiates the training program, monitors and analyzes each
child's progress and helps to ensure successful completion of the program. After
such introduction, parents can also elect to administer the Fast ForWord program
at home.
Manufacture and packaging of the Company's Fast ForWord program requires the
pressing of a CD-ROM, the printing of the packages and related materials and the
assembly of these components. The Company has not entered into any long-term
contracts for such services and instead places purchase orders from time to time
with various third-party suppliers. The Company believes that the market for
supplying such services is highly competitive, and consequently the Company is
not dependent upon a limited number of suppliers.
SEMINARS. To assist teachers, speech and language professionals, parents
and other learning facilitators, the Company provides educational seminars on
language-based learning problems and training seminars in the administration of
the Fast ForWord program. Such workshops range from free two- to three-hour
educational seminars for parents to one- or two-day intensive training seminars
for teachers and speech and language professionals. The training seminars
generally include: (i) an overview of the research behind the development of
Fast ForWord; (ii) a presentation of the clinical results achieved through Fast
ForWord; (iii) hands-on training using CD-ROM and Internet components of the
Fast ForWord program; (iv) case studies and recommended practices for selecting
appropriate candidates for Fast ForWord training; and (v) tips for incorporating
Fast ForWord into the professional's practice or the teacher's school
curriculum. Through these seminars, approximately 2,600 teachers and speech and
language professionals have been trained in administering Fast ForWord. To date
for 1998, the Company has conducted four two-day training seminars and has
scheduled eight additional two-day training seminars in various locations
throughout the country, and plans to schedule additional seminars. In addition,
the Company is planning to develop a remote training course that can be
delivered by video, CD-ROM and/or the Internet.
PROFESSIONAL AND PARENTAL SUPPORT. In addition to its educational and
training seminars, the Company provides a number of other support mechanisms for
parents and other learning facilitators involved in addressing language-based
learning problems. The Company believes that, through these forums, it has
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begun to create a virtual community among parents and other learning
facilitators. For example, the Company provides an interactive World Wide Web
site for children using Fast ForWord and their families to access program
information and research on language-based learning problems. Chat rooms for
parents and downloadable graphics and software for children are also available.
The Company also mails to the parents of participating children, as well as to
schools and speech and language professionals, a Fast ForWord newsletter that
contains items of interest on the program and language-based learning problems.
The Company has a professional relations staff dedicated to answering questions
from and providing support to professional providers and parents interested in
the Fast ForWord program, and has a toll-free telephone information line.
TECHNICAL SUPPORT. Because many of the teachers, speech and language
professionals, parents and other learning facilitators who administer the Fast
ForWord program have limited computer knowledge and do not have any technical
support on-site to assist them, the Company provides a variety of technical
support services. The Company employs an experienced staff of technical service
representatives who are capable of answering technical questions regarding Fast
ForWord, regardless of platform, as well as questions regarding hardware and
networks. In addition, in connection with use of the Fast ForWord program in
public schools, the Company provides on-site technical training, computer and
software installation, technical support and assistance with integrating the
Fast ForWord program into existing school curricula.
SALES AND MARKETING
The Company intends to invest in the Scientific Learning Corporation and
Fast ForWord names to increase brand awareness and loyalty. The Company believes
that establishing a trusted brand is critical to success in the education and
training markets. Specifically, the Company intends to: (i) continue to build
recognition of the Fast ForWord brand among learning facilitators and leverage
such recognition to build brand awareness of the Company and future products
such as Fast ForWord Two; (ii) communicate the Company's commitment to proven
research and the commercialization of products with measurable results; (iii)
publish field test results; (iv) promote the publication of media articles and
stories regarding the Company and its products; (v) encourage community-building
through support efforts such as the Company's Web site and chat rooms; and (vi)
engage in direct marketing campaigns to educators and other key public school
decision-makers as well as to speech and language professionals and parents. The
Company believes it has already established itself as a pioneer and leader in
the commercialization of neuroscience research applications.
The Company markets and sells Fast ForWord through three primary channels of
distribution: public schools, speech and language professionals in private
practice and the Company's Learning Centers. The Company also intends to pursue
additional channels of distribution, including the "at-home" learning market
which can benefit from the Company's Internet-based system of distribution and
monitoring, as well as possible alliances with others in the after-school
education and training markets. As it expands its sales and marketing efforts in
these primary and additional channels, the Company plans to expand its sales and
marketing organization, which consisted of 42 employees as of June 30, 1998.
PUBLIC SCHOOLS. To more rapidly introduce Fast ForWord into public schools,
the Company has undertaken a reference site program, in which certain schools
agree to provide reference services for Fast ForWord in exchange for a program
discount. Such services include acting as a reference for other educators
interested in Fast ForWord, hosting tours, speaking at events and with the press
about program results, participating in studies and cooperating in the
publication of results. These sites provide educators and administrators with
the opportunity to see Fast ForWord in use, which the Company believes helps
shorten the sales cycle in schools. As of June 30, 1998, the Company had
established five school reference sites. The Company initiated its marketing to
public schools in late 1997 with a pilot program involving 19 schools in nine
school districts in five states. Fast ForWord is sold directly to public schools
and districts at $850 per child except where the Company has negotiated
reference site or volume discounts in
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connection with large sales. The Company believes that per program revenue
generally will decrease in the future as the Company makes more large sales and
grants a greater number of individually negotiated volume discounts in
connection with such sales. To date the Company has trained more than 600
teachers and speech and language professionals in public schools in the
administration of Fast ForWord. The Company plans to expand its sales and
marketing for schools as well as related training seminars. In addition, the
Company is exploring relationships with independent sales representatives and
with other companies that have existing sales relationships with schools to
augment the efforts of the Company's in-house sales team. While the Company
maintains a database of K-12 public schools, to date the majority of leads have
arisen from key educators and other decision-makers within schools and districts
contacting the Company after learning of Fast ForWord from publications in
journals or the general press, presentations at education conferences,
attendance at Company training seminars or from colleagues or parents.
SPEECH AND LANGUAGE PROFESSIONALS. The Company intends to continue to
expand its marketing of Fast ForWord to speech and language professionals
operating in private practice, private schools and hospitals and clinics. To
administer Fast ForWord, the Company currently requires that a speech and
language professional attend a Company training seminar, which to date have been
held in more than 20 cities across the United States. The Company has trained
more than 1,900 speech and language professionals in private practice in how to
administer Fast ForWord. Such seminars currently involve one or two days of
training and cost $995 per person for a Company-sponsored two-day workshop. Fast
ForWord-trained speech and language professionals in private practice recommend
the use of Fast ForWord to parents in appropriate cases and then administer the
program in connection with providing traditional services. In such instances,
Fast ForWord is typically sold directly to parents for $850 per child,
minimizing the administrative burden on the speech and language professional,
who charges separately for time spent supervising the child. The fees charged by
the speech and language professional generally range from $2,000 to $5,000 per
child. Fast ForWord could be used as supplemental to, or potentially as a
partial replacement of, traditional private pre-reading remediation programs,
which the Company estimates typically cost between $15,000 and $20,000. The
Company has been a pioneer in marketing computer-based training programs to
speech and language professionals and has developed a proprietary database of
information regarding thousands of speech and language professionals. Speech and
language professionals are contacted by the Company through telesales and other
direct marketing efforts, which encourage them to attend Company seminars and
use the Fast ForWord program in their practices. In addition, speech and
language professionals learn of the Fast ForWord program through the Company's
participation in trade conferences, publications in journals and the general
press, and the distribution of the Company's informational videos and practice
kits.
LEARNING CENTERS. The Company markets directly to parents through its
Learning Centers, which are intended to provide a supportive, encouraging
environment for a child to participate in the Fast ForWord program, while
providing support and training for the parent. The Company opened its first Fast
ForWord Learning Center in January 1998 and operated three Fast ForWord Learning
Centers as of May 31, 1998. By July 15, 1998, the Company had opened five
additional, expanding the Company's Learning Centers into a total of five
states. The Company now operates centers in California, Washington, Oregon,
Nevada and Florida. Most of the centers opened during summer 1998 are located at
private schools, enabling the Company to take advantage of available classroom
space. Some of the Company's five centers located in private schools are
expected to operate only in the summer months, while others may operate
year-round by offering after-school training, although to date the Company has
no contracts extending these centers beyond the summer months. The Company's
three other Learning Centers are located in office space leased by the Company.
The Company provides monitoring, supervision and weekly parental consultations
in connection with delivery of the Fast ForWord program at the Learning Centers.
For an additional fee, parents can also elect to have a state-certified speech
and language professional test and evaluate their child's language skills.
Through the Fast ForWord Learning Centers, the Company also offers Fast ForWord
At Home for parents who wish to administer the program at home under the close
supervision of the Center. Fast ForWord At Home is particularly useful for
parents and children who have scheduling
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conflicts or who live too far away to attend daily training sessions at a
Learning Center. Fast ForWord training at or through a Learning Center typically
costs between $2,000 and $3,000, including program fees, consultation fees and
monitoring fees, as applicable. The Company promotes parental awareness of the
Learning Centers and the Fast ForWord program through direct mail, parent
educational seminars, referrals from schools, speech and language professionals
and others, local advertising, stories in the local press, distribution of a
video for parents and other direct marketing efforts.
OTHER CHANNELS OF DISTRIBUTION. The Company is exploring and developing
other channels of distribution. Currently, parents calling the Company to
inquire about the availability of Fast ForWord are referred to a local Fast
ForWord-trained speech and language professional in private practice or to a
Learning Center, if locally available. However, parents are often located in
areas in which there is no easy access to a trained speech and language
professional or Learning Center. As a result, the Company is developing a remote
or "at-home" course that can be delivered by video, CD-ROM and/or the Internet
for the training of parents in the supervision and administration of Fast
ForWord. In addition, the Company is exploring possible alliances with other
organizations involved in the after-school education and summer education and
training markets.
The Company's future success is, in part, dependent on acceptance of Fast
ForWord by public schools, administrators, teachers, speech and language
professionals, parents and other learning facilitators and on penetration of the
public school, speech and language professional and parental markets. There can
be no assurance that the Company will be successful in developing and
penetrating these markets. See "Risk Factors--Uncertainty of Market Acceptance,"
"--Challenges to Market Penetration," "--Reliance on a Single Product" and
"--Lengthy Sales Cycle."
RESEARCH AND DEVELOPMENT
Approximately one third of the Company's employees are engaged in research
and development activities, which include both product development and outcomes
research. The Company's research and development organization includes
neuroscientists, psychologists, engineers, programmers, statisticians, graphic
artists and animators. The Company believes that its future success depends in
large part on its ability to develop new products and maintain and enhance its
current product line, and on its ability to enhance its market positioning by
leveraging the Company's expertise in neuroscience and computer technology,
which the Company believes have broad applicability. Accordingly, the Company
plans to expand its research and development activities with respect to present
and future products based on brain plasticity. In order to enhance its Fast
ForWord program, the Company is conducting longitudinal studies, as well as
studies focusing on whether the program can be broken into smaller modules to
more easily integrate Fast ForWord into school curricula. The Company is also
currently testing a beta version of Fast ForWord Two for children who have
completed Fast ForWord and are ready for a program that focuses on more advanced
pre-reading skills. The Company is also developing other language-based
products, including an ESL program for foreign students and for adults, an adult
version of Fast ForWord and an assessment or screening test for language-based
learning problems. In addition, the Company is evaluating foreign language
versions of Fast ForWord and a program to assist stroke victims in reacquiring
language skills. The Company also is examining ways to leverage its expertise in
brain-plasticity research in other potential non-language-based products,
including computer-based remediation programs for repetitive stress injury and
tinnitus (ringing in the ears).
Once new or improved products are identified and developed through the
Company's research and development process, the Company's product development
team and outcomes research group test the efficacy of such products in extensive
field trials. To promote its goal of commercializing scientifically based and
proven products, the Company intends to release products only after
demonstrating measurable results.
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There can be no assurance that: (i) the Company will be successful in
developing and marketing new products or responding to technological
developments, evolving industry standards or changing customer requirements;
(ii) the Company will not experience difficulties that could delay or prevent
the successful development, introduction and sale of such new products; or (iii)
any new products will adequately meet the requirements of the marketplace and
achieve any significant degree of market acceptance. If release dates of any new
products are delayed or if these products fail to achieve market acceptance when
released, the Company's business, operating results and financial condition
could be materially and adversely affected. See "Risk Factors--Dependence on
Continued Product Development."
EFFICACY STUDIES
The Company was founded by scientists who have spent decades researching
neuroscience and the causes of language-based learning problems at UCSF and
Rutgers. The original research studies combining the work of the Company's
founders were funded by UCSF and Rutgers and certain results were published in
the peer-reviewed scientific journal SCIENCE. The primary study included 22
children with language-based learning problems who played computerized versions
of games such as "Simon Says" for 50 hours over a 20-day period. The
experimental group received commands in slowed, stretched and emphasized speech
while the control group received normal speech. Additionally, the experimental
group's exercises adapted to their individual skill level. The results of these
studies were widely noted because the children in the experimental group showed
significant gains of 1.5 years in critical language skills in just four weeks
through the use of the computer-based language training program that became the
basis for Fast ForWord. Six-month follow-up studies demonstrated that the
language skills of these children continued to improve after the completion of
the four-week training period. Children randomly assigned to the control group
did not demonstrate comparable gains.
The Company has funded two additional large-scale trials. The first study,
conducted in 1996, included approximately 500 children between the ages of four
and 14 trained in private clinics and schools across the country and was
designed to test the effectiveness of the Fast ForWord training program in a
variety of settings. Each of the 60 professionals in the 35 locations was an
independent collaborator who agreed to follow the protocols mandated by the
Company and supply pre- and post-assessment testing data on each child based on
the standardized tests used by such professionals in their regular practice.
Most of these children were already identified as needing specific help in
language skills and were involved in remediation programs through regular
sessions with a speech and language professional in private practice or at a
school. As part of the study, the children were administered standardized tests
prior to and following the use of the Fast ForWord program for 100 minutes a
day, five days a week for four to eight weeks. On average, regardless of age or
grade, children involved in the study demonstrated gains of one to two years.
Some of the independent speech and language professionals involved in the
1996 field trial use certain Tests of Language Development ("TOLD") in their
practices and accordingly these tests were administered by such professionals to
196 participating children, both prior to beginning and upon completion of the
Fast ForWord program. These industry-accepted and normed tests, the TOLD-I:2 and
TOLD-P:2, are individually administered comprehensive language tests that assess
various aspects of language performance including semantics, syntax, morphology,
phonology and listening comprehension. Other standardized tests used by
professionals involved in the 1996 field trials were generally less
comprehensive and administered to a fewer number of children. However, the pre-
and post- assessment data based on these other tests was generally consistent
with the results reported on the TOLD-I:2 and TOLD-P:2. Prior to participation
in the Fast ForWord program, only 19% of the children scored at or above the
population mean, as evidenced below by the standard bell curve superimposed on
the test results. After completion of the Fast ForWord program, 52% of the
children scored at or above the population mean.
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[GRAPHIC: Side by side graphs subtitled "Before Fast ForWord" and "After
Fast ForWord," respectively, showing test scores of 196 children on certain
tests of language development before and after such children used Fast ForWord,
superimposed on bell curves representing the normal distribution of scores on
such tests. The graphs, together, are titled "Test Results" and are accompanied
by the following text footnotes: "(1) Represents the results from the TOLD-I:2
and -P:2. The changes in the scores reflected in the above graphs (histograms)
are statistically significant and highly reliable (t(195)=18.21, p < .0001)
indicating with 99% confidence that the rightward shift in scores (representing
improved performance on the tests) following completion of Fast ForWord training
results from the Fast ForWord training rather than factors of chance. (2) In
order to combine the test results of children of different ages for comparison
to the table of the normal curve (which represents the expected distribution of
test scores among the general population), such test scores were converted into
what are known as "Z-scores." Using Z-scores, the average test score obtained by
the general population (50th percentile) is represented by zero. The -1.0
Z-score represents the 16th percentile in test performance and the 1.0 Z-score
represents the 84th percentile in test performance. (3) Prior to the beginning
of Fast ForWord training, the tested group of 196 children achieved an average
Z-score of -1.0, representing the 16th percentile in performance for this test
(i.e. these children achieved a score higher than only 15% of the general
population). (4) After completion of the Fast ForWord program, the tested group
of 196 children achieved an average Z-score of -0.2, representing approximately
the 42nd percentile in performance for this test (i.e. these children achieved a
score higher than 41% of the general population)."]
The second large-scale study, in the fall of 1997, included approximately
500 children in 19 public schools in nine public school districts in five states
across the country and was designed to test Fast ForWord efficacy with a new
population of children, namely children who were observed by teachers as likely
to be at risk for later academic failure. The children were selected for
participation in the study by their teachers. Most of these children had not
been identified as needing specific help in language skills, nor had they been
assigned to special education classes or other remediation programs outside the
classroom. As part of this study, some of the children were randomly assigned to
a control group which did not receive Fast ForWord training but instead received
traditional remediation training for the same amount of time. The children
trained for 100 minutes a day, five days a week for four to eight weeks. Again,
a substantial majority of the children using Fast ForWord demonstrated similar
gains to those made in earlier studies, making achievements significantly beyond
those made by the control group. Similar results have also been observed in the
overall group of children who have used the Fast ForWord program commercially.
COMPUTER TECHNOLOGY
Fast ForWord can be used on either a Windows PC or on an Apple MacIntosh
platform. Fast ForWord is currently supported on a variety of computer
configurations, including an on-site model where learning facilitators supervise
children that train on computers within their offices, an off-site model where
learning facilitators remotely supervise children that train on computers within
their own homes and a
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<PAGE>
client/server model. With the client/server model, which can support many
children simultaneously, a child does not need to use the same computer for each
training session, but can instead use any computer available which is linked to
the network.
The Fast ForWord back-end system is designed to be modular, reliable and
easily scaleable. Centered around the Internet, the back-end system consists of
training computers, data viewing/monitoring computers and the Company's
databases. The Fast ForWord databases are tightly integrated with all Company
databases to provide seamless service from professional support, technical
support and accounting.
This integration allows learning facilitators to use a Web browser to do
most of the necessary monitoring of the children training under their
supervision. After children at a site complete their training for the day, the
learning facilitator uploads all of their data to the Company databases. During
this transaction, the status of each child is updated. This interaction enables
the Company to gather the data that provides the basis of its Internet-delivered
performance reports. Because such uploaded data are then accessed by the
learning facilitator over the Internet and processed primarily on the learning
facilitator's computer, the learning facilitator can monitor and review a
child's progress from virtually anywhere, providing maximum scheduling
flexibility. If data are not uploaded to the Company within the required number
of days, the license key to the program is turned off until contact is made. The
Company is able to protect against unauthorized use because the program cannot
be activated without a license key delivered through the Internet. See "Risk
Factors--Adoption of Internet Solutions."
INTELLECTUAL PROPERTY
The Company's policy is to aggressively protect its proprietary rights in
its products and technology though a combination of patents, trademarks,
copyrights, trade secret laws, confidentiality procedures and contractual
provisions. The Company has filed patent applications in the United States and
internationally relating to its technology, including 30 with the USPTO.
Additionally, pursuant to the University License, the Company is the exclusive
licensee of the technology owned by UCSF and Rutgers with respect to the basic
speech and sound modification algorithms used in Fast ForWord. The licensed
technology is the subject of a pending patent application. There can be no
assurance that any of the Company's or its licensor's pending patent
applications will result in the issuance of any patents, or that, if issued, any
such patents will offer protection against competitors with similar technology.
There can be no assurance that any patents issued to the Company or its
licensors will not be challenged, invalidated or circumvented in the future or
that the rights created thereunder will provide a competitive advantage. In
addition, there can be no assurance that competitors, many of whom have
substantially greater resources than the Company and have made substantial
investments in competing technologies, will not seek to apply for and obtain
patents covering technologies that are more effective than the Company's
technologies, that would render the Company's technologies or products obsolete
or uncompetitive or that would prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or in
international markets.
The Company's current products incorporate technologies which are the
subject of patents issued to, and patent applications filed by, others. The
Company has obtained licenses for certain of these technologies and may be
required to obtain licenses for others, although the Company does not believe
that it is currently using technology that is subject to patents held by third
parties without a license. There can be no assurance that the Company will be
able to obtain licenses for technology patented by others on commercially
reasonable terms, or at all, that it will be able to develop alternative
approaches if unable to obtain licenses or that the Company's current and future
licenses will be adequate for the operation of the Company's business. The
failure to obtain such licenses or identify and implement alternative approaches
could have a material adverse effect on the Company's business, financial
condition and results of operations.
37
<PAGE>
Pursuant to the terms of the University License, the Company must pay UCSF
certain royalties and milestone payments based upon cumulative net sales of the
Company's products. In connection with entering into the University License, the
Company issued 171,788 shares of Series A Preferred Stock to Rutgers and made
other up-front payments. Unless otherwise terminated by operation of law or acts
of the parties, the University License remains in effect until the later of the
expiration of the last-to-expire patent licensed thereunder or the abandonment
of the last patent application licensed thereunder. The Regents may terminate
the University License if the Company violates its terms, including among others
its obligations to make payments thereunder, and fails to cure such violation
within 60 days of the Regents' written notice thereof. The Company may terminate
the University License at any time by giving written notice of its intent to do
so, and the termination will take effect 60 days from the effective date of such
notice. The loss or inability to maintain the University License could delay the
Company's introduction of new products or cause the recall of products from the
market, which would have a material adverse effect on the Company's business,
financial condition and results of operations. In such event, even if the
Company could identify and license technology equivalent to the technology
covered by the University License, development and integration of such
alternative technology would be likely to delay the Company's product line,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company also relies upon trade secrets, technical know-how and
continuing invention to develop and maintain its competitive position, and no
assurance can be given that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its right to its trade secrets, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors--Dependence on Proprietary Technology."
COMPETITION
The educational technology market in which the Company operates is very
competitive. The Company believes that the principal competitive factors in the
industry are efficacy, ability to deliver measurable results, cost, efficiency
of delivery, ability to provide training to learning facilitators and ability to
complement and supplement public school curriculum. The Company believes that it
competes favorably on the basis of these factors. The Company competes primarily
against providers of traditional methods of remediation for language-based
learning problems, which typically require several years of one-on-one training
in children with identified language-based learning problems. Although the
traditional approach to language-based learning problems is fundamentally
different from the approach taken by the Company, such programs are more widely
known and accepted and, therefore, represent significant competition. In
addition, the Company competes to some extent with other companies offering
educational software products to schools and speech and language professionals
in private practice and with other operators of learning centers. Existing
competitors may continue to broaden their product lines, and potential
competitors, including large software developers and educational publishers, may
enter or increase their focus on the school market, resulting in greater
competition for the Company. Moreover, the Company expects that it will face
additional competition from new entrants into the market. Many competitors have
substantially greater technical, marketing and distribution resources than the
Company. There can be no assurance that the Company will continue to be able to
market its products successfully or compete effectively in the educational
technology market. See "Risk Factors--Competition."
EMPLOYEES
As of June 30, 1998, the Company had 101 full-time and 12 part-time
employees. The Company believes its relations with employees are good. None of
the Company's employees is represented by a union or subject to collective
bargaining agreements. See "Risk Factors--Dependence on Key Personnel."
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PROPERTIES
The Company leases a 34,257 square-foot facility in Berkeley, California
under a five-year lease that expires in September 2002. The Berkeley facility
houses the Company's corporate offices and a Fast ForWord Learning Center. The
Company also leases a 772 square-foot facility in Bellevue, Washington for a
Fast ForWord Learning Center, which lease expires in July 1999. The Company has
short-term arrangements with five private schools and one commercial facility
for additional Fast ForWord Learning Centers. The Company believes its
facilities are adequate for its current operations.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information concerning the Company's
directors, executive officers and certain key employees as of June 10, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- -----------------------------------
<S> <C> <C>
Sheryle J. Bolton.................. 51 President, Chief Executive Officer
and Member of the Board of
Directors
Dr. Michael M. Merzenich........... 57 Chief Scientific Officer and Member
of the Board of Directors
Dr. Paula A. Tallal................ 51 Executive Vice President and
Chairman of the Board of Directors
Frank M. Mattson................... 43 Chief Financial Officer, Vice
President, Finance, and Secretary
Dr. William M. Jenkins............. 47 Vice President, Product Development
Dr. Steven L. Miller............... 34 Vice President, Outcomes Research
Dr. Bret E. Peterson............... 35 Vice President, Internet and
Database Systems
Diane H. Church.................... 51 Vice President, Professional
Relations
Kang S. Lim........................ 42 Vice President, Intellectual
Property
Kathryn M. Allen................... 46 Director, Public School Teacher
Training and Marketing
Dr. Kathleen M. Hocker............. 57 Director, Public School Sales
James A. Mills..................... 42 Director, Business Development
Carleton A. Holstrom (1)(2)........ 62 Member of the Board of Directors
Rodman W. Moorhead, III (1)........ 54 Member of the Board of Directors
Dr. Leonard S. Schleifer (1)....... 45 Member of the Board of Directors
James E. Thomas (2)................ 38 Member of the Board of Directors
</TABLE>
- --------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
SHERYLE J. BOLTON has served as Chief Executive Officer and a member of the
Board of Directors of the Company since November 1996. Ms. Bolton has also
served as President since June 1997. From January 1994 to July 1995, Ms. Bolton
served as President and Chief Operating Officer of Physicians' Online, Inc., a
physicians' online service provider. From June 1993 to December 1994 and from
September 1995 to October 1996, Ms. Bolton consulted for a number of
international companies, including many in the health care and technology
sectors, specifically in the areas of strategy, operations and finance. Ms.
Bolton's experience also includes senior management positions at Rockefeller &
Co., Inc., a global investment management firm, and Merrill Lynch Capital
Markets, Investment Banking Division. Earlier in her career, she was a teacher
of English as a second language in Africa and a language arts teacher in public
schools in the State of Georgia. Ms. Bolton is a director or trustee of several
mutual funds of Scudder Kemper Investments, Inc., and a director of LotsOff
Corporation, a public company that operates retail stores and sells consumer
goods in the southwestern United States. Ms. Bolton holds a B.A. in English and
an M.A. in Linguistics from the University of Georgia, and an M.B.A. from
Harvard Business School.
DR. MICHAEL M. MERZENICH is a founder of the Company. He has served as its
Chief Scientific Officer since November 1996 and as a member of the Board of
Directors since the Company's inception. From January 1996 to November 1996, Dr.
Merzenich served as the Chief Executive Officer and President of the Company.
During 1997, Dr. Merzenich worked full-time at the Company during a sabbatical
from his faculty position at UCSF. In 1998, Dr. Merzenich returned to his
faculty position at UCSF, but pursuant to
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<PAGE>
a consulting agreement with the Company devotes 20 percent of his professional
time on consulting activities for the Company. Since 1971, Dr. Merzenich has
been a member of the faculty, and since 1980 a full professor, in Neuroscience,
Physiology, Biomedical Engineering and Otolaryngology at UCSF. He is currently
the Francis A. Sooy Professor of Otolaryngology at UCSF. Dr. Merzenich has more
than 25 years of experience in managing large, multidisciplinary brain
science/behavior/engineering research projects that have led to commercial
products and numerous publications and awards. Dr. Merzenich holds a B.S. in
General Science from the University of Portland and a Ph.D. in Physiology from
The Johns Hopkins University, with additional training from the University of
Wisconsin.
DR. PAULA A. TALLAL is a founder of the Company. She has served as its
Executive Vice President and Chairman of the Board of Directors since January
1996 and as a director since the Company's inception. During 1997, Dr. Tallal
worked full-time at the Company during a sabbatical from her faculty position at
Rutgers. In 1998, Dr. Tallal returned to her faculty position at Rutgers, but
pursuant to a consulting agreement with the Company devotes an average of one
day per week on consulting activities for the Company. Since 1988, Dr. Tallal
has served as co-director of the Center for Molecular and Behavioral
Neuroscience at Rutgers. Dr. Tallal is an active participant in many scientific
advisory boards and governmental committees for both developmental language
disorders and learning disabilities. Dr. Tallal has over 20 years experience
managing multi-site, multi-disciplinary federally funded contracts and grants
that have resulted in over 150 publications, as well as national and
international honors. Dr. Tallal holds a B.A. in Art History from New York
University and a Ph.D. in Experimental Psychology from Cambridge University with
additional training from The Johns Hopkins University.
FRANK M. MATTSON has served as the Company's Chief Financial Officer and
Vice President, Finance since January 1997. He has served as Secretary of the
Company since June 1997. From August 1994 to January 1997, Mr. Mattson served as
Vice President of Finance and Operations, Executive Vice President, Chief
Financial Officer and as a director of MNI Interactive, Inc., a startup
entertainment marketing company. From June 1992 to August 1994, Mr. Mattson was
Vice President of Distribution and Strategic Planning for Ingram Entertainment,
Inc. ("Ingram"), a unit of the Ingram Distribution Group, one of the world's
largest distribution companies. At Ingram, Mr. Mattson directed the post-merger
integration of Ingram and Commtron Corporation ("Commtron"), the largest
distributor in the home video industry until its acquisition by Ingram in 1992.
From 1986 to 1992, Mr. Mattson served in a variety of management positions at
Commtron, a publicly traded company, most recently as Vice President of
Operations and as a director of the company. Mr. Mattson holds a B.S. in
Business from Miami University (Ohio) and an M.A. in Economics from the
University of Wisconsin in Milwaukee. Mr. Mattson has also served on the faculty
of Drake University.
DR. WILLIAM M. JENKINS is a founder of the Company and has served as the
Company's Vice President, Product Development since June 1997. From March 1996
to June 1997, Mr. Jenkins served as Vice President, Research and Development.
Since 1990, Dr. Jenkins has also served as an Adjunct Associate Professor at
UCSF. Dr. Jenkins currently serves on the editorial board in the Systems
Plasticity section of RESTORATIVE NEUROLOGY AND NEUROSCIENCE. Dr. Jenkins is the
principal developer of the Company's current training activities. Dr. Jenkins
holds a B.S. in Psychology, an M.A. in Psychobiology and a Ph.D. in
Psychobiology from Florida State University, with additional post-doctoral
training from UCSF.
DR. STEVEN L. MILLER is a founder of the Company and has served as the
Company's Vice President, Outcomes Research since June 1997. From May 1996 to
June 1997, Dr. Miller served as Vice President, Professional Relations and
Outcomes. From September 1991 to May 1996, he held research appointments at the
Center for Molecular and Behavioral Neuroscience at Rutgers. Dr. Miller has
extensive experience in organizing clinical research studies and conducting
longitudinal studies of children and adults who have language and reading
impairments. Dr. Miller holds a B.A. in Psychology from Bloomsburg University of
Pennsylvania, an M.A. in Neuroscience from the University of Hartford and a
Ph.D. in Psychology from
41
<PAGE>
the University of North Carolina at Greensboro. He received additional training
in Clinical Neuropsychology at the Bowman Gray School of Medicine at Wake Forest
University.
DR. BRET E. PETERSON has served as the Company's Vice President, Internet
and Database Systems since June 1997. He has worked for the Company since June
1996. From January 1995 to March 1996, Dr. Peterson served as a Research
Scientist at Yale University. From January 1994 to December 1995, he was a
post-doctoral fellow at Los Alamos National Laboratory. From September 1993 to
November 1993, Dr. Peterson provided consulting services to Bio-Rad
Laboratories, Inc. From April 1986 to August 1987 he worked as an engineer at
Apple Computer, Inc. Dr. Peterson holds an A.B. in Computer Science from the
University of California at Berkeley, and an M.S. and Ph.D. in Bioengineering
from a joint program with the University of California at Berkeley and UCSF.
DIANE H. CHURCH has served as the Company's Vice President, Professional
Relations since August 1997. From February 1997 to August 1997, Ms. Church was
Georgia Account Team Manager with Compuware Corporation, an information systems
software and services company. Ms. Church was Mid-Atlantic Regional Director and
Regional Director for Telecommunications Accounts at Candle Corporation from
April 1994 to September 1995 and at Legent Corporation Regional Director for
Mid-Atlantic and then South-Eastern Regional Director from April 1990 to April
1994, both of which are information systems software and services companies.
Prior to that time, Ms. Church held senior management positions with Wang
Laboratories, a computer and office equipment company. Ms. Church also worked as
an educator in public schools in the State of Georgia. Ms. Church holds a B.A.
in English and Education from Georgia Southwestern College and an M.B.A. from
Emory University.
KANG S. LIM has served as the Company's Vice President, Intellectual
Property since September 1997. From January 1997 to August 1997, Mr. Lim was the
Director of Intellectual Property for VXTreme, Inc., an Internet applications
software company that was acquired by Microsoft Corporation. From December 1993
to January 1997, Mr. Lim was patent counsel at Sun Microsystems Inc., a computer
workstations company and from May 1992 to December 1993, practiced patent law at
the law firm of Skjerven, Morrill, MacPherson, Franklin & Friel. Mr. Lim holds a
B.Sc. in Computer Engineering from Manchester University, an M.S. in Computer
Engineering from the University of Southern California and a J.D. from the
University of California, Hastings College of the Law.
KATHRYN M. ALLEN has served as Director, Public School Teacher Training and
Marketing since April 1998. Ms. Allen has more than 14 years of experience in
information sales, marketing, and training for the K-12 public school market.
From January 1995 to January 1997, Ms. Allen was Director of Marketing and
Special Sales for Teacher Created Materials, Inc., a supplemental print
publisher and staff development provider. From December 1982 to December 1994,
Ms. Allen held several sales and marketing positions within the Dun & Bradstreet
Corporation, most recently as Western Regional Sales Manager for the Market Data
Retrieval division. Earlier in her career, Ms. Allen was an elementary school
teacher in Japan and Australia. Ms. Allen holds a B.S. in Elementary Education
from Western Connecticut State College and an M.S. in Mathematics from the
University of Bridgeport.
DR. KATHLEEN M. HOCKER has served as Director, Public School Sales, since
March 1998. Dr. Hocker has more than 13 years of experience in educational sales
and marketing specifically to the K-12 public school market and eight years of
teaching experience at the elementary, special, and higher education levels.
From November 1996 to December 1997, Dr. Hocker was the National Sales Manager,
Interactive Products for Steck-Vaugh Company, a leading publisher of educational
materials. From February 1995 to November 1996, Dr. Hocker was the Director of
Curriculum and Assessment for the Northeastern U.S. for Computer Curriculum
Corporation, a division of Simon & Schuster. From October 1993 to January 1995,
she was Marketing Director for Ligature, a curriculum development company. Her
previous experience includes a position as Regional Senior Consultant for
Houghton Mifflin Company and educational consulting for Addison Wesley
Publishing Company. Dr. Hocker holds a B.A. in Elementary Education and an M.Ed.
in Special Education from Antioch University and an Ed.D. from Nova University.
42
<PAGE>
JAMES A. MILLS has served as Director, Business Development since July 1997.
Since October 1997 he has had responsibility for the development of the
Company's Fast ForWord Learning Centers. Prior to joining the Company, Jim was a
consultant advising California-based clients on financial, organizational, and
merger-related consolidation issues. From 1986 to June 1996, Mr. Mills served as
a Vice President at Citicorp Real Estate. Mr. Mills previously worked in cable
television programming and distribution for Viacom International, Inc., a cable
programming start-up venture and a national cable marketing trade association.
Mr. Mills holds a B.S. in Environmental Sciences from Stanford University and an
M.B.A. from Harvard Business School.
CARLETON A. HOLSTROM is a founder of the Company and has been a member of
the Board of Directors of the Company since February 1996. From February 1996 to
March 1997, Mr. Holstrom also served as the Company's Chief Financial Officer.
Mr. Holstrom retired in 1987 as Senior Vice President--Finance of The Bear
Stearns Companies. He is a director of Custodial Trust Company and is a trustee,
overseer or director of a number of non-profit organizations. Mr. Holstrom has
served as a member of the Board of Trustees and Board of Governors of Rutgers,
including as chairman and vice-chairman of both. He is currently a member of the
Board of Overseers' of the College of Letters and Science at the University of
Wisconsin-Madison. Mr. Holstrom holds a B.S. in Economics from University of
Wisconsin-Madison and an M.A. in Economics from Rutgers.
RODMAN W. MOORHEAD, III has been a member of the Board of Directors of the
Company since June 1998. Mr. Moorhead has been employed since 1973 by E.M.
Warburg, Pincus & Co., LLC, a specialized private equity firm (or its
predecessors), where he currently serves as Senior Managing Director. Mr.
Moorhead was nominated to the Company's Board of Directors in accordance with
rights held by Ventures, pursuant to an equity agreement. Upon the completion of
this Offering and so long as Ventures owns a requisite percentage of outstanding
shares of Common Stock, the Company must nominate Mr. Moorhead, or another
individual designated by Ventures and reasonably acceptable to the Company, and
use its best efforts to have Mr. Moorhead or such other individual elected to
the Board. See "Certain Transactions--Board Representation Right." Mr. Moorhead
is a director of Coventry Health Care, Inc., NeXstar Pharmaceuticals, Inc.,
Transkaryotic Therapies, Inc. and Xomed Surgical Products, Inc. and a number of
privately held companies. He is a trustee of The Taft School and a member of the
Overseers' Committee on University Resources at Harvard College. Mr. Moorhead
holds an A.B. in Economics and an M.B.A. from Harvard University.
DR. LEONARD S. SCHLEIFER has been a member of the Board of Directors of the
Company since May 1996. Dr. Schleifer is a founder of Regeneron Pharmaceuticals,
Inc. ("Regeneron"), a public company focused on the application of molecular and
cell biology to the search for novel human therapeutics, and has been a director
and its President and Chief Executive Officer since Regeneron's inception in
1988. He served as Chairman of the Board of Regeneron from 1990 to 1994. From
1984 to 1988, Dr. Schleifer was an Assistant Professor at the Cornell University
Medical School in the Departments of Neurology and Neurobiology, and in 1992 he
was appointed Clinical Professor of Neurology. Dr. Schleifer received his M.D.
and Ph.D. in Pharmacology from the University of Virginia. Dr. Schleifer is a
licensed physician and is certified in Neurology by the American Board of
Psychiatry and Neurology.
JAMES E. THOMAS has served as a member of the Board of Directors of the
Company since November 1996. Since 1989, he has been employed by E.M. Warburg,
Pincus & Co., LLC, a specialized private equity firm (or its predecessors),
where he currently serves as Managing Director. Prior to 1989, Mr. Thomas was a
Vice President of Goldman Sachs International in London. Mr. Thomas was
nominated to the Company's Board of Directors in accordance with rights held by
Ventures, pursuant to an equity agreement. Upon the completion of this Offering
and so long as Ventures owns a requisite percentage of outstanding shares of
Common Stock, the Company must nominate Mr. Thomas, or another individual
designated by Ventures and reasonably acceptable to the Company, and use its
best efforts to have
43
<PAGE>
Mr. Thomas or such other individual elected to the Board. See "Certain
Transactions--Board Representation Right." Mr. Thomas is also a director of
Anergen, Inc., Celtrix Pharmaceuticals, Inc., Menley & James Laboratories, Inc.,
Xomed Surgical Products, Inc., Transkaryotic Therapies, Inc., Oxford
GlycoSciences plc and a number of privately held companies. Mr. Thomas holds a
B.S. in Finance and Economics from The Wharton School of Business at the
University of Pennsylvania and an M.Sc. from The London School of Economics.
BOARD COMPOSITION
The Company currently has authorized seven directors. In accordance with the
terms of the Company's Restated Certificate of Incorporation, which will become
effective upon the closing of this Offering (the "Restated Certificate"), the
terms of office of the directors will be divided into three classes: Class I,
Class II and Class III, which term will expire at the annual meetings of
stockholders to be held in 1999, 2000 and 2001, respectively (or special
meetings held in lieu thereof). The Class I directors are Messrs. Holstrom and
Thomas and Dr. Tallal, the Class II directors are Ms. Bolton and Dr. Schleifer,
and the Class III directors are Dr. Merzenich and Mr. Moorhead. At each annual
meeting of stockholders after the initial classification or special meeting in
lieu thereof, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election or special meeting held in lieu thereof. In
addition, the Restated Certificate provides that the authorized number of
directors may be changed only by resolution of the Board of Directors. Any
additional directorships resulting from an increase in the number of directors
will be distributed among the three classes so that, as nearly as possible, each
class will consist of one-third of the directors. This classification of the
Board of Directors may have the effect of delaying or preventing changes in
control or management of the Company. Although directors of the Company may be
removed for cause by the affirmative vote of the holders of a majority of the
Common Stock, the Restated Certificate provides that directors may be removed
without cause only by the affirmative vote of holders of at least 66 2/3% of the
voting power of all the then-outstanding shares of the Company's voting stock.
BOARD COMMITTEES
The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee, currently composed of Messrs. Holstrom and Thomas, reviews
the internal accounting procedures of the Company and consults with and reviews
the services provided by the Company's independent auditors. The Compensation
Committee, currently composed of Dr. Schleifer and Messrs. Holstrom and
Moorhead, reviews and recommends to the Board of Directors the compensation and
benefits of the Company. The Compensation Committee also administers the
issuance of stock options and other awards under the Company's equity incentive
plans.
DIRECTOR COMPENSATION
The Company currently provides cash compensation to directors who are not
employees of or consultants to the Company and do not hold five percent or more
of the Company's voting securities ("Non-Employee Directors") for services as
directors at a rate of $1,000 per regular meeting of the Board of Directors
attended in person and $500 per Board Committee meeting and per meeting of the
Board of Directors attended by telephone. Directors will also be reimbursed for
certain expenses in connection with attendance at Board of Directors and
committee meetings. Directors are currently eligible to participate in the
Company's Stock Option Plan and, beginning with the completion of this Offering,
employee directors will also be eligible to participate in the Company's 1998
Employee Stock Purchase Plan and non-employee directors will be eligible to
participate in the 1998 Non-Employee Directors' Stock Option Plan. See
"--Employee Benefit Plans."
44
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee of the Board of Directors
has been an officer or employee of the Company, except that Mr. Holstrom served
as the Company's Chief Financial Officer from February 1996 to March 1997. No
executive officer of the Company serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving on the Company's Board of Directors or Compensation Committee.
EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded or paid by the
Company during the fiscal year ended December 31, 1997 to the Company's Chief
Executive Officer and the other most highly compensated officer receiving
compensation in excess of $100,000 in 1997 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
-------------------
ANNUAL COMPENSATION NUMBER OF SHARES OF
---------------------------- COMMON STOCK
ALL OTHER UNDERLYING
NAME AND PRINCIPAL POSITION (2) SALARY ($) COMPENSATION ($) OPTIONS (#)
- -------------------------------------------------------------- ---------- ---------------- -------------------
<S> <C> <C> <C>
Sheryle J. Bolton ............................................ $ 205,000 $ 30,000(3) --
Chief Executive Officer
Frank M. Mattson ............................................. $ 140,000 -- 82,500
Chief Financial Officer
</TABLE>
- --------------------------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), the compensation described in this table does not include
medical, group life insurance or other benefits received by the Named
Executive Officers that are available generally to all salaried employees of
the Company and certain perquisites and other personal benefits received by
the Named Executive Officers, which do not exceed the lesser of $50,000 or
10% of any such officer's salary and bonus disclosed in this table.
(2) In determining compensation packages for its officers, the Company currently
takes into consideration the equity of the Company held by such officer.
Accordingly, certain officers may receive smaller compensation packages than
other officers of the Company with comparable responsibilities.
(3) Reflects reimbursement of relocation expenses in 1997.
45
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
year ended December 31, 1997 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------
NUMBER OF POTENTIAL REALIZABLE VALUE
SHARES OF PERCENTAGE OF AT ASSUMED ANNUAL RATES OF
COMMON STOCK TOTAL OPTIONS STOCK APPRECIATION FOR
UNDERLYING GRANTED IN EXERCISE OPTION TERM (4)
OPTIONS FISCAL 1997 PRICE EXPIRATION --------------------------
NAME GRANTED (1) (2) ($/SHARE) (3) DATE 5% ($) 10% ($)
- ------------------------ -------------- -------------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sheryle J. Bolton -- -- -- -- -- --
Frank M. Mattson 70,000 20.1% $0.20 1/27/07 $ 1,469,300 $ 2,342,900
12,500 3.6% $0.40 10/28/07 $ 259,875 $ 415,875
</TABLE>
- ------------------------
(1) Each of the options was granted under the Company's Stock Option Plan and
has a term of 10 years, subject to earlier termination in certain events
related to termination of employment. Generally, initial option grants for
executive officers vest as to 25% of the total shares one year from the date
of hire, and one forty-eighth of the total shares vest on each monthly
anniversary thereafter. Additional option grants generally vest as to one
forty-eighth of the total shares each month.
(2) Based on an aggregate of 348,875 shares subject to options granted to
employees of the Company in 1997, including the Named Executive Officers.
(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock as determined by the Board of Directors on the
date of grant.
(4) The potential realizable value is calculated based on the term of the option
at the time of grant (10 years) and an assumed initial public offering price
of $13.00 per share. Stock price appreciation of 5% and 10% is assumed
pursuant to rules promulgated by the Securities and Exchange Commission and
does not represent the Company's prediction of its stock price performance.
The potential realizable value is calculated based on the deemed value at
the date of grant and assumes that the deemed value appreciates from the
date of grant at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised at the exercise
price and sold on the last day of its term at the appreciated price.
YEAR-END OPTION VALUES (1)
The following table sets forth for each of the Named Executive Officers the
number and value of securities underlying unexercised options held by the Named
Executive Officers at December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1997 (2) AT DECEMBER 31, 1997 (3)
------------------------------ -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- ----------- ----------------- ------------ -----------------
<S> <C> <C> <C> <C>
Sheryle J. Bolton.................... 500,000 -- $ 1,950,000 $ --
Frank M. Mattson..................... 82,500 -- $ 319,250 --
</TABLE>
- ------------------------
(1) No Named Executive Officer exercised any option in fiscal 1997.
(2) Options may be exercised immediately pursuant to early exercise provisions
contained in option agreements. Any unvested shares issued pursuant to such
early exercise provisions are subject to a repurchase option in favor of the
Company upon termination of employment. Such repurchase option terminates at
a rate reflecting the vesting schedule of the underlying option.
Accordingly, such repurchase option generally terminates at a rate of
1/48th per month. See "--Principal and Selling Stockholders."
(3) Based on the difference between the deemed fair market value of the Common
Stock at December 31, 1997 ($4.10 per share) and the exercise price.
46
<PAGE>
EMPLOYEE BENEFIT PLANS
1998 EQUITY INCENTIVE PLAN. The Company's 1998 Equity Incentive Plan (the
"Incentive Plan") was adopted by the Company's Board of Directors and approved
by the Company's stockholders in June 1998. The Incentive Plan amends and
restates the Company's existing Stock Option Plan adopted in February 1996 and
amended in September 1996 (the "Prior Plan"). As of June 30, 1998, there were
options outstanding to purchase an aggregate of 1,511,498 shares of the
Company's Common Stock under the Prior Plan. The Incentive Plan will become
effective upon completion of this Offering. There are currently 2,800,000 shares
of Common Stock authorized for issuance under the Incentive Plan.
The Incentive Plan provides for the grant of incentive stock options, as
defined under the Internal Revenue Code of 1986, as amended (the "Code"), to
employees (including officers) and nonstatutory stock options, restricted stock
purchase awards, stock bonuses and stock appreciation rights to employees
(including officers), directors and consultants of the Company. The Incentive
Plan is administered by the Compensation Committee, which determines recipients
and types of options to be granted, including the exercise price, number of
shares subject to the option and the exercisability thereof.
The terms of stock options granted under the Incentive Plan generally may
not exceed 10 years. The Compensation Committee determines the exercise price of
options granted under the Incentive Plan, provided that the exercise price for
an incentive stock option cannot be less than 100% of the fair market value of
the Common Stock on the date of grant and, prior to the Company's stock being
publicly traded, the exercise price for a nonstatutory stock option cannot be
less than 85% of the fair market value of the Common Stock on the date of grant.
Options granted under the Incentive Plan vest at the rate specified in the
option agreement. Generally, the optionee may not transfer a stock option other
than by will or the laws of descent or distribution unless the optionee holds a
nonstatutory stock option that provides otherwise. However, an optionee may
designate a beneficiary who may exercise the option following the optionee's
death. An optionee whose service relationship with the Company or any affiliate
ceases for any reason may exercise vested options for the term provided in the
option agreement.
No incentive stock option (and prior to the Company's stock being publicly
traded, no nonstatutory stock option) may be granted to any person who, at the
time of the grant, owns (or is deemed to own) stock possessing more than 10% of
the total combined voting power of the Company or any affiliate of the Company,
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant and the term of the option
does not exceed five years from the date of grant. In addition, the aggregate
fair market value, determined at the time of grant, of the shares of Common
Stock with respect to which incentive stock options are exercisable for the
first time by an optionee during any calendar year (under all such plans of the
Company and its affiliates) may not exceed $100,000.
When the Company becomes subject to Section 162(m) of the Code (which denies
a deduction to publicly held corporations for certain compensation paid to
specified employees in a taxable year to the extent that the compensation
exceeds $1,000,000), no person may be granted options under the Incentive Plan
covering more than 625,000 shares of Common Stock in any calendar year.
Shares subject to stock options that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
awards under the Incentive Plan. Under its general authority to grant options,
the Compensation Committee has the implicit authority to reprice outstanding
options or to offer optionees the opportunity to replace outstanding options
with new options for the same or a different number of shares. Both the original
and new options will count toward the Code Section 162(m) limitation set forth
above.
Restricted stock purchases may be at any price determined by the Board in
its sole discretion, and stock bonuses may be awarded in consideration of past
services without a purchase payment. Rights under a stock bonus or restricted
stock bonus agreement may not be transferred other than by will, the laws of
47
<PAGE>
descent and distribution or a domestic relations order during the time the stock
awarded pursuant to such an agreement remains subject to the agreement.
In the event of certain changes in control, all outstanding options under
the Incentive Plan either will be assumed or substituted for by any surviving
entity. If the surviving entity determines not to assume or substitute for such
awards, the vesting provisions of such stock awards will be accelerated and such
stock awards will be terminated upon the change in control if not previously
exercised. In the event of the acquisition pursuant to Section 13(d) or 14(d) of
the Exchange Act of 1934 of securities representing at least fifty percent (50%)
of the combined voting power of the Company, the vesting of stock awards will be
accelerated immediately upon the occurrence of such event.
1998 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN. In June 1998, the Board
adopted, and the Company's stockholders approved, the 1998 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan") to provide for the
automatic grant of options to purchase shares of Common Stock to Non-Employee
Directors of the Company. The Board administers the Directors' Plan, unless the
Board delegates administration to a committee. The aggregate number of shares of
Common Stock that may be issued pursuant to options granted under the Directors'
Plan is 100,000 shares.
Pursuant to the terms of the Directors' Plan, upon the completion of this
Offering, subject to certain exceptions, each Non-Employee Director will
automatically be granted an option to purchase 20,000 shares of Common Stock
(the "Initial Grant"). Any individual who becomes a Non-Employee Director after
this Offering will automatically be granted the Initial Grant upon being elected
to the Board of Directors. Any person who is a Non-Employee Director on the
first anniversary of this Offering automatically will be granted an option to
purchase 4,000 shares of Common Stock (the "Annual Grant") on the first
anniversary of this Offering and on each anniversary thereafter during his or
her service as a Non-Employee Director. Any individual who becomes a
Non-Employee Director after the first anniversary of this Offering will receive,
in addition to the Initial Grant, an Annual Grant on each anniversary of the
date such Non-Employee Director was first elected as a member of the Board
during his or her service as a Non-Employee Director.
Initial Grants vest quarterly over the four-year period following the date
of grant such that the entire Initial Grant shall become exercisable on the
fourth anniversary of the date of grant. Annual Grants vest quarterly over the
one-year period following the date of grant, such that the entire Annual Grant
will become exercisable on the first anniversary of the date of grant.
The exercise price of the options granted under the Directors' Plan will be
equal to the fair market value of the Common Stock on the date of grant. No
option granted under the Directors' Plan may be exercised after the expiration
of 10 years from the date it was granted. Options granted under the Directors'
Plan generally are non-transferable. However, an optionee may designate a
beneficiary who may exercise the option following the optionee's death. An
optionee whose service relationship with the Company or any affiliate (whether
as a Non-Employee Director of the Company or subsequently as an employee,
director or consultant of either the Company or an affiliate) ceases for any
reason may exercise vested options for the term provided in the option agreement
(12 months generally, 18 months in the event of death).
In the event of certain changes in control, all outstanding options under
the Directors' Plan either will be assumed or substituted for by any surviving
or acquiring entity. If the surviving or acquiring entity determines not to
assume or substitute for such options, the options will be accelerated prior to
the change in control and will be terminated if not exercised prior to the
change in control. In the event of the acquisition pursuant to Section 13(d) or
14(d) of the Exchange Act of 1934 of securities representing at least fifty
percent (50%) of the combined voting power of the Company, the vesting of
options will be accelerated immediately upon the occurrence of such event.
48
<PAGE>
1998 EMPLOYEE STOCK PURCHASE PLAN. In June 1998, the Board adopted, and the
Company's stockholders approved, the 1998 Employee Stock Purchase Plan (the
"Purchase Plan"), authorizing the issuance of 500,000 shares of Common Stock
pursuant to purchase rights granted to employees of the Company or to employees
of any affiliate of the Company. The Purchase Plan is intended to qualify as an
employee stock purchase plan within the meaning of Section 423 of the Code.
The Purchase Plan provides a means by which employees may purchase Common
Stock of the Company through payroll deductions. The Purchase Plan is
implemented by offerings of rights to eligible employees. Under the Plan, the
Company may specify offerings with a duration of not more than 27 months, and
may specify shorter purchase periods within each offering. The first offering
will begin on the effective date of this Offering and be approximately 12 months
in duration with purchases occurring every six months. Unless otherwise
determined by the Board of Directors, Common Stock is purchased for accounts of
employees participating in the Purchase Plan at a price per share equal to the
lower of (i) 85% of the fair market value of a share of Common Stock on the date
of commencement of participation in the offering or (ii) 85% of the fair market
value of a share of Common Stock on the date of purchase. Generally, all regular
employees, including executive officers, who work at least 20 hours per week and
are customarily employed by the Company or by an affiliate of the Company for at
least five months per calendar year may participate in the Purchase Plan and may
authorize payroll deductions of up to 15% of their base compensation for the
purchase of stock under the Purchase Plan.
Eligible employees may be granted rights only if the rights together with
any other rights granted under employee stock purchase plans do not permit such
employee's rights to purchase stock of the Company to accrue at a rate which
exceeds $25,000 of fair market value of such stock for each calendar year in
which such rights are outstanding. No employee shall be eligible for the grant
of any rights under the Purchase Plan if immediately after such rights are
granted, such employee has voting power over 5% or more of the Company's
outstanding capital stock. As of the date hereof, no shares of Common Stock had
been purchased under the Purchase Plan.
401(k) PLAN. In January 1996, the Company adopted a tax-qualified employee
savings and retirement plan (the "401(k) Plan") covering all of the Company's
employees. Pursuant to the 401(k) Plan, employees may elect to reduce their
current compensation by up to the lesser of 20% of eligible compensation or the
statutorily prescribed annual limit ($10,000 in 1998) and have the amount of
such reduction contributed to the 401(k) Plan. The trustee under the 401(k)
Plan, at the direction of each participant, invests the assets of the 401(k)
Plan in any of four investment options. The 401(k) Plan is intended to qualify
under Section 401 of the Internal Revenue Code so that contributions by
employees to the 401(k) Plan, and income earned on plan contributions, are not
taxable to employees until withdrawn, and so that the contributions by employees
will be deductible by the Company when made. The Company may make matching or
additional contributions to the 401(k) Plan, in amounts to be determined
annually by the Board of Directors.
EMPLOYMENT AND CONSULTING AGREEMENTS
In October 1996, the Company entered into an employment agreement with Ms.
Bolton that provided that, in the event Ms. Bolton's employment with the Company
is terminated without cause prior to November 1, 1998, Ms. Bolton would receive
her base salary on regularly scheduled pay days for the 12 months following such
termination, provided that such amount would be reduced by any compensation she
is then receiving from other employment as an executive.
In September 1996, the Company entered into consulting agreements with Dr.
Merzenich and Dr. Tallal. The agreement with Dr. Merzenich generally provides,
among other things, that he will devote up to 20 percent of his professional
time on consulting activities for the Company through December 31, 2001. The
agreement with Dr. Tallal generally provides, among other things, that she will
devote an average of one day per week on consulting activities for the Company
through December 31, 2001.
49
<PAGE>
Historically, the amount paid to Dr. Merzenich under his consulting agreement
has not exceeded $60,000 per year. The amount paid to Dr. Tallal under her
consulting agreement was $70,000 in 1997. See "Certain Transactions."
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
In June 1998, the Board authorized the Company to enter into indemnity
agreements with each of the Company's directors and executive officers. The form
of indemnity agreement provides that the Company will indemnify against any and
all expenses of the director or executive officer who incurred such expenses
because of his or her status as a director or executive officer, to the fullest
extent permitted by the Company's Bylaws.
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate") and Bylaws contain certain provisions relating to the limitation
of liability and indemnification of directors and officers. The Certificate
provides that directors of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability: (i) for any breach of the directors'
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) in respect of certain unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law; or (iv) for any transaction from which the director
derives any improper personal benefit. The Certificate also provides that if the
Delaware General Corporation Law is amended after the approval by the Company's
stockholders of the Certificate to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of the Company's directors shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law. In addition, as permitted by
Section 145 of the Delaware General Corporation Law, the Bylaws of the Company
provide that the Company shall indemnify its directors and executive officers
and may indemnify its other officers, employees and other agents to the fullest
extent not prohibited by Delaware law. These provisions do not affect a
director's responsibilities under any other laws, such as the federal securities
laws or state or federal environmental laws. The Company has purchased a
directors' and officers' liability insurance policy providing coverage up to
specified amounts for losses incurred by the Company, its directors or officers
in connection with certain claims against them, including certain claims under
state and federal securities laws.
50
<PAGE>
CERTAIN TRANSACTIONS
From April to September 1996, the Company issued an aggregate of 1,444,681
shares of its Series A Preferred Stock. An aggregate of 1,142,956 shares of the
Company's Series A Preferred Stock were sold at a price of $1.70 per share; an
aggregate of 92,592 shares of the Company's Series A Preferred Stock were sold
at a price of $1.62 per share to Drs. Merzenich, Holstrom and Jenkins pursuant
to an Employee Stock Purchase Plan. In October and November 1996, the Company
issued an aggregate of 2,250,000 shares of Series B Preferred Stock at a price
of $1.80 per share. In connection with the sale of Series B Preferred Stock, the
Company also issued warrants to purchase a total of 1,428,571 shares of Series C
Preferred Stock with an exercise price of $2.80 per share (all of which have
since been exercised). Listed below are the directors, executive officers and
five percent stockholders who have made equity investments in the Company to
purchase shares of the Company's Preferred Stock or Common Stock. See "Principal
and Selling Stockholders."
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
COMMON PREFERRED PREFERRED PREFERRED AGGREGATE
INVESTOR STOCK STOCK STOCK STOCK CONSIDERATION
- ------------------------------------------------- ---------- ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Dr. Michael M. Merzenich......................... 1,250,000 30,864 -- -- $ 51,000
Dr. Paula A. Tallal.............................. 1,250,000 -- -- -- $ 1,000
Dr. William M. Jenkins........................... 833,337 30,864 -- -- $ 50,667
Dr. Steven L. Miller............................. 185,175 -- -- -- $ 148
Warburg, Pincus Ventures, L.P. (1)............... -- -- 2,222,222 1,428,571 $ 8,000,000
Carleton A. Holstrom (2)......................... 231,474 60,276 -- -- $ 100,186
Dr. Leonard S. Schleifer......................... 50,000 29,412 -- -- $ 58,501
</TABLE>
- --------------------------
(1) Messrs. Moorhead and Thomas, directors of the Company, are affiliated with
Ventures. Does not include warrants to purchase 100,000 shares of the
Company's Common Stock issued to Ventures in June 1998 in connection with
Ventures' guarantee of an unsecured line of credit obtained by the Company.
(2) Includes 29,412 shares of Series A Preferred Stock held by the Solon Edward
Trust #2 ("Solon Trust"), for which Mr. Holstrom serves as trustee.
The holders of the Company's Series B and C Preferred Stock are entitled to
certain registration rights with respect to the Common Stock issued or issuable
upon conversion of thereof. See "Description of Capital Stock--Registration
Rights."
In connection with the issuance of Series B Preferred Stock and the warrants
to purchase Series C Preferred Stock referenced above, the Company entered into
an agreement that requires the Company, following the completion of this
Offering and as long as Ventures owns at least 10% and 20% of the outstanding
Common Stock, to nominate and use its best efforts to elect one or two
individuals, respectively, designated by Ventures for election to the Board of
Directors. See "Risk Factors--Control by Existing Management and Stockholders"
and "Description of Capital Stock--Board Representation Rights."
In June 1998, the Company obtained a $3 million unsecured line of credit
from BankBoston, N.A. (the "Line of Credit") which is guaranteed by Ventures. In
connection with Ventures providing such guarantee, the Company issued to
Ventures warrants to purchase 100,000 shares of the Company's Common Stock at
$6.00 per share. Such warrants expire on May 31, 2003. Additionally, in order to
enable the Company to repay the outstanding balance on the Line of Credit,
Ventures agreed to purchase up to 500,000 shares of the Company's capital stock
at $6.00 per share if requested by the Company. The Company's right to require
Ventures to purchase such securities expires upon the completion of this
Offering.
51
<PAGE>
Pursuant to the University License, the Company is obligated to make certain
license-issue fee payments, royalty payments, milestone payments and other
payments (collectively, the "Payments") to the Regents in exchange for a license
to commercially develop and sell products that make use of a patent filed by
Drs. Tallal, Merzenich, Jenkins and Miller (each an "Inventor" and,
collectively, the "Inventors"), among others, and subsequently assigned to the
Regents. Drs. Tallal and Merzenich are members of the Board of Directors of the
Company, and Drs. Jenkins and Miller are vice presidents of the Company. To
date, the Company has paid all license-issue fees owed under the University
License, certain royalty payments and certain milestone payments. Pursuant to
separate patent policies of the University of California and Rutgers University
(each a "University" and, collectively, the "Universities"), each University
distributes to those Inventors affiliated with such University, on an annual
basis, a portion of the Payments received from the Company. To date, the amounts
paid to each Inventor pursuant to the Universities' patent policies have not
exceeded $60,000 per year. The amount of future University payments to the
Inventors are indeterminable at this time because such figures are tied to the
Company's future performance; however, the Company estimates that less than 0.5%
of product sales during the term of the University License will be payable by
the Universities to each Inventor.
Ms. Bolton's husband, Stephen Shane, is a principal of TouchStar
Communications ("TouchStar"), which has produced certain of the Company's
promotional and training videos. The total compensation paid to TouchStar for
such production services was approximately $131,000 and $28,000 in 1997 and the
six months ended June 30, 1998, respectively. No amounts were paid to TouchStar
in 1996.
The Company believes that the foregoing transactions were in its best
interests. As a matter of policy these transactions were, and all future
transactions between the Company and any of its officers, directors or principal
stockholders will be, approved by a majority of the disinterested members of the
Board of Directors, on terms no less favorable to the Company than could be
obtained from unaffiliated third parties and in connection with bona fide
business purposes of the Company. See "Management-- Employment and Consulting
Agreements."
52
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of June 30, 1998 (except
as otherwise indicated) and as adjusted to reflect the sale of the Common Stock
being offered hereby by (assuming no exercise of the Underwriters' over-
allotment option): (i) each person (or group of affiliated persons) who is known
by the Company to own beneficially more than 5% of the Common Stock; (ii) each
of the Named Executive Officers; (iii) each of the Company's directors and (iv)
all directors and executive officers of the Company as a group. Unless otherwise
noted, the address for the individuals listed below is: c/o Scientific Learning
Corporation, 1995 University Avenue, Suite 400, Berkeley, CA 94704.
<TABLE>
<CAPTION>
PERCENTAGE OWNED (1)
------------------------
BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNERS SHARES (1) OFFERING OFFERING
- ------------------------------------------------------------------------------- ---------- ----------- -----------
<S> <C> <C> <C>
Warburg, Pincus Ventures, L.P. (2)............................................. 3,750,793 40.0% 31.9%
466 Lexington Avenue
New York, NY 10017
Sheryle J. Bolton (3).......................................................... 500,000 5.1 4.1
Dr. Michael M. Merzenich(4).................................................... 1,005,864 10.8 8.6
Dr. Paula A. Tallal (5)........................................................ 1,233,268 13.3 10.6
Frank M. Mattson (6)........................................................... 105,000 1.1 *
Dr. William M. Jenkins (7)..................................................... 864,201 9.3 7.4
Carleton A. Holstrom (8)....................................................... 291,750 3.1 2.5
Rodman W. Moorhead, III (2)(9)................................................. 3,750,793 40.0 31.9
Dr. Leonard S. Schleifer....................................................... 79,412 * *
James E. Thomas (2)(9)......................................................... 3,750,793 40.0 31.9
All directors and executive officers as a group (9 persons) (10)............... 7,830,288 78.3% 63.1%
</TABLE>
- --------------------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
Percentage of beneficial ownership is based on 9,271,893 shares of Common
Stock outstanding as of June 30, 1998 and 11,671,893 shares of Common Stock
outstanding upon completion of this Offering.
(2) Includes 100,000 shares issuable upon the exercise of an immediately
exercisable warrant issued in June 1998. Messrs. Moorhead and Thomas,
directors of the Company, are affiliated with Ventures. The sole general
partner of Ventures is Warburg, Pincus & Co., a New York general
partnership ("WP"). E.M. Warburg, Pincus & Co., LLC, a New York limited
liability company ("EMW LLC"), manages Ventures. The members of EMW LLC are
substantially the same as the partners of WP. Lionel I. Pincus is the
managing partner of WP and the managing member of EMW LLC and may be deemed
to control both WP and EMW LLC. WP has a 15% interest in the profits of
Ventures as the general partner and also owns approximately 1.5% of the
limited partnership interests in Ventures. See "Certain Transactions."
(3) Includes 500,000 shares subject to immediately exercisable stock options,
218,750 of which will be vested as of August 29, 1998 and the remaining
281,250 shares which would be subject to repurchase if purchased prior to
vesting.
(4) Includes 605,864 shares held in the Merzenich Family Trust and 25,000
shares subject to vested stock options.
(5) Includes 50,000 shares to be sold if the Underwriter's over-allotment
option is exercised in full. See "Selling Stockholders and Exercise of
Over-Allotment Option."
(6) Includes 105,000 shares subject to immediately exercisable stock options,
31,678 of which will be vested as of August 29, 1998 and the remaining
73,322 shares which would be subject to repurchase if purchased prior to
vesting.
(7) Includes 40,864 shares to be sold if the Underwriter's over-allotment
option is exercised in full. See "Selling Stockholders and Exercise of
Over-Allotment Option."
53
<PAGE>
(8) Includes 231,474 shares held by the Holstrom Family Limited Partnership and
29,412 shares held in the Solon Trust, for which Mr. Holstrom serves as
trustee. Mr. Holstrom disclaims beneficial ownership of the shares held in
the Solon Trust within the meaning of Rule 13d-3 under the Securities Act
of 1934.
(9) All of the shares indicated as owned by Messrs. Moorhead and Thomas are
owned directly by Ventures and are included because of each individual's
affiliation with Ventures. Messrs. Moorhead and Thomas are both directors
of the Company. Mr. Thomas is a Managing Director of EMW LLC and a general
partner of WP. Mr. Moorhead is a Senior Managing Director of EMW LLC and a
general partner of WP. As such, Mr. Moorhead and Mr. Thomas may be deemed
to have an indirect pecuniary interest (within the meaning of Rule 16a-1
under the Securities Exchange Act of 1934) in an indeterminate portion of
the shares beneficially owned by Ventures and WP. Each of Messrs. Moorhead
and Thomas disclaims beneficial ownership of these shares within the
meaning of Rule 13d-3 under the Securities Exchange Act of 1934. The
address for Messrs. Moorhead and Thomas is: c/o Warburg, Pincus Ventures,
L.P., 466 Lexington Avenue, New York, NY 10017.
(10) Includes the information in notes (1) through (9), as applicable.
SELLING STOCKHOLDERS AND EXERCISE OF OVER-ALLOTMENT OPTION
If the Underwriters' over-allotment option is exercised in full, the Selling
Stockholders will sell an aggregate of 193,658 shares of Common Stock. The
number of shares being sold, and, if sold, the number of shares and percentages
of outstanding shares beneficially owned upon completion of this Offering
(assuming the Underwriters' over-allotment option is exercised in full), by the
following individuals will be as follows:
<TABLE>
<CAPTION>
AFTER OFFERING
-------------------------
NUMBER OF SHARES SHARES PERCENTAGE
NAME OF SELLING STOCKHOLDER TO BE SOLD OWNED OWNED
- ---------------------------------------------------------------------- ----------------- ---------- -------------
<S> <C> <C> <C>
Richard Brockway...................................................... 1,000 4,882 *%
David Charron......................................................... 22,000 329,842 2.8
Gordon Connor......................................................... 2,000 6,750 *
Cooper White & Cooper Pension Plan(1)................................. 1,882 4,000 *
Stephen Devries....................................................... 2,500 3,382 *
Highview Investment L.P............................................... 9,500 49,325 *
Dr. William M. Jenkins................................................ 40,864 823,337 7.1
Charles Miller........................................................ 2,500 5,000 *
Colleen Osburn........................................................ 50,000 3,080 *
Dr. Paula A. Tallal................................................... 50,000 1,183,268 10.1
Glenn Tobias.......................................................... 11,412 47,413 *
All Selling Stockholders as a group................................... 193,658 2,460,279 21.1%
</TABLE>
- ------------------------
*Less than one percent.
(1) Such shares are beneficially owned by David Tucker.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation and Bylaws is a summary
and is qualified in its entirety by the provisions of the Certificate of
Incorporation and Bylaws, which have been filed as exhibits to the Company's
Registration Statement, of which this Prospectus is a part.
Upon the closing of this Offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, $0.001 par value per
share ("Common Stock ), and 1,000,000 shares of Preferred Stock, $0.001 par
value per share ("Preferred Stock").
COMMON STOCK
As of June 30, 1998, there were 9,271,893 shares of Common Stock outstanding
held by 107 holders of record. The holders of Common Stock are entitled to one
vote for each share held of record on all matters submitted to a vote of the
stockholders. The holders of Common Stock are not entitled to cumulative voting
rights with respect to the election of directors, and as a consequence, minority
stockholders will not be able to elect directors on the basis of their votes
alone. Subject to preferences that may be applicable to any shares of Preferred
Stock issued in the future, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, holders of the Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding Preferred
Stock. Holders of Common Stock have no preemptive rights and no right to convert
their Common Stock into any other securities. There are no redemption or sinking
fund provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon completion of
this Offering will be, fully paid and nonassessable.
PREFERRED STOCK
Upon the completion of this Offering, all outstanding shares of Series A,
Series B and Series C Preferred Stock will be converted into 5,098,252 shares of
Common Stock. See Note 5 to Financial Statements for a description of currently
outstanding Preferred Stock. Following the conversion, the shares converted will
be retired from the number of authorized shares of Preferred Stock.
Upon the completion of this Offering, the Board of Directors will have the
authority, without further action by the stockholders, to issue up to 1,000,000
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 and the number of shares constituting any series or the
designation of such series, without any further vote or action by stockholders.
The issuance of Preferred Stock could adversely affect the voting power of
holders of Common Stock and the likelihood that such holders will receive
dividend payments and payments upon liquidation and could have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company has no present plan to issue any shares of Preferred Stock.
REGISTRATION RIGHTS
Pursuant to an Amended and Restated Registration Rights Agreement among the
Company and certain of its stockholders, such stockholders (the "Holders") are
entitled to certain rights with respect to the registration of approximately
3,678,571 shares of Common Stock under the Securities Act. If the Company
proposes to register any of its securities under the Securities Act, the Holders
are entitled to notice of such registration and are entitled to include their
shares therein at the Company's expense, subject to certain limitations. In
addition, the Holders may require the Company at its expense to register their
shares on Form S-3 when such form becomes available for use by the Company.
55
<PAGE>
BOARD REPRESENTATION RIGHTS
Pursuant to a Securities Purchase Agreement between the Company and
Ventures, among others, the Company is required, following the completion of
this Offering and for so long as Ventures owns beneficially and of record at
least 20% of the outstanding shares of Common Stock, to nominate and use its
best efforts to have two individuals, designated by Ventures and reasonably
acceptable to the Company, elected to the Board. In addition, the Company is
required, following the completion of this Offering and for so long as Ventures
owns beneficially and of record at least 10% of the outstanding shares of Common
Stock, to nominate and use its best efforts to have one individual, designated
by Ventures and reasonably acceptable to the Company, elected to the Board.
Ventures may not assign the above described right.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Delaware Law"), an anti-takeover law. In general,
the statute prohibits a publicly held 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 approved in a prescribed manner.
For purposes of Section 203, a "business combination" includes a merger, asset
sale or other transaction resulting in a financial benefit to the interested
stockholder, and an "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years prior, did own) 15% or
more of the corporation's voting stock.
Effective upon the closing of this Offering, the Company's Restated
Certificate and Restated Bylaws, among other things, require that any action
required or permitted to be taken by stockholders be effected at a duly called
annual or special meeting of the stockholders and may not be effected by a
consent in writing, require that advance notice be given of stockholder
proposals and director nominations and prohibit cumulative voting in the
election of directors. Both the Restated Certificate and the Restated Bylaws
will also require the affirmative vote of the holders of at least 66 2/3% of the
voting power of the outstanding shares ("Super-Majority Vote") to remove a
director without cause or amend the Company's Bylaws. In addition, a
Super-Majority Vote will be required to amend certain provisions of the Restated
Certificate, including provisions regarding managing the Company's business,
indemnification of directors, classification of the Board of Directors, the
manner by which vacancies may be filled on the Board of Directors, the manner by
which stockholders may act and notice requirements when stockholders want to
make nominations for elections of directors or bring other business before a
stockholder meeting. The Restated Certificate authorizes the Board of Directors
to issue up to 1,000,000 shares of Preferred Stock and to determine the rights,
preferences and privileges thereof without any further vote or action by the
stockholders, provides for a classified Board of Directors and specifies that
the authorized number of directors may be changed only by a resolution of the
Board of Directors. Special meetings of the stockholders of the Company may be
called only by the Board of Directors, the Chairman of the Board or the Chief
Executive Officer. The provisions described above could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company, or delay, prevent or deter a merger,
acquisition or tender offer in which the Company's stockholders could receive a
premium for their shares, a proxy contest for control of the Company or other
change in the Company's management. See "Risk Factors--Possible Anti-Takeover
Effect of Certain Charter Provisions."
TRANSFER AGENT AND REGISTRAR
BankBoston, N.A. has been appointed as the transfer agent and registrar for
the Company's Common Stock.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this Offering, the Company will have outstanding
11,671,893 shares of Common Stock, based on the number of shares of Common Stock
outstanding as of June 30, 1998 and assuming no exercise of the Underwriters'
over-allotment option. Of these shares, all the shares sold in this Offering
will be freely tradable without restrictions or further registration under the
Securities Act. The remaining 9,271,893 shares of Common Stock held by existing
stockholders are "restricted securities" within the meaning of the Securities
Act ("Restricted Shares"). Restricted Shares may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rules 144, 144(k) or 701 promulgated under the Securities Act. The Company has
granted holders of 3,678,571 Restricted Shares certain rights with respect to
the registration of such shares. See "Description of Capital Stock--
Registration Rights."
Holders of 8,932,932 shares of the Company's Common Stock, including all
executive officers and directors, have entered into lock-up agreements with the
representatives of the Underwriters. See "Underwriting." As a result of such
contractual restrictions and the provisions of Rule 144 and 701, additional
shares will be available for sale in the public market as follows: (i) 338,961
Restricted Shares will be eligible for immediate sale on the date of this
Prospectus; (ii) 834,238 shares of Common Stock issuable upon exercise of
currently outstanding options will be eligible for sale 180 days after the date
of this Prospectus upon expiration of lock-up agreements; (iii) 8,932,932
Restricted Shares will be eligible for sale 180 days after the date of this
Prospectus upon expiration of lock-up agreements; and (iv) 100,000 shares of
Common Stock issuable upon exercise of currently outstanding warrants will be
eligible for sale in the public market upon expiration of the one-year holding
period. Depending on the method of exercise, the one year holding period is
calculable either from the date of the issuance of the warrant in June 1998 or
the date of exercise.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, any holder, including an affiliate of the Company
within the meaning of Rule 405 under the Securities Act (an "Affiliate"), of
Restricted Shares as to which at least one year has elapsed since the date of
the holder's acquisition of such shares from the Company or from an Affiliate,
would be entitled within any three-month period to sell a number of shares that
does not exceed the greater of 1% of the then outstanding shares of Common Stock
(approximately 116,718 shares immediately after the completion of this Offering
assuming no exercise of the Underwriters' over-allotment option) or the average
weekly trading volume of the Common Stock on the Nasdaq National Market during
the four calendar weeks preceding the date on which notice of the sale is filed
with the Commission. Sales under Rule 144 are subject to certain requirements
relating to manner of sale, notice and availability of current public
information about the Company. However, a person (or persons whose shares are
aggregated) who is not deemed to have been an Affiliate of the Company at any
time during the 90 days immediately preceding the sale and who beneficially owns
Restricted Shares is entitled to sell such shares under Rule 144(k) without
regard to the limitations described above, provided that at least two years have
elapsed since the date the shares were acquired from the Company or from an
Affiliate of the Company. The foregoing is a summary of Rule 144 and is not
intended to be a complete description of that rule.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisors prior to the completion of this
Offering, pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. In addition, the Commission has
indicated that Rule 701 will apply to stock options granted by the Company
before this Offering, along with the shares acquired upon exercise of such
options. Securities issued in reliance on Rule 701 are deemed to be Restricted
Shares and, beginning 90 days after the date of this Prospectus (unless subject
to the contractual restrictions described above), may be sold by persons other
than Affiliates, subject only to the manner of sale provisions of Rule 144 and
by Affiliates under Rule 144 without compliance with its one-year minimum
holding period requirements.
57
<PAGE>
The Company intends to file a registration statement on Form S-8 under the
Securities Act covering shares of Common Stock reserved for issuance under the
Incentive Plan, the Directors' Plan and the Purchase Plan. See
"Management--Employee Benefit Plans." Such registration statement is expected to
be filed and become effective as soon as practicable after the completion of
this Offering. Accordingly, shares registered under such registration statement
will, subject to Rule 144 volume limitations applicable to Affiliates of the
Company, be available for sale in the open market, unless such shares are
subject to vesting restrictions with the Company or the lock-up agreements
described above. As of June 30, 1998, options to purchase 1,511,498 shares of
Common Stock were issued and outstanding. See "Management-- Executive
Compensation" and "--Employee Benefit Plans."
Prior to this 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 this Offering. As described
herein, only a limited number of shares will be available for sale shortly after
this Offering because of certain contractual and legal restrictions on resale.
Sales of substantial amounts of Common Stock of the Company in the public market
after completion of this Offering could materially and adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future.
58
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by
NationsBanc Montgomery Securities LLC, BancAmerica Robertson Stephens and
Pacific Growth Equities, Inc. (the "Representatives"), have severally agreed,
subject to the terms and conditions set forth in the underwriting agreement (the
"Underwriting Agreement"), by and between the Company and the Underwriters, to
purchase from the Company the number of shares of Common Stock indicated below
opposite their respective names, at the public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters are committed
to purchase all of the shares of Common Stock, if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ----------------------------------------------------------------------------------- -----------
<S> <C>
NationsBanc Montgomery Securities LLC..............................................
BancAmerica Robertson Stephens.....................................................
Pacific Growth Equities, Inc.......................................................
-----------
Total............................................................................
-----------
-----------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow selected
dealers a concession of not more than $ per share; and the Underwriters may
allow, and such dealers may reallow, a concession of not more than $ per
share to certain other dealers. After the initial public offering, the offering
price and other selling terms may be changed by the Representatives. The Common
Stock is offered subject to receipt and acceptance by the Underwriters and to
certain other conditions, including the right to reject orders in whole or in
part.
The Company and the Selling Stockholders have granted to the Underwriters an
over-allotment option, exercisable for 30 days from the date of this Prospectus,
to purchase up to a maximum of 193,658 and 166,342 additional shares of Common
Stock, respectively, to cover over-allotments, if any, at the same price per
share as the initial shares to be purchased by the Underwriters. To the extent
the Underwriters exercise such over-allotment option, each of the Underwriters
will be committed, subject to certain conditions, to purchase such additional
shares in approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with this Offering.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
The Company's officers and directors and certain stockholders of the Company
prior to this Offering have agreed that for a period commencing on June 8, 1998
and continuing to a date 180 days after the first date any of the Common Stock
to be sold in this Offering is released by the Underwriters for sale to the
public they will not, subject to certain exceptions, directly or indirectly
sell, offer, contract or grant any option to sell, pledge, transfer, establish
an open put equivalent position or otherwise dispose of any shares of Common
Stock, options or warrants to acquire shares of Common Stock or securities
exchangeable or exercisable for or convertible into shares of Common Stock,
without the prior written consent of
59
<PAGE>
NationsBanc Montgomery Securities LLC. This 180-day lock-up will be of no
further force or effect in the event the Registration Statement is not declared
effective on or before December 31, 1998. The Company has also agreed not to
issue, offer, sell, grant options to purchase, or otherwise dispose of any of
the Company's equity securities for a period of 180 days after the effective
date of this Offering without the prior written consent of NationsBanc
Montgomery Securities LLC except for securities issued by the Company in
connection with acquisitions, and for grants and exercises of stock options,
subject in each case to any remaining portion of the 180-day period applying to
shares issued or transferred. In evaluating any request for a waiver of the
180-day lock-up period, NationsBanc Montgomery Securities LLC will consider, in
accordance with their customary practice, all relevant facts and circumstances
at the time of the request, including, without limitation, the recent trading
market for the Common Stock, the size of the request and, with respect to a
request by the Company to issue additional equity securities, the purpose of
such an issuance. See "Shares Eligible For Future Sale."
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates engage in transactions that stabilize,
maintain or otherwise affect the market price of the Common Stock. Such
transactions may include stabilization transactions effected in accordance with
Rule 104 of Regulation M under the Securities and Exchange Act of 1934, as
amended, pursuant to which such persons may bid for or purchase Common Stock for
the purpose of stabilizing its market price. The Underwriters also may create a
short position for the account of the Underwriters by selling more Common Stock
in connection with this Offering than they are committed to purchase from the
Company and, in such case, may purchase Common Stock in the open market
following completion of this Offering to cover all or a portion of such short
position. The Underwriters may also cover all or a portion of such short
position, up to 360,000 shares of Common Stock, by exercising the Underwriters'
over-allotment option referred to above. In addition, NationsBanc Montgomery
Securities LLC on behalf of the Underwriters, may impose "penalty bids" under
contractual arrangements with the Underwriters, whereby it may reclaim from an
Underwriter (or dealer participating in this Offering) for the account of the
other underwriters, the selling concession with respect to Common Stock that is
distributed in this Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales of Common Stock offered by this Prospectus to accounts
over which they exercise discretionary authority in excess of 5% of the number
of shares of Common Stock offered hereby.
Prior to this Offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price was determined by
negotiations between the Company and the Representatives. Among the factors
considered in such negotiations were the history of and prospects for the
Company and the industries in which it operates, an assessment of the Company's
management, its past and present earnings and the trend of such earnings, the
prospects for future earnings of the Company, the present state of the Company's
development, the general condition of securities markets at the time of this
Offering and the market price of publicly traded stock of comparable companies
in recent periods.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cooley Godward LLP, San Francisco, California ("Cooley
Godward"). Certain legal matters will be passed upon for the Underwriters by
Brobeck, Phleger & Harrison LLP, San Francisco, California. An investment
partnership affiliated with Cooley Godward owns 27,778 shares of the Company's
Preferred Stock which will convert into 27,778 shares of the Company's Common
Stock upon the closing of this Offering.
60
<PAGE>
EXPERTS
The financial statements of the Company at December 31, 1996 and 1997 and
for the years then ended appearing in this Prospectus and the Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto, relating
to the Common Stock offered hereby has been filed by the Company with the
Securities and Exchange Commission (the "Commission"), Washington, D.C. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to such Registration Statement, exhibits
and schedules. A copy of the Registration Statement may be inspected by anyone
without charge at the Commission's principal office at the public reference
facility maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any
part thereof may be obtained from the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon the payment of certain fees prescribed by the
Commission. The Commission maintains a web site that contains reports, proxy
statements and other information regarding registrants, including the Company.
The address of the Commission's web site is http://www.sec.gov.
As a result of this Offering, the Company will be subject to the information
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). So long as the Company is subject to periodic reporting requirements of
the Exchange Act, it will continue to furnish the reports and other information
required thereby to the Commission. The Company intends to furnish its
stockholders with annual reports containing financial statements audited by an
independent public accounting firm and quarterly reports containing unaudited
financial information for the first three quarters of each fiscal year.
TRADEMARKS
Fast ForWord-Registered Trademark- and the Fast ForWord logo are registered
trademarks of the Company and certain other marks contained in this Prospectus
are trademarks of the Company. This Prospectus also includes trade names and
trademarks of other companies, whose mention herein is with due recognition of
and without intent to misappropriate their marks.
61
<PAGE>
SCIENTIFIC LEARNING CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit)............................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Scientific Learning Corporation
We have audited the accompanying balance sheets of Scientific Learning
Corporation as of December 31, 1996 and 1997, and the related statements of
operations, redeemable convertible preferred stock and stockholders' equity
(deficit), and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our 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 Scientific Learning Corporation
at December 31, 1996 and 1997, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
/S/ ERNST & YOUNG LLP
Walnut Creek, California
April 9, 1998
F-2
<PAGE>
SCIENTIFIC LEARNING CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY
---------------------------- JUNE 30, JUNE 30,
1996 1997 1998 1998
------------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 3,822 $ 2,699 $ 1,019
Accounts receivable................................ -- 44 318
Prepaid expenses and other current assets.......... 5 157 321
------------- ------------- -----------
Total current assets................................. 3,827 2,900 1,658
Restricted cash deposit.............................. -- 350 350
Property and equipment, net.......................... 466 1,120 1,151
Other assets......................................... 13 86 542
------------- ------------- -----------
Total assets......................................... $ 4,306 $ 4,456 $ 3,701
------------- ------------- -----------
------------- ------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................... $ 115 $ 419 $ 718
Accrued liabilities................................ 138 356 444
Deferred revenue................................... 1 342 1,644
Current portion of borrowings under bank line
of credit........................................ -- 193 845
Current portion of capital lease obligations....... 11 21 26
------------- ------------- -----------
Total current liabilities............................ 265 1,331 3,677
Borrowings under bank line of credit................. -- 97 212
Capital lease obligations............................ 24 19 7
Other liabilities.................................... 100 71 178
------------- ------------- -----------
Total liabilities.................................... 389 1,518 4,074
Commitments
Redeemable convertible preferred stock, $0.001 par
value, issuable in series:
Authorized shares--4,700,000
Issued and outstanding shares--2,250,000 in 1996,
3,678,571 in 1997 and 1998, and none pro forma
(liquidation preference--$8,050)................. 4,002 8,002 8,002 $ --
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value,
Authorized shares--7,000,000 (including 4,700,000
shares designated as redeemable convertible
preferred stock)
Issued and outstanding shares--1,444,681 in 1996,
1,419,681 in 1997 and 1998, and none pro forma
(liquidation preference--$2,413)............... 2,400 2,355 2,355 --
Common stock, $0.001 par value,
Authorized shares--17,500,000
Issued and outstanding shares--3,985,385 in 1996,
3,986,694 in 1997, 4,173,641 in 1998, and
9,271,893 pro forma............................ 12 520 1,851 12,208
Deferred compensation.............................. -- (384) (923) (923)
Accumulated deficit................................ (2,497) (7,555) (11,658) (11,658)
------------- ------------- ----------- -----------
Total stockholders' equity (deficit)................. (85) (5,064) (8,375) $ (373)
------------- ------------- ----------- -----------
-----------
Total liabilities and stockholders' equity
(deficit).......................................... $ 4,306 $ 4,456 $ 3,701
------------- ------------- -----------
------------- ------------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
SCIENTIFIC LEARNING CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1996 1997
--------- ---------
SIX MONTHS ENDED
JUNE 30,
------------------------
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Programs....................................... $ -- $ 2,249 $ 330 $ 1,572
Services....................................... -- 713 359 228
--------- --------- ----------- -----------
Total revenues............................... -- 2,962 689 1,800
Cost of revenues:
Programs....................................... -- 481 124 293
Services....................................... -- 468 199 174
--------- --------- ----------- -----------
Total cost of revenues....................... -- 949 323 467
--------- --------- ----------- -----------
Gross profit..................................... -- 2,013 366 1,333
Operating expenses:
Sales and marketing............................ 164 2,646 873 2,361
Research and development....................... 1,514 1,965 809 1,316
General and administrative..................... 933 2,537 925 1,740
--------- --------- ----------- -----------
Total operating expenses..................... 2,611 7,148 2,607 5,417
--------- --------- ----------- -----------
Operating loss................................... (2,611) (5,135) (2,241) (4,084)
Interest income (expense), net................... 70 162 51 (19)
Other income (expense), net...................... 44 (85) -- --
--------- --------- ----------- -----------
Net loss......................................... $ (2,497) $ (5,058) $ (2,190) $ (4,103)
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Basic and diluted net loss per share............. $ (0.68) $ (1.27) $ (0.55) $ (0.99)
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Shares used in computing basic and diluted net
loss per share................................. 3,678,931 3,985,833 3,985,385 4,129,224
Pro forma basic and diluted net loss per share... $ (0.60) $ (0.44)
--------- -----------
--------- -----------
Shares used in computing pro forma net loss per
share.......................................... 8,436,444 9,227,476
</TABLE>
See accompanying notes.
F-4
<PAGE>
SCIENTIFIC LEARNING CORPORATION
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
REDEEMABLE -----------------------------------------------------------------------
CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
-------------------- -------------------- -------------------- DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT
--------- --------- --------- --------- --------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock................... -- $ -- -- $ -- 3,985,385 $ 12 $ -- $ --
Issuance of Series A
preferred stock, net of
issuance costs.......... -- -- 1,247,893 2,046 -- -- -- --
Issuance of Series A
preferred stock in
connection with license
agreement............... -- -- 196,788 354 -- -- -- --
Issuance of Series B
preferred stock, net of
issuance costs.......... 2,250,000 4,002 -- -- -- -- -- --
Net loss.................. -- -- -- -- -- -- -- (2,497)
--------- --------- --------- --------- --------- --------- ------------- ------------
Balances at December 31,
1996.................... 2,250,000 4,002 1,444,681 2,400 3,985,385 12 -- (2,497)
Issuance of common stock
under stock option
plan.................... -- -- -- -- 1,309 -- -- --
Issuance of Series C
preferred stock upon
exercise of warrant, net
of issuance costs....... 1,428,571 4,000 -- -- -- -- -- --
Reduction of Series A
preferred stock issued
in connection with
license agreement....... -- -- (25,000) (45) -- -- -- --
Deferred compensation
related to grant of
stock options........... -- -- -- -- -- 508 (508) --
Amortization of deferred
compensation............ -- -- -- -- -- -- 124 --
Net loss.................. -- -- -- -- -- -- -- (5,058)
--------- --------- --------- --------- --------- --------- ------------- ------------
Balances at December 31,
1997.................... 3,678,571 8,002 1,419,681 2,355 3,986,694 520 (384) (7,555)
Issuance of common stock
under stock option plan
(unaudited)............. -- -- -- -- 186,947 39 -- --
Issuance of common stock
warrants in connection
with guarantee of line
of credit (unaudited)... -- -- -- -- -- 494 -- --
Deferred compensation
related to grant of
stock options
(unaudited)............. -- -- -- -- -- 798 (798) --
Amortization of deferred
compensation
(unaudited)............. -- -- -- -- -- -- 259 --
Net loss (unaudited)...... -- -- -- -- -- -- -- (4,103)
--------- --------- --------- --------- --------- --------- ------------- ------------
Balances at March 31, 1998
(unaudited)............. 3,678,571 $ 8,002 1,419,681 $ 2,355 4,173,641 $ 1,851 $ (923) $ (11,658)
--------- --------- --------- --------- --------- --------- ------------- ------------
--------- --------- --------- --------- --------- --------- ------------- ------------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
--------------
<S> <C>
Issuance of common
stock................... $ 12
Issuance of Series A
preferred stock, net of
issuance costs.......... 2,046
Issuance of Series A
preferred stock in
connection with license
agreement............... 354
Issuance of Series B
preferred stock, net of
issuance costs.......... --
Net loss.................. (2,497)
--------------
Balances at December 31,
1996.................... (85)
Issuance of common stock
under stock option
plan.................... --
Issuance of Series C
preferred stock upon
exercise of warrant, net
of issuance costs....... --
Reduction of Series A
preferred stock issued
in connection with
license agreement....... (45)
Deferred compensation
related to grant of
stock options........... --
Amortization of deferred
compensation............ 124
Net loss.................. (5,058)
--------------
Balances at December 31,
1997.................... (5,064)
Issuance of common stock
under stock option plan
(unaudited)............. 39
Issuance of common stock
warrants in connection
with guarantee of line
of credit (unaudited)... 494
Deferred compensation
related to grant of
stock options
(unaudited)............. --
Amortization of deferred
compensation
(unaudited)............. 259
Net loss (unaudited)...... (4,103)
--------------
Balances at March 31, 1998
(unaudited)............. $ (8,375)
--------------
--------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
SCIENTIFIC LEARNING CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1996 1997
--------- --------- SIX MONTHS ENDED
JUNE 30
------------------------
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.......................................................... $ (2,497) $ (5,058) $ (2,190) $ (4,103)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................... 77 326 120 283
Loss on disposal of property and equipment...................... -- 85 -- --
Preferred stock issued in connection with license agreement..... 354 (45) (45) --
Amortization of deferred compensation........................... -- 124 53 259
Changes in operating assets and liabilities:
Accounts receivable........................................... -- (44) (65) (274)
Prepaid expenses and other assets............................. (18) (225) (57) (166)
Accounts payable.............................................. 115 304 180 299
Accrued liabilities........................................... 138 218 165 88
Deferred revenue.............................................. 1 341 714 1,302
Other liabilities............................................. 100 (29) -- 107
--------- --------- ----------- -----------
Net cash used in operating activities........................... (1,730) (4,003) (1,125) (2,205)
INVESTING ACTIVITIES
Restricted cash deposit......................................... -- (350) -- --
Purchase of property and equipment, net......................... (506) (1,045) (383) (267)
--------- --------- ----------- -----------
Net cash used in investing activities........................... (506) (1,395) (383) (267)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock....................... 6,048 4,000 4,000 --
Proceeds from issuance of common stock.......................... 12 -- -- 39
Borrowings under bank line of credit............................ -- 355 355 863
Repayments of borrowings under bank line of credit.............. -- (65) -- (96)
Repayments of capital lease obligations......................... (2) (15) (6) (14)
--------- --------- ----------- -----------
Net cash provided by (used in) financing activities............. 6,058 4,275 4,349 792
--------- --------- ----------- -----------
Increase (decrease) in cash and cash equivalents................ 3,822 (1,123) 2,841 (1,680)
Cash and cash equivalents at beginning of period................ -- 3,822 3,822 2,699
--------- --------- ----------- -----------
Cash and cash equivalents at end of period...................... $ 3,822 $ 2,699 $ 6,663 $ 1,019
--------- --------- ----------- -----------
--------- --------- ----------- -----------
SUPPLEMENTAL DISCLOSURE:
Interest paid................................................... $ 1 $ 32 $ 8 $ 23
--------- --------- ----------- -----------
--------- --------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Capital lease obligations incurred.............................. $ 37 $ 20 $ 10 $ 7
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Issuance of common stock warrants in connection with guarantee
of line of credit............................................. $ -- $ -- $ -- $ 494
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
SCIENTIFIC LEARNING CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Scientific Learning Corporation (the "Company") was incorporated on November
30, 1995 in the State of California and was reincorporated on May 2, 1997 in the
State of Delaware. The Company commenced operations in February 1996. The
Company develops, markets, and sells neuroscience-based education and training
programs designed to increase human learning and performance. The Company's
revenues have been derived primarily from one product, Fast ForWord, which is an
intensive, computer-based training program that focuses on improving receptive
and expressive communication skills in children with language-based learning
problems. Delivered through a variety of distribution channels, including public
schools, speech and language professionals in private practice and
Company-operated Learning Centers, Fast ForWord is designed to support teachers,
speech and language professionals, parents and other learning facilitators in
providing a program that can be integrated with school curricula and other
language programs to assist children in overcoming language-based learning
challenges. The Company was in the development stage during 1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The interim financial information as of June 30, 1998 and for the six months
ended June 30, 1997 and 1998 is unaudited but includes all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of its financial position at such date and its
results of operations and cash flows for those periods. Operating results for
the six months ended June 30, 1998 are not necessarily indicative of results
that may be expected for any future periods.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid short-term
investments with original maturities of three months or less.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets which
range from three to five years.
SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards ("FAS") No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed," under
which certain software development costs incurred subsequent to the
establishment of technological feasibility are capitalized and amortized over
the estimated lives of the related products. Technological feasibility is
established upon completion of a working version. Through June 30, 1998, such
capitalizable software development costs have been insignificant and all such
costs have been charged to research and development expense.
F-7
<PAGE>
SCIENTIFIC LEARNING CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for employee stock options using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25 ("APB 25")
and makes the pro forma disclosures required by FAS No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123") (Note 5).
REVENUE RECOGNITION
Program revenues are derived from the sale of Fast ForWord programs.
Revenues on sales of Fast ForWord are recognized over the average duration of
the program. Service revenues are derived from the Company's Fast ForWord
training seminars for learning facilitators and from services provided to
customers of the Company's Learning Centers. Revenues from seminars are
recognized when the seminar is held. Revenues from Learning Center services are
recognized over the average duration of the program. The Company only recently
began its Learning Center operations and revenues through June 30, 1998 have
been minimal. Cancellations and refunds are allowed in limited circumstances,
and such amounts have not been significant. Provisions are made for
cancellations and refunds as revenue is recorded. Costs of revenues are
generally recognized as such costs are incurred.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense was $342,000
for the year ended December 31, 1997 (none for 1996).
INCOME TAXES
The Company uses the liability method to account for income taxes as
required by FAS No. 109, "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities. Deferred tax assets
and liabilities are measured suing enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued FAS No. 130,
"Reporting Comprehensive Income" ("FAS 130"), which established new standards
for reporting and displaying comprehensive income and its components in a full
set of general purpose financial statements. There is no difference in the
Company's historical net losses as reported and the comprehensive net losses
under the provisions of FAS 130 for all periods presented. Accordingly, the
adoption of FAS 130 had no effect on the Company's reported results of
operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD
In June 1997, the Financial Accounting Standards Board issued FAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"). FAS 131 will change the way companies report selected segment information
in interim financial reports to shareholders. FAS 131 is effective for the
Company's financial statements for the year ending December 31, 1998. The
Company has not reached a conclusion as to the appropriate segments, if any, it
will be required to report to comply with the provisions of FAS 131.
F-8
<PAGE>
SCIENTIFIC LEARNING CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
Net loss per share is presented under the requirements of FAS No. 128,
"Earnings per Share" ("FAS 128") which replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Net loss per share amounts for all periods have been
presented to conform to FAS 128 requirements. Potentially dilutive securities
have been excluded from the computation as their effect is antidilutive.
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share has been computed as described above and also
gives effect, under Securities and Exchange Commission guidance, to the
conversion of preferred shares not included above that will automatically
convert upon completion of the Company's initial offering, using the
if-converted method (Note 5).
The calculation of historical and pro forma basic and diluted net loss per
share is as follows (in thousands, except share and per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1996 1997
---------- ---------- SIX MONTHS ENDED
JUNE 30,
------------------------
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Historical:
Net loss................................................... $(2,497) $(5,058) $(2,190) $(4,103)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Weighted average shares of common stock outstanding used in
computing basic and diluted net per loss share........... 3,678,931 3,985,833 3,985,385 4,129,224
Basic and diluted net loss per share....................... $ (0.68) $ (1.27) $ (0.55) $ (0.99)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Pro forma:
Net loss................................................... $(2,497) $(5,058) $(2,190) $(4,103)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Shares used in computing basic and diluted net loss per
share (from above)....................................... 3,678,931 3,985,833 3,985,385 4,129,224
Adjustment to reflect the effect of the assumed conversion
of preferred stock from the date of issuance............. 4,450,611 5,098,252
---------- -----------
Weighted average shares used in computing pro forma basic
and diluted net per loss share........................... 8,436,444 9,227,476
Pro forma basic and diluted net loss per share............. $ (0.60) $ (0.44)
---------- -----------
---------- -----------
</TABLE>
F-9
<PAGE>
SCIENTIFIC LEARNING CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRO FORMA NET LOSS PER SHARE (CONTINUED)
If the Company had reported net income, the calculation of diluted earnings
per share (historical and pro forma) would have included the shares used in the
computation of pro forma net loss per share as well as an additional
approximately 36,017, 1,359,459, 1,252,430, and 1,457,920 common equivalent
shares related to the outstanding options and warrants not included above
(determined using the treasury stock method at the estimated fair value) for the
years ended December 31, 1996 and 1997 and for the six months ended June 30,
1997 and 1998, respectively.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Computer equipment............................................................................. $ 425 $ 1,168
Office furniture and equipment................................................................. 103 300
Leasehold improvements......................................................................... 15 21
--------- ---------
543 1,489
Less accumulated depreciation.................................................................. 77 369
--------- ---------
$ 466 $ 1,120
--------- ---------
--------- ---------
</TABLE>
3. BANK LINE OF CREDIT
The Company has a $400,000 line of credit with a bank which was used to
finance equipment purchases during 1997 and expired in June 1998. Borrowings
under the line of credit bear interest at the bank's prime rate plus 3% (11.5%
at December 31, 1997) and are secured by substantially all of the Company's
assets, excluding intellectual property. At December 31, 1997, the Company had
outstanding borrowings in the amount of $290,000 which are being repaid in equal
monthly installments through June 1999. The agreement restricts the Company's
payment of dividends.
In September 1997, the Company obtained a $350,000 irrevocable standby
letter of credit as security for the lease agreement covering its corporate
office facility. A $350,000 certificate of deposit has been pledged as
collateral for the standby letter of credit. The standby letter of credit is
reduced annually by $70,000 provided that there have been no events of default
under the lease agreement. The amount of the letter of credit can be further
reduced if certain financial covenants, as specified in the lease agreement, are
met.
4. INCOME TAXES
At December 31, 1997, the Company had net operating loss carryforwards and
research credit carryforwards for federal income tax purposes of approximately
$6,600,000 and $85,000, respectively. The net operating loss carryforward will
expire in years 2011 through 2012. Utilization of the net operating losses may
be subject to a substantial annual limitation, due to the ownership change
limitations provided by the Internal Revenue Code of 1986. The annual limitation
may result in the expiration of net operating losses before utilization.
F-10
<PAGE>
SCIENTIFIC LEARNING CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................................................... $ 768 $ 2,668
Research credit carryforwards.............................................................. 41 110
Other...................................................................................... 217 254
--------- ---------
Total deferred tax assets.................................................................... 1,026 3,032
Valuation allowance.......................................................................... (1,026) (3,032)
--------- ---------
Net deferred tax assets...................................................................... $ -- $ --
--------- ---------
--------- ---------
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net deferred
tax assets have been fully offset by a valuation allowance. The valuation
allowance increased by $1,026,000 and $2,006,000 during the years ended December
31, 1996 and 1997, respectively.
5. STOCKHOLDERS' EQUITY
PREFERRED STOCK
Preferred Stock at December 31, 1996 and 1997 and June 30, 1998 is as
follows by series:
<TABLE>
<CAPTION>
SHARES ISSUED AND OUTSTANDING
---------------------------------
DECEMBER 31,
DESIGNATED --------------------
SERIES SHARES 1996 1997
- ------------------------------------------------------- --------- --------- ---------
JUNE 30,
1998
-----------
(UNAUDITED)
-----------
<S> <C> <C> <C> <C> <C>
A Convertible............................... 1,500,000 1,444,681 1,419,681 1,419,681
B Redeemable convertible.................... 2,900,000 2,250,000 2,250,000 2,250,000
C Redeemable convertible.................... 1,800,000 -- 1,428,571 1,428,571
--------- --------- --------- -----------
6,200,000 3,694,681 5,098,252 5,098,252
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
Each share of preferred stock is convertible into one share of common stock
subject to antidilution provisions. Automatic conversion will occur upon
completion of an initial public offering of the Company's common stock with
proceeds of a minimum of $7.5 million at a minimum price of $8.80 per common
share. The voting rights of preferred stock are equivalent to the voting rights
of common stock into which it is convertible. Dividends on preferred stock are
non-cumulative but fully participating with any cash dividends declared on
common stock. Dividends on Series A, Series B, and Series C preferred stock are
payable in cash in the amount of $.12, $.126 and $.196 per share per annum as
adjusted for any stock dividends, combinations or splits with respect to such
shares, respectively, when and if declared by the
F-11
<PAGE>
SCIENTIFIC LEARNING CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
PREFERRED STOCK (CONTINUED)
Board of Directors. No such dividends have been declared as of December 31,
1997. The Series B and C preferred stock have stated redemption values of $1.80
and $2.80 per share, respectively. Series B and C preferred stock are
mandatorily redeemable at their stated redemption values ten years after
issuance.
COMMON STOCK
At December 31, 1997 the Company had reserved shares of common stock for
future issuance as follows:
<TABLE>
<CAPTION>
<S> <C>
Stock Option Plan:
Options outstanding............................................................................... 1,562,087
Options available for future grants............................................................... 686,379
Convertible preferred stock......................................................................... 5,098,252
------------
7,346,718
------------
------------
</TABLE>
STOCK OPTIONS
Under the Company's Stock Option Plan, 2,250,000 shares of common stock were
reserved for the issuance of incentive stock options (ISO) or non-statutory
stock options (NSO) to eligible participants. The ISOs may be granted at a price
per share not less than the fair market value at the date of grant. The NSOs may
be granted at a price per share not less than 85% of the fair market value at
the date of grant. Options granted to date are immediately exercisable and
unvested shares are subject to repurchase by the Company. Options and unvested
shares granted generally vest over a period of up to five years, with a maximum
term of ten years. In the event optionholders cease to be employed by the
Company, all unvested options are forfeited and all vested options may be
exercised within a 90-day period after termination; the Company also has the
right to repurchase at the original purchase price any unvested (but issued)
shares if the holder is no longer employed by the Company. At June 30, 1998, no
outstanding common shares are subject to such repurchase rights. Common shares
purchased under the plan are subject to certain restrictions, including the
right of first refusal by the Company for sale or transfer of these shares to
outside parties. The Company's right of first refusal terminates upon completion
of an initial public offering of common stock.
F-12
<PAGE>
SCIENTIFIC LEARNING CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
A summary of the Company's stock option activity under the plan for the
years ended December 31, 1996 and 1997 and the six months ended June 30, 1998 is
as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
---------- ---------------
<S> <C> <C>
Granted......................................................... 1,464,887 $ 0.18
Exercised....................................................... (225) 0.17
Canceled........................................................ (6,675) 0.17
---------- -----
Outstanding at December 31, 1996.................................. 1,457,987 0.18
Granted......................................................... 348,875 0.37
Exercised....................................................... (1,309) 0.17
Canceled........................................................ (243,466) 0.19
---------- -----
Outstanding at December 31, 1997.................................. 1,562,087 0.21
Granted (unaudited)............................................. 161,325 0.97
Exercised (unaudited)........................................... (186,947) 0.21
Canceled (unaudited)............................................ (24,967) 0.41
---------- -----
Outstanding at June 30, 1998 (unaudited).......................... 1,511,498 $ 0.30
---------- -----
---------- -----
Vested and exercisable at December 31, 1997....................... 587,300 $ 0.20
---------- -----
---------- -----
Vested and exercisable at June 30, 1998 (unaudited)............... 576,577 $ 0.20
---------- -----
---------- -----
</TABLE>
The following table summarizes information concerning outstanding and
exercisable stock options at December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING VESTED AND EXERCISABLE
---------------------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE
NUMBER OF PRICE CONTRACTUAL NUMBER OF PRICE
EXERCISE PRICE SHARES PER SHARE LIFE (YEARS) SHARES PER SHARE
- -------------------------------- ---------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$0.17-$0.20..................... 1,299,812 $ 0.18 8.5 532,819 $ 0.18
$0.40-$0.44..................... 262,275 $ 0.41 9.6 54,481 $ 0.44
---------- -----------
1,562,087 587,300
---------- -----------
---------- -----------
</TABLE>
The Company recorded deferred compensation of $508,000 during the year ended
December 31, 1997 and $798,000 during the six months ended June 30, 1998
representing the difference between the exercise price and the deemed fair value
of certain of the Company's stock options granted to employees. These amounts
are being amortized by charges to operations over the vesting periods of the
individual stock options. Such amortization amounted to $124,000 for the year
ended December 31, 1997 and $259,000 for the six months ended June 30, 1998.
F-13
<PAGE>
SCIENTIFIC LEARNING CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK BASED COMPENSATION
Pro forma information regarding results of operations and net loss per share
is required by FAS 123, which also requires that the information be determined
as if the Company had accounted for its employee stock options under the fair
value method of FAS 123. The fair value for these options was estimated at the
date of grant using the minimum value method with the following weighted average
assumptions: a risk-free interest rate of 6.5% and 6.3% for the years ended
December 31, 1996 and 1997, respectively, no dividend yield or volatility
factors of the expected market price of the Company's common stock, and a
weighted average expected life of the option of five years.
The option valuation models were developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock-based compensation plans been
determined using the fair value at the grant dates for awards under those plans
calculated using the minimum value method of FAS 123, the Company's net loss and
pro forma basic and diluted net loss per share would have been increased to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Pro forma net loss (in thousands)........................................ $ (2,506) $ (5,092)
--------- ---------
--------- ---------
Pro forma basic and diluted net loss per share........................... $ (0.68) $ (1.28)
--------- ---------
--------- ---------
</TABLE>
The weighted average fair value of options granted, which is the value
assigned to the options under FAS 123, was $0.02 and $0.83 for options granted
during the years ended December 31, 1996 and 1997, respectively.
The pro forma impact of options on the net loss for the years ended December
31, 1996 and 1997 is not representative of the effects on net income (loss) for
future years, as future years will include the effects of additional years of
stock option grants.
6. COMMITMENTS
LEASES
The Company leases equipment and its corporate office facility under
non-cancelable capital and operating leases, with initial terms in excess of one
year. The cost of equipment under capital leases is approximately $37,000 and
$57,000 and the related accumulated amortization is $1,000 and $16,000 at
F-14
<PAGE>
SCIENTIFIC LEARNING CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS (CONTINUED)
LEASES (CONTINUED)
December 31, 1996 and 1997, respectively. Future minimum payments under these
leases as of December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
1998..................................................................... $ 25 $ 747
1999..................................................................... 20 897
2000..................................................................... -- 939
2001..................................................................... -- 980
2002..................................................................... -- 671
--- -----------
Total minimum lease payments............................................. 45 $ 4,234
-----------
-----------
Less amount representing interest........................................ (5)
---
Present value of minimum lease payments.................................. 40
Less amount due within one year.......................................... 21
---
$ 19
---
---
</TABLE>
Rent expense under all operating leases was $67,000 and $418,000 for the
years ended December 31, 1996 and 1997, respectively.
The Company has the option to extend the operating lease covering its
corporate office facility for an additional five years at the end of the lease
term, provided that certain conditions of the lease agreement are met.
LICENSE AGREEMENT
In 1996, the Company entered into a license agreement with a university for
the use of the intellectual property underlying its training methods. In
exchange for the license, the Company issued 196,788 shares of Series A
preferred stock and paid the university a license-issue fee of $200,000. In
March 1997, the number of shares of Series A preferred stock issued under the
agreement was reduced to 171,788.
Under the agreement, additional royalties and milestone payments are payable
to the university based upon revenues from products using the licensed
technology. Royalty and milestone expenses were $202,000 for the year ended
December 31, 1997 (none in 1996) and are included in cost of revenues.
7. EMPLOYEE RETIREMENT AND BENEFIT PLAN
The Company has a defined contribution retirement plan under Section 401(k)
of the Internal Revenue Code which covers substantially all employees. Eligible
employees may contribute amounts to the plan, via payroll withholding, subject
to certain limitations. The Company does not match contributions by plan
participants.
F-15
<PAGE>
SCIENTIFIC LEARNING CORPORATION
NOTES TO FINANCIAL STATEMENTS
8. SUBSEQUENT EVENTS (UNAUDITED)
PROPOSED PUBLIC OFFERING OF COMMON STOCK
On June 6, 1998, the Board of Directors authorized the Company to proceed
with an initial public offering of its common stock. If the offering is
consummated as presently anticipated, all of the outstanding preferred stock
will automatically convert into common stock. The unaudited pro forma
stockholders' equity (deficit) at June 30, 1998 gives effect to the conversion
of all outstanding shares of convertible preferred stock at that date into
5,098,252 shares of common stock upon the completion of the offering.
STOCK SPLIT
On June 6, 1998, the Board of Directors approved, and on June 26, 1998 the
stockholders approved, a one-for-two reverse stock split of issued and
outstanding common and preferred stock. All common and preferred share prices,
and amounts associated with rights, preferences, dividends and privileges in the
accompanying financial statements have been retroactively adjusted to reflect
the stock split. In addition, the Board of Directors authorized an increase in
the number of authorized shares of common stock to 50,000,000 and a decrease in
the number of authorized shares of preferred stock to 1,000,000 shares, subject
to stockholder approval.
1998 EQUITY INCENTIVE PLAN
On June 6, 1998, the Company's Board of Directors adopted, and on June 26,
1998 the stockholders approved, the 1998 Equity Incentive Plan which amends and
restates the Company's existing stock option plan. There are 2,800,000 shares of
common stock authorized for issuance under the plan. The plan will become
effective upon completion of the Company's initial public offering of its common
stock.
1998 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
On June 6, 1998, the Company's Board of Directors adopted, and on June 26,
1998 the stockholders approved, the 1998 Non-Employee Directors' Stock Option
Plan and reserved an aggregate of 100,000 shares of common stock for grants of
stock options under such plan.
1998 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1998 Employee Stock Purchase Plan was adopted by the Board of
Directors on June 6, 1998 and approved by the stockholders on June 26, 1998 to
be effective upon the completion of the Company's initial public offering of its
common stock. The Company has reserved a total of 500,000 shares of common stock
for issuance under the plan. Eligible employees may purchase common stock at 85%
of the lesser of the fair market value of the Company's common stock on the
first day of the applicable one year offering period or the last day of the
applicable six month purchase period.
BANK LINES OF CREDIT
In February 1998, the Company entered into an additional line of credit with
a bank which provides for borrowings of up to $450,000 to finance equipment
purchases through August 1998. Borrowings are due in monthly installments
through August 2000 plus interest at the bank's prime rate plus 3% and are
secured by substantially all of the Company's assets, excluding intellectual
property.
F-16
<PAGE>
SCIENTIFIC LEARNING CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
BANK LINES OF CREDIT (CONTINUED)
In June 1998, the Company obtained a $3 million unsecured line of credit
from another bank. Borrowings under the line of credit bear interest, at the
election of the Company, at the bank's base rate or the adjusted LIBOR plus
1.75% and are due in May 1999. Borrowings are guaranteed by a significant
preferred stockholder of the Company. In connection with such guarantee, the
Company issued to the stockholder warrants to purchase 100,000 shares of the
Company's Common Stock at $6.00 per share. Such warrants expire on May 31, 2003.
The Company estimated the fair value of the warrants to be $494,000, which
amount has been recorded as deferred financing costs (included in other assets)
and is being amortized by charges to interest expense over the term of the line
of credit. Additionally, the stockholder agreed to purchase up to 500,000 shares
of the Company's preferred stock at $6.00 per share if requested by the Company.
The Company's right to require the stockholder to purchase such securities
expires upon the closing of an initial public offering of the Company's Common
Stock.
F-17
<PAGE>
INSIDE BACK COVER OF PROSPECTUS: [Contains a photograph of children using
Fast ForWord with a speech and language professional. Text with the photograph
states: "Scientific Learning Corporation is committed to advancing human
learning and performance through neuroscience-based education and training
programs using advanced integrated technologies with proven results. Fast
ForWord-Registered Trademark-, its initial product, is an intensive,
computer-based training program that focuses on improving critical pre-reading
skills, including receptive and expressive communication skills, in children
with language-based learning problems. The Company has sponsored two field
trials involving approximately 1,000 children with language-based learning
problems. Participants on average achieved improvement of one to two years in
language processing and related skills after completion of the Fast ForWord
program in four to eight weeks." The words "Scientific Learning Corporation"
appear in the bottom right corner.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE 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, ANY SELLING STOCKHOLDER, OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES
OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH
AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR
THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
-------------------------
TABLE OF CONTENTS
-------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY............................. 3
RISK FACTORS................................... 7
USE OF PROCEEDS................................ 16
DIVIDEND POLICY................................ 16
CAPITALIZATION................................. 17
DILUTION....................................... 18
SELECTED FINANCIAL DATA........................ 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................... 20
BUSINESS....................................... 25
MANAGEMENT..................................... 40
CERTAIN TRANSACTIONS........................... 51
PRINCIPAL AND SELLING STOCKHOLDERS............. 53
DESCRIPTION OF CAPITAL STOCK................... 55
SHARES ELIGIBLE FOR FUTURE SALE................ 57
UNDERWRITING................................... 59
LEGAL MATTERS.................................. 60
EXPERTS........................................ 61
ADDITIONAL INFORMATION......................... 61
TRADEMARKS..................................... 61
INDEX TO FINANCIAL STATEMENTS.................. F-1
</TABLE>
UNTIL AFTER , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES OFFERED HEREBY,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
SHARES
[LOGO]
COMMON STOCK
---------------
PROSPECTUS
---------------
NationsBanc Montgomery
Securities LLC
BancAmerica Robertson Stephens
Pacific Growth Equities, Inc.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All the amounts shown are estimates except
for the registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee.................................................. $ 10,178
NASD filing fee................................................... 3,950
Nasdaq application fee............................................ 1,000
Blue sky qualification fee and expenses........................... 5,000
Printing and engraving expenses................................... 130,000
Legal fees and expenses........................................... 350,000
Accounting fees and expenses...................................... 200,000
Transfer agent and registrar fees................................. 10,000
Miscellaneous..................................................... 39,872
---------
Total......................................................... $ 750,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Under Section 145 of the Delaware General Corporation Law, the Company has
broad powers to indemnify its directors and officers against liabilities they
may incur in such capacities, including liabilities under the Securities Act of
1933, as amended (the "Securities Act"). The Company's Bylaws also provide that
the Company will indemnify its directors and executive officers and may
indemnify its other officers, employees and other agents to the fullest extent
not prohibited by Delaware law.
The Company's Certificate of Incorporation provides for the elimination of
liability for monetary damages for breach of the directors' fiduciary duty of
care to the Company and its stockholders. These provisions do not eliminate the
directors' duty of care and, in appropriate circumstances, equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Company, for acts
or omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for any transaction from which the director derived an
improper personal benefit and for payment of dividends or approval of stock
repurchases or redemptions that are unlawful under Delaware law. These
provisions do not affect a director's responsibilities under any other laws,
such as the federal securities laws or state or federal environmental laws.
The Company has entered into agreements with its directors and executive
officers that require the Company to indemnify such persons against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
(including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such person may be made a party by
reason of the fact that such person is or was a director or officer of the
Company or any of its affiliated enterprises, provided such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the Company and, with respect to any criminal proceeding,
had no reasonable cause to believe his or her conduct was unlawful. The
indemnification agreements also set forth certain procedures that will apply in
the event of a claim for indemnification thereunder.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Company and
its officers and directors for certain liabilities arising under the Securities
Act or otherwise.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since its incorporation on November 30, 1995, the Company has sold and
issued the following unregistered securities:
1. From January 1996 to June 1996, the Company issued and sold an aggregate
of 3,985,161 shares of Common Stock at prices ranging from $0.0008 to
$0.17 per share to seven executive officers and directors, 185,175 of
which are currently held by one individual who is no longer associated
with the Company.
2. In April 1996, the Company issued and sold an aggregate of 104,937
shares of Series A Preferred Stock at $1.62 per share to four executive
officers and directors pursuant to its Series A Preferred Stock Employee
Purchase Plan, 12,345 of which are currently held by one individual who
is no longer associated with the Company.
3. From April 1996 to May 1996, the Company issued and sold and aggregate
of 1,142,956 shares of Series A Preferred Stock at $1.70 per share to 68
investors, 24,412 of which were sold to Dr. Schleifer, a member of the
Board of Directors of the Company.
4. On September 27, 1996, the Company issued 196,788 shares of Series A
Preferred Stock to Rutgers University in partial payment of a license
fee. On March 28, 1997, Rutgers University returned 25,000 shares to the
Company.
5. From October 1996 to November 1996, the Company issued and sold and
aggregate of 2,250,000 shares of Series B Preferred Stock at $1.80 per
share to two investors, 2,222,222 of which were sold to Ventures, an
affiliate of the Company.
6. On October 1, 1996 the Company issued a warrant to purchase 1,428,571
shares of Series C Preferred Stock at an exercise price of $2.80 per
share to Ventures, an affiliate of the Company. This warrant was
subsequently exercised on June 16, 1997 and the 1,428,571 shares were
issued to the affiliate.
7. Since inception, the Company has granted stock options under its Stock
Option Plan covering an aggregate of 1,699,979 shares of the Company's
Common Stock (net of expirations and cancellations) at exercise prices
ranging from $0.17 to $1.50 per share.
8. Since inception, options to purchase an aggregate of 188,481 shares of
the Company's Common Stock were exercised for an aggregate purchase price
of $39,408.27 at exercise prices ranging from $0.17 to $0.50 per share.
9. In June 1998, the Company issued to Ventures, an affiliate of the
Company, warrants to purchase 100,000 shares of the Company's Common
Stock. These warrants were issued in connection with Ventures' guarantee
of a $3 million unsecured line of credit obtained by the Company in June
1998.
The sales and issuances of securities in the transactions described in
paragraphs 1 through 6 and 9 above were deemed to be exempt from registration
under the Securities Act by virtue of Section 4(2) or Regulation D promulgated
under the Securities Act. The purchasers in each case represented their
intention to acquire the securities for investment only and not with a view to
the distribution thereof. Appropriate legends are affixed to the stock
certificates issued in such transactions. Similar legends were imposed in
connection with any subsequent sales of any such securities. All recipients
either received adequate information about the Company or had access, through
employment or other relationships, to such information.
The sales and issuances of securities in the transactions described in
paragraphs 1, 2, 7 and 8 above were deemed to be exempt from registration under
the Securities Act by virtue of Rule 701 promulgated
II-2
<PAGE>
thereunder in that they were offered and sold either pursuant to written
compensatory benefit plans or pursuant to a written contract relating to
compensation, as provided by Rule 701.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the Company.
3.2+ Bylaws of the Company.
3.3+ Form of Restated Certificate of Incorporation of the Company to be
filed upon completion of this Offering.
3.4+ Form of Amended and Restated Bylaws of the Company to be effective upon
the closing of this Offering.
4.1 Reference is made to Exhibits 3.1 through 3.4.
4.2+ Registration Rights Agreement among the Company and the parties
indicated therein, dated as of October 1, 1996, as amended on
November 14, 1996.
4.3 Specimen stock certificate.
5.1* Opinion of Cooley Godward LLP as to the legality of the securities
being registered.
10.1+ Form of Indemnity Agreement between the Company and each its directors
and executive officers, with related schedules.
10.2 1998 Equity Incentive Plan (the "Incentive Plan").
10.3+ Form of Stock Option Agreement under the Incentive Plan.
10.4+ Form of Stock Option Grant Notice under the Incentive Plan.
10.5 1998 Non-Employee Directors' Stock Option Plan ("Directors' Plan").
10.6+ Form of Nonstatutory Stock Option Agreement under the Directors' Plan
(Initial Grant).
10.7+ Form of Nonstatutory Stock Option Agreement under the Directors' Plan
(Annual Grant).
10.8 1998 Employee Stock Purchase Plan ("ESP Plan").
10.9 Form of Employee Stock Purchase Plan Offering under the ESP Plan.
10.10+ Letter agreement, dated as of October 31, 1996, between Sheryle J.
Bolton and the Company.
10.11+ Consulting Agreement, dated as of September 20, 1996, between Dr.
Michael M. Merzenich and the Company, as modified on January 19,
1998.
10.12+ Consulting Agreement, dated as of September 19, 1996, between Dr. Paula
A. Tallal and the Company, as modified on January 22, 1998.
10.13**+ Exclusive License Agreement, dated September 27, 1996, between the
Company and the Regents of the University of California.
10.14+ Loan and Security Agreement, dated as of February 13, 1998, between the
Company and Silicon Valley Bank.
10.15+ Revolving Loan Agreement, dated as of June 4, 1998, between the Company
and BankBoston, N.A.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------------------------------------------------------
<C> <S>
10.16+ Lease Agreement, dated as of July 31, 1997, between the Company and
GBC-University Associates, L.P.
10.17 Securities Purchase Agreement, dated September 24, 1986, between the
Company and Warburg, Pincus Ventures, L.P.
23.1 Consent of Ernst & Young LLP, Independent Auditors. Reference is made
to page II-7.
23.2* Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1+ Power of Attorney. Reference is made to page II-5.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
+ Filed previously
* To be filed by amendment.
** The Company has sought confidential treatment pursuant to Rule 406 for
portions of the referenced exhibit.
(b) FINANCIAL STATEMENT SCHEDULES.
All financial statement schedules are omitted because the information called
for is not required, is not applicable, or is shown either in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The Company hereby undertakes to provide at the closing, to the Underwriters
specified in the Underwriting Agreement, certificates in such denominations and
registered in such names as required by the Underwriters permitting prompt
delivery to each purchaser.
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 provisions described in Item 14 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, therefor, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer, or controlling person of the Company in
the successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The Company undertakes that: (1) for purposes of determining any liability
under the Securities Act, the information omitted from the form of prospectus as
filed as part of the registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Company pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of the registration statement as of the time it was declared effective, and (2)
for the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
BONA FIDE offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company has caused this Amendment No. 1 to Registration Statement No. 333-56545
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Berkeley, County of Alameda, State of California, on the
day of July, 1998.
<TABLE>
<S> <C> <C>
SCIENTIFIC LEARNING CORPORATION
By:
/s/ SHERYLE J. BOLTON
-----------------------------------------
Sheryle J. Bolton
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement No. 333-56545 has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- -------------------------- -------------------
<C> <S> <C>
President, Chief Executive
/s/ SHERYLE J. BOLTON Officer and Director
- ----------------------------------- (PRINCIPAL EXECUTIVE July 17, 1998
Sheryle J. Bolton OFFICER)
/s/ DR. MICHAEL M. MERZENICH*
- ----------------------------------- Chief Scientific Officer July 17, 1998
Dr. Michael M. Merzenich and Director
/s/ DR. PAULA A. TALLAL* Executive Vice President
- ----------------------------------- and Chairman of the July 17, 1998
Dr. Paula A. Tallal Board
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- -------------------------- -------------------
Chief Financial Officer,
/s/ FRANK M. MATTSON Vice President, Finance
- ----------------------------------- and Secretary (PRINCIPAL July 17, 1998
Frank M. Mattson FINANCIAL AND ACCOUNTING
OFFICER)
<C> <S> <C>
/s/ CARLETON A. HOLSTROM*
- ----------------------------------- Director July 17, 1998
Carleton A. Holstrom
/s/ DR. LEONARD S. SCHLEIFER*
- ----------------------------------- Director July 17, 1998
Dr. Leonard S. Schleifer
/s/ RODMAN W. MOORHEAD, III*
- ----------------------------------- Director July 17, 1998
Rodman W. Moorhead, III
/s/ JAMES E. THOMAS*
- ----------------------------------- Director July 17, 1998
James E. Thomas
*By: /s/ SHERYLE J. BOLTON
- -----------------------------------
Sheryle J. Bolton
Attorney-in-Fact
(Signing under the authority of a
Power of Attorney previously filed
with the Securities and Exchange
Commission)
</TABLE>
II-6
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our report dated April 9, 1998 in the
Registration Statement (Form S-1, No. 333-56545) and related Prospectus of
Scientific Learning Corporation for the registration of 2,760,000 shares of its
Common Stock.
/S/ ERNST & YOUNG LLP
Walnut Creek, California
July 16, 1998
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the Company.
3.2+ Bylaws of the Company.
3.3+ Form of Restated Certificate of Incorporation of the Company to be
filed upon completion of this Offering.
3.4+ Form of Amended and Restated Bylaws of the Company to be effective upon
the closing of this Offering.
4.1 Reference is made to Exhibits 3.1 through 3.4.
4.2+ Registration Rights Agreement among the Company and the parties
indicated therein, dated as of October 1, 1996, as amended on
November 14, 1996.
4.3 Specimen stock certificate.
5.1* Opinion of Cooley Godward LLP as to the legality of the securities
being registered.
10.1+ Form of Indemnity Agreement between the Company and each its directors
and executive officers, with related schedules.
10.2 1998 Equity Incentive Plan (the "Incentive Plan").
10.3+ Form of Stock Option Agreement under the Incentive Plan.
10.4+ Form of Stock Option Grant Notice under the Incentive Plan.
10.5 1998 Non-Employee Directors' Stock Option Plan ("Directors' Plan").
10.6+ Form of Nonstatutory Stock Option Agreement under the Directors' Plan
(Initial Grant).
10.7+ Form of Nonstatutory Stock Option Agreement under the Directors' Plan
(Annual Grant).
10.8 1998 Employee Stock Purchase Plan ("ESP Plan").
10.9 Form of Employee Stock Purchase Plan Offering under the ESP Plan.
10.10+ Letter agreement, dated as of October 31, 1996, between Sheryle J.
Bolton and the Company.
10.11+ Consulting Agreement, dated as of September 20, 1996, between Dr.
Michael M. Merzenich and the Company, as modified on January 19,
1998.
10.12+ Consulting Agreement, dated as of September 19, 1996, between Dr. Paula
A. Tallal and the Company, as modified on January 22, 1998.
10.13**+ Exclusive License Agreement, dated September 27, 1996, between the
Company and the Regents of the University of California.
10.14+ Loan and Security Agreement, dated as of February 13, 1998, between the
Company and Silicon Valley Bank.
10.15+ Revolving Loan Agreement, dated as of June 4, 1998, between the Company
and BankBoston, N.A.
10.16+ Lease Agreement, dated as of July 31, 1997, between the Company and
GBC-University Associates, L.P.
10.17 Securities Purchase Agreement, dated September 24, 1986, between the
Company and Warburg, Pincus Ventures, L.P.
23.1 Consent of Ernst & Young LLP, Independent Auditors. Reference is made
to page II-7.
23.2* Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1+ Power of Attorney. Reference is made to page II-5.
27.1 Financial Data Schedule.
</TABLE>
- --------------------------
+ Filed previously
* To be filed by amendment
** The Company has sought confidential treatment pursuant to Rule 406 for
portions of the referenced exhibit.
<PAGE>
Exhibit 1.1
Draft of July 6, 1998
_______________ SHARES
SCIENTIFIC LEARNING CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
DATED AUGUST ___, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1. Representations and Warranties............................................2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............................2
COMPLIANCE WITH REGISTRATION REQUIREMENTS..............................2
OFFERING MATERIALS FURNISHED TO UNDERWRITERS...........................3
DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY.......................3
THE UNDERWRITING AGREEMENT.............................................3
AUTHORIZATION OF THE COMMON SHARES.....................................3
NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS.....................3
NO MATERIAL ADVERSE CHANGE.............................................3
PREPARATION OF THE FINANCIAL STATEMENTS................................4
INCORPORATION AND GOOD STANDING OF THE COMPANY.........................4
CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS.........................4
STOCK EXCHANGE LISTING.................................................4
USE OF PROCEEDS........................................................5
NON-CONTRAVENTION OF EXISTING INSTRUMENTS; NO FURTHER AUTHORIZATIONS
OR APPROVALS REQUIRED...............................................5
NO MATERIAL ACTIONS OR PROCEEDINGS.....................................5
INTELLECTUAL PROPERTY RIGHTS...........................................5
ALL NECESSARY PERMITS, ETC.............................................6
TITLE TO PROPERTIES....................................................6
TAX LAW COMPLIANCE.....................................................6
COMPANY NOT AN "INVESTMENT COMPANY."...................................6
INSURANCE..............................................................6
NO PRICE STABILIZATION OR MANIPULATION.................................7
RELATED PARTY TRANSACTIONS.............................................7
NO UNLAWFUL CONTRIBUTIONS OR OTHER PAYMENTS............................7
COMPANY'S ACCOUNTING SYSTEM............................................7
REPRESENTATION AND WARRANTIES OF THE SELLING STOCKHOLDERS.................7
THE UNDERWRITING AGREEMENT.............................................7
THE CUSTODY AGREEMENT AND POWER OF ATTORNEY............................8
TITLE TO OPTIONAL COMMON SHARES TO BE SOLD; ALL AUTHORIZATIONS
OBTAINED............................................................8
DELIVERY OF THE OPTIONAL COMMON SHARES TO BE SOLD......................8
NON-CONTRAVENTION; NO FURTHER AUTHORIZATIONS OR APPROVALS REQUIRED.....8
NO REGISTRATION OR OTHER SIMILAR RIGHTS................................9
NO FURTHER CONSENTS, ETC...............................................9
DISCLOSURE MADE BY SUCH SELLING STOCKHOLDER IN THE PROSPECTUS..........9
NO PRICE STABILIZATION OR MANIPULATION.................................9
CONFIRMATION OF COMPANY REPRESENTATIONS AND WARRANTIES.................9
SECTION 2. Purchase, Sale and Delivery of the Common Shares.........................10
THE FIRM COMMON SHARES...................................................10
THE FIRST CLOSING DATE...................................................10
THE OPTIONAL COMMON SHARES; THE SECOND CLOSING DATE......................10
PUBLIC OFFERING OF THE COMMON SHARES.....................................11
PAYMENT FOR THE COMMON SHARES............................................11
DELIVERY OF THE COMMON SHARES............................................12
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<S> <C>
DELIVERY OF PROSPECTUS TO THE UNDERWRITERS...............................12
SECTION 3. Additional Covenants.....................................................12
COVENANTS OF THE COMPANY.................................................12
REPRESENTATIVES' REVIEW OF PROPOSED AMENDMENTS AND SUPPLEMENTS........12
SECURITIES ACT COMPLIANCE.............................................12
AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS AND OTHER SECURITIES
ACT MATTERS........................................................13
COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS............13
BLUE SKY COMPLIANCE...................................................13
TRANSFER AGENT........................................................13
EARNINGS STATEMENT....................................................14
PERIODIC REPORTING OBLIGATIONS........................................14
AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES..................14
FUTURE REPORTS TO THE REPRESENTATIVES.................................14
COVENANTS OF THE SELLING STOCKHOLDERS....................................14
AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES..................14
DELIVERY OF FORMS W-8 AND W-9.........................................15
SECTION 4. Payment of Expenses......................................................15
SECTION 5. Conditions of the Obligations of the Underwriters........................16
ACCOUNTANTS' COMFORT LETTER...........................................16
COMPLIANCE WITH REGISTRATION REQUIREMENTS; NO STOP ORDER; NO
OBJECTION FROM NASD................................................16
NO MATERIAL ADVERSE CHANGE............................................17
OPINION OF COUNSEL FOR THE COMPANY....................................17
OPINION OF COUNSEL FOR THE UNDERWRITERS...............................17
OFFICERS' CERTIFICATE.................................................17
BRING-DOWN COMFORT LETTER.............................................17
OPINION OF COUNSEL FOR THE SELLING STOCKHOLDERS.......................18
SELLING STOCKHOLDERS' CERTIFICATE.....................................18
SELLING STOCKHOLDERS' DOCUMENTS.......................................18
LOCK-UP AGREEMENT FROM CERTAIN STOCKHOLDERS OF THE COMPANY
OTHER THAN SELLING STOCKHOLDERS....................................18
ADDITIONAL DOCUMENTS..................................................18
SECTION 6. Reimbursement of Underwriters' Expenses..................................19
SECTION 7. Effectiveness of this Agreement..........................................19
SECTION 8. Indemnification..........................................................19
INDEMNIFICATION OF THE UNDERWRITERS...................................19
INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS AND OFFICERS AND
THE SELLING STOCKHOLDERS...........................................21
NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES....................22
SETTLEMENTS...........................................................23
SECTION 9. Contribution.............................................................23
SECTION 10. Default of One or More of the Several Underwriters.......................25
SECTION 11. Termination of this Agreement............................................25
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<S> <C>
SECTION 12. Representations and Indemnities to Survive Delivery......................26
SECTION 13. Notices..................................................................26
SECTION 14. Successors...............................................................27
SECTION 15. Partial Unenforceability.................................................27
SECTION 16. Governing Law Provisions.................................................27
CONSENT TO JURISDICTION...............................................27
WAIVER OF IMMUNITY....................................................28
SECTION 17. Failure of One or More of the Selling Stockholders to Sell and Deliver
Optional Common Shares................................................28
SECTION 18. General Provisions.......................................................28
</TABLE>
iii
<PAGE>
UNDERWRITING AGREEMENT
August __, 1998
NATIONSBANC MONTGOMERY SECURITIES LLC
BANCAMERICA ROBERTSON STEPHENS
PACIFIC GROWTH EQUITIES, INC.
As Representatives of the several Underwriters
c/o NATIONSBANC MONTGOMERY SECURITIES LLC
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
Scientific Learning Corporation, a Delaware corporation (the "Company),
proposes to issue and sell to the several underwriters named in SCHEDULE A
(the "Underwriters") an aggregate of [___] shares (the "Firm Common Shares")
of its Common Stock, par value $[___] per share (the "Common Stock"). In
addition, the Company has granted to the Underwriters an option to purchase
up to an additional [____] shares of Common Stock and the Selling
Stockholders have severally granted to the Underwriters an option to purchase
up to an additional [____] shares of Common Stock, each Selling Stockholder
selling up to the amount set forth opposite such Selling Stockholder's name
in SCHEDULE B, all as provided in Section 2. The additional [____] shares to
be sold by the Company and the additional [____] shares to be sold by the
Selling Stockholders pursuant to such option are collectively called the
"Optional Common Shares". The Firm Common Shares and, if and to the extent
such option is exercised, the Optional Common Shares are collectively called
the "Common Shares." NationsBanc Montgomery Securities LLC, BancAmerica
Robertson Stephens and Pacific Growth Equities, Inc. have agreed to act as
representatives of the several Underwriters (in such capacity, the
"Representatives") in connection with the offering and sale of the Common
Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-56545) which contains a form of prospectus to be used in connection with
the public offering and sale of the Common Shares. Such registration
statement, as amended, including the financial statements, exhibits and
schedules thereto, in the form in which it was declared effective by the
Commission under the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder (collectively, the "Securities Act"),
including any information deemed to be a part thereof at the time of
effectiveness pursuant to Rule 430A or Rule 434 under the Securities Act, is
called the "Registration Statement." Any registration statement filed by the
Company pursuant to Rule 462(b) under the Securities Act is called the "Rule
462(b) Registration Statement," and from and after the date and time of
filing of the Rule 462(b) Registration Statement the term "Registration
Statement" shall include the Rule 462(b) Registration Statement. Such
prospectus, in the form first used by the Underwriters to confirm sales of
the Common Shares, is called the "Prospectus;" provided, however, if the
Company has, with the consent of NationsBanc
1
<PAGE>
Montgomery Securities LLC, elected to rely upon Rule 434 under the Securities
Act, the term "Prospectus" shall mean the Company's prospectus subject to
completion (each, a "preliminary prospectus") dated [___] (such preliminary
prospectus is called the "Rule 434 preliminary prospectus"), together with
the applicable term sheet (the "Term Sheet") prepared and filed by the
Company with the Commission under Rules 434 and 424(b) under the Securities
Act and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet. All references in this Agreement to the
Registration Statement, the Rule 462(b) Registration Statement, a preliminary
prospectus, the Prospectus or the Term Sheet, or any amendments or
supplements to any of the foregoing, shall include any copy thereof filed
with the Commission pursuant to its Electronic Data Gathering, Analysis and
Retrieval System ("EDGAR").
The Company and each of the Selling Stockholders hereby confirm their
respective agreements with the Underwriters as follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES.
A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents, warrants and covenants to each Underwriter as follows:
(a) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has
complied to the Commission's satisfaction with all requests of the
Commission for additional or supplemental information. No stop order
suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement is in effect and no proceedings for such
purpose have been instituted or are pending or, to the best knowledge of
the Company, are contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed
complied in all material respects with the Securities Act and, if filed
by electronic transmission pursuant to EDGAR (except as may be permitted
by Regulation S-T under the Securities Act), was identical to the copy
thereof delivered to the Underwriters for use in connection with the
offer and sale of the Common Shares. Each of the Registration Statement,
any Rule 462(b) Registration Statement and any post-effective amendment
thereto, at the time it became effective and at all subsequent times
through the Prospectus Delivery Period (as defined), complied and, as
amended or supplemented, will comply in all material respects with the
Securities Act and did not and, as amended or supplemented, will not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus, as amended or
supplemented, as of its date and at all subsequent times through the
Prospectus Delivery Period (as defined), did not and, as amended or
supplemented, will not contain any untrue statement of a material fact
or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading. The representations and warranties set forth
in the two immediately preceding sentences do not apply to statements in
or omissions from the Registration Statement, any Rule 462(b)
Registration Statement, or any post-effective amendment thereto, or the
Prospectus, or any amendments or supplements thereto, made in reliance
upon and in conformity with information relating to any Underwriter
furnished to the Company by the Representatives
2
<PAGE>
expressly for use therein. There are no contracts or other documents
required to be described in the Prospectus or to be filed as exhibits to
the Registration Statement which have not been described or filed as
required.
(b) OFFERING MATERIALS FURNISHED TO UNDERWRITERS. The Company
has delivered to each of the Representatives one complete manually
signed copy of the Registration Statement and of each consent and
certificate of experts filed as a part thereof, and conformed copies of
the Registration Statement (without exhibits) and preliminary
prospectuses and the Prospectus, as amended or supplemented, in such
quantities and at such places as the Representatives have reasonably
requested for each of the Underwriters.
(c) DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY. The
Company has not distributed and will not distribute, prior to the later
of the Second Closing Date (as defined below) and the completion of the
Underwriters' distribution of the Common Shares, any offering material
in connection with the offering and sale of the Common Shares other than
a preliminary prospectus, the Prospectus or the Registration Statement.
(d) THE UNDERWRITING AGREEMENT. This Agreement has been duly
authorized, executed and delivered by the Company and is a valid and
binding agreement of the Company, enforceable in accordance with its
terms, except as rights to indemnification hereunder may be limited by
applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by
general equitable principles.
(e) AUTHORIZATION OF THE COMMON SHARES. The Common Shares to be
purchased by the Underwriters from the Company have been duly authorized
for issuance and sale pursuant to this Agreement and, when issued and
delivered by the Company pursuant to this Agreement, will be validly
issued, fully paid and nonassessable.
(f) NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS. There
are no persons with registration or other similar rights to have any
equity or debt securities registered for sale under the Registration
Statement or included in the offering contemplated by this Agreement,
except for such rights as have been duly waived.
(g) NO MATERIAL ADVERSE CHANGE. Except as otherwise disclosed in
the Prospectus, subsequent to the respective dates as of which
information is given in the Prospectus: (i) there has been no material
adverse change in the financial condition, earnings, business,
operations or prospects, whether or not arising from transactions in the
ordinary course of business, of the Company (any such change is called a
"Material Adverse Change") or any development that could reasonably be
expected to result in a Material Adverse Change; (ii) the Company has
not incurred any material liability or obligation, indirect, direct or
contingent, not in the ordinary course of business nor entered into any
material transaction or agreement not in the ordinary course of
business; and (iii) there has been no dividend or distribution of any
kind declared, paid or made by the Company.
3
<PAGE>
(h) PREPARATION OF THE FINANCIAL STATEMENTS. The financial
statements filed with the Commission as a part of the Registration
Statement and included in the Prospectus present fairly the financial
position of the Company as of and at the dates indicated and the results
of their operations and cash flows for the periods specified. The
supporting schedules included in the Registration Statement present
fairly the information required to be stated therein. Such financial
statements and supporting schedules have been prepared in conformity
with generally accepted accounting principles as applied in the United
States, applied on a consistent basis throughout the periods involved,
except as may be expressly stated in the related notes thereto. No other
financial statements or supporting schedules are required to be included
in the Registration Statement. The financial data set forth in the
Prospectus under the captions "Prospectus Summary--Summary Selected
Financial Data," "Selected Financial Data" and "Capitalization" fairly
present the information set forth therein on a basis consistent with
that of the audited financial statements contained in the Registration
Statement.
(i) INCORPORATION AND GOOD STANDING OF THE COMPANY. The Company
has been duly incorporated and is validly existing as a corporation in
good standing under the laws of the jurisdiction of its incorporation
and has corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus
and to enter into and perform its obligations under this Agreement. The
Company is duly qualified as a foreign corporation to transact business
and is in good standing in the State of California and each other
jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business,
except for such jurisdictions (other than the State of California) where
the failure to so qualify or to be in good standing would not,
individually or in the aggregate, result in a Material Adverse Change.
The Company does not own or control, directly or indirectly, any
corporation, association or other entity.
(j) CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS. The
authorized, issued and outstanding capital stock of the Company is as
set forth in the Prospectus under the caption "Capitalization" (other
than for subsequent issuances, if any, pursuant to employee benefit
plans described in the Prospectus or upon exercise of outstanding
options or warrants described in the Prospectus). The Common Stock
(including the Common Shares) conforms in all material respects to the
description thereof contained in the Prospectus. All of the issued and
outstanding shares of Common Stock have been duly authorized and validly
issued, are fully paid and nonassessable and have been issued in
compliance with federal and state securities laws. None of the
outstanding shares of Common Stock were issued in violation of any
preemptive rights, rights of first refusal or other similar rights to
subscribe for or purchase securities of the Company. There are no
authorized or outstanding options, warrants, preemptive rights, rights
of first refusal or other rights to purchase, or equity or debt
securities convertible into or exchangeable or exercisable for, any
capital stock of the Company other than those accurately described in
the Prospectus. The description of the Company's stock option, stock
bonus and other stock plans or arrangements, and the options or other
rights granted thereunder, set forth in the Prospectus accurately and
fairly presents the information required to be shown with respect to
such plans, arrangements, options and rights.
(k) STOCK EXCHANGE LISTING. The Common Shares have been approved
for listing on the Nasdaq National Market, subject only to official
notice of issuance.
4
<PAGE>
(l) USE OF PROCEEDS. The Company currently plans to apply the
net proceeds from the sale of the Common Shares sold by it in the manner
described under the caption "Use of Proceeds" in the Prospectus.
(m) NON-CONTRAVENTION OF EXISTING INSTRUMENTS; NO FURTHER
AUTHORIZATIONS OR APPROVALS REQUIRED. The Company is not in violation of
its charter or by-laws or in default (or, with the giving of notice or
lapse of time, would be in default) ("Default") under any indenture,
mortgage, loan or credit agreement, note, contract, franchise, lease or
other instrument to which the Company is a party or by which it may be
bound, or to which any of the property or assets of the Company is subject
(each, an "Existing Instrument"), except for such Defaults as would not,
individually or in the aggregate, result in a Material Adverse Change. The
Company's execution, delivery and performance of this Agreement and
consummation of the transactions contemplated hereby and by the Prospectus
(i) have been duly authorized by all necessary corporate action and will
not result in any violation of the provisions of the charter or by-laws of
the Company, (ii) will not conflict with or constitute a breach of, or
Default under, or result in the creation or imposition of any lien, charge
or encumbrance upon any property or assets of the Company pursuant to, or
require the consent of any other part to, any Existing Instrument, except
for such conflicts, breaches, Defaults, liens, charges or encumbrances or
failures to obtain consents as would not, individually or in the
aggregate, result in a Material Adverse Change and (iii) will not result
in any violation of any law, administrative regulation or administrative
or court decree applicable to the Company, except as would not result in a
Material Adverse Change. No material consent, approval, authorization or
other order of, or registration or filing with, any court or other
governmental or regulatory authority or agency, is required for the
Company's execution, delivery and performance of this Agreement and
consummation of the transactions contemplated hereby and by the
Prospectus, except such as have been obtained or made by the Company and
are in full force and effect under the Securities Act, applicable state
securities or blue sky laws and from the National Association of
Securities Dealers, Inc. (the "NASD").
(n) NO MATERIAL ACTIONS OR PROCEEDINGS. There are no legal or
governmental actions, suits or proceedings pending or, to the best of
the Company's knowledge, threatened (i) against or affecting the
Company, (ii) which has as the subject thereof any officer or director
of, or property owned or leased by, the Company or (iii) relating to
environmental or discrimination matters, where in any such case (A)
there is a reasonable expectation that such action, suit or proceeding
might be determined adversely to the Company and (B) any such action,
suit or proceeding, if so determined adversely, would reasonably be
expected to result in a Material Adverse Change or adversely affect the
consummation of the transactions contemplated by this Agreement. No
material labor dispute exists with the employees of the Company, nor is
the Company aware of any material labor disputes with the employees of
any principal supplier of the Company, nor, to the best of the Company's
knowledge, are any such labor disputes threatened or imminent.
(o) INTELLECTUAL PROPERTY RIGHTS. The Company owns or possesses
sufficient rights to trademarks, trade names, patent rights, copyrights,
licenses, approvals, trade secrets and other similar rights
(collectively, "Intellectual Property Rights") reasonably necessary to
conduct its business as now conducted. The Company has not
5
<PAGE>
received any notice of infringement or conflict with asserted
Intellectual Property Rights of others, which infringement or conflict,
if the subject of an unfavorable decision, would reasonably be expected
to result in a Material Adverse Change.
(p) ALL NECESSARY PERMITS, ETC. The Company possesses such valid
and current certificates, authorizations or permits issued by the
appropriate state, federal or foreign regulatory agencies or bodies
necessary to conduct its business, and the Company has not received any
written or, to its knowledge, oral notice of proceedings relating to the
revocation or modification of, or non-compliance with, any such
certificate, authorization or permit which, singly or in the aggregate,
the failure to obtain or if the subject of an unfavorable decision,
ruling or finding, would reasonably be expected to result in a Material
Adverse Change.
(q) TITLE TO PROPERTIES. The Company has good and marketable
title to all the properties and assets reflected as owned in the
financial statements referred to in Section 1(i) above (or elsewhere in
the Prospectus), in each case free and clear of any security interests,
mortgages, liens, encumbrances, equities, claims and other defects,
except such as would not, individually or in the aggregate, result in a
Material Adverse Change. The real property, improvements, equipment and
personal property held under lease by the Company are held under valid
and enforceable leases, with such exceptions as would not, individually
or in the aggregate, result in a Material Adverse Change.
(r) TAX LAW COMPLIANCE. The Company has filed all necessary
federal, state and foreign income and franchise tax returns or has
properly requested extensions thereof and has paid all taxes required to
be paid by it and, if due and payable, any related or similar
assessment, fine or penalty levied against it except as may be being
contested in good faith and by appropriate proceedings. The Company has
made adequate charges, accruals and reserves in the applicable financial
statements referred to in Section 1(i) above in respect of all federal,
state and foreign income and franchise taxes for all periods covered by
such financial statements as to which the tax liability of the Company
has not been finally determined.
(s) COMPANY NOT AN "INVESTMENT COMPANY." The Company has been
advised of the rules and requirements under the Investment Company Act
of 1940, as amended (the "Investment Company Act"). The Company (a) is
primarily engaged in a business or businesses other than that of
investing, reinvesting, owning, holding or trading in securities, (b) is
not engaged and does not propose to engage in the business of issuing
face-amount certificates of the installment type, and has not been
engaged in such business and does not have any such certificate
outstanding, and (c) is not engaged and does not propose to engage in
the business of investing, reinvesting, owning, holding or trading in
securities, and does not own or propose to acquire investment securities
(as defined in Section 3(a) of the Investment Company Act) having a
value exceeding 40 percent of the value of its total assets (exclusive
of government securities and cash items) on an unconsolidated basis. The
Company is not required to file on Form N-1A.
(t) INSURANCE. The Company is insured by recognized, financially
sound and reputable institutions with policies in such amounts and with
such deductibles and covering such risks as are generally deemed
adequate and customary for its business including, but not limited to,
policies covering real and personal property owned or
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leased by the Company against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against. The Company
has no reason to believe that it will not be able (i) to renew its
existing insurance coverage as and when such policies expire or (ii) to
obtain comparable coverage from similar institutions as may be necessary
or appropriate to conduct its business as now conducted and at a cost
that would not result in a Material Adverse Change. The Company has not
been denied any insurance coverage which it has sought or for which it
has applied.
(u) NO PRICE STABILIZATION OR MANIPULATION. The Company has not
taken and will not take, directly or indirectly, any action designed to
or that might be reasonably expected to cause or result in stabilization
or manipulation of the price of the Common Stock to facilitate the sale
or resale of the Common Shares.
(v) RELATED PARTY TRANSACTIONS. There are no business
relationships or related-party transactions involving the Company or any
other person required to be described in the Prospectus which have not
been described as required.
(w) NO UNLAWFUL CONTRIBUTIONS OR OTHER PAYMENTS. Neither the
Company nor, to the best of the Company's knowledge, any employee or
agent of the Company, has made any contribution or other payment to any
official of, or candidate for, any federal, state or foreign office in
violation of any law or of the character required to be disclosed in the
Prospectus.
(x) COMPANY'S ACCOUNTING SYSTEM. The Company maintains a system
of accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles as applied in the United States and to
maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization;
and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
Any certificate signed by an officer of the Company and delivered to the
Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the
matters set forth therein.
B. REPRESENTATION AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each
Selling Stockholder severally and not jointly represents, warrants and
covenants to each Underwriter as follows:
(a) THE UNDERWRITING AGREEMENT. This Agreement has been duly
authorized, executed and delivered by or on behalf of such Selling
Stockholder and is a valid and binding agreement of such Selling
Stockholder, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as
the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
the rights and remedies of creditors or by general equitable principles.
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(b) THE CUSTODY AGREEMENT AND POWER OF ATTORNEY. Each of the (i)
Custody Agreement signed by such Selling Stockholder and [___], as
custodian (the "Custodian"), relating to the optional deposit of the
Optional Common Shares to be sold by such Selling Stockholder (the "Custody
Agreement") and (ii) Power of Attorney appointing certain individuals named
therein as such Selling Stockholder's attorneys-in-fact (each, an
"Attorney-in-Fact") to the extent set forth therein relating to the
transactions contemplated hereby and by the Prospectus (the "Power of
Attorney"), of such Selling Stockholder has been duly authorized, executed
and delivered by such Selling Stockholder and is a valid and binding
agreement of such Selling Stockholder, enforceable in accordance with its
terms, except as rights to indemnification thereunder may be limited by
applicable law and except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles.
(c) TITLE TO OPTIONAL COMMON SHARES TO BE SOLD; ALL AUTHORIZATIONS
OBTAINED. Such Selling Stockholder has, and on the Second Closing Date (as
defined below) will have, good and valid title to all of the Optional
Common Shares which may be sold by such Selling Stockholder pursuant to
this Agreement on such date and the legal right and power, and all
authorizations and approvals required by law [and under its charter or
by-laws,] [partnership agreement,] [trust agreement] [or other
organizational documents] to enter into this Agreement and its Custody
Agreement and Power of Attorney, to sell, transfer and deliver all of the
Optional Common Shares which may be sold by such Selling Stockholder
pursuant to this Agreement and to comply with its other obligations
hereunder and thereunder.
(d) DELIVERY OF THE OPTIONAL COMMON SHARES TO BE SOLD. Delivery of
the Optional Common Shares which are sold by such Selling Stockholder
pursuant to this Agreement will pass good and valid title to such Optional
Common Shares, free and clear of any security interest, mortgage, pledge,
lien, encumbrance or other claim.
(e) NON-CONTRAVENTION; NO FURTHER AUTHORIZATIONS OR APPROVALS
REQUIRED. The execution and delivery by such Selling Stockholder of, and
the performance by such Selling Stockholder of its obligations under, this
Agreement, the Custody Agreement and the Power of Attorney will not
contravene or conflict with, result in a breach of, or constitute a Default
under, or require the consent of any other party to, the charter or
by-laws, [partnership agreement,] [trust agreement] or other organizational
documents of such Selling Stockholder or any other material agreement or
instrument to which such Selling Stockholder is a party or by which it is
bound or under which it is entitled to any right or benefit, any provision
of applicable law or any judgment, order, decree or regulation applicable
to such Selling Stockholder of any court, regulatory body, administrative
agency, governmental body or arbitrator having jurisdiction over such
Selling Stockholder, except for such contraventions, conflicts, breaches,
defaults or failures to obtain a consent as would not, individually or in
the aggregate materially adversely affect the offering and sale of the
Optional Common Shares. No consent, approval, authorization or other order
of, or registration or filing with, any court or other governmental
authority or agency, is required for the consummation by such Selling
Stockholder of the transactions contemplated in this Agreement, except such
as have been obtained or made and are in full force and effect under the
Securities Act, applicable state securities or blue sky laws and from the
NASD
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or as would not materially adversely affect the offering and sale of
the Optional Common Shares.
(f) NO REGISTRATION OR OTHER SIMILAR RIGHTS. Such Selling
Stockholder does not have any registration or other similar rights to have
any equity or debt securities registered for sale by the Company under the
Registration Statement or included in the offering contemplated by this
Agreement, except for such rights as are described in the Prospectus under
"Shares Eligible for Future Sale."
(g) NO FURTHER CONSENTS, ETC. Except for the consent of such
Selling Stockholder to the respective number of Optional Common Shares to
be sold by each of the Selling Stockholders pursuant to this Agreement, no
consent, approval or waiver is required under any instrument or agreement
to which such Selling Stockholder is a party or by which it is bound or
under which it is entitled to any right or benefit, in connection with the
offering, sale or purchase by the Underwriters of any of the Optional
Common Shares which may be sold by such Selling Stockholder under this
Agreement or the consummation by such Selling Stockholder of any of the
other transactions contemplated hereby, except as would not materially
adversely affect the offering and sale of the Optional Common Shares.
(h) DISCLOSURE MADE BY SUCH SELLING STOCKHOLDER IN THE PROSPECTUS.
All information furnished by or on behalf of such Selling Stockholder in
writing expressly for use in the Registration Statement and Prospectus is,
and on the Second Closing Date will be, true, correct and complete in all
material respects, and does not, and on the Second Closing Date, as amended
or supplemented, will not, contain any untrue statement of a material fact
or omit to state any material fact necessary to make such information not
misleading. Such Selling Stockholder confirms as accurate the number of
shares of Common Stock set forth opposite such Selling Stockholder's name
in the Prospectus under the caption "Principal and Selling Stockholders"
(both prior to and after giving effect to the sale of the Common Shares).
(i) NO PRICE STABILIZATION OR MANIPULATION. Such Selling
Stockholder has not taken and will not take, directly or indirectly, any
action designed to or that might be reasonably expected to cause or result
in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Common Shares.
(j) CONFIRMATION OF COMPANY REPRESENTATIONS AND WARRANTIES. Such
Selling Stockholder has no reason to believe that the representations and
warranties of the Company contained in Section 1(A) hereof are not true
and correct, is familiar with the Registration Statement and the
Prospectus and has no knowledge of any material fact, condition or
information not disclosed in the Registration Statement or the Prospectus
which has had or would reasonably be expected to have a Material Adverse
Change and is not prompted to sell shares of Common Stock by any material
information concerning the Company which is required to be and is not set
forth in the Registration Statement and the Prospectus.
Any certificate signed by or on behalf of any Selling Stockholder and
delivered to the Representatives or to counsel for the Underwriters shall be
deemed to be a representation and warranty by such Selling Stockholder to each
Underwriter as to the matters covered thereby.
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SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES. THE
FIRM COMMON SHARES. The Company agrees to issue and sell to the several
Underwriters the Firm Common Shares upon the terms herein set forth. On the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the
Underwriters agree, severally and not jointly, to purchase from the Company
the respective number of Firm Common Shares set forth opposite their names on
SCHEDULE A. The purchase price per Firm Common Share to be paid by the
several Underwriters to the Company shall be $[___] per share.
THE FIRST CLOSING DATE. Delivery of certificates for the Firm
Common Shares to be purchased by the Underwriters and payment therefor shall
be made at the offices of NationsBanc Montgomery Securities LLC, 600
Montgomery Street, San Francisco, California (or such other place as may be
agreed to by the Company and the Representatives) at 6:00 a.m. San Francisco
time, on [___], (1) or such other time and date not later than 10:30 a.m. San
Francisco time, on [___] (2) as the Representatives shall designate by notice
to the Company (the time and date of such closing are called the "First
Closing Date"). The Company hereby acknowledges that circumstances under
which the Representatives may provide notice to postpone the First Closing
Date as originally scheduled include, but are in no way limited to, any
determination by the Company and the Representatives to recirculate to the
public copies of an amended or supplemented Prospectus or a delay as
contemplated by the provisions of Section 10.
THE OPTIONAL COMMON SHARES; THE SECOND CLOSING DATE. In addition,
on the basis of the representations, warranties and agreements herein
contained, and upon the terms but subject to the conditions herein set forth,
the Company and the Selling Stockholders hereby grant an option to the
several Underwriters to purchase, severally and not jointly, up to an
aggregate of [___] Optional Common Shares from the Company and the Selling
Stockholders at the purchase price per share to be paid by the Underwriters
for the Firm Common Shares. The option granted hereunder is for use by the
Underwriters solely in covering any over-allotments in connection with the
sale and distribution of the Firm Common Shares. The option granted hereunder
may be exercised at any time (but not more than once) upon notice by the
Representatives to the Company and the Selling Stockholders, which notice may
be given at any time within 30 days from the date of this Agreement. Such
notice shall set forth (i) the aggregate number of Optional Common Shares as
to which the Underwriters are exercising the option, (ii) the names and
denominations in which the certificates for the Optional Common Shares are to
be registered and (iii) the time, date and place at which such certificates
will be delivered (which time and date may be simultaneous with, but not
earlier than, the First Closing Date; and in such case the term "First
Closing Date" shall refer to the time and date of delivery of certificates
for the Firm Common Shares and the Optional Common Shares). Such time and
date of delivery, if subsequent to the
_________________________
(1) Typically, insert the fourth full business day after the date of
this Agreement, unless the pricing occurs at a time earlier than 4:30 p.m., EAST
COAST TIME, in which case insert the third full business day after the date of
this Agreement. In certain instances, such as when the Underwriters do not plan
to begin to release the Common Shares for sale to the public immediately
following execution of this Agreement, a later settlement date may be agreed to
by the Representative and the Company. (SEE Rule 15c6-1 under the Exchange Act.)
(2) Insert a date ten business days following the original
contemplated First Closing Date.
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First Closing Date, is called the "Second Closing Date" and shall be
determined by the Representatives and shall not be earlier than three nor
later than five full business days after delivery of such notice of exercise.
If any Optional Common Shares are to be purchased, (a) each Underwriter
agrees, severally and not jointly, to purchase the number of Optional Common
Shares (subject to such adjustments to eliminate fractional shares as the
Representatives may determine) that bears the same proportion to the total
number of Optional Common Shares to be purchased as the number of Firm Common
Shares set forth on SCHEDULE A opposite the name of such Underwriter bears to
the total number of Firm Common Shares and (b) the Company and each Selling
Stockholder agrees, severally and not jointly, to sell the number of Optional
Common Shares (subject to such adjustments to eliminate fractional shares as
the Representatives may determine) that bears the same proportion to the
total number of Option Common Shares to be sold as the number of Optional
Common Shares set forth in SCHEDULE B opposite the name of each such Selling
Stockholder or, in the case of the Company, as the number of Optional Common
Shares to be sold by the Company as set forth in the introductory paragraph
of this Agreement. The Representatives may cancel the option at any time
prior to its expiration by giving written notice of such cancellation to the
Company and the Selling Stockholders.
PUBLIC OFFERING OF THE COMMON SHARES. The Representatives hereby
advise the Company and the Selling Stockholders that the Underwriters intend
to offer for sale to the public, as described in the Prospectus, their
respective portions of the Common Shares as soon after this Agreement has
been executed and the Registration Statement has been declared effective as
the Representatives, in their sole judgment, have determined is advisable and
practicable.
PAYMENT FOR THE COMMON SHARES. Payment for the Common Shares to be
sold by the Company shall be made at the First Closing Date (and, if
applicable, at the Second Closing Date) by wire transfer of immediately
available funds to the order of the Company. Payment for the Optional Shares
to be sold by the Selling Stockholders, if applicable, shall be made at the
Second Closing Date by wire transfer of immediately available funds to the
order of the Custodian.
It is understood that the Representatives have been authorized, for
their own account and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Common Shares and any Optional Common Shares the Underwriters have
agreed to purchase. NationsBanc Montgomery Securities LLC, individually and
not as one of the Representatives of the Underwriters, may (but shall not be
obligated to) make payment for any Common Shares to be purchased by any
Underwriter whose funds shall not have been received by the Representatives
by the First Closing Date or the Second Closing Date, as the case may be, for
the account of such Underwriter, but any such payment shall not relieve such
Underwriter from any of its obligations under this Agreement.
Each Selling Stockholder hereby agrees that (i) it will pay all
stock transfer taxes, stamp duties and other similar taxes, if any, payable
upon the sale or delivery of the Common Shares to be sold by such Selling
Stockholder to the several Underwriters, or otherwise in connection with the
performance of such Selling Stockholder's obligations hereunder and (ii) the
Custodian is authorized to deduct for such payment any such amounts from the
proceeds to such Selling Stockholder hereunder and to hold such amounts for
the account of such Selling Stockholder with the Custodian under the Custody
Agreement.
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DELIVERY OF THE COMMON SHARES. The Company shall deliver, or cause
to be delivered, to the Representatives for the accounts of the several
Underwriters certificates for the Firm Common Shares at the First Closing
Date, against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. The Company
and the Selling Stockholders shall also deliver, or cause to be delivered, to
the Representatives for the accounts of the several Underwriters,
certificates for the Optional Common Shares the Underwriters have agreed to
purchase from them at the First Closing Date or the Second Closing Date, as
the case may be, against the irrevocable release of a wire transfer of
immediately available funds for the amount of the purchase price therefor.
The certificates for the Common Shares shall be in definitive form and
registered in such names and denominations as the Representatives shall have
requested at least two full business days prior to the First Closing Date (or
the Second Closing Date, as the case may be) and shall be made available for
inspection on the business day preceding the First Closing Date (or the
Second Closing Date, as the case may be) at a location in New York City as
the Representatives may designate. If the Representatives so elect, delivery
of the Firm Common Shares and the Optional Common Shares, if applicable, may
be made by credit through full fast transfer to the accounts at The
Depository Trust Company designated by the Representatives. Time shall be of
the essence, and delivery at the time and place specified in this Agreement
is a further condition to the obligations of the Underwriters.
DELIVERY OF PROSPECTUS TO THE UNDERWRITERS. Not later than 12:00
p.m. on the second business day following the date the Common Shares have
been released by the Underwriters for sale to the public, the Company shall
delivery or cause to be delivered copies of the Prospectus in such quantities
and at such places as the Representatives shall request.
SECTION 3. ADDITIONAL COVENANTS.
A. COVENANTS OF THE COMPANY. The Company further covenants and
agrees with each Underwriter as follows:
(a) REPRESENTATIVES' REVIEW OF PROPOSED AMENDMENTS AND SUPPLEMENTS.
During such period beginning on the date hereof and ending on the later of
the First Closing Date or such date, as in the opinion of counsel for the
Underwriters, the Prospectus is no longer required by law to be delivered
in connection with sales by an Underwriter or dealer (the "Prospectus
Delivery Period"), prior to amending or supplementing the Registration
Statement (including any registration statement filed under Rule 462(b)
under the Securities Act) or the Prospectus, the Company shall furnish to
the Representatives for review a copy of each such proposed amendment or
supplement, and the Company shall not file any such proposed amendment or
supplement to which the Representatives reasonably object.
(b) SECURITIES ACT COMPLIANCE. After the date of this Agreement,
the Company shall promptly advise the Representatives in writing (i) of
the receipt of any comments of, or requests for additional or supplemental
information from, the Commission with respect to the Registration
Statement, (ii) of the time and date of any filing of any post-effective
amendment to the Registration Statement or any amendment or supplement to
any preliminary prospectus or the Prospectus, (iii) of the time and date
that any post-effective amendment to the Registration Statement becomes
effective and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of
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the Registration Statement or any post-effective amendment thereto or of
any order preventing or suspending the use of any preliminary prospectus
or the Prospectus, or of any proceedings to remove, suspend or terminate
from listing or quotation the Common Stock from any securities exchange
upon which the it is listed for trading or included or designated for
quotation, or of the threatening or initiation of any proceedings for any
of such purposes. If the Commission shall enter any such stop order at any
time, the Company will use its best efforts to obtain the lifting of such
order at the earliest possible moment. Additionally, the Company agrees
that it shall comply with the provisions of Rules 424(b), 430A and 434, as
applicable, under the Securities Act and will use its reasonable efforts
to confirm that any filings made by the Company under such Rule 424(b)
were received in a timely manner by the Commission.
(c) AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS AND OTHER
SECURITIES ACT MATTERS. If, during the Prospectus Delivery Period, any
event shall occur or condition exist as a result of which it is necessary
to amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances when the Prospectus is
delivered to a purchaser, not misleading, or if in the reasonable opinion
of the Representatives or counsel for the Underwriters it is otherwise
necessary to amend or supplement the Prospectus to comply with law, the
Company agrees to promptly prepare (subject to Section 3(A)(a) hereof),
file with the Commission and furnish at its own expense to the
Underwriters and to dealers, amendments or supplements to the Prospectus
so that the statements in the Prospectus as so amended or supplemented
will not, in the light of the circumstances when the Prospectus is
delivered to a purchaser, be misleading or so that the Prospectus, as
amended or supplemented, will comply with law.
(d) COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS.
The Company agrees to furnish the Representatives, without charge, during
the Prospectus Delivery Period, as many copies of the Prospectus and any
amendments and supplements thereto as the Representatives may reasonably
request.
(e) BLUE SKY COMPLIANCE. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register the
Common Shares for sale under (or obtain exemptions from the application of)
the or state securities or blue sky laws or Canadian provincial Securities
laws of those jurisdictions designated by the Representatives, shall comply
with such laws and shall continue such qualifications, registrations and
exemptions in effect so long as required for the distribution of the Common
Shares. The Company shall not be required to qualify as a foreign
corporation or to take any action that would subject it to general service
of process in any such jurisdiction where it is not presently qualified or
where it would be subject to taxation as a foreign corporation. The Company
will advise the Representatives promptly of the suspension of the
qualification or registration of (or any such exemption relating to) the
Common Shares for offering, sale or trading in any jurisdiction or any
initiation or threat of any proceeding for any such purpose, and in the
event of the issuance of any order suspending such qualification,
registration or exemption, the Company shall use its best efforts to obtain
the withdrawal thereof at the earliest possible moment.
(f) TRANSFER AGENT. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Common Stock.
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(g) EARNINGS STATEMENT. As soon as practicable, the Company will
make generally available to its security holders and to the
Representatives an earnings statement (which need not be audited) covering
the twelve-month period ending [___] that satisfies the provisions of
Section 11(a) of the Securities Act.
(h) PERIODIC REPORTING OBLIGATIONS. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and
the Nasdaq National Market all reports and documents required to be filed
under the Exchange Act.
(i) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES. During
the period of 180 days following the date of the Prospectus, the Company
will not, without the prior written consent of NationsBanc Montgomery
Securities LLC (which consent may be withheld at the sole discretion of
NationsBanc Montgomery Securities LLC), directly or indirectly, sell,
offer, contract or grant any option to sell, pledge, transfer or establish
an open "put equivalent position" within the meaning of Rule 16a-1(h)
under the Exchange Act, or otherwise dispose of or transfer, or announce
the offering of, or file any registration statement under the Securities
Act in respect of, any shares of Common Stock, options or warrants to
acquire shares of the Common Stock or securities exchangeable or
exercisable for or convertible into shares of Common Stock (other than as
contemplated by this Agreement with respect to the Common Shares);
provided, however, that the Company may issue shares of its Common Stock
or options to purchase its Common Stock, or Common Stock upon exercise of
options, pursuant to any stock option, stock bonus or other stock plan or
arrangement described in the Prospectus, but only if the holders of such
shares, options, or shares issued upon exercise of such options, agree in
writing not to sell, offer, dispose of or otherwise transfer any such
shares or options during such 180 day period without the prior written
consent of NationsBanc Montgomery Securities LLC (which consent may be
withheld at the sole discretion of the NationsBanc Montgomery
Securities LLC).
(j) FUTURE REPORTS TO THE REPRESENTATIVES. During the period of
three years hereafter the Company will furnish to the Representatives at
600 Montgomery Street, San Francisco, CA 94111, Attention: Kent Penwell:
(i) as soon as practicable after the end of each fiscal year, copies of the
Annual Report of the Company; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form 10-K,
Quarterly Report on Form 10-Q, Current Report on Form 8-K or other material
report filed by the Company with the Commission, the NASD or any securities
exchange; and (iii) as soon as available, copies of any report or
communication of the Company mailed generally to holders of its capital
stock.
B. COVENANTS OF THE SELLING STOCKHOLDERS. Each Selling Stockholder
further covenants and agrees with each Underwriter:
(a) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES. Such
Selling Stockholder will not, without the prior written consent of
NationsBanc Montgomery Securities LLC (which consent may be withheld in its
sole discretion), directly or indirectly, sell, offer, contract or grant
any option to sell (including without limitation any short sale), pledge,
transfer, establish an open "put equivalent position" within the meaning of
Rule 16a-1(h) under the Exchange Act, or otherwise dispose of any shares of
Common Stock, options or warrants to acquire shares of Common Stock, or
securities
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exchangeable or exercisable for or convertible into shares of Common Stock
currently or hereafter owned either of record or beneficially
(as defined in Rule 13d-3 under Securities Exchange Act of 1934, as
amended) by the undersigned, or publicly announce the undersigned's
intention to do any of the foregoing, for a period commencing on the date
hereof and continuing through the close of trading on the date 180 days
after the date of the Prospectus.
(b) DELIVERY OF FORMS W-8 AND W-9. To deliver to the
Representative prior to the First Closing Date a properly completed and
executed United States Treasury Department Form W-8 (if the Selling
Stockholder is a non-United States person) or Form W-9 (if the Selling
Stockholder is a United States Person).
NationsBanc Montgomery Securities LLC, on behalf of the several
Underwriters, may, in its sole discretion, waive in writing the
performance by any of the Company or the Selling Stockholder of any one or
more of the foregoing covenants or extend the time for their performance.
SECTION 4. PAYMENT OF EXPENSES. The Company and the Selling
Stockholders, jointly and severally, agree to pay in such proportions as they
may agree upon among themselves all costs, fees and expenses incurred in
connection with the performance of their obligations hereunder and in
connection with the transactions contemplated hereby, including without
limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the
issuance and sale of the Common Shares to the Underwriters, (iv) all fees and
expenses of the Company's counsel, independent public or certified public
accountants and other advisors, (v) all costs and expenses incurred in
connection with the preparation, printing, filing, shipping and distribution
of the Registration Statement (including financial statements, exhibits,
schedules, consents and certificates of experts), each preliminary prospectus
and the Prospectus, and all amendments and supplements thereto, and this
Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by the
Company or the Underwriters in connection with qualifying or registering (or
obtaining exemptions from the qualification or registration of) all or any
part of the Common Shares for offer and sale under the state securities or
blue sky laws or the provincial securities laws of Canada, and, if requested
by the Representatives, preparing and printing a "Blue Sky Survey" or
memorandum, and any supplements thereto, advising the Underwriters of such
qualifications, registrations and exemptions, (vii) the filing fees incident
to, and the reasonable fees and expenses of counsel for the Underwriters in
connection with, the NASD's review and approval of the Underwriters'
participation in the offering and distribution of the Common Shares, (viii)
the fees and expenses associated with listing the Common Shares on the Nasdaq
National Market, and (ix) all other fees, costs and expenses referred to in
Item 13 of Part II of the Registration Statement. Except as provided in this
Section 4, Section 6, Section 8 and Section 9 hereof, the Underwriters shall
pay their own expenses, including the fees and disbursements of their counsel.
The Selling Stockholders further agree with each Underwriter to pay
(directly or by reimbursement) all fees and expenses incident to the
performance of their obligations under this Agreement which are not otherwise
specifically provided for herein, including but not limited to (i) fees and
expenses of counsel and other advisors for such Selling Stockholders, (ii)
fees and expenses of the Custodian and (iii) expenses and taxes incident to
the sale and delivery of the
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Optional Common Shares to be sold by such Selling Stockholders to the
Underwriters hereunder (which taxes, if any, may be deducted by the Custodian
under the provisions of Section 2 of this Agreement).
This Section 4 shall not affect or modify any separate, valid
agreement relating to the allocation of payment of expenses between the
Company, on the one hand, and the Selling Stockholders, on the other hand.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company and
the Selling Stockholders set forth in Section 1(A) and 1(B) hereof as of the
date hereof and as of the First Closing Date as though then made and, with
respect to the Optional Common Shares, as of the Second Closing Date as
though then made, to the timely performance by the Company and the Selling
Stockholders of their respective covenants and other obligations hereunder,
and to each of the following additional conditions:
(a) ACCOUNTANTS' COMFORT LETTER. On the date hereof, the
Representatives shall have received from Ernst & Young LLP, independent
public or certified public accountants for the Company, a letter dated the
date hereof addressed to the Underwriters, in form and substance
satisfactory to the Representatives, containing statements and information
of the type ordinarily included in accountant's "comfort letters" to
underwriters, delivered according to Statement of Auditing Standards
No. 72 (or any successor bulletin), with respect to the audited and
unaudited financial statements and certain financial information contained
in the Registration Statement and the Prospectus (and the Representatives
shall have received an additional six (6) conformed copies of such
accountants' letter for each of the several Underwriters).
(b) COMPLIANCE WITH REGISTRATION REQUIREMENTS; NO STOP ORDER; NO
OBJECTION FROM NASD. For the period from and after effectiveness of this
Agreement and prior to the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date:
i. the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A under the
Securities Act) in the manner and within the time period required by
Rule 424(b) under the Securities Act; or the Company shall have filed
a post-effective amendment to the Registration Statement containing
the information required by such Rule 430A, and such post-effective
amendment shall have become effective; or, if the Company elected to
rely upon Rule 434 under the Securities Act and obtained the
Representatives' consent thereto, the Company shall have filed a Term
Sheet with the Commission in the manner and within the time period
required by such Rule 424(b);
ii. no stop order suspending the effectiveness of the
Registration Statement, any Rule 462(b) Registration Statement, or
any post-effective amendment to the Registration Statement, shall be
in effect and no proceedings for such purpose shall have been
instituted or threatened by the Commission; and
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iii. the NASD shall have raised no objection to the fairness and
reasonableness of the underwriting terms and arrangements.
(c) NO MATERIAL ADVERSE CHANGE. For the period from and after the
date of this Agreement and prior to the First Closing Date and, with
respect to the Optional Common Shares, the Second Closing Date, in the
judgment of the Representatives there shall not have occurred any Material
Adverse Change.
(d) OPINION OF COUNSEL FOR THE COMPANY. On each of the First
Closing Date and the Second Closing Date the Representatives shall have
received the favorable opinion of Cooley Godward LLP, counsel for the
Company, dated as of such Closing Date, the form of which is attached as
EXHIBIT A (and the Representatives shall have received an additional six
(6) conformed copies of such counsel's legal opinion for each of the
several Underwriters).
(e) OPINION OF COUNSEL FOR THE UNDERWRITERS. On each of the First
Closing Date and the Second Closing Date the Representatives shall have
received the favorable opinion of Brobeck, Phleger & Harrison LLP, counsel
for the Underwriters, dated as of such Closing Date, in form and substance
satisfactory to the Representatives (and the Representatives shall have
received an additional six (6) conformed copies of such counsel's legal
opinion for each of the several Underwriters).
(f) OFFICERS' CERTIFICATE. On each of the First Closing Date and
the Second Closing Date the Representatives shall have received a written
certificate executed by the Chairman of the Board, Chief Executive Officer
or President of the Company and the Chief Financial Officer or Chief
Accounting Officer of the Company, dated as of such Closing Date, to the
effect set forth in subsections (b)(ii) and (c)(ii) of this Section 5, and
further to the effect that:
i. for the period from and after the date of this Agreement and
prior to such Closing Date, there has not occurred any material
adverse change in the business, financial condition or results of
operations of the Company;
ii. the representations, warranties and covenants of the Company
set forth in Section 1(A) of this Agreement are true and correct with
the same force and effect as though expressly made on and as of such
Closing Date;and
iii. the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied
at or prior to such Closing Date.
(g) BRING-DOWN COMFORT LETTER. On each of the First Closing Date
and the Second Closing Date the Representatives shall have received from
Ernst & Young LLP, independent public or certified public accountants for
the Company, a letter dated such date, in form and substance satisfactory
to the Representatives, to the effect that they reaffirm the statements
made in the letter furnished by them pursuant to subsection (a) of this
Section 5, except that the specified date referred to therein for the
carrying out of procedures shall be no more than three business days prior
to the First Closing Date or Second Closing Date, as the case may be (and
the Representatives shall
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have received an additional six (6) conformed copies of such accountants'
letter for each of the several Underwriters).
(h) OPINION OF COUNSEL FOR THE SELLING STOCKHOLDERS. On the Second
Closing Date, the Representatives shall have received the favorable opinion
of counsel for the Selling Stockholders, dated as of such Closing Date, the
form of which is attached as EXHIBIT B (and the Representatives shall have
received an additional six (6) conformed copies of such counsel's legal
opinion for each of the several Underwriters).
(i) SELLING STOCKHOLDERS' CERTIFICATE. On the Second Closing Date,
the Representatives shall received a written certificate executed by the
Attorney-in-Fact of each Selling Stockholder, dated as of the Second
Closing Date, to the effect that:
i. the representations, warranties and covenants of such Selling
Stockholder set forth in Section 1(B) of this Agreement are true and
correct with the same force and effect as though expressly made by
such Selling Stockholder on and as of the Second Closing Date; and
ii. such Selling Stockholder has complied with all the agreements
and satisfied all the conditions on its part to be performed or
satisfied at or prior to the Second Closing Date.
(j) SELLING STOCKHOLDERS' DOCUMENTS. On the date hereof, the
Company and the Selling Stockholders shall have furnished for review by the
Representative copies of the Powers of Attorney and Custody Agreements
executed by each of the Selling Stockholders and such further information,
certificates and documents as the Representative may reasonably request.
(k) LOCK-UP AGREEMENT FROM CERTAIN STOCKHOLDERS OF THE COMPANY
OTHER THAN SELLING STOCKHOLDERS. On the date hereof, the Company shall have
furnished to the Representatives an agreement in the form of EXHIBIT D
hereto from each director, officer and each beneficial owner of Common
Stock (as defined and determined according to Rule 13d-3 under the Exchange
Act, except that a one hundred eighty day period shall be used rather than
the sixty day period set forth therein) listed on EXHIBIT C, and such
agreement shall be in full force and effect on each of the First Closing
Date and the Second Closing Date.
(l) ADDITIONAL DOCUMENTS. On or before each of the First Closing
Date and the Second Closing Date, the Representatives and counsel for the
Underwriters shall have received such information, documents and opinions
as they may reasonably require for the purposes of enabling them to pass
upon the issuance and sale of the Common Shares as contemplated herein, or
in order to evidence the accuracy of any of the representations and
warranties, or the satisfaction of any of the conditions or agreements,
herein contained.
If any condition specified in this Section 5 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company and the Selling Stockholders at any
time on or prior to the First Closing Date and, with respect to the Optional
Common Shares, at any time prior to the Second Closing Date, which
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termination shall be without liability on the part of any party to any other
party, except that Section 4, Section 6, Section 8 and Section 9 shall at all
times be effective and shall survive such termination.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this
Agreement is terminated by the Representatives pursuant to Section 5 or
Section 11, or if the sale to the Underwriters of the Common Shares on the
First Closing Date is not consummated because of any refusal, inability or
failure on the part of the Company or the Selling Stockholders to perform any
agreement herein or to comply with any provision hereof, the Company agrees
to reimburse the Representatives and the other Underwriters (or such
Underwriters as have terminated this Agreement with respect to themselves),
severally, upon demand for all out-of-pocket expenses that shall have been
reasonably incurred by the Representatives and the Underwriters in connection
with the proposed purchase and the offering and sale of the Common Shares,
including but not limited to fees and disbursements of counsel, printing
expenses, travel expenses, postage, facsimile and telephone charges.
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT. This Agreement shall
not become effective until the later of (i) the execution of this Agreement
by the parties hereto and (ii) notification by the Commission to the Company
and the Representatives of the effectiveness of the Registration Statement
under the Securities Act.
Prior to the effectiveness of the Registration Statement, this
Agreement may be terminated by any party by notice to each of the other
parties hereto, and any such termination shall be without liability on the
part of (a) the Company or the Selling Stockholders to any Underwriter,
except that the Company and the Selling Stockholders shall be obligated to
reimburse the expenses of the Representatives and the Underwriters to the
extent required by Sections 4 and 6 hereof, (b) of any Underwriter to the
Company or the Selling Stockholders or (c) of any party hereto to any other
party except that the provisions of Section 8 and Section 9 shall at all
times be effective and shall survive such termination.
SECTION 8. INDEMNIFICATION.
(a) INDEMNIFICATION OF THE UNDERWRITERS.
(i) The Company agrees to indemnify and hold harmless each
Underwriter, its officers and employees, and each person, if any, who
controls any Underwriter within the meaning of the Securities Act and the
Exchange Act against any loss, claim, damage, liability or expense, as
reasonably incurred, to which such Underwriter or such controlling person
may become subject, under the Securities Act, the Exchange Act or other
federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement
is effected with the written consent of the Company), insofar as such
loss, claim, damage, liability or expense (or actions in respect thereof
as contemplated below) arises out of or is based (i) upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any
information deemed to be a part thereof pursuant to Rule 430A or Rule 434
under the Securities Act, or the omission or alleged omission therefrom of
a material fact required to be stated therein or necessary to make the
statements therein not misleading; or (ii) upon any untrue statement or
alleged untrue statement of a material fact contained in any preliminary
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prospectus or the Prospectus (or any amendment or supplement thereto), or
the omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and to reimburse each
Underwriter and each such controlling person for any and all reasonable
expenses (including , except as otherwise herein provided, the reasonable
fees and disbursements of counsel chosen by NationsBanc Montgomery
Securities LLC) as such expenses are reasonably incurred by such
Underwriter or such controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; PROVIDED, HOWEVER, that the foregoing
indemnity agreement shall not apply to any loss, claim, damage, liability
or expense to the extent, but only to the extent, arising out of or based
upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company by the Representatives expressly for
use in the Registration Statement, any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto); and PROVIDED,
FURTHER, that with respect to any preliminary prospectus, the foregoing
indemnity agreement shall not inure to the benefit of any Underwriter from
whom the person asserting any loss, claim, damage, liability or expense
purchased Common Shares, or any person controlling such Underwriter, if
copies of the Prospectus were timely delivered to the Underwriter pursuant
to Section 2 and a copy of the Prospectus (as then amended or supplemented
if the Company shall have furnished any amendments or supplements thereto)
was not sent or given by or on behalf of such Underwriter to such person,
if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Common Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect
giving rise to such loss, claim, damage, liability or expense. The
indemnity agreement set forth in this Section 8(a) shall be in addition to
any liabilities that the Company may otherwise have.
(ii) Each of the Selling Stockholders, severally and not jointly,
agrees to indemnify and hold harmless each Underwriter, its officers and
employees, and each person, if any, who controls any Underwriter within
the meaning of the Securities Act and the Exchange Act against any loss,
claim, damage, liability or expense, as reasonably incurred, to which such
Underwriter or such controlling person may become subject, under the
Securities Act, the Exchange Act or other federal or state statutory law
or regulation, or at common law or otherwise (including in settlement of
any litigation, if such settlement is effected with the written consent of
the Company), insofar as such loss, claim, damage, liability or expense
(or actions in respect thereof as contemplated below) arises out of or is
based (i) upon any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement, or any amendment
thereto, including any information deemed to be a part thereof pursuant to
Rule 430A or Rule 434 under the Securities Act, any preliminary prospectus
or the Prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading, but only to the extent that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with any information
furnished to the Company by the Selling Stockholder for use therein; or
(ii) in whole or in part upon any inaccuracy in the representations and
warranties of such Selling Stockholder contained herein; and to reimburse
each Underwriter and each such controlling person for any and all
reasonable
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expenses (including, except as otherwise herein provided, the
reasonable fees and disbursements of counsel chosen by NationsBanc
Montgomery Securities LLC) as such expenses are reasonably incurred by
such Underwriter or such controlling person in connection with
investigating, defending, settling, compromising or paying any such loss,
claim, damage, liability, expense or action; provided, however, that the
foregoing indemnity agreement shall not apply to any loss, claim, damage,
liability or expense to the extent, but only to the extent, arising out of
or based upon any untrue statement or alleged untrue statement or omission
or alleged omission made in reliance upon and in conformity with written
information furnished to such Selling Stockholder by the Representatives
expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto); and
provided, further, that with respect to any preliminary prospectus, the
foregoing indemnity agreement shall not inure to the benefit of any
Underwriter from whom the person asserting any loss, claim, damage,
liability or expense purchased Common Shares, or any person controlling
such Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then
amended or supplemented if the Company shall have furnished any amendments
or supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been delivered,
at or prior to the written confirmation of the sale of the Common Shares
to such person, and if the Prospectus (as so amended or supplemented)
would have cured the defect giving rise to such loss, claim, damage,
liability or expense. The Selling Stockholders may agree, as among
themselves and without limiting the rights of the Underwriters under this
Agreement, as to their respective amounts of such liability for which they
each shall be responsible. In addition to its other obligations under this
Section 8(a)(ii), the Selling Stockholders agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry
or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, or any inaccuracy in the
representations and warranties of the Selling Stockholders herein or
failure to perform its obligations hereunder, all as described in this
Section 8(a)(ii), they will reimburse each Underwriter on a quarterly
basis for all reasonable legal or other expenses incurred in connection
with investigating or defending any such claim, action, investigation,
inquiry or other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the Selling
Stockholders' obligation to reimburse each Underwriter for such expenses
and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, each
Underwriter shall promptly return it to the Selling Stockholders together
with interest, compounded daily, determined on the basis of the Prime
Rate. Any such interim reimbursement payments which are not made to an
Underwriter within 30 days of a request for reimbursement, shall bear
interest at the Prime Rate from the date of such request. This indemnity
agreement will be in addition to any liability which the Selling
Stockholders may otherwise have. Notwithstanding anything else herein, in
no event shall the liability of any Selling Stockholder for
indemnification under this Section 8(a)(ii) or for breach of
representations or warranties under this Agreement exceed the proceeds
received by such Selling Stockholder from the Underwriters in the
offering.
(b) INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS AND OFFICERS AND
THE SELLING STOCKHOLDERS. Each Underwriter agrees, severally and not
jointly, to indemnify
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and hold harmless the Company, each of its directors, each of its officers
who signed the Registration Statement, the Selling Stockholders and each
person, if any, who controls the Company or any Selling Stockholder within
the meaning of the Securities Act or the Exchange Act, against any loss,
claim, damage, liability or expense, as reasonably incurred, to which the
Company, or any such director, officer, Selling Stockholder or controlling
person may become subject, under the Securities Act, the Exchange Act, or
other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement
is effected with the written consent of such Underwriter), insofar as such
loss, claim, damage, liability or expense (or actions in respect thereof
as contemplated below) arises out of or is based upon any untrue or
alleged untrue statement of a material fact contained in the Registration
Statement, any preliminary prospectus or the Prospectus (or any amendment
or supplement thereto), or arises out of or is based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was
made in the Registration Statement, any preliminary prospectus, the
Prospectus (or any amendment or supplement thereto), in reliance upon and
in conformity with written information furnished to the Company and the
Selling Stockholders by the Representatives expressly for use therein; and
to reimburse the Company, or any such director, officer, Selling
Stockholder or controlling person for any legal and other expense
reasonably incurred by the Company, or any such director, officer or
controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action. Each of the Company and each of the Selling Stockholders hereby
acknowledges that the only information that the Underwriters have
furnished to the Company and the Selling Stockholders expressly for use in
the Registration Statement, any preliminary prospectus or the Prospectus
(or any amendment or supplement thereto) are the statements set forth (A)
as the paragraph on the inside front cover page of the Prospectus
concerning stabilization by the Underwriters and (B) in the table in the
first paragraph and as the second and seventh paragraphs under the caption
"Underwriting" in the Prospectus; and the Underwriters confirm that such
statements are correct. The indemnity agreement set forth in this Section
8(b) shall be in addition to any liabilities that each Underwriter may
otherwise have.
(c) NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES. Promptly
after receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement
thereof, but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified party
for contribution or otherwise than under the indemnity agreement contained
in this Section 8 or to the extent it is not prejudiced as a proximate
result of such failure. In case any such action is brought against any
indemnified party and such indemnified party seeks or intends to seek
indemnity from an indemnifying party, the indemnifying party will be
entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof
with counsel reasonably satisfactory to such indemnified party; provided,
however, if the defendants in any such action include both the indemnified
party and the
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indemnifying party and the indemnified party shall have reasonably
concluded that a conflict may arise between the positions of the
indemnifying party and the indemnified party in conducting the defense of
any such action or that there may be legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties
shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties. Upon receipt of notice from
the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by
the indemnified party of counsel, the indemnifying party will not be
liable to such indemnified party under this Section 8 for any legal or
other expenses subsequently incurred by such indemnified party in
connection with the defense thereof unless (i) the indemnified party shall
have employed separate counsel in accordance with the proviso to the next
preceding sentence (it being understood, however, that the indemnifying
party shall not be liable for the expenses of more than one separate
counsel (together with local counsel), approved by the indemnifying party
(NationsBanc Montgomery Securities LLC in the case of Section 8(b) and
Section 9), representing the indemnified parties who are parties to such
action) or (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party
within a reasonable time after notice of commencement of the action, in
each of which cases the fees and expenses of counsel shall be at the
expense of the indemnifying party.
(d) SETTLEMENTS. The indemnifying party under this Section 8 shall
not be liable for any settlement of any proceeding effected without its
written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party against any loss, claim, damage, liability or expense by
reason of such settlement or judgment. Notwithstanding the foregoing
sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 8(c) hereof, the indemnifying party
agrees that it shall be liable for any settlement of any proceeding
effected without its written consent if (i) such settlement is entered into
more than 30 days after receipt by such indemnifying party of the aforesaid
request, (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement, and (iii) the indemnifying party shall not have objected in
writing to such reimbursement of fees and expenses as contemplated by
Section 8(c) hereof. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement, compromise or
consent to the entry of judgment in any pending or threatened action, suit
or proceeding in respect of which any indemnified party is or could have
been a party and indemnity was or could have been sought hereunder by such
indemnified party, unless such settlement, compromise or consent includes
an unconditional release of such indemnified party from all liability on
claims that are the subject matter of such action, suit or proceeding.
SECTION 9. CONTRIBUTION. If the indemnification provided for in
Section 8 is for any reason held to be unavailable to or otherwise
insufficient to hold harmless an indemnified party in respect of any losses,
claims, damages, liabilities or expenses referred to therein, then each
indemnifying party shall contribute to the aggregate amount paid or payable
by such indemnified party, as incurred, as a result of any losses, claims,
damages, liabilities or expenses
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referred to therein (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Selling Stockholders, on
the one hand, and the Underwriters, on the other hand, from the offering of
the Common Shares pursuant to this Agreement or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company
and the Selling Stockholders, on the one hand, and the Underwriters, on the
other hand, in connection with the statements or omissions or inaccuracies in
the representations and warranties herein which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company and
the Selling Stockholders, on the one hand, and the Underwriters, on the other
hand, in connection with the offering of the Common Shares pursuant to this
Agreement shall be deemed to be in the same respective proportions as the
total net proceeds from the offering of the Common Shares pursuant to this
Agreement (before deducting expenses) received by the Company and the Selling
Stockholders, and the total underwriting discount received by the
Underwriters, in each case as set forth on the front cover page of the
Prospectus (or, if Rule 434 under the Securities Act is used, the
corresponding location on the Term Sheet) bear to the aggregate initial
public offering price of the Common Shares as set forth on such cover. The
relative fault of the Company and the Selling Stockholders, on the one hand,
and the Underwriters, on the other hand, shall be determined by reference to,
among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact or any
such inaccurate or alleged inaccurate representation or warranty relates to
information supplied by the Company or the Selling Stockholders, on the one
hand, or the Underwriters, on the other hand, and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed
to include, subject to the limitations set forth in Section 8(c), any
reasonable legal or other fees or expenses reasonably incurred by such party
in connection with investigating or defending any action or claim, except as
would not have been reimbursable if indemnification had been available under
Section 8. The provisions set forth in Section 8(c) with respect to notice of
commencement of any action shall apply if a claim for contribution is to be
made under this Section 9; provided, however, that no additional notice shall
be required with respect to any action for which notice has been given under
Section 8(c) for purposes of indemnification.
The Company, the Selling Stockholders and the Underwriters agree
that it would not be just and equitable if contribution pursuant to this
Section 9 were determined by pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations
referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter
shall be required to contribute any amount in excess of the underwriting
commissions received by such Underwriter in connection with the Common Shares
underwritten by it and distributed to the public nor shall a Selling
Stockholder be required to contribute any amount in excess of the net
proceeds received by such Selling Stockholder in connection with the Common
Shares sold by such Selling Stockholder. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
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pursuant to this Section 9 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
SCHEDULE A. For purposes of this Section 9, each officer and employee of an
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights
to contribution as such Underwriter, and each director of the Company, each
officer of the Company who signed the Registration Statement, and each
person, if any, who controls the Company with the meaning of the Securities
Act and the Exchange Act shall have the same rights to contribution as the
Company.
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If,
on the First Closing Date or the Second Closing Date, as the case may be, any
one or more of the several Underwriters shall fail or refuse to purchase
Common Shares that it or they have agreed to purchase hereunder on such date,
and the aggregate number of Common Shares which such defaulting Underwriter
or Underwriters agreed but failed or refused to purchase does not exceed 10%
of the aggregate number of the Common Shares to be purchased on such date,
the other Underwriters shall be obligated, severally, in the proportions that
the number of Firm Common Shares set forth opposite their respective names on
SCHEDULE A bears to the aggregate number of Firm Common Shares set forth
opposite the names of all such non-defaulting Underwriters, or in such other
proportions as may be specified by the Representatives with the consent of
the non-defaulting Underwriters, to purchase the Common Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to
purchase on such date. If, on the First Closing Date or the Second Closing
Date, as the case may be, any one or more of the Underwriters shall fail or
refuse to purchase Common Shares and the aggregate number of Common Shares
with respect to which such default occurs exceeds 10% of the aggregate number
of Common Shares to be purchased on such date, and arrangements satisfactory
to the Representatives and the Company for the purchase of such Common Shares
are not made within 48 hours after such default, this Agreement shall
terminate without liability of any party to any other party except that the
provisions of Section 4, Section 8 and Section 9 shall at all times be
effective and shall survive such termination. In any such case either the
Representatives or the Company shall have the right to postpone the First
Closing Date or the Second Closing Date, as the case may be, but in no event
for longer than seven days in order that the required changes, if any, to the
Registration Statement and the Prospectus or any other documents or
arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed
to include any person substituted for a defaulting Underwriter under this
Section 10. Any action taken under this Section 10 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
SECTION 11. TERMINATION OF THIS AGREEMENT. Prior to the First
Closing Date this Agreement may be terminated by the Representatives by
notice given to the Company if at any time (i) trading or quotation in any of
the Company's securities shall have been suspended or limited by the
Commission or by the Nasdaq Stock Market, or trading in securities generally
on either the Nasdaq National Market or the New York Stock Exchange shall
have been suspended or limited, or minimum or maximum prices shall have been
generally established on any of such stock exchanges by the Commission or the
NASD; (ii) a general banking moratorium shall have been declared by any of
federal, New York, Delaware or California authorities; (iii) there shall have
occurred any outbreak or escalation of national or international hostilities
or any crisis or calamity, or any change in the United States or
international financial markets, or any substantial change or development
involving a prospective substantial change in United States' or
25
<PAGE>
international political, financial or economic conditions, as in the judgment
of the Representatives is material and adverse and makes it impracticable to
market the Common Shares in the manner and on the terms described in the
Prospectus or to enforce contracts for the sale of securities; (iv) in the
judgment of the Representatives there shall have occurred any material
adverse change in the business, financial condition, results of operations or
prospects of the Company; or (v) the Company shall have sustained a loss by
strike, fire, flood, earthquake, accident or other calamity of such character
as in the judgment of the Representatives may interfere materially with the
conduct of the business and operations of the Company regardless of whether
or not such loss shall have been insured. Any termination pursuant to this
Section 11 shall be without liability on the part of (a) the Company or the
Selling Stockholders to any Underwriter, except that the Company and the
Selling Stockholders shall be obligated to reimburse the expenses of the
Representatives and the Underwriters to the extent required by Sections 4 and
6 hereof, (b) any Underwriter to the Company or the Selling Stockholders, or
(c) of any party hereto to any other party, except that the provisions of
Section 8 and Section 9 shall at all times be effective and shall survive
such termination.
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY.
The respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Stockholders and
of the several Underwriters set forth in or made pursuant to this Agreement
will remain in full force and effect, regardless of any investigation made by
or on behalf of any Underwriter or the Company or any of its or their
partners, officers or directors or any controlling person or the Selling
Stockholders, as the case may be, and will survive delivery of and payment
for the Common Shares sold hereunder and any termination of this Agreement.
SECTION 13. NOTICES. All communications hereunder shall be in
writing and shall be mailed, hand delivered or telecopied and confirmed to
the parties hereto as follows:
If to the Representatives:
NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: 415-249-5558
Attention: Mr. Kent Penwell
with a copy to:
NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: David A. Baylor, Esq.
If to the Company:
Scientific Learning Corporation
1995 University Avenue, Suite 400
Berkeley, California 94704
26
<PAGE>
Facsimile: (510) 665-1717
Attention: Ms. Sheryle J. Bolton
with a copy to:
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
Facsimile: (415) 951-3699
Attention: Jeffrey S. Zimman, Esq.
If to the Selling Stockholders:
[Custodian]
[Address]
Facsimile: [_______]
Attention: [_______]
Any party hereto may change the address for receipt of
communications by giving written notice to the others.
SECTION 14. SUCCESSORS. This Agreement will inure to the benefit of
and be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 10 hereof, and to the benefit of the employees, officers
and directors and controlling persons referred to in Section 8 and Section 9,
and in each case their respective successors, and no other person will have
any right or obligation hereunder. The term "successors" shall not include
any purchaser of the Common Shares as such from any of the Underwriters
merely by reason of such purchase.
SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement
shall not affect the validity or enforceability of any other Section,
paragraph or provision hereof. If any Section, paragraph or provision of this
Agreement is for any reason determined to be invalid or unenforceable, there
shall be deemed to be made such minor changes (and only such minor changes)
as are necessary to make it valid and enforceable.
SECTION 16. GOVERNING LAW PROVISIONS.
(a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
(b) CONSENT TO JURISDICTION. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions
contemplated hereby ("Related Proceedings") may be instituted in the
federal courts of the United States of America located in the City and
County of San Francisco or the courts of the State of California in each
case located in the City and County of San Francisco (collectively, the
"Specified Courts"), and each party irrevocably submits to the exclusive
jurisdiction (except for proceedings instituted in regard to the
enforcement of a judgment of any such court (a
27
<PAGE>
"Related Judgment"), as to which such jurisdiction is non-exclusive) of
such courts in any such suit, action or proceeding. Service of any
process, summons, notice or document by mail to such party's address set
forth above shall be effective service of process for any suit, action or
other proceeding brought in any such court. The parties irrevocably and
unconditionally waive any objection to the laying of venue of any suit,
action or other proceeding in the Specified Courts and irrevocably and
unconditionally waive and agree not to plead or claim in any such court
that any such suit, action or other proceeding brought in any such court
has been brought in an inconvenient forum.
(c) WAIVER OF IMMUNITY. With respect to any Related Proceeding,
each party irrevocably waives, to the fullest extent permitted by
applicable law, all immunity (whether on the basis of sovereignty or
otherwise) from jurisdiction, service of process, attachment (both before
and after judgment) and execution to which it might otherwise be entitled
in the Specified Courts, and with respect to any Related Judgment, each
party waives any such immunity in the Specified Courts or any other court
of competent jurisdiction, and will not raise or claim or cause to be
pleaded any such immunity at or in respect of any such Related Proceeding
or Related Judgment, including, without limitation, any immunity pursuant
to the United States Foreign Sovereign Immunities Act of 1976, as amended.
SECTION 17. FAILURE OF ONE OR MORE OF THE SELLING STOCKHOLDERS TO
SELL AND DELIVER OPTIONAL COMMON SHARES. If one or more of the Selling
Stockholders shall fail to sell and deliver to the Underwriters the Optional
Common Shares to be sold and delivered by such Selling Stockholders pursuant
to this Agreement at the Second Closing Date, then the Underwriters shall
have the right, by written notice from the Representative to the Company and
the Selling Stockholders, to postpone the Second Closing Date, as the case
may be, but in no event for longer than seven days in order that the required
changes, if any, to the Registration Statement and the Prospectus or any
other documents or arrangements may be effected.
SECTION 18. GENERAL PROVISIONS. This Agreement constitutes the
entire agreement of the parties to this Agreement and supersedes all prior
written or oral and all contemporaneous oral agreements, understandings and
negotiations with respect to the subject matter hereof. This Agreement may be
executed in two or more counterparts, each one of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the
same instrument. This Agreement may not be amended or modified unless in
writing by all of the parties hereto, and no condition herein (express or
implied) may be waived unless waived in writing by each party whom the
condition is meant to benefit. The Table of Contents and the Section headings
herein are for the convenience of the parties only and shall not affect the
construction or interpretation of this Agreement.
Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the
parties hereto further acknowledges that the provisions of Sections 8 and 9
hereto fairly allocate the risks in light of the ability of the parties to
investigate the Company, its affairs and its business in order to assure that
adequate disclosure has been made in the Registration Statement, any
preliminary prospectus and the Prospectus (and any amendments and supplements
thereto), as required by the Securities Act and the Exchange Act.
28
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
SCIENTIFIC LEARNING CORPORATION
By:____________________________
Sheryle J. Bolton
Chief Executive Officer
SELLING STOCKHOLDERS
By:____________________________
Attorney-in-Fact
29
<PAGE>
The foregoing Underwriting Agreement is hereby confirmed and
accepted by the Representatives in San Francisco, California as of the date
first above written.
NATIONSBANC MONTGOMERY SECURITIES LLC
BANCAMERICA ROBERTSON STEPHENS
PACIFIC GROWTH EQUITIES, INC.
Acting as Representatives of the
several Underwriters named in the
attached Schedule A.
By NATIONSBANC MONTGOMERY SECURITIES LLC
By:____________________________________
Authorized Signatory
Print Name:____________________________
Title:_________________________________
30
<PAGE>
SCHEDULE A
NUMBER OF FIRM
COMMONSHARES
UNDERWRITERS TO BE PURCHASED
NationsBanc Montgomery Securities LLC ............................ [___]
BancAmerica Robertson Stephens.................................... [___]
Pacific Growth Equities, Inc...................................... [___]
[___]............................................................. [___]
[___]............................................................. [___]
-----------
Total [___]
-----------
-----------
<PAGE>
SCHEDULE B
<TABLE>
NUMBER OF MAXIMUM NUMBER
FIRM COMMON OF OPTIONAL
SHARES TO BE COMMON SHARES TO
SELLING STOCKHOLDER SOLD BE SOLD
<S> <C> <C>
Selling Stockholder #1
[address]
Attention: [___] . . . . . . . [___] [___]
Selling Stockholder #2
[address]
Attention: [___] . . . . . . . [___] [___]
------------ ------------
Total: [___] [___]
------------ ------------
------------ ------------
</TABLE>
<PAGE>
EXHIBIT A
Opinion of counsel for the Company to be delivered pursuant to
Section 5(e) of the Underwriting Agreement. References to the Prospectus in
this EXHIBIT A at the Closing Date include any supplements thereto.
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the
Underwriting Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in the State of California and
to the best knowledge of such counsel in each other jurisdiction in which
such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except for such
jurisdictions where the failure to so qualify or to be in good standing
would not, individually or in the aggregate result in a Material Adverse
Change.
(iv) The authorized, issued and outstanding capital stock of the
Company (including the Common Stock) conforms to the description thereof
set forth in the Prospectus under the caption "Description of Capital
Stock." All of the outstanding shares of Common Stock have been duly
authorized and validly issued, are fully paid and nonassessable. The form
of certificate used to evidence the Common Stock filed as an Exhibit to the
Registration Statement is in due and proper form and complies with all
applicable requirements of the charter and bylaws of the Company and the
General Corporation Law of the State of Delaware. The description of the
Company's equity incentive plans, and the options or other rights that may
be granted and exercised thereunder, set forth in the Prospectus is
accurate and summarizes the information required to be shown with respect
to such plans, arrangements, options and rights to the extent required by
the Act and Rules.
(v) No stockholder of the Company or any other person has any
preemptive right, right of first refusal or other similar right to
subscribe for or purchase from the Company securities of the Company
arising (i) by operation of the charter or bylaws of the Company or the
General Corporation Law of the State of Delaware or (ii) to the best
knowledge of such counsel, under any agreement to which the Company is a
party.
(vi) The Underwriting Agreement has been duly authorized, executed
and delivered by, and is a valid and binding agreement of, the Company,
enforceable in accordance with its terms, except as rights to
indemnification and contribution thereunder may be limited by applicable
law and public policy and except as the enforcement thereof may be limited
by bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles and limitations on the availability of equitable
remedies.
(vii) The Firm Shares [or the Option Shares] from the Company have
been duly authorized for issuance and sale pursuant to the Underwriting
Agreement and, when
A-1
<PAGE>
issued and delivered by the Company pursuant to the Underwriting Agreement
against payment of the consideration set forth therein, will be validly
issued, fully paid and nonassessable.
(viii) Each of the Registration Statement and the Rule 462(b)
Registration Statement, if any, has been declared effective by the
Commission under the Securities Act. To the best knowledge of such
counsel, no stop order suspending the effectiveness of either of the
Registration Statement or the Rule 462(b) Registration Statement, if any,
has been issued under the Securities Act and no proceedings for such
purpose have been instituted or are pending or threatened by the
Commission. Any required filing of the Prospectus and any supplement
thereto pursuant to the Rule 424(b) under the Securities Act has been made
in the manner and within the time period required by such Rule 424(b).
(ix) The Registration Statement, including any Rule 462(b)
Registration Statement, the Prospectus and each post-effective amendment
or supplement to the Registration Statement and the Prospectus as of their
respective effective or issue dates (other than the financial statements
and supporting schedules, other financial information and statistical
information derived therefrom included therein or in exhibits to or
excluded from the Registration Statement, as to which no opinion need be
rendered) comply as to form in all material respects with the applicable
requirements of the Securities Act.
(x) The Common Shares have been approved for listing on the Nasdaq
National Market subject to official notice of issuance.
(xi) The statements (i) in the Prospectus under the captions
"Description of Capital Stock," "Business-Intellectual Property," "Certain
Transactions," and "Shares Eligible for Future Sale" and (ii) in Item 14
and Item 15 of the Registration Statement, insofar as such statements
constitute matters of law, summaries of legal matters, the Company's
charter of bylaw provisions, documents or legal proceedings, or legal
conclusions, are accurate and summarize such matters to the extent
required by the Act and Rules.
(xii) To the best knowledge of such counsel, there are no legal or
governmental actions, suits or proceedings pending or threatened which are
required under the Act and Rules to be disclosed in the Registration
Statement other than those disclosed therein.
(xiii) To the best knowledge of such counsel, there are no Existing
Instruments required under the Act and Rules to be described or referred to
in the Registration Statement or to be filed as exhibits thereto other than
those described or referred to therein or filed or incorporated by
reference as exhibits thereto; and the descriptions thereof and references
thereto are correct in all material respects.
(xiv) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority or
agency, is required for the Company's execution, delivery and performance
of the Underwriting Agreement and consummation of the transactions
contemplated thereby, except as required under the Securities Act,
applicable state securities or blue sky laws and from the NASD.
A-2
<PAGE>
(xv) The execution and delivery of the Underwriting Agreement by the
Company and the performance by the Company of its obligations thereunder
(other than performance by the Company of its obligations under the
indemnification and contribution sections of the Underwriting Agreement,
as to which no opinion need be rendered) (i) have been duly authorized by
all necessary corporate action on the part of the Company; (ii) will not
result in any violation of the provisions of the charter or bylaws of the
Company; (iii) will not constitute a breach of, or Default under, or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company pursuant to any exhibit to the
Registration Statement; or (iv) to the best knowledge of such counsel,
will not result in any violation of any law, administrative regulation or
administrative or court decree applicable to the Company.
(xvi) The Company is not, and after receipt of payment for the Common
Shares will not be, an "investment company" within the meaning of
Investment Company Act.
(xvii) Except as disclosed in the Prospectus under the caption
"Description of Capital Stock--Registration Rights" to the best knowledge
of such counsel, there are no persons with registration or other similar
rights to have any equity or debt securities registered for sale under the
Registration Statement or included in the offering contemplated by the
Underwriting Agreement, other than the Selling Stockholders, except for
such rights as have been duly waived.
(xviii) To the best knowledge of such counsel, the Company is not in
violation of its charter or bylaws or any law, administrative regulation
or administrative or court decree applicable to the Company or is in
Default in the performance or observance of any obligation, agreement,
covenant or condition contained in any exhibit to the Registration
Statement, except in each such case for such violations or Defaults as
would not, individually or in the aggregate, result in a Material Adverse
Change.
In addition, such counsel shall state that they have participated
in conferences with officers and other representatives of the Company,
representatives of the independent public or certified public accountants for
the Company and with representatives of the Underwriters at which the
contents of the Registration Statement and the Prospectus, and any
supplements or post-effective amendments thereto, and related matters were
discussed and, although such counsel is not passing upon and does not assume
any responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus (other
than as specified in the first sentence of paragraph (iv) and paragraph (xi)
above), and any supplements or amendments thereto, on the basis of the
foregoing, nothing has come to their attention which would lead them to
believe that either the Registration Statement or any post-effective
amendments thereto, at the time the Registration Statement or such amendments
became effective, contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectus, as of its date
or at the First Closing Date or the Second Closing Date, as the case may be,
contained an untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading (it being
understood that such counsel need express no belief as to the financial
statements or schedules, other financial information or statistical data
derived therefrom, included in the Registration Statement or the Prospectus
of any post-effective amendments or supplements thereto).
A-3
<PAGE>
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of Delaware, the General Corporation Law of the
State of California or the federal law of the United States, to the extent
they deem proper and specified in such opinion, upon the opinion (which shall
be dated the First Closing Date or the Second Closing Date, as the case may
be, shall be satisfactory in form and substance to the Underwriters, shall
expressly state that the Underwriters may rely on such opinion as if it were
addressed to them and shall be furnished to the Representatives) of other
counsel of good standing whom they believe to be reliable and who are
satisfactory to counsel for the Underwriters; provided, however, that such
counsel shall further state that they believe that they and the Underwriters
are justified in relying upon such opinion of other counsel, and (B) as to
matters of fact, to the extent they deem proper, on certificates of
responsible officers of the Company and public officials.
A-4
<PAGE>
EXHIBIT B
The opinion of such counsel pursuant to Section 5(h) shall be
rendered to the Representatives at the request of the Company and shall so
state therein. References to the Prospectus in this EXHIBIT B include any
supplements thereto at the Closing Date.
(i) The Underwriting Agreement has been duly authorized by such
Entity Selling Stockholder and has been executed and delivered by or on
behalf of, and is a valid and binding agreement of, such Selling
Stockholder, enforceable in accordance with its terms, except as rights to
indemnification and contribution thereunder may be limited by applicable
law and public policy and except as the enforcement thereof may be limited
by bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles and limitations on the availability of equitable
remedies.
(ii) [The execution and delivery by such Entity Selling Stockholder
of, and the performance by such Entity Selling Stockholder of its
obligations under, the Underwriting Agreement and its Custody Agreement
and its Power of Attorney will not contravene or conflict with, result in
a breach of, or constitute a default under, the charter or by-laws,
partnership agreement, trust agreement or other organizational documents,
as the case may be, of such Entity Selling Stockholder, or, to the best of
such counsel's knowledge, violate or contravene any provision of
applicable law or regulation (except for applicable state securities or
blue sky laws as to which such counsel need express no opinion) or
violate, result in a breach of or constitute a default under the terms of
any other agreement or instrument to which such Entity Selling Stockholder
is a party or by which it is bound, or any judgment, order or decree
applicable to such Entity Selling Stockholder of any court, regulatory
body, administrative agency, governmental body or arbitrator having
jurisdiction over such Entity Selling Stockholder, except for such
contraventions, conflicts, breaches, defaults or failures to obtain a
consent as would not, individually or in the aggregate, materially
adversely affect the offering and sale of the Optional Common Shares] or
[To the best of such counsel's knowledge, the execution and delivery by
each Individual Selling Stockholder of, and the performance by such
Individual Selling Stockholder of its obligations under, the Underwriting
Agreement and its Custody Agreement and its Power of Attorney will not
violate or contravene any provision of applicable law or regulation
(except for applicable state securities or blue sky laws as to which such
counsel need express no opinion) or violate, result in a breach of or
constitute a default under the terms of any other agreement or instrument
to which such Individual Selling Stockholder is a party or by which it is
bound, or any judgment, order or decree applicable to such Individual
Selling Stockholder of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over such Individual
Selling Stockholder, except for such contraventions, conflicts, breaches,
defaults or failures to obtain a consent as would not, individually or in
the aggregate, materially adversely affect the offering and sale of the
Optional Common Shares.]
(iii) Such Selling Stockholder has record title to all of the
Optional Common Shares which may be sold by such Selling Stockholder under
the Underwriting Agreement and each Entity Selling Stockholder has the
right and power [under its charter and by-laws,] [partnership agreement,]
[trust agreement] [or other organizational documents, as the case may be,]
to enter into the Underwriting Agreement and its
B-1
<PAGE>
Custody Agreement and its Power of Attorney, to sell, transfer and deliver
all of the Optional Common Shares which may be sold by such Selling
Stockholder under the Underwriting Agreement and to comply with its other
obligations under the Underwriting Agreement, its Custody Agreement and
its Power of Attorney.
(iv) Each of the Custody Agreement and Power of Attorney of such
Entity Selling Stockholder has been duly authorized and each of the
Custody Agreement and Power of Attorney of such Selling Stockholder has
been executed and delivered by such Selling Stockholder and is a valid and
binding agreement of such Selling Stockholder, enforceable in accordance
with it terms, except as rights to indemnification thereunder may be
limited by applicable law and except as the enforcement thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
general equitable principles and limitations on the availability of
equitable remedies.
(v) Assuming that the Underwriters purchase the Optional Common
Shares which are sold by such Selling Stockholder pursuant to the
Underwriting Agreement for value, in good faith and without notice of any
adverse claim, the delivery of the certificate representing such Optional
Common Shares, duly endorsed for transfer pursuant to the Underwriting
Agreement, will pass good and valid title to such Optional Common Shares,
free and clear of any adverse claim.
(vi) To the best of such counsel's knowledge, no consent, approval,
authorization or other order of, or registration or filing with, any court
or governmental authority or agency, is required for the consummation by
such Selling Stockholder of the transactions contemplated in the
Underwriting Agreement, except as required under the Securities Act,
applicable state securities or blue sky laws, and from the NASD.
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other than the
General Corporation Law of the State of Delaware, the General Corporation Law
of the State of California or the federal law of the United States, to the
extent they deem proper and specified in such opinion, upon the opinion
(which shall be dated the Second Closing Date, shall be satisfactory in form
and substance to the Underwriters, shall expressly state that the
Underwriters may rely on such opinion as if it were addressed to them and
shall be furnished to the Representatives) of other counsel of good standing
whom they believe to be reliable and who are satisfactory to counsel for the
Underwriters; PROVIDED, HOWEVER, that such counsel shall further state that
they believe that they and the Underwriters are justified in relying upon
such opinion of other counsel, and (B) as to matters of fact, to the extent
they deem proper, on certificates of the Selling Stockholders and public
officials.
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<PAGE>
EXHIBIT C
LIST OF STOCKHOLDERS
LOCKED-UP
<PAGE>
EXHIBIT D
[Date]
NationsBanc Montgomery Securities LLC
BancAmerica Robertson Stephens
Pacific Growth Equities, Inc.
As Representatives of the Several Underwriters
c/o NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
RE: Scientific Learning Corporation (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain
shares of Common Stock of the Company ("Common Stock") or securities
convertible into or exchangeable or exercisable for Common Stock. The Company
proposes to carry out a public offering of Common Stock (the "Offering") for
which you will act as the representatives (the "Representatives") of the
underwriters. The undersigned recognizes that the Offering will be of benefit
to the undersigned and will benefit the Company by, among other things,
raising additional capital for its operations. The undersigned acknowledges
that you and the other underwriters are relying on the representations and
agreements of the undersigned contained in this letter in carrying out the
Offering and in entering into underwriting arrangements with the Company with
respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees
that the undersigned will not, without the prior written consent of
NationsBanc Montgomery Securities LLC (which consent may be withheld in its
sole discretion), directly or indirectly, sell, offer, contract or grant any
option to sell (including without limitation any short sale), pledge,
transfer, establish an open "put equivalent position" within the meaning of
Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended, or
otherwise dispose of any shares of Common Stock, options or warrants to
acquire shares of Common Stock, or securities exchangeable or exercisable for
or convertible into shares of Common Stock currently or hereafter owned
either of record or beneficially (as defined in Rule 13d-3 under Securities
Exchange Act of 1934, as amended) by the undersigned, or publicly announce
the undersigned's intention to do any of the foregoing, for a period
commencing on June 8, 1998 and continuing to a date 180 days after the first
date any of the Common Stock to be sold in the Offering is released by you
for sale to the public. The undersigned also agrees and consents to the entry
of stop transfer instructions with the Company's transfer agent and registrar
against the transfer of shares of Common Stock or securities convertible into
or exchangeable or exercisable for Common Stock held by the undersigned
except in compliance with the foregoing restrictions. In the event that the
Registration Statement shall not have been declared effective on or before
December 31, 1998, this Lock-Up Agreement shall be of no further force or
effect.
D-1
<PAGE>
This agreement is irrevocable and will be binding on the
undersigned and the respective successors, heirs, personal representatives,
and assigns of the undersigned.
Dated:_____________________
_________________________________
Signature
_________________________________
Printed Name of Holder
D-2
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
SCIENTIFIC LEARNING CORPORATION
Frank M. Mattson hereby certifies that:
1. The original name of this corporation is Scientific Learning Corporation
and the date of filing the original Certificate of Incorporation of this
corporation with the Secretary of State of the State of Delaware is May 2, 1997.
2. He is the duly elected and acting Chief Financial Officer, Vice
President, Finance and Secretary of this corporation.
3. The Amended and Restated Certificate of Incorporation of this
corporation is hereby amended and restated to read as follows:
"I.
The name of this corporation is Scientific Learning Corporation (the
"Company").
II.
The address of the registered office of the Company in the State of
Delaware is 15 East North Street, City of Dover, County of Kent, and the name of
the registered agent of the Company in the State of Delaware at such address is
Amerisearch Corporate Services, Inc.
III.
The purpose of the Company is to engage in any lawful act or activity for
which a corporation may be organized under the General Corporation Law of the
State of Delaware.
IV.
A. The Company is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the Company is authorized to issue is Forty-One
Million (41,000,000). Thirty-Four Million (34,000,000) shares shall be
Common Stock, each having a par value of one-tenth of one cent ($0.001).
Seven Million (7,000,000) shares shall be Preferred Stock, each having a par
value of one-tenth of one cent ($0.001). Upon filing of this Amended and
Restated Certificate of Incorporation, every two (2) outstanding shares of
Common Stock shall be combined into one (1) share of Common Stock and every
two (2) outstanding shares of Preferred Stock shall be combined into one (1)
share of Preferred Stock.
1.
<PAGE>
B. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, within the limitations and
restrictions stated in this Certificate, by filing a certificate pursuant to the
Delaware General Corporation Law, to fix or alter from time to time the
designation, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions of any wholly unissued
series of Preferred Stock, and to establish from time to time the number of
shares constituting any such series or any of them; and to increase or decrease
the number of shares of any series subsequent to the issuance of shares of that
series, but not below the number of shares of such series then outstanding. In
case the number of shares of any series shall be decreased in accordance with
the foregoing sentence, the shares constituting such decrease shall resume the
status that they had prior to the adoption of the resolution originally fixing
the number of shares of such series.
C. No share or shares of any series of Preferred Stock acquired by the
Company by reason of redemption, purchase, conversion or otherwise shall be
reissued as part of such series, and the Board of Directors is authorized,
pursuant to section 243 of Delaware General Corporation Law, to retire any such
share or shares. The retirement of any such share or shares shall not reduce
the total authorized number of shares of Preferred Stock.
V.
The rights, preferences, privileges and restrictions relating to the Common
Stock and Preferred Stock are as follows:
A. DESIGNATION.
The Preferred Stock shall be divided into series. The first series
shall consist of One Million Five Hundred Thousand (1,500,000) shares and is
designated "Series A Preferred Stock" (the "Series A Preferred"). The second
series shall consist of Two Million Nine Hundred Thousand (2,900,000) shares
and is designated "Series B Preferred Stock" (the "Series B Preferred"). The
third series shall consist of One Million Eight Hundred Thousand (1,800,000)
shares and is designated "Series C Preferred Stock" (the "Series C
Preferred"). The Series A Preferred, Series B Preferred and Series C
Preferred shall be referred to collectively herein as the "Preferred."
B. DIVIDEND RIGHTS.
1. Holders of Series A Preferred, Series B Preferred and Series C
Preferred, in preference to the holders of any other stock of the Company
("Junior Stock"), shall be entitled to receive, when and as declared by the
Board of Directors, but only out of funds that are legally available
therefor, cash dividends at the rate of Twelve Cents ($0.12), Twelve and
Six-Tenths Cents ($0.126) and Nineteen and Six-Tenths Cents ($0.196),
respectively, per share (as adjusted for any stock dividends, combinations or
splits with respect to such shares) per annum. Such dividends shall be
payable only when, as and if declared by the Board of Directors and shall be
non-cumulative.
2.
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2. So long as any shares of the Preferred shall be outstanding, no
dividend, whether in cash or property, shall be paid or declared, nor shall any
other distribution be made, on any Junior Stock, nor shall any shares of any
Junior Stock of the Company be purchased, redeemed, or otherwise acquired for
value by the Company (except for acquisitions of Common Stock by the Company
pursuant to agreements which permit the Company to repurchase such shares upon
termination of services to the Company or in exercise of the Company's right of
first refusal upon a proposed transfer) until all dividends (set forth in
Section B(1) above) on the Preferred shall have been paid or declared and set
apart. In the event dividends are paid on any share of Common Stock, an
additional dividend shall be paid with respect to all outstanding shares of the
Preferred in an amount equal per share (on an as-if-converted to Common Stock
basis) to the amount paid or set aside for each share of Common Stock. The
provisions of this Section B(2) shall not, however, apply to (a) a dividend
payable in Common Stock, (b) the acquisition of shares of any Junior Stock in
exchange for shares of any other Junior Stock, or (c) any repurchase of any
outstanding securities of the Company that is unanimously approved by the
Company's Board of Directors. To the extent the Company is subject to Section
2115 of the California Corporations Code, the holders of the Preferred expressly
waive their rights, if any, as described in California Corporations Code
Sections 502, 503 and 506 as they relate to repurchase of shares upon
termination of employment.
C. VOTING RIGHTS.
1. GENERAL RIGHTS. Except as otherwise provided herein or as
required by law, the Preferred shall be voted equally with the shares of the
Common Stock of the Company and not as a separate class, at any annual or
special meeting of stockholders of the Company, and may act by written consent
in the same manner as the Common Stock, in either case upon the following basis:
each holder of shares of Preferred shall be entitled to such number of votes as
shall be equal to the whole number of shares of Common Stock into which such
holder's aggregate number of shares of the Preferred are convertible (pursuant
to Section E hereof) immediately after the close of business on the record date
fixed for such meeting or the effective date of such written consent.
2. SEPARATE VOTES BY SERIES OF THE PREFERRED. For so long as at
least One Million (1,000,000) shares of any series of Preferred remain
outstanding, in addition to any other vote or consent required herein or by law,
the vote or written consent of the holders of at least a majority of the
outstanding shares of such series of Preferred shall be necessary for effecting
or validating the following actions:
(a) Any increase or decrease (other than by redemption or
conversion) in the authorized number of shares of Common Stock or Preferred
Stock;
(b) Any authorization or any increase, whether by
reclassification or otherwise, in the authorized amount of any class of shares
or series of equity securities of the Company ranking senior to such series of
the Preferred in right of redemption, liquidation preference, voting or
dividends;
3.
<PAGE>
(c) Any redemption, repurchase, payment of dividends or other
distributions with respect to Junior Stock (except for acquisitions of Common
Stock by the Company pursuant to agreements that permit the Company to
repurchase such shares upon termination of services to the Company or in
exercise of the Company's right of first refusal upon a proposed transfer);
(d) Any agreement by the Company or its stockholders regarding
an Asset Transfer or Acquisition (each as defined in Section D.3.);
(e) Any action that results in the payment or declaration of any
dividend on any shares of Common Stock or Preferred Stock; or
(f) Any voluntary dissolution or liquidation of the Company.
3. ELECTION OF BOARD OF DIRECTORS. For so long as at least One
Million Two Hundred Thousand (1,200,000) shares of Series A Preferred remain
outstanding, the holders of Series A Preferred, voting as a separate class,
shall be entitled to One (1) Board Seat (as hereinafter defined). For so
long as the sum of the number of shares of Series B Preferred outstanding and
the number of shares of Series C Preferred outstanding exceeds Two Million
Two Hundred Thousand (2,200,000), the holders of Series B Preferred and
Series C Preferred, voting together as a single class, shall be entitled to
Two (2) Board Seats. The holders of the Common Stock, voting as a class,
shall be entitled to all remaining Board Seats. As used herein, a "Board
Seat" shall mean the right to elect a member of the Company's Board of
Directors at each meeting or pursuant to each consent of the Company's
stockholders for the election of directors, and to remove from office such
director and to fill any vacancy caused by the resignation, death or removal
of such director. In the event that the Company is subject to Section 2115
of the California Corporations Code, directors will be elected in accordance
with the foregoing provisions and Sections 301, 301.5 and 708 of the
California Corporations Code or any successor provisions thereto.
D. LIQUIDATION RIGHTS.
1. Upon any liquidation, dissolution, or winding up of the Company,
whether voluntary or involuntary, before any distribution or payment shall be
made to the holders of any Junior Stock, the holders of Preferred shall be
entitled to be paid in cash out of the assets of the Company an amount per share
of Preferred equal to the "Original Issue Price" (hereinafter defined)
4.
<PAGE>
(as adjusted for any stock dividends, combinations, splits, recapitalizations
and the like with respect to such shares) for each share of Preferred held by
them. The Original Issue Price of the Series A Preferred, Series B Preferred
and Series C Preferred is One Dollar and Seventy Cents ($1.70), One Dollar
and Eighty Cents ($1.80) and Two Dollars and Eighty Cents ($2.80),
respectively.
2. After the payment of the full liquidation preference of the
Preferred as set forth in Section D.1. above, the remaining assets of the
Company legally available for distribution, if any, shall be distributed ratably
to the holders of the Common Stock.
3. The following events shall be considered a liquidation under
Section D.1.:
(a) any consolidation or merger of the Company with or into any
other corporation or other entity or person, or any other corporate
reorganization, in which the stockholders of the Company immediately prior to
such consolidation, merger or reorganization, own less than 50% of the Company's
voting power immediately after such consolidation, merger or reorganization, or
any transaction or series of related transactions in which in excess of fifty
percent (50%) of the Company's voting power is transferred (an "Acquisition");
or
(b) a sale, lease or other disposition of all or substantially
all of the assets of the Company (an "Asset Transfer").
4. If, upon any liquidation, distribution or winding up, the assets
of the Company shall be insufficient to make payment in full to all holders of
Preferred of the liquidation preference set forth in Section D.1., then such
assets shall be distributed among the holders of the Preferred at the time
outstanding, ratably in proportion to the full amounts to which they would
otherwise be respectively entitled.
E. CONVERSION RIGHTS.
The holders of the Preferred shall have the following rights with
respect to the conversion of the Preferred into shares of Common Stock (the
"Conversion Rights"):
1. OPTIONAL CONVERSION. Subject to and in compliance with the
provisions of this Section E any shares of a series of the Preferred may, at the
option of the holder, be converted at any time into fully-paid and nonassessable
shares of Common Stock. The number of shares of Common Stock to which a holder
of shares of a series of the Preferred shall be entitled upon conversion shall
be the product obtained by multiplying the "Conversion Rate" then in effect for
such series (determined as provided in Section E.2. by the number of shares of
such series of Preferred being converted.
2. CONVERSION RATE. The conversion rate in effect at any time for
conversion of shares of a series of the Preferred (the "Conversion Rate") shall
be the quotient obtained by dividing the Original Issue Price of such series of
the Preferred by the "Conversion Price" for such series of the Preferred,
calculated as provided in Section E.3.
5.
<PAGE>
3. CONVERSION PRICE. The conversion price for each series of the
Preferred shall initially be the Original Issue Price of that series of
Preferred (the "Conversion Price"). Such initial Conversion Price shall be
adjusted from time to time in accordance with this Section E. All references to
the Conversion Price herein shall mean the Conversion Price as so adjusted.
4. MECHANICS OF CONVERSION. Each holder of the Preferred who
desires to convert the same into shares of Common Stock pursuant to this
Section E shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Company or any transfer agent for the Preferred,
and shall give written notice to the Company at such office that such holder
elects to convert the same. Such notice shall state the number of shares of the
Preferred being converted. Thereupon, the Company shall promptly issue and
deliver at such office to such holder a certificate or certificates for the
number of shares of Common Stock to which such holder is entitled and shall
promptly pay in cash or, to the extent sufficient funds are not then legally
available therefor, in Common Stock (at the Common Stock's fair market value
determined by the Board of Directors as of the date of such conversion), any
declared and unpaid dividends on the shares of the Preferred being converted.
Such conversion shall be deemed to have been made at the close of business on
the date of such surrender of the certificates representing the shares of the
Preferred to be converted, and the person entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder of such shares of Common Stock on such date.
5. ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the Company
shall at any time or from time to time after the first day the Company issues
any shares of Preferred (the "Original Issue Date") effect a subdivision of the
outstanding Common Stock, the Conversion Price for each series of the Preferred
in effect immediately before that subdivision shall be proportionately
decreased. Conversely, if the Company shall at any time or from time to time
after the Original Issue Date combine the outstanding shares of Common Stock
into a smaller number of shares, the Conversion Price for each series of the
Preferred in effect immediately before the combination shall be proportionately
increased. Any adjustment under this Section E.5. shall become effective at the
close of business on the date the subdivision or combination becomes effective.
6. ADJUSTMENT FOR COMMON STOCK DIVIDENDS AND DISTRIBUTIONS. If the
Company at any time or from time to time after the Original Issue Date makes, or
fixes a record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in additional shares of Common
Stock, in each such event the Conversion Price that is then in effect for each
series of the Preferred shall be decreased as of the time of such issuance or,
in the event such record date is fixed, as of the close of business on such
record date, by multiplying the Conversion Price then in effect for each series
of the Preferred by a fraction (a) the numerator of which is the total number of
shares of Common Stock issued and outstanding immediately prior to the time of
such issuance or the close of business on such record date, and (b) the
denominator of which is the total number of shares of Common Stock issued and
outstanding immediately prior to the time of such issuance or the close of
business on such record date plus the number of shares of Common Stock issuable
in payment of such dividend or distribution; PROVIDED, HOWEVER, that if such
record date is fixed and such dividend is not fully paid or if such distribution
is not fully made on the date fixed therefor, the Conversion Price for each
6.
<PAGE>
series of the Preferred shall be recomputed accordingly as of the close of
business on such record date and thereafter the Conversion Price shall be
adjusted pursuant to this Section E.6. to reflect the actual payment of such
dividend or distribution.
7. ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. If the
Company at any time or from time to time after the Original Issue Date makes, or
fixes a record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in securities of the Company
other than shares of Common Stock, in each such event provision shall be made so
that the holders of the Preferred shall receive upon conversion thereof, in
addition to the number of shares of Common Stock receivable thereupon, the
amount of other securities of the Company that they would have received had
their Preferred been converted into Common Stock on the date of such event and
had they thereafter, during the period from the date of such event to and
including the conversion date, retained such securities receivable by them as
aforesaid during such period, subject to all other adjustments called for during
such period under this Section E with respect to the rights of the holders of
the Preferred or with respect to such other securities by their terms.
8. ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. If
at any time or from time to time after the Original Issue Date, the Common Stock
issuable upon the conversion of the Preferred is changed into the same or a
different number of shares of any class or classes of stock, whether by
recapitalization, reclassification or otherwise (other than an Acquisition or
Asset Transfer as defined in Section D.3. or a subdivision or combination of
shares or stock dividend or a reorganization, merger, consolidation or sale of
assets provided for elsewhere in this Section E), in any such event each holder
of the Preferred shall have the right thereafter to convert such stock into the
kind and amount of stock and other securities and property receivable upon such
recapitalization, reclassification or other change by holders of the maximum
number of shares of Common Stock into which such shares of the Preferred could
have been converted immediately prior to such recapitalization, reclassification
or change, all subject to further adjustment as provided herein or with respect
to such other securities or property by the terms thereof.
9. REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS. If
at any time or from time to time after the Original Issue Date, there is a
capital reorganization of the Common Stock (other than an Acquisition or Asset
Transfer as defined in Section D.3. or as recapitalization, subdivision,
combination, reclassification, exchange or substitution of shares provided for
elsewhere in this Section E), as a part of such capital reorganization,
provision shall be made so that the holders of the Preferred shall thereafter be
entitled to receive upon conversion of the Preferred the number of shares of
stock or other securities or property of the Company to which a holder of the
number of shares of Common Stock deliverable upon conversion would have been
entitled on such capital reorganization, subject to adjustment in respect of
such stock or securities by the terms thereof. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Section E
with respect to the rights of the holders of the Preferred after the capital
reorganization to the end that the provisions of this Section E (including
adjustment of the Conversion Price then in effect for each series of the
Preferred and the number of shares issuable
7.
<PAGE>
upon conversion of the Preferred) shall be applicable after that event and be as
nearly equivalent as practicable.
10. SALE OF SHARES BELOW CONVERSION PRICE.
(a) If at any time or from time to time after the Original Issue
Date, the Company issues or sells, or is deemed by the express provisions of
this Subsection 10 to have issued or sold, Additional Shares of Common Stock (as
hereinafter defined), other than as a dividend or other distribution on any
class of stock as provided in Section E.6. above, and other than a subdivision
or combination of shares of Common Stock as provided in Section E.5. above, for
an Effective Price (as hereinafter defined) less than the then effective
Conversion Price with respect to any series of the Preferred, then and in each
such case the then existing Conversion Price for such series of the Preferred
shall be reduced, as of the opening of business on the date of such issue or
sale, to a price determined by multiplying such Conversion Price by a fraction
(1) the numerator of which shall be (A) the number of shares of Common Stock
deemed outstanding (as defined below) immediately prior to such issue or sale,
plus (B) the number of shares of Common Stock which the aggregate consideration
received (as defined in Subsection 10(b)) by the Company for the total number of
Additional Shares of Common Stock so issued would purchase at such Conversion
Price, and (2) the denominator of which shall be the number of shares of Common
Stock deemed outstanding (as defined below) immediately prior to such issue or
sale plus the total number of Additional Shares of Common Stock so issued. For
the purposes of the preceding sentence, the number of shares of Common Stock
deemed to be outstanding as of a given date shall be the sum of (A) the number
of shares of Common Stock actually outstanding, (B) the number of shares of
Common Stock into which the then outstanding shares of the Preferred could be
converted if fully converted on the day immediately preceding the given date,
and (C) the number of shares of Common Stock which could be obtained through the
exercise or conversion of all other rights, options and Convertible Securities
(as hereinafter defined) on the day immediately preceding the given date.
(b) For the purpose of making any adjustment required under this
Section E.10., the consideration received by the Company for any issue or sale
of securities shall (1) to the extent it consists of cash, be computed at the
net amount of cash received by the Company after deduction of any underwriting
or similar commissions, compensation or concessions paid or allowed by the
Company in connection with such issue or sale but without deduction of any
expenses payable by the Company, (2) to the extent it consists of property other
than cash, be computed at the fair market value of that property as determined
in good faith by the Board of Directors, and (3) if Additional Shares of Common
Stock, Convertible Securities (as hereinafter defined) or rights or options to
purchase either Additional Shares of Common Stock or Convertible Securities are
issued or sold together with other stock or securities or other assets of the
Company for a consideration which covers both, be computed as the portion of the
consideration so received that may be reasonably determined in good faith by the
Board of Directors to be allocable to such Additional Shares of Common Stock,
Convertible Securities or rights or options.
8.
<PAGE>
(c) For the purpose of the adjustment required under this
Section E.10., if the Company issues or sells any rights or options for the
purchase of, or stock or other securities convertible into, Additional Shares of
Common Stock (such convertible stock or securities being herein referred to as
"Convertible Securities") and if the Effective Price of such Additional Shares
of Common Stock is less than the Conversion Price with respect to a series of
the Preferred, in each case the Company shall be deemed to have issued at the
time of the issuance of such rights or options or Convertible Securities the
maximum number of Additional Shares of Common Stock issuable upon exercise or
conversion thereof and to have received as consideration for the issuance of
such shares an amount equal to the total amount of the consideration, if any,
received by the Company for the issuance of such rights or options or
Convertible Securities, plus, in the case of such rights or options, the minimum
amounts of consideration, if any, payable to the Company upon the exercise of
such rights or options, plus, in the case of Convertible Securities, the minimum
amounts of consideration, if any, payable to the Company (other than by
cancellation of liabilities or obligations evidenced by such Convertible
Securities) upon the conversion thereof; PROVIDED that if in the case of
Convertible Securities the minimum amounts of such consideration cannot be
ascertained, but are a function of antidilution or similar protective clauses,
the Company shall be deemed to have received the minimum amounts of
consideration without reference to such clauses; PROVIDED FURTHER that if the
minimum amount of consideration payable to the Company upon the exercise or
conversion of rights, options or Convertible Securities is reduced over time or
on the occurrence or non-occurrence of specified events other than by reason of
antidilution adjustments, the Effective Price shall be recalculated using the
figure to which such minimum amount of consideration is reduced; PROVIDED
FURTHER that if the minimum amount of consideration payable to the Company upon
the exercise or conversion of such rights, options or Convertible Securities is
subsequently increased, the Effective Price shall be again recalculated using
the increased minimum amount of consideration payable to the Company upon the
exercise or conversion of such rights, options or Convertible Securities. No
further adjustment of the Conversion Price with respect to a series of the
Preferred, as adjusted upon the issuance of such rights, options or Convertible
Securities, shall be made as a result of the actual issuance of Additional
Shares of Common Stock on the exercise of any such rights or options or the
conversion of any such Convertible Securities. If any such rights or options or
the conversion privilege represented by any such Convertible Securities shall
expire without having been exercised, such Conversion Price as adjusted upon the
issuance of such rights, options or Convertible Securities shall be readjusted
to the Conversion Price which would have been in effect had an adjustment been
made on the basis that the only Additional Shares of Common Stock so issued were
the Additional Shares of Common Stock, if any, actually issued or sold on the
exercise of such rights or options or rights of conversion of such Convertible
Securities, and such Additional Shares of Common Stock, if any, were issued or
sold for the consideration actually received by the Company upon such exercise,
plus the consideration, if any, actually received by the Company for the
granting of all such rights or options, whether or not exercised, plus the
consideration received for issuing or selling the Convertible Securities
actually converted, plus the consideration, if any, actually received by the
Company (other than by cancellation of liabilities or obligations evidenced by
such Convertible Securities) on the conversion of such Convertible Securities,
PROVIDED that such readjustment shall not apply to prior conversions of the
Preferred.
9.
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(d) "Additional Shares of Common Stock" shall mean all shares of
Common Stock issued by the Company or deemed to be issued pursuant to this
Section E.10., whether or not subsequently reacquired or retired by the Company
other than (1) shares of Common Stock issued upon conversion of the Preferred;
(2) shares of Common Stock and/or options, warrants or other Common Stock
purchase rights and the Common Stock issued pursuant to such options, warrants
or other rights (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like) issued or to be issued to employees, officers or
directors of, or consultants or advisors to the Company or any subsidiary
pursuant to stock purchase or stock option plans or other arrangements that are
approved by the Board; (3) shares of Common Stock issued pursuant to the
exercise of options, warrants or convertible securities outstanding as of the
Original Issue Date; (4) shares of Common Stock issuable in connection with a
loan or leasing transaction approved by the Board of Directors, (5) shares of
Series B Preferred, shares of Series C Preferred or the Series C Warrant issued
to Warburg, Pincus Ventures, L.P., (6) strategic transactions approved by a
majority of the members of the Board of Directors including at least one of the
directors elected by the holders of the Series B Preferred and the Series C
Preferred and (7) shares of Common Stock issuable under options, warrants or
rights granted in connection with any of the foregoing transactions. The
"Effective Price" of Additional Shares of Common Stock shall mean the quotient
determined by dividing the total number of Additional Shares of Common Stock
issued or sold, or deemed to have been issued or sold by the Company under this
Section E.10., into the aggregate consideration received, or deemed to have been
received by the Company for such issue under this Section E.10., for such
Additional Shares of Common Stock.
11. CERTIFICATE OF ADJUSTMENT. In each case of an adjustment or
readjustment of the Conversion Price of a series of the Preferred for the number
of shares of Common Stock or other securities issuable upon conversion of such
series of the Preferred, if such Preferred is then convertible pursuant to this
Section E, the Company, at its expense, shall compute such adjustment or
readjustment in accordance with the provisions hereof and prepare a certificate
showing such adjustment or readjustment, and shall mail such certificate, by
first class mail, postage prepaid, to each registered holder of shares of such
series of the Preferred at the holder's address as shown in the Company's books.
The certificate shall set forth such adjustment or readjustment, showing in
detail the facts upon which such adjustment or readjustment is based, including
a statement of (a) the consideration received or deemed to be received by the
Company for any Additional Shares of Common Stock issued or sold or deemed to
have been issued or sold, (b) the Conversion Price at the time in effect,
(c) the number of Additional Shares of Common Stock and (d) the type and amount,
if any, of other property which at the time would be received upon conversion of
that series of the Preferred.
12. NOTICES OF RECORD DATE. Upon (a) any taking by the Company of
a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, or (b) any Acquisition (as defined in Section D.3.) or other
capital reorganization of the Company, any reclassification or recapitalization
of the capital stock of the Company, any merger or consolidation of the Company
with or into any other corporation, or any Asset Transfer (as defined in
Section D.3.), or any voluntary or involuntary dissolution, liquidation or
winding up of the Company, the Company shall mail to each
10.
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holder of the Preferred at least twenty (20) days prior to the record date
specified therein a notice specifying (x) the date on which any such record is
to be taken for the purpose of such dividend or distribution and a description
of such dividend or distribution, (y) the date on which any such Acquisition,
reorganization, reclassification, transfer, consolidation, merger, Asset
Transfer, dissolution, liquidation or winding up is expected to become
effective, and (z) the date, if any, that is to be fixed as to when the holders
of record of Common Stock (or other securities) shall be entitled to exchange
their shares of Common Stock (or other securities) for securities or other
property deliverable upon such Acquisition, reorganization, reclassification,
transfer, consolidation, merger, Asset Transfer, dissolution, liquidation or
winding up; PROVIDED, HOWEVER, that any notice required by this Section E.12.
may be waived by holders of a majority of the Preferred.
13. AUTOMATIC CONVERSION.
(a) Each share of the Preferred shall automatically be
converted into shares of Common Stock, based on the then-effective Conversion
Price for the applicable series of the Preferred, (1) at any time upon the
affirmative vote of the holders of at least a majority of the outstanding
shares of the Preferred, or (2) immediately upon the closing of a firmly
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offer and sale of
Common Stock for the account of the Company in which the per share price is
at least Eight Dollars and Eighty Cents ($8.80) (as adjusted for any stock
dividends, combinations, splits, recapitalizations and the like) and the
gross cash proceeds to the Company (before underwriting discounts,
commissions and fees) are at least Seven Million Five Hundred Thousand
Dollars ($7,500,000). Upon such automatic conversion, any declared but
unpaid dividends shall be paid in accordance with the provisions of Section
E.4.
(b) Upon the occurrence of the event specified in paragraph (a)
above, the outstanding shares of the Preferred shall be converted automatically
without any further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the Company or its
transfer agent; PROVIDED, HOWEVER, that the Company shall not be obligated to
issue certificates evidencing the shares of Common Stock issuable upon such
conversion unless the certificates evidencing such shares of Preferred are
either delivered to the Company or its transfer agent as provided below, or the
holder notifies the Company or its transfer agent that such certificates have
been lost, stolen or destroyed and executes an agreement satisfactory to the
Company to indemnify the Company from any loss incurred by it in connection with
such certificates. Upon the occurrence of such automatic conversion of the
Preferred, the holders of the Preferred shall surrender the certificates
representing such shares at the office of the Company or any transfer agent for
the Preferred. Thereupon, there shall be issued and delivered to such holder
promptly at such office and in its name as shown on such surrendered certificate
or certificates, a certificate or certificates for the number of shares of
Common Stock into which the shares of the Preferred surrendered were convertible
on the date on which such automatic conversion occurred, and any declared and
unpaid dividends shall be paid in accordance with the provisions of Section E.4.
11.
<PAGE>
14. FRACTIONAL SHARES. No fractional shares of Common Stock shall be
issued upon conversion of the Preferred. All shares of Common Stock (including
fractions thereof) issuable upon conversion of more than one share of the
Preferred by a holder thereof shall be aggregated for purposes of determining
whether the conversion would result in the issuance of any fractional share.
If, after the aforementioned aggregation, the conversion would result in the
issuance of any fractional share, the Company shall, in lieu of issuing any
fractional share, pay cash equal to the product of such fraction multiplied by
the Common Stock's fair market value (as determined by the Board) on the date of
conversion.
15. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Preferred, such number of its shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all outstanding
shares of the Preferred. If at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion of all
then outstanding shares of the Preferred, the Company will take such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose.
16. NOTICES. Any notice required by the provisions of this Section E
shall be in writing and shall be deemed effectively given: (a) upon personal
delivery to the party to be notified, (b) when sent by confirmed telex or
facsimile if sent during normal business hours of the recipient; if not, then on
the next business day, (c) five (5) days after having been sent by registered or
certified mail, return receipt requested, postage prepaid, or (d) one (1) day
after deposit with a nationally recognized overnight courier, specifying next
day delivery, with written verification of receipt. All notices shall be
addressed to each holder of record at the address of such holder appearing on
the books of the Company.
17. PAYMENT OF TAXES. The Company will pay all taxes (other than
taxes based upon income) and other governmental charges that may be imposed with
respect to the issue or delivery of shares of Common Stock upon conversion of
shares of the Preferred, excluding any tax or other charge imposed in connection
with any transfer involved in the issue and delivery of shares of Common Stock
in a name other than that in which the shares of the Preferred so converted were
registered.
18. NO DILUTION OR IMPAIRMENT. The Company shall not amend its
Certificate of Incorporation or participate in any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, for the purpose of avoiding or seeking to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company, but shall at all times in good faith assist in
carrying out all such action as may be reasonably necessary or appropriate in
order to protect the conversion rights of the holders of the Preferred.
12.
<PAGE>
F. NO REISSUANCE OF THE PREFERRED. No share or shares of the Preferred
acquired by the Company by reason of redemption, purchase, conversion or
otherwise shall be reissued.
G. NO PREEMPTIVE RIGHTS. Stockholders shall have no preemptive rights
except as granted by the Company pursuant to written agreements.
H. REDEMPTION.
1. The holders of a majority of the then outstanding shares of
Series B Preferred may require the Company to redeem, from any source of
funds legally available therefor, the Series B Preferred on September 10,
2006 (the "Series B Redemption Date") by delivering the Series B Redemption
Notice (as hereinafter defined) to the Company. The "Series B Redemption
Notice" means a notice that shall (a) be executed by holders of at least a
majority of the then outstanding shares of Series B Preferred; (b) request
redemption of all Series B Preferred on the Series B Redemption Date and (c)
be delivered to the Company no more than ninety (90) nor less than sixty (60)
days prior to the Series B Redemption Date. The Company shall effect such
redemption by paying in cash in exchange for the shares of Series B to be
redeemed a sum equal to One Dollar and Eighty Cents ($1.80) per share of
Series B Preferred (as adjusted for any stock dividends, combinations or
splits with respect to those shares) plus any declared but unpaid dividends
on such shares against delivery of such shares.
2. The holders of a majority of the then outstanding shares of
Series C Preferred may require the Company to redeem, from any source of
funds legally available therefor, the Series C Preferred on the Series C
Redemption Date (as hereinafter defined) by delivering the Series C
Redemption Notice (as hereinafter defined) to the Company. The "Series C
Redemption Date" means the tenth anniversary of the first issuance by the
Company of the Series C Preferred. The "Series C Redemption Notice" means a
notice that shall (a) be executed by holders of at least a majority of the
then outstanding shares of Series C Preferred; (b) request redemption of all
Series C Preferred on the Series C Redemption Date; and (c) be delivered to
the Company no more than ninety (90) nor less than sixty (60) days prior to
the Series C Redemption Date. The Company shall effect such redemption by
paying in cash in exchange for the Series C Preferred to be redeemed a sum
equal to Two Dollars and Eighty Cents ($2.80) per share of Series C Preferred
(as adjusted for any stock dividends, combinations or splits with respect to
those shares) plus any declared but unpaid dividends on such shares against
delivery of such shares.
3. If the Company is unable to redeem any shares of any series of
Preferred Stock on its redemption date because such redemption would violate
applicable laws, then the Company shall redeem such shares as soon thereafter as
redemption would not violate such laws. In the event of any redemption of only
part of a series of Preferred Stock, the Company shall effect such redemption
pro rata among the holders thereof (based on the number of shares of such series
held on the date of notice of redemption).
VI.
13.
<PAGE>
The management of the business and the conduct of the affairs of the
Company shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be fixed by the Board
of Directors in the manner provided in the Bylaws. Subject to paragraph (h) of
Section 43 of the Bylaws, the Bylaws may be altered or amended or new Bylaws
adopted by the stockholders entitled to vote. The Board of Directors shall also
have the power to adopt, amend or repeal Bylaws; provided, however, that any
amendment of the Bylaws reducing the number of directors to less than six
requires the approval of the holders of a majority of the outstanding Common
Stock.
VII.
A. A director of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability (1) for any breach of the director's
duty of loyalty to the Company or its stockholders, (2) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law (3) under Section 174 of the Delaware General Corporation Law, or (4) for
any transaction from which the director derived an improper personal benefit.
If the Delaware General Corporation Law is amended after approval by the
stockholders of this Article VII to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director shall be eliminated or limited to the fullest extent permitted by
the Delaware General Corporation Law, as so amended.
B. Any repeal or modification of this Article VII shall be prospective
and shall not affect the rights under this Article VII in effect at the time of
the alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VIII.
Following the closing of the initial public offering pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
covering the offer and sale of Common Stock of the Company, any action permitted
to be taken at any annual or special meeting of the stockholders may only be
taken with such a meeting and may not be consented to in writing.
IX.
The Company reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon the stockholders
herein are granted subject to this reservation."
14.
<PAGE>
4. This Amended and Restated Certificate of Incorporation has been duly
approved by the Board of Directors of this corporation.
5. This Amended and Restated Certificate of Incorporation has been duly
adopted in accordance with the provisions of Sections 228 and 245 of the General
Corporation Law of the State of Delaware by the stockholders of this
corporation.
IN WITNESS WHEREOF, Scientific Learning Corporation has caused this Amended
and Restated Certificate of Incorporation to be signed by its President and
Secretary in Berkeley, California this 9th day of July, 1998.
SCIENTIFIC LEARNING CORPORATION
By: /s/ Frank M. Mattson
------------------------------------------
FRANK M. MATTSON
Chief Financial Officer,
Vice President, Finance and Secretary
15.
<PAGE>
Exhibit 4.3
Number Shares
SCI
COMMON STOCK COMMON STOCK
SCIENTIFIC LEARNING
CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE
IN BOSTON, MA OR NEW YORK, NY CUSIP 808760 10 2
THIS CERTIFIES THAT SEE REVERSE FOR CERTAIN
DEFINITIONS AND A STATEMENT AS
TO THE POWERS, DESIGNATIONS,
PREFERENCES, RESTRICTIONS
AND RIGHTS OF SHARES
IS THE OWNER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $0.001 PAR VALUE PER
SHARE, OF
SCIENTIFIC LEARNING CORPORATION
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
is not valid until countersigned and registered by the Transfer Agent and
Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ Frank M. Mattson [SEAL] /s/ Sheryle J. Bolton
CHIEF FINANCIAL OFFICER AND SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
BANKBOSTON, N.A.
TRANSFER AGENT AND REGISTRAR
BY /s/ [ILLEGIBLE]
AUTHORIZED SIGNATURE
<PAGE>
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights as established, from time to time, by the
Certificate of Incorporation of the Corporation and by any certificate of
determination, the number of shares constituting each class and series, and
the designations thereof, may be obtained by the holder hereof upon request
and without charge at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- ...................... Custodian .......................
(Cust) (Minor)
under Uniform Gifts to Minors
Act.....................................................
(State)
UNIF TRF MIN ACT -- .................. Custodian (until age ................)
(Cust)
............................ under Uniform Transfers
(Minor)
to Minors Act............................................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------------
- ---------------------------------------------
- ------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
_______________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_____________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
-------------------------------
X
---------------------------------------
X
---------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
------------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR
DESTROYED THE CORPORATION MAY REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
<PAGE>
EXHIBIT 10.2
SCIENTIFIC LEARNING CORPORATION
1998 EQUITY INCENTIVE PLAN
ADOPTED FEBRUARY 19, 1996
APPROVED BY STOCKHOLDERS MARCH 30, 1996
AMENDED AND RESTATED SEPTEMBER 27, 1996
APPROVED BY STOCKHOLDERS JUNE 11, 1997
AMENDED AND RESTATED JUNE 6, 1998
APPROVED BY STOCKHOLDERS JUNE 26, 1998
TERMINATION DATE: JUNE 6, 2008
1. PURPOSES.
(a) The Plan initially was established effective as of February 19, 1996
(the "Prior Plan"). The Prior Plan hereby is amended and restated in its
entirety as the Plan, effective as of the date of the closing of the initial
public offering ("IPO") of the common stock of the Company ("Common Stock").
The terms of the Prior Plan shall remain in effect and apply to all options
granted pursuant to the Prior Plan.
(b) The purpose of the Plan is to provide a means by which selected
Employees, Directors and Consultants may be given an opportunity to benefit from
increases in value of the Common Stock through the granting of (i) Incentive
Stock Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses, (iv) rights
to purchase restricted stock and (v) Stock Appreciation Rights.
(c) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees, Directors or Consultants, to secure and retain
the services of new Employees, Directors and Consultants and to provide
incentives for such persons to exert maximum efforts for the success of the
Company and its Affiliates.
(d) The Company intends that the Stock Awards issued under the Plan shall,
in the discretion of the Board or any Committee to which responsibility for
administration of the Plan has been delegated pursuant to subsection 3(c), be
either (i) Options granted pursuant to Section 6 hereof, including Incentive
Stock Options and Nonstatutory Stock Options, (ii) stock bonuses or rights to
purchase restricted stock granted pursuant to Section 7 hereof or (iii) Stock
Appreciation Rights granted pursuant to Section 8 hereof. All Options shall be
separately designated Incentive Stock Options or Nonstatutory Stock Options at
the time of grant, and in such form as issued pursuant to Section 6, and a
separate certificate or certificates will be issued for shares purchased on
exercise of each type of Option.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
1.
<PAGE>
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in accordance
with subsection 3(c) of the Plan.
(e) "COMPANY" means Scientific Learning Corporation, a Delaware
corporation.
(f) "CONSULTANT" means any person, including an advisor, engaged by the
Company or an Affiliate to render consulting services and who is compensated for
such services, provided that the term "Consultant" shall not include Directors
who are paid only a director's fee by the Company or who are not compensated by
the Company for their services as Directors.
(g) "CONTINUOUS SERVICE" means that the Optionee's employment or service
with the Company or an Affiliate of the Company, whether in the capacity of an
Employee, a Director or a Consultant, is not interrupted or terminated. The
Optionee's Continuous Service shall not be deemed to have terminated merely
because of a change in the capacity in which the Optionee renders employment or
service to the Company or an Affiliate or the Company or a change in the entity
for which the Optionee renders such employment or service, provided that there
is no interruption or termination of the Optionee's Continuous Service. The
Board or the Chief Executive Officer of the Company, in that party's sole
discretion, may determine whether Continuous Service shall be considered
interrupted in the case of any leave of absence approved by the Board or the
Chief Executive Officer of the Company, including sick leave, military leave, or
any other personal leave.
(h) "COVERED EMPLOYEE" means the Chief Executive Officer and the four (4)
other highest compensated officers of the Company for whom total compensation is
required to be reported to stockholders under the Exchange Act, as determined
for purposes of Section 162(m) of the Code.
(i) "DIRECTOR" means a member of the Board.
(j) "DISABILITY" means the permanent and total disability of a person
within the meaning of Section 22(e)(3) of the Code.
(k) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
(m) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock of the Company determined as follows:
(1) If the Common Stock is listed on any established stock
exchange, or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
the Fair Market Value of a share of Common Stock shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as quoted
on such exchange or market (or the exchange or market with the greatest volume
of trading in Common Stock) on the trading day prior to the day of
2.
<PAGE>
determination, as reported in the Wall Street Journal or such other source as
the Board deems reliable;
(2) In the absence of such markets for the Common Stock, the
Fair Market Value shall be determined in good faith by the Board.
(n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act),
does not possess an interest in any other transaction as to which disclosure
would be required under Item 404(a) of Regulation S-K, and is not engaged in a
business relationship as to which disclosure would be required under Item 404(b)
of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for
purposes of Rule 16b-3.
(p) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as
an Incentive Stock Option.
(q) "OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "OPTION" means a stock option granted pursuant to the Plan.
(s) "OPTION AGREEMENT" means a written agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option grant.
Each Option Agreement shall be subject to the terms and conditions of the Plan.
(t) "OPTIONEE" means a person to whom an Option is granted pursuant to the
Plan.
(u) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
Treasury regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time, and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director, or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(v) "PLAN" means this Scientific Learning Corporation 1998 Equity
Incentive Plan.
(w) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
Rule 16b-3, as in effect when discretion is being exercised with respect to the
Plan.
3.
<PAGE>
(x) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(y) "STOCK APPRECIATION RIGHT" means any of the various types of rights
which may be granted under Section 8 of the Plan.
(z) "STOCK AWARD" means any right granted under the Plan, including any
Option, any stock bonus, any right to purchase restricted stock and any Stock
Appreciation Right.
(aa) "STOCK AWARD AGREEMENT" means a written agreement between the Company
and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to
the terms and conditions of the Plan.
3. ADMINISTRATION.
(a) The Board shall administer the Plan unless and until the Board
delegates administration to a Committee, as provided in subsection 3(c).
(b) The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(1) To determine from time to time which of the persons eligible
under the Plan shall be granted Stock Awards; when and how each Stock Award
shall be granted; whether a Stock Award will be an Incentive Stock Option or a
Nonstatutory Stock Option, a stock bonus, a right to purchase restricted stock,
a Stock Appreciation Right or a combination of the foregoing; the provisions of
each Stock Award granted (which need not be identical), including the time or
times when a person shall be permitted to receive stock pursuant to a Stock
Award; whether a person shall be permitted to receive stock upon exercise of an
Independent Stock Appreciation Right; and the number of shares with respect to
which a Stock Award shall be granted to each such person.
(2) To construe and interpret the Plan and Stock Awards granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
(3) To amend the Plan or a Stock Award as provided in
Section 13.
(4) Generally, to exercise such powers and to perform such acts
as the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(c) The Board may delegate administration of the Plan to a Committee or
Committees of one or more members of the Board. In the discretion of the Board,
a Committee may consist solely of two or more Outside Directors, in accordance
with Code Section 162(m), or solely of two or more Non-Employee Directors, in
accordance with Rule 16b-3. If administration is delegated to a Committee, the
Committee shall have, in connection with the administration of the Plan, the
powers theretofore possessed by the Board (and references in this Plan to the
Board shall thereafter be to the
4.
<PAGE>
Committee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan. Notwithstanding anything in this Section 3 to the
contrary, the Board or the Committee may delegate to a committee of one or more
members of the Board the authority to grant Options to eligible persons who (1)
are not then subject to Section 16 of the Exchange Act and/or (2) are either (i)
not then Covered Employees and are not expected to be Covered Employees at the
time of recognition of income resulting from such Option, or (ii) not persons
with respect to whom the Company wishes to comply with Section 162(m) of the
Code.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of subsection 12(a) relating to adjustments
upon changes in stock, the stock that may be issued pursuant to Stock Awards
shall not exceed in the aggregate Two Million Eight Hundred Thousand (2,800,000)
shares of Common Stock. If any Stock Award shall for any reason expire or
otherwise terminate, in whole or in part, without having been exercised in full
(or vested in the case of restricted stock), the stock not acquired under such
Stock Award shall revert to and again become available for issuance under the
Plan. Shares subject to Stock Appreciation Rights exercised in accordance with
Section 8 of the Plan shall not be available for subsequent issuance under the
Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Incentive Stock Options and Stock Appreciation Rights appurtenant
thereto may be granted only to Employees. Stock Awards other than Incentive
Stock Options and Stock Appreciation Rights appurtenant thereto may be granted
to Employees, Directors and Consultants.
(b) No person shall be eligible for the grant of an Incentive Stock Option
if, at the time of grant, such person owns (or is deemed to own pursuant to
Section 424(d) of the Code) stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or of any of
its Affiliates unless the exercise price of such Option is at least one hundred
ten percent (110%) of the Fair Market Value of such stock at the date of grant
and the Option is not exercisable after the expiration of five (5) years from
the date of grant.
(c) Subject to the provisions of Section 12 relating to adjustments upon
changes in stock, no employee shall be eligible to be granted Options and Stock
Appreciation Rights covering more than Six Hundred Twenty Five Thousand
(625,000) shares of the Common Stock in any calendar year.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
5.
<PAGE>
(a) TERM. No Incentive Stock Option shall be exercisable after the
expiration of ten (10) years from the date it was granted.
(b) PRICE. The exercise price of each Incentive Stock Option shall be not
less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted, but the exercise price
of each Nonstatutory Stock Option shall be any price determined by the Board in
its sole discretion. Notwithstanding the foregoing, an Incentive Stock Option
may be granted with an exercise price lower than that set forth in the preceding
sentence if such Incentive Stock Option is granted pursuant to an assumption or
substitution for another option in a manner satisfying the provisions of Section
424(a) of the Code.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash or (ii) at the discretion of the Board (A) by
delivery to the Company of other Common Stock of the Company, (B) according to a
deferred payment (however, payment of the common stock's "par value," as defined
in the Delaware General Corporation Law, shall not be made by deferred payment),
or other arrangement (which may include, without limiting the generality of the
foregoing, the use of other Common Stock of the Company) with the person to whom
the Option is granted or to whom the Option is transferred pursuant to
subsection 6(d), or (C) in any other form of legal consideration that may be
acceptable to the Board.
In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.
(d) TRANSFERABILITY. An Incentive Stock Option shall not be transferable
except by will or by the laws of descent and distribution, and shall be
exercisable during the lifetime of the person to whom the Option is granted only
by such person. A Nonstatutory Stock Option may be transferred to the extent
provided in the Option Agreement; provided that if the Option Agreement does not
expressly permit the transfer of a Nonstatutory Stock Option, the Nonstatutory
Stock Option shall not be transferable except by will, by the laws of descent
and distribution or pursuant to a domestic relations order satisfying the
requirements of Rule 16 of the Exchange Act and shall be exercisable during the
lifetime of the person to whom the Option is granted only by such person or any
transferee pursuant to a domestic relations order. Notwithstanding the
foregoing, the person to whom the Option is granted may, by delivering written
notice to the Company, in a form satisfactory to the Company, designate a third
party who, in the event of the death of the Optionee, shall thereafter be
entitled to exercise the Option.
(e) VESTING. The total number of shares of stock subject to an Option
may, but need not, be allotted in periodic installments (which may, but need
not, be equal). The Option Agreement may provide that from time to time during
each of such installment periods, the Option may become exercisable ("vest")
with respect to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not fully
exercised. The Option may be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The vesting provisions of
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individual Options may vary. The provisions of this subsection 6(e) are subject
to any Option provisions governing the minimum number of shares as to which an
Option may be exercised.
(f) TERMINATION OF THE OPTIONEE'S CONTINUOUS SERVICE. In the event an
Optionee's Continuous Service terminates (other than upon the Optionee's death
or Disability), the Optionee may exercise his or her Option (to the extent that
the Optionee was entitled to exercise it at the date of termination) but only
within such period of time ending on the earlier of (i) the date three (3)
months after the termination of the Optionee's Continuous Service (or such
longer or shorter period specified in the Option Agreement), or (ii) the
expiration of the term of the Option as set forth in the Option Agreement. If,
after termination, the Optionee does not exercise his or her Option within the
time specified in the Option Agreement, the Option shall terminate, and the
shares covered by such Option shall revert to and again become available for
issuance under the Plan.
An Optionee's Option Agreement may also provide that, if the exercise of
the Option following the termination of the Optionee's Continuous Service (other
than upon the Optionee's death or Disability) would be prohibited at any time
solely because the issuance of shares would violate the registration
requirements under the Securities Act, then the Option shall terminate on the
earlier of (i) the expiration of the term of the Option as described in
subsection 6(a) or (ii) the expiration of a period of three (3) months after the
termination of the Optionee's Continuous Service during which the exercise of
the Option would not be in violation of such registration requirements (if such
provisions would result in an extension of the time during which the Option may
be exercised beyond the period described in the first paragraph of this
subsection 6(f)).
(g) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Service
terminates as a result of the Optionee's Disability, the Optionee may exercise
his or her Option (to the extent that the Optionee was entitled to exercise it
at the date of termination), but only within such period of time ending on the
earlier of (i) the date twelve (12) months following such termination (or such
longer or shorter period specified in the Option Agreement, or (ii) the
expiration of the term of the Option as set forth in the Option Agreement. If,
at the date of termination, the Optionee is not entitled to exercise his or her
entire Option, the shares covered by the unexercisable portion of the Option
shall revert to and again become available for issuance under the Plan. If,
after termination, the Optionee does not exercise his or her Option within the
time specified herein, the Option shall terminate, and the shares covered by
such Option shall revert to and again become available for issuance under the
Plan.
(h) DEATH OF OPTIONEE. In the event of the death of an Optionee during,
or within a period specified in the Option after the termination of, the
Optionee's Continuous Service, the Option may be exercised (to the extent the
Optionee was entitled to exercise the Option at the date of death) by the
Optionee's estate, by a person who acquired the right to exercise the Option by
bequest or inheritance or by a person designated to exercise the option upon the
Optionee's death pursuant to subsection 6(d), but only within the period ending
on the earlier of (i) the date eighteen (18) months following the date of death
(or such longer or shorter period specified in the Option Agreement), or (ii)
the expiration of the term of such Option as set forth in the Option Agreement.
If, at the time of death, the Optionee was not entitled to exercise his or her
entire Option, the shares covered by the unexercisable portion of the Option
shall revert to and again become available for issuance under the Plan. If,
after death, the Option is not exercised within the time specified herein, the
Option shall
7.
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terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.
(i) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionee may elect at any time before the Optionee's Continuous
Service terminates to exercise the Option as to any part or all of the shares
subject to the Option prior to the full vesting of the Option. Any unvested
shares so purchased may be subject to a repurchase right in favor of the Company
or to any other restriction the Board determines to be appropriate.
(j) RE-LOAD OPTIONS. Without in any way limiting the authority of the
Board to make or not to make grants of Options hereunder, the Board shall have
the authority (but not an obligation) to include as part of any Option Agreement
a provision entitling the Optionee to a further Option (a "Re-Load Option") in
the event the Optionee exercises the Option evidenced by the Option Agreement,
in whole or in part, by surrendering other shares of Common Stock in accordance
with this Plan and the terms and conditions of the Option Agreement. Any such
Re-Load Option (i) shall be for a number of shares equal to the number of shares
surrendered as part or all of the exercise price of such Option; (ii) shall have
an expiration date which is the same as the expiration date of the Option the
exercise of which gave rise to such Re-Load Option; and (iii) shall have an
exercise price which is equal to one hundred percent (100%) of the Fair Market
Value of the Common Stock subject to the Re-Load Option on the date of exercise
of the original Option. Notwithstanding the foregoing, a Re-Load Option which
is an Incentive Stock Option and which is granted to a 10% stockholder (as
described in subsection 5(b)), shall have an exercise price which is equal to
one hundred ten percent (110%) of the Fair Market Value of the stock subject to
the Re-Load Option on the date of exercise of the original Option and shall have
a term which is no longer than five (5) years.
Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory
Stock Option, as the Board may designate at the time of the grant of the
original Option; provided, however, that the designation of any Re-Load Option
as an Incentive Stock Option shall be subject to the one hundred thousand
dollars ($100,000) annual limitation on exercisability of Incentive Stock
Options described in subsection 11(e) of the Plan and in Section 422(d) of the
Code. There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load
Option shall be subject to the availability of sufficient shares under
subsection 4(a) and shall be subject to such other terms and conditions as the
Board may determine which are not inconsistent with the express provisions of
the Plan regarding the terms of Options.
7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK.
Each stock bonus or restricted stock purchase agreement shall be in such
form and shall contain such terms and conditions as the Board shall deem
appropriate. The terms and conditions of stock bonus or restricted stock
purchase agreements may change from time to time, and the terms and conditions
of separate agreements need not be identical, but each stock bonus or restricted
stock purchase agreement shall include (through incorporation of provisions
hereof by reference in the agreement or otherwise) the substance of each of the
following provisions as appropriate:
(a) PURCHASE PRICE. The purchase price under each restricted stock
purchase agreement shall be such amount as the Board shall determine and
designate in such agreement.
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Notwithstanding the foregoing, the Board may determine that eligible
participants in the Plan may be awarded stock pursuant to a stock bonus
agreement in consideration for past services actually rendered to the Company
for its benefit.
(b) TRANSFERABILITY. Rights under a stock bonus or restricted stock
purchase agreement may be transferred to the extent provided in the agreement;
provided that if the agreement does not expressly permit the transfer of such
rights, no rights under the agreement shall be transferable except by will or
the laws of descent and distribution or, if the agreement so provides, pursuant
to a domestic relations order satisfying the requirements of Rule 16b-3 so long
as stock awarded under such agreement remains subject to the terms of the
agreement.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to a
stock purchase agreement shall be paid either: (i) in cash; (ii) at the
discretion of the Board, according to a deferred payment or other arrangement
with the person to whom the stock is sold; or (iii) in any other form of legal
consideration that may be acceptable to the Board in its discretion.
Notwithstanding the foregoing, the Board to which administration of the Plan has
been delegated may award stock pursuant to a stock bonus agreement in
consideration for past services actually rendered to the Company or for its
benefit.
(d) VESTING. Shares of stock sold or awarded under the Plan may, but need
not, be subject to a repurchase option in favor of the Company in accordance
with a vesting schedule to be determined by the Board.
(e) TERMINATION OF CONTINUOUS SERVICE. In the event the Stock Award
recipient's Continuous Service terminates, the Company may repurchase or
otherwise reacquire any or all of the shares of stock held by that person which
have not vested as of the date of termination under the terms of the stock bonus
or restricted stock purchase agreement between the Company and such person.
8. STOCK APPRECIATION RIGHTS.
(a) To exercise any outstanding Stock Appreciation Right, the holder must
provide written notice of exercise to the Company in compliance with the
provisions of the Stock Award Agreement evidencing such right. Except as
provided in subsection 5(c), no limitation shall exist on the aggregate amount
of cash payments the Company may make under the Plan in connection with the
exercise of a Stock Appreciation Right.
(b) Three types of Stock Appreciation Rights shall be authorized for
issuance under the Plan:
(1) TANDEM STOCK APPRECIATION RIGHTS. Tandem Stock Appreciation
Rights will be granted appurtenant to an Option, and shall, except as
specifically set forth in this Section 8, be subject to the same terms and
conditions applicable to the particular Option grant to which it pertains.
Tandem Stock Appreciation Rights will require the holder to elect between the
exercise of the underlying Option for shares of stock and the surrender, in
whole or in part, of such Option for an appreciation distribution. The
appreciation distribution payable on the exercised
9.
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Tandem Right shall be in cash (or, if so provided, in an equivalent number of
shares of stock based on Fair Market Value on the date of the Option surrender)
in an amount up to the excess of (A) the Fair Market Value (on the date of the
Option surrender) of the number of shares of stock covered by that portion of
the surrendered Option in which the Optionee is vested over (B) the aggregate
exercise price payable for such vested shares.
(2) CONCURRENT STOCK APPRECIATION RIGHTS. Concurrent Rights
will be granted appurtenant to an Option and may apply to all or any portion of
the shares of stock subject to the underlying Option and shall, except as
specifically set forth in this Section 8, be subject to the same terms and
conditions applicable to the particular Option grant to which it pertains. A
Concurrent Right shall be exercised automatically at the same time the
underlying Option is exercised with respect to the particular shares of stock to
which the Concurrent Right pertains. The appreciation distribution payable on
an exercised Concurrent Right shall be in cash (or, if so provided, in an
equivalent number of shares of stock based on Fair Market Value on the date of
the exercise of the Concurrent Right) in an amount equal to such portion as
shall be determined by the Board or the Committee at the time of the grant of
the excess of (A) the aggregate Fair Market Value (on the date of the exercise
of the Concurrent Right) of the vested shares of stock purchased under the
underlying Option which have Concurrent Rights appurtenant to them over (B) the
aggregate exercise price paid for such shares.
(3) INDEPENDENT STOCK APPRECIATION RIGHTS. Independent Rights
will be granted independently of any Option and shall, except as specifically
set forth in this Section 8, be subject to the same terms and conditions
applicable to Nonstatutory Stock Options as set forth in Section 6. They shall
be denominated in share equivalents. The appreciation distribution payable on
the exercised Independent Right shall be not greater than an amount equal to the
excess of (A) the aggregate Fair Market Value (on the date of the exercise of
the Independent Right) of a number of shares of Company stock equal to the
number of share equivalents in which the holder is vested under such Independent
Right, and with respect to which the holder is exercising the Independent Right
on such date, over (B) the aggregate Fair Market Value (on the date of the grant
of the Independent Right) of such number of shares of Company stock. The
appreciation distribution payable on the exercised Independent Right shall be in
cash or, if so provided, in an equivalent number of shares of stock based on
Fair Market Value on the date of the exercise of the Independent Right.
9. COVENANTS OF THE COMPANY.
(a) During the terms of the Stock Awards, the Company shall keep available
at all times the number of shares of stock required to satisfy such Stock
Awards.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares under Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
the Plan, any Stock Award or any stock issued or issuable pursuant to any such
Stock Award. If, after reasonable efforts, the Company is unable to obtain from
any such regulatory commission or agency the authority which counsel for the
Company deems necessary for the lawful issuance and sale of stock under the
Plan, the Company shall be relieved from any liability
10.
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for failure to issue and sell stock upon exercise of such Stock Awards unless
and until such authority is obtained.
10. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Stock Awards shall constitute
general funds of the Company.
11. MISCELLANEOUS.
(a) The Board shall have the power to accelerate the time at which a Stock
Award may first be exercised or the time during which a Stock Award or any part
thereof will vest, notwithstanding the provisions in the Stock Award stating the
time at which it may first be exercised or the time during which it will vest.
(b) Neither the recipient of a Stock Award nor any person to whom a Stock
Award is transferred in accordance with the Plan shall be deemed to be the
holder of, or to have any of the rights of a holder with respect to, any shares
subject to such Stock Award unless and until such person has satisfied all
requirements for exercise of the Stock Award pursuant to its terms.
(c) Nothing in the Plan or any instrument executed or Stock Award granted
pursuant thereto shall confer upon any recipient or other holder of Stock Awards
any right to continue in the employ of the Company or any Affiliate or to
continue serving as a Consultant or a Director, or shall affect the right of the
Company or any Affiliate to terminate the employment of any Employee with or
without notice and with or without cause, or the right to terminate the
relationship of any Consultant pursuant to the terms of such Consultant's
agreement with the Company or Affiliate or service as a Director pursuant to the
Company's Bylaws and the provisions of the corporate law of the state in which
the Company is incorporated.
(d) To the extent that the aggregate Fair Market Value (determined at the
time of grant) of stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year under
all plans of the Company and its Affiliates exceeds one hundred thousand dollars
($100,000), the Options or portions thereof which exceed such limit (according
to the order in which they were granted) shall be treated as Nonstatutory Stock
Options.
(e) The Company may require any person to whom a Stock Award is granted,
or any person to whom a Stock Award is transferred in accordance with the Plan,
as a condition of exercising or acquiring stock under any Stock Award, (1) to
give written assurances satisfactory to the Company as to such person's
knowledge and experience in financial and business matters and/or to employ a
purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters, and that he or
she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Stock Award; and (2) to
give written assurances satisfactory to the Company stating that such person is
acquiring the stock subject to the Stock Award for such person's own account and
not with any present intention of selling or otherwise distributing the stock.
The foregoing requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the shares upon the
exercise or acquisition of stock under the Stock Award has been registered under
a then currently effective
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registration statement under the Securities Act, or (ii) as to any particular
requirement, a determination is made by counsel for the Company that such
requirement need not be met in the circumstances under the then applicable
securities laws. The Company may, upon advice of counsel to the Company, place
legends on stock certificates issued under the Plan as such counsel deems
necessary or appropriate in order to comply with applicable securities laws,
including, but not limited to, legends restricting the transfer of the stock.
(f) To the extent provided by the terms of a Stock Award Agreement, the
person to whom a Stock Award is granted may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of stock
under a Stock Award by any of the following means (in addition to the Company's
right to withhold from any compensation paid to such person by the Company) or
by a combination of such means: (1) tendering a cash payment; (2) authorizing
the Company to withhold shares from the shares of the Common Stock otherwise
issuable to the participant as a result of the exercise or acquisition of stock
under the Stock Award; or (3) delivering to the Company owned and unencumbered
shares of the Common Stock of the Company.
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject to
any Stock Award, without the receipt of consideration by the Company (through
merger, consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company), the Plan will be appropriately adjusted in the class(es) and maximum
number of shares subject to the Plan pursuant to subsection 4(a) and the maximum
number of shares subject to award to any person during any calendar year
pursuant to subsection 5(c), and the outstanding Stock Awards will be
appropriately adjusted in the class(es) and number of shares and price per share
of stock subject to such outstanding Stock Awards. Such adjustments shall be
made by the Board, the determination of which shall be final, binding and
conclusive. (The conversion of any convertible securities of the Company shall
not be treated as a "transaction not involving the receipt of consideration by
the Company".)
(b) In the event of a proposed dissolution or liquidation of the Company,
the Board shall notify the Stock Award holder at least fifteen (15) days prior
to such proposed action. To the extent it has not been previously exercised,
the Stock Award shall terminate immediately prior to the consummation of such
proposed action.
(c) In the event of: (1) a dissolution, liquidation or sale of
substantially all of the assets of the Company; (2) a merger or consolidation
in which the Company is not the surviving corporation; or (3) a reverse merger
in which the Company is the surviving corporation but the shares of Common
Stock outstanding immediately preceding the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash or
otherwise, then (i) any surviving corporation or acquiring corporation shall
assume any Stock Awards outstanding under the Plan or shall substitute similar
stock awards (including an award to acquire the same consideration paid to the
stockholders in the transaction described in this subsection 12(b)) for those
outstanding under the Plan, or (ii) in the event any surviving corporation or
acquiring corporation refuses to assume such Stock Awards or to substitute
similar stock awards for those outstanding under the Plan, (A) with respect to
Stock
12.
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Awards held by persons whose Continuous Service has not terminated, the vesting
of such Stock Awards (and, if applicable, the time during which such Stock
Awards may be exercised) shall be accelerated prior to such event and the Stock
Awards terminated if not exercised (if applicable) after such acceleration and
at or prior to such event, and (B) with respect to any other Stock Awards
outstanding under the Plan, such Stock Awards shall be terminated if not
exercised (if applicable) prior to such event.
(d) In the event of the acquisition by any person, entity or group within
the meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable
successor provisions (excluding any employee benefit plan, or related trust,
sponsored or maintained by the Company or any Affiliate of the Company) of the
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act, or comparable successor rule) of securities of the Company
representing at least fifty percent (50%) of the combined voting power entitled
to vote in the election of directors, then, with respect to Stock Awards held by
persons whose Continuous Service has not terminated, the vesting of such Stock
Awards (and, if applicable, the time during which such Stock Awards may be
exercised) shall be accelerated immediately upon the happening of such event.
13. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 12 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company to the extent stockholder approval is necessary for the Plan to
satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any Nasdaq or
securities exchange listing requirements.
(b) The Board may in its sole discretion submit any other amendment to the
Plan for stockholder approval, including, but not limited to, amendments to the
Plan intended to satisfy the requirements of Section 162(m) of the Code and the
regulations thereunder regarding the exclusion of performance-based compensation
from the limit on corporate deductibility of compensation paid to certain
executive officers.
(c) It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide eligible Optionees
with the maximum benefits provided or to be provided under the provisions of the
Code and the regulations promulgated thereunder relating to Incentive Stock
Options and/or to bring the Plan and/or Incentive Stock Options granted under it
into compliance therewith.
(d) Rights under any Stock Award granted before amendment of the Plan
shall not be impaired by any amendment of the Plan unless (i) the Company
requests the consent of the person to whom the Stock Award was granted and (ii)
such person consents in writing.
(e) The Board at any time, and from time to time, may amend the terms of
any one or more Stock Awards; provided, however, that the rights under any Stock
Award shall not be impaired by any such amendment unless (i) the Company
requests the consent of the person to whom the Stock Award was granted and (ii)
such person consents in writing.
13.
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14. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate ten (10) years from the date the
Plan is adopted by the Board or approved by the stockholders of the Company,
whichever is earlier. No Stock Awards may be granted under the Plan while the
Plan is suspended or after it is terminated. Notwithstanding the foregoing, all
Incentive Stock Options shall be granted, if at all, no later than the last day
preceding the tenth (10th) anniversary of the earlier of (i) the date on which
the latest increase in the maximum number of shares issuable under the Plan was
approved by the stockholders of the Company or (ii) the date such amendment was
adopted by the Board.
(b) Rights and obligations under any Stock Award granted while the Plan is
in effect shall not be impaired by suspension or termination of the Plan, except
with the consent of the person to whom the Stock Award was granted.
15. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as of the date of the closing of the IPO,
but no Options or rights to purchase restricted stock granted under the Plan
shall be exercised, and no stock bonuses shall be granted under the Plan, unless
and until the Plan has been approved by the stockholders of the Company, which
approval shall be within twelve (12) months before or after the date the Plan
was adopted by the Board.
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Exhibit 10.5
SCIENTIFIC LEARNING CORPORATION
1998 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
ADOPTED JUNE 6, 1998
APPROVED BY STOCKHOLDERS JUNE 26, 1998
TERMINATION DATE: JUNE 6, 2008
1. PURPOSE.
(a) The purpose of the 1998 Non-Employee Directors' Stock Option Plan (the
"Plan") is to provide a means by which each member of the Board of Directors of
Scientific Learning Corporation (the "Company") who is not otherwise at the time
of grant an employee of or consultant to the Company or of any Affiliate of the
Company, or a holder or a representative of the holder of 5% or more of the
Company's capital stock (each such person being hereafter referred to as a
"Non-Employee Director") will be given an opportunity to purchase stock of
the Company.
(b) The word "Affiliate" as used in the Plan means any parent corporation
or subsidiary corporation of the Company as those terms are defined in Sections
424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended
from time to time (the "Code").
(c) The Company, by means of the Plan, seeks to retain the services of
persons now serving as Non-Employee Directors of the Company, to secure and
retain the services of persons capable of serving in such capacity, and to
provide incentives for such persons to exert maximum efforts for the success of
the Company.
2. ADMINISTRATION.
(a) The Board of Directors of the Company (the "Board") shall administer
the Plan unless and until the Board delegates administration to a committee, as
provided in subparagraph 2(b).
(b) The Board may delegate administration of the Plan to a committee
composed of two (2) or more members of the Board (the "Committee"). If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore possessed
by the Board, subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
3. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of paragraph 10 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to options granted under
the Plan shall not exceed in the aggregate One Hundred Thousand (100,000) shares
of the Company's common stock. If any option granted under the Plan shall for
any reason expire or
1.
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otherwise terminate without having been exercised in full, the stock not
purchased under such option shall again become available for the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
4. ELIGIBILITY.
Options shall be granted only to Non-Employee Directors of the Company.
5. NON-DISCRETIONARY GRANTS AND COMPENSATION.
(i) Upon the closing of the initial public offering (the "IPO") of
the Company, each person who is then a Non-Employee Director, and after the IPO,
upon the election to the Board of Directors of a new member who is a
Non-Employee Director, automatically shall be granted options to purchase
Twenty Thousand (20,000) shares of common stock of the Company on the
terms and conditions set forth herein; provided, however, that (unless
otherwise determined by a majority of disinterested Directors) such Initial
Grant shall only be granted to Non-Employee Directors who have not previously
been granted stock options or had the opportunity to purchase restricted stock
in the Company in connection with their service as a Director of the Company.
(b) Each person who is a Non-Employee Director on the first anniversary of
the IPO automatically shall, on such day and each anniversary thereafter, be
granted an option to purchase Four Thousand (4,000) shares of common stock of
the Company on the terms and conditions set forth herein (an "Annual Grant").
(c) Each person who is elected for the first time to be a Non-Employee
Director after the first anniversary of the IPO automatically also shall be
granted an Annual Grant on each anniversary of the date such Non-Employee
Director was elected to be a Non-Employee Director by the Board or stockholders.
6. OPTION PROVISIONS.
Each option shall be subject to the following terms and conditions:
(a) The term of each option commences on the date it is granted and,
unless sooner terminated as set forth herein, expires on the date ten (10) years
from the date of grant ("Expiration Date"). If the optionee's service as a
Non-Employee Director of the Company or an employee, member of the Board of
Directors or consultant to the Company or any Affiliate terminates for any
reason or for no reason, the option shall terminate on the earlier of the
Expiration Date or the date twelve (12) months following the date of
termination of all such service; PROVIDED, HOWEVER, that if such termination of
service is due to the optionee's death, the option shall terminate on the
earlier of the Expiration Date or eighteen (18) months following the date of
the optionee's death.
2.
<PAGE>
(b) The exercise price of each option shall be equal to one hundred
percent (100%) of the Fair Market Value of the stock (as such term is defined in
subsection 9(d)) subject to such option on the date such option is granted.
(c) The optionee may elect to make payment of the exercise price under one
of the following alternatives:
(i) Payment of the exercise price per share in cash at the time of
exercise;
(ii) Provided that at the time of the exercise the Company's common
stock is publicly traded and quoted regularly in THE WALL STREET JOURNAL,
payment by delivery of shares of common stock of the Company already owned by
the optionee, held for the period required to avoid a charge to the Company's
reported earnings, and owned free and clear of any liens, claims, encumbrances
or security interest, which common stock shall be valued at its Fair Market
Value on the date preceding the date of exercise; or
(iii) Payment pursuant to a program developed under Regulation T as
promulgated by the Federal Reserve Board which results in the receipt of cash
(or check) by the Company either prior to the issuance of shares of the
Company's common stock or pursuant to the terms of irrevocable instructions
issued by the optionee prior to the issuance of shares of the Company's common
stock.
(iv) Payment by a combination of the methods of payment specified in
subparagraph 6(c)(i) through 6(c)(iii) above.
(d) An option shall be transferable only to the extent specifically
provided in the option agreement; PROVIDED, HOWEVER, that if the option
agreement does not specifically provide for the transferability of an option,
then the option shall not be transferable except by will or by the laws of
descent and distribution, and shall be exercisable during the lifetime of the
person to whom the option is granted only by such person (or by his guardian or
legal representative) or transferee pursuant to such an order. Notwithstanding
the foregoing, the optionee may, by delivering written notice to the Company in
a form satisfactory to the Company, designate a third party who, in the event of
the death of the optionee, shall thereafter be entitled to exercise the option.
(e) The Initial Grant shall vest quarterly over the four (4)-year period
following the date of grant such that the entire Initial Grant shall become
exercisable on the fourth anniversary of the date of grant of the option,
provided that the optionee has, during the entire period prior to such vesting
installment date, continuously served as a Non-Employee Director or employee of
or consultant to the Company or any Affiliate of the Company, whereupon such
option shall become fully vested and exercisable in accordance with its terms
with respect to that portion of the shares represented by that installment.
(f) The Annual Grant shall vest quarterly over the one (1)-year period
following the date of grant such that the entire Annual Grant shall become
exercisable on the one (1)-year anniversary of the date of grant of the option,
provided that the optionee has, during the entire
3.
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period prior to such vesting installment date, continuously served as a
Non-Employee Director or employee of or consultant to the Company or any
Affiliate of the Company, whereupon such option shall become fully vested and
exercisable in accordance with its terms with respect to that portion of the
shares represented by that installment.
(g) The Company may require any optionee, or any person to whom an option
is transferred under subparagraph 6(d), as a condition of exercising any such
option: (i) to give written assurances satisfactory to the Company as to the
optionee's knowledge and experience in financial and business matters; and
(ii) to give written assurances satisfactory to the Company stating that such
person is acquiring the stock subject to the option for such person's own
account and not with any present intention of selling or otherwise distributing
the stock. These requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the shares upon the
exercise of the option has been registered under a then currently-effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), or (ii) as to any particular requirement, a determination is
made by counsel for the Company that such requirement need not be met in the
circumstances under the then applicable securities laws. The Company may
require any optionee to provide such other representations, written assurances
or information that the Company shall determine is necessary, desirable or
appropriate to comply with applicable securities laws as a condition of granting
an option to the optionee or permitting the optionee to exercise the option.
The Company may, upon advice of counsel to the Company, place legends on stock
certificates issued under the Plan as such counsel deems necessary or
appropriate in order to comply with applicable securities laws, including, but
not limited to, legends restricting the transfer of the stock.
(h) Notwithstanding anything to the contrary contained herein, an option
may not be exercised unless the shares issuable upon exercise of such option are
then registered under the Securities Act or, if such shares are not then so
registered, the Company has determined that such exercise and issuance would be
exempt from the registration requirements of the Securities Act.
7. COVENANTS OF THE COMPANY.
(a) During the terms of the options granted under the Plan, the Company
shall keep available at all times the number of shares of stock required to
satisfy such options.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the options granted under the
Plan; PROVIDED HOWEVER, that this
4.
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undertaking shall not require the Company to register under the Securities Act
either the Plan, any option granted under the Plan, or any stock issued or
issuable pursuant to any such option. If, after reasonable efforts, the Company
is unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such options.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to options granted under the Plan
shall constitute general funds of the Company.
9. MISCELLANEOUS.
(a) Neither an optionee nor any person to whom an option is transferred
under subparagraph 6(d) shall be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares subject to such option unless
and until such person has satisfied all requirements for exercise of the option
pursuant to its terms.
(b) Nothing in the Plan or in any instrument executed pursuant thereto
shall confer upon any Non-Employee Director any right to continue in the service
of the Company or any Affiliate in any capacity or shall affect any right of the
Company, its Board or shareholders or any Affiliate, to remove any Non-Employee
Director pursuant to the Company's Bylaws and the provisions of Delaware general
corporation law.
(c) In connection with each option made pursuant to the Plan, it shall be
a condition precedent to the Company's obligation to issue or transfer shares to
a Non-Employee Director, or to evidence the removal of any restrictions on
transfer, that such Non-Employee Director make arrangements satisfactory to the
Company to insure that the amount of any federal, state or local withholding tax
required to be withheld with respect to such sale or transfer, or such removal
or lapse, is made available to the Company for timely payment of such tax.
(d) As used in this Plan, "Fair Market Value" means, as of any date, the
value of the common stock of the Company determined as follows:
(i) If the common stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq National
Market or The Nasdaq SmallCap, the Fair Market Value of a share of common stock
shall be the closing sales price for such stock (or the closing bid, if no sales
were reported) as quoted on such system or exchange (or the exchange with the
greatest volume of trading in common stock) on the last market trading day prior
to the day of determination, as reported in THE WALL STREET JOURNAL or such
other source as the Board deems reliable; or
(ii) In the absence of an established market for the common stock,
the Fair Market Value shall be determined in good faith by the Board.
5.
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10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject to
any option granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan and outstanding options will
be appropriately adjusted in the class(es) and maximum number of shares subject
to the Plan and the class(es) and number of shares and price per share of stock
subject to outstanding options. The Board shall make such adjustments, and the
determination of the Board shall be final, binding and conclusive. (The
conversion of any convertible securities of the Company shall not be treated as
a "transaction not involving the receipt of consideration by the Company.")
(b) In the event of: (1) a dissolution, liquidation or sale of
substantially all of the assets of the Company; (2) a merger or consolidation
in which the Company is not the surviving corporation; or (3) a reverse
merger in which the Company is the surviving corporation but the shares of
Common Stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property, whether in the form of securities,
cash or otherwise, then (i) any surviving corporation or acquiring
corporation shall assume any options outstanding under the Plan or shall
substitute similar options (including an option to acquire the same
consideration paid to the stockholders in the transaction described in this
subsection 6(b)) for those outstanding under the Plan, or (ii) in the event
any surviving corporation or acquiring corporation refuses to assume such
options or to substitute similar options for those outstanding under the
Plan, (A) with respect to options held by persons whose continuous service
has not terminated, the vesting of such options (and, if applicable, the time
during which such options may be exercised) shall be accelerated prior to
such event and the options terminated if not exercised (if applicable) after
such acceleration and at or prior to such event, and (B) with respect to any
other options outstanding under the Plan, such options shall be terminated if
not exercised (if applicable) prior to such event.
(c) In the event of the acquisition by any person, entity or group
within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any
comparable successor provisions (excluding any employee benefit plan, or
related trust, sponsored or maintained by the Company or any Affiliate of the
Company) of the beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act, or comparable successor rule) of
securities of the Company representing at least fifty percent (50%) of the
combined voting power entitled to vote in the election of directors, then,
with respect to options held by persons whose continuous service has not
terminated, the vesting of such options (and, if applicable, the time during
which such options may be exercised) shall be accelerated immediately upon
the happening of such event.
11. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan
and/or some or all outstanding options granted under the Plan. However, except
as provided in paragraph 10 relating to adjustments upon changes in stock, no
amendment shall be effective unless approved by the shareholders of the Company
to the extent shareholder approval is necessary for the Plan to satisfy the
requirements of Rule 16b-3 under the Exchange Act or any Nasdaq or securities
exchange listing requirements.
(b) Rights and obligations under any option granted before any amendment
of the Plan shall not be impaired by such amendment unless (i) the Company
requests the consent of the person to whom the option was granted and (ii) such
person consents in writing.
6.
<PAGE>
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate ten (10) years after the date
adopted by the Board. No options may be granted under the Plan while the Plan
is suspended or after it is terminated.
(b) Suspension or termination of the Plan shall not impair rights and
obligations under any option granted while the Plan is in effect, except with
the consent of the person to whom the option was granted.
13. EFFECTIVE DATE OF PLAN; CONDITIONS OF EXERCISE.
(a) The Plan shall become effective on the same day that the Company's
initial public offering of shares of common stock becomes effective, subject to
the condition subsequent that the shareholders of the Company approve the Plan.
(b) No option granted under the Plan shall be exercised or exercisable
unless and until the condition of subparagraph 13(a) above has been met.
7.
<PAGE>
EXHIBIT 10.8
SCIENTIFIC LEARNING CORPORATION
1998 EMPLOYEE STOCK PURCHASE PLAN
ADOPTED JUNE 6, 1998
APPROVED BY STOCKHOLDERS JUNE 26, 1998
NO TERMINATION DATE
1. PURPOSE.
(a) The purpose of the 1998 Employee Stock Purchase Plan (the "Plan") is
to provide a means by which employees of Scientific Learning Corporation, a
Delaware corporation (the "Company"), and its Affiliates, as defined in
subparagraph 1(b), which are designated as provided in subparagraph 2(b), may be
given an opportunity to purchase common stock of the Company.
(b) The word "Affiliate" as used in the Plan means any parent corporation
or subsidiary corporation of the Company, as those terms are defined in Sections
424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended
(the "Code").
(c) The Company, by means of the Plan, seeks to retain the services of its
employees, to secure and retain the services of new employees, and to provide
incentives for such persons to exert maximum efforts for the success of the
Company.
(d) The Company intends that the rights to purchase stock of the Company
granted under the Plan be considered options issued under an "employee stock
purchase plan" as that term is defined in Section 423(b) of the Code
2. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors (the "Board")
of the Company unless and until the Board delegates administration to a
Committee, as provided in subparagraph 2(c). Whether or not the Board has
delegated administration, the Board shall have the final power to determine all
questions of policy and expediency that may arise in the administration of the
Plan.
(b) The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(i) To determine when and how rights to purchase stock of the
Company shall be granted and the provisions of each offering of such rights
(which need not be identical).
(ii) To designate from time to time which Affiliates of the
Company shall be eligible to participate in the Plan.
(iii) To construe and interpret the Plan and rights granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the
1.
<PAGE>
exercise of this power, may correct any defect, omission or inconsistency in
the Plan, in a manner and to the extent it shall deem necessary or expedient
to make the Plan fully effective.
(iv) To amend the Plan as provided in paragraph 13.
(v) Generally, to exercise such powers and to perform such acts
as the Board deems necessary or expedient to promote the best interests of
the Company and its Affiliates and to carry out the intent that the Plan be
treated as an "employee stock purchase plan" within the meaning of Section
423 of the Code.
(c) The Board may delegate administration of the Plan to a Committee
composed of not fewer than two (2) members of the Board (the "Committee")
constituted in accordance with the requirements of Rule 16b-3 ("Rule 16b-3")
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore possessed
by the Board, subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
3. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of paragraph 12 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to rights granted under
the Plan shall not exceed in the aggregate Five Hundred Thousand (500,000)
shares of the Company's common stock (the "Common Stock"). If any right granted
under the Plan shall for any reason terminate without having been exercised, the
Common Stock not purchased under such right shall again become available for the
Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
4. GRANT OF RIGHTS; OFFERING.
(a) The Board or the Committee may from time to time grant or provide for
the grant of rights to purchase Common Stock of the Company under the Plan to
eligible employees (an "Offering") on a date or dates (the "Offering Date(s)")
selected by the Board or the Committee. Each Offering shall be in such form and
shall contain such terms and conditions as the Board or the Committee shall deem
appropriate, which shall comply with the requirements of Section 423(b)(5) of
the Code that all employees granted rights to purchase stock under the Plan
shall have the same rights and privileges. The terms and conditions of an
Offering shall be incorporated by reference into the Plan and treated as part of
the Plan. The provisions of separate Offerings need not be identical, but each
Offering shall include (through incorporation of the provisions of this Plan by
reference in the document comprising the Offering or otherwise) the period
during which the Offering shall be effective, which period shall not exceed
twenty-seven (27) months beginning with the Offering Date, and the substance of
the provisions contained in paragraphs 5 through 8, inclusive.
2.
<PAGE>
(b) If an employee has more than one right outstanding under the Plan,
unless he or she otherwise indicates in agreements or notices delivered
hereunder: (1) each agreement or notice delivered by that employee will be
deemed to apply to all of his or her rights under the Plan, and (2) a right with
a lower exercise price (or an earlier-granted right, if two rights have
identical exercise prices), will be exercised to the fullest possible extent
before a right with a higher exercise price (or a later-granted right, if two
rights have identical exercise prices) will be exercised.
5. ELIGIBILITY.
(a) Rights may be granted only to employees of the Company or, as the
Board or the Committee may designate as provided in subparagraph 2(b), to
employees of any Affiliate of the Company. Except as provided in subparagraph
5(b), an employee of the Company or any Affiliate shall not be eligible to be
granted rights under the Plan, unless, on the Offering Date, such employee has
been in the employ of the Company or any Affiliate for such continuous period
preceding such grant as the Board or the Committee may require, but in no event
shall the required period of continuous employment be equal to or greater than
two (2) years. In addition, unless otherwise determined by the Board or the
Committee and set forth in the terms of the applicable Offering, no employee of
the Company or any Affiliate shall be eligible to be granted rights under the
Plan, unless, on the Offering Date, such employee's customary employment with
the Company or such Affiliate is for at least twenty (20) hours per week and at
least five (5) months per calendar year.
(b) The Board or the Committee may provide that, each person who, during
the course of an Offering, first becomes an eligible employee of the Company or
designated Affiliate will, on a date or dates specified in the Offering which
coincides with the day on which such person becomes an eligible employee or
occurs thereafter, receive a right under that Offering, which right shall
thereafter be deemed to be a part of that Offering. Such right shall have the
same characteristics as any rights originally granted under that Offering, as
described herein, except that:
(i) the date on which such right is granted shall be the
"Offering Date" of such right for all purposes, including determination of
the exercise price of such right;
(ii) the period of the Offering with respect to such right shall
begin on its Offering Date and end coincident with the end of such Offering;
and
(iii) the Board or the Committee may provide that if such person
first becomes an eligible employee within a specified period of time before
the end of the Offering, he or she will not receive any right under that
Offering.
(c) No employee shall be eligible for the grant of any rights under the
Plan if, immediately after any such rights are granted, such employee owns stock
possessing five percent (5%) or more of the total combined voting power or value
of all classes of stock of the Company or of any Affiliate. For purposes of
this subparagraph 5(c), the rules of Section 424(d) of the Code shall apply in
determining the stock ownership of any employee, and stock which such
3.
<PAGE>
employee may purchase under all outstanding rights and options shall be
treated as stock owned by such employee.
(d) An eligible employee may be granted rights under the Plan only if such
rights, together with any other rights granted under "employee stock purchase
plans" of the Company and any Affiliates, as specified by Section 423(b)(8) of
the Code, do not permit such employee's rights to purchase stock of the Company
or any Affiliate to accrue at a rate which exceeds twenty five thousand dollars
($25,000) of fair market value of such stock (determined at the time such rights
are granted) for each calendar year in which such rights are outstanding at any
time.
(e) Officers of the Company and any designated Affiliate shall be eligible
to participate in Offerings under the Plan, provided, however, that the Board
may provide in an Offering that certain employees who are highly compensated
employees within the meaning of Section 423(b)(4)(D) of the Code shall not be
eligible to participate.
6. RIGHTS; PURCHASE PRICE.
(a) On each Offering Date, each eligible employee, pursuant to an Offering
made under the Plan, shall be granted the right to purchase up to the number of
shares of Common Stock of the Company purchasable with a percentage designated
by the Board or the Committee not exceeding fifteen percent (15%) of such
employee's Earnings (as defined by the Board or the Committee in each Offering)
during the period which begins on the Offering Date (or such later date as the
Board or the Committee determines for a particular Offering) and ends on the
date stated in the Offering, which date shall be no later than the end of the
Offering. The Board or the Committee shall establish one or more dates during
an Offering (the "Purchase Date(s)") on which rights granted under the Plan
shall be exercised and purchases of Common Stock carried out in accordance with
such Offering.
(b) In connection with each Offering made under the Plan, the Board or the
Committee may specify a maximum number of shares that may be purchased by any
employee as well as a maximum aggregate number of shares that may be purchased
by all eligible employees pursuant to such Offering. In addition, in connection
with each Offering that contains more than one Purchase Date, the Board or the
Committee may specify a maximum aggregate number of shares which may be
purchased by all eligible employees on any given Purchase Date under the
Offering. If the aggregate purchase of shares upon exercise of rights granted
under the Offering would exceed any such maximum aggregate number, the Board or
the Committee shall make a pro rata allocation of the shares available in as
nearly a uniform manner as shall be practicable and as it shall deem to be
equitable.
(c) The purchase price of stock acquired pursuant to rights granted under
the Plan shall be not less than the lesser of:
(i) an amount equal to eighty-five percent (85%) of the fair
market value of the stock on the Offering Date; or
(ii) an amount equal to eighty-five percent (85%) of the fair
market value of the stock on the Purchase Date.
4.
<PAGE>
7. PARTICIPATION; WITHDRAWAL; TERMINATION.
(a) An eligible employee may become a participant in the Plan pursuant to
an Offering by delivering a participation agreement to the Company within the
time specified in the Offering, in such form as the Company provides. Each such
agreement shall authorize payroll deductions of up to the maximum percentage
specified by the Board or the Committee of such employee's Earnings during the
Offering (as defined by the Board or Committee in each Offering). The payroll
deductions made for each participant shall be credited to an account for such
participant under the Plan and shall be deposited with the general funds of the
Company. A participant may reduce (including to zero) or increase such payroll
deductions, and an eligible employee may begin such payroll deductions, after
the beginning of any Offering only as provided for in the Offering. A
participant may make additional payments into his or her account only if
specifically provided for in the Offering and only if the participant has not
had the maximum amount withheld during the Offering.
(b) At any time during an Offering, a participant may terminate his or her
payroll deductions under the Plan and withdraw from the Offering by delivering
to the Company a notice of withdrawal in such form as the Company provides.
Such withdrawal may be elected at any time prior to the end of the Offering
except as provided by the Board or the Committee in the Offering. Upon such
withdrawal from the Offering by a participant, the Company shall distribute to
such participant all of his or her accumulated payroll deductions (reduced to
the extent, if any, such deductions have been used to acquire stock for the
participant) under the Offering, without interest, and such participant's
interest in that Offering shall be automatically terminated. A participant's
withdrawal from an Offering will have no effect upon such participant's
eligibility to participate in any other Offerings under the Plan but such
participant will be required to deliver a new participation agreement in order
to participate in subsequent Offerings under the Plan.
(c) Rights granted pursuant to any Offering under the Plan shall terminate
immediately upon cessation of any participating employee's employment with the
Company and any designated Affiliate, for any reason, and the Company shall
distribute to such terminated employee all of his or her accumulated payroll
deductions (reduced to the extent, if any, such deductions have been used to
acquire stock for the terminated employee) under the Offering, without interest.
(d) Rights granted under the Plan shall not be transferable by a
participant otherwise than by will or the laws of descent and distribution, or
by a beneficiary designation as provided in paragraph 14 and, otherwise during
his or her lifetime, shall be exercisable only by the person to whom such rights
are granted.
8. EXERCISE.
(a) On each Purchase Date specified therefor in the relevant Offering,
each participant's accumulated payroll deductions and other additional payments
specifically provided for in the Offering (without any increase for interest)
will be applied to the purchase of whole shares of stock of the Company, up to
the maximum number of shares permitted pursuant to the terms of the Plan and the
applicable Offering, at the purchase price specified in the Offering. No
5.
<PAGE>
fractional shares shall be issued upon the exercise of rights granted under
the Plan. The amount, if any, of accumulated payroll deductions remaining in
each participant's account after the purchase of shares which is less than
the amount required to purchase one share of stock on the final Purchase Date
of an Offering shall be held in each such participant's account for the
purchase of shares under the next Offering under the Plan, unless such
participant withdraws from such next Offering, as provided in subparagraph
7(b), or is no longer eligible to be granted rights under the Plan, as
provided in paragraph 5, in which case such amount shall be distributed to
the participant after such final Purchase Date, without interest. The
amount, if any, of accumulated payroll deductions remaining in any
participant's account after the purchase of shares which is equal to the
amount required to purchase whole shares of stock on the final Purchase Date
of an Offering shall be distributed in full to the participant after such
Purchase Date, without interest.
(b) No rights granted under the Plan may be exercised to any extent unless
the shares to be issued upon such exercise under the Plan (including rights
granted thereunder) are covered by an effective registration statement pursuant
to the Securities Act of 1933, as amended (the "Securities Act") and the Plan is
in material compliance with all applicable state, foreign and other securities
and other laws applicable to the Plan. If on a Purchase Date in any Offering
hereunder the Plan is not so registered or in such compliance, no rights granted
under the Plan or any Offering shall be exercised on such Purchase Date, and the
Purchase Date shall be delayed until the Plan is subject to such an effective
registration statement and such compliance, except that the Purchase Date shall
not be delayed more than twelve (12) months and the Purchase Date shall in no
event be more than twenty-seven (27) months from the Offering Date. If on the
Purchase Date of any Offering hereunder, as delayed to the maximum extent
permissible, the Plan is not registered and in such compliance, no rights
granted under the Plan or any Offering shall be exercised and all payroll
deductions accumulated during the Offering (reduced to the extent, if any, such
deductions have been used to acquire stock) shall be distributed to the
participants, without interest.
9. COVENANTS OF THE COMPANY.
(a) During the terms of the rights granted under the Plan, the Company
shall keep available at all times the number of shares of stock required to
satisfy such rights.
(b) The Company shall seek to obtain from each federal, state, foreign or
other regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to issue and sell shares of stock upon exercise of
the rights granted under the Plan. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such rights unless and until
such authority is obtained.
10. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to rights granted under the Plan
shall constitute general funds of the Company.
6.
<PAGE>
11. RIGHTS AS A STOCKHOLDER.
A participant shall not be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares subject to rights granted
under the Plan unless and until the participant's shareholdings acquired upon
exercise of rights under the Plan are recorded in the books of the Company.
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject to
any rights granted under the Plan (through merger, consolidation,
reorganization, recapitalization, reincorporation, stock dividend, dividend in
property other than cash, stock split, liquidating dividend, combination of
shares, exchange of shares, change in corporate structure or other transaction
not involving the receipt of consideration by the Company), the Plan and
outstanding rights will be appropriately adjusted in the class(es) and maximum
number of shares subject to the Plan and the class(es) and number of shares and
price per share of stock subject to outstanding rights. Such adjustments shall
be made by the Board or the Committee, the determination of which shall be
final, binding and conclusive. (The conversion of any convertible securities of
the Company shall not be treated as a "transaction not involving the receipt of
consideration by the Company.")
(b) In the event of: (1) a dissolution or liquidation of the Company;
(2) a merger or consolidation in which the Company is not the surviving
corporation; (3) a reverse merger in which the Company is the surviving
corporation but the shares of the Company's Common Stock outstanding immediately
preceding the merger are converted by virtue of the merger into other property,
whether in the form of securities, cash or otherwise; or (4) the acquisition by
any person, entity or group within the meaning of Section 13(d) or 14(d) of the
Exchange Act or any comparable successor provisions (excluding any employee
benefit plan, or related trust, sponsored or maintained by the Company or any
Affiliate of the Company) of the beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of
securities of the Company representing at least fifty percent (50%) of the
combined voting power entitled to vote in the election of directors, then, as
determined by the Board in its sole discretion (i) any surviving or acquiring
corporation may assume outstanding rights or substitute similar rights for those
under the Plan, (ii) such rights may continue in full force and effect, or
(iii) participants' accumulated payroll deductions may be used to purchase
Common Stock immediately prior to the transaction described above and the
participants' rights under the ongoing Offering terminated.
13. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in paragraph 12 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company to the extent stockholder approval is necessary for the Plan to
satisfy the requirements of Section 423 of the Code, Rule 16b-3 or any Nasdaq or
securities exchange listing requirements.
7.
<PAGE>
(b) The Board may in its sole discretion submit any other amendment to the
Plan for stockholder approval, including.
(c) It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide employees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to employee stock purchase plans
and/or to bring the Plan and/or rights granted under it into compliance
therewith.
(d) Rights and obligations under any rights granted before amendment of
the Plan shall not be impaired by any amendment of the Plan, except with the
consent of the person to whom such rights were granted, or except as necessary
to comply with any laws or governmental regulations, or except as necessary to
ensure that the Plan and/or rights granted under the Plan comply with the
requirements of Section 423 of the Code.
14. DESIGNATION OF BENEFICIARY.
(a) A participant may file a written designation of a beneficiary who is
to receive any shares and cash, if any, from the participant's account under the
Plan in the event of such participant's death subsequent to the end of an
Offering but prior to delivery to the participant of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death during an Offering.
(b) The participant may change such designation of beneficiary at any time
by written notice. In the event of the death of a participant and in the
absence of a beneficiary validly designated under the Plan who is living at the
time of such participant's death, the Company shall deliver such shares and/or
cash to the executor or administrator of the estate of the participant, or if no
such executor or administrator has been appointed (to the knowledge of the
Company), the Company, in its sole discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
15. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board in its discretion may suspend or terminate the Plan at any
time. Unless sooner terminated, the Plan shall terminate at the time that all
of the shares subject to the Plan's share reserve, as increased and/or adjusted
from time to time, have been issued under the terms of the Plan. No rights may
be granted under the Plan while the Plan is suspended or after it is terminated.
(b) Rights and obligations under any rights granted while the Plan is in
effect shall not be impaired by suspension or termination of the Plan, except as
expressly provided in the Plan or with the consent of the person to whom such
rights were granted, or except as necessary to comply with any laws or
governmental regulation, or except as necessary to ensure that the Plan and/or
rights granted under the Plan comply with the requirements of Section 423 of the
Code.
8.
<PAGE>
16. EFFECTIVE DATE OF PLAN.
The Plan shall become effective on the same day that the Company's initial
public offering of shares of common stock becomes effective (the "Effective
Date"), but no rights granted under the Plan shall be exercised unless and until
the Plan has been approved by the stockholders of the Company within twelve (12)
months before or after the date the Plan is adopted by the Board or the
Committee, which date may be prior to the Effective Date.
9.
<PAGE>
EXHIBIT 10-9
SCIENTIFIC LEARNING CORPORATION
1998 EMPLOYEE STOCK PURCHASE PLAN OFFERING
ADOPTED BY BOARD OF DIRECTORS JUNE 6, 1998
1. GRANT; OFFERING DATE.
(a) The Board of Directors of Scientific Learning Corporation, a Delaware
corporation (the "Company"), pursuant to the Company's 1998 Employee Stock
Purchase Plan (the "Plan"), hereby authorizes the grant of rights to purchase
shares of the common stock of the Company ("Common Stock") to all Eligible
Employees (an "Offering"). The first day of an Offering is that Offering's
"Offering Date." An Offering may consist of one (1) or more consecutive
"Purchase Periods." The last day of each Purchase Period during an Offering
shall be a "Purchase Date" for that Offering. If an Offering Date or Purchase
Date does not fall on a day during which the Company's Common Stock is actively
traded, then the Offering Date or Purchase Date, as the case may be, shall be
the next subsequent day during which the Company's Common Stock is actively
traded.
(b) Unless otherwise specifically provided herein, the first Purchase
Period of an Offering shall begin on the Offering Date and shall end
approximately six (6) months thereafter on the next February 28 (February 29
during a leap year) or August 31, as the case may be. Subsequent Purchase
Periods during the Offering shall begin each March 1 and September 1 and
shall end six (6) months thereafter on August 31 or February 28 (February 29
during a leap year), as the case may be.
(c) The first Offering shall begin on the effective date of the initial
public offering of the Company's Common Stock and end on August 31, 1999, unless
terminated sooner as herein provided (the "Initial Offering"). The Initial
Offering will be divided into two (2) shorter Purchase Periods of approximately
six (6) months in duration. The first Purchase Period shall begin on the
Offering Date and shall end on February 28, 1999 and the second Purchase Period
shall begin on March 1, 1999 and end on August 31, 1999. Thereafter, an
Offering shall begin on September 1st of every year and shall end twelve (12)
months later on the day prior to the next Offering Date.
(d) Prior to the commencement of any Offering, the Board of Directors (or
the Committee described in subparagraph 2(c) of the Plan, if any) may change any
or all terms of such Offering and any subsequent Offerings. The granting of
rights pursuant to each Offering hereunder shall occur on each respective
Offering Date unless, prior to such date (a) the Board of Directors (or such
Committee) determines that such Offering shall not occur, or (b) no shares
remain available for issuance under the Plan in connection with the Offering.
(e) Notwithstanding any other provisions of an Offering, if the terms
of an Offering as previously established by the Board of Directors of the
Company would, as a result of a change to applicable accounting standards,
generate a charge to earnings, such Offering shall terminate effective as of
the day prior to the date such change of accounting standards
1.
<PAGE>
would otherwise first apply to the Offering (the "Offering Termination
Date"), and such Offering Termination Date shall be the final Purchase Date
of such Offering. A subsequent Offering shall commence on such date and on
such terms as shall be provided by the Board of Directors of the Company.
2. ELIGIBLE EMPLOYEES.
All employees of the Company and each of its Affiliates (as defined in the
Plan) incorporated in the United States, shall be granted rights to purchase
Common Stock under each Offering on the Offering Date (an "Eligible Employee").
Notwithstanding the foregoing, the following employees shall NOT be Eligible
Employees or be granted rights under an Offering: (i) part-time or seasonal
employees whose customary employment is less than 20 hours per week or five
months per calendar year or (ii) 5% stockholders (including ownership through
unexercised options) described in subparagraph 5(c) of the Plan.
3. RIGHTS.
(a) Subject to the limitations contained herein and in the Plan, on each
Offering Date each Eligible Employee shall be granted the right to purchase the
number of shares of Common Stock purchasable with up to fifteen percent (15%) of
such Eligible Employee's Earnings paid during such Offering; PROVIDED, HOWEVER,
that no employee may purchase Common Stock on a particular Purchase Date that
would result in more than fifteen percent (15%) of such employee's Earnings in
the period from the Offering Date to such Purchase Date having been applied to
purchase shares under all ongoing Offerings under the Plan and all other Company
plans intended to qualify as "employee stock purchase plans" under Section 423
of the Internal Revenue Code of 1986, as amended (the "Code").
(b) For purposes of this Offering, "Earnings" means the total compensation
paid to an employee, including all salary, wages (including amounts elected to
be deferred by the employee, that would otherwise have been paid, under any cash
or deferred arrangement established by the Company), overtime pay, commissions,
bonuses, and other remuneration paid directly to the employee, but excluding
profit sharing, the cost of employee benefits paid for by the Company, education
or tuition reimbursements, imputed income arising under any Company group
insurance or benefit program, traveling expenses, business and moving expense
reimbursements, income received in connection with stock options, contributions
made by the Company under any employee benefit plan, and similar items of
compensation.
(c) Subject to the limitations contained herein and in the Plan, each
employee who was not eligible on the Offering Date but who first becomes an
Eligible Employee during the Offering and prior to the March 1 during the
Offering shall, on such March 1 during that Offering, be granted the right to
purchase the number of shares of Common Stock purchasable with up to fifteen
percent (15%) of such employee's Earnings paid during his or her
participation in such Offering, which right shall be deemed to be a part of
the Offering. Such right shall have the same characteristics as any rights
originally granted under the Offering, except that (i) the date on which such
a right is granted shall be the "Offering Date" of such right for all
purposes, including determination of the exercise price of such right; and
(ii) the Offering
2.
<PAGE>
for such right shall begin on its Offering Date and end coincident with the
end of the ongoing Offering.
(d) The maximum number of shares of Common Stock an Eligible Employee may
purchase on any Purchase Date in an Offering shall be such number of shares as
has a fair market value (determined as of the Offering Date for such Offering)
equal to (x) $25,000 multiplied by the number of calendar years in which the
right under such Offering has been outstanding at any time, minus (y) the fair
market value of any other shares of Common Stock (determined as of the relevant
Offering Date with respect to such shares) which, for purposes of the limitation
of Section 423(b)(8) of the Code, are attributed to any of such calendar years
in which the right is outstanding. The amount in clause (y) of the previous
sentence shall be determined in accordance with regulations applicable under
Section 423(b)(8) of the Code based on (i) the number of shares previously
purchased with respect to such calendar years pursuant to such Offering or any
other Offering under the Plan, or pursuant to any other Company plans intended
to qualify as "employee stock purchase plans" under Section 423 of the Code, and
(ii) the number of shares subject to other rights outstanding on the Offering
Date for such Offering pursuant to the Plan or any other such Company plan.
(e) The maximum aggregate number of shares available to be purchased by
all Eligible Employees under an Offering shall be the number of shares remaining
available under the Plan on the Offering Date. If the aggregate purchase of
shares of Common Stock upon exercise of rights granted under the Offering would
exceed the maximum aggregate number of shares available, the Board shall make a
pro rata allocation of the shares available in a uniform and equitable manner.
4. PURCHASE PRICE.
The purchase price of the Common Stock under the Offering shall be the
lesser of eighty-five percent (85%) of the fair market value of the Common Stock
on the Offering Date or eighty-five percent (85%) of the fair market value of
the Common Stock on the Purchase Date, in each case rounded up to the nearest
whole cent per share. For the Initial Offering, the fair market value of the
Common Stock at the time when the Offering commences shall be the price per
share at which shares of Common Stock are first sold to the public in the
Company's initial public offering as specified in the final prospectus with
respect to that offering.
5. PARTICIPATION.
(a) An Eligible Employee may elect to participate in an Offering only at
the beginning of the Offering, or such later date specified in subparagraph
3(c). An Eligible Employee shall become a participant in an Offering by
delivering an agreement authorizing payroll deductions. Such deductions must be
in whole dollars or whole percentages, with a maximum percentage of fifteen
percent (15%) of Earnings. A participant may not make additional payments into
his or her account. The agreement shall be made on such enrollment form as the
Company or a designated Affiliate provides, and must be delivered to the Company
or designated Affiliate at least ten (10) days before the Offering Date, or
before such later date specified in subparagraph 3(c), to be effective, unless a
later time for filing the enrollment form
3.
<PAGE>
is set by the Board for all Eligible Employees with respect to a given
Offering Date. For the Initial Offering, the time for filing an enrollment
form and commencing participation for individuals who are Eligible Employees
on the Offering Date for the Initial Offering may be after the Offering Date,
as determined by the Company and communicated to such Eligible Employees.
(If the agreement authorizing payroll deductions is required to be delivered
to the Company or designated Affiliate a specified number of days before the
Offering Date to be effective, then an employee who becomes eligible during
the required delivery period shall not be considered to be an Eligible
Employee at the beginning of the Offering but may elect to participate during
the Offering as provided in subparagraph 3(c).)
(b) A participant may increase or reduce (including to zero) his or her
participation level effective as of the March 2 following the March 1 Purchase
Date during the course of an Offering. Any such change in participation shall
be made by delivering a notice to the Company or a designated Affiliate in such
form and at such time as the Company provides. In addition, a participant may
increase or decrease his or her deductions prior to the beginning of a new
Offering to be effective at the beginning of such new Offering. Except as
otherwise specifically provided herein, a participant may not increase or
decrease his or her participation level during the course of an Offering.
(c) A participant may withdraw from an Offering and receive his or her
accumulated payroll deductions from the Offering (reduced to the extent, if any,
such deductions have been used to acquire Common Stock for the participant on
any prior Purchase Dates), without interest, at any time prior to the end of the
Offering, excluding only each ten (10) day period immediately preceding a
Purchase Date (or such shorter period of time determined by the Company and
communicated to participants) by delivering a withdrawal notice to the Company
in such form as the Company provides. A participant who has withdrawn from an
Offering shall not again participate in such Offering but may participate in
subsequent Offerings under the Plan by submitting a new participation agreement
in accordance with the terms thereof.
(d) A participant shall automatically participate in the Offering
commencing immediately after the final Purchase Date of each Offering in which
the participant participates until such time as such participant (i) ceases to
be an Eligible Employee, (ii) withdraws from the Offering or (iii) terminates
employment. A participant who automatically participates in a subsequent
Offering is not required to file any additional enrollment form for such
subsequent Offering in order to continue participation in the Plan. However, a
participant may file an enrollment form with respect to such subsequent Offering
if the participant desires to change any of the participant's elections
contained in the participant's then effective enrollment form.
6. PURCHASES.
Subject to the limitations contained herein, on each Purchase Date, each
participant's accumulated payroll deductions (without any increase for interest)
shall be applied to the purchase of whole shares of Common Stock, up to the
maximum number of shares permitted under the Plan and the Offering.
4.
<PAGE>
7. NOTICES AND AGREEMENTS.
Any notices or agreements provided for in an Offering or the Plan shall be
given in writing, in a form provided by the Company, and unless specifically
provided for in the Plan or this Offering shall be deemed effectively given upon
receipt or, in the case of notices and agreements delivered by the Company,
five (5) days after deposit in the United States mail, postage prepaid.
8. EXERCISE CONTINGENT ON STOCKHOLDER APPROVAL.
The rights granted under an Offering are subject to the approval of the
Plan by the stockholders as required for the Plan to obtain treatment as a
tax-qualified employee stock purchase plan under Section 423 of the Code.
9. OFFERING SUBJECT TO PLAN.
Each Offering is subject to all the provisions of the Plan, and its
provisions are hereby made a part of the Offering, and is further subject to
all interpretations, amendments, rules and regulations which may from time to
time be promulgated and adopted pursuant to the Plan. In the event of any
conflict between the provisions of an Offering and those of the Plan
(including interpretations, amendments, rules and regulations that may from
time to time be promulgated and adopted pursuant to the Plan), the provisions
of the Plan shall control.
5.
<PAGE>
EXHIBIT 10.17
SCIENTIFIC LEARNING
PRINCIPLES CORPORATION
SECURITIES PURCHASE AGREEMENT
SEPTEMBER 24, 1996
<PAGE>
TABLE OF CONTENTS
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1. PURCHASE AND SALE OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . 1.
1.1 Sale And Issuance Of Series B Preferred Stock . . . . . . . . . . . . . 1.
1.2 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . . . . . . . . . 2.
2.1 Organization; Good Standing; Qualification. . . . . . . . . . . . . . . 2.
2.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.
2.3 Valid Issuance Of Preferred And Common Stock. . . . . . . . . . . . . . 3.
2.4 Governmental Consents . . . . . . . . . . . . . . . . . . . . . . . . . 3.
2.5 Capitalization And Voting Rights. . . . . . . . . . . . . . . . . . . . 3.
(a) Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 3.
(b) Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.
2.6 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.
2.7 Contracts And Other Commitments . . . . . . . . . . . . . . . . . . . . 5.
2.8 Related-Party Transactions. . . . . . . . . . . . . . . . . . . . . . . 5.
2.9 Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . 5.
2.10 Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.
2.11 Compliance With Other Instruments . . . . . . . . . . . . . . . . . . . 6.
2.12 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.
2.13 Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.
2.14 Offering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.
2.15 Material Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 7.
2.16 Patents And Trademarks. . . . . . . . . . . . . . . . . . . . . . . . . 7.
2.17 Manufacturing And Marketing Rights. . . . . . . . . . . . . . . . . . . 8.
2.18 Employees; Employee Compensation. . . . . . . . . . . . . . . . . . . . 8.
2.19 Environmental And Safety Laws . . . . . . . . . . . . . . . . . . . . . 8.
2.20 Minute Books. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.
2.21 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . 9.
2.22 Absence Of Certain Developments . . . . . . . . . . . . . . . . . . . . 9.
2.23 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.
2.24 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. . . . . . . . . . . . . . . .10.
3.1 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10.
3.2 Purchase Entirely For Own Account . . . . . . . . . . . . . . . . . . .10.
3.3 Reliance Upon Investor's Representations. . . . . . . . . . . . . . . .10.
3.4 Receipt Of Information. . . . . . . . . . . . . . . . . . . . . . . . .10.
3.5 Investment Experience . . . . . . . . . . . . . . . . . . . . . . . . .11.
3.6 Accredited Investor . . . . . . . . . . . . . . . . . . . . . . . . . .11.
3.7 Restricted Securities . . . . . . . . . . . . . . . . . . . . . . . . .11.
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TABLE OF CONTENTS
(CONTINUED)
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3.8 Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11.
3.9 Public Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12.
3.10 Right Of First Refusal. . . . . . . . . . . . . . . . . . . . . . . . .12.
4. CONDITIONS OF INVESTORS' OBLIGATIONS AT CLOSING . . . . . . . . . . . . . . .12.
4.1 Representations And Warranties. . . . . . . . . . . . . . . . . . . . .12.
4.2 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12.
4.3 Compliance Certificate. . . . . . . . . . . . . . . . . . . . . . . . .13.
4.4 Qualifications. . . . . . . . . . . . . . . . . . . . . . . . . . . . .13.
4.5 Proceedings And Documents . . . . . . . . . . . . . . . . . . . . . . .13.
4.6 Voting For Directors. . . . . . . . . . . . . . . . . . . . . . . . . .13.
4.7 Opinion Of Company Counsel. . . . . . . . . . . . . . . . . . . . . . .13.
4.8 Registration Rights Agreement . . . . . . . . . . . . . . . . . . . . .13.
4.9 Delivery Of The Shares And The Warrant. . . . . . . . . . . . . . . . .13.
4.10 Tag Along Rights Agreement. . . . . . . . . . . . . . . . . . . . . . .14.
4.11 Technology Agreements.. . . . . . . . . . . . . . . . . . . . . . . . .14.
4.12 Committee Findings. . . . . . . . . . . . . . . . . . . . . . . . . . .14.
5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. . . . . . . . . . . . . .14.
5.1 Representations And Warranties. . . . . . . . . . . . . . . . . . . . .14.
5.2 Qualifications. . . . . . . . . . . . . . . . . . . . . . . . . . . . .14.
5.3 Delivery Of Consideration . . . . . . . . . . . . . . . . . . . . . . .15.
5.4 Tag Along Rights Agreement. . . . . . . . . . . . . . . . . . . . . . .15.
6. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15.
6.1 Board Nominees. . . . . . . . . . . . . . . . . . . . . . . . . . . . .15.
(a) Company Covenant. . . . . . . . . . . . . . . . . . . . . . . . . .15.
(b) Investor Covenant . . . . . . . . . . . . . . . . . . . . . . . . .15.
6.2 Financial And Business Information. . . . . . . . . . . . . . . . . . .15.
(a) Monthly And Quarterly Statements. . . . . . . . . . . . . . . . . .16.
(b) Annual Statements . . . . . . . . . . . . . . . . . . . . . . . . .16.
(c) Business Plan; Projections. . . . . . . . . . . . . . . . . . . . .16.
(d) Audit Reports . . . . . . . . . . . . . . . . . . . . . . . . . . .16.
(e) Other Reports . . . . . . . . . . . . . . . . . . . . . . . . . . .17.
(f) Requested Information . . . . . . . . . . . . . . . . . . . . . . .17.
6.3 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . .17.
6.4 Conduct Of Business And Maintenance Of Existence. . . . . . . . . . . .17.
6.5 Compliance With Law . . . . . . . . . . . . . . . . . . . . . . . . . .17.
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(CONTINUED)
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6.6 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17.
6.7 Keeping Of Books. . . . . . . . . . . . . . . . . . . . . . . . . . . .18.
6.8 Subscription Right. . . . . . . . . . . . . . . . . . . . . . . . . . .18.
6.9 Injunctive Relief . . . . . . . . . . . . . . . . . . . . . . . . . . .19.
6.10 Additional Stock Issuances. . . . . . . . . . . . . . . . . . . . . . .20.
6.11 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20.
7. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20.
7.1 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . .20.
7.2 Survival Of Warranties. . . . . . . . . . . . . . . . . . . . . . . . .20.
7.3 Successors And Assigns. . . . . . . . . . . . . . . . . . . . . . . . .20.
7.4 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21.
7.5 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21.
7.6 Titles And Subtitles. . . . . . . . . . . . . . . . . . . . . . . . . .21.
7.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21.
7.8 Finder's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21.
7.9 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22.
7.10 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . .22.
7.11 Amendments And Waivers. . . . . . . . . . . . . . . . . . . . . . . . .22.
7.12 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22.
7.13 California Corporate Securities Law . . . . . . . . . . . . . . . . . .22.
7.14 No Reliance On Third Parties. . . . . . . . . . . . . . . . . . . . . .23.
7.15 Termination of Agreement. . . . . . . . . . . . . . . . . . . . . . . .23.
</TABLE>
<PAGE>
SCIENTIFIC LEARNING PRINCIPLES CORPORATION
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement") is made as of the
24th day of September, 1996, by and between SCIENTIFIC LEARNING PRINCIPLES
CORPORATION, a California corporation (the "Company"), and WARBURG, PINCUS
VENTURES, L.P., a Delaware limited partnership (the "Investor").
RECITALS
WHEREAS, the Company has authorized the sale and issuance of Four Million
Four Hundred Forty-Four Thousand Four Hundred Forty-Four (4,444,444) shares of
its Series B Preferred Stock (the "Shares") and a Warrant (the "Warrant") to
purchase Two Million Eight Hundred Fifty-Seven Thousand One Hundred Forty-Three
(2,857,143) shares of its Series C Preferred Stock (the "Series C Preferred");
WHEREAS, the Company desires to issue and sell and the Investor desires to
purchase the Series B Preferred on the terms and conditions set forth herein;
and
WHEREAS, the Company desires to issue and sell and the Investor desires to
purchase the Warrant on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises hereinafter set forth, the parties hereto agree as follows:
1. PURCHASE AND SALE OF SECURITIES.
1.1 SALE AND ISSUANCE OF SERIES B PREFERRED STOCK AND WARRANT.
(a) The Company shall adopt and file with the Secretary of State
of the State of California on or before the Closing (as defined below) an
Amended and Restated Articles of Incorporation in the form attached hereto as
Exhibit A (the "Restated Articles").
(b) Subject to the terms and conditions of this Agreement, the
Investor agrees to purchase at the Closing and the Company agrees to sell and
issue to the Investor at the Closing (i) the Four Million Four Hundred
Forty-Four Thousand Four Hundred Forty-Four (4,444,444) shares of Series B
Preferred Stock that constitute the Shares and (ii) the Warrant, in
substantially the form attached hereto as Exhibit C. The total consideration
paid by the Investor to the Company at the Closing for the Shares and the
Warrant shall be equal to Four Million Dollars ($4,000,000), of which Three
Million Nine Hundred Ninety-nine Thousand Dollars ($3,999,000) shall be
deemed consideration for the Shares and One Thousand Dollars ($1,000) shall
be deemed consideration for the Warrant. The Shares and the Series C
Preferred issuable upon exercise of
1.
<PAGE>
the Warrant (the "Warrant Shares") and the shares of Common Stock issuable
upon conversion of the Shares and the Warrant Shares will have the rights,
preferences, privileges and restrictions set forth in the Restated Articles.
1.2 CLOSING.
(a) The closing of the purchase and sale of the Shares and the
Warrant shall take place at the offices of Cooley Godward Castro Huddleson &
Tatum, San Francisco, California, at 9:00 a.m., on the date of this Agreement or
at such other time and place as the Company and Investor shall mutually agree,
either orally or in writing (which time and place are designated as the
"Closing").
(b) At the Closing, the Company shall deliver to the Investor
(i) a stock certificate representing the Shares and (ii) the executed Warrant,
against payment of the purchase price therefor by wire transfer or such other
form of payment as shall be mutually agreed upon by the Investor and the
Company.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
Except as set forth on the Schedule of Exceptions attached hereto as
Exhibit D, the Company hereby represents and warrants to the Investor as
follows:
2.1 ORGANIZATION; GOOD STANDING; QUALIFICATION.
The Company is a corporation duly organized, validly existing, and
in good standing under the laws of the State of California, has all requisite
corporate power and authority to own and operate its properties and assets and
to carry on its business as now conducted and as presently proposed to be
conducted, to execute and deliver this Agreement, the Registration Rights
Agreement in the form attached hereto as Exhibit B, the Warrant in the form
attached hereto as Exhibit C and the Tag-Along Rights Agreement in the form
attached hereto as Exhibit G (collectively, this Agreement, the Registration
Rights Agreement, the Warrant and the Tag-Along Rights Agreement are hereinafter
referred to as the "WPV Agreements"), to issue and sell the Shares, the Warrant,
the Warrant Shares, and the Common Stock issuable upon conversion of the Shares
and the Warrant Shares (the "Conversion Shares"), and to carry out the
provisions of the WPV Agreements. The Company is duly qualified and is
authorized to transact business and is in good standing as a foreign corporation
in each jurisdiction in which the failure so to qualify would have a material
adverse effect on its business, properties, prospects, or financial condition.
2.2 AUTHORIZATION.
All corporate action on the part of the Company, its officers,
directors and shareholders necessary for the authorization, execution and
delivery of the WPV Agreements, the performance of all obligations of the
Company hereunder and thereunder and the authorization, issuance (or reservation
for issuance), sale, and delivery of the Shares, the Warrant, the Warrant
2.
<PAGE>
Shares, and the Conversion Shares (collectively, the Shares, the Warrant, the
Warrant Shares, and the Conversion Shares are hereinafter referred to as the
"Securities") have been taken or will be taken prior to the Closing, and the WPV
Agreements, when executed and delivered, will constitute valid and legally
binding obligations of the Company, enforceable in accordance with their
respective terms except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief, or other equitable
remedies, and (iii) to the extent that the indemnification provisions contained
in the Registration Rights Agreement may be limited by applicable laws.
2.3 VALID ISSUANCE OF PREFERRED AND COMMON STOCK.
The Shares purchased hereunder, when issued, sold, and delivered in
accordance with the terms of this Agreement for the consideration expressed
herein, will be duly and validly issued, fully paid, and nonassessable, and will
be free of restrictions on transfer other than restrictions on transfer under
this Agreement, the Registration Rights Agreement, the Tag-Along Rights
Agreement, the Restated Articles, the Company's Bylaws and under applicable
state and federal securities laws. The Warrant Shares and the Conversion Shares
have been duly and validly reserved for issuance and, upon issuance and payment
therefor in accordance with the terms of this Agreement, the Warrant and the
Restated Articles, will be duly and validly issued, fully paid, and
nonassessable and will be free of restrictions on transfer other than
restrictions on transfer under the WPV Agreements and under applicable state and
federal securities laws.
2.4 GOVERNMENTAL CONSENTS.
No consent, approval, qualification, order or authorization of, or
filing with, any local, state, or federal governmental authority is required on
the part of the Company in connection with the Company's valid execution,
delivery, or performance of this Agreement, the offer, sale or issuance of the
Shares and the Warrant by the Company, the issuance of the Warrant Shares, or
the issuance of the Conversion Shares, except (i) the filing of the Restated
Articles with the Secretary of State of the State of California, and (ii) such
filings as have been made prior to the Closing, except any notices of sale
required to be filed with the Securities and Exchange Commission under
Regulation D of the Securities Act of 1933, as amended (the "Securities Act"),
or such post-closing filings as may be required under applicable state
securities laws, which will be timely filed within the applicable periods
therefor.
2.5 CAPITALIZATION AND VOTING RIGHTS.
The authorized capital of the Company consists, or will consist
immediately prior to the Closing, of:
(a) PREFERRED STOCK. Fourteen Million (14,000,000) shares of
Preferred Stock, of which Three Million (3,000,000) shares have been designated
Series A Preferred Stock (the "Series A Preferred"), of which Two Million Four
Hundred Ninety-Five Thousand Eight Hundred
3.
<PAGE>
Twenty-Seven (2,495,827) are issued and outstanding, Five Million Eight
Hundred (5,800,000) shares have been designated Series B Preferred, of which
Four Million Four Hundred Forty-Four Thousand Four Hundred Forty-Four
(4,444,444) will be sold pursuant to this Agreement, and Three Million Six
Hundred Thousand (3,600,000) shares have been designated Series C Preferred,
of which up to Two Million Eight Hundred Fifty-Seven Thousand One Hundred
Forty-Three (2,857,143) may be issued upon exercise of the Warrant. The
rights, privileges and preferences of the Series A Preferred, Series B
Preferred and Series C Preferred are as stated in the Restated Articles.
(b) COMMON STOCK. Thirty-Five Million (35,000,000) shares of
common stock ("Common Stock"), of which Seven Million Nine Hundred Seventy
Thousand Three Hundred Twenty-Five (7,970,325) shares are issued and
outstanding.
(c) The outstanding shares of Series A Preferred Stock and
Common Stock have been duly authorized and validly issued, are fully paid and
nonassessable, and were issued in accordance with the registration or
qualification provisions of the Securities Act and any relevant state securities
laws or pursuant to valid exemptions therefrom.
(d) Except for (i) the conversion privileges of the Series A,
Series B and Series C Preferred, (ii) the rights provided in the Warrant, (iii)
the Voting Rights Agreement, dated January 19, 1996, by and between Dr. Paula
Tallal and Dr. Michael Merzenich (the "Voting Rights Agreement"), (iii) the
contemplated issuance of approximately Three Hundred Ninety-Four Thousand
(394,000) shares of Series A Preferred to Rutgers University in connection with
the license of certain technology, (iv) the Escrow Agreement limiting the voting
rights of certain shares owned by Dr. Paula Tallal and (v) currently outstanding
options to purchase One Million Nine Hundred Twenty-Nine Thousand Seven Hundred
Seventy-Five (1,929,775) shares of Common Stock granted to employees pursuant to
the Company's Stock Option Plan (the "Option Plan"), there are not outstanding
any options, warrants, rights (including conversion or preemptive rights and
rights of first refusal), proxy or stockholder agreements or agreements of any
kind for the purchase or acquisition from the Company of any of its securities.
In addition to the aforementioned options, the Company has reserved an
additional Eight Hundred Fifty-Seven Thousand Four Hundred Twenty Five (857,425)
shares of its Common Stock for purchase upon exercise of options to be granted
in the future under the Option Plan. The Company is not a party or subject to
any agreement or understanding, and, to the best of the Company's knowledge,
there is no agreement or understanding between any persons that affects or
relates to the voting or giving of written consents with respect to any security
or the voting by a director of the Company.
2.6 SUBSIDIARIES.
The Company does not own or control, directly or indirectly, any
interest in any other corporation, partnership, limited liability company,
association, or other business entity.
4.
<PAGE>
2.7 CONTRACTS AND OTHER COMMITMENTS.
The Company does not have and is not bound by any contract,
agreement, lease, commitment, or proposed transaction, judgment, order, writ or
decree, written or oral, absolute or contingent, other than (i) contracts for
the purchase of supplies and services that were entered into in the ordinary
course of business and that do not involve more than Fifty Thousand Dollars
($50,000), (ii) sales contracts entered into in the ordinary course of business,
and (iii) contracts terminable at will by the Company on no more than Thirty
(30) days' notice without cost or liability to the Company and that do not
involve any employment or consulting arrangement and are not material to the
conduct of the Company's business. For the purpose of this paragraph,
employment and consulting contracts and contracts with labor unions, and license
agreements and any other agreements relating to the Company's acquisition or
disposition of patent, copyright, trade secret or other proprietary rights or
technology (other than standard end-user license agreements) shall not be
considered to be contracts entered into in the ordinary course of business.
2.8 RELATED-PARTY TRANSACTIONS.
No employee, officer, stockholder or director of the Company or
member of his or her immediate family is indebted to the Company, nor is the
Company indebted (or committed to make loans or extend or guarantee credit) to
any of them, other than (i) for payment of salary for services rendered, (ii)
reimbursement for reasonable expenses incurred on behalf of the Company, and
(iii) for other standard employee benefits made generally available to all
employees (including stock option agreements outstanding under any stock option
plan approved by the Board of Directors of the Company). To the best of the
Company's knowledge, none of such persons has any direct or indirect ownership
interest in any firm or corporation with which the Company is affiliated or with
which the Company has a business relationship, or any firm or corporation that
competes with the Company, except that employees, stockholders, officers, or
directors of the Company and members of their immediate families may own stock
in publicly traded companies that may compete with the Company in an amount not
exceeding 1% of the issued and outstanding voting securities of such publicly
traded company. To the best of the Company's knowledge, no officer, director,
or stockholder or any member of their immediate families is, directly or
indirectly, interested in any material contract with the Company (other than
such contracts as relate to any such person's ownership of capital stock or
other securities of the Company).
2.9 REGISTRATION RIGHTS.
Except as provided in the Registration Rights Agreement, the Company
is presently not under any obligation and has not granted any rights to register
under the Securities Act any of its presently outstanding securities or any of
its securities that may subsequently be issued.
5.
<PAGE>
2.10 PERMITS.
The Company has all franchises, permits, licenses, and any similar
authority necessary for the conduct of its business as now being conducted by
it, the lack of which could materially and adversely affect the business,
properties, prospects, or financial condition of the Company, and believes it
can obtain, without undue burden or expense, any similar authority for the
conduct of its business as presently planned to be conducted. The Company is
not in default in any material respect under any of such franchises, permits,
licenses or other similar authority.
2.11 COMPLIANCE WITH OTHER INSTRUMENTS.
The Company is not in violation or default of any provision of its
Restated Articles or Bylaws or in any material respect of any provision of
any mortgage, indenture, agreement, instrument, or contract to which it is a
party or by which it is bound or, to the best of its knowledge, any federal
or state judgment, order, writ, decree, statute, rule, regulation or
restriction applicable to the Company. The execution, delivery, and
performance by the Company of the WPV Agreements, and the consummation of the
transactions contemplated hereby and thereby, will not result in any such
violation or be in material conflict with or constitute, with or without the
passage of time or giving of notice, either a material default under any such
provision or an event that results in the creation of any material lien,
charge, or encumbrance upon any assets of the Company or the suspension,
revocation, impairment, forfeiture, or nonrenewal of any material permit,
license, authorization, or approval applicable to the Company, its business
or operations, or any of its assets or properties.
2.12 LITIGATION.
There is no action, suit, proceeding, or investigation pending or,
to the Company's knowledge, currently threatened against the Company. The
foregoing includes, without limitation, any action, suit, proceeding, or
investigation pending or, to the Company's knowledge, currently threatened
involving the prior employment of any of the Company's employees, their use
in connection with the Company's business of any information or techniques
allegedly proprietary to any of their former employers, their obligations
under any agreements with prior employers, or negotiations by the Company
with potential backers of, or investors in, the Company or its proposed
business. The Company is not a party to or, to the best of its knowledge,
named in or subject to any order, writ, injunction, judgment, or decree of
any court, government agency, or instrumentality. There is no action, suit,
proceeding or, to the Company's knowledge, investigation by, against or of
the Company currently pending or that the Company currently intends to
initiate.
2.13 DISCLOSURE.
The Company has provided the Investor with all the information
reasonably available to it without undue expense that the Investor has requested
for deciding whether to purchase the Shares and the Warrant and all information
that the Company believes is reasonably
6.
<PAGE>
necessary to enable the Investor to make such decision. This Agreement, the
WPV Agreements and the other documents, certificates or written statements
furnished or to be furnished to the Investor through the Closing Date by or
on behalf of the Company in connection with the transactions contemplated
hereby taken as a whole, do not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements
contained therein or herein, in light of the circumstances in which they were
made, not misleading. There is no fact which is known to the Company and
which has not been disclosed herein or otherwise by the Company to the
Investor which may materially adversely affect the business, properties,
assets or condition, financial or otherwise of the Company.
2.14 OFFERING.
Subject in part to the truth and accuracy of the Investor's
representations set forth in this Agreement, the offer, sale and issuance of the
Shares and the Warrant as contemplated by this Agreement are exempt from the
registration requirements of the Securities Act, and neither the Company nor any
authorized agent acting on its behalf will take any action hereafter that would
cause the loss of such exemption.
2.15 MATERIAL LIABILITIES.
The Company has no material liability or obligation, absolute or
contingent (individually or in the aggregate), except (i) obligations and
liabilities incurred after the date of incorporation in the ordinary course of
business that are not material, individually or in the aggregate, and
(ii) obligations under contracts made in the ordinary course of business (none
of which are, individually or in the aggregate, material) that would not be
required to be reflected in financial statements prepared in accordance with
generally accepted accounting principles.
2.16 PATENTS AND TRADEMARKS.
To the best of its knowledge (but without having conducted any
special investigation or patent search), the Company owns or possesses
sufficient legal rights to all patents, trademarks, service marks, trade
names, copyrights, trade secrets, licenses, information, and proprietary
rights and processes ("Intellectual Property") necessary for its business as
now conducted and as proposed to be conducted without any conflict with, or
infringement of the rights of, others. Except for agreements with its own
employees or consultants, and standard end-user license agreements, there are
no outstanding options, licenses, or agreements of any kind relating to the
Intellectual Property, nor is the Company bound by or a party to any options,
licenses, or agreements of any kind with respect to the Intellectual Property
of any other person or entity. The Company has not received any
communications alleging that the Company has violated or, by conducting its
business as proposed, would violate any of the patents, trademarks, service
marks, trade names, copyrights, trade secrets, or other proprietary rights or
processes of any other person or entity. The Company is not aware that any
of its employees is obligated under any contract (including licenses,
covenants, or commitments of any nature) or other agreement, or subject to
any judgment, decree, or order of any court or administrative agency, that
would interfere with
7.
<PAGE>
the use of such employee's best efforts to promote the interests of the
Company or that would conflict with the Company's business as proposed to be
conducted. Neither the execution nor delivery of this Agreement, nor the
carrying on of the Company's business by the employees of the Company, nor
the conduct of the Company's business as proposed, will, to the best of the
Company's knowledge, conflict with or result in a breach of the terms,
conditions, or provisions of, or constitute a default under, any contract,
covenant, or instrument under which any of such employees is now obligated.
2.17 MANUFACTURING AND MARKETING RIGHTS.
The Company has not granted rights to manufacture, produce,
assemble, license, market, or sell its products to any other person and is not
bound by any agreement that affects the Company's exclusive right to develop,
manufacture, assemble, distribute, market, or sell its products.
2.18 EMPLOYEES; EMPLOYEE COMPENSATION.
The Company has complied in all material respects with all
applicable state and federal equal opportunity and other laws related to
employment. To the best of the Company's knowledge, no employee of the
Company is or will be in violation of any judgment, decree, or order, or any
term of any employment contract, patent disclosure agreement, or other
contract or agreement relating to the relationship of any such employee with
the Company, or any other party because of the nature of the business
conducted or presently proposed to be conducted by the Company or to the use
by the employee of his best efforts with respect to such business. The
Company is not a party to or bound by any currently effective employment
contract, deferred compensation agreement, bonus plan, incentive plan, profit
sharing plan, retirement agreement, or other employee compensation agreement.
The Company has no employee benefit plans (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974) covering former and current
employees of the Company, or under which the Company has any obligation or
liability. The Company is not aware that any officer or key employee, or
that any group of key employees, intends to terminate their employment with
the Company, nor does the Company have a present intention to terminate the
employment of any of the foregoing. Subject to general principles related to
wrongful termination of employees, the employment of each officer and
employee of the Company is terminable at the will of the Company.
2.19 ENVIRONMENTAL AND SAFETY LAWS.
The Company is not in violation of any applicable statute, law, or
regulation relating to the environment or occupational health and safety
which might result in a material expenditure, and no material expenditures
are or will be required in order to comply with any such existing statute,
law, or regulation.
2.20 MINUTE BOOKS.
8.
<PAGE>
The copy of the minute books of the Company provided to the
Investor's counsel contains minutes of all meetings of directors and
shareholders and all actions by written consent without a meeting by the
directors and shareholders since the date of incorporation and accurately
reflects all actions by the directors (and any committee of directors) and
stockholders with respect to all transactions referred to in such minutes in all
material respects.
2.21 FINANCIAL STATEMENTS.
The audited balance sheet of the Company as at January 31, 1996 and
the unaudited balance sheet of the Company as July 31, 1996 fairly present the
financial position of the Company as at the dates thereof, and the statements of
income as at July 31, 1996, fairly present the results of operations and changes
in financial position of the Company for the respective periods indicated. All
such financial statements, including the schedules and notes thereto, were
prepared in accordance with generally accepted accounting principles ("GAAP")
applied consistently throughout the periods involved, except for the omission of
footnotes required by GAAP and except for normal year-end adjustments.
2.22 ABSENCE OF CERTAIN DEVELOPMENTS.
Since January 31, 1996, there has been no (i) material adverse
change in the condition, financial or otherwise, of the Company or in its
assets, liabilities, properties, or business or prospects, (ii) declaration,
setting aside or payment of any dividend or other distribution with respect
to the capital stock of the Company, (iii) issuance of capital stock (other
than pursuant to the exercise of options, warrants, or convertible securities
outstanding at such date) or options, warrants or rights to acquire capital
stock (other than the rights granted to the Investors hereunder), (iv)
material loss, destruction or damage to any property of the Company, whether
or not insured, (v) acceleration or prepayment of any indebtedness for
borrowed money or the refunding of any such indebtedness, or (vi) acquisition
or disposition of any material assets (or any contract or arrangement
therefor), or any other material transaction by the Company otherwise than
for fair value in the ordinary course of business.
2.23 TAX MATTERS.
There are no federal, state, county or local taxes due and payable
by the Company which have not been paid. The provisions for taxes on the
audited and unaudited balance sheets described in Section 2.21 are sufficient
for the payment of all accrued and unpaid federal, state, county and local
taxes of the Company whether or not assessed or disputed as of the respective
dates of such balance sheets. The Company has duly filed all federal, state,
county and local tax returns required to have been filed by it and there are
in effect no waivers of applicable statutes of limitations with respect to
taxes for any year. The Company has not been subject to a federal or state
tax audit of any kind.
2.24 INSURANCE.
9.
<PAGE>
The Company and its properties are insured in such amounts, against
such losses and with such insurers as are prudent when considered in light of
the nature of the properties and businesses of the Company. No notice of any
termination or threatened termination of any of its insurance policies has been
received and such policies are in full force and effect.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR.
The Investor hereby represents and warrants to the Company that:
3.1 AUTHORIZATION.
The Investor has full power and authority to enter into the WPV
Agreements, and that the WPV Agreements, when executed and delivered, will
constitute valid and legally binding obligations of the Investor.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT.
The WPV Agreements are made with the Investor in reliance upon the
Investor's representation to the Company, which by the Investor's execution
of the WPV Agreements the Investor hereby confirms, that the Securities will
be acquired for investment for the Investor's own account, not as a nominee
or agent, and not with a view to the resale or distribution of any part
thereof, and that the Investor has no present intention of selling, granting
any participation in, or otherwise distributing the same. By executing the
WPV Agreements, the Investor further represents that the Investor does not
have any contract, undertaking, agreement or arrangement with any person to
sell, transfer or grant participations to such person or to any third person,
with respect to any of the Securities.
3.3 RELIANCE UPON INVESTOR'S REPRESENTATIONS.
The Investor understands that the Shares and the Warrant are not,
and the Warrant Shares and the Conversion Shares at the time of issuance may
not be, registered under the Securities Act on the ground that the sale
provided for in this Agreement and the issuance of securities hereunder is
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof, and that the Company's reliance on such exemption is predicated on
the Investor's representations set forth herein. The Investor realizes that
the basis for the exemption may not be present if, notwithstanding such
representations, the Investor has in mind merely acquiring the Securities for
a fixed or determinable period in the future, or for a market rise, or for
sale if the market does not rise. The Investor has no such intention.
3.4 RECEIPT OF INFORMATION.
The Investor has had an opportunity to ask questions and receive
answers from the Company regarding the terms and conditions of the offering of
the Shares and the Warrant and the business, properties, prospects, and
financial condition of the Company and to obtain
10.
<PAGE>
additional information (to the extent the Company possessed such information
or could acquire it without unreasonable effort or expense) necessary to
verify the accuracy of any information furnished to the Investor or to which
the Investor had access. The foregoing, however, does not limit or modify
the representations and warranties of the Company in Section 2 of this
Agreement or the right of the Investor to rely thereon.
3.5 INVESTMENT EXPERIENCE.
The Investor represents that the Investor is experienced in
evaluating and investing in private placement transactions of securities of
companies in a similar stage of development and acknowledges that the
Investor is able to fend for itself, can bear the economic risk of the
Investor's investment, understands that the Securities are speculative
investments, and has such knowledge and experience in financial and business
matters that the Investor is capable of evaluating the merits and risks of
the investment in the Shares and the Warrant. The Investor also represents
the Investor has not been organized for the purpose of acquiring the Shares
or the Warrant.
3.6 ACCREDITED INVESTOR.
The Investor is an "accredited investor" as defined in Regulation D
under the Securities Act.
3.7 RESTRICTED SECURITIES.
The Investor understands that the Securities may not be sold,
transferred, or otherwise disposed of without registration under the
Securities Act or an exemption therefrom, and that in the absence of an
effective registration statement covering any Securities or an available
exemption from registration under the Securities Act, any Securities not
covered by an effective registration statement must be held indefinitely. In
particular, the Investor is aware that the Securities may not be sold
pursuant to Rule 144 promulgated under the Securities Act unless all of the
conditions of that Rule are met. Among the conditions for use of Rule 144
may be the availability of current information to the public about the
Company. Such information is not now available and the Company has no
present plans to make such information available.
3.8 LEGENDS.
To the extent applicable, each certificate or other document
evidencing any of the Securities shall be endorsed with the legends set forth
below:
(a) The following legend under the Securities Act:
"THE SHARES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED,
11.
<PAGE>
AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED,
PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER SUCH ACT, OR UNLESS THE
COMPANY HAS RECEIVED AN OPINION OF COUNSEL
OR OTHER EVIDENCE, SATISFACTORY TO THE COMPANY
AND ITS COUNSEL, THAT SUCH REGISTRATION IS
NOT REQUIRED."
(b) Any legend imposed or required by the Company's Bylaws or
applicable state securities laws.
3.9 PUBLIC SALE.
The Investor agrees not to make, without the prior written consent
of the Company, any public offering or public sale of any Securities,
although permitted to do so pursuant to Rule 144(k) promulgated under the
Securities Act, until the earlier of (i) the date on which the Company
effects its initial registered public offering pursuant to the Securities Act
or (ii) the date on which it becomes a registered company pursuant to Section
12(g) of the Securities Exchange Act of 1934, as amended, or (iii) five years
after the Closing.
3.10 RIGHT OF FIRST REFUSAL.
The Investor acknowledges and agrees that the Securities are all
subject to the restrictions on transfer set forth in Section 64 of the
Company's Bylaws, which Section is entitled "Right of First Refusal." A copy
of the Company's Bylaws is attached hereto as Exhibit F.
4. CONDITIONS OF INVESTORS' OBLIGATIONS AT CLOSING.
The obligations of the Investor under subparagraph 1.1(b) of this Agreement
are subject to the fulfillment on or before the Closing of each of the following
conditions:
4.1 REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Company contained in
Section 2 shall be true on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the date of the
Closing.
4.2 PERFORMANCE.
The Company shall have performed and complied with all agreements,
obligations, and conditions contained in this Agreement that are required to be
performed or complied with by it on or before the Closing.
12.
<PAGE>
4.3 COMPLIANCE CERTIFICATE.
The President of the Company shall deliver to the Investor at the
Closing a certificate certifying that the conditions specified in paragraphs
4.1, 4.2 and 4.4 have been fulfilled.
4.4 QUALIFICATIONS.
All authorizations, approvals, or permits, if any, of any
governmental authority or regulatory body of the United States or of any state
that are required in connection with the lawful issuance and sale of the Shares
and the Warrant pursuant to this Agreement prior to the Closing shall be duly
obtained and effective as of the Closing.
4.5 PROCEEDINGS AND DOCUMENTS.
All corporate and other proceedings in connection with the
transactions contemplated at the Closing and all documents incident thereto
shall be reasonably satisfactory in form and substance to the Investor, which
shall have received all such counterpart original and certified or other copies
of such documents as it may reasonably request.
4.6 VOTING FOR DIRECTORS.
At Closing, the Bylaws of the Company shall provide that the
authorized number of directors of the Company at such time shall be six (6).
Upon Closing, the Board of Directors shall consist of Carleton A. Holstrom, as
the representative of the Series A Preferred Stock, two persons designated by
the Investor, as the Representatives of the Series B Preferred Stock and
Series C Preferred Stock and Michael M. Merzenich, Paula A. Tallal and
Leonard S. Schleifer, as the representatives of the Common Stock.
4.7 OPINION OF COMPANY COUNSEL.
The Investor shall have received from Cooley Godward Castro
Huddleson & Tatum, counsel for the Company, an opinion, dated the date of the
Closing, in substantially the form set forth in Exhibit E hereto.
4.8 REGISTRATION RIGHTS AGREEMENT.
The Company and the Investor shall have entered into the
Registration Rights Agreement substantially in the form attached hereto as
Exhibit B.
4.9 DELIVERY OF THE SHARES AND THE WARRANT.
The Investor shall have received a stock certificate representing the
Shares and the executed, original warrant pursuant to Section 1.2 hereof.
13.
<PAGE>
4.10 TAG ALONG RIGHTS AGREEMENT.
The Company and the Investor shall have entered into the Tag Along
Rights Agreement substantially in the form attached hereto as Exhibit G.
4.11 TECHNOLOGY AGREEMENTS.
The Company shall have used commercially reasonable efforts to improve the
terms of the draft Exclusive License Agreement between the Company and the
University of California regarding Pending U.S. Patent Application Serial No.
08/351,803 (the "Patent"), which was attached to a letter from Joan Bruland to
the Company dated July 29, 1996 and a copy of which has been delivered to the
Investor (the "Draft Agreement"), and the Company shall have entered (a) into an
agreement with the University of California for license of the Patent on terms
no less favorable to the Company than the Draft Agreement and (b) into an
agreement with the University of California for the commercial use of certain
intellectual property known as "Time-Domain and Emphasis Programs" and "LL Game
Code 3/26/96" developed by Drs. Merzenich, Jenkins and Schreiner and Dr.
Jenkins, respectively, at the University of California at San Francisco
("UCSF").
4.12 COMMITTEE FINDINGS.
The Company shall have delivered to the Investor either a copy of the
report of the Special Review Committee of UCSF which has reviewed the compliance
of Dr. Michael Merzenich with UCSF policies in connection with the
administration of the Dana Foundation grant and the formation of the Company, or
a letter from UCSF, which, in either case, shall confirm that Dr. Merzenich has
not been found to have violated policies of UCSF in any manner which would
interfere with the licensing of the Patent to the Company.
5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING.
The obligations of the Company to the Investor under this Agreement are
subject to the fulfillment on or before the Closing of each of the following
conditions by the Investor:
5.1 REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Investor contained in
Section 3 shall be true on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the date of the
Closing.
5.2 QUALIFICATIONS.
All authorizations, approvals, or permits, if any, of any
governmental authority or regulatory body of the United States or of any state
that are required in connection with the lawful
14.
<PAGE>
issuance and sale of the Stock pursuant to this Agreement shall be duly
obtained and effective as of the Closing.
5.3 DELIVERY OF CONSIDERATION.
The Company shall have received the consideration of Four Million
Dollars ($4,000,000) pursuant to Section 1.1(b) and 1.2 of this Agreement.
5.4 TAG ALONG RIGHTS AGREEMENT
The Company and the Investor shall have entered into the Tag Along
Rights Agreement substantially in the form attached hereto as Exhibit G.
6. COVENANTS.
6.1 BOARD NOMINEES.
(a) COMPANY COVENANT. From the date on which the Company
completes an underwritten public offering for shares of Common Stock (the
"Initial Public Offering") pursuant to a registration under the Securities Act
and for as long as any Investor owns beneficially (within the meaning of
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) at least twenty percent (20%) of the Common Stock, the Company will
nominate and use its best efforts to have two individuals reasonably acceptable
to the Company designated by such Investor elected to the Board. From the date
on which the Company completes its Initial Public Offering and for as long as
any Investor owns beneficially and of record at least ten percent (10%) of the
outstanding shares of Common Stock, the Company will nominate and use its best
efforts to have one individual reasonably acceptable to the Company designated
by such Investor elected to the Board. The rights of the Investor under this
subsection 6.1(a) shall not be assignable and shall not inure to the benefit of
successors of the Investor, assigns of the Investor or any permitted transferees
of any Securities.
(b) INVESTOR COVENANT. Investor agrees that upon the Company's
selection of a candidate for the position of Chief Executive Officer, Investor
will use its best efforts to expand the number of members of the Board of
Directors to seven (7) and to nominate and elect such Chief Executive Officer to
the Board as a representative of the Common Stock. Investor further agrees that
at all times it will use its best efforts to ensure that Michael M. Merzenich
and Paula A. Tallal are elected to the Board of Directors as representatives of
the Common Stock; provided, however, that the Investor's obligation to use its
best efforts to ensure that such persons are elected to the Board of Directors
will terminate (i) with respect to both Dr. Tallal and Dr. Merzenich, upon the
closing of the Company's Initial Public Offer or (ii) with respect to either Dr.
Tallal or Dr. Merzenich, as the case may be, when such person is no longer an
employee of or a consultant to the Company.
15.
<PAGE>
6.2 FINANCIAL AND BUSINESS INFORMATION.
From and after the date hereof, the Company shall deliver to the
Investor so long as such Investor owns Four Million (4,000,000) Shares (or
shares of Common Stock).
(a) MONTHLY AND QUARTERLY STATEMENTS. As soon as practicable,
and in any event within 30 days after the close of each month of each fiscal
year of the Company in the case of monthly statements and 45 days after the
close of each of the first three fiscal quarters of each fiscal year of the
Company in the case of quarterly statements, a consolidated balance sheet,
statement of income and statement of cash flows of the Company and any
subsidiaries as at the close of such month or quarter and covering operations
for such month or quarter, as the case may be, and the portion of the Company's
fiscal year ending on the last day of such month or quarter, all in reasonable
detail and prepared in accordance with GAAP (other than with respect to GAAP
footnote requirements), subject to audit and year-end adjustments, setting forth
in each case in comparative form the figures for the comparable period of the
previous fiscal year. The Company shall also provide comparisons of each
pertinent item to the budget referred to in subsection (c) below.
(b) ANNUAL STATEMENTS. As soon as practicable after the end of
each fiscal year of the Company, and in any event within 120 days thereafter,
duplicate copies of:
(i) consolidated and consolidating balance sheets of the Company
and any subsidiaries at the end of such year; and
(ii) consolidated and consolidating statements of income,
stockholders' equity and cash flows of the Company and any subsidiaries for such
year, setting forth in each case in comparative form the figures for the
previous fiscal year, all in reasonable detail and accompanied by an opinion
thereon of independent certified public accountants of recognized national
standing selected by the Company, which opinion shall state that such financial
statements fairly present the financial position of the Company and any
subsidiaries on a consolidated basis and have been prepared in accordance with
GAAP (except for changes in application in which such accountants concur) and
that the examination of such accountants in connection with such financial
statements has been made in accordance generally accepted auditing standards,
and accordingly included such tests of the accounting records and such other
auditing procedures as were considered necessary in the circumstances, and the
Company shall also provide comparisons of each pertinent item to the budget
referred to in subsection (c) below.
(c) BUSINESS PLAN; PROJECTIONS. No later than 30 days prior to
the commencement of each fiscal year of the Company, an annual business plan of
the Company and projections of operating results, prepared on a monthly basis,
and a three-year business plan of the Company and projections of operating
results. Within 45 days of the close of each semi-annual fiscal period of the
Company, the Company shall provide the Investors with an update of such monthly
projections. Such business plans, projections and updates shall contain such
substance and detail and shall be in such form as will be reasonably acceptable
to the Investors.
16.
<PAGE>
(d) AUDIT REPORTS. Promptly upon receipt thereof, one copy of
each other financial report and internal control letter submitted to the Company
by independent accountants in connection with any annual, interim or special
audit made by them of the books of the Company.
(e) OTHER REPORTS. Promptly upon their becoming available, one
copy of each financial statement, report, notice or proxy statement sent by the
Company to stockholders generally.
(f) REQUESTED INFORMATION. With reasonable promptness, the
Company shall furnish each of the Investors with such other data and information
as from time to time may be reasonably requested.
6.3 CONFIDENTIALITY.
As to so much of the information and other material furnished under
or in connection with this Agreement (whether furnished before, on or after the
date hereof, including, without limitation, information furnished pursuant to
Section 6.2 hereof) as constitutes or contains confidential business, financial
or other information of the Company, each of the Investors covenants for itself
and its directors, officers and partners that it will use due care to prevent
its officers, directors, partners, employees, counsel, accountants and other
representatives from disclosing such information to persons other than their
respective authorized employees, counsel, accountants, shareholders, partners,
limited partner and other authorized representatives; PROVIDED, HOWEVER, that
the Investor may disclose or deliver any information or other material disclosed
to or received by it should the Investor be advised by its counsel that such
disclosure or delivery is required by law, regulation or judicial or
administrative order. For purposes of this Section 6.3, "due care" means at
least the same level of care that such Investor would use to protect the
confidentiality of its own sensitive or proprietary information, and this
obligation shall survive termination of this Agreement.
6.4 CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE.
The Company will preserve, renew and keep in full force and effect
its corporate existence and take all reasonable action to maintain all rights,
privileges and franchises necessary or desirable in the normal conduct of its
business. The Company shall require all of its employees or consultants to
enter into appropriate confidentiality agreements to protect confidential
information relating to the Company and its business, including trade secrets.
6.5 COMPLIANCE WITH LAW.
The Company will comply in all material respects with all applicable
laws, rules, regulations and orders except where the failure to comply would not
have a material adverse effect on the business, properties, operations,
prospects or financial condition of the Company.
17.
<PAGE>
6.6 INSURANCE.
The Company will maintain insurance with responsible and reputable
insurance companies or associations in such amounts and covering such risks as
is usually carried by companies of similar size and credit standing engaged in
similar business and owning similar properties, provided that such insurance is
and remains available to the Company at commercially reasonable rates.
6.7 KEEPING OF BOOKS.
The Company will keep proper books of record and accountant, in
which full and correct entries shall be made of all financial transactions and
the assets and business of the Company in accordance with GAAP.
6.8 SUBSCRIPTION RIGHT.
(a) Subject to the restrictions set forth in subsection 6.8 (e)
below, if at any time after the date hereof the Company proposes to issue equity
securities of any kind (the term "equity securities" shall include for these
purposes any warrants, options or other rights to acquire equity securities and
debt securities convertible into equity securities) of the Company (other than
(1) shares of Common Stock issued upon conversion of the Company's Preferred
Stock; (2) shares of Common Stock and/or options, warrants or other Common Stock
purchase rights and the Common Stock issued pursuant to such options, warrants
or other rights (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like) issued or to be issued to employees, officers or
directors of, or consultants or advisors to the Company or any subsidiary
pursuant to stock purchase or stock option plans or other arrangements that are
approved by the Board; (3) shares of Common Stock issued pursuant to the
exercise of options, warrants or convertible securities outstanding as of the
date of this Agreement; (4) shares of Common Stock issuable in connection with a
loan or leasing transaction approved by the Board of Directors, (5) shares of
Series B Preferred, Series C Preferred or the Series C Warrant issued under this
Agreement, (6) equity securities issued in strategic transactions approved by a
majority of the members of the Board of Directors including at least one of the
directors elected by the holders of the Series B Preferred and the Series C
Preferred, (7) equity securities issued to the public in a firm commitment
underwriting pursuant to a registration statement filed under the Securities
Act, (8) equity securities issued pursuant to the acquisition of another
corporation by the Company by merger, purchase of substantially all of the
assets or other form of reorganization, (9) equity securities issued in the
transactions described in subsection 6.10(a) below and (10) shares of Common
Stock issuable under options, warrants or rights granted in connection with any
of the foregoing transactions) then, as long as the Investor then holds in
excess of one percent (1%) of the then outstanding shares of Common Stock), the
Company shall:
(1) give the Investor written notice setting forth in reasonable
detail (A) the designation and all of the terms and provisions of the securities
proposed to be issued (the "Proposed Securities"), including, where applicable,
the voting powers, preferences and relative
18.
<PAGE>
participating, optional or other special rights, and the qualification,
limitations or restrictions thereof and interest rate and maturity; (B) the
price and other terms of the proposed sale of such securities; (C) the amount
of such securities proposed to be issued; and (D) such other information as
the Investor may reasonably request in order to evaluate the proposed
issuance; and
(2) offer to issue to the Investor a portion of the Proposed
Securities equal to a percentage determined by dividing (A) the number of shares
of Common Stock held by such Investor and issuable to such Investor, assuming
conversion in full of any convertible securities then held by such Investor, by
(B) the total number of shares of Common Stock then outstanding, including for
purposes of this calculation, all shares of Common Stock issuable upon
conversion in full of any then outstanding convertible securities.
(b) The Investor must exercise its purchase rights hereunder
within ten (10) days after receipt of such notice from the Company. To the
extent that the Company offers two or more securities in units, the Investor
must purchase such units as a whole and will not be given the opportunity to
purchase only one of the securities making up such unit.
(c) Upon the expiration of the offering periods described above,
the Company will be free to sell such Proposed Securities that the Investor has
not elected to purchase during the ninety (90) days following such expiration on
terms and conditions no more favorable to the purchasers thereof than those
offered to the Investor. Any proposed securities offered or sold by the Company
after such 90-day period must be reoffered to the Investor pursuant to this
Section 6.8.
(d) The election by the Investor not to exercise its subscription
rights under this Section 6.8 in any one instance shall not affect its right
(other than in respect of a reduction in its percentage holdings) as to any
subsequent proposed insurance.
(e) The subscription rights provided to the Investor pursuant to
this Section 6.8 shall immediately terminate in the event that (i) the Investor
has never held or ceases to hold at least four million (4,000,000) shares of the
Company's capital stock or (ii) the Investor sells or otherwise disposes of any
of the Shares or the Warrant or any securities issued upon the conversion of the
Shares or the exercise of the Warrant.
6.9 INJUNCTIVE RELIEF.
The Company and the Investor hereby declare that it is impossible to
measure in money the damages which will accrue to the parties hereto by reason
of the failure of the Company to perform any of its obligations set forth in
this Section 6. Therefore, the Investor shall have the right to specific
performance of such obligations, and the Company hereby waives the claim or
defense that the Investor has an adequate remedy at law.
19.
<PAGE>
6.10 ADDITIONAL STOCK ISSUANCES.
(a) The Company agrees that it will not sell or issue additional
shares of Series B Preferred or Series C Preferred in any transaction other than
the transactions contemplated in this Agreement and the transactions set forth
below:
(i) sales of Series B Preferred substantially upon the terms and
conditions of the transactions contemplated by this Agreement; provided that
such sales of Series B Preferred shall be consummated within forty-five (45)
days of the Closing; and
(ii) sales of rights to purchase Series C Preferred within
forty-five (45) days of the Closing (and any subsequent exercise of such
rights.)
(b) In connection with the transactions described in subsection
6.10(a)(i) and (ii) above, the parties hereby agree that: (i) such sales of
securities will be made only (A) to Johnson & Johnson or an affiliate thereof,
(B) to a person who becomes the Company's new Chief Executive Officer, (C) GC&H
Investments or (D) to such other person or entity as has been approved in
writing by the Investor, and (ii) such transactions shall be exempt from the
Investor's subscription right as set forth in Section 6.8 above.
6.11 TERMINATION.
The provisions of this Section 6 (other than Section 6.1(a)) shall
remain in effect until the closing of the Initial Public Offering.
7. MISCELLANEOUS.
7.1 ENTIRE AGREEMENT.
This Agreement and the documents referred to herein constitute the
entire agreement among the parties relating to the subject matter hereof and no
party shall be liable or bound to any other party in any manner by any
warranties, representations, or covenants except as specifically set forth
herein or therein.
7.2 SURVIVAL OF WARRANTIES.
The warranties, representations, and covenants of the Company and
the Investors contained in or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement and the Closing.
7.3 SUCCESSORS AND ASSIGNS.
Except as otherwise provided herein, the terms and conditions of
this Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the
20.
<PAGE>
parties (including permitted transferees of any Securities). Nothing in this
Agreement, express or implied, is intended to confer upon any party other
than the parties hereto or their respective successors and assigns any
rights, remedies, obligations, or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.
7.4 GOVERNING LAW.
This Agreement shall be governed by and construed under the laws of
the State of California without giving effect to principles of conflicts of laws
thereof.
7.5 COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
7.6 TITLES AND SUBTITLES.
The titles and subtitles used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.
7.7 NOTICES.
All notices required or permitted hereunder shall be in writing and
shall be deemed effectively given: (i) upon personal delivery to the party to be
notified, (ii) when sent by confirmed telex or facsimile if sent during normal
business hours of the recipient; if not, then on the next business day, (iii)
five (5) days after having been sent by registered or certified mail, return
receipt requested, postage prepaid, or (iv) one (1) business day after deposit
with a nationally recognized overnight courier, specifying next day delivery,
with written verification of receipt (where a "business day" is any day other
than a Saturday, Sunday or federal holiday). All communications shall be sent
to the party to be notified at the address as set forth on the signature pages
hereof or at such other address as such party may designate by ten (10) days
advance written notice to the other parties hereto.
7.8 FINDER'S FEES.
Each party represents that it neither is nor will be obligated for
any finder's fee or commission in connection with this transaction.
The Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finder's fee (and the cost and expenses of defending against such liability or
asserted liability) for which the Investor or any of its officers, partners,
employees, or representatives is responsible.
21.
<PAGE>
The Company agrees to indemnify and hold harmless the Investor from
any liability for any commission or compensation in the nature of a finder's fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees, or
representatives is responsible.
7.9 EXPENSES.
Each party to this Agreement shall bear its own expenses and legal
fees incurred by it with respect to this Agreement and all related transactions
and agreements.
7.10 ATTORNEYS' FEES.
If any action at law or in equity is necessary to enforce or
interpret the terms of the WPV Agreements or the Restated Articles, the
prevailing party shall be entitled to reasonable attorneys' fees, costs, and
disbursements in addition to any other relief to which such party may be
entitled.
7.11 AMENDMENTS AND WAIVERS.
Any term of this Agreement may be amended and the observance of any
term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the Company and the Investor. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each holder of any
securities purchased under this Agreement at the time outstanding (including
securities into which such securities have been converted), each future holder
of all such securities, and the Company.
7.12 SEVERABILITY.
If one or more provisions of this Agreement, are held to be
unenforceable under applicable law, such provision shall be excluded from this
Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
7.13 CALIFORNIA CORPORATE SECURITIES LAW.
THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT
HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY
PART OF THE CONSIDERATION FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS
UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION
25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL
22.
<PAGE>
PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION
BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
7.14 NO RELIANCE ON THIRD PARTIES.
The Investor acknowledges that it is not relying upon any person,
firm, or corporation, other than the Company and its officers and directors, in
making its investment or decision to invest in the Company.
7.15 TERMINATION OF AGREEMENT.
In the event the conditions to Closing have not been met or duly waived on
or before October 1, 1996, either party may terminate this Agreement. This
provision shall not survive the Closing.
[THIS SPACE INTENTIONALLY LEFT BLANK]
23.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Securities Purchase
Agreement as of the date first above written.
SCIENTIFIC LEARNING PRINCIPLES CORPORATION
By: /s/ Michael M. Merzenich
---------------------------------------
Michael M. Merzenich
President
Address: One Kearny Street
San Francisco, CA 94108
Fax: 415-296-1481
INVESTOR:
WARBURG, PINCUS VENTURES, L.P.
By its General Partner, Warburg, Pincus & Co.
By: /s/ James E. Thomas
---------------------------------------
James E. Thomas
Title: Partner
------------------------------------
Address: 466 Lexington Avenue
New York, NY 10017
Fax: 212-878-9361
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1996 JAN-01-1997 JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1996 DEC-31-1997 JUN-30-1997 JUN-30-1998
<CASH> 3,822 2,699 0 1,019
<SECURITIES> 0 0 0 0
<RECEIVABLES> 0 44 0 318
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 3,827 2,900 0 1,658
<PP&E> 543 1,489 0 1,756
<DEPRECIATION> 77 369 0 605
<TOTAL-ASSETS> 4,306 4,456 0 3,701
<CURRENT-LIABILITIES> 265 1,331 0 3,677
<BONDS> 0 0 0 0
4,002 8,002 0 8,002
2,400 2,355 0 2,355
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<OTHER-SE> (2,497) (7,939) 0 (12,581)
<TOTAL-LIABILITY-AND-EQUITY> 4,306 4,456 0 3,701
<SALES> 0 2,249 330 1,572
<TOTAL-REVENUES> 0 2,962 689 1,800
<CGS> 0 481 124 359
<TOTAL-COSTS> 0 949 323 533
<OTHER-EXPENSES> 2,611 7,148 2,607 5,351
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 1 32 8 66
<INCOME-PRETAX> (2,497) (5,058) (2,190) (4,103)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> 0 0 0 0
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (2,497) (5,058) (2,190) (4,103)
<EPS-PRIMARY> 0 (0.60) (0.55) (0.99)
<EPS-DILUTED> 0 (0.60) (0.55) (0.99)
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