<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 27, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
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
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
ISOBEL A. JONES KIMBERLEY E. HENNINGSEN
LAURA RANDALL WOODHEAD COLBY R. GARTIN
STEVE R. DAETZ 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
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common Stock, par value $0.001 per share.................................... $46,000,000 $12,788
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee under
Rule 457(o) of the Securities Act of 1933. Such amount includes $6,000,000
of common stock which the underwriters have an election to purchase solely
to cover over-allotments, if any. In accordance with Rule 457(o) under the
Securities Act of 1933, the number of shares being registered and the
proposed maximum offering price per share have not been included in this
table.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED , 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
SHARES
[LOGO]
COMMON STOCK
--------------
This is Scientific Learning Corporation's initial public offering of common
stock. We are offering shares.
We expect the public offering price to be between $ and $ per share.
Currently, no public market exists for the shares. After pricing of the
offering, we expect that the common stock will be quoted on the Nasdaq National
Market System under the symbol "SCIL."
INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
-----------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ---------
<S> <C> <C>
Public Offering Price................................................ $ $
Underwriting Discount................................................ $ $
Proceeds, before expenses, to Scientific Learning Corporation........ $ $
</TABLE>
The underwriters may also purchase up to an additional shares, at
the public offering price, less the underwriting discount, within 30 days from
the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any other state
securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
The shares of common stock will be ready for delivery in New York, New York
on or about , 1999.
-------------------
MERRILL LYNCH & CO.
THOMAS WEISEL PARTNERS LLC
PACIFIC GROWTH EQUITIES, INC.
-------------------
The date of this prospectus is , 1999.
<PAGE>
[INSIDE FRONT COVER]
[TO COME]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Forward-Looking Statements................................................................................. 3
Prospectus Summary......................................................................................... 5
Risk Factors............................................................................................... 9
How We Intend to Use the Proceeds from this Offering....................................................... 18
Dividend Policy............................................................................................ 18
Capitalization............................................................................................. 19
Dilution................................................................................................... 20
Selected Financial Data.................................................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 22
Business................................................................................................... 30
Management................................................................................................. 48
Certain Transactions....................................................................................... 61
Principal Stockholders..................................................................................... 63
Description of Capital Stock............................................................................... 65
Shares Eligible for Future Sale............................................................................ 67
Underwriting............................................................................................... 69
Legal Matters.............................................................................................. 71
Experts.................................................................................................... 71
Additional Information..................................................................................... 72
Index to Financial Statements.............................................................................. F-1
</TABLE>
------------------------
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events, including, among other things:
- Implementing our business strategy;
- Developing and successfully introducing new products;
- Our ability to embed our products in the public school and private
practice markets;
- Our ability to compete successfully against direct and indirect
competitors; and
- Managing our rapid growth and attracting and retaining key personnel.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue" or the negative of these
terms or other comparable terminology.
This prospectus also contains forward-looking statements attributed to or
extrapolated from third-party data related to estimates regarding the growth in
technology spending by public schools.
Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors that may cause our and the educational
technology industry's actual results, levels of activity, performance,
achievements and prospects to differ materially from those expressed or implied
by any forward-looking statements. These risks, uncertainties and other factors
include, among other things, those identified under "Risk Factors" and elsewhere
in this prospectus.
3
<PAGE>
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur. See "Risk Factors."
------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this is accurate as of the date on the front of
this prospectus only. Our business, financial condition, results of operations
and prospects may have changed since that date.
------------------------
We are a Delaware corporation. We incorporated in 1995 in California under
the name Scientific Learning Principles Corporation and reincorporated in 1997
in Delaware under our present name. Our principal executive office is located at
1995 University Avenue, Suite 400, Berkeley, California 94704 and our telephone
number is (510) 665-9700. We maintain a World Wide Web site at
WWW.SCIENTIFICLEARNING.COM. The reference to our World Wide Web site does not
constitute incorporation by reference of the information contained at the site.
In this prospectus, the "Company," "Scientific Learning," "we," "us" and "our"
refer to Scientific Learning Corporation but not to the underwriters listed in
this prospectus. In addition, "common stock" refers to our common stock, $0.001
par value per share. See "Description of Capital Stock."
Fast ForWord-Registered Trademark-, Fast ForWord Two-TM-, Language Takes Us
Everywhere-TM-, A Bridge to Reading-TM-, Away We Go!-TM-, the Fast ForWord logo
and the names of products and services we offer are trademarks, registered
trademarks, service marks or registered service marks of Scientific Learning.
This prospectus also includes product names, trade names and trademarks of other
companies that are their property.
4
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY MAY NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO
YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL DATA AND
RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. UPON COMPLETION OF THIS
OFFERING, THE ONLY CLASS OF OUR CAPITAL STOCK OUTSTANDING WILL BE OUR COMMON
STOCK. EXCEPT WHERE OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (A)
ASSUMES A TWO-FOR-THREE REVERSE STOCK SPLIT OF OUR COMMON STOCK AND PREFERRED
STOCK TO BE EFFECTED PRIOR TO THIS OFFERING, (B) ASSUMES THE AUTOMATIC
CONVERSION OF OUR OUTSTANDING PREFERRED STOCK INTO COMMON STOCK ON A ONE-FOR-ONE
BASIS UPON CLOSING OF THIS OFFERING AND (C) ASSUMES THE UNDERWRITERS' OPTION TO
PURCHASE ADDITIONAL SHARES IN THIS OFFERING WILL NOT BE EXERCISED. SEE
"DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITING."
OUR COMPANY
We develop, market and sell proprietary, neuroscience-based software and
other educational products and services designed to increase human learning and
performance. Language and reading skills are the foundation for all learning,
and we have developed scientifically validated products to help children learn
how to read or become better readers. Our Fast ForWord products are intensive,
computer-based training programs that focus on improving critical language and
reading skills. Our current products, Fast ForWord and Fast ForWord Two, focus
primarily on the learning needs of children aged four to 13. In field studies,
90% of participants identified as having language or reading difficulties showed
statistically significant gains in language comprehension skills, achieving, on
average, one to two years of improvement in language and reading skills after
completion of Fast ForWord programs in four to eight weeks. Based upon decades
of independent neuroscience research on the brain's ability to adapt to stimuli,
our Fast ForWord family of products uses computer-controlled, repetitive and
adaptive training exercises to modify the manner in which the brain processes
language. Our research and results have been independently validated in
published articles in prestigious, peer-reviewed scientific journals, including
SCIENCE and NATURE.
We intend to continue expanding our product offerings through new products
and services, as well as extensions of our current product lines. We have an
additional four products scheduled for launch in the second quarter of 1999 and
have six products targeted for launch in the year 2000. We believe our products
benefit children and adults of all ages and capabilities. We also offer
professional development seminars in which educators, speech and language
professionals and other learning facilitators can learn about recent
developments in brain research and the practical application of our programs, as
well as earn continuing education credit. In addition, our software products
have secure links to our web site, ScientificLearning.com, which enables
parents, educators and other learning facilitators to upload performance data
and track progress daily to maximize the benefit of our products and services.
ScientificLearning.com also provides information and forums for the exchange of
ideas. In the second quarter of 1999, we will launch BrainConnection.com, an
online community that will provide recent developments in brain research and
offer learning products directly to consumers. We believe that
BrainConnection.com will significantly expand our Internet capabilities,
interactions with consumers and e-commerce activities.
Our products are delivered through a variety of distribution channels,
including sales to public schools, speech and language professionals in private
practice and direct-to-consumer channels, such as the Internet. Our Fast ForWord
programs are designed to integrate with school curricula and support educators,
speech and language professionals, parents and other learning facilitators to
help children improve their language and reading skills, the foundation for all
learning. As of March 31, 1999, we have sold more than 13,000 copies of Fast
ForWord and Fast ForWord Two and have trained more than 3,600 individuals in
administering our programs. We have sold our programs in nearly 300 school
districts, including districts in Chicago, Orlando, Las Vegas, New Orleans,
Houston, Detroit and Los
5
<PAGE>
Angeles. The majority of our public school sales have occurred since we formed a
dedicated sales force in the fall of 1998.
OUR MARKET
While we believe our products and services benefit children and adults of
all ages and capabilities, we are currently concentrating on schools with
students in kindergarten through high school, or K-12, in the United States in
order to reach the largest number of children who are learning to read or need
to become better readers. We estimate that more than 52.7 million students
attend over 110,000 K-12 public and private schools in the United States in the
1998-99 school year. Our initial focus is children between the ages of four and
13. Based on U.S. Department of Commerce, Bureau of the Census data, there are
approximately 40 million children in this age group. According to the National
Institute of Child Health and Human Development, as much as 40% of the
population, or 16,000,000 of these children, have reading problems. We believe
that approximately 1,600,000 children in the United States enter this category
each year.
Consistent with our strategy to reach the broadest market, we are developing
and plan to introduce products for improving the reading and language
comprehension skills of adolescents and adults, including those who are
functionally illiterate, have limited English proficiency or suffer from
language loss due to stroke. According to the National Adult Literacy Study
conducted in 1992, more than 40 million adults in the United States are
functionally illiterate. In August 1998, the National Center on Adult Literacy
estimated that among functionally illiterate adults there were 14 million
non-native English speaking adults living in the United States in 1996 with
limited proficiency in the English language. According to the National Stroke
Association, in 1998 nearly four million people in the United States were living
with the after effects of a stroke.
OUR STRATEGY
Our goal is to establish Scientific Learning as the leading provider of
proven, neuroscience-based software and other education and training products
and services. Key elements of our growth strategy include:
- INTRODUCE ADDITIONAL NEUROSCIENCE-BASED SOFTWARE PRODUCTS AND SERVICES. We
believe our expertise in neuroscience, language learning and technology
positions us well for the successful introduction of new education and
training products and services applicable to children and adults of all
ages and capabilities. We have four products targeted for launch in the
second quarter of 1999 and have six products targeted for launch in the
year 2000.
- RAPIDLY EXPAND OUR SALES AND MARKETING EFFORTS. We intend to continue to
hire sales people, implement additional direct-to-consumer e-commerce
capabilities and explore and develop other channels of distribution,
including potential strategic alliances with for-profit educational
companies, day care providers and private schools.
- IMPLEMENT EXPANDED INTERNET STRATEGY. In addition to our current web site,
ScientificLearning.com, in the second quarter of 1999 we will launch
BrainConnection.com, an online community that will provide the latest
brain research and learning products directly to consumers. We believe
that BrainConnection.com will significantly expand our web capabilities,
interactions with consumers and e-commerce capabilities.
- BUILD A TRUSTED BRAND. We intend to continue to build recognition of our
company and product brands among parents, educators, speech and language
professionals and other learning facilitators and use that recognition to
successfully commercialize other neuroscience-based products.
6
<PAGE>
THIS OFFERING
<TABLE>
<S> <C>
Common stock offered:.................... shares
Shares outstanding after this shares (1)
offering:................................
Over-allotment option.................... shares
Use of Proceeds.......................... Sales and marketing, research and product
development and other general corporate
purposes. See "How We Intend to Use the
Proceeds from this Offering."
Risk Factors............................. See "Risk Factors" for a discussion of
factors you should carefully consider
before deciding to invest in the shares
of the common stock.
Proposed Nasdaq National Market symbol... SCIL
</TABLE>
- ------------------------
(1) Based on the number of shares outstanding as of March 31, 1999. Excludes:
- 1,400,306 shares of common stock issuable upon exercise of options and
warrants outstanding as of March 31, 1999 with a weighted average
exercise price of $2.57 per share;
- 437,590 shares of additional common stock reserved for issuance under
our 1999 Equity Incentive Plan;
- 75,000 shares of common stock reserved for issuance under our 1999
Non-Employee Directors' Stock Option Plan; and
- 350,000 shares of common stock reserved for issuance under our 1999
Employee Stock Purchase Plan. See "Management--Employee Benefit Plans,"
"Certain Transactions" and "Description of Capital Stock."
7
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................................. $ -- $ 2,962 $ 5,166 $ 647 $ 1,340
Gross profit................................... -- 2,013 3,768 486 1,007
Operating loss................................. (2,611) (5,135) (9,918) (1,768) (3,625)
Net loss....................................... (2,497) (5,058) (10,748) (1,748) (3,537)
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------------------
ACTUAL AS ADJUSTED (1)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 7,249 $
Working capital (deficit)............................ 5,003
Total assets......................................... 10,421
Long-term debt, including current portion............ 319
Redeemable convertible preferred stock............... 23,836
Stockholders' equity (deficit) (2)................... (17,393)
</TABLE>
- ------------------------
(1) As adjusted to reflect our sale of shares of common stock at an
assumed initial public offering price of $ per share after deducting
the underwriting discount and estimated offering expenses and the
application of the estimated net proceeds from this sale and the conversion
of outstanding preferred stock into 5,232,146 shares of common stock upon
completion of this offering. See "How We Intend to Use the Proceeds from
this Offering" and "Capitalization."
(2) We have paid no cash dividends since our inception.
8
<PAGE>
RISK FACTORS
INVESTING IN OUR COMMON STOCK WILL PROVIDE YOU WITH AN EQUITY OWNERSHIP
INTEREST IN SCIENTIFIC LEARNING CORPORATION. AS A STOCKHOLDER, YOUR INVESTMENT
MAY BE SUBJECT TO RISKS INHERENT IN OUR BUSINESS. THE PERFORMANCE OF YOUR SHARES
WILL REFLECT THE PERFORMANCE OF OUR BUSINESS RELATIVE TO, AMONG OTHER THINGS,
OUR COMPETITION, GENERAL ECONOMIC AND MARKET CONDITIONS AND INDUSTRY CONDITIONS.
THE VALUE OF YOUR INVESTMENT MAY INCREASE OR DECLINE AND COULD RESULT IN A LOSS.
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AS WELL AS OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN SHARES OF THE COMMON
STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY AND ADVERSELY AFFECTED.
IN SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU MAY
LOSE ALL OR PART OF YOUR INVESTMENT.
WE RELY PRIMARILY ON A SINGLE FAMILY OF PRODUCTS AND ANY FAILURE TO INCREASE OUR
SALES OF THE FAST FORWORD FAMILY OF PRODUCTS COULD CAUSE OUR BUSINESS TO SUFFER
Since our formation, the sale and servicing of our Fast ForWord family of
products has accounted for substantially all of our revenues. We anticipate that
this will continue to be the case for the foreseeable future. In addition, we
only recently expanded our Fast ForWord family of products beyond Fast ForWord,
through the introduction of Fast ForWord Two. Consequently, we only have a
limited history upon which you can gauge the success of the Fast ForWord family
of products. We also have not yet introduced other product line extensions
planned for Fast ForWord. We cannot assure you that our Fast ForWord family of
products will receive the same or greater level of commercial acceptance as Fast
ForWord.
OUR BUSINESS DEPENDS ON WHETHER WE CAN ACHIEVE AND MAINTAIN MARKET ACCEPTANCE
AND INCREASE THE NUMBER OF PROGRAMS WE COMMERCIALLY INTRODUCE AND SELL
Our future success depends on acceptance of the Fast ForWord family of
products and our other products by public schools, administrators, educators,
speech and language professionals, parents and other learning facilitators.
Sales of our products depend on many factors, including:
- our ability to incorporate our products into traditional school programs;
- the willingness of learning facilitators to adopt new teaching and
training methods;
- the cost of our programs compared to other available programs;
- the availability of government funding;
- competitive developments;
- our ability to continue to demonstrate the efficacy and acceptance of our
products;
- our ability to adapt to evolving technology and standards; and
- the public's ability and willingness to use the Internet.
We have introduced three products or services and have an additional four
products scheduled for launch in the second quarter of 1999 and have six
products targeted for launch in the year 2000. We cannot assure you that we will
be able to introduce new products as scheduled or that, if introduced, new
products will be successful. Our business will suffer if we do not achieve and
maintain market acceptance for our existing products or if we fail to increase
the number of programs we commercially introduce and sell.
9
<PAGE>
ANY DIFFICULTY IN PENETRATING NECESSARY MARKETS COULD ADVERSELY AFFECT OUR
BUSINESS
We began selling Fast ForWord to public schools in May 1997 and initiated
our public schools sales force in the fall of 1998. We believe that our success
in the public school market will depend largely on our ability to continue to
hire and retain experienced sales personnel and whether we can convince
educators and other key public school decision-makers to use our products. This
could be difficult because the learning methods required by our products differ
from the way schools have traditionally addressed language learning and reading.
In addition, schools and teachers may find it difficult to incorporate our
intensive training programs into their curriculum since our products are
generally designed to be used for 90 to 100 minutes per day, five days per week.
We may not be able to penetrate the market of speech and language
professionals in private practice as quickly or as broadly as we would like,
because our programs require use of computers and other technology. In addition,
we will have to convince speech and language professionals that our programs are
a tool that can be useful in their practice and will enable them to supervise
multiple clients at a time. We also have had limited experience selling our
products directly to parents and may have difficulty doing so. The Internet is a
possible distribution channel for our products. We believe that we will be able
to penetrate the parental market only if we can develop a remote or at-home
course delivered by video, CD ROM and/or the Internet to train parents in
supervising and administering our products. We may not be successful in
developing these distance-based training programs. Finally, our ability to sell
programs to parents and other potential customers depends upon word-of-mouth
referrals which could take considerable time to develop. Any failure to
penetrate necessary markets could adversely affect our business and financial
condition.
OUR QUARTERLY OPERATING RESULTS ARE SUSCEPTIBLE TO FLUCTUATIONS WHICH COULD
CAUSE OUR STOCK PRICE TO DECLINE
Since our formation, our quarterly operating results have fluctuated
significantly. We expect these fluctuations to continue for a number of reasons,
including factors described elsewhere in this "Risk Factors" section of the
prospectus. Demand for our programs and services is subject to seasonal
influences. We do not have sufficient operating experience to predict the
overall effect of various seasonal factors and their effect on future quarterly
operating results. We believe that demand for our programs from speech and
language professionals in private practice will be lower during the school year
than in the summer, because the intensive nature of Fast ForWord is more
conducive to training during school vacation. We also believe we will experience
seasonality in the public school market due to public school calendars and
budget cycles.
Prediction of future revenues and expenses is difficult because of our
limited operating history and the emerging nature of our market. Our expense
levels are based on our expectations of future revenues and are primarily fixed
in the short term. We cannot guarantee that we will be able to predict our
future revenues accurately or that we will be able to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. Any
significant shortfall of revenues in relation to our expectations could cause
significant fluctuations in quarterly operating results, and our stock price
could suffer.
OUR FAILURE TO ACHIEVE AND SUSTAIN PROFITABILITY WOULD SERIOUSLY HARM OUR
BUSINESS
We started operations in February 1996 and began generating revenues in the
first quarter of 1997. Because we have generated limited revenues to date, we
have incurred significant operating losses and negative cash flow since
inception. We have an accumulated deficit of approximately $21.8 million from
inception through March 31, 1999. We expect to incur additional losses for at
least the next 18 months, because of substantial increases in sales and
marketing and research and development expenses. We cannot guarantee that we
will ever generate sufficient revenues to achieve or sustain profitability or
10
<PAGE>
generate positive cash flow. We cannot assure you that our cash resources after
this offering will be sufficient to fund our negative cash flow and expected
capital expenditures for this period. As a result, we may need to obtain
additional equity or debt financing in the future, which may not be available on
acceptable terms, if at all.
WE MAY INCUR ADDITIONAL LOSSES AS A RESULT OF OUR LIMITED OPERATING HISTORY
It is difficult for us to evaluate our current business and prospects
because we have a limited operating history. Companies with limited operating
histories, including ours, encounter high risks and uncertainties, particularly
in new and rapidly evolving markets such as neuroscience-based learning
products. These risks include, but are not limited to, (1) the demand for
technology-based learning products; (2) the management of growth; (3) demand for
our programs and services; (4) our ability to penetrate our target markets; and
(5) competition. To address these risks, we must, among other things:
- successfully gain market acceptance for our Fast ForWord family of
products, 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.
We cannot assure you that we will be successful in addressing the risks we
face and our failure to address those risks will materially and adversely affect
our business and financial condition.
TO REMAIN COMPETITIVE WE MUST CONTINUE TO INTRODUCE NEW PRODUCTS AND PRODUCT
ENHANCEMENTS
Our future success will significantly depend on whether we are able to
enhance our existing programs and develop new programs based on our proprietary
technology. We have four products scheduled for commercial launch in the second
quarter of 1999 and six targeted for commercial launch in the year 2000. We
cannot assure you that we will be successful in developing and marketing these
or any other new products or that product introduction will not be delayed. If
the release of any new products is delayed or if these products do not gain
market acceptance, then our business may suffer. There is also the risk that our
own new products, or products developed by our competitors, will cause customers
to defer or forgo purchases of our products. In addition, there is the risk that
our products may be rendered obsolete or we may not have sufficient resources to
make the investments to develop and market the products necessary to maintain
our competitive position.
OUR REVENUES DEPEND ON GOVERNMENT FUNDING AVAILABLE TO PUBLIC SCHOOLS AND ANY
SUBSTANTIAL DELAYS OR REDUCTIONS IN GOVERNMENT BUDGETS OR FUNDING FOR
EDUCATIONAL SOFTWARE OR TECHNOLOGY WOULD HARM OUR BUSINESS
To date, we have generated limited revenues from sales to public schools.
However, our future revenues will depend, in part, on our ability to increase
revenues from public schools. This, in turn, depends largely on federal, state
and local government funding. Federal funding for educational technology is
available primarily through legislation, including Title I of the Elementary and
Secondary Education Act of 1965, the Individuals with Disabilities Education
Act, Goals 2000, Technology Literacy Challenge Grants and the education rate
discount authorized by the Telecommunications Act of 1996. Many states have
enacted similar legislation. Substantial delays or reductions in government
budgets or funding for educational software or technology would have a material
adverse effect on our business and financial condition.
11
<PAGE>
WE WILL NEED TO MANAGE OUR EXPANDING BUSINESS EFFECTIVELY IN ORDER TO MEET
INVESTOR EXPECTATIONS
We have recently experienced a period of significant expansion. Our
historical growth has placed, and any further growth will place, a significant
strain on our managerial, operational, financial and other resources. We have
grown from five employees at March 31, 1996 to 139 full-time and 24 part-time
employees at March 31, 1999. During this period, we significantly expanded our
operations and introduced Fast ForWord and Fast ForWord Two. Our future success
will depend, in part, upon whether our senior management can manage growth
effectively. This will require us to implement additional management information
systems and to develop additional operating, administrative, financial and
accounting systems and controls. We will also have to maintain close
coordination among our accounting, finance, marketing, sales, customer support
and professional service organizations. If we are unsuccessful in managing
growth, our business and financial condition will be materially and adversely
affected.
WE RELY ON OUR INTELLECTUAL PROPERTY RIGHTS AND MAY BE UNABLE TO PROTECT THESE
RIGHTS
Our ability to compete effectively will depend in part on whether we are
able to develop and maintain the proprietary aspects of our technology and to
operate without infringing on the proprietary rights of others. We rely on a
combination of patents, trademarks, copyrights, trade secret laws,
confidentiality procedures and contractual provisions to protect our proprietary
rights in our products and technology. We have filed patent applications in the
United States and internationally relating to our technology, including, as of
March 31, 1999, 38 applications with the U. S. Patent and Trademark Office, or
USPTO. Additionally, we are the exclusive licensee of the technology owned by
The Regents of the University of California ("The Regents") and Rutgers, the
State University of New Jersey ("Rutgers") which is the subject of a patent
issued in September 1998, covering the basic speech and sound modification
algorithms used in our programs. We obtained this license under a licensing
agreement with The Regents. We cannot assure you that additional pending patent
applications will result in the issuance of any patents or that any issued
patents will offer protection against competitors with similar technology. In
addition, any patents issued to us or our licensors could be challenged,
invalidated or circumvented in the future.
The Regents may terminate the license agreement if we fail to perform or
violate its terms without curing the violation within 60 days of receiving
written notice of the violation. For example, The Regents could terminate the
agreement if we fail to perform any of the following obligations:
- make royalty and milestone payments;
- provide periodic progress reports;
- prepare, file and prosecute U.S. and foreign patent applications;
- provide indemnification;
- insure our activities in connection with work under the agreement; and
- maintain the confidentiality of information received from The Regents
relating to the agreement.
If we lose or are unable to maintain the license agreement, this could delay
our introduction of new products and would require the recall of our products
from the market. Even if we could identify and license technology equivalent to
the technology covered by the license agreement, developing and integrating
alternative technology would likely delay our product line.
As a patent holder, it is possible we may 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.
12
<PAGE>
Litigation may be necessary to enforce patents issued to us, to protect
trade secrets or know-how that we own or to determine the enforceability, scope
and validity of the proprietary rights of others. Any litigation or interference
proceedings will result in substantial expense and significant diversion of
effort by our technical and management personnel. An adverse determination in
litigation or interference proceedings to which we may become a party could
subject us to significant liabilities to third parties or require us to seek
licenses from third parties which may not be available on commercially
reasonable terms or at all.
WE COULD LOSE REVENUES AS A RESULT OF SOFTWARE ERRORS OR DEFECTS AND AS A RESULT
OF OUR REFUND POLICY. AS A SELLER OF PRODUCTS AND SERVICES TO CONSUMERS, WE ALSO
FACE RISK FROM PRODUCT AND PROFESSIONAL LIABILITY CLAIMS
Software programs frequently contain errors or defects, especially when
first introduced or when new versions are released. We could, in the future,
lose revenues as a result of software errors or defects. We cannot assure you
that errors will not be found in new products or releases, even though products
are tested prior to release. Any errors could result in loss of revenue or delay
in market introduction or acceptance, diversion of development resources, damage
to our reputation or increased service and warranty costs.
We have adopted a refund policy under which we provide a refund if a child's
performance on Fast ForWord products indicates (based on criteria we set forth
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 child in the program,
rather than receive a refund. While we do not expect this policy to have a
material effect on our operations, we cannot guarantee that the policy will not
have a material adverse effect in the future on our business and financial
condition.
Because we market products to the public we face an inherent business risk
of financial exposure to product liability claims. In addition, to the extent we
provide professional or similar services, we may also face a risk of exposure to
professional liability claims. We currently carry product and professional
liability insurance that, in general, covers product and professional liability
claims up to the policy limits. We cannot assure you that we will continue to
have access to this insurance at a reasonable cost, if at all, or that the
insurance will be adequate to satisfy any liability or litigation expenses. Any
claim or claims against us, regardless of their merit or eventual outcome, could
materially and adversely affect our business.
THE LONG SALES CYCLE FOR OUR PRODUCTS COULD CAUSE REVENUES AND OPERATING RESULTS
TO VARY SIGNIFICANTLY FROM QUARTER TO QUARTER
The nature of our products requires us to provide a significant level of
education to prospective speech and language professionals, educators, parents
and other learning facilitators regarding the use and benefits of our programs
and services. In addition, our 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 our programs and services may be lengthy and
is subject to a number of significant delays over which we have little or no
control. Our sales cycle could be lengthened as we target school-wide and
district-wide sales. Delay in the sale or implementation of a limited number of
sales transactions could cause our operating results to vary significantly from
quarter to quarter.
13
<PAGE>
THERE IS ACADEMIC DEBATE REGARDING THE SCIENTIFIC BASIS UNDERLYING OUR PRODUCTS
WHICH COULD SIGNIFICANTLY AFFECT THE MARKET FOR OUR PROGRAMS AND SERVICES
Our Fast ForWord family of products is based on particular theories of
neuroscience and language acquisition. Our 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 the Fast ForWord family of products are based have
been, and are likely to be, subject to public debate and challenges. Although we
believe that the Fast ForWord family of products is based primarily upon
non-controversial scientific theories, some of the principles and methodologies
underlying and associated with our products are opposed by some academicians and
educators, any of whom could influence the market for our products and services.
Consequently, academic publications and debate challenging the theories of
neuroscience and language acquisition propounded by the founders and others
could adversely affect the market for our products and services.
IF INTERNET USE FAILS TO DEVELOP WITHIN SCHOOLS AND AMONG SPEECH AND LANGUAGE
PROFESSIONALS IN PRIVATE PRACTICE, OR IF THE INTERNET EXPERIENCES PERFORMANCE OR
RELIABILITY PROBLEMS, OUR BUSINESS WILL SUFFER
One of the key features of the Fast ForWord family of products is its daily
uploading and downloading of information to and from our proprietary database
via the Internet. 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, our business will suffer. If the Internet
infrastructure does not adequately support continued Internet growth, access to
our ScientificLearning.com and BrainConnection.com web sites, or other web sites
we develop or launch, could be harmed. The Internet has experienced a variety of
outages and other delays as a result of damage to portions of its
infrastructure, and it could face outages and delays in the future, resulting in
performance or reliability problems. This might include outages and delays
resulting from the "Year 2000" problem. In addition, the Internet could be
adversely affected 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 use of the Internet.
WE MAY NOT BE ABLE TO MARKET OUR PRODUCTS SUCCESSFULLY OR COMPETE EFFECTIVELY IN
THE EDUCATIONAL TECHNOLOGY MARKET
The educational technology market in which we operate is very competitive.
We compete primarily with providers of traditional methods of remediation for
language and reading problems, which typically require several years of
one-on-one training for children with identified language and reading problems.
In addition, we compete to some extent with other companies offering educational
software products and reading and language skill building programs to schools
and to speech and language professionals in private practice. 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. Moreover, we expect that we
will face additional competition from new entrants into the market. Many
competitors have substantially greater technical, marketing and distribution
resources than we do. We cannot assure you that we will continue to be able to
market our products successfully or compete effectively in the educational
technology market.
IF WE FAIL TO RETAIN OUR KEY PERSONNEL OR ATTRACT AND RETAIN KEY EMPLOYEES, OUR
BUSINESS WILL SUFFER
Our success depends to a significant extent upon the continued active
participation of key members of our management. The loss of one or more of these
persons could have a material adverse effect on our business, financial
condition and results of operations. We believe that our future success will
depend upon our ability to continue to attract, motivate and retain highly
skilled managerial, sales and marketing and product development personnel.
Competition for such personnel is intense. Our
14
<PAGE>
failure in attracting or retaining the necessary personnel could materially and
adversely affect our business.
WE FACE A NUMBER OF RISKS ASSOCIATED WITH TRYING TO BECOME YEAR 2000 COMPLIANT
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 and, as a result, many companies'
software and computer systems may need to be upgraded or replaced in order to be
Year 2000 compliant. Although we believe that our products and internal systems
are compliant, we utilize third-party equipment and software that may not be
compliant. If any third-party equipment or software is not Year 2000 compliant,
we may have to incur unanticipated expenses to remedy any problems. Year 2000
compliance issues could also affect the purchasing patterns of existing or
potential customers as educational institutions expend significant resources to
correct their current systems for compliance. These expenditures may result in
reduced funds available to purchase our products and services.
WE ARE SUBJECT TO GOVERNMENT REGULATIONS THAT COULD IMPOSE ADDITIONAL COSTS ON
THE CONDUCT OF OUR BUSINESS
Our business is potentially subject to or affected by a variety of federal,
state and local laws and regulations. These include, without limitation, laws
and regulations relating to:
- education;
- licensing of speech and language professionals in private practice and
delivery of speech and language testing and remediation services;
- consumer protection and anti-fraud and related protections, including the
regulation of referrals by professionals; and
- government funding.
Compliance with these and other laws and regulations impose additional costs on
the conduct of our business, and failure to comply with these laws and
regulations, changes in these laws and regulations, or in their applicability to
our business may impose additional costs.
To date, we have not expressly agreed to grant any distribution territory or
franchise to any person or entity and believe that we are not currently subject
to the laws regulating distributors or franchisers. Nonetheless, in the future
we may make distribution or franchise arrangements, or may be deemed to have
made distribution or franchise arrangements, and could, as a result, be subject
to laws regulating distributors or franchisers. These regulations could
materially and adversely affect our business, financial condition and results of
operations. Although we believe our existing products are educational training
tools not subject to regulation by the U.S. Food and Drug Administration, we
cannot assure you that the U.S. Food and Drug Administration will not make a
contrary determination in the future with respect to other products under
development or to our existing products. Our business could suffer in the event
we became subject to such regulation.
OUR EXECUTIVE OFFICERS AND DIRECTORS AND THEIR AFFILIATES EFFECTIVELY CONTROL
THE VOTING POWER OF OUR COMPANY
Following the completion of this offering, our executive officers and
directors and their respective affiliates will beneficially own approximately
% of the outstanding common stock ( % 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. This concentration of ownership may also
delay, prevent or deter a change in control of our company. In addition, in
15
<PAGE>
connection with the issuance of Series B preferred stock and warrants to
purchase Series C preferred stock, we entered into an agreement that requires
us, following the completion of this offering and as long as Warburg, Pincus
Ventures, L.P. owns at least 20% of the outstanding common stock, to nominate
and use our best efforts to elect two individuals designated by Warburg, Pincus
Ventures, L.P. for election to the board of directors, and to elect one director
as long as Warburg, Pincus Ventures, L.P. owns at least 10% of the outstanding
common stock.
THE MARKET PRICE OF OUR STOCK MAY BE HIGHLY VOLATILE
Prior to this offering, there has been no public market for our common stock
and we can give no assurance that an active public market for our common stock
will develop or be sustained after this offering. The initial offering price
will be determined by our negotiation with the underwriters based upon several
factors and may bear no relation to the price at which the common stock will
trade after this offering. The market price of our common stock is likely to be
highly volatile and could be subject to wide fluctuations for the following
reasons, among others:
- in response to the timing of our future product releases, if any;
- variations in our annual or quarterly financial results or those of our
competitors;
- changes by financial research analysts in their estimates of our future
earnings;
- conditions in the economy in general or in our industry in particular; and
- unfavorable publicity or changes in applicable laws and regulations
affecting us or the educational technology industry.
Broad market fluctuations may adversely affect the market price of our
common stock and result in class action litigation. This litigation could result
in substantial costs and would, at a minimum, divert our management's attention
and resources, which could materially and adversely affect our business. Any
adverse determination in this litigation could also subject us to significant
liabilities.
SALES OF OUR SHARES AFTER THIS OFFERING COULD NEGATIVELY AFFECT THE MARKET PRICE
OF OUR STOCK AND RESULT IN FURTHER DILUTION
Sales of substantial amounts of shares in the public market following this
offering could have a material adverse effect on the market price of our common
stock. Immediately following this offering, we will have shares of common
stock outstanding assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options or warrants after March 31, 1999.
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.
The remaining 8,041,573 shares of common stock will be restricted securities as
defined by Rule 144 adopted under the Securities Act of 1933. 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 adopted under the
Securities Act of 1933. We cannot predict the effect that future sales made
under Rule 144, Rule 701 or otherwise will have on the market price of our
common stock.
In addition, following closing of this offering we intend to register shares
of common stock issuable upon the exercise of stock options granted under our
stock option plans. After the effective date of this registration, shares issued
upon the exercise of stock options generally will be available for sale in the
public market. Our executive officers and directors and stockholders
beneficially owning in the aggregate 7,828,017 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 Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") 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
16
<PAGE>
agreements may be released at any time by Merrill Lynch, with or without notice.
The holders of approximately 4,285,711 shares of common stock are entitled to
register their shares.
OUR CHARTER PROVISIONS COULD HAVE THE EFFECT OF DELAYING OR PREVENTING CORPORATE
TAKEOVERS
Our Certificate of Incorporation authorizes our Board 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 Certificate
of Incorporation and Bylaws, among other things, provide for a classified board
of directors, 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.
OUR MANAGEMENT HAS BROAD DISCRETION TO DETERMINE HOW TO USE THE FUNDS RAISED IN
THIS OFFERING AND MAY USE THEM IN WAYS THAT STOCKHOLDERS MAY NOT DEEM DESIRABLE
We plan 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 these expenditures will depend on business and
market developments. The remaining net proceeds, representing approximately %
to % of the total net proceeds of this offering, have not been allocated for
a particular purpose. We intend to use the remaining net proceeds for general
corporate purposes, including working capital. As a result, our management will
have significant discretion as to the use of the net proceeds of this offering.
These proceeds may be applied to uses stockholders may not deem desirable.
YOU SHOULD NOT UNDULY RELY ON FORWARD-LOOKING STATEMENTS CONTAINED IN THIS
PROSPECTUS
This prospectus contains forward-looking statements. The outcome of the
events described in these forward-looking statements is subject to risks and you
should not put undue reliance on these forward-looking statements. Our actual
results could differ materially from those discussed in the forward-looking
statements contained in this prospectus. This section and the sections entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" contain a discussion of some of the factors that
could contribute to those differences.
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<PAGE>
HOW WE INTEND TO USE THE PROCEEDS FROM THIS OFFERING
The net proceeds from the sale of the shares of common stock we are
offering, at an assumed initial public offering price of $ per share, are
estimated to be approximately $ ($ if the underwriters' over-allotment
option is exercised in full), after deducting the underwriting discount and
estimated offering expenses that we will pay.
We expect to use the net proceeds of this offering for sales and marketing,
research and product development and other general corporate purposes. 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.
DIVIDEND POLICY
We have never paid cash dividends and do not anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay dividends
will be at the discretion of our board of directors and will be dependent upon
then existing conditions, including our financial condition, results of
operations, contractual restrictions, capital requirements, business prospects
and other factors our board of directors deems relevant. Furthermore, our bank
line of credit restricts the payment of dividends.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999, on
an actual basis and as adjusted to reflect: (i) our sale of the shares of
common stock offered hereby at an assumed initial public offering price of
$ per share after deducting the underwriting discount and estimated
offering expenses, and the application of the estimated net proceeds therefrom;
and (ii) the conversion of all outstanding shares of 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>
MARCH 31, 1999
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
(IN THOUSANDS)
Long-term debt, including current portion................................................ $ 319 $
Redeemable convertible preferred stock, $0.001 par value per share; 8,046,668 shares
authorized; 4,285,711 shares issued and outstanding actual, no shares issued and
outstanding as adjusted................................................................ 23,836 --
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value per share; 10,346,668 shares authorized
(including 8,046,668 shares designated as redeemable convertible preferred stock);
946,435 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; 37,346,668 shares authorized; 2,809,427 shares
issued and outstanding actual; 40,000,000 shares authorized, 8,041,573 shares issued
and outstanding as adjusted (1)........................................................ 3,504
Deferred compensation (2)................................................................ (1,412)
Accumulated deficit...................................................................... (21,840)
---------- -----------
Total stockholders' equity (deficit)................................................. (17,393)
---------- -----------
Total capitalization............................................................... $ 6,762
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) Based on the number of shares outstanding as of March 31, 1999. Excludes:
- 1,400,306 shares of common stock issuable upon exercise of options and
warrants outstanding as of March 31, 1999 with a weighted average exercise
price of $2.57 per share;
- 437,590 shares of additional common stock reserved for issuance under our
1999 Equity Incentive Plan;
- 75,000 shares of common stock reserved for issuance under our 1999
Non-Employee Directors' Stock Option Plan; and
- 350,000 shares of common stock reserved for issuance under our 1999
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.
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<PAGE>
DILUTION
The pro forma net tangible book value at March 31, 1999 was approximately
$6,443,000 or $0.80 per share of common stock. Pro forma net tangible book value
per share represents the amount of our 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 5,232,146 shares of common stock. After giving effect
to the sale of the shares of common stock offered hereby at an assumed
initial public offering price of $ per share after deducting the underwriting
discount and estimated offering expenses we pay and applying the estimated net
proceeds therefrom, our adjusted net tangible book value as of March 31, 1999
would have been approximately $ million, or $ per share of common stock. This
represents an immediate increase in net tangible book value of $ per share
of common stock to existing stockholders and an immediate dilution in net
tangible book value of $ 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.................................
Pro forma net tangible book value (deficit) per share............... $ 0.80
Increase per share attributable to new investors....................
---------
Net tangible book value per share, as adjusted for this offering......
---------
Dilution per share to new investors................................... $
---------
---------
</TABLE>
The following table summarizes as of March 31, 1999, on the pro forma basis
described above, the number of shares of common stock sold by us, 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 $ per share for shares purchased in this offering, before deducting
the underwriting discount and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE
---------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................. 8,041,573 % $ 27,174,000 % $ 3.38
New investors..................................... $
---------- ----- ------------- -----
Total............................................. 100.0% $ 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
The foregoing table assumes no exercise of outstanding stock options and
warrants and excludes: (i) 1,400,306 shares of common stock issuable upon
exercise of options and warrants outstanding as of March 31, 1999 with a
weighted average exercise price of $2.57 per share; (ii) 437,590 additional
shares of common stock reserved for issuance under our 1999 Equity Incentive
Plan; (iii) 75,000 shares of common stock reserved for issuance under our 1999
Non-Employee Directors' Stock Option Plan; and (iv) 350,000 shares of Common
Stock reserved for issuance under our 1999 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.
20
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain historical financial data as of and
for the years ended December 31, 1996, 1997 and 1998 and the three months ended
March 31, 1998 and 1999. The statement of operations data for the years ended
December 31, 1996, 1997 and 1998 and the balance sheet data as of December 31,
1997 and 1998 were derived from our Financial Statements that have been audited
by Ernst & Young LLP, independent auditors, and are included elsewhere in this
prospectus and are qualified by reference to these financial statements and the
notes thereto. The balance sheet data as of December 31, 1996 was derived from
audited financial statements not included herein. The historical financial data
as of March 31, 1999 and for the three months ended March 31, 1998 and 1999 were
derived from unaudited financial statements included elsewhere in this
prospectus. In the opinion of management, the historical financial data as of
March 31, 1999 and for the three months ended March 31, 1998 and 1999 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 Financial Statements and Notes thereto appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Programs......................................................... $ -- $ 2,249 $ 4,462 $ 603 $ 1,076
Services......................................................... -- 713 704 44 264
--------- --------- --------- --------- ---------
Total revenues................................................. -- 2,962 5,166 647 1,340
Cost of revenues:
Programs......................................................... -- 481 784 127 181
Services......................................................... -- 468 614 34 152
--------- --------- --------- --------- ---------
Total cost of revenues......................................... -- 949 1,398 161 333
--------- --------- --------- --------- ---------
Gross profit....................................................... -- 2,013 3,768 486 1,007
Operating expenses:
Sales and marketing.............................................. 164 2,646 6,057 768 2,730
Research and development......................................... 1,514 1,965 2,880 666 762
General and administrative....................................... 933 2,537 4,749 820 1,140
--------- --------- --------- --------- ---------
Total operating expenses....................................... 2,611 7,148 13,686 2,254 4,632
--------- --------- --------- --------- ---------
Operating loss..................................................... (2,611) (5,135) (9,918) (1,768) (3,625)
Interest income (expense), net..................................... 70 162 (832) 20 88
Other income (expense), net........................................ 44 (85) 2 -- --
--------- --------- --------- --------- ---------
Net loss........................................................... $ (2,497) $ (5,058) $ (10,748) $ (1,748) ($ 3,537)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic and diluted net loss per share............................... $ (1.02) $ (1.90) $ (3.87) $ (0.64) $ (1.26)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in computing basic and diluted net loss per share...... 2,453 2,657 2,777 2,737 2,805
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma basic and diluted net loss per share (1)................. $ (1.74) $ (0.44)
--------- ---------
--------- ---------
Shares used in computing pro forma net loss per share (1).......... 6,179 8,000
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997 1998 MARCH 31, 1999
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................... $ 3,822 $ 2,699 $ 6,362 $ 7,249
Working capital......................................................... 3,562 1,569 3,543 5,003
Total assets............................................................ 4,306 4,456 9,121 10,421
Long-term debt, including current portion............................... 35 330 417 319
Redeemable convertible preferred stock.................................. 4,002 8,002 18,940 23,836
Stockholders' (deficit) (2)............................................. (85) (5,064) (14,082) (17,393)
</TABLE>
- ------------------------------
(1) The pro forma net loss per share data gives effect to the conversion of all
outstanding shares of preferred stock into 5,232,146 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) We have paid no cash dividends since our inception.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH "SELECTED FINANCIAL DATA" AND THE
FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, STATEMENTS OF OUR PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. OUR 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
We develop, market and sell proprietary, neuroscience-based software and
other educational products and services designed to increase human learning and
performance. Language and reading skills are the foundation for all learning,
and we have developed scientifically validated products to help children learn
how to read or become better readers. Our Fast ForWord products are intensive,
computer-based training programs that focus on improving critical language and
reading skills. Our current products, Fast ForWord and Fast ForWord Two, focus
primarily on the learning needs of children aged four to 13. We also offer
professional development seminars in which educators, speech and language
professionals and other learning facilitators can learn about recent
developments in brain research and the practical application of our programs as
well as earn continuing education credit. Our products are delivered through a
variety of distribution channels, including sales to public schools, speech and
language professionals in private practice and direct-to-consumer channels.
We commenced operations in February 1996, and, until April 1997, we devoted
substantially all of our efforts to developing the Fast ForWord program,
performing a field trial, recruiting and training personnel, establishing
relationships with and training educators and speech and language professionals
and raising capital. Since the commercial launch of Fast ForWord in April 1997,
we have also devoted efforts to sales and marketing activities. We have an
accumulated deficit of $21.8 million from inception through March 31, 1999 and
expect to incur additional losses for at least the next 18 months, due primarily
to substantial increases in sales and marketing and research and development
expenses. We expect that losses will fluctuate from quarter to quarter and that
these fluctuations may be substantial.
REVENUES. We derive revenues from program sales and service fees. Program
revenues are derived from the sale of programs including Fast ForWord and Fast
ForWord Two, which generally list for $850 per child and are typically
discounted for volume sales and in connection with the bundling of different
products. Customers license the right to use our program software during the
program period and do not acquire or otherwise gain unlimited rights to use the
software. The total value of products and services invoiced during a particular
period is recorded as deferred revenues until recognized. Revenues on sales of
our current programs are recognized only upon program activation and then
ratably over the average training period. Service revenues are derived from
training seminars for learning facilitators, from software installation at large
sites such as schools and from services provided to consumers who buy directly
from us. Revenues from services are recognized when the services are provided.
We only recently began offering our programs directly to consumers and revenues
to date have been minimal. Cancellations and refunds are allowed in limited
circumstances, and these amounts have not been significant. Provisions are made
for cancellations and refunds as revenue is recorded.
Our revenues have been derived exclusively from the sale of Fast ForWord
programs and related seminars and services. While we are developing additional
products based upon our proprietary technology and neuroscience expertise, there
can be no assurance that we will be successful in doing so. In addition, to
date, the substantial majority of our sales of Fast ForWord have been through
public schools and speech and language professionals, with the majority of the
public school revenues
22
<PAGE>
recorded in the last nine months. Furthermore, due to the inherent complexity of
selling to schools and school districts, we expect that our sales cycle could be
significantly longer than that experienced historically as we increasingly focus
on sales to this market. As a result, we may have limited visibility on our
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 program sales, including
royalties, manufacturing, packaging, documentation, fulfillment, Internet
hosting and technical support costs. Service costs consist primarily of the
costs of providing training seminars and installations and services to consumers
who buy directly from us, including personnel, materials, facilities and travel.
These costs of revenues are generally recognized as incurred. We generally
recognize significantly higher gross margins on our program revenues than on our
service revenues.
OPERATING EXPENSES. Our operating expenses consist of sales and marketing,
research and development 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 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. We expense all software development
costs associated with a product until technological feasibility is established,
after which time all these associated 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.
We recorded deferred compensation of $2.1 million during the two years ended
December 31, 1998 and $571,000 during the three months ended March 31, 1999,
representing the difference between the exercise price and the deemed fair value
of certain stock options granted to employees. These amounts are being amortized
by charges to operations over the vesting periods of the individual stock
options. This amortization amounted to $1.0 million for the two years ended
December 31, 1998 and $223,000 for the three months ended March 31, 1999. The
remaining aggregate deferred compensation of $1.4 million will be amortized over
the remainder of the vesting periods of the options (generally five years).
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, various financial
data expressed as a percentage of revenues (unless otherwise noted). We
commenced operations, and were in the
23
<PAGE>
development stage, in 1996. As a result, there were no revenues, cost of
revenues or gross profits in 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
-------------------------- --------------------------
1997 1998 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Programs................. 75.9% 86.4% 93.2% 80.3%
Services................. 24.1 13.6 6.8 19.7
------------ ------------ ------------ ------------
Total revenues......... 100.0 100.0 100.0 100.0
Cost of revenues:
Programs (1)............. 21.4 17.6 21.1 16.8
Services (2)............. 65.6 87.2 77.3 57.6
------------ ------------ ------------ ------------
Total cost of
revenues............. 32.0 27.1 24.9 24.9
------------ ------------ ------------ ------------
Gross margin................. 68.0% 72.9% 75.1% 75.1%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
- ------------------------
(1) Program costs are expressed as a percentage of program revenues.
(2) Service costs are expressed as a percentage of service revenues.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998.
REVENUES. Revenues increased to $1.3 million in the three months ended
March 31, 1999 from $647,000 in the comparable period of 1998, an increase of
107.1%. Program revenues increased to $1.1 million from $603,000, an increase of
78.4%, due to increased program activations in speech and language professional
and public school markets. Services revenues increased to $264,000 from $44,000,
an increase of 500.0%, due to increased revenue from professional development
seminars for both public schools and speech and language professionals in
private practice.
COST OF REVENUES. Cost of revenues increased to $333,000 in the three
months ended March 31, 1999 from $161,000 in the comparable period of 1998, an
increase of 106.8%. As a percentage of revenues, cost of revenues was unchanged
at 24.9%. Cost of program revenues, as a percentage of revenues, declined to
16.8% from 21.1% due to lower royalties and because technical support and
Internet hosting costs declined as a percentage of revenues, reflecting growth
in program volume. Cost of services revenues, as a percentage of revenues,
declined to 57.6% from 77.3%, due to a higher volume of services in the current
period.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$2.7 million in the three months ended March 31, 1999 from $768,000 in the
comparable period in 1998, an increase of 255.5%. This increase was primarily
attributable to increased personnel, marketing and travel costs. We expect to
substantially increase sales and marketing expenses in the future as we increase
marketing efforts for current and future products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $762,000 in the three months ended March 31, 1999 from $666,000 in
the comparable period in 1998, an increase of 14.4%. This increase was primarily
attributable to increased personnel and contractor costs. We expect to
substantially increase research and development expenses in the future as we
continue to refine current products and develop additional products based upon
our proprietary technology and neuroscience expertise.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $1.1 million in the three months ended March 31, 1999 from $820,000
in the comparable period in
24
<PAGE>
1998, an increase of 39.0%. This increase was primarily attributable to
increased personnel, consulting, legal and travel costs.
PROVISION FOR INCOME TAXES. We recorded no provision for income taxes in
the quarters ended March 31, 1999 and March 31, 1998 as we incurred losses
during such periods.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues increased to $5.2 million in 1998 from $3.0 million in
1997, an increase of 74.4%. Program revenues increased to $4.5 million from $2.2
million, an increase of 98.4%, due to increased program activations in speech
and language professional and public school markets. Services revenues were
$704,000, a slight decrease from $713,000 in the prior year, reflecting a
planned decline in professional development seminars for speech and language
professionals in private practice, offset partially by growth in public school
services revenues.
COST OF REVENUES. Cost of revenues increased to $1.4 million in 1998 from
$949,000 in 1997, an increase of 47.3%. As a percentage of revenues, cost of
revenues declined to 27.1% from 32.0%, due to growth in program revenues as a
percentage of total revenues. Cost of program revenues, as a percentage of
revenues, declined to 17.6% from 21.4%, due to a decline in costs of materials,
technical support and Internet hosting as a percentage of revenues, reflecting
growth in program volume. Cost of services revenues, as a percentage of
revenues, grew to 87.2% from 65.6% in 1997, due to introductory pricing of
professional development and installation services offered to schools.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$6.1 million in 1998 from $2.6 million in 1997, an increase of 128.9%. This
increase was primarily attributable to personnel, advertising and promotion,
travel and public relations costs.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $2.9 million in 1998 from $2.0 million in 1997, an increase of
46.6%. This increase was primarily attributable to increased personnel and to a
lesser extent to consulting, software and equipment-related costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $4.7 million in 1998 from $2.5 million in 1997, an increase of
87.2%. This increase was primarily attributable to fees and expenses related to
a proposed initial public offering withdrawn in 1998, personnel, facilities,
legal and travel costs.
INTEREST INCOME (EXPENSE). Interest expense, net of interest income, was
$832,000 in 1998, compared to interest income, net of interest expense, of
$162,000 in 1997. Interest expense in 1998 resulted principally from charges of
$780,000 which represented the fair value of warrants to acquire preferred and
common stock issued to a significant preferred stockholder in connection with a
loan from the stockholder and a bank loan guarantee provided by the stockholder.
PROVISION FOR INCOME TAXES. We recorded no provision for income taxes in
the years ended December 31, 1998 and 1997 as we incurred losses during such
periods. At December 31, 1998, we had net operating loss carryforwards for
federal income tax purposes of approximately $14.0 million. The net operating
loss carryforwards will expire in years 2011 through 2018. 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 we can use them. At December 31, 1998, we had approximately $6.6 million
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.
25
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Revenues were $3.0 million in 1997. Program revenues were $2.2
million following the commercial release of Fast ForWord in April 1997. Services
revenues of $713,000 were primarily attributable to training seminars which were
introduced in January 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.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $2.0 million in 1997 from $1.5 million in 1996, an increase of
29.8%. 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, an increase of 171.9%.
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
these periods.
QUARTERLY RESULTS OF OPERATIONS
Our 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 our control. Factors that may affect our
quarterly operating results include among others:
- the demand for technology-based education and training products;
- the size and timing of product orders and implementation;
- the revenue mix between our products and services;
- the timely development, introduction and market acceptance of our existing
and future products, if any;
- the pricing of our programs and services:
- seasonality in product purchase and usage;
- competitive conditions;
- our ability to attract and retain experienced personnel;
- the availability of government funding for public schools;
- public school calendars and budget cycles;
- the number and timing of Fast ForWord training seminars for learning
facilitators; and
- general economic and market conditions.
26
<PAGE>
We cannot assure you that we will be able to predict our future revenues
accurately, and we may not be able to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall of revenues in relation to our expectations could cause significant
fluctuations in quarterly operating results, which would have an adverse effect
on our business, financial condition and results of operations.
Demand for our programs and services is subject to various seasonal
influences which can vary depending on the distribution channel being employed.
We do not have sufficient operating experience in our various distribution
channels to predict the overall effect of various seasonal factors and their
effect on future quarterly operating results. We believe that, because of the
intensive nature of Fast ForWord, demand for our programs from speech and
language professionals in private practice may be lower during the school year
than in the summer. To the extent we penetrate the public school market, we may
experience seasonality due to public school calendars and budget cycles.
Due to all of the foregoing factors, our quarterly revenues and operating
results are difficult to forecast, and we believe that period-to-period
comparisons of our 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 March 31, 1999, we used approximately $16.2 million
of cash for operating activities, resulting primarily from operating losses of
$21.8 million and increases in accounts receivable of $1.0 million, partially
offset by increases in accounts payable of $630,000, depreciation and
amortization charges of $1.9 million and amortization of deferred compensation
of $1.3 million.
During this same period, we used $2.8 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 our existing bank lines of credit. As of
March 31, 1999, we had cash and cash equivalents of $7.2 million.
In June 1998, we obtained a $3.0 million unsecured line of credit with
BankBoston N.A. Borrowings under the line of credit bore interest, at our
election, at the bank's base rate, or the adjusted LIBOR plus 1.75%. Borrowings
under the line of credit were repaid and the line of credit was terminated in
December 1998.
We believe that funds generated from operations together with the net
proceeds from this offering and available borrowings will be sufficient to
finance our presently anticipated operating losses, planned capital expenditure
requirements and internal growth for at least the next 18 months. However, we
cannot be certain that our cash resources following this offering will be
sufficient to fund negative cash flow and expected capital expenditures for that
period. We therefore may need to obtain additional equity or debt financing in
the future. We may not be able to obtain the additional financing to satisfy our
cash requirements on acceptable terms or at all.
YEAR 2000 ISSUES
Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because these computer programs would not properly recognize a year that begins
with "20" instead of "19." This, in turn, could result in major system failures
or miscalculations that could disrupt our business. We have formulated a Year
2000, otherwise referred to as Y2K, plan to address our Y2K issues and have
created a Y2K task force headed by our Director of Information Technology to
implement the plan. Our Y2K plan has six phases:
1. Organizational Awareness--educate our employees, senior management
and the board of directors about the Y2K issue;
27
<PAGE>
2. Inventory--complete inventory of internal business systems and their
relative priority to continuing business operations. In addition,
this phase includes a complete inventory of critical vendors,
suppliers and services providers and their Y2K compliance status. Our
products have been Y2K compliant since they were developed and we
will continue to ensure Y2K compliance in future products;
3. Assessment--assessment of internal business systems and the Y2K
compliance status of our important vendors, suppliers and service
providers;
4. Planning--preparing the individual project plans and project teams
and other required internal and external resources to implement the
required solutions for Y2K compliance;
5. Execution--implementation of the solutions and fixes; and
6. Validation--testing the solutions for Y2K compliance.
Our Y2K plan will apply to two areas:
1. Internal business systems and our products; and
2. Compliance by external customers and providers.
INTERNAL BUSINESS SYSTEMS AND OUR PRODUCTS
Our internal business systems and workstation business applications will be
a primary area of focus. Since we began our business in 1996, we have
implemented and will continue to implement new enterprise-wide business
software. These solutions are represented by their vendors as being fully Y2K
compliant. We have few, if any, legacy applications that will need to be
evaluated for Y2K compliance.
We completed the inventory, assessment and planning phases of substantially
all critical internal business systems in August 1998. We expect that the
execution and validation phases will be completed by August 31, 1999. We expect
to be Y2K compliant on all critical systems that rely on the calendar year,
before December 31, 1999.
We may not address the Y2K compliance of some non-critical systems until
after January 1, 2000. However, we believe these systems will not cause
significant disruptions in our operations.
Our product lines are already Y2K compliant and no patches will need to be
applied by our customers.
COMPLIANCE BY EXTERNAL PROVIDERS AND CONTRACTORS
We are in the inventory and assessment phases of our Y2K Plan with respect
to suppliers, service providers and contractors to determine the extent to which
our systems are susceptible to those third parties' failure to remedy their own
Y2K issues. We expect that assessment will be complete by mid-1999. To the
extent that responses to Y2K readiness are unsatisfactory, we intend to change
suppliers, service providers or contractors to those that have demonstrated Y2K
readiness. We cannot assure you that we will be successful in finding such
alternative suppliers, service providers and contractors.
RISKS ASSOCIATED WITH Y2K
We believe the major risk associated with the Y2K issue is the ability of
our key business partners and vendors to resolve their own Y2K issues. We will
spend a great deal of time over the next several months working closely with
suppliers and vendors to assure their compliance.
Should a situation occur where a key partner or vendor is unable to resolve
its Y2K issues, we expect to be in a position to change to Y2K compliant
partners and vendors.
28
<PAGE>
COSTS TO ADDRESS Y2K ISSUES
Because we are in the position of implementing new enterprise-wide business
solutions, there are few, if any, Y2K changes required to existing business
applications. We believe that all of the new business applications implemented,
or in the process of being implemented in 1999, are represented as being Y2K
compliant.
We currently believe that implementing our Y2K plan will not have a material
effect on our financial position.
CONTINGENCY PLAN
We have not formulated a contingency plan at this time but expect to have
specific contingency plans in place prior to September 30, 1999.
SUMMARY
We anticipate that the Y2K issue will not have a material adverse effect on
our financial position or results of our operations. We can give no assurance,
however, that the systems of other companies or government entities, on which we
rely for supplies, cash payments and future business, will be timely converted
or that a failure to convert by another company or government entities would not
have a material adverse effect on our business. If third party suppliers,
service providers and contractors, due to Y2K issues, fail to provide us with
components, materials or services that are necessary to deliver our service and
product offerings, our business will suffer.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
The risk associated with fluctuating interest expense is limited, however, to
the exposure related to those debt instruments and credit facilities which are
tied to market rates. We do not use derivative financial instruments in our
investment portfolio. We ensure the safety and preservation of our invested
principal funds by limiting default risks, market risk and reinvestment risk. We
mitigate default risk by investing in safe and high-credit quality securities.
29
<PAGE>
BUSINESS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE DISCUSSED IN
THIS PROSPECTUS. FACTORS THAT MAY CAUSE OR CONTRIBUTE TO A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," AS WELL AS THOSE
DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We develop, market and sell proprietary, neuroscience-based software and
other educational products and services designed to increase human learning and
performance. Language and reading skills are the foundation for all learning,
and we have developed scientifically validated products to help children learn
how to read or become better readers. Our Fast ForWord products are intensive,
computer-based training programs that focus on improving critical language and
reading skills. Our current products, Fast ForWord and Fast ForWord Two, focus
primarily on the learning needs of children aged four to 13. In field studies,
90% of participants identified as having language or reading difficulties showed
statistically significant gains in language comprehension skills, achieving, on
average, one to two years of improvement in language and reading skills after
completion of Fast ForWord programs in four to eight weeks. Based upon decades
of research on brain plasticity, the brain's ability to adapt to stimuli, our
Fast ForWord family of products uses computer-controlled, repetitive and
adaptive training exercises to modify the manner in which the brain processes
language. Our research and results have been independently validated in
published articles in prestigious, peer-reviewed scientific journals, including
SCIENCE and NATURE.
We intend to continue expanding our product offerings through new products
and services, as well as extensions of our current product lines. We have an
additional four products scheduled for launch in the second quarter of 1999 and
have six products targeted for launch in the year 2000. We believe our products
benefit children and adults of all ages and capabilities. We also offer
professional development seminars in which educators, speech and language
professionals and other learning facilitators can learn about recent
developments in brain research and the practical application of our programs, as
well as earn continuing education credit. In addition, our software products
have secure links to our web site, ScientificLearning.com, which enables
parents, educators and other learning facilitators to upload performance data
and track progress daily to maximize the benefit of our products and services.
ScientificLearning.com also provides information and forums for the exchange of
ideas. In the second quarter of 1999, we will launch BrainConnection.com, an
online community that will provide recent developments in brain research and
offer learning products directly to consumers. We believe that
BrainConnection.com will significantly expand our Internet capabilities,
interactions with consumers and e-commerce activities.
Extrapolating from U.S. Department of Commerce, Bureau of Census data and
information from the National Institute of Child Health and Human Development,
approximately 16,000,000 million children between the ages of four and 13 have
reading difficulties. Each year approximately 4,000,000 children enter the U.S.
public school system, and approximately 40% of the population, or 1,600,000 of
these children, have significant reading problems. Because primary education
involves a great deal of oral instruction, a child with poor language
comprehension is likely to have difficulty not only in reading, but in all areas
of learning. Poor oral language comprehension and subsequent reading problems
are often associated with low self esteem and behavioral problems. Children
identified as having the most severe language and reading problems are often
placed in multi-year remediation programs. Children with less severe problems
often go unidentified and their needs go unaddressed.
30
<PAGE>
THE SCIENTIFIC LEARNING SOLUTION
We combine decades of brain and language research with the power of
technology to create innovative language and reading programs. Our initial
products, which focus primarily on the learning needs of children aged four to
13, help build the language comprehension skills that are critical to learning
to read or becoming a better reader. We believe that our programs have
applications beyond language and reading problems in children and can be used to
build reading and language comprehension skills in children, adolescents and
adults. Moreover, we believe our products address additional challenges, such as
adult literacy, greater English language proficiency for non-native English
speakers and language reacquisition for individuals who have suffered from a
stroke or other brain injury.
We believe the primary advantages of our products are as follows:
- RESEARCH-BASED PROGRAMS. Our programs are based on decades of research on
brain plasticity and language and reading problems. Many problems children
encounter with language and reading can be attributed to difficulty in
understanding oral language, including distinguishing among related
phonemes, the basic auditory building blocks of speech. We use repetitive
computer-based training exercises to enable a child to build better oral
language skills including the ability to differentiate among sounds before
teaching the relationship between letters and sounds. In contrast to
traditional exercises, our programs combine electronically modified speech
with cross-training in critical language skills, including morphology,
syntax, semantics and grammar, and executive function skills, such as
short-term memory and event sequencing capabilities, in an adaptive
reward-based learning environment.
- PROVEN, RAPID AND MEASURABLE RESULTS. All of our products are designed to
demonstrate efficacy through scientifically validated results. Field
studies of our Fast ForWord program show that 90% of participants
identified as having language and reading problems showed statistically
significant gains in language comprehension skills, achieving, on average,
one to two years of improvement in language and reading skills after
completion of Fast ForWord programs in four to eight weeks.
- INTEGRATED APPROACH WITH LEARNING FACILITATORS. We work closely with
educators, speech and language professionals, parents and other learning
facilitators to integrate our programs into a participant's existing
educational program and to train learning facilitators in how to use our
programs more effectively. Through the Internet, our programs
automatically provide learning facilitators with performance tables and
templates enabling them to establish a baseline analysis and monitor the
participant's skill level on a daily basis.
- EFFECTIVE ALLOCATION OF RESOURCES. We believe that effective use of our
programs 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 educators 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
programs enable schools to more effectively utilize resources for
remediation programs.
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A summary of our products and services currently being offered and those
under development is outlined below:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
TARGET AUDIENCE
----------------
PRODUCT/SERVICE CHILDREN ADULTS DESCRIPTION STATUS
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
FAST FORWORD PRODUCT FAMILY
- -------------------------------------------------------------------------------------------
Fast ForWord X Intensive computer-based Launched in
training program that focuses March 1997
on building language skills
that are critical to learning
to read or becoming a better
reader. Fast ForWord combines
electronically modified
speech with cross-training in
critical language skills in
an adaptive reward-based
learning environment.
- -------------------------------------------------------------------------------------------------------
Fast ForWord Two X Computer-based training Launched in
program that continues October 1998
building language skills and
adds specific reading skills
such as sound-letter
relationships, word decoding
and visual tracking.
- -------------------------------------------------------------------------------------------------------
Fast ForWord Three X Computer-based reading Year 2000
comprehension program that Launch
combines the essential
components of word
recognition and decoding with
reading comprehension skills.
- -------------------------------------------------------------------------------------------------------
Fast ForWord for Increased X X Computer-based language Year 2000
English Proficiency specific program that focuses Launch
on training the receptive
language/phonemic
distinctions found in English
that are the most difficult
for non-native English
speakers.
- -------------------------------------------------------------------------------------------------------
Fast ForWord for Adolescents X X Computer-based training Year 2000
program with Launch
adolescent-tailored graphics,
story lines and content. Fast
ForWord for adolescents
combines electronically
modified speech with
cross-training in critical
language skills in an
adaptive learning
environment. This program
enables participants to track
their daily progress.
- -------------------------------------------------------------------------------------------------------
Fast ForWord for Adults X Computer-based training Year 2000
program with adult-tailored Launch
graphics, story lines and
content. Fast ForWord for
adults combines
electronically modified
speech with cross-training in
critical language skills in
an adaptive learning
environment. This program
enables participants to track
their daily progress.
- -------------------------------------------------------------------------------------------------------
Fast ForWord for Language X Computer-based training Year 2000
Reacquisition program designed for Launch
rehabilitation specialists to
provide individualized
exercises that meet the
specific needs of individuals
who have suffered a stroke or
other brain injury.
- -------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
TARGET AUDIENCE
----------------
PRODUCT/SERVICE CHILDREN ADULTS DESCRIPTION STATUS
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
AWAY WE GO! PRODUCT FAMILY
- ------------------------------------------------------------------------------------------------------------------
Away We Go! X Software product that teaches key 2Q99 Launch
skill-building software games developmental language and cognitive
skills. This product focuses on key
skills needed for success in grades
K-1, such as recognition of colors
and shapes, and provides practice in
phonological awareness skills, fine
motor control, hand-eye
coordination, and has an assessment
component.
- ------------------------------------------------------------------------------------------------------------------
Away We Go! X Proprietary stories in an 2Q99 Launch
CD ROM and CD storybooks interactive CD format, designed as a
companion to the Away We Go!
skill-building software games. These
stories provide exposure to
appropriate spoken and written
language content, thereby supporting
the phonological awareness skill
training in the Away We Go!
skill-building software games.
- ------------------------------------------------------------------------------------------------------------------
Away We Go! X Proprietary stories in an 2Q99 Launch
CD ROM and CD storybooks - interactive CD format, designed as a
professional version. companion to the Away We Go!
skill-building software games. These
stories provide exposure to
appropriate spoken and written
language content, thereby supporting
the phonological awareness skill
training in the Away We Go!
skill-building software games. This
version, which contains four
different levels of patented speech
modification, is targeted only for
delivery through certified
professionals and educators.
- ------------------------------------------------------------------------------------------------------------------
Away We Go! X Proprietary stories in a four-color 2Q99 Launch
printed storybooks printed format, designed as a
companion to the Away We Go! skill-
building software games. These
stories provide exposure to
appropriate spoken and written
language content, thereby supporting
the phonological awareness skill
training in the Away We Go! skill-
building software games.
- ------------------------------------------------------------------------------------------------------------------
PROFESSIONAL DEVELOPMENT SEMINARS X We offer a variety of professional Launched in January
development seminars, including one- 1997
half-day, one-day and two-day
programs.
- ------------------------------------------------------------------------------------------------------------------
SCREENING / ASSESSMENT X X Computer-based screening and Year 2000 Launch
assessment product designed to
evaluate language comprehension
skills of children and adults.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
MARKET OPPORTUNITY
While our software and other educational products and services are
applicable to children and adults of all ages and capabilities, we believe our
largest market opportunity is school children. We
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estimate that more than 52.7 million students are attending over 110,000 K-12
public and private schools in the United States in the 1998-99 school year. Our
current Fast ForWord family of language and reading training programs and our
Away We Go! skill-building games and storybooks have been developed primarily
for children between the ages of four and 13. Based on U.S. Department of
Commerce, Bureau of the Census data, there are approximately 40 million children
in this age group. According to the National Institute of Child Health and Human
Development, as much as 40% of the population, or 16,000,000 of these children,
have reading problems. We believe that approximately 1,600,000 children in the
United States enter this category each year and that their language and reading
difficulties result in part from poor language comprehension skills.
Educators in public schools and speech and language professionals are our
target market for our Professional Development Seminars. We estimate that as of
1997 there were 2.7 million K-12 public school teachers in the United States. We
estimate that there are 100,000 speech and language professionals practicing in
the United States, including 13,000 in private practice, 50,000 in public
schools and 37,000 working part-time or in adult rehabilitation centers.
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. In addition, we believe that the growing shortage of teachers in the
United States will further increase the demand for technology-based educational
programs. According to the Department of Education, schools in the United States
will need to hire more than 2,000,000 teachers over the next decade. While total
spending on education in the United States has grown at an average rate of five
percent per year, spending on technology in public schools in the United States
has more than doubled since the 1991-92 school year. Technology spending is
projected to reach $5.4 billion for the 1998-99 school year, a 12% increase from
the prior school year. These expenditures include computers, Internet
connections, other technology infrastructure components and software. We expect
public school spending on instructional software alone will be over $500
million, an increase of approximately 70% over the 1997-98 school year. This
increased demand for instructional software is driven in part by plans to
increase the inventory of multimedia PCs in public schools by over 30% in
1998-99. We have identified more than $13 billion of specific federal and state
funding sources that can be used for our products and services, including Title
I of the Elementary and Secondary Education Act of 1965, the Individuals with
Disabilities Education Act, Goals 2000, Technology Literacy Challenge Grants and
the education rate discount authorized by the Telecommunications Act of 1996. In
addition to the 47 states that have adopted programs to support the use of
technology in the classroom, special reading initiative funds are available in
many states, including California, Florida and Texas. Foundations and
corporations have set aside more than $700 million in funding sources that could
be used to implement our products in classrooms.
In addition to the K-12 market, we are developing, and plan to introduce,
products for improving the reading and language comprehension skills of
adolescents and adults. Accordingly to the National Adult Literacy Study
conducted in 1992, more than 40 million adults in the United States are
functionally illiterate. Recently, there has been an increased focus by
educators, government officials and labor groups on the literacy problem. This
increased concern has resulted in part because jobs are demanding increasingly
higher levels of basic skills from workers, while millions of workers have
limited literacy skills. Labor organizations and companies are funding programs
and initiatives to identify literacy skills required in future job groupings and
to develop and evaluate employee training curriculum. We believe that a
significant opportunity exists to address the adult literacy problem in the
United States.
According to industry sources, in 1996, an estimated 12 to 14 million
non-native English speaking adults living in the United States had limited
proficiency in the English language. Many of these adults require assistance
from government agencies for English language training. The demand for these
services far exceeds the available sources. Additionally, educators have
discovered that instructional
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<PAGE>
methods developed for first language literacy instruction are inappropriate for
many immigrants. We believe that a significant opportunity exists to address
this market.
According to industry sources, there are nearly four million people in the
United States who have survived a stroke and are living with the after effects,
including aphasia, an impairment of language and speaking skills. These
individuals struggle, alone and through therapy with rehabilitation specialists,
to reacquire their language skills. We believe that a significant opportunity
exists in developing neuroscience-based products and training programs to meet
the skill needs of a brain injured patient attempting to reacquire language
skills.
GROWTH STRATEGY
Our goal is to establish Scientific Learning as the leading provider of
proven, neuroscience-based software and other educational products and services.
Key elements of our growth strategy include:
INTRODUCE ADDITIONAL NEUROSCIENCE-BASED SOFTWARE PRODUCTS AND SERVICES. We
believe our expertise in neuroscience, language learning and technology
positions us well for the successful introduction of new education and training
products applicable to children and adults of all ages and capabilities. After
extensive research and substantial field testing, we introduced Fast ForWord in
April 1997 and Fast ForWord Two in October 1998, and intend to do the following:
- Introduce the following four new products in the second quarter of 1999:
Away We Go! skill-building software games, Away We Go! CD ROM and CD
storybooks, Away We Go! CD ROM and CD storybooks-professional version and
Away We Go! printed storybooks;
- Develop the following language-based products with a projected
introduction in the year 2000: Fast ForWord Three, Fast ForWord for
Increased Language Proficiency, Fast ForWord for Adolescents, Fast ForWord
for Adults, Fast ForWord for Language Reacquisition and a
Screening/Assessment product; and
- Examine ways to leverage our expertise in brain research into potential
non-language-based products, including products addressing tinnitus
(ringing in the ears) and repetitive stress injury.
See "--Programs and Services" and "--Research and Development." We cannot assure
you that we will be able to introduce these new products and services as
scheduled, or that if introduced, these products and services will perform as
intended or be accepted by the marketplace.
RAPIDLY EXPAND OUR SALES AND MARKETING EFFORTS. We recently expanded our
outside sales force by targeting and hiring experienced professionals with
established relationships in the education sector. We currently have more than
28 sales professionals. We intend to continue to expand our sales and marketing
efforts to increase our penetration of the public school, private practice
speech and language professional, direct-to-consumer and other distribution
channels. As of March 31, 1999, we have sold more than 13,000 copies of Fast
ForWord and Fast ForWord Two, and we have trained more than 3,600 individuals in
administering Fast ForWord. Specifically, we intend to:
- hire additional salespeople to focus exclusively on sales to the K-12
school market;
- implement direct-to-consumer e-commerce capabilities on our web site,
ScientificLearning.com, as well as on BrainConnection.com;
- hire additional salespeople to target speech and language professionals in
private practice;
- expand our direct marketing campaign to parents and consumers;
- explore and develop other channels of distribution, including potential
strategic alliances with for-profit educational services companies, day
care providers and private schools; and
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<PAGE>
- expand our Education Advisory Board, which provides access to leaders in
the fields of education, neuroscience, behavioral science, health and
public policy.
IMPLEMENT EXPANDED INTERNET STRATEGY. We use technology and the Internet to
implement our learning programs, to track and evaluate participants and to
provide an online community for individuals using our products, as well as those
interested in neuroscience and learning. Through our ScientificLearning.com web
site, we offer parents, educators and other learning facilitators a wide variety
of information and forums for the exchange of ideas.
We intend to significantly expand our web capabilities, interactions with
consumers, and e-commerce activities through our BrainConnection.com web site,
to be launched in the second quarter of 1999. We are designing
BrainConnection.com to aggregate a vast library of information about
neuroscience and how the brain learns a variety of complex tasks, including
language and reading, and to help people find information, products and services
through the use of sophisticated search technology. We also are designing the
site to facilitate the purchasing of our products and services and those offered
by others. We intend to drive activity to BrainConnection.com through
relationships with education, scientific and medical information web sites and
web portals.
In addition, we intend to leverage our proprietary Internet/database
capabilities to produce new products and services. Our database of performance
information is growing rapidly as our customer base grows. We intend to use our
database capabilities to further customize our training programs and to
facilitate the collection and analysis of data from a variety of sources.
BUILD A TRUSTED BRAND. We intend to continue to build recognition of our
company and product brands among parents, speech and language professionals,
educators and other learning facilitators and leverage that recognition to
successfully commercialize other neuroscience-based products. Specifically, we
intend to:
- promote the publication of media articles and stories regarding Scientific
Learning, our Fast ForWord family of products and our other products and
research;
- engage in direct marketing campaigns to educators and other key public
school decision-makers, as well as to speech and language professionals
and parents;
- encourage community-building through ScientificLearning.com,
BrainConnection.com and our newsletters;
- continue to publish field test results; and
- build expertise through collaboration with our Education Advisory Board.
PROGRAMS AND SERVICES
We have currently introduced three products or services, have an additional
four products scheduled for launch in the second quarter of 1999 and have six
products targeted for launch in the year 2000. We intend to continue to expand
the family of products we offer through new products and services, as well as
extensions of our current product lines.
Our current programs and services are described in detail below.
FAST FORWORD. Fast ForWord is an intensive, computer-based training
program, which has the look and feel of a computer game. It 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. The program is comprised of seven training exercises.
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
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<PAGE>
become increasingly more difficult, driving him or her continually to increase
his or her rate of oral language 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. In addition, the exercises cross-train the
child in other critical language skills, including morphology, syntax, grammar
and semantics, and executive function skills including event sequencing and
working memory. All of these skills are necessary to a solid foundation for
learning to read or becoming a better reader. 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.
The Fast ForWord program is designed to be used for 100 minutes per day,
five days a week for four to eight weeks. Results from each child's Fast ForWord
exercises are uploaded daily via the Internet to our 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.
In field studies, 90% of participants identified as having language or
reading difficulties showed statistically significant gains in language
comprehension skills, achieving, on average, one to two years of improvement in
language and reading skills after completion of Fast ForWord programs in four to
eight weeks. Additionally, based on extensive interviews with parents and
educators, children who have completed the Fast ForWord program are generally
reported to have shown substantial improvements in both self esteem and
confidence as their communication skills improve.
FAST FORWORD TWO. Fast ForWord Two is a computer-based training program
that helps children practice and refine the language comprehension skills they
learned in Fast ForWord, but at the more complex level necessary for reading.
Fast ForWord Two introduces new skills that are now accessible to children who
have developed basic oral language proficiency. Fast ForWord Two develops skills
that are critical to reading such as word decoding, sound-letter recognition and
visual tracking. Word decoding enables a child to build associations between
word sounds, written representations of words and meaning. Being able to process
rapid sound-letter associations is critical to being able to read. Fast ForWord
Two also provides training exercises that reinforce left to right reading
patterns for children who may have visual tracking problems.
The Fast ForWord Two program is designed to be used for 90 minutes per day,
five days a week for four to eight weeks. As with Fast ForWord, Fast ForWord Two
results are uploaded daily via the Internet to our proprietary database which
automatically analyzes the data and creates performance charts and reports.
PROFESSIONAL DEVELOPMENT. To assist educators, speech and language
professionals, parents and other learning facilitators, we provide educational
seminars on the latest in brain research, the connection between language
comprehension and learning to read, and the practical application of Fast
ForWord. Typically, workshops are either one- or two-day intensive training
seminars for educators and speech and language professionals and typically list
at $695.
More than 3,600 individuals have been trained in administering Fast ForWord
through these seminars, including more than 1,400 educators in public schools
and more than 2,200 speech and language professionals in private practice.
Participants in the training seminars for the administration of the Fast ForWord
programs are eligible to receive continuing education credit to support the
ongoing educational certification requirements of teachers and educators.
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We have developed the following new products for introduction in the second
quarter of 1999:
AWAY WE GO! SKILL-BUILDING SOFTWARE GAMES will teach key developmental
language and cognitive skills. They will also provide users with training in
fine motor control and hand-eye coordination. The product focuses on the
development of key skills needed for academic success in kindergarten and first
grade, such as identification of colors, common shapes, relative size and lower
and upper case letters. The product will also provide training on phonological
awareness skills, including phoneme analysis and phonological working memory.
Both informal and formal assessment will provide feedback on a child's areas of
strength and areas of needed improvement.
AWAY WE GO! CD ROM AND CD STORYBOOKS is a companion to the Away We Go!
skill-building software games that will provide children with exposure to
appropriate spoken and written language content in a fun, interactive story
format. The oral and written language exposure supports the phonological
awareness skill training in the Away We Go! skill-building software games. These
proprietary stories provide multiple forms of use including oral story reading,
eye-text-tracking training, sound-printed work association and practice at
reading. The interactive CDs can be used with both computers and audio CD
players.
AWAY WE GO! CD ROM AND CD STORYBOOKS-PROFESSIONAL VERSION is a companion to
our Away We Go! skill-building software games that will provide exposure to
appropriate spoken and written language content in a fun, interactive story
format. This product will be provided on four separate CDs with four different
levels of patented speech modification. This product is designed to be sold to
certified professionals and educators who provide Fast ForWord training.
AWAY WE GO! PRINTED STORYBOOKS contains five different four-color, printed
books. Their content will match that found in the interactive CD product so that
children can begin to read along with adults. The printed books also will
support the phonological skill training in the Away We Go! skill-building
software games.
The following additional products are under development and scheduled for
introduction in the year 2000:
FAST FORWORD THREE is a software product being designed to combine the
essential components of word recognition and decoding with reading comprehension
skills. This product is intended to provide complimentary skill training to Fast
ForWord and Fast ForWord Two.
FAST FORWORD FOR INCREASED ENGLISH PROFICIENCY is a software product being
designed to serve as a language-specific product that focuses on training the
receptive language/phonemic distinctions found in English that are the most
difficult for those learning English as a second language.
FAST FORWORD FOR ADOLESCENTS is a software product being designed as a new
version of Fast ForWord with graphics, story lines, interface designs and
content modified for the adolescent. Fast ForWord for adolescents combines
electronically modified speech with cross-training in critical language skills
in an adaptive learning environment.
FAST FORWORD FOR ADULTS is a software product being designed as a
computer-based training program featuring graphics, story lines, interface
designs and content modified for the adult audience. Fast ForWord for adults
combines electronically modified speech with cross-training in critical language
skills in an adaptive learning environment.
FAST FORWORD FOR LANGUAGE REACQUISITION is a software product being designed
for use by rehabilitation specialists who provide language therapy services to
stroke patients, patients who have suffered a traumatic brain injury and other
individuals with neurological trauma. This version is expected to have
substantial new graphics, story lines, interface designs and content for the
adult audience. The exercises are being designed to use our proprietary signal
enhancement and adaptive
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methods that provide individualized integrated training experiences to meet the
specific auditory, phonological, language and cognitive skill needs of a patient
with a brain injury.
SCREENING/ASSESSMENT is an interactive, computer-based test designed to
evaluate the language comprehension skills of children and adults.
We cannot assure you that we will be able to introduce these new products
and services as scheduled, or that if introduced, such products and services
will perform as intended or be accepted by the marketplace.
SUPPORT SERVICES
SUPPORT FOR EDUCATORS, PARENTS AND LEARNING FACILITATORS. We provide a
number of support services for educators, parents and other learning
facilitators involved in improving reading and language skills. Through our
ScientificLearning.com website, we offer parents, educators and other learning
facilitators a wide variety of information and forums for the exchange of ideas.
We provide two to three hour seminars for parents interested in learning more
about brain research, the connection between language comprehension skills and
learning to read and the science behind our Fast ForWord programs. In addition,
we mail a Fast ForWord newsletter that contains items of interest on the program
and language and reading problems to the parents of participating children, as
well as to educators and speech and language professionals. We have a
professional relations staff dedicated to answering questions from and providing
support to professional providers and parents. Our professional relations staff
provides support over the Internet and a toll-free telephone information line.
TECHNICAL SUPPORT. Because many of the parents, educators, speech and
language professionals and other learning facilitators who administer our
programs have limited computer knowledge and have limited technical support
on-site to assist them, we provide a variety of technical support services. We
employ an experienced staff of technical service representatives to answer
technical questions regarding our programs, computer hardware and networks. In
addition, at large sites such as schools, we provide on-site software
installation, technical training and technical support.
SALES AND MARKETING
We market and sell our products through two primary channels of
distribution: public schools and speech and language professionals in private
practice. In addition, we are in the process of expanding direct-to-consumer
distribution channels, such as the Internet and other alternative distribution
channels. As of March 31, 1999, we have sold more than 13,000 copies of Fast
ForWord and Fast ForWord Two, including more than 3,400 copies to public schools
and more than 9,500 copies to speech and language professionals in private
practice. We have recently expanded our outside sales force, and currently have
23 sales representatives focused on the public school market and five sales
representatives focused on speech and language professionals in private
practice. Our hiring process has targeted experienced professionals who have
established relationships with prospective customers.
PUBLIC SCHOOLS. As of March 31, 1999, we have sold our programs to over 500
schools in nearly 300 school districts. The majority of our public school sales
have occurred since the formation in the fall of 1998 of a dedicated sales force
focused on that market. To date we have trained more than 1,400 teachers and
speech and language professionals in public schools in the administration of
Fast ForWord. We believe that, to date, the majority of leads have arisen from
our sales force and decision-makers within schools and districts who have
contacted us after learning about Fast ForWord from publications in industry
journals or the general press, presentations at education conferences,
attendance at our training seminars or from colleagues or parents. To more
rapidly introduce our products into public schools, we have undertaken a model
site program, in which participating schools agree to provide services in
exchange for a program discount. These services include acting as a reference
for other educators interested in our products, hosting tours, speaking at
events and with the
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<PAGE>
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 our products in use, which we believe helps shorten the
sales cycle in schools. As of March 31, 1999, we had established more than 50
model school sites. Our Fast ForWord products generally list for $850 per child
and are typically discounted for volume sales and in connection with the
bundling of different products. In addition, we intend to market and sell our
Away We Go! family of products to schools to use with their students prior to,
and as a complement to, the Fast ForWord programs.
SPEECH AND LANGUAGE PROFESSIONALS. We have experienced positive
year-over-year retention rates with speech and language professionals operating
in private practice. Our year-over-year retention rates for professionals who
have sold two or more of our programs is 93%, and our overall year-over-year
retention rate is 76%. We intend to continue to expand the marketing of our
products to speech and language professionals operating in private practice,
private schools and hospitals and clinics. To administer our products, we
currently require that a speech and language professional attend a training
seminar. To date, these training seminars have been held in more than 20 cities
across the United States. We have trained more than 2,200 speech and language
professionals in private practice on how to administer Fast ForWord and Fast
ForWord Two. Generally, these seminars currently involve two days of training
and generally list for $695 per person. Trained speech and language
professionals in private practice recommend the use of our products to parents
in appropriate cases and then administer the program in connection with
providing traditional services. In such instances, Fast ForWord and Fast ForWord
Two are typically sold to parents for a list price of $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. Our
products could be used as supplemental to, or potentially as a partial
replacement of, traditional private reading remediation programs, which we
estimate typically cost between $15,000 and $20,000. In addition, we intend to
market and sell our Away We Go! family of products to the private speech and
language professionals for use by their students prior to and as a complement to
the Fast ForWord program. We have been a pioneer in marketing computer-based
training programs to speech and language professionals and have developed a
proprietary database of information regarding thousands of speech and language
professionals. We contact speech and language professionals through telesales
and other direct marketing efforts to encourage them to attend our seminars and
use Fast ForWord programs in their practices. In addition, speech and language
professionals learn of our programs through our participation in trade
conferences, publications in journals and the general press and the distribution
of our informational videos and practice kits.
DIRECT-TO-CONSUMER SALES AND MARKETING. We believe that there is a
significant market for our products in sales directly to consumers. We are
currently focusing our direct distribution efforts on direct mail channels and
Internet-based sales. We currently market to consumers directly through mailings
to parents of Fast ForWord participants and other parents in select target
markets. We are developing a product catalog that would be sent directly to
parents and consumers enabling them to purchase products directly from us. For
our electronic-based sales, we are extending the capabilities of our web sites,
to facilitate e-commerce and allow purchasing of products and services online.
OTHER CHANNELS OF DISTRIBUTION. We are exploring and developing other
channels of distribution, including strategic alliances with for-profit
educational services companies, day care providers and private schools.
Our future success is, in part, dependent on acceptance of our products by
public schools, administrators, educators, speech and language professionals,
parents and other learning facilitators and on penetration of the public school,
speech and language professional and parental markets. We may not be successful
in developing and penetrating these markets. See "Risk Factors--Our business
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depends on whether we can achieve and maintain market acceptance and increase
the number of programs we commercially introduce and sell," "--Any difficulty in
penetrating necessary markets could adversely affect our business," and "--The
long sales cycle for our products could cause revenues and operating results to
vary significantly from quarter to quarter."
INTERNET STRATEGY
Our current web site, ScientificLearning.com, is an important method of
daily communication between us and users of Fast ForWord and Fast ForWord Two
and enables our users to maximize the benefit of our Fast Forward programs. The
site includes:
- For everyone--a variety of information for anyone interested in learning
more about our products and services, brain research, upcoming seminars,
professional meetings or parent meetings;
- For parents--a description of behaviors often exhibited by children who
could benefit from our products, and a searchable index to help find local
providers of our programs;
- For children--a section that includes coloring books and games on line;
- For educators in schools--information about public and private funding
sources, assistance in writing grants, help in selecting children for Fast
ForWord programs, tips from other educators on the use of Fast ForWord in
classrooms;
- For Fast ForWord providers in private practice--business support, such as
advice from other professionals on marketing Fast ForWord and effectively
running off-site programs for people training at home;
- For parents, educators and providers--chat sessions, forums and listserves
where they can share information and experiences, ask questions of other
parents or providers, share tips and anecdotes about the progress of Fast
ForWord participants, or ask questions of our scientists; and
- For Fast ForWord learning facilitators and parents--performance reports
and summary progress reports for each of the individuals or groups
participating in Fast ForWord, based on daily Internet transmission of
detailed training results.
We plan to launch a separate web site, BrainConnection.com, in the second
quarter of 1999, to provide parents, children, educators, learning facilitators
and researchers with trusted educational resources and services.
BrainConnection.com is intended to provide the latest neuroscience-based
information on language development, reading skills and other related topics. We
believe BrainConnection.com will become an easily accessible portal for a
virtual community of networked parents, children, educators, learning
facilitators, researchers and others interested in reliable information on
educational development. We also plan for it to aggregate global education
resources and information onto one site. Our site is being designed to provide
an individualized experience that allows access to, and interaction with,
information that is tailored to each visitor's particular interests and goals.
The site will contain a magazine/journal component providing a means through
which new material may be presented and written materials may be purchased.
Community services such as forums and chat rooms will be available to users who
will receive periodic updates on new information and material that can be
accessed on the site. BrainConnection.com will also allow visitors to purchase
some of our products and services, as well as the products and services of other
companies, online.
TECHNOLOGY
Our products are cross-platform, software-based adaptive learning programs
available for a variety of hardware and software configurations. Our products
are designed to work with the computer
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technology widely available in schools and homes, minimizing the need for users
to purchase new equipment. We offer the programs in a variety of configurations,
including an on-site model where learning facilitators supervise children in
their offices, an off-site model where children can train from their homes and a
client/server-based model for larger scale deployments. All of our existing
products link to the ScientificLearning.com web site via standard, secure
Internet connections for data transfer and updates. Parents, educators and other
learning professionals can use any web browser to upload program results to our
database and monitor individuals under their supervision.
Products are typically delivered via a CD ROM which can be activated only by
receiving an electronic key delivered via the ScientificLearning.com web site.
Continued access to the program requires periodic uploads of performance data
over the Internet. If users do not upload data within a required time period,
access to the program is denied.
We use an object-oriented authoring environment for all our software
products. New products and product extensions can be built off our core object
model, allowing all products to benefit from improvements in the core code and
reducing new product development time. The Scientific Learning database
maintains a performance history on every user of a Fast ForWord product. The
database is unique and highly scalable, built on a SQL-based Oracle backbone,
and capable of dynamic information queries. Using a proprietary set of
analytical tools, we automatically generate summaries and reports for use by the
educator, parent, speech and language professional or other learning
facilitator. We can also generate custom demographic reports from specific
groups of users by defining search characteristics such as school, classroom or
common primary language. The resulting reports show exactly how a given user is
performing and what challenges remain. The Fast ForWord databases at the client
site are tightly integrated with our databases to provide seamless service from
professional and technical support to accounting.
RESEARCH AND DEVELOPMENT
Approximately one third of our employees are engaged in research and
development activities, which include both product development and outcomes
research. Our research and development organization includes neuroscientists,
psychologists, engineers, programmers, statisticians, graphic artists and
animators. We believe that our future success depends in large part on our
ability to develop new products and maintain and enhance our current product
line. Our success also depends on our ability to enhance our market positioning
by leveraging our expertise in neuroscience and technology, which we believe has
broad applicability. Accordingly, we plan to expand our research and development
activities with respect to present and future products based on our expertise in
neuroscience. We also are examining ways to leverage our expertise in
neuroscience research into other potential non-language-based products,
including computer-based remediation programs for repetitive stress injury and
tinnitus (ringing in the ears).
We can not assure you that: (1) we will be successful in developing and
marketing new products or responding to technological developments, evolving
industry standards or changing customer requirements; (2) we will not experience
difficulties that could delay or prevent the successful development,
introduction and sale of new products; or (3) 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, our business,
operating results and financial condition could be materially and adversely
affected. See "Risk Factors--To remain competitive we must continue to introduce
new products and product enhancements."
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THE LANGUAGE LEARNING PROCESS
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. 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 reading. 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. 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 these phonemes with the three letters "d," "o" and
"g." Our founders 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. These individuals frequently
have difficulty with other language skills, including morphology, syntax,
semantics and grammar, and executive function skills, such as short-term memory
and event sequencing capabilities. The National Institute of Child Health and
Human Development at the National Institutes of Health has found that there is a
strong correlation between these language-based learning problems and
difficulties in learning to read.
Our scientific founders working at UCSF noted that the human brain changes
in response to stimuli, a trait known as brain plasticity. Their work
demonstrated that specific 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, our 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. The scientists used the
computers and their knowledge of language learning techniques and neuroscience
to design exercises that continually adjust to challenge each child
appropriately with customized training. Through thousands of repetitions of
individualized exercises focused on important aspects of language, these
children could gradually master natural speech sounds and develop other language
skills, such as morphology, syntax, semantics and grammar, and executive
function skills, such as short-term memory and event sequencing capabilities,
critical to learning to read and to becoming a better reader. Our founders
established our company to move this research as rapidly as possible from
laboratories into products and services designed to improve human learning and
performance.
Our scientific founders postulated that the gain in oral language
comprehension skills demonstrated by children in the initial study, 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 many language difficulties. We
believe that the manner in which the brain processes speech and language is not
yet fully understood. When we refer 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--There is
academic debate regarding the scientific basis underlying our products which
could significantly affect the market for our programs and services."
EFFICACY STUDIES
We were 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 our 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
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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.
We have 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 we mandated and supply pre- and
post-assessment testing data on each child based on the standardized tests used
by these 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 these 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 fewer 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), test scores were
converted into what are known as "Z-scores." Using Z-scores, the average
test score obtained by the general population (50(th) percentile) is
represented by zero. The -1.0 Z-score represents the 16(th) percentile in
test performance and the 1.0 Z-score represents the 84(th) 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 16(th)
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
42(nd) 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. This second study 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.
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INTELLECTUAL PROPERTY
We have a broad intellectual property strategy addressing both product
technology and product concepts. We aggressively protect our proprietary rights
in our products and technology through a combination of patents, trademarks,
copyrights, trade secret laws, confidentiality procedures and contractual
provisions. As of March 31, 1999, we have filed patent applications in the
United States and internationally relating to our technology, including 38 with
the USPTO. To date, one patent has been granted and we have received
notification of allowance on five additional patents. Additionally, pursuant to
a license with The Regents of the University of California, we are 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 subject of a patent issued in September 1998. We cannot be certain
that any of our or the licensor's additional pending patent applications will
result in the issuance of any patents, or that, if issued, any of these patents
will offer protection against competitors with similar technology. We cannot
assure you that any patents issued to us or the licensors will not be
challenged, invalidated or circumvented in the future or that the rights created
thereunder will provide a competitive advantage. In addition, our competitors
may apply for and obtain patents covering technologies that are more effective
than our technologies. This could render our technologies or products obsolete
or uncompetitive or prevent, limit or interfere with our ability to make, use or
sell our products either in the United States or in international markets.
Our current products incorporate technologies which are the subject of
patents issued to, and patent applications filed by, others. We have obtained
licenses for certain of these technologies and may be required to obtain
licenses for others. We do not believe that we are currently using technology
that is subject to patents held by third parties without a license. However, if
needed we may not be able to obtain licenses for technology patented by others
on commercially reasonable terms, or at all. We also may not be able to develop
alternative approaches if we are unable to obtain necessary licenses. We cannot
assure you that our current and future licenses will be adequate for the
operation of our business. The failure to obtain necessary licenses or identify
and implement alternative approaches could have a material adverse effect on our
business, financial condition and results of operations.
Under the terms of the license with The Regents of the University of
California, we must pay royalties and milestone payments based upon cumulative
net sales of our products, subject to certain minimum royalty amounts. In
connection with this license, we issued 114,526 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 license remains in effect until
the later of the expiration of the last-to-expire patent licensed or the
abandonment of the last patent application licensed. The Regents may terminate
the license agreement if we fail to perform or violate its terms without curing
the violation within 60 days of receiving written notice of the violation. For
example, The Regents could terminate the agreement if we fail to perform the
following obligations:
- make royalty and milestone payments;
- provide periodic progress reports;
- prepare, file and prosecute U.S. and foreign patent applications;
- provide indemnification;
- insure our activities in connection with work under the agreement; and
- maintain the confidentiality of information received from The Regents
relating to the agreement.
If we lose or are unable to maintain the license agreement, this could delay
our introduction of new products or could require the recall of our products
from the market. Even if we could identify
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and license technology equivalent to the technology covered by the license
agreement, developing and integrating alternative technology would likely delay
our product line.
We also rely upon trade secrets, technical know-how and continuing invention
to develop and maintain our competitive position. There is some risk that others
may independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets or disclose this
technology. We may also be unable to meaningfully protect our right to our trade
secrets. Any of these could have a material adverse effect on our business,
financial condition and results of operations. See "Risk Factors--We rely on our
intellectual property rights and may be unable to protect these rights."
COMPETITION
The educational technology market in which we operate is very competitive.
We believe 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. We believe that we compete favorably on the
basis of these factors. We compete primarily against providers of traditional
methods of remediation for language and reading problems, which typically
require several years of one-on-one training for children with identified
language and reading problems. Although the traditional approach to language and
reading problems is fundamentally different from the approach we take, these
programs are more widely known and accepted and, therefore, represent
significant competition. In addition, we compete to some extent with other
companies offering educational software products to schools and to speech and
language professionals in private practice. 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. Moreover, we expect that we
will face additional competition from new entrants into the market. Many
competitors have substantially greater technical, marketing and distribution
resources than we do. There can be no assurance that we will continue to be able
to market our products successfully or compete effectively in the educational
technology market. See "Risk Factors--We may not be able to market our products
successfully or compete effectively in the educational technology market."
EMPLOYEES
As of March 31, 1999, we had 139 full-time and 24 part-time employees. We
believe our relations with employees are good. None of our employees is
represented by a union or subject to collective bargaining agreements. See "Risk
Factors--If we fail to retain our key personnel or attract and retain key
employees, our business will suffer."
PROPERTIES
We lease a 34,257 square-foot facility in Berkeley, California under a
five-year lease that expires in September 2002. We believe our facilities are
adequate for our current operations.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth various information concerning our directors,
executive officers and certain key employees as of March 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- ----------- ------------------------------------------------------------
<S> <C> <C>
Sheryle J. Bolton............................ 52 President, Chief Executive Officer and Member of the Board
of Directors
Dr. Michael M. Merzenich..................... 56 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............................. 44 Chief Financial Officer, Vice President, Finance, and
Secretary
Diane H. Church.............................. 52 Vice President, Private Channel Sales
Bernard G. Fraenkel.......................... 40 Vice President, Engineering
Dr. William M. Jenkins....................... 48 Vice President, Product Development
Anita M. Kopec............................... 52 Senior Vice President, School Group
Dr. Steven L. Miller......................... 35 Vice President, Outcomes Research
James A. Mills............................... 42 Vice President, Marketing
Patricia A. Murphy........................... 43 Vice President, Human Resources
Dr. Bret E. Peterson......................... 36 Vice President, Internet and Database Systems
Dr. Kathleen M. Hocker....................... 58 Director, Public School Sales
Carleton A. Holstrom (1)(2).................. 63 Member of the Board of Directors
Rodman W. Moorhead, III (1).................. 55 Member of the Board of Directors
Dr. Leonard S. Schleifer (1)................. 46 Member of the Board of Directors
James E. Thomas (2).......................... 38 Member of the Board of Directors
David A. Tanner (2).......................... 40 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 our Chief Executive Officer and as a
director since November 1996 and as our 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 July 1995 to October 1996, Ms. Bolton consulted for a
number of international companies, including many in the Internet, 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 is a director of
HealthCentral.com, a private Internet consumer healthcare information company.
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 one of our founders. He has served as our Chief
Scientific Officer since November 1996 and as a director since 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 with us during a sabbatical from his faculty position at UCSF. In
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January 1998, Dr. Merzenich returned to his faculty position at UCSF, but
continues to direct our research and development activities under a consulting
agreement. 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 one of our founders. She has served as our Executive
Vice President and Chairman of the board of directors since January 1996 and as
a director since our inception. During 1997, Dr. Tallal worked full-time with us
during a sabbatical from her faculty position at Rutgers. In January 1998, Dr.
Tallal returned to her faculty position at Rutgers, but continues to consult
with us pursuant to a consulting agreement. 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 our Chief Financial Officer and Vice
President, Finance since January 1997 and as our Secretary 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.
DIANE H. CHURCH has served as our Vice President, Private Channel Sales
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.
BERNARD G. FRAENKEL has served as our Vice President, Engineering since
April 1999. From August 1996 until April 1999, Mr. Fraenkel served as Vice
President of Engineering at One Touch Systems, a joint venture of Hughes Network
Systems and Apollo Group, Inc., which is a leading provider of interactive
distance learning systems. From January 1996 until July 1996, he was a founder
of Pixel Engines, a developer of DVD authoring systems. From December 1993 until
December 1995,
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Mr. Fraenkel was Director of Research and Development with Sigma Designs, a
provider of MPEG products and integrated circuits for personal computers. He
previously served as Director of Engineering with Teknekron Communications
Systems, where he led an engineering team on consulting projects in the areas of
data and wireless communications, multimedia and VLSI design. Mr. Fraenkel holds
Graduate Engineer degrees from Ecole Polytechnique and Ecole National Superieure
des University Paris IX and an M.S. in Electrical Engineering and Computer
Science from the University of California at Berkeley.
DR. WILLIAM M. JENKINS is a founder and has served as our Vice President,
Product Development since June 1997. From March 1996 to June 1997, Dr. Jenkins
was our 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 our
current training programs. 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.
ANITA M. KOPEC has served as our Senior Vice President, Public Schools since
October 1998. From July 1997 to October 1998, Ms. Kopek was President and CEO of
Educational Consulting Services, Inc., a company she founded to provide
strategic consulting to educational, technology and publishing companies.
Previously, Ms. Kopec was President and Chief Executive Officer of Steck-Vaughn
Publishing Company and held management positions with Computer Curriculum
Corporation and Macmillan/McGraw-Hill School Division. Ms. Kopec began her
career in education as a classroom teacher. Ms. Kopec holds a B.A. in Education
from the University of Akron.
DR. STEVEN L. MILLER is a founder and has served as our Vice President,
Outcomes Research since June 1997. From May 1996 to June 1997, Dr. Miller was
our 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 problems. 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 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.
JAMES A. MILLS has served as our Vice President, Marketing, since April,
1999, having previously served as Director of Marketing since August, 1998. He
joined our company in July, 1997, as Director, Business Development. Prior to
joining our company, Mr. Mills was a consultant advising California-based
clients on financial and operational issues. From 1986 to 1996, Mr. Mills was
with Citibank, holding positions with various sales and marketing
responsibilities, most recently as a Vice President responsible for domestic and
overseas-based clients. Mr. Mills previously worked in cable television
marketing, promotion and public affairs for Viacom International, Inc., as well
as for a cable programming start-up venture and a national cable marketing trade
association. Mr. Mills holds a B.S. from Stanford University and an M.B.A. from
Harvard Business School.
PATRICIA A. MURPHY has served as our Vice President of Human Resources since
November 1998. From 1990 to November 1998, Ms. Murphy served as Vice President,
Human Resources with Broderbund Software, a leading publisher of educational
software and games. Ms. Murphy has also worked as Personnel Manager with
Lucasfilm Ltd, and as an organization development consultant to Kaiser
Permanente and local school districts offering management development, conflict
resolution and strategic planning. Ms. Murphy currently serves on the board of
the Carlston Foundation. Ms. Murphy holds a B.A. in Mass Communication and
Sociology from the University of California, Santa Cruz and an M.A. in Human
Resources and Organization Development from the University of San Francisco.
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DR. BRET E. PETERSON has served as our Vice President, Internet and Database
Systems since June 1996. From January 1995 to March 1996, Dr. Peterson served as
a research scientist at Yale University and he was a post-doctoral fellow at Los
Alamos National Laboratory from January 1994 to December 1995. From September
1993 to November 1993, Dr. Peterson provided consulting services to Bio-Rad
Laboratories, Inc. Previously, 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. Dr. Peterson is the principal
developer of our Internet database performance tracking system.
DR. KATHLEEN M. HOCKER has served as our Director, Public School Sales,
since March 1998. From November 1996 to December 1997, Dr. Hocker was the
National Sales Manager, Interactive Products for Steck-Vaughn 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 United
States for Computer Curriculum Corporation, a division of Simon & Schuster. From
October 1993 to January 1995, she was Marketing Director for Ligature, Inc., 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. She also has eight years of
teaching experience at the elementary, special and higher education levels. 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.
CARLETON A. HOLSTROM is a founder and has been a director since February
1996. From February 1996 to March 1997, Mr. Holstrom also served as our 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 director since June 1998. Mr. Moorhead
has been employed since 1973 by E.M. Warburg, Pincus & Co., LLC ("E.M.
Warburg"), a specialized private equity firm (or its predecessors), where he
currently serves as Senior Managing Director. Mr. Moorhead was nominated to our
Board in accordance with rights held by Warburg, Pincus Ventures, relating 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 Board
must nominate Mr. Moorhead, or another individual designated by Ventures and
reasonably acceptable to the Board, and use its best efforts to cause Mr.
Moorhead or such other individual to be elected to the Board. See "Certain
Transactions--Board Representation Right." Mr. Moorhead is a director of
Coventry Health Care, Inc., ElderTrust, 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 from Harvard University and an M.B.A. from Harvard
Business School.
DR. LEONARD S. SCHLEIFER has been a director since May 1996. Dr. Schleifer
is a founder of Regeneron Pharmaceuticals, Inc., 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 Directors 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.
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<PAGE>
JAMES E. THOMAS has been a director since November 1996. Since 1989, he has
been employed by E.M. Warburg, 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 our Board in accordance with rights held by
Ventures, relating 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 Board must nominate Mr. Thomas, or another individual
designated by Ventures and reasonably acceptable to the Board, and use its best
efforts to cause Mr. Thomas or such other individual to be elected to the Board.
See "Certain Transactions--Board Representation Right." Mr. Thomas is also a
director of 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.
DAVID A. TANNER has been a director since January 1999. Since June 1998, Mr.
Tanner has been a Managing Director of Lazard Freres & Co. LLC. From 1993 until
1997, he served as a Managing Director at E.M. Warburg, having worked in other
capacities at E.M. Warburg since 1986. Mr. Tanner holds a J.D. from New York
University School of Law, a degree in Economics from the London School of
Economics and a B.A. from Princeton University. Mr. Tanner serves as a director
of several privately-held companies.
EDUCATION ADVISORY BOARD
We have established an Education Advisory Board consisting of members that
are leaders in the fields of education, neuroscience, behavioral science, health
and public policy. The advisory board provides us with experienced counsel on
matters relevant to ongoing research and development of our products. The
advisory board reflects our multi-disciplinary approach by offering a broad base
of knowledge, including research from neuroscience, cognitive neuropsychology,
education, reading and language, engineering, bioethics, public health and
medicine. Members of the advisory board are appointed for a three-year term.
The members of the advisory board are set forth below. Except as otherwise
noted, each of the members of the advisory board was appointed in April 1999.
JOAN ELIZABETH BALDWIN is an educator with more than 25 years of experience
focusing on early elementary reading instruction and childhood learning
disabilities. She is the recipient of the 1999 Outstanding Educator of the Year
Award from the Learning Disabilities Association of America, as well as the
recipient of the Pennsylvania Learning Disabilities Association's 1998
Outstanding Educator of the Year Award. Ms. Baldwin is also a Fellow in the
National Writing Project.
DR. CHARLES I. BERLIN is professor of Otorhinolaryngology and Physiology and
Director of the Kresge Hearing Research Laboratory of the South at LSU Medical
School in New Orleans. He is also a practicing licensed audiologist. His
clinical activities specialize in fitting hearing aids with real ear measurement
to children and adults. He is the recipient of numerous awards and a founding
member of the Advisory Board to the National Institute of Deafness and Other
Communications Disorders. He has authored numerous articles relating to hearing
and speech. Dr. Berlin will become an active participant on the Education
Advisory Board on June 1, 1999.
DR. FERNANDO A. GUERRA currently serves as Director of Health for the San
Antonio Metropolitan Health District. He is also a clinical professor at the
University of Texas in the Department of Pediatrics. In addition to his training
as a medical doctor, Dr. Guerra has served on numerous associations and task
forces as a public health professional. He is a frequent speaker on public
health matters affecting children, including immunization and disease
prevention, and has served in an advisory capacity to local, state and national
childhood development programs, including Head Start.
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ALAN T. OLKES is a founder and chief of operations for Cambridge Academic, a
company that forms and operates private schools, and manages charter schools. He
has been a consultant to Haskell Education Services, where he wrote and
successfully attained charters for three schools. He is a former superintendent
of schools in Dade County, Florida, having served in the Dade County school
system for more than 30 years. He has taught music, mathematics, English and
social studies and has served in numerous administrative positions, including
principal, director of management information systems and supervisor of support
operations.
DR. ALBA A. ORTIZ is a professor in the Department of Special Education and
director of the Office of Bilingual Education at The University of Texas at
Austin. She has served as co-chair of the Exceptional Needs Standards Committee
for the National Board for Professional Teaching Standards and is a member of
the National Educational Research Policy and Priorities Board. Dr. Ortiz is a
former President of the International Council for Exceptional Children.
DR. CHARLES R. THOMAS has served in various educational and administrative
positions for more than 30 years. He is associated with Plath, Nielsen, Rodger
Associates, a management consulting firm, and has previously served as assistant
superintendent of the Illinois State Board of Education and superintendent of
both North Chicago Community Unit School District 187 and North Chicago
Elementary School District 64. He is currently the Professor of Educational
Leadership at National Louis University in Evanston, Illinois.
P. MICHAEL TIMPANE currently serves as a Senior Advisor for Education Policy
with RAND. From 1994 to 1997, he served as Vice President and Senior Scholar at
the Carnegie Foundation for the Advancement of Teaching. He previously served at
Teachers College, Columbia University, as president, dean and professor of
education. He serves on the boards of Children's Television Workshop, the
Southern Education Foundation, Jobs for the Future and the Visiting Committee of
the Harvard Graduate School of Education.
OCTAVIO J. VISIEDO is currently an educational consultant with OV
Educational Concepts, having served as the superintendent of schools in Dade
County, Florida from 1990 until 1996. In his capacity as superintendent, Mr.
Visiedo managed the United States' fourth-largest school district with 330,000
K-12 students and 150,000 adult students.
BOARD COMPOSITION
We currently have authorized eight directors. In accordance with the terms
of the certificate of incorporation that will become effective upon the closing
of this offering, the terms of office of the directors will be divided into
three classes: Class I, Class II and Class III. The terms for each class will
expire at the annual meetings of stockholders to be held in 2000, 2001 and 2002
(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, Dr.
Schleifer and Mr. Tanner, 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 of an annual meeting, 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 of the third annual meeting. In addition, the
certificate of incorporation provides that the authorized number of directors
may be changed only by resolution of the 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.
Although directors may be removed for cause by the affirmative vote of the
holders of a majority of the common stock, the certificate of incorporation
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 our voting stock.
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BOARD COMMITTEES
The board of directors has an audit committee and a compensation committee.
The audit committee, currently composed of Messrs. Holstrom, Thomas and Tanner,
reviews our internal accounting procedures and consults with and reviews the
services provided by our independent auditors. The compensation committee,
currently composed of Dr. Schleifer and Messrs. Holstrom and Moorhead, reviews
and recommends the compensation and benefits matters to the board of directors.
The compensation committee also administers the issuance of stock options and
other awards under our equity incentive plans.
DIRECTOR COMPENSATION
We currently provide cash compensation to directors who are not our
employees or consultants and do not hold five percent or more of our voting
securities for services as directors. This compensation includes $1,000 per
regular meeting of the board of directors attended in person and $500 per
committee meeting and per meeting of the board of directors attended by
telephone. Directors will also be reimbursed for various expenses in connection
with attendance at board and committee meetings. Directors are currently
eligible to participate in our stock option plan. Beginning with the completion
of this offering, employee directors will also be eligible to participate in our
1999 Employee Stock Purchase Plan and non-employee directors will be eligible to
participate in the 1999 Non-Employee Directors' Stock Option Plan. See
"--Employee Benefit Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee have been an officer or
employee, except that Mr. Holstrom served as our Chief Financial Officer from
February 1996 to March 1997. No executive officer serves as a member of the
board of directors or compensation committee of any entity that has one or more
executive officers serving on our board of directors or compensation committee.
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EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded or paid during the
fiscal year ended December 31, 1998 to our Chief Executive Officer and the other
most highly compensated officer receiving compensation in excess of $100,000 in
1998 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION -------------------
SECURITIES
------------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION (2) SALARY ($) BONUS OPTIONS COMPENSATION
- --------------------------------------------------------- ----------- ----------- ------------------- -----------------
<S> <C> <C> <C> <C>
Sheryle J. Bolton, Chief Executive Officer............... 220,000 -- 16,666 225
Frank M. Mattson, Chief Financial Officer................ 166,000 -- 19,000 --
Diane H. Church, Vice President, Private Channel Sales... 127,000 -- 2,333 368
James A. Mills, Vice President, Marketing................ 103,757 -- 10,332 --
</TABLE>
- ------------------------
(1) In accordance with the rules of the Securities and Exchange 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 and various perquisites
and other personal benefits received by the Named Executive Officers, which
do not exceed the lesser of $50,000 or 10% of any officer's salary and bonus
disclosed in this table.
(2) In determining compensation packages for our officers, we currently take
into consideration the equity held by the officer. Accordingly, some
officers may receive smaller compensation packages than other officers with
comparable responsibilities.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
year ended December 31, 1998 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL RATES
OF STOCK
NUMBER OF INDIVIDUAL GRANTS APPRECIATION FOR
SECURITIES % OF TOTAL OPTIONS ---------------------------- OPTION TERM (4)
UNDERLYING OPTIONS GRANTED IN FISCAL EXERCISE PRICE EXPIRATION ----------------------
NAME GRANTED (1) 1998 (2) ($/SHARE) (3) DATE 5% ($) 10% ($)
- --------------------------- ------------------- --------------------- --------------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sheryle J. Bolton.......... 16,666 5.5 $ 6.00 12/16/08 $ $
Frank M. Mattson........... 15,000 5.0 2.25 4/30/08
4,000 1.3 6.00 12/16/08
Diane H. Church............ 2,333 0.8 6.00 12/16/08
James E. Mills............. 333 0.1 0.75 1/13/08
9,999 3.3 6.00 12/16/08
</TABLE>
- ------------------------
(1) Each of the options was granted under our 1999 Equity Incentive Plan and has
a term of 10 years, subject to earlier termination upon the occurrence of
events related to termination of employment. The option grants for Ms.
Bolton and Mr. Mattson vest as to 1/48(th) of the total shares on a monthly
basis from the date of grant. The option grants for Ms. Church and Mr. Mills
vest as to 1/60(th) of the total shares on a monthly basis from the date of
grant.
(2) Based on an aggregate of 302,949 shares subject to options granted to our
employees in 1998, 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 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 $ per share. Stock price appreciation of 5% and 10% is assumed based on
rules promulgated by the Securities and Exchange Commission and does not
represent our prediction of our 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.
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<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL 1998
AND YEAR-END OPTION VALUES
The following table sets forth for each of the Named Executive Officers the
number and value of securities underlying unexercised options held by such Named
Executive Officer at December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT DECEMBER 31, 1998 (1) AT DECEMBER 31, 1998 (2)
ACQUIRED ON VALUE ------------------------------ -----------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- ------------- ------------- ----------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Sheryle J. Bolton.............. -- -- 333,333 -- 1,899,999 --
16,666 0
Frank M. Mattson............... 1,666 9,496 45,000 -- 256,500 --
8,333 44,998
15,000 56,250
4,000 0
Diane H. Church................ -- -- 33,333 -- 100,000 --
2,333 0
James E. Mills................. -- -- 10,000 -- 54,000 --
333 1,748
9,999 0
</TABLE>
- ------------------------
(1) Options may be exercised immediately under early exercise provisions
contained in option agreements. Any unvested shares issued under 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 terminates at a rate of 1/48th per month
for Ms. Bolton and Mr. Mattson and at a rate of 1/60th per month for Ms.
Church and Mr. Mills. See "Principal Stockholders."
(2) Based on the difference between the deemed fair market value of the common
stock at December 31, 1998 ($6.00 per share) and the exercise price.
EMPLOYEE BENEFIT PLANS
1999 EQUITY INCENTIVE PLAN. Our 1999 Equity Incentive Plan was adopted by
the board of directors in April 1999 and will be submitted to our stockholders
for approval in May 1999. The incentive plan amends and restates our existing
option plan adopted in February 1996 and amended in September 1996. As of March
31, 1999, there were options outstanding to purchase an aggregate of 1,276,418
shares of our common stock under the prior plan. The incentive plan will become
effective upon completion of this offering. There are currently 1,714,008 shares
of common stock reserved for future 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, to employees
(including officers). The incentive plan also provides for the grant of
nonstatutory stock options, restricted stock purchase awards, stock bonuses and
stock appreciation rights to employees (including officers), directors and
consultants. 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. The exercise price for an incentive
stock option cannot be less than 100% of the fair market value of
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the common stock on the date of grant. Prior to our 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 us or any affiliate of ours ceases for any reason may exercise vested
options for the term provided in the option agreement.
No incentive stock option (and prior to our 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 our total
combined voting power or any affiliate, 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 our plans and those of our affiliates) may not exceed
$100,000.
When we become subject to Section 162(m) of the Internal Revenue 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 420,000 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 Section 162(m) limitation set forth above.
Restricted stock purchases may be at any price determined by the board of
directors 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 descent and distribution or a domestic relations order during
the time the stock awarded under a stock bonus or restricted stock bonus
agreement remains subject to the agreement.
In the event of specified 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 these
awards, the vesting provisions of these stock awards will be accelerated and
these stock awards will be terminated upon the change in control if not
previously exercised. In the event of an acquisition under Section 13(d) or
14(d) of the Securities Exchange Act of 1934 of securities representing at least
fifty percent (50%) of our combined voting power, the vesting of stock awards
will be accelerated immediately upon the occurrence of this event.
1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN. Our 1999 Non-Employee
Directors' Stock Option Plan was adopted by the Board of Directors in April 1999
and will be submitted to our stockholders for approval in May 1999. The Plan
provides for the automatic grant of options to purchase shares of common stock
to non-employee directors. The board of directors administers the directors'
plan, unless the board of directors 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 75,000 shares.
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Each non-employee director will automatically be granted an option to
purchase shares of our common stock upon the completion of this offering and
each anniversary thereafter. Any individual who becomes a non-employee director
after this offering will automatically be granted an initial grant upon being
elected to the board of directors and an annual grant on each anniversary of the
date the non-employee director was first elected as a member of the Board during
his or her service as a non-employee director.
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. 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 us or any
affiliate of ours (whether as a non-employee director 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 specified 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 the 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 under Section 13(d) or 14(d) of the
Securities Exchange Act of 1934 of securities representing at least fifty
percent (50%) of our combined voting power, the vesting of options will be
accelerated immediately upon the occurrence of such event.
1999 EMPLOYEE STOCK PURCHASE PLAN. Our 1999 Employee Stock Purchase Plan
was adopted by the Board of Directors in April 1999 and will be submitted to our
stockholders for approval in May 1999. The plan authorizes the issuance of
350,000 shares of common stock under purchase rights granted to our employees or
to employees of any affiliate of ours. 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 our
common stock through payroll deductions. The purchase plan is implemented by
offerings of rights to eligible employees. Under the plan, we 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 us or by an affiliate of ours 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 the
employee's rights to purchase our stock to accrue at a rate which exceeds
$25,000 of fair market value of the stock for each calendar year in which the
rights are outstanding. No employee shall be eligible for the grant of any
rights under the purchase plan if immediately after the rights are granted, such
employee has voting power over 5% or more of our 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, we adopted a tax-qualified employee savings
and retirement plan covering all of our employees. Under this 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
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<PAGE>
limit ($10,000 in 1998) and have the amount of this 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 us
when made. We may make matching or additional contributions to the 401(k) plan,
in amounts to be determined annually by the board of directors.
CONSULTING AGREEMENTS
In September 1996, we entered into consulting agreements with Dr. Merzenich
and Dr. Tallal. The agreement with Dr. Merzenich enables him to continue to
direct our research and development activities 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 us through
December 31, 2001. The amounts paid to Dr. Merzenich or Dr. Tallal under their
consulting agreements did not exceed $60,000 in 1998. See "Certain
Transactions."
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
In June 1998, the board of directors authorized us to enter into indemnity
agreements with each of our directors and executive officers. The form of
indemnity agreement provides that we will indemnify against any and all expenses
of the director or executive officer who incurred expenses because of his or her
status as a director or executive officer, to the fullest extent permitted by
our bylaws.
Our certificate of incorporation and bylaws contain provisions relating to
the limitation of liability and indemnification of directors and officers. The
certificate of incorporation provides that directors will not be personally
liable to us or our stockholders for monetary damages for any breach of
fiduciary duty as a director, except for liability: (1) for any breach of the
directors' duty of loyalty to us or our stockholders; (2) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law; (3) 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 (4) for any transaction from which the director
derives any improper personal benefit. The certificate of incorporation also
provides that if the Delaware General Corporation Law is amended after the
approval by our stockholders of the certificate of incorporation to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of the directors will be eliminated or limited to
the fullest extent permitted by the Delaware law. In addition, as permitted by
Section 145 of the Delaware General Corporation Law, our bylaws provide that we
will indemnify our directors and executive officers and may indemnify our 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. We have purchased a directors' and officers' liability
insurance policy providing coverage up to specified amounts for losses incurred
by us, our directors or officers in connection with specified claims against
them, including specified claims under state and federal securities laws.
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<PAGE>
CERTAIN TRANSACTIONS
From April to September 1996, we issued an aggregate of 963,101 shares of
our Series A preferred stock, of which 761,951 shares were sold at a price of
$2.55 per share to investors and 61,728 shares were sold at a price of $2.43 per
share to Drs. Merzenich, Holstrom and Jenkins under an employee stock purchase
plan. In October and November 1996, we issued an aggregate of 1,499,999 shares
of Series B preferred stock at a price of $2.70 per share. In connection with
the sale of Series B preferred stock, we also issued warrants to purchase a
total of 952,380 shares of Series C preferred stock with an exercise price of
$4.20 per share (all of which warrants have since been exercised). From December
1998 to January 1999, we issued an aggregate of 1,833,332 shares of Series D
preferred stock at a price of $9.00 per share. In connection with the sale of
Series D preferred stock, we also issued a warrant to purchase 7,222 shares of
Series D preferred stock with an exercise price of $11.25 per share. Listed
below are the directors, executive officers and five percent stockholders who
have made equity investments to purchase shares of our preferred stock or common
stock. See "Principal Stockholders."
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D
COMMON PREFERRED PREFERRED PREFERRED PREFERRED AGGREGATE
INVESTOR STOCK STOCK STOCK STOCK STOCK CONSIDERATION
- --------------------------------------- --------- ----------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dr. Michael M. Merzenich............... 833,333 20,576 -- -- -- $ 51,000
Dr. Paula A. Tallal.................... 833,333 -- -- -- -- $ 1,000
Dr. William M. Jenkins................. 555,558 20,576 -- -- -- $ 50,667
Dr. Steven L. Miller................... 123,450 -- -- -- -- $ 148
Warburg, Pincus Ventures, L.P. (1)..... -- -- 1,481,481 952,380 1,111,111 $ 17,999,994
Carleton A. Holstrom (2)............... 154,315 40,184 -- -- -- $ 100,186
Dr. Leonard S. Schleifer............... 33,333 19,608 -- -- -- $ 58,501
David A. Tanner (3).................... -- -- -- -- 555,555 $ 4,999,995
</TABLE>
- ------------------------
(1) Messrs. Moorhead and Thomas, our directors, are affiliated with Warburg,
Pincus Ventures. Does not include warrants to purchase 116,666 shares of our
common stock issued to Warburg, Pincus Ventures in June and October 1998 in
connection with Warburg, Pincus Ventures' guarantee of an unsecured line of
credit obtained by the Company.
(2) Includes 19,608 shares of Series A preferred stock held by the Solon Edward
Trust #2, for which Mr. Holstrom serves as trustee.
(3) Includes 555,555 shares held by LF SL Holding LLC. Mr. Tanner is affiliated
with Lazard Capital Partners LLC, the Managing Member of LF SL Holding LLC.
The holders of our Series B, C and D preferred stock are entitled to
registration rights with respect to the common stock issued or issuable upon
conversion of the Series B, C or D preferred stock. 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, we entered into an
agreement that requires us, following the completion of this offering and as
long as Warburg, Pincus Ventures owns at least 10% or 20% of the outstanding
common stock, to nominate and use our best efforts to elect one or two
individuals, respectively, designated by Warburg, Pincus Ventures for election
to the board or directors. See "Risk Factors--Our executive officers and
directors and their affiliates hold a majority of our outstanding capital stock"
and "Description of Capital Stock--Board Representation Rights."
In June 1998, we obtained a $3 million unsecured line of credit from
BankBoston, N.A. which was guaranteed by Warburg, Pincus Ventures. This line of
credit has since been paid off in full. In connection with Warburg, Pincus
Ventures providing this guarantee, we issued to Warburg, Pincus Ventures
warrants to purchase 116,666 shares of our common stock at $9.00 per share.
These warrants
61
<PAGE>
expire on May 31, 2003. Additionally, in order to enable us to repay the
outstanding balance on particularly lines of credit, Warburg, Pincus Ventures
agreed to purchase up to 333,333 shares of our capital stock at $9.00 per share
if requested by us. Our right to require Warburg, Pincus Ventures to purchase
such securities was cancelled in connection with the closing of our Series D
preferred stock financing in December 1998.
Under our license with the Regents of the University of California, we are
obligated to make license-issue fee payments, royalty payments, milestone
payments and other 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, among others, and subsequently assigned
to the Regents. This patent was granted by the USPTO in September 1998. Drs.
Tallal and Merzenich are members of our board of directors, and Drs. Jenkins and
Miller are vice presidents with us. These payments include our obligation to
make minimum royalty payments which commenced the year of our first commercial
sale. In 1999, and for each year thereafter during the term of the license, the
minimum royalty payment will be $150,000. To date, we have paid $200,000 and
issued a net of 114,526 shares of our common stock in satisfaction of all
license-issue fees owed under the license and are current on all royalty
payments due under the license. To date, a milestone payment of $50,000 has
become due under the license. However, total aggregate milestone payments under
the license are expected to be $350,000, with individual milestone payments
being dependent upon our achieving specified net sales. We expensed an aggregate
of $415,000 for royalty and milestone payments under the license for the year
ended December 31, 1998. Pursuant to separate patent policies of the UCSF and
Rutgers, as well as understandings between inventors affiliated with each
university, each university distributes to those inventors affiliated with the
university, on an annual basis, a portion of the payments received from us. To
date, the amounts distributed to each inventor under the universities' patent
policies have not exceeded $60,000 per year. The amount of any future university
distributions to the inventors are indeterminable at this time because these
figures are tied to our future performance; however, we estimate that less than
0.5% of product sales during the term of the license will be payable by the
universities to each inventor. The license was negotiated by us on an
arms-length basis, without involvement by the inventors.
Ms. Bolton's husband, Stephen Shane, is a principal of TouchStar
Communications, which has produced some of our promotional and training videos.
The total compensation paid to TouchStar for production services was
approximately $58,000 in 1998 and approximately $28,000 through April 1999.
We believe that the foregoing transactions were in our best interest. As a
matter of policy these transactions were, and all future transactions between us
and any of our 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 us than could be obtained from unaffiliated third parties
and in connection with bona fide business purposes. See "Management--Consulting
Agreements."
62
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of March 31, 1999 (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 us to own
beneficially more than five percent of the common stock; (ii) each of the Named
Executive Officers; (iii) each of our directors; and (iv) all directors and
executive officers 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).............................................. 3,661,638 44.9
466 Lexington Avenue
New York, NY 10017
LF SL Holding LLC (3)........................................................... 555,555 6.9
30 Rockefeller Plaza, 62(nd) Floor
New York, NY 10020
Sheryle J. Bolton (4)........................................................... 349,999 4.2
Dr. Michael M. Merzenich (5).................................................... 670,574 8.3
Dr. Paula A. Tallal (6)......................................................... 803,843 10.0
Frank M. Mattson (7)............................................................ 73,999 *
Dr. William M. Jenkins.......................................................... 565,022 7.0
Diane H. Church (8)............................................................. 35,666 *
James A. Mills (9).............................................................. 20,332 *
Carleton A. Holstrom (10)....................................................... 194,449 2.4
Rodman W. Moorhead, III (2)(11)................................................. 3,661,638 44.9
Dr. Leonard S. Schleifer........................................................ 52,941 *
James E. Thomas (2)(11)......................................................... 3,661,638 44.9
David A. Tanner (12)............................................................ 555,555 6.9
All directors and executive officers as a group (12 persons) (13)............... 6,984,068 80.7
</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 8,041,573 shares of common
stock outstanding as of March 31, 1999 and shares of common stock
outstanding upon completion of this offering.
(2) Includes 116,666 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 Warburg, Pincus Ventures. The
sole general partner of Warburg, Pincus Ventures is Warburg, Pincus & Co., a
New York general partnership. E.M. Warburg, Pincus & Co., LLC, a New York
limited liability company, manages Warburg, Pincus Ventures. The members of
E.M. Warburg, Pincus & Co., LLC are substantially the same as the partners
of Warburg, Pincus & Co. Lionel I. Pincus is the managing partner of
Warburg, Pincus & Co. and the managing member of E.M. Warburg, Pincus & Co.
LLC and may be deemed to control both Warburg, Pincus & Co. and E.M.
Warburg,
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<PAGE>
Pincus & Co. LLC. Warburg, Pincus & Co. has a 15% interest in the profits of
Warburg, Pincus Ventures as the general partner and also owns approximately
1.5% of the limited partnership interests in Warburg, Pincus Ventures. See
"Certain Transactions."
(3) Mr. Tanner, a director of the Company, is affiliated with Lazard Capital
Partners LLC, the Managing Member of LF SL Holding LLC. Mr. Tanner is a
Managing Director of Lazard Freres & Co. LLC, the Managing Member of Lazard
Capital Partners LLC.
(4) Includes 349,999 shares subject to immediately exercisable stock options,
210,070 shares of which will be vested as of May 30, 1999 and the remaining
139,929 shares which would be subject to repurchase if purchased prior to
vesting.
(5) Includes 249,999 shares of common stock beneficially owned directly by Dr.
Merzenich, 403,909 shares of common stock held in the Merzenich Family Trust
and 16,666 shares subject to vested stock options.
(6) Includes 670,510 shares of common stock beneficially owned directly by Dr.
Tallal and 133,333 shares held by the Colleen Osburn 1998 Irrevocable Trust,
for which Dr. Tallal serves as trustee. Dr. Tallal disclaims beneficial
ownership of the shares held by the Colleen Osburn 1998 Irrevocable Trust
within the meaning of Rule 13d-3 under the Securities Act of 1934.
(7) Includes 72,333 shares subject to immediately exercisable stock options,
39,395 of which will be vested as of May 30, 1999 and the remaining 32,938
shares which would be subject to repurchase if purchased prior to vesting.
(8) Includes 35,666 shares subject to immediately exercisable stock options,
11,821 shares of which will be vested as of May 30, 1999 and the remaining
23,845 shares which would be subject to repurchase if purchased prior to
vesting.
(9) Includes 20,332 shares subject to immediately exercisable stock options,
3,868 shares of which will be vested as of May 30, 1999 and the remaining
16,464 shares which would be subject to repurchase if purchased prior to
vesting.
(10) Includes 154,315 shares held by the Holstrom Family Limited Partnership and
19,608 shares held in the Solon Edward Trust #2, for which Mr. Holstrom
serves as trustee. Mr. Holstrom disclaims beneficial ownership of the shares
held in the Solon Edward Trust #2 within the meaning of Rule 13d-3 under the
Securities Act of 1934.
(11) All of the shares indicated as owned by Messrs. Moorhead and Thomas are
owned directly by Warburg, Pincus Ventures and are included because of each
individual's affiliation with Ventures. Messrs. Moorhead and Thomas are both
our directors. 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.
(12) Includes 555,555 shares held by LF SL Holding LLC. Mr. Tanner is affiliated
with Lazard Capital Partners LLC, the Managing Member of LF SL Holding LLC.
(13) Includes the information in notes (1) through (12), as applicable.
64
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and provisions of our
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 Registration Statement, of which this
prospectus is a part.
Upon the closing of this offering, our authorized capital stock will consist
of 40,000,000 shares of common stock, $0.001 par value per share, and 1,000,000
shares of preferred stock, $0.001 par value per share.
COMMON STOCK
As of March 31, 1999, there were 8,041,573 shares of common stock
outstanding held by 139 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 dividends as may be declared by the Board out of
funds legally available therefor. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of our 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, B,
C and D preferred stock will be converted into 5,232,146 shares of common stock.
See Note 5 to Financial Statements for a description of currently outstanding
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 of these shares of preferred stock,
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 the 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 the
holders will receive dividend payments and payments upon liquidation and could
have the effect of delaying, deferring or preventing a change in control. We
have no present plan to issue any shares of preferred stock.
REGISTRATION RIGHTS
Under a registration rights agreement, some of our stockholders are entitled
to rights with respect to the registration of approximately 4,285,711 shares of
common stock under the Securities Act of 1933. If we propose to register any of
our securities under the Securities Act, these stockholders are entitled to
notice of registration and are entitled to include their shares therein at our
expense, subject to certain limitations. In addition, these stockholders may
require us at our expense to register their shares on Form S-3 when the form
becomes available for use by us.
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<PAGE>
BOARD REPRESENTATION RIGHTS
Under a purchase agreement with Warburg, Pincus Ventures, among others, we
are required, following the completion of this offering and for so long as
Warburg, Pincus Ventures owns beneficially and of record at least 20% of the
outstanding shares of common stock, to nominate and use our best efforts to have
two individuals designated by Warburg, Pincus Ventures and reasonably acceptable
to us, elected to the board of directors. In addition, we are required,
following the completion of this offering and for so long as Warbug, Pincus
Ventures owns beneficially and of record at least 10% of the outstanding shares
of common stock, to nominate and use our best efforts to have one individual,
designated by Warburg, Pincus Ventures and reasonably acceptable to us, elected
to the board of directors.
DELAWARE ANTI-TAKEOVER LAW AND CHARTER PROVISIONS
We are subject to the provisions of Section 203 of the Delaware General
Corporation 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 of the Delaware General Corporation Law, 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, our certificate of
incorporation and 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 certificate of incorporation and the bylaws will also
require the affirmative vote of the holders of at least 66 2/3% of the voting
power of the outstanding shares to remove a director without cause or amend our
bylaws. In addition, a 66 2/3% vote will be required to amend specified
provisions of the certificate of incorporation, including provisions regarding
managing our 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 certificate of incorporation
authorizes the board of directors to issue up to 1,000,000 shares of preferred
stock and to determine the rights, preferences and privileges of these shares of
preferred stock 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 may be called only by the board of directors, the
chairman of the board of directors 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 our outstanding voting stock, or delay,
prevent or deter a merger, acquisition or tender offer in which our stockholders
could receive a premium for their shares, a proxy contest or other change in our
management. See "Risk Factors--Our charter provisions could have the effect of
preventing corporate take-overs."
TRANSFER AGENT AND REGISTRAR
BankBoston, N.A. has been appointed as the transfer agent and registrar for
our common stock. The transfer agent's address is 150 Royall Street, Canton,
Massachusetts and its telephone number is (781) 575-2000.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, we will have outstanding shares
of common stock, based on the number of shares of common stock outstanding as of
March 31, 1999 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
of 1933. The remaining 8,041,573 shares of common stock held by existing
stockholders are restricted securities within the meaning of the Securities Act.
These 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 of 1933. We have granted holders of
4,285,711 restricted shares rights with respect to the registration of these
shares. See "Description of Capital Stock--Registration Rights."
Holders of 7,828,017 shares of our 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
contractual restrictions and the provisions of Rule 144 and 701, additional
shares will be available for sale in the public market as follows: (i) 207,309
restricted shares will be eligible for immediate sale on the date of this
prospectus; (ii) 568,601 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) 5,988,155
restricted shares will be eligible for sale 180 days after the date of this
prospectus upon expiration of lock-up agreements; and (iv) 123,888 shares of
common stock issuable upon exercise of currently outstanding warrants and
1,846,109 other shares 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 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 ours within
the meaning of Rule 405 under the Securities Act of 1933, of restricted shares
as to which at least one year has elapsed since the date of the holder's
acquisition of such shares from us 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 one percent of the then outstanding shares of common stock
(approximately 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 Securities and Exchange Commission. Sales under Rule 144 are subject to
various requirements relating to manner of sale, notice and availability of
current public information about us. However, a person (or persons whose shares
are aggregated) who is not deemed to have been an affiliate of ours at any time
during the 90 days immediately preceding the sale and who beneficially owns
restricted shares is entitled to sell 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 us or from an affiliate of ours.
The foregoing is a summary of Rule 144 and is not intended to be a complete
description of that rule.
Subject to various 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 us by our 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 these persons. In addition, the Securities and
Exchange Commission has indicated that Rule 701 will apply to stock options
granted by us 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
67
<PAGE>
provisions of Rule 144 and by affiliates under Rule 144 without compliance with
its one-year minimum holding period requirement.
We intend to file a registration statement on Form S-8 under the Securities
Act covering shares of common stock reserved for issuance under our option
plans. See "Management--Employee Benefit Plans." This 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 ours, be available for sale in the open market, unless such
shares are subject to vesting restrictions or the lock-up agreements described
above. As of March 31, 1999, options to purchase 1,276,418 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 our 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 in the public market after completion of
this offering could materially and adversely affect the prevailing market price
and our ability to raise equity capital in the future.
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<PAGE>
UNDERWRITING
GENERAL
We intend to offer our common stock through a number of underwriters.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Thomas
Weisel Partners LLC and Pacific Growth Equities, Inc. are acting as
representatives of each of the underwriters named below. Subject to the terms
and conditions set forth in a purchase agreement among our company and the
underwriters, we have agreed to sell to the underwriters, and each of the
underwriters severally and not jointly has agreed to purchase from us the number
of shares of common stock indicated below opposite its name, at the public
offering price less the underwriting discount.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ---------------------------------------------------------------------------------- -----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................................
Thomas Weisel Partners LLC........................................................
Pacific Growth Equities, Inc......................................................
-----------
Total.........................................................................
-----------
-----------
</TABLE>
In the purchase agreement, the several underwriters have agreed, subject to
the terms and conditions set forth in the agreement, to purchase all of the
shares of common stock being sold under the terms of the agreement if any of the
shares are purchased. In the event of a default by an underwriter, the purchase
agreement provides that, under some circumstances, the purchase commitments of
the nondefaulting underwriters may be increased or the purchase agreement may be
terminated.
We have agreed to indemnify the underwriters against some liabilities,
including some liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect of those
liabilities.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of various legal matters by counsel for the underwriters and other
conditions. The underwriters reserve the right to withdraw, cancel or modify
this offer and to reject orders in whole or in part.
OVER-ALLOTMENT OPTION
We have granted an option to the underwriters, exercisable for 30 days after
the date of this prospectus, to purchase up to an aggregate of additional
shares of our common stock at the public offering price set forth on the cover
page of this prospectus, less the underwriting discount. The underwriters may
exercise this option solely to cover over-allotments, if any, made on the sale
of the common stock offered hereby. To the extent that the underwriters exercise
this option, each underwriter will be obligated to purchase a number of
additional shares of common stock proportionate to the underwriter's initial
amount reflected in the foregoing table.
COMMISSIONS AND DISCOUNTS
The representatives of the underwriters have advised us that the
underwriters propose initially to offer the shares of common stock to the public
at the initial public offering price set forth on the cover page of this
prospectus, and to certain dealers at that price less a concession not in excess
of $ per share of common stock. The underwriters may allow, and such
dealers may reallow, a
69
<PAGE>
discount not in excess of $ per share of common stock to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may change.
The following table shows the per share and total underwriting discount to
be paid by us to the underwriters and the proceeds before expenses to us. This
information is presented assuming either no exercise or full exercise by the
underwriters of their over-allotment option.
<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OPTION OPTION
---------- ---------- ---------
<S> <C> <C> <C>
Public offering price..................................................... $ $ $
Underwriting discount..................................................... $ $ $
Proceeds, before expenses, to Scientific Learning......................... $ $ $
</TABLE>
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $ and are payable entirely by us.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to five percent of the shares offered hereby to be
sold to some of our directors, officers and employees and other persons
associated with us or with any of our directors, officers or employees. The
number of shares of our common stock available for sale to the general public
will be reduced to the extent that those persons purchase the reserved shares.
Any reserved shares which are not orally confirmed for purchase within one day
of the pricing of this offering will be offered by the underwriters to the
general public on the same terms as the other shares offered by this prospectus.
NO SALES OF SIMILAR SECURITIES
We and our officers and directors and existing stockholders holding % of
our capital stock outstanding after this offering have agreed, with certain
exceptions, without the prior written consent of Merrill Lynch on behalf of the
underwriters for a period of 180 days after the date of this prospectus not to,
directly or indirectly
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant for the sale of, lend otherwise dispose of or transfer any
shares of our common stock or securities convertible into or exchangeable
or exercisable for or repayable with our common stock, or file a
registration statement under the Securities Act relating to any shares of
our common stock or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of our common stock, whether
any such swap or transaction is to be settled by delivery of our common
stock or other securities, in cash or otherwise.
QUOTATION ON THE NASDAQ NATIONAL MARKET
We expect our common stock to be approved for quotation on the Nasdaq
National Market, subject to official notice of issuance, under the symbol
"SCIL." Before this offering, there has been no public market for our common
stock. The initial public offering price will be determined through negotiations
among us and the representatives. The factors to be considered in determining
the initial public offering price, in addition to prevailing market conditions,
are the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us, our financial information, the
history of, and the prospectus for, our company and the industry in which we
compete, and an assessment of our management, its past and present operations,
the prospects for, and timing of, future revenues of our company, the present
state of our development, and the above factors in relation to market values and
various valuation measures of other companies engaged in activities similar to
ours.
70
<PAGE>
We cannot assure you that an active trading market will develop for our common
stock or that our common stock will trade in the public market subsequent to
this offering at or above the initial public offering price.
The underwriters do not expect sales of the common stock to any accounts
over which they exercise discretionary authority to exceed five percent of the
number of shares being offered in this offering.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of our common stock is completed, the rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
certain selling group members to bid for and purchase our common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of our common stock. These transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of our common stock.
If the underwriters create a short position in our common stock in
connection with this offering, that is, if they sell more shares of our common
stock than are set forth on the cover page of this prospectus, the
representatives may reduce that short position by purchasing our common stock in
the open market. The representatives may also elect to reduce any short position
by exercising all or part of their over-allotment option.
The representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares of
our common stock in the open market to reduce the underwriters' short position
or to stabilize the price of our common stock, they may reclaim the amount of
the selling concession from the underwriters and selling group member who sold
those shares.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of these purchases. The imposition of a penalty bid
might also have an effect on the price of our common stock to the extent that it
discourages resales of our common stock.
Neither our company nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
our company nor any of the underwriters makes any representation that the
representatives or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
Thomas Weisel Partners LLC, one of the representatives, was organized and
registered as a broker-dealer in December 1998. Since December 1998, Thomas
Weisel Partners has been named as a lead or co-manager on 22 filed public
offerings of equity securities, of which seven have been completed, and has
acted as a syndicate member in an additional 10 public offerings of equity
securities. Thomas Weisel Partners does not have any material relationship with
us or any of our officers, directors or other controlling persons, except with
respect to its contractual relationship with us under the purchase agreement
entered into in connection with this offering.
LEGAL MATTERS
The validity of the shares of common stock offered hereby is being passed
upon by Cooley Godward LLP, San Francisco, California. 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 18,518 shares of our preferred stock which will convert into 18,518 shares
of our common stock upon the closing of this offering.
71
<PAGE>
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1997 and 1998, and for each of the three
years in the period ended December 31, 1998, as set forth in their report. We
have included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
AVAILABLE INFORMATION
We have filed with the Commission a registration statement on Form S-1 under
the Securities Act of 1933 with respect to the common stock offered by this
prospectus. This prospectus does not contain all of the information included in
the registration statement, certain portions of which are omitted as permitted
by the Commission's rules and regulations. For further information about us and
the common stock we are offering, you should refer to the registration statement
and the exhibits and the financial statements, notes and schedules filed as part
of the registration statement. You may obtain a copy of the registration
statement 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 our reports
and information. The address of the Commission's web site is http://www.sec.gov.
Upon completion of this offering, we will be subject to the informational
requirements of the Securities Exchange Act of 1934. So long as we are subject
to periodic reporting requirements of the Securities Exchange Act of 1934, we
will file with the Commission the reports, proxy statements and other
information required thereby. We intend to furnish our 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.
------------------------
72
<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, 1997 and 1998, and the related statements of
operations, redeemable convertible preferred stock and stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Scientific Learning
Corporation at December 31, 1997 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
Walnut Creek, California
January 15, 1999
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon completion of
stockholder approval of the two-for-three reverse stock split described in Note
8 to the financial statements.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
April 26, 1999
F-2
<PAGE>
SCIENTIFIC LEARNING CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY
-------------------- MARCH 31, MARCH 31,
1997 1998 1999 1999
--------- --------- ----------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 2,699 $ 6,362 $ 7,249
Accounts receivable.............................................. 44 799 1,048
Prepaid expenses and other current assets........................ 157 307 389
--------- --------- -----------
Total current assets............................................... 2,900 7,468 8,686
Restricted cash deposit............................................ 350 280 280
Property and equipment, net........................................ 1,120 1,278 1,359
Other assets....................................................... 86 95 96
--------- --------- -----------
Total assets....................................................... $ 4,456 $ 9,121 $ 10,421
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................. $ 419 $ 731 $ 630
Accrued liabilities.............................................. 356 1,249 868
Deferred revenue................................................. 342 1,649 1,942
Current portion of borrowings under bank line of credit.......... 193 278 230
Current portion of capital lease obligations..................... 21 18 13
--------- --------- -----------
Total current liabilities.......................................... 1,331 3,925 3,683
Borrowings under bank line of credit............................... 97 121 76
Capital lease obligations.......................................... 19 -- --
Other liabilities.................................................. 71 217 219
--------- --------- -----------
Total liabilities.................................................. 1,518 4,263 3,978
Commitments
Redeemable convertible preferred stock, $0.001 par value, issuable
in series:
Authorized shares-8,046,668 (none pro forma)
Issued and outstanding shares-2,452,379 in 1997, 3,730,156 in
1998, 4,285,711 in 1999, and none pro forma (liquidation
preference-- $19,550).......................................... 8,002 18,940 23,836 $ --
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value:
Authorized shares-10,346,668 (including 8,046,668 shares
designated as redeemable convertible preferred stock)
(1,000,000 pro forma)........................................
Issued and outstanding shares-946,435 in 1997, 1998 and 1999,
and none pro forma (liquidation preference--$2,413).......... 2,355 2,355 2,355 --
Common stock, $0.001 par value:
Authorized shares-37,346,668 (40,000,000 pro forma)............
Issued and outstanding shares-2,657,788 in 1997, 2,795,781 in
1998, 2,809,427 in 1999, and 8,041,573 pro forma............. 520 2,930 3,504 29,695
Deferred compensation............................................ (384) (1,064) (1,412) (1,412)
Accumulated deficit.............................................. (7,555) (18,303) (21,840) (21,840)
--------- --------- ----------- -------------
Total stockholders' equity (deficit)............................... (5,064) (14,082) (17,393) $ 6,443
--------- --------- ----------- -------------
-------------
Total liabilities and stockholders' equity (deficit)............... $ 4,456 $ 9,121 $ 10,421
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
SCIENTIFIC LEARNING CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues:
Programs................................. $ -- $ 2,249 $ 4,462 $ 603 $ 1,076
Services................................. -- 713 704 44 264
------------ ------------ ------------ ------------ ------------
Total revenues............................. -- 2,962 5,166 647 1,340
Cost of revenues:
Programs................................. -- 481 784 127 181
Services................................. -- 468 614 34 152
------------ ------------ ------------ ------------ ------------
Total cost of revenues..................... -- 949 1,398 161 333
------------ ------------ ------------ ------------ ------------
Gross profit............................... -- 2,013 3,768 486 1,007
Operating expenses:
Sales and marketing...................... 164 2,646 6,057 768 2,730
Research and development................. 1,514 1,965 2,880 666 762
General and administrative............... 933 2,537 4,749 820 1,140
------------ ------------ ------------ ------------ ------------
Total operating expenses................... 2,611 7,148 13,686 2,254 4,632
------------ ------------ ------------ ------------ ------------
Operating loss............................. (2,611) (5,135) (9,918) (1,768) (3,625)
Interest income (expense), net............. 70 162 (832) 20 88
Other income (expense), net................ 44 (85) 2 -- --
------------ ------------ ------------ ------------ ------------
Net loss................................... $ (2,497) $ (5,058) $ (10,748) $ (1,748) $ (3,537)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Basic and diluted net loss per share....... $ (1.02) $ (1.90) $ (3.87) $ (0.64) $ (1.26)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Shares used in computing basic and diluted
net loss per share....................... 2,452,621 2,657,222 2,776,775 2,736,811 2,805,044
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Pro forma basic and diluted net loss per
share (unaudited)........................ $ (1.74) $ (0.44)
------------ ------------
------------ ------------
Shares used in computing pro forma basic
and diluted net loss per share
(unaudited).............................. 6,179,110 8,000,175
------------ ------------
------------ ------------
</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>
STOCKHOLDER'S EQUITY (DEFICIT)
----------------------------------------------
REDEEMABLE
CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------------- ---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock.................................. -- $ -- -- $ -- 2,656,769 $ 12
Issuance of common stock under stock option plan.......... -- -- -- -- 149 --
Issuance of Series A preferred stock, net of issuance
costs................................................... -- -- 831,909 2,046 -- --
Issuance of Series A preferred stock in connection with
license agreement....................................... -- -- 131,192 354 -- --
Issuance of Series B preferred stock, net of issuance
costs................................................... 1,499,999 4,002 -- -- -- --
Net loss and comprehensive loss........................... -- -- -- -- -- --
--------- ----------- --------- ----------- --------- -----------
Balances at December 31, 1996............................... 1,499,999 4,002 963,101 2,400 2,656,918 12
Issuance of common stock under stock option plan.......... -- -- -- -- 870 --
Issuance of Series C preferred stock upon exercise of
warrant, net of issuance costs.......................... 952,380 4,000 -- -- -- --
Reduction of Series A preferred stock issued in connection
with license agreement.................................. -- -- (16,666) (45) -- --
Deferred compensation related to grant of stock options... -- -- -- -- -- 508
Amortization of deferred compensation..................... -- -- -- -- -- --
Net loss and comprehensive loss........................... -- -- -- -- -- --
--------- ----------- --------- ----------- --------- -----------
Balances at December 31, 1997............................... 2,452,379 8,002 946,435 2,355 2,657,788 520
Issuance of common stock under stock option plan.......... -- -- -- -- 137,993 44
Issuance of Series D preferred stock, net of issuance
costs................................................... 1,277,777 10,938 -- -- -- --
Issuance of common stock warrants to preferred stockholder
in connection with guarantee of line of credit and loan
obtained from stockholder............................... -- -- -- -- -- 780
Deferred compensation related to grant of stock options... -- -- -- -- -- 1,586
Amortization of deferred compensation..................... -- -- -- -- -- --
Net loss and comprehensive loss........................... -- -- -- -- -- --
--------- ----------- --------- ----------- --------- -----------
Balances at December 31, 1998............................... 3,730,156 18,940 946,435 2,355 2,795,781 2,930
Issuance of common stock under stock option plan
(unaudited)............................................. -- -- -- -- 13,646 3
Issuance of Series D preferred stock, net of issuance
costs (unaudited)....................................... 555,555 4,896 -- -- -- --
Deferred compensation related to grant of stock options
(unaudited)............................................. -- -- -- -- -- 571
Amortization of deferred compensation (unaudited)......... -- -- -- -- -- --
Net loss and comprehensive loss (unaudited)............... -- -- -- -- -- --
--------- ----------- --------- ----------- --------- -----------
Balances at March 31, 1999 (unaudited)...................... 4,285,711 $ 23,836 946,435 $ 2,355 2,809,427 $ 3,504
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
<CAPTION>
TOTAL
STOCKHOLDERS'
DEFERRED ACCUMULATED EQUITY
COMPENSATION DEFICIT (DEFICIT)
--------------- ------------ ---------------
<S> <C> <C> <C>
Issuance of common stock.................................. $ -- $ -- $ 12
Issuance of common stock under stock option plan.......... -- -- --
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 and comprehensive loss........................... -- (2,497) (2,497)
------- ------------ ---------------
Balances at December 31, 1996............................... -- (2,497) (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... (508) -- --
Amortization of deferred compensation..................... 124 -- 124
Net loss and comprehensive loss........................... -- (5,058) (5,058)
------- ------------ ---------------
Balances at December 31, 1997............................... (384) (7,555) (5,064)
Issuance of common stock under stock option plan.......... -- -- 44
Issuance of Series D preferred stock, net of issuance
costs................................................... -- -- --
Issuance of common stock warrants to preferred stockholder
in connection with guarantee of line of credit and loan
obtained from stockholder............................... -- -- 780
Deferred compensation related to grant of stock options... (1,586) -- --
Amortization of deferred compensation..................... 906 -- 906
Net loss and comprehensive loss........................... -- (10,748) (10,748)
------- ------------ ---------------
Balances at December 31, 1998............................... (1,064) (18,303) (14,082)
Issuance of common stock under stock option plan
(unaudited)............................................. -- -- 3
Issuance of Series D preferred stock, net of issuance
costs (unaudited)....................................... -- -- --
Deferred compensation related to grant of stock options
(unaudited)............................................. (571) -- --
Amortization of deferred compensation (unaudited)......... 223 -- 223
Net loss and comprehensive loss (unaudited)............... -- (3,537) (3,537)
------- ------------ ---------------
Balances at March 31, 1999 (unaudited)...................... $ (1,412) $ (21,840) $ (17,393)
------- ------------ ---------------
------- ------------ ---------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
SCIENTIFIC LEARNING CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- ----------------------------
1996 1997 1998 1998 1999
--------- --------- --------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................. $ (2,497) $ (5,058) $ (10,748) $ (1,748) $ (3,537)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 77 326 1,328 117 177
Loss on disposal of property and equipment.............. -- 85 -- -- --
Preferred stock issued in connection with license
agreement............................................. 354 (45) -- -- --
Amortization of deferred compensation................... -- 124 906 168 223
Changes in operating assets and liabilities:
Accounts receivable................................... -- (44) (755) (13) (249)
Prepaid expenses and other assets..................... (18) (225) (160) (36) (82)
Accounts payable...................................... 115 304 312 (133) (101)
Accrued liabilities................................... 138 218 894 123 (381)
Deferred revenue...................................... 1 341 1,307 118 293
Other liabilities..................................... 100 (29) 146 55 2
--------- --------- --------- ------------- -------------
Net cash used in operating activities..................... (1,730) (4,003) (6,770) (1,349) (3,655)
INVESTING ACTIVITIES
Restricted cash deposit................................... -- (350) 70 -- --
Purchase of property and equipment, net................... (506) (1,045) (700) (39) (259)
--------- --------- --------- ------------- -------------
Net cash used in investing activities..................... (506) (1,395) (630) (39) (259)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock................. 6,048 4,000 10,938 -- 4,896
Proceeds from issuance of common stock.................... 12 -- 44 27 3
Borrowings under bank line of credit...................... -- 355 6,363 -- --
Repayments of borrowings under bank line of credit........ -- (65) (6,254) (48) (94)
Repayments of capital lease obligations................... (2) (15) (28) (6) (4)
--------- --------- --------- ------------- -------------
Net cash provided by (used in) financing activities....... 6,058 4,275 11,063 (27) 4,801
--------- --------- --------- ------------- -------------
Increase (decrease) in cash and cash equivalents.......... 3,822 (1,123) 3,663 (1,415) 887
Cash and cash equivalents at beginning of period.......... -- 3,822 2,699 2,699 6,362
--------- --------- --------- ------------- -------------
Cash and cash equivalents at end of period................ $ 3,822 $ 2,699 $ 6,362 $ 1,284 $ 7,249
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
SUPPLEMENTAL DISCLOSURES:
Interest paid........................................... $ 1 $ 32 $ 142 $ 10 $ 8
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Capital lease obligations incurred...................... $ 37 $ 20 $ 6 $ 6 $ --
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
Issuance of common stock warrants in connection with
guarantee of line of credit and loan obtained from
stockholder........................................... $ -- $ -- $ 780 $ -- $ --
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
SCIENTIFIC LEARNING CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 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 operates in one business segment, which is the development, marketing
and sales of neuroscience-based software and other educational products and
services designed to increase human learning and performance. The Company's
revenues have been derived primarily from two products, Fast ForWord and Fast
ForWord Two, which focus on children aged four to 13. The Company's products are
delivered through a variety of distribution channels, including sales to public
schools, speech and language professionals in private practice and direct-to-
consumer channels.
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 March 31, 1999 and for the three
months ended March 31, 1998 and 1999 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 three months ended March 31, 1999 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 December 31, 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)
(INFORMATION AS OF MARCH 31, 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
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.
Customers license the right to use the Fast ForWord software during the program
period and do not acquire or otherwise gain unlimited rights to use the
software. Service revenues are derived from the Company's Fast ForWord training
seminars for learning facilitators and from services provided to customers.
Revenues on sales of Fast ForWord are recognized over the average duration
of the program. Revenues from seminars are recognized when the seminar is held.
Revenues from services provided to customers are recognized over the average
duration of the program. 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
recognized as such costs are incurred.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense was $342,000
and $292,000 for the years ended December 31, 1997 and 1998, respectively (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 using 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.
NET LOSS PER SHARE
Basic and diluted net loss per share information for all periods is
presented under the requirement of FAS No. 128, "Earnings per Share" ("FAS
128"). Basic earnings per share has been computed using
F-8
<PAGE>
SCIENTIFIC LEARNING CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the weighted-average number of shares outstanding during the period and excludes
any dilutive effects of stock options, warrants, and convertible securities.
Potentially dilutive securities have been excluded from the computation of
diluted net loss per share as their inclusion would be antidilutive.
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, expect share and per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------------- ------------------------
1996 1997 1998 1998 1999
--------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Historical:
Net loss............................... $ (2,497) $ (5,058) $ (10,748) $ (1,748) $ (3,537)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Weighted average shares of common stock
outstanding used in computing basic
and diluted net per loss share....... 2,452,621 2,657,222 2,776,775 2,736,811 2,805,044
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Basic and diluted net loss per share... $ (1.02) $ (1.90) $ (3.87) $ (0.64) $ (1.26)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Pro forma (unaudited):
Net loss............................... $ (2,497) $ (5,058) $ (10,748) $ (1,748) $ (3,537)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Shares used in computing basic and
diluted net loss per share (from
above)............................... 2,452,621 2,657,222 2,776,775 2,736,811 2,805,044
Adjustment to reflect the effect of the
assumed conversion of preferred stock
from the date of issuance............ 3,402,335 5,195,131
--------- -----------
Weighted average shares used in
computing pro forma basic and diluted
net loss per share................... 6,179,110 8,000,175
--------- -----------
--------- -----------
Pro forma basic and diluted net loss
per share............................ $ (1.74) $ (0.44)
--------- -----------
--------- -----------
</TABLE>
If the Company had reported net income, the calculation of diluted earnings
per share would have included approximately an additional 24,000, 906,000,
955,000, 956,000 and 987,000 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, 1997
and 1998 and for the three months ended March 31, 1998 and 1999, respectively.
F-9
<PAGE>
SCIENTIFIC LEARNING CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Computer equipment.......................................................... $ 1,168 $ 1,707
Office furniture and equipment.............................................. 300 466
Leasehold improvements...................................................... 21 22
--------- ---------
1,489 2,195
Less accumulated depreciation............................................... 369 917
--------- ---------
$ 1,120 $ 1,278
--------- ---------
--------- ---------
</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. Borrowings under the line of credit
bear interest at the bank's prime rate plus 3% (11.5% at December 31, 1998) and
are secured by substantially all of the Company's assets, excluding intellectual
property. At December 31, 1998, the Company had outstanding borrowings in the
amount of $97,000 which are being repaid in equal monthly installments through
June 1999. The agreement restricts the Company's payment of dividends.
In February 1998, the Company entered into an additional line of credit with
the same bank which provided for borrowings of up to $450,000 to finance
equipment purchases during the year ended December 31, 1998. Borrowings are due
in monthly installments through August 2000 plus interest at the bank's prime
rate plus 3% (11.5% at December 31, 1998) and are secured by substantially all
of the Company's assets, excluding intellectual property. At December 31, 1998,
the Company had outstanding borrowings in the amount of $302,000.
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 was pledged as collateral for
the standby letter of credit, which was subsequently reduced to $280,000 in
September 1998. The standby letter of credit will continue to be 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.
In June 1998, the Company obtained a $3.0 million unsecured line of credit
from another bank. Borrowings under the line of credit bore interest, at the
election of the Company, at the bank's base rate or the adjusted LIBOR plus
1.75%. Borrowings were guaranteed by a significant preferred stockholder of the
Company. In connection with such guarantee, the Company issued to the
stockholder warrants to purchase 66,666 shares of the Company's common stock at
$9.00 per share. Such warrants expire on May 31, 2003. The Company estimated the
fair value of the warrants to be $650,000, which was amortized by charges to
interest expense during the year ended December 31, 1998. Additionally, the
stockholder agreed to purchase up to 333,333 shares of the Company's preferred
F-10
<PAGE>
SCIENTIFIC LEARNING CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
3. BANK LINE OF CREDIT (CONTINUED)
stock at $9.00 per share if requested by the Company. The Company's right to
require the stockholder to purchase such securities expired upon the closing of
the Series D preferred stock financing in January 1999. Borrowings under the
line of credit were repaid and the line of credit was terminated in December
1998.
In October 1998, the Company obtained a $3.0 million term loan from a
significant preferred stockholder of the Company. Borrowings under this loan
bore interest at 8% per annum. In connection with such loan, the Company issued
to the stockholder warrants to purchase 50,000 shares of the Company's common
stock at $9.00 per share. Such warrants expire on October 23, 2003. The Company
estimated the fair value of the warrants to be $130,000, which was amortized by
charges to interest expense during the year ended December 31, 1998. The loan
was repaid in December 1998.
4. INCOME TAXES
At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $14,000,000. The net operating loss
carryforward will expire in years 2011 through 2018. 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.
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,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................................... $ 2,668 $ 5,370
Deferred revenue.......................................................... -- 660
Research credit carryforwards............................................. 110 210
Other..................................................................... 254 360
--------- ---------
Total deferred tax assets................................................... 3,032 6,600
Valuation allowance......................................................... (3,032) (6,600)
--------- ---------
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, $2,006,000 and $3,568,000 during the years
ended December 31, 1996, 1997 and 1998, respectively.
F-11
<PAGE>
SCIENTIFIC LEARNING CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY
PREFERRED STOCK
Preferred stock is as follows by series:
<TABLE>
<CAPTION>
SHARES ISSUED AND OUTSTANDING
---------------------------------
DECEMBER 31,
DESIGNATED -------------------- MARCH 31,
SERIES SHARES 1997 1998 1999
- -------------------------------------------------- --------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
A Convertible 1,000,000 946,435 946,435 946,435
B Redeemable convertible 1,933,333 1,499,999 1,499,999 1,499,999
C Redeemable convertible 1,200,000 952,380 952,380 952,380
D Redeemable convertible 2,231,112 -- 1,277,777 1,833,332
--------- --------- --------- -----------
6,364,445 3,398,814 4,676,591 5,232,146
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
Each share of preferred stock is convertible into one share of common stock,
subject to antidilution provisions. Automatic conversion will occur (i) upon
completion of an initial public offering of the Company's common stock with
proceeds of a minimum of $22.5 million at a minimum price of $14.25 per common
share or (ii) upon the consent of the holders of a majority of outstanding
preferred stock. 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, Series C,
and Series D preferred stock are payable in cash in the amount of $0.18, $0.019,
$0.294 and $0.63 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 Board of Directors. No such dividends have been declared as of
December 31, 1998. The Series B, C and D preferred stock have stated redemption
values of $2.70, $4.20 and $9.00 per share, respectively. Series B, C and D
preferred stock are mandatorily redeemable at their stated redemption values in
September 2006, June 2007, and December 2005, respectively.
COMMON STOCK
At December 31, 1998, the Company had reserved shares of common stock for
future issuance as follows:
<TABLE>
<S> <C>
Stock Option Plan:
Options outstanding............................................................ 1,144,417
Options available for future grants............................................ 216,571
Common stock warrants............................................................ 116,666
Convertible preferred stock...................................................... 4,676,591
---------
6,154,245
---------
---------
</TABLE>
F-12
<PAGE>
SCIENTIFIC LEARNING CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS
Under the Company's Stock Option Plan, 1,500,000 shares of common stock are
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 can be exercised immediately but, if
so exercised, these unvested shares are subject to repurchase by the Company.
Options and unvested shares granted generally vest over a period of up to five
years. Options under the plan have a maximum term of 10 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 December 31, 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.
A summary of the Company's stock option activity under the plan is as
follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------
WEIGHTED-
AVERAGE
EXERCISE
NUMBER OF PRICE
SHARES PER SHARE
--------- -------------
<S> <C> <C>
Granted............................................................ 976,490 $ 0.27
Exercised.......................................................... (149) 0.26
Canceled........................................................... (4,414) 0.26
---------
Outstanding at December 31, 1996..................................... 971,927 0.27
Granted............................................................ 232,632 0.55
Exercised.......................................................... (870) 0.26
Canceled........................................................... (162,305) 0.28
---------
Outstanding at December 31, 1997..................................... 1,041,384 0.33
Granted............................................................ 302,949 4.38
Exercised.......................................................... (137,993) 0.32
Canceled........................................................... (61,923) 0.89
---------
Outstanding at December 31, 1998..................................... 1,144,417 1.38
Granted (unaudited)................................................ 157,072 6.00
Exercised (unaudited).............................................. (13,646) 0.47
Canceled (unaudited)............................................... (11,425) 4.27
---------
Outstanding at March 31, 1999 (unaudited)............................ 1,276,418 $ 1.93
---------
---------
Vested and exercisable at December 31, 1998.......................... 499,107 $ 0.33
--------- -----
--------- -----
Vested and exercisable at March 31, 1999 (unaudited)................. 548,917 $ 0.36
--------- -----
--------- -----
</TABLE>
F-13
<PAGE>
SCIENTIFIC LEARNING CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable stock options at December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING VESTED AND EXERCISABLE
------------------------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE
NUMBER OF PRICE CONTRACTUAL NUMBER OF PRICE
PRICE RANGE SHARES PER SHARE LIFE (YEARS) SHARES PER SHARE
- ------------------------------- --------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$0.26-$0.30.................... 749,241 $ 0.28 7.52 443,865 $ 0.27
0.60- 0.66.................... 136,637 0.61 8.68 49,328 0.62
0.75.......................... 19,006 0.75 9.04 3,466 0.75
2.25.......................... 45,000 2.25 9.33 2,313 2.25
6.00.......................... 194,533 6.00 9.96 135 6.00
--------- -----------
1,144,417 499,107
--------- -----------
--------- -----------
</TABLE>
The Company recorded deferred compensation of $508,000, $1,586,000 and
$571,000 during the years ended December 31, 1997 and 1998, and the three months
ended March 31, 1999, respectively, 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, $906,000 and $223,000 for the years ended
December 31, 1997 and 1998, and the three months ended March 31, 1999,
respectively.
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%, 6.3% and 6.0% for the years
ended December 31, 1996, 1997 and 1998, 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.
F-14
<PAGE>
SCIENTIFIC LEARNING CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
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>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Pro forma net loss (in thousands)................ $ (2,506) $ (5,092) $ (10,822)
--------- --------- ---------
--------- --------- ---------
Pro forma basic and diluted net loss per share... $ (1.02) $ (1.92) $ (3.90)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The weighted-average fair value of options granted, which is the value
assigned to the options under FAS 123, was $0.03, $1.25 and $6.44 for options
granted during the years ended December 31, 1996, 1997 and 1998, respectively.
The pro forma impact of options on the net loss for the years ended December
31, 1996, 1997 and 1998 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 $57,000 and
$63,000 and the related amortization included is $16,000 and $34,000 at December
31, 1997 and 1998, respectively. Future minimum payments under these leases as
of December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
1999..................................................................... $ 20 $ 949
2000..................................................................... -- 982
2001..................................................................... -- 1,012
2002..................................................................... -- 671
--- -----------
Total minimum lease payments............................................. 20 $ 3,614
-----------
-----------
Less amount representing interest........................................ (2)
---
Present value of minimum lease payments.................................. $ 18
---
---
</TABLE>
Rent expense under all operating leases was $67,000, $418,000 and $974,000
for the years ended December 31, 1996, 1997 and 1998, respectively.
F-15
<PAGE>
SCIENTIFIC LEARNING CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
6. COMMITMENTS (CONTINUED)
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 September 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 131,192 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 114,526.
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 and $415,000 for the
years ended December 31, 1997 and 1998 (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.
8. SUBSEQUENT EVENTS (UNAUDITED)
PROPOSED PUBLIC OFFERING OF COMMON STOCK
On April 22, 1999, 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 March 31, 1999 gives effect to the conversion
of all outstanding shares of convertible preferred stock at that date into
5,232,146 shares of common stock upon the completion of the offering.
STOCK SPLIT
On April 22, 1999, the Board of Directors approved, subject to stockholder
approval, a two-for-three 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 connection with the reverse stock split, the Board of
Directors authorized a decrease in the number of authorized shares of common
stock to 35,500,000 and a decrease in the number of authorized shares of
preferred stock to 5,500,000 shares, subject to stockholder approval. Effective
immediately prior to the closing of the initial public offering of its common
stock, the Board of Directors authorized, subject to
F-16
<PAGE>
SCIENTIFIC LEARNING CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
8. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
stockholder approval, an increase in the number of authorized shares of common
stock to 40,000,000 and a decrease in the number of authorized shares of
preferred stock to 1,000,000 shares.
1999 EQUITY INCENTIVE PLAN
On April 22, 1999, the Company's Board of Directors adopted, subject to
stockholder approval, the 1999 Equity Incentive Plan which amends and restates
the Company's existing stock option plan. There are 1,866,666 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.
1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
On April 22, 1999, the Company's Board of Directors adopted, subject to
stockholder approval, the 1999 Non-Employee Directors' Stock Option Plan and
reserved an aggregate of 75,000 shares of common stock for grants of stock
options under the plan.
1999 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1999 Employee Stock Purchase Plan was adopted by the Board of
Directors on April 22, 1999 to be effective upon the completion of the Company's
initial public offering of its common stock, subject to stockholder approval.
The Company has reserved a total of 350,000 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 date of purchase.
F-17
<PAGE>
[INSIDE BACK COVER]
[TO COME]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THROUGH AND INCLUDING , 1999 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH & CO.
THOMAS WEISEL PARTNERS LLC
PACIFIC GROWTH EQUITIES, INC.
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 us 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................................................... $ 12,788
NASD filing fee.................................................... 1,000
Nasdaq application fee............................................. *
Blue sky qualification fee and expenses............................ 3,000
Printing and engraving expenses.................................... *
Legal fees and expenses............................................ *
Accounting fees and expenses....................................... *
Transfer agent and registrar fees.................................. *
Miscellaneous...................................................... *
Total............................................................ $ *
---------
---------
</TABLE>
- ------------------------
* To be provided by amendment
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Under Section 145 of the Delaware General Corporation Law, we have broad
powers to indemnify our directors and officers against liabilities they may
incur in such capacities, including liabilities under the Securities Act of
1933. Our bylaws also provide that we will indemnify our directors and executive
officers and may indemnify our other officers, employees and other agents to the
fullest extent not prohibited by Delaware law.
Our 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 us, 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.
We have entered into agreements with our directors and executive officers
that require us 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 our or any of our
affiliated enterprises, provided such person acted in good faith and in a manner
such person reasonably believed to be in or not opposed to our best interests
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.
II-1
<PAGE>
The underwriting agreement filed as Exhibit 1.1 to this registration
statement provides that the underwriters will indemnify the company and its
officers and directors for specified liabilities arising under the Securities
Act of 1933 or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since our incorporation on November 30, 1995, we have sold and issued the
following unregistered securities:
1. From January 1996 to June 1996, we issued and sold an aggregate of
2,656,769 shares of common stock at prices ranging from $0.0012 to $0.255
per share to seven executive officers and directors, 123,450 of which are
currently held by one individual who is no longer associated with us.
2. In April 1996, we issued and sold an aggregate of 69,958 shares of
Series A preferred stock at $2.43 per share to four executive officers and
directors under our Series A preferred stock Employee Purchase Plan, 8,230
of which are currently held by one individual who is no longer associated
with us.
3. From April 1996 to May 1996, we issued and sold and aggregate of
761,951 shares of Series A preferred stock at $2.55 per share to 68
investors, 16,274 of which were sold to Dr. Schleifer, a member of our
Board.
4. On September 27, 1996, we issued 131,192 shares of Series A
preferred stock to Rutgers University in partial payment of a license fee.
On March 28, 1997, Rutgers University returned 16,666 shares to us.
5. From October 1996 to November 1996, we issued and sold an aggregate
of 1,499,999 shares of Series B preferred stock at $2.70 per share to two
investors, 1,481,481 of which were sold to Ventures, an affiliate ours.
6. On October 1, 1996 we issued a warrant to purchase 952,380 shares of
Series C preferred stock at an exercise price of $4.20 per share to Warburg,
Pincus Ventures, an affiliate of ours. This warrant was subsequently
exercised on June 16, 1997 and the 952,380 shares were issued to the
affiliate.
7. Since inception, we have granted stock options under our stock
option plan covering an aggregate of 1,502,578 shares of our common stock
(net of expirations and cancellations) at exercise prices ranging from
$0.260 to $11.25 per share.
8. Since inception, options to purchase an aggregate of 152,658 shares
of our common stock were exercised for an aggregate purchase price of
$51,379.00 at exercise prices ranging from $0.26 to $6.00 per share.
9. In June and October 1998, we issued to Warburg, Pincus Ventures, an
affiliate of ours, warrants to purchase 116,666 shares of our common stock.
These warrants were issued in connection with Warburg, Pincus Ventures'
guarantee of a $3 million unsecured line of credit obtained by us in June
1998.
10. In December 1998 and January 1999, we issued and sold an aggregate
of 1,833,332 shares of Series D preferred stock at $6.00 per share,
1,111,111 of which were sold to Warburg, Pincus Ventures, an affiliate of
ours.
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 of 1933 by virtue of Section 4(2) or Regulation D
promulgated under the Securities Act of 1933. The purchasers in each case
represented their intention to acquire the securities for investment only and
not with a view to the
II-2
<PAGE>
distribution thereof. Appropriate legends are affixed to the stock certificates
issued in these transactions. Similar legends were imposed in connection with
any subsequent sales of any such securities. All recipients either received
adequate information about us 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 of 1933 by virtue of Rule 701 promulgated thereunder in that
they were offered and sold either under written compensatory benefit plans or
under a written contract relating to compensation, as provided by Rule 701.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation.
3.2 Bylaws.
3.3 Form of Restated Certificate of Incorporation to be filed upon completion of this offering.
3.4 Form of Amended and Restated Bylaws 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, 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 with each of our directors and executive officers, with related schedules.
10.2 1999 Equity 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* 1999 Non-Employee Directors' Stock Option Plan.
10.6* Form of Nonstatutory Stock Option Agreement under the Non-Employee Directors' Stock Option Plan (Initial
Grant).
10.7* Form of Nonstatutory Stock Option Agreement under the Non-Employee Directors' Stock Option Plan (Annual
Grant).
10.8 1999 Employee Stock Purchase Plan.
10.9 Form of Employee Stock Purchase Plan Offering under the Employee Stock Purchase Plan.
10.10 Consulting Agreement, dated as of September 20, 1996, with Dr. Michael M. Merzenich, as modified on
January 19, 1998.
10.11 Consulting Agreement, dated as of September 19, 1996, with Dr. Paula A. Tallal, as modified on January
22, 1998.
10.12 Loan and Security Agreement, dated as of February 13, 1998, with Silicon Valley Bank.
10.13+ Exclusive License Agreement, dated September 27, 1996, with the Regents of the University of California.
10.14 Lease Agreement, dated as of July 31, 1997, with GBC-University Associates, L.P.
10.15 Securities Purchase Agreement, dated September 24, 1996, with Warburg, Pincus Ventures, L.P.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
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>
- ------------------------
* To be filed by amendment.
+ Certain portions of this exhibit have been omitted based upon our request
for confidential treatment pursuant to Rule 406 for portions of the
referenced exhibit.
II-4
<PAGE>
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.
We hereby undertake 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
of 1933 may be permitted to our directors, officers, and controlling persons
pursuant to the provisions described in Item 14 or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefor, unenforceable. In the event that a claim for
indemnification against these liabilities (other than the payment by us of
expenses incurred or paid by a director, officer, or controlling person 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, we will, unless in the opinion of our 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.
We undertake that: (1) for purposes of determining any liability under the
Securities Act of 1933, 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 us pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 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 of 1933, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company has caused this Registration Statement on Form S-1 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 26th day of April, 1999.
<TABLE>
<S> <C> <C>
SCIENTIFIC LEARNING CORPORATION
By: /s/ SHERYLE J. BOLTON
-----------------------------------------
Sheryle J. Bolton
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
</TABLE>
POWER OF ATTORNEY
Each individual whose signature appears below constitutes and appoints
Sheryle J. Bolton and Frank M. Mattson, and each of them, his or her true and
lawful attorneys-in-fact and agents with full power of substitution, for him or
her and in his or her name, place and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments) to this
registration statement, and to sign any registration statement for the same
offering covered by the registration statement that is to be effective upon
filing pursuant to Rule 462(b) promulgated under the Securities Act, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or
his, her or their substitute or substitutes, may lawfully do or cause to be done
or by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ SHERYLE J. BOLTON President, Chief Executive April 26, 1999
- ------------------------------ Officer and Director
Sheryle J. Bolton (Principal Executive
Officer)
/s/ DR. MICHAEL M. MERZENICH Chief Scientific Officer April 26, 1999
- ------------------------------ and Director
Dr. Michael M. Merzenich
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ DR. PAULA A. TALLAL Executive Vice President April 26, 1999
- ------------------------------ and Chairman of the
Dr. Paula A. Tallal Board
/s/ FRANK M. MATTSON Chief Financial Officer, April 26, 1999
- ------------------------------ Vice President, Finance
Frank M. Mattson and Secretary (Principal
Financial and Accounting
Officer)
/s/ CARLETON A. HOLSTROM Director April 26, 1999
- ------------------------------
Carleton A. Holstrom
/s/ DR. LEONARD S. SCHLEIFER Director April 26, 1999
- ------------------------------
Dr. Leonard S. Schleifer
/s/ RODMAN W. MOORHEAD, III Director April 26, 1999
- ------------------------------
Rodman W. Moorhead, III
/s/ JAMES E. THOMAS Director April 26, 1999
- ------------------------------
James E. Thomas
/s/ DAVID A. TANNER Director April 26, 1999
- ------------------------------
David A. Tanner
</TABLE>
II-7
<PAGE>
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 Five Million Five Hundred Thousand (35,500,000) shares
shall be Common Stock, each having a par value of one-tenth of one cent
($0.001). Five Million Five Hundred Thousand (5,500,000) 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
three (3) outstanding shares of Common Stock shall be combined into two (2)
shares of Common Stock and every three (3) outstanding shares of Preferred Stock
shall be combined into two (2) shares of Preferred Stock. Upon filing of the
Company's Amended and Restated Certificate of Incorporation on July 10, 1998,
every two (2) outstanding shares of Common Stock was combined into one (1) share
of
1.
<PAGE>
Common Stock and every two (2) outstanding shares of Series A Preferred,
Series B Preferred or Series C Preferred was combined into (1) share of Series A
Preferred, Series B Preferred or Series C Preferred, respectively.
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 (1,000,000) shares and is designated "Series A
Preferred Stock" (the "Series A Preferred"). The second series shall consist of
One Million Five Hundred Thousand (1,500,000) shares and is designated "Series B
Preferred Stock" (the "Series B Preferred"). The third series shall consist of
One Million (1,000,000) shares and is designated "Series C Preferred Stock" (the
"Series C Preferred"). The fourth series shall consist of Two Million
(2,000,000) shares and is designated "Series D Preferred Stock" (the "Series D
Preferred"). The Series A Preferred, Series B Preferred, Series C Preferred and
Series D Preferred shall be referred to collectively herein as the "Preferred."
B. DIVIDEND RIGHTS.
1. Holders of Series A Preferred, Series B Preferred, Series C
Preferred and Series D 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 Eighteen Cents ($0.18),
Eighteen and Nine-Tenths Cents ($0.189), Twenty Nine and Four-Tenths
Cents ($0.294) and Sixty Three Cents ($0.63), respectively, per share (as
adjusted for any stock dividends,
2.
<PAGE>
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. 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 Six Hundred Sixty Six Thousand Six Hundred Sixty Six (666,666) 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. SEPARATE VOTES BY SERIES D PREFERRED. For so long as at least
One Million Eight Hundred Thirty Three (1,833,333) shares of Series D 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 seventy-five
percent (75%) of the outstanding shares of the Series D Preferred shall be
necessary for effecting or validating the following actions:
a. 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 the Series D
Preferred in right of redemption, liquidation preference, voting or dividends;
PROVIDED, HOWEVER, that any security with a dividend or liquidation preference
that is greater than that of the Series D Preferred solely as a result of, or in
connection with, a higher per share initial purchase price of such security
shall not be deemed senior for purposes hereof;
b. 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); or
c. Any action that results in the payment or declaration of any
dividend on any shares of Common Stock or Preferred Stock.
4. ELECTION OF BOARD OF DIRECTORS. For so long as at least Eight
Hundred Thousand (800,000) 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 One Million, Four Hundred Sixty Six
Thousand Six Hundred Sixty Six (1,466,666), the holders of Series B Preferred
and Series C Preferred, voting together as a single class, shall be entitled to
Two (2) Board Seats. For so long as the number of shares of Series D Preferred
outstanding exceeds One Million Three Hundred Thirty Three Thousand Three
Hundred Thirty Three (1,333,333), the holders of the Series D Preferred shall be
entitled to One (1) Board seat. The holders of the Common Stock, voting as a
class, shall be entitled to all remaining Board Seats. As used herein, a "Board
4.
<PAGE>
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, (A) the holders of Series A Preferred,
Series B Preferred and Series C 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) (as adjusted for any stock
dividends, combinations, splits, recapitalizations and the like with respect to
such shares) for each share of Series A Preferred, Series B Preferred and Series
C Preferred, respectively, held by them, and (B) the holders of the Series D
Preferred shall be entitled to be paid in cash out of the assets of the Company
for each share of Series D Preferred held by them an amount equal to the
"Original Issue Price" (as adjusted for any stock dividends, combinations,
splits, recapitalizations and the like with respect to such shares) (as
adjusted, the "Base Series D Liquidation Amount"), plus the amount equal to
seven percent (7%) per annum of the Base Series D Liquidation Amount (calculated
on the basis of a 365 day year and the number of days actually elapsed since the
Original Issue Date of the Series D Preferred) and less the per share amount of
any dividend paid with respect to the Series D Preferred. The Original Issue
Price of the Series A Preferred, Series B Preferred, Series C Preferred and
Series D Preferred is Two Dollars and Fifty Five Cents ($2.55), Two Dollars and
Seventy Cents ($2.70), Four Dollars and Twenty Cents ($4.20) and Nine Dollars
($9.00), 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
5.
<PAGE>
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.
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," which, with respect to each
series of Preferred Stock shall mean the first day the Company issued any shares
of such series of Preferred Stock) effect a subdivision of the
6.
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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.
Notwithstanding any provision herein to the contrary however, no such adjustment
shall be made in connection with the one-for-two reverse split of the Common
Stock, Series A Preferred, Series B Preferred and Series C Preferred that was
effected on July 10, 1998.
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
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
7.
<PAGE>
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 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
8.
<PAGE>
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.
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,
9.
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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.
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
10.
<PAGE>
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 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 Fourteen Dollars
and Twenty Five Cents ($14.25) (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 Twenty Two Million Five Hundred Thousand Dollars ($22,500,000).
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
11.
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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.
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.
12.
<PAGE>
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.
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 Two Dollars
and Seventy Cents ($2.70) 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 Four Dollars and Twenty
Cents ($4.20) 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. The holders of a majority of the then outstanding shares of
Series D Preferred may require the Company to redeem, from any source of funds
legally available therefor, the Series D Preferred on the Series D Redemption
Date (as hereinafter defined) by delivering the
13.
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Series D Redemption Notice (as hereinafter defined) to the Company. The "Series
D Redemption Date" means the seventh anniversary of the first issuance by the
Company of the Series D Preferred. The "Series D Redemption Notice" means a
notice that shall (a) be executed by holders of at least a majority of the then
outstanding shares of Series D Preferred; (b) request redemption of all Series D
Preferred on the Series D Redemption Date and (c) be delivered to the Company no
more than ninety (90) nor less than sixty (60) days prior to the Series D
Redemption Date. The Company shall effect such redemption by paying in cash in
exchange for the shares of Series D to be redeemed a sum equal to Nine Dollars
($9.00) per share of Series D 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.
4. 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.
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.
14.
<PAGE>
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."
[THIS SPACE INTENTIONALLY LEFT BLANK]
15.
<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, 242 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 Chief Financial
Officer, Vice President, Finance and Secretary in Berkeley, California this
_____ day of __________, 1999.
SCIENTIFIC LEARNING CORPORATION
By:
-------------------------------------
FRANK M. MATTSON
Chief Financial Officer, Vice
President, Finance and Secretary
16.
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
SCIENTIFIC LEARNING CORPORATION
(A DELAWARE CORPORATION)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Section 1. Registered Office. . . . . . . . . . . . . . . . . . . . . . . .1
Section 2. Other Offices. . . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE II CORPORATE SEAL. . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Section 3. Corporate Seal . . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE III STOCKHOLDERS' MEETINGS. . . . . . . . . . . . . . . . . . . . . . . .1
Section 4. Place of Meetings. . . . . . . . . . . . . . . . . . . . . . . .1
Section 5. Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . .1
Section 6. Special Meetings . . . . . . . . . . . . . . . . . . . . . . . .2
Section 7. Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . .3
Section 8. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Section 9. Adjournment and Notice of Adjourned Meetings . . . . . . . . . .4
Section 10. Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . .4
Section 11. Joint Owners of Stock. . . . . . . . . . . . . . . . . . . . . .4
Section 12. List of Stockholders . . . . . . . . . . . . . . . . . . . . . .4
Section 13. Action Without Meeting . . . . . . . . . . . . . . . . . . . . .5
Section 14. Organization . . . . . . . . . . . . . . . . . . . . . . . . . .5
ARTICLE IV DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Section 15. Number and Term of Office. . . . . . . . . . . . . . . . . . . .6
Section 16. Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Section 17. Term of Directors. . . . . . . . . . . . . . . . . . . . . . . .6
Section 18. Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Section 19. Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . .7
Section 20. Removal. . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Section 21. Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Section 22. Quorum and Voting. . . . . . . . . . . . . . . . . . . . . . . .8
Section 23. Action Without Meeting . . . . . . . . . . . . . . . . . . . . .8
Section 24. Fees and Compensation. . . . . . . . . . . . . . . . . . . . . .8
Section 25. Committees . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Section 26. Organization . . . . . . . . . . . . . . . . . . . . . . . . . 10
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TABLE OF CONTENTS
(CONTINUED)
PAGE
ARTICLE V OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 27. Officers Designated. . . . . . . . . . . . . . . . . . . . . . 10
Section 28. Tenure and Duties of Officers. . . . . . . . . . . . . . . . . 10
Section 29. Delegation of Authority. . . . . . . . . . . . . . . . . . . . 12
Section 30. Resignations . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 31. Removal. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
OF SECURITIES OWNED BY THE CORPORATION. . . . . . . . . . . . . . . 12
Section 32. Execution of Corporate Instruments . . . . . . . . . . . . . . 12
Section 33. Voting of Securities Owned by the Corporation. . . . . . . . . 13
ARTICLE VII SHARES OF STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 34. Form and Execution of Certificates . . . . . . . . . . . . . . 13
Section 35. Lost Certificates. . . . . . . . . . . . . . . . . . . . . . . 14
Section 36. Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 37. Fixing Record Dates. . . . . . . . . . . . . . . . . . . . . . 14
Section 38. Registered Stockholders. . . . . . . . . . . . . . . . . . . . 15
ARTICLE VIII OTHER SECURITIES OF THE CORPORATION . . . . . . . . . . . . . . . . 15
Section 39. Execution of Other Securities. . . . . . . . . . . . . . . . . 15
ARTICLE IX DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 40. Declaration of Dividends . . . . . . . . . . . . . . . . . . . 16
Section 41. Dividend Reserve . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE X FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 42. Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE XI INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 43. Indemnification of Directors, Executive Officers,
Other Officers, Employees and Other Agents . . . . . . . . . . 16
ARTICLE XII NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 44. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE XIII AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 45. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . 21
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TABLE OF CONTENTS
(CONTINUED)
PAGE
ARTICLE XIV RIGHT OF FIRST REFUSAL. . . . . . . . . . . . . . . . . . . . . . . 21
Section 46. Right of First Refusal . . . . . . . . . . . . . . . . . . . . 21
ARTICLE XV LOANS TO OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 47. Loans to Officers. . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE XVI MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 48. Annual Report. . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
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AMENDED AND RESTATED BYLAWS
OF
SCIENTIFIC LEARNING CORPORATION
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the corporation
in the State of Delaware shall be in the City of Dover, County of Kent.
SECTION 2. OTHER OFFICES. The corporation shall also have and maintain
an office or principal place of business at such place as may be fixed by the
Board of Directors, and may also have offices at such other places, both within
and without the State of Delaware as the Board of Directors may from time to
time determine or the business of the corporation may require.
ARTICLE II
CORPORATE SEAL
SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die
bearing the name of the corporation and the inscription, "Corporate
Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to
be impressed or affixed or reproduced or otherwise.
ARTICLE III
STOCKHOLDERS' MEETINGS
SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the principal office of the corporation required
to be maintained pursuant to Section 2 hereof.
SECTION 5. ANNUAL MEETING.
(a) The annual meeting of the stockholders of the corporation, for
the purpose of election of directors and for such other business as may lawfully
come before it, shall be held on such date and at such time as may be designated
from time to time by the Board of Directors.
(b) At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To
be properly brought before an annual meeting, business must be: (A) specified
in the notice of meeting (or any
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supplement thereto) given by or at the direction of the Board of Directors, (B)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors, or (C) otherwise properly brought before the meeting by a
stockholder. For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation not later than the close of business on the sixtieth (60th) day nor
earlier than the close of business on the ninetieth (90th) day prior to the
first anniversary of the preceding year's annual meeting; provided, however,
that in the event that no annual meeting was held in the previous year or the
date of the annual meeting has been changed by more than thirty (30) days from
the date contemplated at the time of the previous year's proxy statement, notice
by the stockholder to be timely must be so received not earlier than the close
of business on the ninetieth (90th) day prior to such annual meeting and not
later than the close of business on the later of the sixtieth (60th) day prior
to such annual meeting or, in the event public announcement of the date of such
annual meeting is first made by the corporation fewer than seventy (70) days
prior to the date of such annual meeting, the close of business on the tenth
(10th) day following the day on which public announcement of the date of such
meeting is first made by the corporation. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the annual meeting: (i) a brief description of the business desired to
be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (ii) the name and address, as they appear on the
corporation's books, of the stockholder proposing such business, (iii) the class
and number of shares of the corporation which are beneficially owned by the
stockholder, (iv) any material interest of the stockholder in such business and
(v) any other information that is required to be provided by the stockholder
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "1934 Act"), in his capacity as a proponent to a stockholder proposal.
Notwithstanding the foregoing, in order to include information with respect to a
stockholder proposal in the proxy statement and form of proxy for a
stockholders' meeting, stockholders must provide notice as required by the
regulations promulgated under the 1934 Act. Notwithstanding anything in these
Bylaws to the contrary, no business shall be conducted at any annual meeting
except in accordance with the procedures set forth in this paragraph (b). The
chairman of the annual meeting shall, if the facts warrant, determine and
declare at the meeting that business was not properly brought before the meeting
and in accordance with the provisions of this paragraph (b), and, if he should
so determine, he shall so declare at the meeting that any such business not
properly brought before the meeting shall not be transacted.
(c) For purposes of this Section 5, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
SECTION 6. SPECIAL MEETINGS.
(a) Special meetings of the stockholders of the corporation may be
called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer, (iii) the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exists any vacancies in previously
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authorized directorships at the time any such resolution is presented to the
Board of Directors for adoption), or (iv) by the holders of shares entitled to
cast not less than ten percent (10%) of the votes at the meeting, and shall be
held at such place, on such date, and at such time as the Board of Directors,
shall fix.
(b) If a special meeting is called by any person or persons other
than the Board of Directors, the request shall be in writing, specifying the
general nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the Chairman of the Board of Directors, the Chief Executive
Officer, or the Secretary of the corporation. No business may be transacted at
such special meeting otherwise than specified in such notice. The Board of
Directors shall determine the time and place of such special meeting, which
shall be held not less than thirty-five (35) nor more than one hundred twenty
(120) days after the date of the receipt of the request. Upon determination of
the time and place of the meeting, the officer receiving the request shall cause
notice to be given to the stockholders entitled to vote, in accordance with the
provisions of Section 7 of these Bylaws. If the notice is not given within
sixty (60) days after the receipt of the request, the person or persons
requesting the meeting may set the time and place of the meeting and give the
notice. Nothing contained in this paragraph (b) shall be construed as limiting,
fixing, or affecting the time when a meeting of stockholders called by action of
the Board of Directors may be held.
SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or
the Certificate of Incorporation, written notice of each meeting of stockholders
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder entitled to vote at such meeting, such
notice to specify the place, date and hour and purpose or purposes of the
meeting. Notice of the time, place and purpose of any meeting of stockholders
may be waived in writing, signed by the person entitled to notice thereof,
either before or after such meeting, and will be waived by any stockholder by
his attendance thereat in person or by proxy, except when the stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Any stockholder so waiving notice of such meeting shall be
bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.
SECTION 8. QUORUM. At all meetings of stockholders, except where
otherwise provided by statute or by the Certificate of Incorporation, or by
these Bylaws, the presence, in person or by proxy duly authorized, of the
holders of a majority of the outstanding shares of stock entitled to vote shall
constitute a quorum for the transaction of business. In the absence of a
quorum, any meeting of stockholders may be adjourned, from time to time, either
by the chairman of the meeting or by vote of the holders of a majority of the
shares represented thereat, but no other business shall be transacted at such
meeting. The stockholders present at a duly called or convened meeting, at
which a quorum is present, may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum. Except as otherwise provided by law, the Certificate of Incorporation
or these Bylaws, all action taken by the holders of a majority of the vote cast,
including abstentions, at any meeting at which a quorum is present shall be
valid and binding upon the corporation; provided, however, that directors shall
be elected by a plurality of the votes of the shares present in person
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or represented by proxy at the meeting and entitled to vote on the election of
directors. Where a separate vote by a class or classes or series is required,
except where otherwise provided by the statute or by the Certificate of
Incorporation or these Bylaws, a majority of the outstanding shares of such
class or classes or series, present in person or represented by proxy, shall
constitute a quorum entitled to take action with respect to that vote on that
matter and, except where otherwise provided by statute or by the Certificate of
Incorporation or these Bylaws, the affirmative vote of the majority (plurality,
in the case of the election of directors) of the votes cast, including
abstentions, by the holders of shares of such class or classes or series shall
be the act of such class or classes or series.
SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting
of stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes, excluding abstentions. When a meeting is adjourned to another
time or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken.
At the adjourned meeting, the corporation may transact any business which might
have been transacted at the original meeting. If the adjournment is for more
than thirty (30) days or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
SECTION 10. VOTING RIGHTS. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 12 of
these Bylaws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote or execute consents shall have the right to do so either
in person or by an agent or agents authorized by a proxy granted in accordance
with Delaware law. An agent so appointed need not be a stockholder. No proxy
shall be voted after three (3) years from its date of creation unless the proxy
provides for a longer period.
SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities having
voting power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety, or otherwise, or if two (2) or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (a) if only
one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the
majority so voting binds all; (c) if more than one (1) votes, but the vote is
evenly split on any particular matter, each faction may vote the securities in
question proportionally, or may apply to the Delaware Court of Chancery for
relief as provided in the General Corporation Law of Delaware, Section 217(b).
If the instrument filed with the Secretary shows that any such tenancy is held
in unequal interests, a majority or even-split for the purpose of subsection (c)
shall be a majority or even-split in interest.
SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make,
at least ten (10) days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at said meeting, arranged in alphabetical
order, showing the address of each stockholder and
4.
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the number of shares registered in the name of each stockholder. Such list
shall be open to the examination of any stockholder, for any purpose germane to
the meeting, during ordinary business hours, for a period of at least ten (10)
days prior to the meeting, either at a place within the city where the meeting
is to be held, which place shall be specified in the notice of the meeting, or,
if not specified, at the place where the meeting is to be held. The list shall
be produced and kept at the time and place of meeting during the whole time
thereof and may be inspected by any stockholder who is present.
SECTION 13. ACTION WITHOUT MEETING.
(a) Unless otherwise provided in the Certificate of Incorporation,
any action required by statute to be taken at any annual or special meeting of
the stockholders, or any action which may be taken at any annual or special
meeting of the stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted.
(b) Every written consent shall bear the date of signature of each
stockholder who signs the consent, and no written consent shall be effective to
take the corporate action referred to therein unless, within sixty (60) days of
the earliest dated consent delivered to the corporation in the manner herein
required, written consents signed by a sufficient number of stockholders to take
action are delivered to the corporation by delivery to its registered office in
the State of Delaware, its principal place of business or an officer or agent of
the corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to a corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
(c) Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing. If the action which is
consented to is such as would have required the filing of a certificate under
any section of the General Corporation Law of the State of Delaware if such
action had been voted on by stockholders at a meeting thereof, then the
certificate filed under such section shall state, in lieu of any statement
required by such section concerning any vote of stockholders, that written
notice and written consent have been given as provided in Section 228 of the
General Corporation Law of Delaware.
SECTION 14. ORGANIZATION.
(a) At every meeting of stockholders, the Chairman of the Board of
Directors, or, if a Chairman has not been appointed or is absent, the President,
or, if the President is absent, a chairman of the meeting chosen by a majority
in interest of the stockholders entitled to vote, present in person or by proxy,
shall act as chairman. The Secretary, or, in his absence, an Assistant
Secretary directed to do so by the President, shall act as secretary of the
meeting.
(b) The Board of Directors of the corporation shall be entitled to
make such rules or regulations for the conduct of meetings of stockholders as it
shall deem necessary,
5.
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appropriate or convenient. Subject to such rules and regulations of the Board
of Directors, if any, the chairman of the meeting shall have the right and
authority to prescribe such rules, regulations and procedures and to do all such
acts as, in the judgment of such chairman, are necessary, appropriate or
convenient for the proper conduct of the meeting, including, without limitation,
establishing an agenda or order of business for the meeting, rules and
procedures for maintaining order at the meeting and the safety of those present,
limitations on participation in such meeting to stockholders of record of the
corporation and their duly authorized and constituted proxies and such other
persons as the chairman shall permit, restrictions on entry to the meeting after
the time fixed for the commencement thereof, limitations on the time allotted to
questions or comments by participants and regulation of the opening and closing
of the polls for balloting on matters which are to be voted on by ballot.
Unless and to the extent determined by the Board of Directors or the chairman of
the meeting, meetings of stockholders shall not be required to be held in
accordance with rules of parliamentary procedure.
ARTICLE IV
DIRECTORS
SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of
directors of the corporation shall be fixed by the Board of Directors from time
to time. Directors need not be stockholders unless so required by the
Certificate of Incorporation. If for any cause, the directors shall not have
been elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.
SECTION 16. POWERS. The powers of the corporation shall be exercised,
its business conducted and its property controlled by the Board of Directors,
except as may be otherwise provided by statute or by the Certificate of
Incorporation.
SECTION 17. TERM OF DIRECTORS. Subject to the rights of the holders of
any series of Preferred Stock to elect additional directors under specified
circumstances, directors shall be elected at each annual meeting of stockholders
for a term of one year. Each director shall serve until his successor is duly
elected and qualified or until his death, resignation or removal. No decrease
in the number of directors constituting the Board of Directors shall shorten the
term of any incumbent director.
SECTION 18. VACANCIES. Unless otherwise provided in the Certificate of
Incorporation, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by stockholders, be filled only
by the affirmative vote of a majority of the directors then in office, even
though less than a quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the director for which the vacancy was created or occurred and
until such director's successor shall have been elected and qualified. A
vacancy in the Board of Directors shall be deemed to exist under this Bylaw in
the case of the death, removal or resignation of any director.
6.
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SECTION 19. RESIGNATION. Any director may resign at any time by
delivering his written resignation to the Secretary, such resignation to specify
whether it will be effective at a particular time, upon receipt by the Secretary
or at the pleasure of the Board of Directors. If no such specification is made,
it shall be deemed effective at the pleasure of the Board of Directors. When
one or more directors shall resign from the Board of Directors, effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each Director so chosen shall hold office for the unexpired
portion of the term of the Director whose place shall be vacated and until his
successor shall have been duly elected and qualified.
SECTION 20. REMOVAL. Subject to the rights of the holders of any series
of Preferred Stock, the Board of Directors or any individual director may be
removed from office at any time (i) with cause by the affirmative vote of the
holders of a majority of the voting power of all the then-outstanding shares of
voting stock of the corporation, entitled to vote at an election of directors
(the "Voting Stock") or (ii) without cause by the affirmative vote of the
holders of at least a majority of the voting power of all the then-outstanding
shares of the Voting Stock.
SECTION 21. MEETINGS.
(a) ANNUAL MEETINGS. The annual meeting of the Board of Directors
shall be held immediately before or after the annual meeting of stockholders and
at the place where such meeting is held. No notice of an annual meeting of the
Board of Directors shall be necessary and such meeting shall be held for the
purpose of electing officers and transacting such other business as may lawfully
come before it.
(b) REGULAR MEETINGS. Except as hereinafter otherwise provided,
regular meetings of the Board of Directors shall be held in the office of the
corporation required to be maintained pursuant to Section 2 hereof. Unless
otherwise restricted by the Certificate of Incorporation, regular meetings of
the Board of Directors may also be held at any place within or without the State
of Delaware which has been designated by resolution of the Board of Directors or
the written consent of all directors.
(c) SPECIAL MEETINGS. Unless otherwise restricted by the Certificate
of Incorporation, special meetings of the Board of Directors may be held at any
time and place within or without the State of Delaware whenever called by the
Chairman of the Board, the President or any two of the directors.
(d) TELEPHONE MEETINGS. Any member of the Board of Directors, or of
any committee thereof, may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
by such means shall constitute presence in person at such meeting.
(e) NOTICE OF MEETINGS. Notice of the time and place of all special
meetings of the Board of Directors shall be orally or in writing, by telephone,
facsimile, telegraph or telex, during normal business hours, at least
twenty-four (24) hours before the date and time of the
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meeting, or sent in writing to each director by first class mail, postage
prepaid, at least three (3) days before the date of the meeting. Notice of any
meeting may be waived in writing at any time before or after the meeting and
will be waived by any director by attendance thereat, except when the director
attends the meeting for the express purpose of objecting, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened.
(f) WAIVER OF NOTICE. The transaction of all business at any meeting
of the Board of Directors, or any committee thereof, however called or noticed,
or wherever held, shall be as valid as though had at a meeting duly held after
regular call and notice, if a quorum be present and if, either before or after
the meeting, each of the directors not present shall sign a written waiver of
notice. All such waivers shall be filed with the corporate records or made a
part of the minutes of the meeting.
SECTION 22. QUORUM AND VOTING.
(a) Unless the Certificate of Incorporation requires a greater number
and except with respect to indemnification questions arising under Section 43
hereof, for which a quorum shall be one-third of the exact number of directors
fixed from time to time, a quorum of the Board of Directors shall consist of a
majority of the exact number of directors fixed from time to time by the Board
of Directors in accordance with the Certificate of Incorporation; provided,
however, at any meeting whether a quorum be present or otherwise, a majority of
the directors present may adjourn from time to time until the time fixed for the
next regular meeting of the Board of Directors, without notice other than by
announcement at the meeting.
(b) At each meeting of the Board of Directors at which a quorum is
present, all questions and business shall be determined by the affirmative vote
of a majority of the directors present, unless a different vote be required by
law, the Certificate of Incorporation or these Bylaws.
SECTION 23. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
SECTION 24. FEES AND COMPENSATION. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any meeting of a committee of the Board
of Directors. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor.
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SECTION 25. COMMITTEES.
(a) EXECUTIVE COMMITTEE. The Board of Directors may by resolution
passed by a majority of the whole Board of Directors appoint an Executive
Committee to consist of one (1) or more members of the Board of Directors. The
Executive Committee, to the extent permitted by law and provided in the
resolution of the Board of Directors shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the corporation, including without limitation the power or authority
to declare a dividend, to authorize the issuance of stock and to adopt a
certificate of ownership and merger, and may authorize the seal of the
corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to amending the
Certificate of Incorporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the Board of Directors fix the designations and any of the
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
corporation or fix the number of shares of any series of stock or authorize the
increase or decrease of the shares of any series), adopting an agreement of
merger or consolidation, recommending to the stockholders the sale, lease or
exchange of all or substantially all of the corporation's property and assets,
recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation.
(b) OTHER COMMITTEES. The Board of Directors may, by resolution
passed by a majority of the whole Board of Directors, from time to time appoint
such other committees as may be permitted by law. Such other committees
appointed by the Board of Directors shall consist of one (1) or more members of
the Board of Directors and shall have such powers and perform such duties as may
be prescribed by the resolution or resolutions creating such committees, but in
no event shall such committee have the powers denied to the Executive Committee
in these Bylaws.
(c) TERM. Each member of a committee of the Board of Directors shall
serve a term on the committee coexistent with such member's term on the Board of
Directors. The Board of Directors, subject to the provisions of subsections (a)
or (b) of this Bylaw may at any time increase or decrease the number of members
of a committee or terminate the existence of a committee. The membership of a
committee member shall terminate on the date of his death or voluntary
resignation from the committee or from the Board of Directors. The Board of
Directors may at any time for any reason remove any individual committee member
and the Board of Directors may fill any committee vacancy created by death,
resignation, removal or increase in the number of members of the committee. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee, and, in addition, in the absence or disqualification of any
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
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(d) MEETINGS. Unless the Board of Directors shall otherwise provide,
regular meetings of the Executive Committee or any other committee appointed
pursuant to this Section 25 shall be held at such times and places as are
determined by the Board of Directors, or by any such committee, and when notice
thereof has been given to each member of such committee, no further notice of
such regular meetings need be given thereafter. Special meetings of any such
committee may be held at any place which has been determined from time to time
by such committee, and may be called by any director who is a member of such
committee, upon written notice to the members of such committee of the time and
place of such special meeting given in the manner provided for the giving of
written notice to members of the Board of Directors of the time and place of
special meetings of the Board of Directors. Notice of any special meeting of
any committee may be waived in writing at any time before or after the meeting
and will be waived by any director by attendance thereat, except when the
director attends such special meeting for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. A majority of the authorized number
of members of any such committee shall constitute a quorum for the transaction
of business, and the act of a majority of those present at any meeting at which
a quorum is present shall be the act of such committee.
SECTION 26. ORGANIZATION. At every meeting of the directors, the
Chairman of the Board of Directors, or, if a Chairman has not been appointed or
is absent, the President, or if the President is absent, the most senior Vice
President, or, in the absence of any such officer, a chairman of the meeting
chosen by a majority of the directors present, shall preside over the meeting.
The Secretary, or in his absence, an Assistant Secretary directed to do so by
the President, shall act as secretary of the meeting.
ARTICLE V
OFFICERS
SECTION 27. OFFICERS DESIGNATED. The officers of the corporation shall
include, if and when designated by the Board of Directors, the Chairman of the
Board of Directors, the Chief Executive Officer, the President, one or more Vice
Presidents, the Secretary, the Chief Financial Officer, the Treasurer, the
Controller, all of whom shall be elected at the annual organizational meeting of
the Board of Directors. The Board of Directors may also appoint one or more
Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such
other officers and agents with such powers and duties as it shall deem
necessary. The Board of Directors may assign such additional titles to one or
more of the officers as it shall deem appropriate. Any one person may hold any
number of offices of the corporation at any one time unless specifically
prohibited therefrom by law. The salaries and other compensation of the
officers of the corporation shall be fixed by or in the manner designated by the
Board of Directors.
SECTION 28. TENURE AND DUTIES OF OFFICERS.
(a) GENERAL. All officers shall hold office at the pleasure of the
Board of Directors and until their successors shall have been duly elected and
qualified, unless sooner removed. Any officer elected or appointed by the Board
of Directors may be removed at any
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time by the Board of Directors. If the office of any officer becomes vacant for
any reason, the vacancy may be filled by the Board of Directors.
(b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of
the Board of Directors, when present, shall preside at all meetings of the
stockholders and the Board of Directors. The Chairman of the Board of Directors
shall perform other duties commonly incident to his office and shall also
perform such other duties and have such other powers as the Board of Directors
shall designate from time to time. If there is no President, then the Chairman
of the Board of Directors shall also serve as the Chief Executive Officer of the
corporation and shall have the powers and duties prescribed in paragraph (c) of
this Section 28.
(c) DUTIES OF PRESIDENT. The President shall preside at all meetings
of the stockholders and at all meetings of the Board of Directors, unless the
Chairman of the Board of Directors has been appointed and is present. Unless
some other officer has been elected Chief Executive Officer of the corporation,
the President shall be the chief executive officer of the corporation and shall,
subject to the control of the Board of Directors, have general supervision,
direction and control of the business and officers of the corporation. The
President shall perform other duties commonly incident to his office and shall
also perform such other duties and have such other powers as the Board of
Directors shall designate from time to time.
(d) DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume and
perform the duties of the President in the absence or disability of the
President or whenever the office of President is vacant. The Vice Presidents
shall perform other duties commonly incident to their office and shall also
perform such other duties and have such other powers as the Board of Directors
or the President shall designate from time to time.
(e) DUTIES OF SECRETARY. The Secretary shall attend all meetings of
the stockholders and of the Board of Directors and shall record all acts and
proceedings thereof in the minute book of the corporation. The Secretary shall
give notice in conformity with these Bylaws of all meetings of the stockholders
and of all meetings of the Board of Directors and any committee thereof
requiring notice. The Secretary shall perform all other duties given him in
these Bylaws and other duties commonly incident to his office and shall also
perform such other duties and have such other powers as the Board of Directors
shall designate from time to time. The President may direct any Assistant
Secretary to assume and perform the duties of the Secretary in the absence or
disability of the Secretary, and each Assistant Secretary shall perform other
duties commonly incident to his office and shall also perform such other duties
and have such other powers as the Board of Directors or the President shall
designate from time to time.
(f) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial Officer
shall keep or cause to be kept the books of account of the corporation in a
thorough and proper manner and shall render statements of the financial affairs
of the corporation in such form and as often as required by the Board of
Directors or the President. The Chief Financial Officer, subject to the order
of the Board of Directors, shall have the custody of all funds and securities of
the corporation. The Chief Financial Officer shall perform other duties
commonly incident to his office and shall also perform such other duties and
have such other powers as the Board of Directors or the President shall
designate from time to time. The President may direct the Treasurer or any
Assistant Treasurer, or the Controller or any Assistant Controller to assume and
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perform the duties of the Chief Financial Officer in the absence or disability
of the Chief Financial Officer, and each Treasurer and Assistant Treasurer and
each Controller and Assistant Controller shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors or the President shall designate from
time to time.
SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may from
time to time delegate the powers or duties of any officer to any other officer
or agent, notwithstanding any provision hereof.
SECTION 30. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.
SECTION 31. REMOVAL. Any officer may be removed from office at any
time, either with or without cause, by the affirmative vote of a majority of the
directors in office at the time, or by the unanimous written consent of the
directors in office at the time, or by any committee or superior officers upon
whom such power of removal may have been conferred by the Board of Directors.
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND
VOTING OF SECURITIES OWNED BY THE CORPORATION
SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors
may, in its discretion, determine the method and designate the signatory officer
or officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on behalf of
the corporation, except where otherwise provided by law or these Bylaws, and
such execution or signature shall be binding upon the corporation.
Unless otherwise specifically determined by the Board of Directors or
otherwise required by law, promissory notes, deeds of trust, mortgages and other
evidences of indebtedness of the corporation, and other corporate instruments or
documents requiring the corporate seal, and certificates of shares of stock of
the corporation, shall be executed, signed or endorsed by the Chairman of the
Board of Directors, or the President or any Vice President, and by the Secretary
or Treasurer or any Assistant Secretary or Assistant Treasurer. All other
instruments and documents requiring the corporate signature, but not requiring
the corporate seal, may be executed as aforesaid or in such other manner as may
be directed by the Board of Directors.
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All checks and drafts drawn on banks or other depositaries on funds to the
credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock
and other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chairman of the Board of Directors, the Chief Executive Officer, the
President, or any Vice President.
ARTICLE VII
SHARES OF STOCK
SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the
shares of stock of the corporation shall be in such form as is consistent with
the Certificate of Incorporation and applicable law. Every holder of stock in
the corporation shall be entitled to have a certificate signed by or in the name
of the corporation by the Chairman of the Board of Directors, or the President
or any Vice President and by the Treasurer or Assistant Treasurer or the
Secretary or Assistant Secretary, certifying the number of shares owned by him
in the corporation. Any or all of the signatures on the certificate may be
facsimiles. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued with the same effect as if he were such officer,
transfer agent, or registrar at the date of issue. Each certificate shall state
upon the face or back thereof, in full or in summary, all of the powers,
designations, preferences, and rights, and the limitations or restrictions of
the shares authorized to be issued or shall, except as otherwise required by
law, set forth on the face or back a statement that the corporation will furnish
without charge to each stockholder who so requests 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. Within a reasonable time after
the issuance or transfer of uncertificated stock, the corporation shall send to
the registered owner thereof a written notice containing the information
required to be set forth or stated on certificates pursuant to this section or
otherwise required by law or with respect to this section a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, designations, preferences and relative participating, optional or oher
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Except as
otherwise expressly provided by law, the rights and obligations of the holders
of certificates representing stock of the same class and series shall be
identical.
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SECTION 35. LOST CERTIFICATES. A new certificate or certificates shall
be issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require or to
give the corporation a surety bond in such form and amount as it may direct as
indemnity against any claim that may be made against the corporation with
respect to the certificate alleged to have been lost, stolen, or destroyed.
SECTION 36. TRANSFERS.
(a) Transfers of record of shares of stock of the corporation shall
be made only upon its books by the holders thereof, in person or by attorney
duly authorized, and upon the surrender of a properly endorsed certificate or
certificates for a like number of shares.
(b) The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
SECTION 37. FIXING RECORD DATES.
(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix, in advance, a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall not be more than sixty (60) nor less than ten (10) days before the date of
such meeting. If no record date is fixed by the Board of Directors, the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held. A determination
of stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
(b) In order that the corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which date shall not be more than 10 days after the date upon
which the resolution fixing the record date is adopted by the Board of
Directors. Any stockholder of record seeking to have the stockholders authorize
or take corporate action by written consent shall, by written notice to the
Secretary, request the Board of Directors to fix a record date. The Board of
Directors shall promptly, but in all events within 10 days after the date on
which such a request is received, adopt a resolution fixing the record date. If
no record date has been fixed by the Board of Directors within 10 days of the
date on which such a request is received, the record date for determining
stockholders entitled to consent to corporate action in
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writing without a meeting, when no prior action by the Board of Directors is
required by applicable law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the corporation by delivery to its registered office in the State of Delaware,
its principal place of business or an officer or agent of the corporation having
custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested. If no record date
has been fixed by the Board of Directors and prior action by the Board of
Directors is required by law, the record date for determining stockholders
entitled to consent to corporate action in writing without a meeting shall be at
the close of business on the day on which the Board of Directors adopts the
resolution taking such prior action.
(c) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty (60)
days prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
SECTION 38. REGISTERED STOCKHOLDERS. The corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and shall not
be bound to recognize any equitable or other claim to or interest in such share
or shares on the part of any other person whether or not it shall have express
or other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and
other corporate securities of the corporation, other than stock certificates
(covered in Section 34), may be signed by the Chairman of the Board of
Directors, the President or any Vice President, or such other person as may be
authorized by the Board of Directors, and the corporate seal impressed thereon
or a facsimile of such seal imprinted thereon and attested by the signature of
the Secretary or an Assistant Secretary, or the Chief Financial Officer or
Treasurer or an Assistant Treasurer; provided, however, that where any such
bond, debenture or other corporate security shall be authenticated by the manual
signature, or where permissible facsimile signature, of a trustee under an
indenture pursuant to which such bond, debenture or other corporate security
shall be issued, the signatures of the persons signing and attesting the
corporate seal on such bond, debenture or other corporate security may be the
imprinted facsimile of the signatures of such persons. Interest coupons
appertaining to any such bond, debenture or other corporate security,
authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an
Assistant Treasurer of the corporation or such other person as may be authorized
by the Board of Directors, or bear imprinted thereon the facsimile signature of
such person. In case any officer
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who shall have signed or attested any bond, debenture or other corporate
security, or whose facsimile signature shall appear thereon or on any such
interest coupon, shall have ceased to be such officer before the bond, debenture
or other corporate security so signed or attested shall have been delivered,
such bond, debenture or other corporate security nevertheless may be adopted by
the corporation and issued and delivered as though the person who signed the
same or whose facsimile signature shall have been used thereon had not ceased to
be such officer of the corporation.
ARTICLE IX
DIVIDENDS
SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital stock
of the corporation, subject to the provisions of the Certificate of
Incorporation, if any, may be declared by the Board of Directors pursuant to law
at any regular or special meeting. Dividends may be paid in cash, in property,
or in shares of the capital stock, subject to the provisions of the Certificate
of Incorporation.
SECTION 41. DIVIDEND RESERVE. Before payment of any dividend, there may
be set aside out of any funds of the corporation available for dividends such
sum or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
ARTICLE X
FISCAL YEAR
SECTION 42. FISCAL YEAR. Unless otherwise fixed by resolution of the
Board of Directors, the fiscal year of the corporation shall end on the 31st day
of December in each calendar year.
ARTICLE XI
INDEMNIFICATION
SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER
OFFICERS, EMPLOYEES AND OTHER AGENTS.
(a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall
indemnify its directors and executive officers (for the purposes of this Article
XI, "executive officers shall have the meaning defined in Rule 3b7 promulgated
under the 1934 Act) to the fullest extent not prohibited by the Delaware General
Corporation Law; provided, however, that the corporation may modify the extent
of such indemnification by individual contracts with its directors and executive
officers; and, provided, further, that the corporation shall not be required to
indemnify any director or executive officer in connection with any proceeding
(or part thereof) initiated by
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such person unless (i) such indemnification is expressly required to be made by
law, (ii) the proceeding was authorized by the Board of Directors of the
corporation, (iii) such indemnification is provided by the corporation, in its
sole discretion, pursuant to the powers vested in the corporation under the
Delaware General Corporation Law or (iv) such indemnification is required to be
made under subsection (d).
(b) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation
shall have power to indemnify its other officers, employees and other agents as
set forth in the Delaware General Corporation Law.
(c) EXPENSES. The corporation shall advance to any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director or executive
officer of the corporation, or is or was serving at the request of the
corporation as a director or executive officer of another corporation,
partnership, joint venture, trust or other enterprise, prior to the final
disposition of the proceeding, promptly following request therefor, all expenses
incurred by any director or executive officer in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person to repay said
amounts if it should be determined ultimately that such person is not entitled
to be indemnified under this Bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to
paragraph (e) of this Bylaw, no advance shall be made by the corporation to an
executive officer of the corporation (except by reason of the fact that such
executive officer is or was a director of the corporation in which event this
paragraph shall not apply) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, if a determination is reasonably and
promptly made (i) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to the proceeding, or (ii) if such
quorum is not obtainable, or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, that
the facts known to the decision-making party at the time such determination is
made demonstrate clearly and convincingly that such person acted in bad faith or
in a manner that such person did not believe to be in or not opposed to the best
interests of the corporation.
(d) ENFORCEMENT. Without the necessity of entering into an express
contract, all rights to indemnification and advances to directors and executive
officers under this Bylaw shall be deemed to be contractual rights and be
effective to the same extent and as if provided for in a contract between the
corporation and the director or executive officer. Any right to indemnification
or advances granted by this Bylaw to a director or executive officer shall be
enforceable by or on behalf of the person holding such right in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting his claim. In connection with any claim for indemnification, the
corporation shall be entitled to raise as a defense to any such action that the
claimant has not met the standards of conduct that make it permissible under the
Delaware General Corporation Law for the corporation to indemnify the claimant
for the amount claimed. In connection with any claim by an executive officer of
the corporation (except in any action, suit or proceeding,
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whether civil, criminal, administrative or investigative, by reason of the fact
that such executive officer is or was a director of the corporation) for
advances, the corporation shall be entitled to raise a defense as to any such
action clear and convincing evidence that such person acted in bad faith or in a
manner that such person did not believe to be in or not opposed to the best
interests of the corporation, or with respect to any criminal action or
proceeding that such person acted without reasonable cause to believe that his
conduct was lawful. Neither the failure of the corporation (including its Board
of Directors, independent legal counsel or its stockholders) to have made a
determination prior to the commencement of such actionthat indemnification of
the claimant is proper in the circumstances because he has met the applicable
standard of conduct set forth in the Delaware General Corporation Law, nor an
actual determination by the corporation (including its Board of Directors,
independent legal counsel or its stockholders) that the claimant has not met
such applicable standard of conduct, shall be a defense to the action or create
a presumption that claimant has not met the applicable standard of conduct.
(e) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by
this Bylaw shall not be exclusive of any other right which such person may have
or hereafter acquire under any statute, provision of the Certificate of
Incorporation, Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office. The corporation is
specifically authorized to enter into individual contracts with any or all of
its directors, officers, employees or agents respecting indemnification and
advances, to the fullest extent not prohibited by the Delaware General
Corporation Law.
(f) SURVIVAL OF RIGHTS. The rights conferred on any person by this
Bylaw shall continue as to a person who has ceased to be a director, officer,
employee or other agent and shall inure to the benefit of the heirs, executors
and administrators of such a person.
(g) INSURANCE. To the fullest extent permitted by the Delaware
General Corporation Law, the corporation, upon approval by the Board of
Directors, may purchase insurance on behalf of any person required or permitted
to be indemnified pursuant to this Bylaw.
(h) AMENDMENTS. Any repeal or modification of this Bylaw shall only
be prospective and shall not affect the rights under this Bylaw in effect at the
time of the alleged occurrence of any action or omission to act that is the
cause of any proceeding against any agent of the corporation.
(i) SAVING CLAUSE. If this Bylaw or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each director and executive officer to
the full extent not prohibited by any applicable portion of this Bylaw that
shall not have been invalidated, or by any other applicable law.
(j) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the
following definitions shall apply:
(i) The term "proceeding" shall be broadly construed and shall
include, without limitation, the investigation, preparation, prosecution,
defense, settlement,
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arbitration and appeal of, and the giving of testimony in, any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative.
(ii) The term "expenses" shall be broadly construed and shall
include, without limitation, court costs, attorneys' fees, witness fees, fines,
amounts paid in settlement or judgment and any other costs and expenses of any
nature or kind incurred in connection with any proceeding.
(iii) The term the "corporation" shall include, in addition to
the resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger which, if
its separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this Bylaw with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(iv) References to a "director," "executive officer,"
"officer," "employee," or "agent" of the corporation shall include, without
limitation, situations where such person is serving at the request of the
corporation as, respectively, a director, executive officer, officer, employee,
trustee or agent of another corporation, partnership, joint venture, trust or
other enterprise.
(v) References to "other enterprises" shall include employee
benefit plans; references to "fines" shall include any excise taxes assessed on
a person with respect to an employee benefit plan; and references to "serving at
the request of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes duties on, or
involves services by, such director, officer, employee, or agent with respect to
an employee benefit plan, its participants, or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Bylaw.
ARTICLE XII
NOTICES
SECTION 44. NOTICES.
(a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of these
Bylaws, notice is required to be given to any stockholder, it shall be given in
writing, timely and duly deposited in the United States mail, postage prepaid,
and addressed to his last known post office address as shown by the stock record
of the corporation or its transfer agent.
(b) NOTICE TO DIRECTORS. Any notice required to be given to any
director may be given by the method stated in subsection (a), or by facsimile,
telex or telegram, except that
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such notice other than one which is delivered personally shall be sent to such
address as such director shall have filed in writing with the Secretary, or, in
the absence of such filing, to the last known post office address of such
director.
(c) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a
duly authorized and competent employee of the corporation or its transfer agent
appointed with respect to the class of stock affected, specifying the name and
address or the names and addresses of the stockholder or stockholders, or
director or directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall in the absence of fraud, be prima
facie evidence of the facts therein contained.
(d) TIME NOTICES DEEMED GIVEN. All notices given by mail, as above
provided, shall be deemed to have been given as at the time of mailing, and all
notices given by facsimile, telex or telegram shall be deemed to have been given
as of the sending time recorded at time of transmission.
(e) METHODS OF NOTICE. It shall not be necessary that the same
method of giving notice be employed in respect of all directors, but one
permissible method may be employed in respect of any one or more, and any other
permissible method or methods may be employed in respect of any other or others.
(f) FAILURE TO RECEIVE NOTICE. The period or limitation of time
within which any stockholder may exercise any option or right, or enjoy any
privilege or benefit, or be required to act, or within which any director may
exercise any power or right, or enjoy any privilege, pursuant to any notice sent
him in the manner above provided, shall not be affected or extended in any
manner by the failure of such stockholder or such director to receive such
notice.
(g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL. Whenever
notice is required to be given, under any provision of law or of the Certificate
of Incorporation or Bylaws of the corporation, to any person with whom
communication is unlawful, the giving of such notice to such person shall not be
required and there shall be no duty to apply to any governmental authority or
agency for a license or permit to give such notice to such person. Any action
or meeting which shall be taken or held without notice to any such person with
whom communication is unlawful shall have the same force and effect as if such
notice had been duly given. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate shall state,
if such is the fact and if notice is required, that notice was given to all
persons entitled to receive notice except such persons with whom communication
is unlawful.
(h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever notice is
required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings or of the
taking of action by written consent without a meeting to such person during the
period between such two consecutive annual meetings, or (ii) all, and at least
two, payments (if sent by first class mail) of dividends or interest on
securities during a twelvemonth period, have been mailed addressed to such
person at his address as shown on the records of the corporation and have been
returned undeliverable, the giving of such notice to
20.
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such person shall not be required. Any action or meeting which shall be taken
or held without notice to such person shall have the same force and effect as if
such notice had been duly given. If any such person shall deliver to the
corporation a written notice setting forth his then current address, the
requirement that notice be given to such person shall be reinstated. In the
event that the action taken by the corporation is such as to require the filing
of a certificate under any provision of the Delaware General Corporation Law,
the certificate need not state that notice was not given to persons to whom
notice was not required to be given pursuant to this paragraph.
ARTICLE XIII
AMENDMENTS
SECTION 45. AMENDMENTS.
Subject to paragraph (h) of Section 43 of the Bylaws, these Bylaws may be
amended or repealed and new Bylaws adopted by the stockholders entitled to vote.
The Board of Directors shall also have the power, if such power is conferred
upon the Board of Directors by the Certificate of Incorporation, to adopt,
amend, or repeal Bylaws (including, without limitation, the amendment of any
Bylaw setting forth the number of Directors who shall constitute the whole Board
of Directors).
ARTICLE XIV
RIGHT OF FIRST REFUSAL
SECTION 46. RIGHT OF FIRST REFUSAL. No stockholder shall sell,
assign, pledge, or in any manner transfer any of the shares of stock of the
corporation or any right or interest therein, whether voluntarily or by
operation of law, or by gift or otherwise, except by a transfer which meets the
requirements hereinafter set forth in this bylaw:
(a) If the stockholder desires to sell or otherwise transfer any of
his shares of stock, then the stockholder shall first give written notice
thereof to the corporation. The notice shall name the proposed transferee and
state the number of shares to be transferred, the proposed consideration, and
all other terms and conditions of the proposed transfer.
(b) For thirty (30) days following receipt of such notice, the
corporation shall have the option to purchase all (but not less than all) of the
shares specified in the notice at the price and upon the terms set forth in such
notice; provided, however, that, with the consent of the stockholder, the
corporation shall have the option to purchase a lesser portion of the shares
specified in said notice at the price and upon the terms set forth therein. In
the event of a gift, property settlement or other transfer in which the proposed
transferee is not paying the full price for the shares, and that is not
otherwise exempted from the provisions of this Section 46, the price shall be
deemed to be the fair market value of the stock at such time as determined in
good faith by the Board of Directors. In the event the corporation elects to
purchase all of the shares or, with consent of the stockholder, a lesser portion
of the shares, it shall give written notice to the transferring stockholder of
its election and settlement for said shares shall be made as provided below in
paragraph (d).
21.
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(c) The corporation may assign its rights hereunder.
(d) In the event the corporation and/or its assignee(s) elect to
acquire any of the shares of the transferring stockholder as specified in said
transferring stockholder's notice, the Secretary of the corporation shall so
notify the transferring stockholder and settlement thereof shall be made in cash
within thirty (30) days after the Secretary of the corporation receives said
transferring stockholder's notice; provided that if the terms of payment set
forth in said transferring stockholder's notice were other than cash against
delivery, the corporation and/or its assignee(s) shall pay for said shares on
the same terms and conditions set forth in said transferring stockholder's
notice.
(e) In the event the corporation and/or its assignees(s) do not elect
to acquire all of the shares specified in the transferring stockholder's notice,
said transferring stockholder may, within the sixty-day period following the
expiration of the option rights granted to the corporation and/or its
assignees(s) herein, transfer the shares specified in said transferring
stockholder's notice which were not acquired by the corporation and/or its
assignees(s) as specified in said transferring stockholder's notice. All shares
so sold by said transferring stockholder shall continue to be subject to the
provisions of this bylaw in the same manner as before said transfer.
(f) Anything to the contrary contained herein notwithstanding, the
following transactions shall be exempt from the provisions of this bylaw:
(1) A stockholder's transfer of any or all shares held either
during such stockholder's lifetime or on death by will or intestacy to such
stockholder's immediate family or to any custodian or trustee for the account of
such stockholder or such stockholder's immediate family. "Immediate family" as
used herein shall mean spouse, domestic partner (as defined below), lineal
descendant, father, mother, brother, or sister of the stockholder making such
transfer.
(i) For purposes of this Section, "domestic partners" (or,
individually, a "domestic partner") shall mean (a) any two adults who have
registered as domestic partners on a registry maintained by a government entity;
or (b) any two adults who (i) have chosen to share one another's lives in an
intimate and committed relationship of mutual caring, (ii) live together, (iii)
have agreed to be jointly responsible for basic living expenses incurred during
the domestic partnership and (iv) have provided the corporation with a written
declaration of domestic partnership in the form and within the time frame
specified below.
(ii) The declaration of domestic partnership shall set forth
the name of the shareholder and his or her domestic partner, shall state that
the shareholder and his or her domestic partner meet the definition of domestic
partners as set forth above and shall be executed by the shareholder and his or
her domestic partner.
(iii) The declaration of domestic partnership must be
received by the corporation at the time that a person becomes a shareholder of
the corporation or at least twelve (12) months prior to a transfer of shares of
stock of the corporation under this Section 64 by a shareholder to his or her
domestic partner.
22.
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(2) A stockholder's bona fide pledge or mortgage of any shares
with a commercial lending institution, provided that any subsequent transfer of
said shares by said institution shall be conducted in the manner set forth in
this bylaw.
(3) A stockholder's transfer of any or all of such
stockholder's shares to the corporation or to any other stockholder of the
corporation.
(4) A stockholder's transfer of any or all of such
stockholder's shares to a person who, at the time of such transfer, is an
officer or director of the corporation.
(5) A corporate stockholder's transfer of any or all of its
shares pursuant to and in accordance with the terms of any merger,
consolidation, reclassification of shares or capital reorganization of the
corporate stockholder, or pursuant to a sale of all or substantially all of the
stock or assets of a corporate stockholder.
(6) A corporate stockholder's transfer of any or all of its
shares to any or all of its stockholders.
(7) A transfer by a stockholder which is a limited or general
partnership to any or all of its partners or former partners.
In any such case, the transferee, assignee, or other recipient shall
receive and hold such stock subject to the provisions of this bylaw, and there
shall be no further transfer of such stock except in accord with this bylaw.
(g) The provisions of this bylaw may be waived with respect to any
transfer either by the corporation, upon duly authorized action of its Board of
Directors, or by the stockholders, upon the express written consent of the
owners of a majority of the voting power of the corporation (excluding the votes
represented by those shares to be transferred by the transferring stockholder).
This bylaw may be amended or repealed either by a duly authorized action of the
Board of Directors or by the stockholders, upon the express written consent of
the owners of a majority of the voting power of the corporation.
(h) Any sale or transfer, or purported sale or transfer, of
securities of the corporation shall be null and void unless the terms,
conditions, and provisions of this bylaw are strictly observed and followed.
(i) The foregoing right of first refusal shall terminate on either of
the following dates, whichever shall first occur:
(1) On November 1, 2005; or
(2) Upon the date securities of the corporation are first
offered to the public pursuant to a registration statement filed with, and
declared effective by, the United States Securities and Exchange Commission
under the Securities Act of 1933, as amended.
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(j) The certificates representing shares of stock of the corporation
shall bear on their face the following legend so long as the foregoing right of
first refusal remains in effect:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION
AND/OR ITS ASSIGNEE(S), AS PROVIDED IN THE BYLAWS OF THE
CORPORATION."
(k) The provisions of this Section 46 shall not apply to any
stockholder so long as such stockholder (i) either (A) holds Series D Preferred
Stock in the Company and has not sold any shares of such stock or (B) holds more
than four million (4,000,000) shares of the capital stock of the corporation;
and (ii) is a party to a tag along rights agreement with the corporation under
which (A) such stockholder agrees to notify the corporation prior to any sale of
shares of capital stock of the corporation by such stockholder, (B) such
stockholder agrees to permit all other stockholders of the corporation to sell
their pro rata share of capital stock as part of such sale and (C) it is agreed
that the tag along rights of the stockholders can be waived by the Board of
Directors of the corporation.
ARTICLE XV
LOANS TO OFFICERS
SECTION 47. LOANS TO OFFICERS. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a Director of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance
may be with or without interest and may be unsecured, or secured in such manner
as the Board of Directors shall approve, including, without limitation, a pledge
of shares of stock of the corporation. Nothing in these Bylaws shall be deemed
to deny, limit or restrict the powers of guaranty or warranty of the corporation
at common law or under any statute.
ARTICLE XVI
MISCELLANEOUS
SECTION 48. ANNUAL REPORT.
(a) Subject to the provisions of paragraph (b) of this Bylaw, the
Board of Directors shall cause an annual report to be sent to each stockholder
of the corporation not later than one hundred twenty (120) days after the close
of the corporation's fiscal year. Such report shall include a balance sheet as
of the end of such fiscal year and an income statement and statement of changes
in financial position for such fiscal year, accompanied by any report thereon of
independent accounts or, if there is no such report, the certificate of an
authorized officer of the corporation that such statements were prepared without
audit from the books and records of the corporation. When there are more than
100 stockholders of record of the corporation's shares, as determined by Section
605 of the California Corporations Code, additional information as required by
Section 1501(b) of the California Corporations Code shall
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also be contained in such report, provided that if the corporation has a class
of securities registered under Section 12 of the 1934 Act, that Act shall take
precedence. Such report shall be sent to stockholders at least fifteen (15)
days prior to the next annual meeting of stockholders after the end of the
fiscal year to which it relates.
(b) If and so long as there are fewer than 100 holders of record of
the corporation's shares, the requirement of sending of an annual report to the
stockholders of the corporation is hereby expressly waived.
25.
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AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
SCIENTIFIC LEARNING CORPORATION
SHERYLE J. BOLTON 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. She is the duly elected and acting President and Chief Executive Officer 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). Forty Million (40,000,000) shares shall be Common Stock,
each having a par value of one-tenth of one cent ($0.001). One Million
(1,000,000) shares shall be Preferred Stock, each having a par value of
one-tenth of one cent ($0.001).
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 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.
V.
For the management of the business and for the conduct of the affairs of
the Company, and in further definition, limitation and regulation of the powers
of the Company, of its directors and of its stockholders or any class thereof,
as the case may be, it is further provided that:
A.
1. 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 exclusively
by one or more resolutions adopted by the Board of Directors.
2. Subject to the rights of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, following the
closing of an initial public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, (the "1933 Act"),
covering the offer and sale of Common Stock to the public (the "Initial Public
Offering"), the directors shall be divided into three classes, designated as
Class I, Class II and Class III, respectively. Directors shall be assigned to
each class in accordance with a resolution or resolutions adopted by the Board
of Directors. At the first annual meeting of stockholders following the closing
of the Initial Public Offering, the term of office of the Class I directors
shall expire and Class I directors shall be elected for a full term of three
years. At the second annual meeting of stockholders following the closing of
the Initial Public Offering, the term of office of the Class II directors shall
expire and Class II directors shall be elected for a full term of three years.
At the third annual meeting of stockholders following the closing of the Initial
Public Offering, the term of office of the Class III directors shall expire and
Class III directors shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting.
3. a. Subject to the rights of the holders of any series of
Preferred Stock, the Board of Directors or any individual director may be
removed from office at any time (i) with cause by the affirmative vote of the
holders of a majority of the voting power of all the then-outstanding shares of
voting stock of the corporation, entitled to vote at an election of directors
(the "Voting Stock") or (ii) without cause by the affirmative vote of the
holders of at
2.
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least sixty-six and two-thirds percent (66 2/3%) of the voting power of all the
then-outstanding shares of the Voting Stock.
b. Subject to the rights of the holders of any series of
Preferred Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, except as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, even though less than a quorum of the Board of
Directors, and not by the stockholders. Any director elected in accordance with
the preceding sentence shall hold office for the remainder of the full term of
the director for which the vacancy was created or occurred and until such
director's successor shall have been elected and qualified.
4. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws
may be altered or amended or new Bylaws adopted by the affirmative vote of at
least sixty-six and two-thirds percent (66-2/3%) of the Voting Stock of all of
the then-outstanding shares of the voting stock of the Company entitled to vote.
The Board of Directors shall also have the power to adopt, amend, or repeal
Bylaws.
5. The directors of the Company need not be elected by written
ballot unless the Bylaws so provide.
6. No action shall be taken by the stockholders of the Company
except at an annual or special meeting of stockholders called in accordance with
the Bylaws, or by written consent of stockholders in accordance with the Bylaws
prior to the closing of the Initial Public Offering, and following the closing
of the Initial Public Offering no action shall be taken by the stockholders by
written consent.
7. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the Company shall be given in the manner provided in the
Bylaws of the Company.
VI.
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 VI 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.
3.
<PAGE>
B. Any repeal or modification of this Article VI shall be prospective and
shall not affect the rights under this Article VI in effect at the time of the
alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VII.
A. 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, except as provided in paragraph B. of this
Article VII, and all rights conferred upon the stockholders herein are granted
subject to this reservation.
B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the voting stock of the Company required by law,
this Certificate of Incorporation or any certificate of designation of Preferred
Stock, the affirmative vote of the holders of at least sixty-six and two-thirds
percent (66-2/3%) of the Voting Stock of all of the then-outstanding shares of
the voting stock, voting together as a single class, shall be required to alter,
amend or repeal Articles V, VI, and VII."
[This Space Intentionally Left Blank]
4.
<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
Chief Executive Officer in Berkeley, California this ____ day of ________, 1999.
SCIENTIFIC LEARNING CORPORATION
By:
---------------------------------------
SHERYLE J. BOLTON
President and Chief Executive Officer
5.
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AMENDED AND RESTATED BYLAWS
OF
SCIENTIFIC LEARNING CORPORATION
(A DELAWARE CORPORATION)
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Section 1. Registered Office. . . . . . . . . . . . . . . . . . . . . . . .1
Section 2. Other Offices. . . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE II CORPORATE SEAL. . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Section 3. Corporate Seal . . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE III STOCKHOLDERS' MEETINGS. . . . . . . . . . . . . . . . . . . . . . . .1
Section 4. Place of Meetings. . . . . . . . . . . . . . . . . . . . . . . .1
Section 5. Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . .1
Section 6. Special Meetings . . . . . . . . . . . . . . . . . . . . . . . .3
Section 7. Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . .4
Section 8. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Section 9. Adjournment and Notice of Adjourned Meetings . . . . . . . . . .4
Section 10. Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . .5
Section 11. Joint Owners of Stock. . . . . . . . . . . . . . . . . . . . . .5
Section 12. List of Stockholders . . . . . . . . . . . . . . . . . . . . . .5
Section 13. Action Without Meeting . . . . . . . . . . . . . . . . . . . . .5
Section 14. Organization . . . . . . . . . . . . . . . . . . . . . . . . . .5
ARTICLE IV DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Section 15. Number and Term of Office. . . . . . . . . . . . . . . . . . . .6
Section 16. Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Section 17. Classes Of Directors.. . . . . . . . . . . . . . . . . . . . . .6
Section 18. Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Section 19. Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . .7
Section 20. Removal. . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Section 21. Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Section 22. Quorum and Voting. . . . . . . . . . . . . . . . . . . . . . . .8
Section 23. Action Without Meeting . . . . . . . . . . . . . . . . . . . . .9
Section 24. Fees and Compensation. . . . . . . . . . . . . . . . . . . . . .9
Section 25. Committees . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Section 26. Organization . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE V OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 27. Officers Designated. . . . . . . . . . . . . . . . . . . . . . 10
Section 28. Tenure and Duties of Officers. . . . . . . . . . . . . . . . . 11
1
<PAGE>
Section 29. Delegation of Authority. . . . . . . . . . . . . . . . . . . . 12
Section 30. Resignations . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 31. Removal. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
OF SECURITIES OWNED BY THE CORPORATION. . . . . . . . . . . . . . . 12
Section 32. Execution of Corporate Instruments . . . . . . . . . . . . . . 12
Section 33. Voting of Securities Owned by the Corporation. . . . . . . . . 13
ARTICLE VII SHARES OF STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 34. Form and Execution of Certificates . . . . . . . . . . . . . . 13
Section 35. Lost Certificates. . . . . . . . . . . . . . . . . . . . . . . 14
Section 36. Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 37. Fixing Record Dates. . . . . . . . . . . . . . . . . . . . . . 14
Section 38. Registered Stockholders. . . . . . . . . . . . . . . . . . . . 15
ARTICLE VIII OTHER SECURITIES OF THE CORPORATION . . . . . . . . . . . . . . . . 15
Section 39. Execution of Other Securities. . . . . . . . . . . . . . . . . 15
ARTICLE IX DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 40. Declaration of Dividends . . . . . . . . . . . . . . . . . . . 15
Section 41. Dividend Reserve . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE X FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 42. Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE XI INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 43. Indemnification of Directors, Executive Officers,
Other Officers, Employees and Other Agents . . . . . . . . . . 16
ARTICLE XII NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 44. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE XIII AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 45. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE XIV LOANS TO OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 46. Loans to Officers. . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
2.
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
SCIENTIFIC LEARNING CORPORATION
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the corporation
in the State of Delaware shall be in the City of Dover, County of Kent.
SECTION 2. OTHER OFFICES. The corporation shall also have and maintain
an office or principal place of business at such place as may be fixed by the
Board of Directors, and may also have offices at such other places, both within
and without the State of Delaware as the Board of Directors may from time to
time determine or the business of the corporation may require.
ARTICLE II
CORPORATE SEAL
SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die
bearing the name of the corporation and the inscription, "Corporate
Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to
be impressed or affixed or reproduced or otherwise.
ARTICLE III
STOCKHOLDERS' MEETINGS
SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the principal office of the corporation required
to be maintained pursuant to Section 2 hereof.
SECTION 5. ANNUAL MEETING.
(a) The annual meeting of the stockholders of the corporation, for
the purpose of election of directors and for such other business as may lawfully
come before it, shall be held on such date and at such time as may be designated
from time to time by the Board of Directors.
(b) At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To
be properly brought before an annual meeting, business must be: (A) specified
in the notice of meeting (or any
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supplement thereto) given by or at the direction of the Board of Directors, (B)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors, or (C) otherwise properly brought before the meeting by a
stockholder. For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation not later than the close of business on the sixtieth (60th) day nor
earlier than the close of business on the ninetieth (90th) day prior to the
first anniversary of the preceding year's annual meeting; provided, however,
that in the event that no annual meeting was held in the previous year or the
date of the annual meeting has been changed by more than thirty (30) days from
the date contemplated at the time of the previous year's proxy statement, notice
by the stockholder to be timely must be so received not earlier than the close
of business on the ninetieth (90th) day prior to such annual meeting and not
later than the close of business on the later of the sixtieth (60th) day prior
to such annual meeting or, in the event public announcement of the date of such
annual meeting is first made by the corporation fewer than seventy (70) days
prior to the date of such annual meeting, the close of business on the tenth
(10th) day following the day on which public announcement of the date of such
meeting is first made by the corporation. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the annual meeting: (i) a brief description of the business desired to
be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (ii) the name and address, as they appear on the
corporation's books, of the stockholder proposing such business, (iii) the class
and number of shares of the corporation which are beneficially owned by the
stockholder, (iv) any material interest of the stockholder in such business and
(v) any other information that is required to be provided by the stockholder
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "1934 Act"), in his capacity as a proponent to a stockholder proposal.
Notwithstanding the foregoing, in order to include information with respect to a
stockholder proposal in the proxy statement and form of proxy for a
stockholders' meeting, stockholders must provide notice as required by the
regulations promulgated under the 1934 Act. Notwithstanding anything in these
Bylaws to the contrary, no business shall be conducted at any annual meeting
except in accordance with the procedures set forth in this paragraph (b). The
chairman of the annual meeting shall, if the facts warrant, determine and
declare at the meeting that business was not properly brought before the meeting
and in accordance with the provisions of this paragraph (b), and, if he should
so determine, he shall so declare at the meeting that any such business not
properly brought before the meeting shall not be transacted.
(c) Only persons who are nominated in accordance with the procedures
set forth in this paragraph (c) shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the corporation
may be made at a meeting of stockholders by or at the direction of the Board of
Directors or by any stockholder of the corporation entitled to vote in the
election of directors at the meeting who complies with the notice procedures set
forth in this paragraph (c). Such nominations, other than those made by or at
the direction of the Board of Directors, shall be made pursuant to timely notice
in writing to the Secretary of the corporation in accordance with the provisions
of paragraph (b) of this Section 5. Such stockholder's notice shall set forth
(i) as to each person, if any, whom the stockholder proposes to nominate for
election or re-election as a director: (A) the name, age, business address and
residence address of such person, (B) the principal occupation or employment of
such person,
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(C) the class and number of shares of the corporation which are beneficially
owned by such person, (D) a description of all arrangements or understandings
between the stockholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nominations are to be made by the
stockholder, and (E) any other information relating to such person that is
required to be disclosed in solicitations of proxies for election of directors,
or is otherwise required, in each case pursuant to Regulation 14A under the 1934
Act (including without limitation such person's written consent to being named
in the proxy statement, if any, as a nominee and to serving as a director if
elected); and (ii) as to such stockholder giving notice, the information
required to be provided pursuant to paragraph (b) of this Section 5. At the
request of the Board of Directors, any person nominated by a stockholder for
election as a director shall furnish to the Secretary of the corporation that
information required to be set forth in the stockholder's notice of nomination
which pertains to the nominee. No person shall be eligible for election as a
director of the corporation unless nominated in accordance with the procedures
set forth in this paragraph (c). The chairman of the meeting shall, if the
facts warrant, determine and declare at the meeting that a nomination was not
made in accordance with the procedures prescribed by these Bylaws, and if he
should so determine, he shall so declare at the meeting, and the defective
nomination shall be disregarded.
(d) For purposes of this Section 5, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the 1934 Act.
SECTION 6. SPECIAL MEETINGS.
(a) Special meetings of the stockholders of the corporation may be
called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer or (iii) the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exists any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption), and shall be held at such place, on such date, and at
such time as the Board of Directors, shall fix.
(b) If a special meeting is called by any person or persons other
than the Board of Directors, the request shall be in writing, specifying the
general nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the Chairman of the Board of Directors, the Chief Executive
Officer, or the Secretary of the corporation. No business may be transacted at
such special meeting otherwise than specified in such notice. The Board of
Directors shall determine the time and place of such special meeting, which
shall be held not less than thirty-five (35) nor more than one hundred twenty
(120) days after the date of the receipt of the request. Upon determination of
the time and place of the meeting, the officer receiving the request shall cause
notice to be given to the stockholders entitled to vote, in accordance with the
provisions of Section 7 of these Bylaws. If the notice is not given within
sixty (60) days after the receipt of the request, the person or persons
requesting the meeting may set the time and place of the meeting and give the
notice. Nothing contained in this paragraph (b) shall be construed as limiting,
3.
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fixing, or affecting the time when a meeting of stockholders called by action of
the Board of Directors may be held.
SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or
the Certificate of Incorporation, written notice of each meeting of stockholders
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder entitled to vote at such meeting, such
notice to specify the place, date and hour and purpose or purposes of the
meeting. Notice of the time, place and purpose of any meeting of stockholders
may be waived in writing, signed by the person entitled to notice thereof,
either before or after such meeting, and will be waived by any stockholder by
his attendance thereat in person or by proxy, except when the stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Any stockholder so waiving notice of such meeting shall be
bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.
SECTION 8. QUORUM. At all meetings of stockholders, except where
otherwise provided by statute or by the Certificate of Incorporation, or by
these Bylaws, the presence, in person or by proxy duly authorized, of the
holders of a majority of the outstanding shares of stock entitled to vote shall
constitute a quorum for the transaction of business. In the absence of a
quorum, any meeting of stockholders may be adjourned, from time to time, either
by the chairman of the meeting or by vote of the holders of a majority of the
shares represented thereat, but no other business shall be transacted at such
meeting. The stockholders present at a duly called or convened meeting, at
which a quorum is present, may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum. Except as otherwise provided by law, the Certificate of Incorporation
or these Bylaws, all action taken by the holders of a majority of the vote cast,
excluding abstentions, at any meeting at which a quorum is present shall be
valid and binding upon the corporation; provided, however, that directors shall
be elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors. Where a separate vote by a class or classes or series is required,
except where otherwise provided by the statute or by the Certificate of
Incorporation or these Bylaws, a majority of the outstanding shares of such
class or classes or series, present in person or represented by proxy, shall
constitute a quorum entitled to take action with respect to that vote on that
matter and, except where otherwise provided by statute or by the Certificate of
Incorporation or these Bylaws, the affirmative vote of the majority (plurality,
in the case of the election of directors) of the votes cast, including
abstentions, by the holders of shares of such class or classes or series shall
be the act of such class or classes or series.
SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting
of stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes, excluding abstentions. When a meeting is adjourned to another
time or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken.
At the adjourned meeting, the corporation may transact any business which might
have been transacted at the original meeting. If the adjournment is for more
than thirty (30) days or if after the adjournment a new record date is fixed for
the adjourned meeting,
4.
<PAGE>
a notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
SECTION 10. VOTING RIGHTS. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 12 of
these Bylaws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote shall have the right to do so either in person or by an
agent or agents authorized by a proxy granted in accordance with Delaware law.
An agent so appointed need not be a stockholder. No proxy shall be voted after
three (3) years from its date of creation unless the proxy provides for a longer
period.
SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities having
voting power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety, or otherwise, or if two (2) or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (a) if only
one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the
majority so voting binds all; (c) if more than one (1) votes, but the vote is
evenly split on any particular matter, each faction may vote the securities in
question proportionally, or may apply to the Delaware Court of Chancery for
relief as provided in the General Corporation Law of Delaware, Section 217(b).
If the instrument filed with the Secretary shows that any such tenancy is held
in unequal interests, a majority or even-split for the purpose of subsection (c)
shall be a majority or even-split in interest.
SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make,
at least ten (10) days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at said meeting, arranged in alphabetical
order, showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held. The list shall be
produced and kept at the time and place of meeting during the whole time thereof
and may be inspected by any stockholder who is present.
SECTION 13. ACTION WITHOUT MEETING. No action shall be taken by the
stockholders except at an annual or special meeting of stockholders called in
accordance with these Bylaws, and no action shall be taken by the stockholders
by written consent.
SECTION 14. ORGANIZATION.
(a) At every meeting of stockholders, the Chairman of the Board of
Directors, or, if a Chairman has not been appointed or is absent, the President,
or, if the President is absent, a chairman of the meeting chosen by a majority
in interest of the stockholders entitled to vote,
5.
<PAGE>
present in person or by proxy, shall act as chairman. The Secretary, or, in his
absence, an Assistant Secretary directed to do so by the President, shall act as
secretary of the meeting.
(b) The Board of Directors of the corporation shall be entitled to
make such rules or regulations for the conduct of meetings of stockholders as it
shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts as, in the judgment of such chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to stockholders of
record of the corporation and their duly authorized and constituted proxies and
such other persons as the chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to questions or comments by participants and regulation of the
opening and closing of the polls for balloting on matters which are to be voted
on by ballot. Unless and to the extent determined by the Board of Directors or
the chairman of the meeting, meetings of stockholders shall not be required to
be held in accordance with rules of parliamentary procedure.
ARTICLE IV
DIRECTORS
SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of
directors of the corporation shall be fixed in accordance with the Certificate
of Incorporation. Directors need not be stockholders unless so required by the
Certificate of Incorporation. If for any cause, the directors shall not have
been elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.
SECTION 16. POWERS. The powers of the corporation shall be exercised,
its business conducted and its property controlled by the Board of Directors,
except as may be otherwise provided by statute or by the Certificate of
Incorporation.
SECTION 17. CLASSES OF DIRECTORS. Subject to the rights of the holders
of any series of Preferred Stock to elect additional directors under specified
circumstances, following the closing of the Initial Public Offering, the
directors shall be divided into three classes designated as Class I, Class II
and Class III, respectively. Directors shall be assigned to each class in
accordance with a resolution or resolutions adopted by the Board of Directors.
At the first annual meeting of stockholders following the closing of the Initial
Public Offering, the term of office of the Class I directors shall expire and
Class I directors shall be elected for a full term of three years. At the
second annual meeting of stockholders following the Closing of the Initial
Public Offering, the term of office of the Class II directors shall expire and
Class II directors shall be elected for a full term of three years. At the
third annual meeting of stockholders following the Closing of the Initial Public
Offering, the term of office of the Class III directors shall expire and
Class III directors shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three
6.
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years to succeed the directors of the class whose terms expire at such annual
meeting.
Notwithstanding the foregoing provisions of this Article, each director
shall serve until his successor is duly elected and qualified or until his
death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
SECTION 18. VACANCIES. Unless otherwise provided in the Certificate of
Incorporation, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by stockholders, be filled only
by the affirmative vote of a majority of the directors then in office, even
though less than a quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the director for which the vacancy was created or occurred and
until such director's successor shall have been elected and qualified. A
vacancy in the Board of Directors shall be deemed to exist under this Bylaw in
the case of the death, removal or resignation of any director.
SECTION 19. RESIGNATION. Any director may resign at any time by
delivering his written resignation to the Secretary, such resignation to specify
whether it will be effective at a particular time, upon receipt by the Secretary
or at the pleasure of the Board of Directors. If no such specification is made,
it shall be deemed effective at the pleasure of the Board of Directors. When
one or more directors shall resign from the Board of Directors, effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each Director so chosen shall hold office for the unexpired
portion of the term of the Director whose place shall be vacated and until his
successor shall have been duly elected and qualified.
SECTION 20. REMOVAL. Subject to the rights of the holders of any series
of Preferred Stock, the Board of Directors or any individual director may be
removed from office at any time (i) with cause by the affirmative vote of the
holders of a majority of the voting power of all the then-outstanding shares of
voting stock of the corporation, entitled to vote at an election of directors
(the "Voting Stock") or (ii) without cause by the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all the then-outstanding shares of the Voting Stock.
SECTION 21. MEETINGS.
(a) ANNUAL MEETINGS. The annual meeting of the Board of Directors
shall be held immediately before or after the annual meeting of stockholders and
at the place where such meeting is held. No notice of an annual meeting of the
Board of Directors shall be necessary and such meeting shall be held for the
purpose of electing officers and transacting such other business as may lawfully
come before it.
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(b) REGULAR MEETINGS. Except as hereinafter otherwise provided,
regular meetings of the Board of Directors shall be held in the office of the
corporation required to be maintained pursuant to Section 2 hereof. Unless
otherwise restricted by the Certificate of Incorporation, regular meetings of
the Board of Directors may also be held at any place within or without the State
of Delaware which has been designated by resolution of the Board of Directors or
the written consent of all directors.
(c) SPECIAL MEETINGS. Unless otherwise restricted by the Certificate
of Incorporation, special meetings of the Board of Directors may be held at any
time and place within or without the State of Delaware whenever called by the
Chairman of the Board, the President or any two of the directors.
(d) TELEPHONE MEETINGS. Any member of the Board of Directors, or of
any committee thereof, may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
by such means shall constitute presence in person at such meeting.
(e) NOTICE OF MEETINGS. Notice of the time and place of all special
meetings of the Board of Directors shall be orally or in writing, by telephone,
including a voice messaging system or other system or technology designed to
record and communicate messages, facsimile, telegraph or telex, or by electronic
mail or other electronic means, during normal business hours, at least
twenty-four (24) hours before the date and time of the meeting, or sent in
writing to each director by first class mail, postage prepaid, at least three
(3) days before the date of the meeting. Notice of any meeting may be waived in
writing at any time before or after the meeting and will be waived by any
director by attendance thereat, except when the director attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
(f) WAIVER OF NOTICE. The transaction of all business at any meeting
of the Board of Directors, or any committee thereof, however called or noticed,
or wherever held, shall be as valid as though had at a meeting duly held after
regular call and notice, if a quorum be present and if, either before or after
the meeting, each of the directors not present shall sign a written waiver of
notice. All such waivers shall be filed with the corporate records or made a
part of the minutes of the meeting.
SECTION 22. QUORUM AND VOTING.
(a) Unless the Certificate of Incorporation requires a greater number
and except with respect to indemnification questions arising under Section 43
hereof, for which a quorum shall be one-third of the exact number of directors
fixed from time to time in accordance with the Certificate of Incorporation, a
quorum of the Board of Directors shall consist of a majority of the exact number
of directors fixed from time to time by the Board of Directors in accordance
with the Certificate of Incorporation; provided, however, at any meeting whether
a quorum be present or otherwise, a majority of the directors present may
adjourn from time to time until the time fixed for the next regular meeting of
the Board of Directors, without notice other than by announcement at the
meeting.
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(b) At each meeting of the Board of Directors at which a quorum is
present, all questions and business shall be determined by the affirmative vote
of a majority of the directors present, unless a different vote be required by
law, the Certificate of Incorporation or these Bylaws.
SECTION 23. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
SECTION 24. FEES AND COMPENSATION. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any meeting of a committee of the Board
of Directors. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor.
SECTION 25. COMMITTEES.
(a) EXECUTIVE COMMITTEE. The Board of Directors may by resolution
passed by a majority of the whole Board of Directors appoint an Executive
Committee to consist of one (1) or more members of the Board of Directors. The
Executive Committee, to the extent permitted by law and provided in the
resolution of the Board of Directors shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to (i) approving or adopting, or recommending to
the stockholders, any action or matter expressly required by Delaware the
General Corporation Law to be submitted to stockholders for approval, or
(ii) adopting, amending or repealing any bylaw of the corporation.
(b) OTHER COMMITTEES. The Board of Directors may, by resolution
passed by a majority of the whole Board of Directors, from time to time appoint
such other committees as may be permitted by law. Such other committees
appointed by the Board of Directors shall consist of one (1) or more members of
the Board of Directors and shall have such powers and perform such duties as may
be prescribed by the resolution or resolutions creating such committees, but in
no event shall such committee have the powers denied to the Executive Committee
in these Bylaws.
(c) TERM. Each member of a committee of the Board of Directors shall
serve a term on the committee coexistent with such member's term on the Board of
Directors. The Board of Directors, subject to the provisions of subsections (a)
or (b) of this Bylaw may at any time increase or decrease the number of members
of a committee or terminate the existence of a committee. The membership of a
committee member shall terminate on the date of his death or voluntary
resignation from the committee or from the Board of Directors. The Board of
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Directors may at any time for any reason remove any individual committee member
and the Board of Directors may fill any committee vacancy created by death,
resignation, removal or increase in the number of members of the committee. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee, and, in addition, in the absence or disqualification of any
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
(d) MEETINGS. Unless the Board of Directors shall otherwise provide,
regular meetings of the Executive Committee or any other committee appointed
pursuant to this Section 25 shall be held at such times and places as are
determined by the Board of Directors, or by any such committee, and when notice
thereof has been given to each member of such committee, no further notice of
such regular meetings need be given thereafter. Special meetings of any such
committee may be held at any place which has been determined from time to time
by such committee, and may be called by any director who is a member of such
committee, upon written notice to the members of such committee of the time and
place of such special meeting given in the manner provided for the giving of
written notice to members of the Board of Directors of the time and place of
special meetings of the Board of Directors. Notice of any special meeting of
any committee may be waived in writing at any time before or after the meeting
and will be waived by any director by attendance thereat, except when the
director attends such special meeting for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. A majority of the authorized number
of members of any such committee shall constitute a quorum for the transaction
of business, and the act of a majority of those present at any meeting at which
a quorum is present shall be the act of such committee.
SECTION 26. ORGANIZATION. At every meeting of the directors, the
Chairman of the Board of Directors, or, if a Chairman has not been appointed or
is absent, the President, or if the President is absent, the most senior Vice
President, or, in the absence of any such officer, a chairman of the meeting
chosen by a majority of the directors present, shall preside over the meeting.
The Secretary, or in his absence, an Assistant Secretary directed to do so by
the President, shall act as secretary of the meeting.
ARTICLE V
OFFICERS
SECTION 27. OFFICERS DESIGNATED. The officers of the corporation shall
include, if and when designated by the Board of Directors, the Chairman of the
Board of Directors, the Chief Executive Officer, the President, one or more Vice
Presidents, the Secretary, the Chief Financial Officer, the Treasurer, the
Controller, all of whom shall be elected at the annual organizational meeting of
the Board of Directors. The Board of Directors may also appoint one or more
Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such
other officers and agents with such powers and duties as it shall deem
necessary. The Board of Directors may assign such additional titles to one or
more of the officers as it shall deem appropriate. Any one
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person may hold any number of offices of the corporation at any one time unless
specifically prohibited therefrom by law. The salaries and other compensation
of the officers of the corporation shall be fixed by or in the manner designated
by the Board of Directors.
SECTION 28. TENURE AND DUTIES OF OFFICERS.
(a) GENERAL. All officers shall hold office at the pleasure of the
Board of Directors and until their successors shall have been duly elected and
qualified, unless sooner removed. Any officer elected or appointed by the Board
of Directors may be removed at any time by the Board of Directors. If the
office of any officer becomes vacant for any reason, the vacancy may be filled
by the Board of Directors.
(b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of
the Board of Directors, when present, shall preside at all meetings of the
stockholders and the Board of Directors. The Chairman of the Board of Directors
shall perform other duties commonly incident to his office and shall also
perform such other duties and have such other powers as the Board of Directors
shall designate from time to time. If there is no President, then the Chairman
of the Board of Directors shall also serve as the Chief Executive Officer of the
corporation and shall have the powers and duties prescribed in paragraph (c) of
this Section 28.
(c) DUTIES OF PRESIDENT. The President shall preside at all meetings
of the stockholders and at all meetings of the Board of Directors, unless the
Chairman of the Board of Directors has been appointed and is present. Unless
some other officer has been elected Chief Executive Officer of the corporation,
the President shall be the chief executive officer of the corporation and shall,
subject to the control of the Board of Directors, have general supervision,
direction and control of the business and officers of the corporation. The
President shall perform other duties commonly incident to his office and shall
also perform such other duties and have such other powers as the Board of
Directors shall designate from time to time.
(d) DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume and
perform the duties of the President in the absence or disability of the
President or whenever the office of President is vacant. The Vice Presidents
shall perform other duties commonly incident to their office and shall also
perform such other duties and have such other powers as the Board of Directors
or the President shall designate from time to time.
(e) DUTIES OF SECRETARY. The Secretary shall attend all meetings of
the stockholders and of the Board of Directors and shall record all acts and
proceedings thereof in the minute book of the corporation. The Secretary shall
give notice in conformity with these Bylaws of all meetings of the stockholders
and of all meetings of the Board of Directors and any committee thereof
requiring notice. The Secretary shall perform all other duties given him in
these Bylaws and other duties commonly incident to his office and shall also
perform such other duties and have such other powers as the Board of Directors
shall designate from time to time. The President may direct any Assistant
Secretary to assume and perform the duties of the Secretary in the absence or
disability of the Secretary, and each Assistant Secretary shall perform other
duties commonly incident to his office and shall also perform such other duties
and have such other powers as the Board of Directors or the President shall
designate from time to time.
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(f) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial Officer
shall keep or cause to be kept the books of account of the corporation in a
thorough and proper manner and shall render statements of the financial affairs
of the corporation in such form and as often as required by the Board of
Directors or the President. The Chief Financial Officer, subject to the order
of the Board of Directors, shall have the custody of all funds and securities of
the corporation. The Chief Financial Officer shall perform other duties
commonly incident to his office and shall also perform such other duties and
have such other powers as the Board of Directors or the President shall
designate from time to time. The President may direct the Treasurer or any
Assistant Treasurer, or the Controller or any Assistant Controller to assume and
perform the duties of the Chief Financial Officer in the absence or disability
of the Chief Financial Officer, and each Treasurer and Assistant Treasurer and
each Controller and Assistant Controller shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors or the President shall designate from
time to time.
SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may from
time to time delegate the powers or duties of any officer to any other officer
or agent, notwithstanding any provision hereof.
SECTION 30. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.
SECTION 31. REMOVAL. Any officer may be removed from office at any
time, either with or without cause, by the affirmative vote of a majority of the
directors in office at the time, or by the unanimous written consent of the
directors in office at the time, or by any committee or superior officers upon
whom such power of removal may have been conferred by the Board of Directors.
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND
VOTING OF SECURITIES OWNED BY THE CORPORATION
SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors
may, in its discretion, determine the method and designate the signatory officer
or officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on behalf of
the corporation, except where otherwise provided by law or these Bylaws, and
such execution or signature shall be binding upon the corporation.
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All checks and drafts drawn on banks or other depositaries on funds to the
credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock
and other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chairman of the Board of Directors, the Chief Executive Officer, the
President, or any Vice President.
ARTICLE VII
SHARES OF STOCK
SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the
shares of stock of the corporation shall be in such form as is consistent with
the Certificate of Incorporation and applicable law. Every holder of stock in
the corporation shall be entitled to have a certificate signed by or in the name
of the corporation by the Chairman of the Board of Directors, or the President
or any Vice President and by the Treasurer or Assistant Treasurer or the
Secretary or Assistant Secretary, certifying the number of shares owned by him
in the corporation. Any or all of the signatures on the certificate may be
facsimiles. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued with the same effect as if he were such officer,
transfer agent, or registrar at the date of issue. Each certificate shall state
upon the face or back thereof, in full or in summary, all of the powers,
designations, preferences, and rights, and the limitations or restrictions of
the shares authorized to be issued or shall, except as otherwise required by
law, set forth on the face or back a statement that the corporation will furnish
without charge to each stockholder who so requests 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. Within a reasonable time after
the issuance or transfer of uncertificated stock, the corporation shall send to
the registered owner thereof a written notice containing the information
required to be set forth or stated on certificates pursuant to this section or
otherwise required by law or with respect to this section a statement that the
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corporation will furnish without charge to each stockholder who so requests the
powers, designations, preferences and relative participating, optional or oher
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Except as
otherwise expressly provided by law, the rights and obligations of the holders
of certificates representing stock of the same class and series shall be
identical.
SECTION 35. LOST CERTIFICATES. A new certificate or certificates shall
be issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require or to
give the corporation a surety bond in such form and amount as it may direct as
indemnity against any claim that may be made against the corporation with
respect to the certificate alleged to have been lost, stolen, or destroyed.
SECTION 36. TRANSFERS.
(a) Transfers of record of shares of stock of the corporation shall
be made only upon its books by the holders thereof, in person or by attorney
duly authorized, and upon the surrender of a properly endorsed certificate or
certificates for a like number of shares.
(b) The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
SECTION 37. FIXING RECORD DATES.
(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix, in advance, a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall not be more than sixty (60) nor less than ten (10) days before the date of
such meeting. If no record date is fixed by the Board of Directors, the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held. A determination
of stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
(b) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
record date shall not precede the date upon which the resolution fixing the
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record date is adopted by the Board of Directors, and which record date shall be
not more than sixty (60) days prior to such action. If no record date has been
fixed by the Board of Directors, the record date for determining stockholders
for any such purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
SECTION 38. REGISTERED STOCKHOLDERS. The corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and shall not
be bound to recognize any equitable or other claim to or interest in such share
or shares on the part of any other person whether or not it shall have express
or other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and
other corporate securities of the corporation, other than stock certificates
(covered in Section 34), may be signed by the Chairman of the Board of
Directors, the President or any Vice President, or such other person as may be
authorized by the Board of Directors, and the corporate seal impressed thereon
or a facsimile of such seal imprinted thereon and attested by the signature of
the Secretary or an Assistant Secretary, or the Chief Financial Officer or
Treasurer or an Assistant Treasurer; provided, however, that where any such
bond, debenture or other corporate security shall be authenticated by the manual
signature, or where permissible facsimile signature, of a trustee under an
indenture pursuant to which such bond, debenture or other corporate security
shall be issued, the signatures of the persons signing and attesting the
corporate seal on such bond, debenture or other corporate security may be the
imprinted facsimile of the signatures of such persons. Interest coupons
appertaining to any such bond, debenture or other corporate security,
authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an
Assistant Treasurer of the corporation or such other person as may be authorized
by the Board of Directors, or bear imprinted thereon the facsimile signature of
such person. In case any officer who shall have signed or attested any bond,
debenture or other corporate security, or whose facsimile signature shall appear
thereon or on any such interest coupon, shall have ceased to be such officer
before the bond, debenture or other corporate security so signed or attested
shall have been delivered, such bond, debenture or other corporate security
nevertheless may be adopted by the corporation and issued and delivered as
though the person who signed the same or whose facsimile signature shall have
been used thereon had not ceased to be such officer of the corporation.
ARTICLE IX
DIVIDENDS
SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital stock
of the corporation, subject to the provisions of the Certificate of
Incorporation, if any, may be declared by the Board of Directors pursuant to law
at any regular or special meeting. Dividends may be paid in cash, in property,
or in shares of the capital stock, subject to the provisions of the Certificate
of Incorporation.
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SECTION 41. DIVIDEND RESERVE. Before payment of any dividend, there may
be set aside out of any funds of the corporation available for dividends such
sum or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
ARTICLE X
FISCAL YEAR
SECTION 42. FISCAL YEAR. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.
ARTICLE XI
INDEMNIFICATION
SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER
OFFICERS, EMPLOYEES AND OTHER AGENTS.
(a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall
indemnify its directors and executive officers (for the purposes of this Article
XI, "executive officers shall have the meaning defined in Rule 3b-7 promulgated
under the 1934 Act) to the fullest extent not prohibited by the Delaware General
Corporation Law; provided, however, that the corporation may modify the extent
of such indemnification by individual contracts with its directors and executive
officers; and, provided, further, that the corporation shall not be required to
indemnify any director or executive officer in connection with any proceeding
(or part thereof) initiated by such person unless (i) such indemnification is
expressly required to be made by law, (ii) the proceeding was authorized by the
Board of Directors of the corporation, (iii) such indemnification is provided by
the corporation, in its sole discretion, pursuant to the powers vested in the
corporation under the Delaware General Corporation Law or (iv) such
indemnification is required to be made under subsection (d).
(b) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation
shall have power to indemnify its other officers, employees and other agents as
set forth in the Delaware General Corporation Law.
(c) EXPENSES. The corporation shall advance to any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director or executive
officer of the corporation, or is or was serving at the request of the
corporation as a director or executive officer of another corporation,
partnership, joint venture, trust or other enterprise, prior to the final
disposition of the proceeding, promptly following request therefor, all expenses
incurred by any director or executive officer in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person
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to repay said amounts if it should be determined ultimately that such person is
not entitled to be indemnified under this Bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to
paragraph (e) of this Bylaw, no advance shall be made by the corporation to an
executive officer of the corporation (except by reason of the fact that such
executive officer is or was a director of the corporation in which event this
paragraph shall not apply) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, if a determination is reasonably and
promptly made (i) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to the proceeding, or (ii) if such
quorum is not obtainable, or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, that
the facts known to the decision-making party at the time such determination is
made demonstrate clearly and convincingly that such person acted in bad faith or
in a manner that such person did not believe to be in or not opposed to the best
interests of the corporation.
(d) ENFORCEMENT. Without the necessity of entering into an express
contract, all rights to indemnification and advances to directors and executive
officers under this Bylaw shall be deemed to be contractual rights and be
effective to the same extent and as if provided for in a contract between the
corporation and the director or executive officer. Any right to indemnification
or advances granted by this Bylaw to a director or executive officer shall be
enforceable by or on behalf of the person holding such right in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting his claim. In connection with any claim for indemnification, the
corporation shall be entitled to raise as a defense to any such action that the
claimant has not met the standards of conduct that make it permissible under the
Delaware General Corporation Law for the corporation to indemnify the claimant
for the amount claimed. In connection with any claim by an executive officer of
the corporation (except in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
executive officer is or was a director of the corporation) for advances, the
corporation shall be entitled to raise a defense as to any such action clear and
convincing evidence that such person acted in bad faith or in a manner that such
person did not believe to be in or not opposed to the best interests of the
corporation, or with respect to any criminal action or proceeding that such
person acted without reasonable cause to believe that his conduct was lawful.
Neither the failure of the corporation (including its Board of Directors,
independent legal counsel or its stockholders) to have made a determination
prior to the commencement of such actionthat indemnification of the claimant is
proper in the circumstances because he has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the corporation (including its Board of Directors, independent
legal counsel or its stockholders) that the claimant has not met such applicable
standard of conduct, shall be a defense to the action or create a presumption
that claimant has not met the applicable standard of conduct. In any suit
brought by a director or executive officer to enforce a right to indemnification
or to an advancement of expenses hereunder, the burden of proving that the
director or executive officer is not entitled to be indemnified, or to such
advancement of expenses, under this Article XI or otherwise shall be on the
corporation.
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(e) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by
this Bylaw shall not be exclusive of any other right which such person may have
or hereafter acquire under any statute, provision of the Certificate of
Incorporation, Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office. The corporation is
specifically authorized to enter into individual contracts with any or all of
its directors, officers, employees or agents respecting indemnification and
advances, to the fullest extent not prohibited by the Delaware General
Corporation Law.
(f) SURVIVAL OF RIGHTS. The rights conferred on any person by this
Bylaw shall continue as to a person who has ceased to be a director, officer,
employee or other agent and shall inure to the benefit of the heirs, executors
and administrators of such a person.
(g) INSURANCE. To the fullest extent permitted by the Delaware
General Corporation Law, the corporation, upon approval by the Board of
Directors, may purchase insurance on behalf of any person required or permitted
to be indemnified pursuant to this Bylaw.
(h) AMENDMENTS. Any repeal or modification of this Bylaw shall only
be prospective and shall not affect the rights under this Bylaw in effect at the
time of the alleged occurrence of any action or omission to act that is the
cause of any proceeding against any agent of the corporation.
(i) SAVING CLAUSE. If this Bylaw or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each director and executive officer to
the full extent not prohibited by any applicable portion of this Bylaw that
shall not have been invalidated, or by any other applicable law. If this
Section 43 shall be invalidated due to the application of the indemnification
provisions of another jurisdiction, then the corporation shall indemnify each
director and executive officer to the full extent under any other applicable
law.
(j) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the
following definitions shall apply:
(i) The term "proceeding" shall be broadly construed and shall
include, without limitation, the investigation, preparation, prosecution,
defense, settlement, arbitration and appeal of, and the giving of testimony in,
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative.
(ii) The term "expenses" shall be broadly construed and shall
include, without limitation, court costs, attorneys' fees, witness fees, fines,
amounts paid in settlement or judgment and any other costs and expenses of any
nature or kind incurred in connection with any proceeding.
(iii) The term the "corporation" shall include, in addition to
the resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger which, if
its separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in
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the same position under the provisions of this Bylaw with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
(iv) References to a "director," "executive officer," "officer,"
"employee," or "agent" of the corporation shall include, without limitation,
situations where such person is serving at the request of the corporation as,
respectively, a director, executive officer, officer, employee, trustee or agent
of another corporation, partnership, joint venture, trust or other enterprise.
(v) References to "other enterprises" shall include employee
benefit plans; references to "fines" shall include any excise taxes assessed on
a person with respect to an employee benefit plan; and references to "serving at
the request of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes duties on, or
involves services by, such director, officer, employee, or agent with respect to
an employee benefit plan, its participants, or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Bylaw.
ARTICLE XII
NOTICES
SECTION 44. NOTICES.
(a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of these
Bylaws, notice is required to be given to any stockholder, it shall be given in
writing, timely and duly deposited in the United States mail, postage prepaid,
and addressed to his last known post office address as shown by the stock record
of the corporation or its transfer agent.
(b) NOTICE TO DIRECTORS. Any notice required to be given to any
director may be given by the method stated in subsection (a), or by facsimile,
telex or telegram, except that such notice other than one which is delivered
personally shall be sent to such address as such director shall have filed in
writing with the Secretary, or, in the absence of such filing, to the last known
post office address of such director.
(c) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a
duly authorized and competent employee of the corporation or its transfer agent
appointed with respect to the class of stock affected, specifying the name and
address or the names and addresses of the stockholder or stockholders, or
director or directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall in the absence of fraud, be prima
facie evidence of the facts therein contained.
(d) TIME NOTICES DEEMED GIVEN. All notices given by mail, as above
provided, shall be deemed to have been given as at the time of mailing, and all
notices given by facsimile, telex or telegram shall be deemed to have been given
as of the sending time recorded at time of transmission.
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(e) METHODS OF NOTICE. It shall not be necessary that the same
method of giving notice be employed in respect of all directors, but one
permissible method may be employed in respect of any one or more, and any other
permissible method or methods may be employed in respect of any other or others.
(f) FAILURE TO RECEIVE NOTICE. The period or limitation of time
within which any stockholder may exercise any option or right, or enjoy any
privilege or benefit, or be required to act, or within which any director may
exercise any power or right, or enjoy any privilege, pursuant to any notice sent
him in the manner above provided, shall not be affected or extended in any
manner by the failure of such stockholder or such director to receive such
notice.
(g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL. Whenever
notice is required to be given, under any provision of law or of the Certificate
of Incorporation or Bylaws of the corporation, to any person with whom
communication is unlawful, the giving of such notice to such person shall not be
required and there shall be no duty to apply to any governmental authority or
agency for a license or permit to give such notice to such person. Any action
or meeting which shall be taken or held without notice to any such person with
whom communication is unlawful shall have the same force and effect as if such
notice had been duly given. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate shall state,
if such is the fact and if notice is required, that notice was given to all
persons entitled to receive notice except such persons with whom communication
is unlawful.
(h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever notice is
required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings or of the
taking of action by written consent without a meeting to such person during the
period between such two consecutive annual meetings, or (ii) all, and at least
two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve month period, have been mailed addressed to such
person at his address as shown on the records of the corporation and have been
returned undeliverable, the giving of such notice to such person shall not be
required. Any action or meeting which shall be taken or held without notice to
such person shall have the same force and effect as if such notice had been duly
given. If any such person shall deliver to the corporation a written notice
setting forth his then current address, the requirement that notice be given to
such person shall be reinstated. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate need not
state that notice was not given to persons to whom notice was not required to be
given pursuant to this paragraph.
ARTICLE XIII
AMENDMENTS
SECTION 45. AMENDMENTS. Subject to paragraph (h) of Section 43 of the
Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the
affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the
voting power of all of the then-outstanding
20.
<PAGE>
shares of the Voting Stock. The Board of Directors shall also have the power to
adopt, amend, or repeal Bylaws.
ARTICLE XIV
LOANS TO OFFICERS
SECTION 46. LOANS TO OFFICERS. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a Director of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance
may be with or without interest and may be unsecured, or secured in such manner
as the Board of Directors shall approve, including, without limitation, a pledge
of shares of stock of the corporation. Nothing in these Bylaws shall be deemed
to deny, limit or restrict the powers of guaranty or warranty of the corporation
at common law or under any statute.
21.
<PAGE>
SCIENTIFIC LEARNING PRINCIPLES CORPORATION
REGISTRATION RIGHTS AGREEMENT
OCTOBER 1, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
1. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Registration; Restrictions On Transfer. . . . . . . . . . . . . . . . 2
2.1 Restrictions on Transfer. . . . . . . . . . . . . . . . . . . 2
2.2 Demand Registration . . . . . . . . . . . . . . . . . . . . . 3
2.3 Piggyback Registrations . . . . . . . . . . . . . . . . . . . 4
2.3.1 Underwriting . . . . . . . . . . . . . . . . . . . . . 4
2.3.2 Right to Terminate Registration. . . . . . . . . . . . 5
2.4 Expenses of Registration. . . . . . . . . . . . . . . . . . . 5
2.5 Obligations of the Company. . . . . . . . . . . . . . . . . . 5
2.6 Termination of Registration Rights. . . . . . . . . . . . . . 6
2.7 Delay of Registration; Furnishing Information . . . . . . . . 6
2.8 Indemnification . . . . . . . . . . . . . . . . . . . . . . . 7
2.9 Assignment of Registration Rights . . . . . . . . . . . . . . 9
2.10 Amendment of Registration Rights. . . . . . . . . . . . . . . 9
2.11 Limitation on Subsequent Registration Rights. . . . . . . . . 9
2.12 "Market Stand-Off" Agreement. . . . . . . . . . . . . . . . . 9
2.13 Rule 144 Reporting. . . . . . . . . . . . . . . . . . . . . .10
3. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
3.1 Governing Law . . . . . . . . . . . . . . . . . . . . . . . .10
3.2 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . .10
3.3 Successors and Assigns. . . . . . . . . . . . . . . . . . . .11
3.4 Severability. . . . . . . . . . . . . . . . . . . . . . . . .11
3.5 Amendment and Waiver. . . . . . . . . . . . . . . . . . . . .11
3.6 Delays or Omissions . . . . . . . . . . . . . . . . . . . . .11
3.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . .11
3.8 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . .12
3.9 Titles and Subtitles. . . . . . . . . . . . . . . . . . . . .12
3.10 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . .12
</TABLE>
i.
<PAGE>
SCIENTIFIC LEARNING PRINCIPLES CORPORATION
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is entered into as of
the 1st day of October, 1996, by and among 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 proposes to sell and issue up to Four Million Four
Hundred Forty-Four Thousand Four Hundred Forty-Four (4,444,444) shares of its
Series B Preferred Stock ("Series B Preferred") and a warrant (the "Warrant") to
purchase up to Two Million Eight Hundred Fifty Seven Thousand One Hundred
Forty-Three (2,857,143) shares of Series C Preferred Stock ("Series C
Preferred") pursuant to the Securities Purchase Agreement dated September 24,
1996, by and between the Company and the Investor (the "Purchase Agreement");
and
WHEREAS, as a condition of entering into the Purchase Agreement, the
Investor has requested that the Company extend to it registration rights as set
forth below.
NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants and conditions set forth in this Agreement and in the
Purchase Agreement, the parties mutually agree as follows:
1. GENERAL
1.1 DEFINITIONS. As used in this Agreement the following terms shall have
the following respective meanings:
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"HOLDER" means any person owning of record Registrable Securities that have
not been sold to the public or any assignee of record of such Registrable
Securities in accordance with Section 2.9 hereof.
"INITIAL OFFERING" means the Company's first firm commitment underwritten
public offering of its Common Stock registered under the Securities Act.
"REGISTER," "registered," and "registration" refer to a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act, and the declaration or ordering of effectiveness of such
registration statement or document.
"REGISTRABLE SECURITIES" means (i) Common Stock of the Company issued or
issuable upon conversion of the Shares; and (ii) any Common Stock of the Company
issued as (or
1.
<PAGE>
issuable upon the conversion or exercise of any warrant, right or other security
which is issued as) a dividend or other distribution with respect to, or in
exchange for or in replacement of, such above-described securities.
Notwithstanding the foregoing, Registrable Securities shall not include any
securities sold by a person to the public either pursuant to a registration
statement or Rule 144 or sold in a private transaction in which the
transferror's rights under Article II of this Agreement are not assigned.
"REGISTRABLE SECURITIES THEN OUTSTANDING" shall be the number of shares
determined by calculating the total number of shares of the Company's Common
Stock that are Registrable Securities and either (1) are then issued and
outstanding or (2) are issuable pursuant to then exercisable or convertible
securities.
"REGISTRATION EXPENSES" shall mean all expenses incurred by the Company in
complying with Sections 2.2 and 2.3 hereof, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, reasonable fees and disbursements not to exceed Fifteen
Thousand Dollars ($15,000) of a single special counsel for the Holders, blue sky
fees and expenses and the expense of any special audits incident to or required
by any such registration (but excluding the compensation of regular employees of
the Company which shall be paid in any event by the Company).
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"SELLING EXPENSES" shall mean all underwriting discounts and selling
commissions applicable to the sale.
"SHARES" shall mean the Company's Series B Preferred issued pursuant to the
Purchase Agreement and any of the Company's Series C Preferred issued upon
exercise of the Warrant.
"SEC" or "COMMISSION" means the Securities and Exchange Commission.
2. REGISTRATION; RESTRICTIONS ON TRANSFER
2.1 RESTRICTIONS ON TRANSFER.
(a) Each Holder agrees not to make any disposition of all or any
portion of the Shares or Registrable Securities unless and until:
(i) There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement; or
(ii) (A) The transferee has agreed in writing to be bound by
this Section 2.1, (B) such Holder shall have notified the Company of the
proposed disposition, and (C) if reasonably requested by the Company, such
Holder shall have furnished the Company with an opinion of counsel, reasonably
satisfactory to the Company, that such disposition will not require registration
of such shares under the Securities Act. It is agreed that the Company will not
require opinions of counsel for transactions made pursuant to Rule 144 except in
unusual circumstances.
2.
<PAGE>
2.2 DEMAND REGISTRATION.
2.2.1 Subject to the conditions of this Section 2.2, if the Company
shall receive a written request from the Holders of more than fifty percent
(50%) of the Registrable Securities then outstanding (the "Initiating Holders")
that the Company file a registration statement under the Securities Act covering
the registration of Registrable Securities having an aggregate offering price to
the public in excess of Five Million Dollars ($5,000,000), then the Company
shall, within thirty (30) days of the receipt thereof, give written notice of
such request to all Holders, and subject to the limitations of this Section 2.2,
effect, as soon as practicable, the registration under the Securities Act of all
Registrable Securities that the Holders request to be registered.
2.2.2 If the Initiating Holders intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall so
advise the Company as a part of their request made pursuant to this Section 2.2
and the Company shall include such information in the written notice referred to
in Section 2.2.1. In such event, the right of any Holder to include its
Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the Initiating Holders and such Holder) to the extent
provided herein. All Holders proposing to distribute their securities through
such underwriting shall enter into an underwriting agreement in customary form
with the underwriter or underwriters selected for such underwriting by a
majority in interest of the Initiating Holders (which underwriter or
underwriters shall be reasonably acceptable to the Company). Notwithstanding
any other provision of this Section 2.2, if the underwriter advises the Company
that marketing factors require a limitation of the number of securities to be
underwritten (including Registrable Securities) then the Company shall so advise
all Holders of Registrable Securities which would otherwise be underwritten
pursuant hereto, and the number of shares that may be included in the
underwriting shall be allocated to the Holders of such Registrable Securities on
a pro rata basis based on the number of Registrable Securities held by all such
Holders (including the Initiating Holders). Any Registrable Securities excluded
or withdrawn from such underwriting shall be withdrawn from the registration.
2.2.3 The Company shall not be required to effect a registration
pursuant to this Section 2.2:
(i) prior to the first anniversary of the Company's Initial
Offering; or
(ii) after the Company has effected two (2) registrations
pursuant to this Section 2.2, and such registrations have been declared or
ordered effective; or
(iii) if the Company shall furnish to Holders requesting a
registration statement pursuant to this Section 2.2, a certificate signed by the
Chairman of the Board stating that in the good faith judgment of the Board of
Directors of the Company, it would be seriously detrimental to the Company and
its shareholders for such registration statement to be effected at such time, in
which event the Company shall have the right to defer such filing for a period
of not more than ninety (90) days after receipt of the request of the Initiating
Holders; provided that such right to delay a request shall be exercised by the
Company no more than once in any one-year period.
3.
<PAGE>
2.3 PIGGYBACK REGISTRATIONS. The Company shall notify all Holders of
Registrable Securities in writing at least thirty (30) days prior to the filing
of any registration statement under the Securities Act for purposes of a public
offering of equity securities of the Company (including, but not limited to,
registration statements relating to secondary offerings of securities of the
Company, but excluding registration statements relating to employee benefit
plans or with respect to corporate reorganizations or other transactions under
Rule 145 of the Securities Act) and will afford each such Holder an opportunity
to include in such registration statement all or part of such Registrable
Securities held by such Holder. Each Holder desiring to include in any such
registration statement all or any part of the Registrable Securities held by it
shall, within fifteen (15) days after the above-described notice from the
Company, so notify the Company in writing. Such notice shall state the intended
method of disposition of the Registrable Securities by such Holder. If a Holder
decides not to include all of its Registrable Securities in any registration
statement thereafter filed by the Company, such Holder shall nevertheless
continue to have the right to include any Registrable Securities in any
subsequent such registration statement or registration statements as may be
filed by the Company with respect to offerings of its securities, all upon the
terms and conditions set forth herein.
2.3.1 UNDERWRITING. If the registration statement under which the
Company gives notice under this Section 2.3 is for an underwritten offering, the
Company shall so advise the Holders of Registrable Securities. In such event,
the right of any such Holder to be included in a registration pursuant to this
Section 2.3 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to distribute
their Registrable Securities through such underwriting shall enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company. Notwithstanding any other
provision of the Agreement, if the underwriter determines in good faith that
marketing factors require a limitation of the number of shares to be
underwritten, the number of shares that may be included in the underwriting
shall be allocated, first, to the Company; second, to the Holders on a pro rata
basis based on the total number of Registrable Securities held by the Holders;
and third, to any shareholder of the Company (other than a Holder) on a pro rata
basis. No such reduction shall reduce the securities being offered by the
Company for its own account to be included in the registration and underwriting,
and in no event shall the amount of securities of the selling Holders included
in the registration be reduced below twenty-five percent (25%) of the total
amount of securities included in such registration, unless such offering is the
Initial Offering and such registration does not include shares of any other
selling shareholders, in which event any or all of the Registrable Securities of
the Holders may be excluded in accordance with the immediately preceding
sentence. In no event will shares of any other selling shareholder be included
in such registration which would reduce the number of shares which may be
included by Holders without the written consent of Holders of not less than a
majority of the Registrable Securities proposed to be sold in the offering.
2.3.2 RIGHT TO TERMINATE REGISTRATION. The Company shall have the
right to terminate or withdraw any registration initiated or withdraw any
registration initiated by it under this Section 2.3 prior to the effectiveness
of such registration whether or not any Holder has elected to include securities
in such registration. The Registration Expenses of such withdrawn registration
shall be borne by the Company in accordance with Section 2.4 hereof.
4.
<PAGE>
2.4 EXPENSES OF REGISTRATION. Except as specifically provided herein, all
Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Section 2.2 or any registration under
Section 2.3 herein shall be borne by the Company. All Selling Expenses incurred
in connection with any registrations hereunder, shall be borne by the holders of
the securities so registered pro rata on the basis of the number of shares so
registered. The Company shall not, however, be required to pay for expenses of
any registration proceeding begun pursuant to Section 2.2, the request of which
has been subsequently withdrawn by the Initiating Holders unless (a) the
withdrawal is based upon material adverse information concerning the Company of
which the Initiating Holders were not aware at the time of such request or (b)
the Holders of a majority of Registrable Securities agree to forfeit their right
to one requested registration pursuant to Section 2.2, as applicable, in which
event such right shall be forfeited by all Holders. If the Holders are required
to pay the Registration Expenses, such expenses shall be borne by the holders of
securities (including Registrable Securities) requesting such registration in
proportion to the number of shares for which registration was requested. If the
Company is required to pay the Registration Expenses of a withdrawn offering
pursuant to clause (a) above, then the Holders shall not forfeit their rights
pursuant to Section 2.2 to a demand registration.
2.5 OBLIGATIONS OF THE COMPANY. Whenever required to effect the
registration of any Registrable Securities, the Company shall, as expeditiously
as reasonably possible:
2.5.1 Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use all reasonable efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to ninety (90) days or, if earlier,
until the Holder or Holders have completed the distribution related thereto.
2.5.2 Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement.
2.5.3 Furnish to the Holders such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.
2.5.4 Use all reasonable efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
2.5.5 In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter(s) of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
5.
<PAGE>
2.5.6 Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
2.5.7 Furnish, at the request of a majority of the Holders
participating in the registration, on the date that such Registrable Securities
are delivered to the underwriters for sale, if such securities are being sold
through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated as of such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten public
offering and reasonably satisfactory to a majority in interest of the Holders
participating in registration, addressed to the underwriters, if any, and to
such Holders and (ii) a letter dated as of such date, from the independent
certified public accountants of the Company, in form and substance as is
customarily given by independent certified public accountants to underwriters in
an underwritten public offering and reasonably satisfactory to a majority in
interest of the Holders requesting registration, addressed to the underwriters,
if any, and if permitted by applicable accounting standards, to the Holders
requesting registration of Registrable Securities.
2.6 TERMINATION OF REGISTRATION RIGHTS. A Holder's registration rights
shall expire if (i) the Company has completed its Initial Offering and is
subject to the provisions of the Exchange Act, (ii) such Holder (together with
its affiliates, partners and former partners) holds less than 1% of the
Company's outstanding Common Stock (treating all shares of convertible Preferred
Stock on an as converted basis) and (iii) all Registrable Securities held by and
issuance to such Holder may be sold under Rule 144 during any ninety (90) day
period.
2.7 DELAY OF REGISTRATION; FURNISHING INFORMATION.
2.7.1 No Holder shall have any right to obtain or seek an injunction
restraining or otherwise delaying any such registration as the result of any
controversy that might arise with respect to the interpretation or
implementation of this Article II.
2.7.2 It shall be a condition precedent to the obligations of the
Company to take any action pursuant to Section 2.2 or 2.3 that the selling
Holders shall furnish to the Company such information regarding themselves, the
Registrable Securities held by them and the intended method of disposition of
such securities as shall be required to effect the registration of their
Registrable Securities.
2.8 INDEMNIFICATION. In the event any Registrable Securities are included
in a registration statement under Sections 2.2 or 2.3:
2.8.1 To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, the partners, officers, directors and legal counsel
of each Holder, any underwriter (as defined in the Securities Act) for such
Holder and each person, if any, who
6.
<PAGE>
controls such Holder or underwriter within the meaning of the Securities Act or
the Exchange Act, against any losses, claims, damages, or liabilities (joint or
several) to which they may become subject under the Securities Act, the Exchange
Act or other federal or state law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively a
"Violation") by the Company: (i) any untrue statement or alleged untrue
statement of a material fact contained in such registration statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the Exchange Act or any state securities law in connection with the offering
covered by such registration statement; and the Company will reimburse each such
Holder, partner, officer or director, underwriter or controlling person for any
legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
PROVIDED, HOWEVER, that the indemnity agreement contained in this Section 2.8.1
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Company, which consent shall not be unreasonably withheld, nor shall the Company
be liable in any such case for any such loss, claim, damage, liability or action
to the extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by such Holder, partner, officer,
director, underwriter or controlling person of such Holder.
2.8.2 To the extent permitted by law, each Holder will, if
Registrable Securities held by such Holder are included in the securities as to
which such registration qualifications or compliance is being effected,
indemnify and hold harmless the Company, each of its directors, its officers,
and legal counsel and each person, if any, who controls the Company within the
meaning of the Securities Act, any underwriter and any other Holder selling
securities under such registration statement or any of such other Holder's
partners, directors or officers or any person who controls such Holder, against
any losses, claims, damages or liabilities (joint or several) to which the
Company or any such director, officer, controlling person, underwriter or other
such Holder, or partner, director, officer or controlling person of such other
Holder may become subject under the Securities Act, the Exchange Act or other
federal or state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder under an instrument duly executed by such Holder and stated to be
specifically for use in connection with such registration; and each such Holder
will reimburse any legal or other expenses reasonably incurred by the Company or
any such director, officer, controlling person, underwriter or other Holder, or
partner, officer, director or controlling person of such other Holder in
connection with investigating or defending any such loss, claim, damage,
liability or action if it is finally judicially determined that there was such a
Violation; PROVIDED, HOWEVER, that the indemnity agreement contained in this
Section 2.8.2 shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the
consent of the Holder, which consent shall not be unreasonably withheld;
PROVIDED
7.
<PAGE>
FURTHER, that in no event shall any indemnity under this Section 2.8 exceed the
proceeds from the offering received by such Holder.
2.8.3 Promptly after receipt by an indemnified party under this
Section 2.8 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 2.8, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; PROVIDED, HOWEVER, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if materially prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 2.8, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 2.8.
2.8.4 If the indemnification provided for in this Section 2.8 is held
by a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any losses, claims, damages or liabilities referred to herein,
the indemnifying party, in lieu of indemnifying such indemnified party
thereunder, shall to the extent permitted by applicable law contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the Violation(s) that resulted in such
loss, claim, damage or liability, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by a court of law by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission; provided, that in no event shall any contribution by a
Holder hereunder exceed the proceeds from the offering received by such Holder.
2.8.5 The obligations of the Company and Holders under this Section
2.8 shall survive completion of any offering of Registrable Securities in a
registration statement. No Indemnifying Party, in the defense of any such claim
or litigation, shall, except with the consent of each Indemnified Party, consent
to entry of any judgment or enter into any settlement which does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. In the event any offering of Registrable Securities is
underwritten, and the underwriting agreement provides for indemnification and/or
contribution by the Company and the Holders offering securities thereunder, the
indemnification and/or contribution obligations of the Company and the Holders
8.
<PAGE>
hereunder shall in no event exceed the obligations of the parties set forth in
such underwriting agreement.
2.9 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the
Company to register Registrable Securities pursuant to this Article II may be
assigned by a Holder to a transferee or assignee of Registrable Securities which
(i) is a subsidiary, parent, general partner, limited partner or retired partner
of a Holder, (ii) is a Holder's family member or trust for the benefit of an
individual Holder, or (iii) acquires at least Five Hundred Thousand (500,000)
shares of Registrable Securities (as adjusted for stock splits and
combinations); PROVIDED, HOWEVER, (A) the transferor shall, within ten (10) days
after such transfer, furnish to the Company written notice of the name and
address of such transferee or assignee and the securities with respect to which
such registration rights are being assigned and (B) such transferee shall agree
to be subject to all restrictions set forth in this Agreement.
2.10 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Article II
may be amended or terminated and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Holders of
at least a majority of the Registrable Securities. Any amendment, termination
or waiver effected in accordance with this Section 2.10 shall be binding upon
each Holder and the Company. By acceptance of any benefits under this Article
II, Holders of Registrable Securities hereby agree to be bound by the provisions
hereunder. Each party hereto acknowledges that by the operation of this Section
the holders of a majority of the outstanding Registrable Securities may have the
right and power to diminish or eliminate all rights of such party under this
Agreement.
2.11 LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS. After the date of this
Agreement, the Company shall not, without the prior written consent of the
Holders of a majority of the Registrable Securities, enter into any agreement
with any holder or prospective holder of any securities of the Company that
would grant such holder registration rights senior to those granted to the
Holders hereunder.
2.12 "MARKET STAND-OFF" AGREEMENT. If requested by the Company as the
representative of the underwriters of Common Stock (or other securities) of the
Company, each Holder shall not sell or otherwise transfer or dispose of any
Shares or Common Stock (or other securities) of the Company held by each such
Holder (other than those included in the registration) for a period specified by
the representative of the underwriters not to exceed one hundred eighty (180)
days following the effective date of a registration statement of the Company
filed under the Securities Act, provided that:
(i) such agreement shall apply only to the Company's Initial
Offering; and
(ii) all officers and directors of the Company and holders of
at least one percent (1%) of the Company's voting securities enter into similar
agreements.
9.
<PAGE>
The Company may impose stop-transfer instructions with respect to the
shares of Common Stock (or other securities) subject to the foregoing
restriction until the end of said one hundred eighty (180) day period.
2.13 RULE 144 REPORTING. With a view to making available to the
Holders the benefits of certain rules and regulations of the SEC which may
permit the sale of the Registrable Securities to the public without
registration, the Company agrees to use its best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in SEC Rule 144 or any similar or analogous rule
promulgated under the Securities Act, at all times after the effective date of
the first registration filed by the Company for an offering of its securities to
the general public;
(b) File with the SEC, in a timely manner, all reports and other
documents required of the Company under the Exchange Act;
(c) So long as a Holder owns any Registrable Securities, furnish to
such Holder forthwith upon request: a written statement by the Company as to
its compliance with the reporting requirements of said Rule 144 of the
Securities Act, and of the Exchange Act (at any time after it has become subject
to such reporting requirements); a copy of the most recent annual or quarterly
report of the Company; and such other reports and documents as a Holder may
reasonably request in availing itself of any rule or regulation of the SEC
allowing it to sell any such securities without registration.
3. MISCELLANEOUS
3.1 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.
3.2 SURVIVAL. The representations, warranties, covenants, and agreements
made herein shall survive any investigation made by any Holder and the closing
of the transactions contemplated hereby. All statements as to factual matters
contained in any certificate or other instrument delivered by or on behalf of
the Company pursuant hereto in connection with the transactions contemplated
hereby shall be deemed to be representations and warranties by the Company
hereunder solely as of the date of such certificate or instrument.
3.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors, and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of Registrable Securities from time to time;
PROVIDED, HOWEVER, that prior to the receipt by the Company of adequate written
notice of the transfer of any Registrable Securities specifying the full name
and address of the transferee, the Company may deem and treat the person listed
as the holder of such shares in its records as the absolute owner and holder of
such shares for all purposes, including the payment of dividends or any
redemption price.
10.
<PAGE>
3.4 SEVERABILITY. In case any provision of the Agreement shall be
invalid, illegal, or unenforceable, the validity, legality, and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
3.5 AMENDMENT AND WAIVER.
3.5.1 Except as otherwise expressly provided, this Agreement may be
amended or modified only upon the written consent of the Company and the holders
of at a majority of the Registrable Securities.
3.5.2 Except as otherwise expressly provided, the obligations of the
Company and the rights of the Holders under this Agreement may be waived only
with the written consent of the holders of at least a majority of the
Registrable Securities.
3.5.3 Notwithstanding the foregoing, this Agreement may be amended
with only the written consent of the Company to include additional purchasers of
Shares as "Investors," "Holders" and parties hereto.
3.6 DELAYS OR OMISSIONS. It is agreed that no delay or omission to
exercise any right, power, or remedy accruing to any Holder, upon any breach,
default or noncompliance of the Company under this Agreement shall impair any
such right, power, or remedy, nor shall it be construed to be a waiver of any
such breach, default or noncompliance, or any acquiescence therein, or of any
similar breach, default or noncompliance thereafter occurring. It is further
agreed that any waiver, permit, consent, or approval of any kind or character on
any Holder's part of any breach, default or noncompliance under the Agreement or
any waiver on such Holder's part of any provisions or conditions of this
Agreement must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement, by law, or otherwise afforded to Holders, shall be cumulative and not
alternative.
3.7 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.
3.8 ATTORNEYS' FEES. In the event that any dispute among the parties to
this Agreement should result in litigation, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.
11.
<PAGE>
3.9 TITLES AND SUBTITLES. The titles of the sections and subsections of
this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
3.10 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
[THIS SPACE INTENTIONALLY LEFT BLANK]
12.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreement as of the date set forth above.
COMPANY: PURCHASERS:
SCIENTIFIC LEARNING PRINCIPLES WARBURG, PINCUS VENTURES, L.P.
CORPORATION
By its General Partner, Warburg,
Pincus & Co.
By: /s/ Michael Merzenich
--------------------------
President
Address: One Kearny Street By: /s/ James Thomas
San Francisco, CA 94108 ------------------------------------
Fax: 415-296-1481 Name/Title: James Thomas, Partner
-----------------------------
Address: 466 Lexington Avenue
New York, NY 10077
Fax: 212-878-9361
REGISTRATION RIGHTS AGREEMENT
13.
<PAGE>
AMENDMENT NO. 1 TO REGISTRATION
RIGHTS AGREEMENT
THIS AMENDMENT NO. 1 TO REGISTRATION RIGHTS AGREEMENT (the "Amendment"),
dated as of November 14, 1996, is entered into by and among SCIENTIFIC LEARNING
PRINCIPLES CORPORATION, a California corporation (the "Company"), and the other
parties hereto, with respect to the Registration Rights Agreement, dated as of
October 1, 1996 (the "Rights Agreement"), by and between the Company and
Warburg, Pincus Ventures, L.P. (the "Investor").
RECITALS
WHEREAS, the Company proposes to sell and issue to GC&H Investments,
a California general partnership (the "Purchaser"), fifty-five thousand five
hundred fifty-six (55,556) shares of its Series B Preferred Stock (the "Series B
Preferred") pursuant to the Stock Purchase Agreement dated of even date
herewith, by and between the Company and the Purchaser (the "Stock Purchase
Agreement");
WHEREAS, the Company desires to grant to the Purchaser, with respect to the
Series B Preferred, the same registration rights as granted to the Investor as
set forth in the Rights Agreement;
WHEREAS, under Section 3.5.1 of the Rights Agreement, the Rights Agreement
may be amended or modified only upon the written consent of the Company and the
holders of at least a majority of the Registrable Securities, as defined in the
Rights Agreement;
WHEREAS, to obtain registration rights in its capacity as the holder of the
Series B Preferred, the Purchaser desires that the Rights Agreement be amended
to make the Purchaser a party thereto;
WHEREAS, in Section 6.10 of that certain Securities Purchase Agreement,
dated September 24, 1996, by and between the Company and the Investor (the
"Securities Purchase Agreement"), the Investor consented to the sale of shares
of the Series B Preferred to the Purchaser;
NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants and conditions set forth in this Agreement, the Securities
Purchase Agreement and the Stock Purchase Agreement, the parties mutually agree
as follows:
1. DEFINITIONS. All capitalized terms used but not defined herein shall
have the meanings ascribed to them in the Rights Agreement.
2. AMENDMENT.
a. The first paragraph of the Rights Agreement on page 1 thereof is
hereby amended to read in its entirety as set forth below:
<PAGE>
"This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is entered into as of
the 1st day of October 1996, by and among SCIENTIFIC LEARNING PRINCIPLES
CORPORATION, a California corporation (the "Company"), and WARBURG, PINCUS
VENTURES, L.P., a Delaware limited partnership ("Warburg"). This Agreement is
amended as of the 14th day of November, 1996, to add GC&H INVESTMENTS,
a California general partnership ("GC&H"), as a party hereto. As used herein,
the term "Investors" shall mean Warburg and GC&H."
b. The definition of the word "Shares" as set forth in Section 1.1
of the Rights Agreement is hereby amended to read in its entirety as set forth
below:
"`SHARES' shall mean (i) the Company's Series B Preferred issued pursuant
to (A) the Purchase Agreement and (B) that certain Stock Purchase Agreement,
dated of even date herewith, by and between the Company and GC&H and (ii) any of
the Company's Series C Preferred issued upon exercise of the Warrant."
3. PURCHASER. Upon the effectiveness of this Amendment, as provided in
Section 4 hereof, the Purchaser agrees to be bound by all of the terms and
conditions of the Rights Agreement applicable to Investors and Holders.
4. EFFECTIVENESS. This Amendment shall become effective as of the date
first set forth above.
5. EFFECT OF AMENDMENT. Except as amended as set forth above, the Rights
Agreement shall continue in full force and effect.
6. COUNTERPARTS. This Amendment may be signed in one or more
counterparts, each of which shall be deemed an original and all of which, taken
together, shall be deemed one and the same document.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1
to Registration Rights Agreement as of the day and year first above written.
COMPANY: INVESTOR:
SCIENTIFIC LEARNING PRINCIPLES WARBURG, PINCUS VENTURES, L.P.
CORPORATION By its General Partner,
Warburg, Pincus & Co.
By: /s/ Sheryle Bolton By: /s/ James E. Thomas
------------------------------- ------------------------------------
Sheryle Bolton
Chief Executive Officer
Name/Title: James E. Thomas, Partner
---------------------------
Address: One Kearny Street Address: 466 Lexington Avenue
San Francisco, CA 94108 New York, NY 10077
Fax: 415-296-1481 Fax: 212-878-9361
PURCHASER:
GC&H INVESTMENTS,
a California general partnership
By: /s/ John Cardoza
--------------------------------
John Cardoza
Executive Partner
Address: One Maritime Plaza, 20th Floor
San Francisco, CA 94111-3580
Fax: 415-961-3699
3
<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>
INDEMNITY AGREEMENT
This Agreement is made and entered into this ____ day of ___________, 1998
by and between SCIENTIFIC LEARNING CORPORATION, a Delaware corporation (the
"Corporation"), and ____________________ ("Agent").
RECITALS
WHEREAS, Agent performs a valuable service to the Corporation in her
capacity as a director of the Corporation;
WHEREAS, the stockholders of the Corporation have adopted bylaws (the
"Bylaws") providing for the indemnification of the directors, officers,
employees and other agents of the Corporation, including persons serving at the
request of the Corporation in such capacities with other corporations or
enterprises, as authorized by the Delaware Corporation Law, as amended (the
"Code");
WHEREAS, the Bylaws and the Code, by their non-exclusive nature, permit
contracts between the Corporation and its agents, officers, employees and other
agents with respect to indemnification of such persons; and
WHEREAS, in order to induce Agent to continue to serve as a director of the
Corporation, the Corporation has determined and agreed to enter into this
Agreement with Agent.
NOW, THEREFORE, in consideration of Agent's continued service as a director
after the date hereof, the parties hereto agree as follows:
AGREEMENT
1. SERVICES TO THE CORPORATION. Agent will serve, at the will of the
Corporation or under separate contract, if any such contract exists, as a
director of the Corporation or as a director, officer or other fiduciary of an
affiliate of the Corporation (including any employee benefit plan of the
Corporation) faithfully and to the best of his or her ability so long as he or
she is duly elected and qualified in accordance with the provisions of the
Bylaws or other applicable charter documents of the Corporation or such
affiliate; provided, however, that Agent may at any time and for any reason
resign from such position (subject to any contractual obligation that Agent may
have assumed apart from this Agreement) and that the Corporation or any
affiliate shall have no obligation under this Agreement to continue Agent in any
such position.
2. INDEMNITY OF AGENT. The Corporation hereby agrees to hold harmless
and indemnify Agent to the fullest extent authorized or permitted by the
provisions of the Bylaws, as the same may be amended from time to time (but,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than the Bylaws permitted prior to adoption of
such amendment or, in case the Bylaws become more restrictive as a result of
amendments to the Code, as the Bylaws were in effect prior to such amendment
to the Code).
1.
<PAGE>
3. ADDITIONAL INDEMNITY. In addition to and not in limitation of the
indemnification otherwise provided for herein, and subject only to the
exclusions set forth in Section 4 hereof, the Corporation hereby further agrees
to hold harmless and indemnify Agent:
(a) against any and all expenses (including attorneys' fees), witness
fees, damages, judgments, fines and amounts paid in settlement and any other
amounts that Agent becomes legally obligated to pay because of any claim or
claims made against or by her in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, arbitrational,
administrative or investigative (including an action by or in the right of the
Corporation) to which Agent is, was or at any time becomes a party, or is
threatened to be made a party, by reason of the fact that Agent is, was or at
any time becomes a director, officer, employee or other agent of Corporation, or
is or was serving or at any time serves at the request of the Corporation as a
director, officer, employee or other agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise; and
(b) otherwise to the fullest extent as may be provided to Agent by
the Corporation under the non-exclusivity provisions of the Code and Section 43
of the Bylaws.
4. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to Section
3 hereof shall be paid by the Corporation:
(a) on account of any claim against Agent for an accounting of
profits made from the purchase or sale by Agent of securities of the Corporation
pursuant to the provisions of Section 16(b) of the Securities Exchange Act of
1934 and amendments thereto or similar provisions of any federal, state or local
statutory law;
(b) on account of Agent's conduct that was knowingly fraudulent or
deliberately dishonest or that constituted willful misconduct;
(c) on account of Agent's conduct that constituted a breach of
Agent's duty of loyalty to the Corporation or resulted in any personal profit or
advantage to which Agent was not legally entitled;
(d) for which payment is actually made to Agent under a valid and
collectible insurance policy or under a valid and enforceable indemnity clause,
bylaw or agreement, except in respect of any excess beyond payment under such
insurance, clause, bylaw or agreement;
(e) if indemnification is not lawful (and, in this respect, both the
Corporation and Agent have been advised that the Securities and Exchange
Commission believes that indemnification for liabilities arising under the
federal securities laws is against public policy and is, therefore,
unenforceable and that claims for indemnification should be submitted to
appropriate courts for adjudication); or
(f) in connection with any proceeding (or part thereof) initiated by
Agent, or any proceeding by Agent against the Corporation or its directors,
officers, employees or other agents, unless (i) such indemnification is
expressly required to be made by law, (ii) the proceeding was authorized by the
Board of Directors of the Corporation, (iii) such indemnification is provided by
the Corporation, in its sole discretion, pursuant to the powers
2.
<PAGE>
vested in the Corporation under the Code, or (iv) the proceeding is initiated
pursuant to Section 9 hereof.
5. CONTINUATION OF INDEMNITY. All agreements and obligations of the
Corporation contained herein shall continue during the period Agent is a
director, officer, employee or other agent of the Corporation (or is or was
serving at the request of the Corporation as a director, officer, employee or
other agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise) and shall continue thereafter so long as Agent
shall be subject to any possible claim or threatened, pending or completed
action, suit or proceeding, whether civil, criminal, arbitrational,
administrative or investigative, by reason of the fact that Agent was serving in
the capacity referred to herein.
6. PARTIAL INDEMNIFICATION. Agent shall be entitled under this Agreement
to indemnification by the Corporation for a portion of the expenses (including
attorneys' fees), witness fees, damages, judgments, fines and amounts paid in
settlement and any other amounts that Agent becomes legally obligated to pay in
connection with any action, suit or proceeding referred to in Section 3 hereof
even if not entitled hereunder to indemnification for the total amount thereof,
and the Corporation shall indemnify Agent for the portion thereof to which Agent
is entitled.
7. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty (30) days
after receipt by Agent of notice of the commencement of any action, suit or
proceeding, Agent will, if a claim in respect thereof is to be made against the
Corporation under this Agreement, notify the Corporation of the commencement
thereof; but the omission so to notify the Corporation will not relieve it from
any liability which it may have to Agent otherwise than under this Agreement.
With respect to any such action, suit or proceeding as to which Agent notifies
the Corporation of the commencement thereof:
(a) the Corporation will be entitled to participate therein at its
own expense;
(b) except as otherwise provided below, the Corporation may, at its
option and jointly with any other indemnifying party similarly notified and
electing to assume such defense, assume the defense thereof, with counsel
reasonably satisfactory to Agent. After notice from the Corporation to Agent of
its election to assume the defense thereof, the Corporation will not be liable
to Agent under this Agreement for any legal or other expenses subsequently
incurred by Agent in connection with the defense thereof except for reasonable
costs of investigation or otherwise as provided below. Agent shall have the
right to employ separate counsel in such action, suit or proceeding but the fees
and expenses of such counsel incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the expense of Agent unless (i)
the employment of counsel by Agent has been authorized by the Corporation, (ii)
Agent shall have reasonably concluded that there may be a conflict of interest
between the Corporation and Agent in the conduct of the defense of such action
or (iii) the Corporation shall not in fact have employed counsel to assume the
defense of such action, in each of which cases the fees and expenses of Agent's
separate counsel shall be at the expense of the Corporation. The Corporation
shall not be entitled to assume the defense of any action, suit or proceeding
brought by or on behalf of the Corporation or as to which Agent shall have made
the conclusion provided for in clause (ii) above; and
3.
<PAGE>
(c) the Corporation shall not be liable to indemnify Agent under this
Agreement for any amounts paid in settlement of any action or claim effected
without its written consent, which shall not be unreasonably withheld. The
Corporation shall be permitted to settle any action except that it shall not
settle any action or claim in any manner which would impose any penalty or
limitation on Agent without Agent's written consent, which may be given or
withheld in Agent's sole discretion.
8. EXPENSES. The Corporation shall advance, prior to the final
disposition of any proceeding, promptly following request therefor, all expenses
incurred by Agent in connection with such proceeding upon receipt of an
undertaking by or on behalf of Agent to repay said amounts if it shall be
determined ultimately that Agent is not entitled to be indemnified under the
provisions of this Agreement, the Bylaws, the Code or otherwise.
9. ENFORCEMENT. Any right to indemnification or advances granted by this
Agreement to Agent shall be enforceable by or on behalf of Agent in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. Agent, in such enforcement action, if
successful in whole or in part, shall be entitled to be paid also the expense of
prosecuting his or her claim. It shall be a defense to any action for which a
claim for indemnification is made under Section 3 hereof (other than an action
brought to enforce a claim for expenses pursuant to Section 8 hereof, provided
that the required undertaking has been tendered to the Corporation) that Agent
is not entitled to indemnification because of the limitations set forth in
Section 4 hereof. Neither the failure of the Corporation (including its Board
of Directors or its stockholders) to have made a determination prior to the
commencement of such enforcement action that indemnification of Agent is proper
in the circumstances, nor an actual determination by the Corporation (including
its Board of Directors or its stockholders) that such indemnification is
improper shall be a defense to the action or create a presumption that Agent is
not entitled to indemnification under this Agreement or otherwise.
10. SUBROGATION. In the event of payment under this Agreement, the
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Agent, who shall execute all documents required and shall
do all acts that may be necessary to secure such rights and to enable the
Corporation effectively to bring suit to enforce such rights.
11. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Agent by this
Agreement shall not be exclusive of any other right which Agent may have or
hereafter acquire under any statute, provision of the Corporation's Certificate
of Incorporation or Bylaws, agreement, vote of stockholders or directors, or
otherwise, both as to action in her official capacity and as to action in
another capacity while holding office.
12. SURVIVAL OF RIGHTS.
(a) The rights conferred on Agent by this Agreement shall continue
after Agent has ceased to be a director, officer, employee or other agent of the
Corporation or to serve at the request of the Corporation as a director,
officer, employee or other agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise and shall inure to the
benefit of Agent's heirs, executors and administrators.
4.
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(b) The Corporation shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Corporation, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Corporation would be required to perform if no such succession
had taken place.
13. SEPARABILITY. Each of the provisions of this Agreement is a separate
and distinct agreement and independent of the others, so that if any provision
hereof shall be held to be invalid for any reason, such invalidity or
unenforceability shall not affect the validity or enforceability of the other
provisions hereof. Furthermore, if this Agreement shall be invalidated in its
entirety on any ground, then the Corporation shall nevertheless indemnify Agent
to the fullest extent provided by the Bylaws, the Code or any other applicable
law.
14. ENTIRE AGREEMENT. This Agreement and the agreements referenced herein
constitute the entire agreement between the parties hereto pertaining to the
subject matter hereof, and any and all other written or oral agreements existing
between the parties hereto pertaining to the subject matters hereof are
superseded and expressly canceled.
15. GOVERNING LAW. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Delaware.
16. AMENDMENT AND TERMINATION. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless in writing signed by
both parties hereto.
17. IDENTICAL COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
but all of which together shall constitute but one and the same Agreement. Only
one such counterpart need be produced to evidence the existence of this
Agreement.
18. HEADINGS. The headings of the sections of this Agreement are inserted
for convenience only and shall not be deemed to constitute part of this
Agreement or to affect the construction hereof.
19. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given (i)
upon delivery if delivered by hand to the party to whom such communication was
directed or (ii) upon the third business day after the date on which such
communication was mailed if mailed by certified or registered mail with postage
prepaid:
(a) If to Agent, at the address indicated on the signature page
hereof.
5.
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(b) If to the Corporation, to
Scientific Learning Corporation
1995 University Avenue
Suite 1400
Berkeley, CA 94704
or to such other address as may have been furnished to Agent by the Corporation.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and
as of the day and year first above written.
SCIENTIFIC LEARNING CORPORATION
By:
-------------------------------------
Sheryle J. Bolton
President and
Chief Executive Officer
AGENT
By:
-------------------------------------
Name:
-----------------------------------
Address:
---------------------------
---------------------------
6.
<PAGE>
SCIENTIFIC LEARNING CORPORATION
1999 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 MARCH 11, 1999
AMENDED AND RESTATED APRIL 22, 1999
APPROVED BY STOCKHOLDERS ____________, 1999
TERMINATION DATE: JUNE ___, 2009
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.
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(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 1999 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 One Million Eight Hundred
Sixty-Six Thousand Six Hundred Sixty-Six (1,866,666) 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 Four Hundred Twenty Thousand (420,000)
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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<PAGE>
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.
8.
<PAGE>
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 Tandem Right shall be in cash
(or, if so provided, in an equivalent number of shares of stock based
9.
<PAGE>
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 for failure to issue and
sell stock upon exercise of such Stock Awards unless and until such authority is
obtained.
10.
<PAGE>
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 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
11.
<PAGE>
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 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
12.
<PAGE>
(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.
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
13.
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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.
14.
<PAGE>
SCIENTIFIC LEARNING CORPORATION
1999 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
(INCENTIVE AND NONSTATUTORY STOCK OPTIONS)
Pursuant to the Stock Option Grant Notice ("Grant Notice") and this Stock
Option Agreement, Scientific Learning Corporation (the "Company") has granted
you an option under its 1999 Equity Incentive Plan (the "Plan") to purchase the
number of shares of the Company's Common Stock indicated in the Grant Notice at
the exercise price indicated in the Grant Notice. Defined terms not explicitly
defined in this Stock Option Agreement but defined in the Plan shall have the
same definitions as in the Plan.
The details of your option are as follows:
1. VESTING. Subject to the limitations contained herein, your option
will vest as provided in the Grant Notice, provided that vesting will cease upon
the termination of your Continuous Service.
2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares subject to
your option and your exercise price per share referenced in the Grant Notice may
be adjusted from time to time for Capitalization Adjustments, as provided in the
Plan.
3. EXERCISE PRIOR TO VESTING ("EARLY EXERCISE"). If permitted in the
Grant Notice (i.e., the "Exercise Schedule" indicates that "Early Exercise" of
your option is permitted) and subject to the provisions of this option, you may
elect at any time that is both (i) during the period of your Continuous Service
and (ii) during the term of your option, to exercise all or part of your option,
including the nonvested portion of your option; provided, however, that:
(a) a partial exercise of your option shall be deemed to cover first
vested shares and then the earliest vesting installment of unvested shares;
(b) any shares so purchased from installments which have not vested
as of the date of exercise shall be subject to the purchase option in favor of
the Company as described in the Company's form of Early Exercise Stock Purchase
Agreement;
(c) you shall enter into the Company's form of Early Exercise Stock
Purchase Agreement with a vesting schedule that will result in the same vesting
as if no early exercise had occurred; and
(d) if your option is an incentive stock option, then, as provided in
the Plan, to the extent that the aggregate Fair Market Value (determined at the
time of grant) of stock with respect to which your option plus all other
incentive stock options you hold are exercisable for the first time by you
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
that exceed
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such limit (according to the order in which they were granted) shall be treated
as nonstatutory stock options.
4. METHOD OF PAYMENT. Payment of the exercise price is due in full upon
exercise of all or any part of your option. You may elect to make payment of
the exercise price in cash or by check or in any other manner PERMITTED BY THE
GRANT NOTICE, which may include one or more of the following:
(a) In the Company's sole discretion at the time your option is
exercised and provided that at the time of exercise the Common Stock is publicly
traded and quoted regularly in THE WALL STREET JOURNAL, pursuant to a program
developed under Regulation T as promulgated by the Federal Reserve Board which,
prior to the issuance of Common Stock, results in either the receipt of cash (or
check) by the Company or the receipt of irrevocable instructions to pay the
aggregate exercise price to the Company from the sales proceeds.
(b) Provided that at the time of exercise the Common Stock is
publicly traded and quoted regularly in THE WALL STREET JOURNAL, by delivery of
already-owned shares of Common Stock, held for the period required to avoid a
charge to the Company's reported earnings (generally six months) or were not
acquired, directly or indirectly from the Company, owned free and clear of any
liens, claims, encumbrances or security interests, and valued at its Fair Market
Value on the date of exercise. "Delivery" for these purposes, in the sole
discretion of the Company at the time your option is exercised, shall include
delivery to the Company of your attestation of ownership of such shares of
Common Stock in a form approved by the Company. Notwithstanding the foregoing,
your option may not be exercised by tender to the Company of Common Stock to the
extent such tender would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
(c) Pursuant to the following deferred payment alternative:
(i) Not less than one hundred percent (100%) of the aggregate
exercise price, plus accrued interest, shall be due four (4) years from date of
exercise or, at the Company's election, upon termination of your Continuous
Service.
(ii) 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 portion of any
amounts other than amounts stated to be interest under the deferred payment
arrangement.
(iii) At any time that the Company is incorporated in Delaware,
payment of the Common Stock's "par value," as defined in the Delaware General
Corporation Law, shall be made in cash and not by deferred payment.
(iv) In order to elect the deferred payment alternative, you
must, as a part of your written notice of exercise, give notice of the election
of this payment alternative and, in order to secure the payment of the deferred
exercise price to the Company hereunder, if the
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<PAGE>
Company so requests, you must tender to the Company a promissory note and a
security agreement covering the purchased shares, both in form and substance
satisfactory to the Company, or such other or additional documentation as the
Company may request.
5. WHOLE SHARES. Your option may only be exercised for whole shares.
6. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary
contained herein, your option may not be exercised unless the shares issuable
upon exercise of your 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. The exercise of your option must also comply with other
applicable laws and regulations governing the option, and the option may not be
exercised if the Company determines that the exercise would not be in material
compliance with such laws and regulations.
7. TERM. The term of your option commences on the Date of Grant and
expires upon the EARLIEST of the following:
(a) three (3) months after the termination of your Continuous Service
for any other reason, provided that if during any part of such three- (3-)month
period the option is not exercisable solely because of the condition set forth
in paragraph 6, the option shall not expire until the earlier of the Expiration
Date or until it shall have been exercisable for an aggregate period of three
(3) months after the termination of your Continuous Service;
(b) twelve (12) months after the termination of your Continuous
Service due to Disability;
(c) eighteen (18) months after your death if you die either during
your Continuous Service or within three (3) months after your Continuous Service
terminates;
(d) the Expiration Date indicated in the Grant Notice; or
(e) the tenth (10th) anniversary of the Date of Grant.
If your option is an incentive stock option, note that, to obtain the
federal income tax advantages associated with an "incentive stock option," the
Code requires that at all times beginning on the date of grant of the option and
ending on the day three (3) months before the date of the option's exercise, you
must be an employee of the Company or an Affiliate, except in the event of your
death or your Disability. The Company has provided for extended exercisability
of your option under certain circumstances for your benefit, but cannot
guarantee that your option will necessarily be treated as an "incentive stock
option" if you provide services to the Company or an Affiliate as a Consultant
or Director or if you exercise your option more than three (3) months after the
date your employment with the Company or an Affiliate terminates.
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<PAGE>
8. EXERCISE.
(a) You may exercise the vested portion of your option (and the
unvested portion of your option if the Grant Notice so permits) during its term
by delivering a Notice of Exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require.
(b) By exercising your option you agree that, as a condition to any
exercise of your option, the Company may require you to enter an arrangement
providing for the payment by you to the Company of any tax withholding
obligation of the Company arising by reason of (1) the exercise of your option,
(2) the lapse of any substantial risk of forfeiture to which the shares are
subject at the time of exercise, or (3) the disposition of shares acquired upon
such exercise.
(c) If your option is an incentive stock option, by exercising your
option you agree that you will notify the Company in writing within fifteen (15)
days after the date of any disposition of any of the shares of the Common Stock
issued upon exercise of your option that occurs within two (2) years after the
date of your option grant or within one (1) year after such shares of Common
Stock are transferred upon exercise of your option.
9. TRANSFERABILITY. Your option is not transferable, except by will or
by the laws of descent and distribution, and is exercisable during your life
only by you. Notwithstanding the foregoing, by delivering written notice to the
Company, in a form satisfactory to the Company, you may designate a third party
who, in the event of your death, shall thereafter be entitled to exercise your
option.
10. RIGHT OF FIRST REFUSAL/RIGHT OF REPURCHASE. Vested shares that are
received upon exercise of your option are subject to any right of first refusal
that may be described in the Company's bylaws in effect at such time the Company
elects to exercise its right. The Company's right of first refusal shall expire
on the date of the first registration of an equity security of the Company under
Section 12 of the Exchange Act. In addition, to the extent provided in the
Company's bylaws as amended from time to time, the Company shall have the right
to repurchase all or any part of the shares received pursuant to the exercise of
your option.
11. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or
service contract, and nothing in your option shall be deemed to create in any
way whatsoever any obligation on your part to continue in the employ of the
Company or an Affiliate, or of the Company or an Affiliate to continue your
employment. In addition, nothing in your option shall obligate the Company or
an Affiliate, their respective shareholders, Boards of Directors, Officers or
Employees to continue any relationship that you might have as a Director or
Consultant for the Company or an Affiliate.
12. WITHHOLDING OBLIGATIONS.
(a) At the time your option is exercised, in whole or in part, or at
any time thereafter as requested by the Company, you hereby authorize
withholding from payroll and any
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<PAGE>
other amounts payable to you, and otherwise agree to make adequate provision for
(including by means of a "cashless exercise" pursuant to a program developed
under Regulation T as promulgated by the Federal Reserve Board to the extent
permitted by the Company), any sums required to satisfy the federal, state,
local and foreign tax withholding obligations of the Company or an Affiliate, if
any, which arise in connection with your option.
(b) Upon your request and subject to approval by the Company, in its
sole discretion, and compliance with any applicable conditions or restrictions
of law, the Company may withhold from fully vested shares of Common Stock
otherwise issuable to you upon the exercise of your option a number of whole
shares having a Fair Market Value, determined by the Company as of the date of
exercise, not in excess of the minimum amount of tax required to be withheld by
law. If the date of determination of any tax withholding obligation is deferred
to a date later than the date of exercise of your option, share withholding
pursuant to the preceding sentence shall not be permitted unless you make a
proper and timely election under Section 83(b) of the Code, covering the
aggregate number of shares of Common Stock acquired upon such exercise with
respect to which such determination is otherwise deferred, to accelerate the
determination of such tax withholding obligation to the date of exercise of your
option. Notwithstanding the filing of such election, shares shall be withheld
solely from fully vested shares of Common Stock determined as of the date of
exercise of your option that are otherwise issuable to you upon such exercise.
Any adverse consequences to you arising in connection with such share
withholding procedure shall be your sole responsibility.
(c) Your option is not exercisable unless the tax withholding
obligations of the Company and/or any Affiliate are satisfied. Accordingly, you
may not be able to exercise your option when desired even though your option is
vested, and the Company shall have no obligation to issue a certificate for such
shares or release such shares from any escrow provided for herein.
13. NOTICES. Any notices provided for in your option or the Plan shall be
given in writing and shall be deemed effectively given upon receipt or, in the
case of notices delivered by the Company to you, five (5) days after deposit in
the United States mail, postage prepaid, addressed to you at the last address
you provided to the Company.
14. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions
of the Plan, the provisions of which are hereby made a part of your option, 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 your option and those of the
Plan, the provisions of the Plan shall control.
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<PAGE>
SCIENTIFIC LEARNING CORPORATION
STOCK OPTION GRANT NOTICE
(1999 EQUITY INCENTIVE PLAN)
Scientific Learning Corporation (the "Company"), pursuant to its 1999 Equity
Incentive Plan (the "Plan"), hereby grants to Optionee, an option to purchase
the number of shares of the Company's Common Stock set forth below. This option
is subject to all of the terms and conditions as set forth herein and in the
Stock Option Agreement, the Plan and the Notice of Exercise, all of which are
attached hereto and incorporated herein in their entirety.
Optionee:
-----------------------------
Date of Grant:
-----------------------------
Vesting Commencement Date:
-----------------------------
Number of Shares Subject to Option:
-----------------------------
Exercise Price Per Share:
-----------------------------
Expiration Date:
-----------------------------
TYPE OF GRANT: / / Incentive Stock Option / / Nonstatutory Stock Option
EXERCISE SCHEDULE: / / Same as Vesting Schedule / / Early Exercise Permitted
VESTING SCHEDULE: 25% of shares will vest one year after the Vesting
Commencement Date.
1/48th of the shares vest monthly thereafter over the next
three years.(1)
PAYMENT: By one or a combination of the following items (described in
the Stock Option Agreement):
By cash or check
Pursuant to a Regulation T Program if the Shares are
publicly traded
By delivery of already-owned shares if the Shares are
publicly traded
[By deferred payment]
ADDITIONAL TERMS/ACKNOWLEDGEMENTS: The undersigned Optionee acknowledges
receipt of, and understands and agrees to, this Grant Notice, the Stock Option
Agreement and the Plan. Optionee further acknowledges that as of the Date of
Grant, this Grant Notice, the Stock Option Agreement and the Plan set forth the
entire understanding between Optionee and the Company regarding the acquisition
of stock in the Company and supersede all prior oral and written agreements on
that subject with the exception of (i) options previously granted and delivered
to Optionee under the Plan, and (ii) the following agreements only:
OTHER AGREEMENTS:
-----------------------------------
-----------------------------------
SCIENTIFIC LEARNING CORPORATION OPTIONEE:
By:
------------------------------------- ------------------------------
Signature Signature
Title: Date:
---------------------------------- -------------------------
Date:
-----------------------------------
ATTACHMENTS: Stock Option Agreement, 1999 Equity Incentive Plan and Notice of
Exercise
- ------------------------
(1) PLAN'S STANDARD VESTING SCHEDULE - USE VESTING SCHEDULE APPROVED BY BOARD
FOR PARTICULAR OPTIONEE, IF DIFFERENT FROM ABOVE.
<PAGE>
ATTACHMENT I
STOCK OPTION AGREEMENT
<PAGE>
ATTACHMENT II
SCIENTIFIC LEARNING CORPORATION
1998 EQUITY INCENTIVE PLAN
<PAGE>
ATTACHMENT III
NOTICE OF EXERCISE
<PAGE>
SCIENTIFIC LEARNING CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
ADOPTED APRIL 22, 1999
APPROVED BY STOCKHOLDERS ____________, 1999
NO TERMINATION DATE
1. PURPOSE.
(a) The purpose of the 1999 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 Three Hundred Fifty Thousand
(350,000) 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.
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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
1999 EMPLOYEE STOCK PURCHASE PLAN OFFERING
ADOPTED BY BOARD OF DIRECTORS APRIL 22, 1999
1. GRANT; OFFERING DATE.
(a) The Board of Directors of Scientific Learning Corporation, a Delaware
corporation (the "Company"), pursuant to the Company's 1999 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 June 30, 2000, 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 December 31, 1999 and the second Purchase Period
shall begin on January 1, 2000 and end on June 30, 2000. 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.
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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>
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement") is entered into as of this 20th
day of September, 1996, by and between SCIENTIFIC LEARNING PRINCIPLES
CORPORATION, a California corporation (the "Company"), and MICHAEL M. MERZENICH,
PH.D. (the "Consultant") to memorialize certain arrangements previously made
between the parties and to record their understanding of their business
arrangements.
RECITALS
WHEREAS, the Company proposes to develop products based on new technology
relating to language learning impairments;
WHEREAS, Consultant is a leading scientist in the forefront of developing
technology to assess and treat language learning impairment; and
WHEREAS, the Company and the Consultant desire to enter into a consulting
arrangement whereby the Company shall benefit from the Consultant's unique
knowledge and experience;
NOW, THEREFORE, in consideration of the mutual undertakings set forth
herein, the parties hereby agree as follows.
AGREEMENT
1. SCOPE. The purpose of this Agreement is to provide for the
performance by the Consultant of research, investigation and consultation on
behalf of the Company to advance and enable the Company to commercially exploit
research related to the inventions described in Pending U.S. Patent Application
Serial No. 08/351,803 entitled "Method and Device for Enhancing the Recognition
of Speech Among Speech Impaired Individuals," filed December 8, 1994 by Drs.
Merzenich, Jenkins, Schreiner, Tallal and Miller and assigned to the Regents of
the University of California and Rutgers-the State University of New Jersey (the
"Patent"), as well as other areas as shall from time to time be mutually agreed
upon by the parties hereto ("Field of Activity"). The Consultant's specific
consulting assignments within the Field of Activity and such other general
consulting services as the Company may reasonably request ("Consulting
Activities") shall be determined from time to time by the Chief Executive
Officer of the Company or by any other officer empowered by the Company's Board
of Directors to determine the Consultant's assignments.
2. TERM. This Agreement shall be deemed effective as of January 31, 1996
(the "Effective Date") and shall terminate on December 31, 2001, unless earlier
terminated pursuant to Section 19, below, or unless extended by mutual written
consent of the parties hereto.
3. TIME COMMITMENT.
(a) The parties acknowledge that during the period from the Effective
Date through March 25, 1996 the Consultant devoted twenty percent (20%) of the
Consultant's
<PAGE>
professional time available under Consultant's employment arrangements with the
University of California, San Francisco ("UCSF") to Consulting Activities.
(b) The Consultant has advised the Company that the Consultant has
taken an in residence sabbatical at UCSF for a one-year period, which commenced
on March 26, 1996. For the period from March 26, 1996 through March 25, 1997,
the Consultant agrees to devote an aggregate of one hundred percent (100%) of
the Consultant's total professional time available under Consultant's sabbatical
leave, other than time engaged in Permitted Sabbatical Activities (defined
below), to Consulting Activities. "Permitted Sabbatical Activities" means
administrative activities, student and research fellow advising activities,
collaborative research activities, special educational and training activities,
grant supervision activities (for grants outside the Field of Activity) at UCSF
and lecturing activities, all of which activities shall not, on average, exceed
thirty-five (35) hours per month.
(c) The Consultant has advised the Company that the Consultant plans
to seek approval for a leave of absence from UCSF for a one-year period,
commencing on March 26, 1997. For the period from March 26, 1997 through March
25, 1998, the Consultant agrees to devote an aggregate of one hundred percent
(100%) of the Consultant's total professional time available under Consultant's
sabbatical leave, other than time engaged in Permitted Leave Activities (defined
below), to Consulting Activities. "Permitted Leave Activities" means
administrative activities, student and research fellow advising activities,
collaborative research activities, special educational and training activities,
grant supervision activities (for grants outside the Field of Activity) at UCSF
and lecturing activities, all of which activities shall not, on average, exceed
thirty-five (35) hours per month.
(d) For the period commencing March 26, 1998 through December 31,
2001, the Consultant agrees to devote an aggregate of up to twenty percent (20%)
of the Consultant's total professional time to Consulting Activities. On or
prior to July 1, 1997, the Company shall notify the Consultant as to the amount
of professional time the Company requires the Consultant to reserve for
Consulting Activities for the period from March 26, 1998 through December 31,
1998 (the "Stub Period"). On or prior to each subsequent July first, the
Company shall notify the Consultant as to the amount of professional time the
Company requires the Consultant to reserve for Consulting Activities for the
next calendar year during the term of this Agreement. In each such case, the
Company shall notify the Consultant that it requires (a) twenty percent (20%) of
the Consultant's professional time, in which case the Consultant shall reserve
an average of one day per week for Consulting Activities on behalf of the
Company, (b) ten percent (10%) of the Consultant's professional time, in which
case the Consultant shall reserve an average of one-half day per week for
Consulting Activities on behalf of the Company, or (c) less than ten percent
(10%) of the Consultant's professional time, in which case the Consultant shall
reserve time at the Consultant's own discretion. Any such notice may be
hereinafter referred to as "Anticipated Request."
(e) When Consultant is engaged in less than full-time work on behalf
of the Company, as described in paragraphs 3(a) and (d), the parties acknowledge
that requests for the Consultant to engage in Consulting Activities shall be of
sufficient flexibility as to allow for reasonable accommodation of the
Consultant's personal and professional schedules.
2
<PAGE>
4. COMPENSATION.
(a) The parties acknowledge that for the period from the Effective
Date through March 25, 1996, the Consultant shall receive no compensation from
the Company.
(b) Pursuant to the policies of UCSF, for the period of Consultant's
in residence sabbatical leave from March 26, 1996 through March 25, 1997, the
Consultant shall not receive any compensation from the Company; however, the
Company shall make the payments described in Section 5 to UCSF and shall assume
liability for the reimbursements described in Section 5.
(c) For the period commencing March 26, 1997 through March 25, 1998,
during the Consultant's leave of absence from UCSF, the Consultant shall be paid
$11,000 per month.
(d) Pursuant to paragraph 3(d) above, the Company shall notify the
Consultant of the level of services requested for the Stub Period and subsequent
calendar years of this Agreement no later than the preceding July first. The
Consultant's compensation shall be set based upon the level of the Anticipated
Requests and the Company shall pay the Consultant consulting fees as follows:
(a) if Anticipated Requests for the period is twenty percent (20%) of the
Consultant's total professional time, then the Company agrees to pay the
Consultant an amount per year equal to the product of fifty-two (52) multiplied
by the "Daily Rate" (as defined below); (b) if Anticipated Requests for the
period is ten percent (10%) of the Consultant's total professional time, then
the Company agrees to pay the Consultant the greater of (i) an amount per year
equal to the product of twenty-six (26) multiplied by the Daily Rate or (ii) an
amount equal to the product of the Daily Rate multiplied by the number of days
worked at the request of the Company; and (c) if the Anticipated Request is less
than ten percent (10%) of the Consultant's total professional time, then the
Company agrees to pay the Consultant an amount equal to the Daily Rate
multiplied by the number of days worked at the request of the Company. For
purposes of the calculations described in the preceding sentence, the "Daily
Rate" shall be as follows:
<TABLE>
<CAPTION>
DAILY RATE COMMENCING ENDING
<S> <C> <C>
$500 3/26/98 12/31/98
$550 1/1/99 12/31/99
$600 1/1/00 12/31/00
$650 1/1/01 12/31/01.
</TABLE>
(e) Within thirty days following the end of any fiscal quarter in
which the Company reports net income exceeding $1,000,000 and the Company is
paying the Consultant based on the Daily Rate, the Company shall pay to the
Consultant an additional amount equal to fifty percent of the amount paid to the
Consultant during such quarter pursuant to paragraph 4(d).
(f) The Consultant acknowledges that a portion of such consulting
fees may be withheld by the Company and paid to taxing authorities, if and to
the extent that the Company determines it is obligated to do so under applicable
tax laws. Compensation shall be paid within
3
<PAGE>
30 days of the rendering of services, and may be prorated by the Company to
coincide with the Company's regular pay days.
5. REIMBURSEMENTS. The Company agrees that it shall reimburse UCSF for
the compensation and benefit expenses incurred by UCSF during the Consultant's
in residence sabbatical in the event that the Consultant does not return to
active employment at UCSF and UCSF seeks reimbursement of such amounts under
applicable UCSF policy. It is agreed that the Company's reimbursement
obligation shall not exceed $150,000. In addition, the Company acknowledges
that it has paid to UCSF $1,989 per month during the Consultant's in residence
sabbatical to reimburse UCSF for the Consultant's non-state funded compensation
and the Company agrees to continue to pay such amount during the Consultant's in
residence sabbatical, pursuant to UCSF policy.
6. FRINGE BENEFITS. To the extent the Consultant is not eligible for
similar or superior benefits through the Consultant's relationship with UCSF,
the Company agrees to provide the Consultant with at least the same non-wage
employment benefits as the Company routinely offers to its full-time employees.
7. EXPENSES. The Consultant shall be entitled to reimbursement by the
Company for all reasonable expenses the Consultant incurs in the conduct of
activities requested by the Company related to the Field of Activity.
8. RIGHTS OF FIRST REFUSAL. The Consultant agrees that prior to making
any requests to third parties for grants or sponsored research to support work
within the Field of Activity, the Consultant will present the Consultant's
proposed project to the Company and offer the Company the opportunity to support
such work in exchange for rights in resulting patents. If the Company declines
such opportunity, the Consultant may obtain support from other parties for such
work.
9. EXTERNAL CONSULTING. Notwithstanding any other provision of this
Agreement, prior to entering into a consulting arrangement with any other entity
(other than those existing commitments set forth on Appendix I ("External
Consulting Activities"), the Consultant agrees to notify the Company as to the
identity of such entity and the amount of the Consultant's professional time
proposed to be devoted to such External Consulting Activities. The Consultant
further agrees not to engage in External Consulting Activities if the Company
promptly notifies the Consultant that such proposed activities are with an
entity the Company deems to be a competitor with the Company or are activities
which the Company reasonably believes will conflict with the Company's business
objectives. During any period in which the Consultant's time commitment to the
Company pursuant to Section 3 above is twenty percent (20%) or more of
Consultant's professional time, the Consultant agrees not to engage in any
External Consulting Activities, without the prior approval of the Company (not
to be unreasonably withheld).
10. CONSENTS. The Consultant agrees to obtain all consents and approvals
from UCSF necessary to undertake and carry out the Consultant's obligations
under this Agreement. The parties acknowledge that this Agreement is intended
to comply with the policies of such institution in effect on the date hereof.
4
<PAGE>
11. PERFORMANCE OF OBLIGATIONS. The Consultant represents and warrants
that the Consultant will perform the Consulting Activities obligations under
this Agreement (a) solely on the Consultant's own time, (b) solely with supplies
and equipment provided by the Company, as set forth in Section 14 below, and
(c) at such locations, excluding in all cases the campuses of UCSF (unless
Company sponsored research is approved for conduct at UCSF), as the Company and
the Consultant may mutually agree.
12. NO CONFLICTS. The Consultant represents and warrants that the
Consultant's performance of this Agreement does not conflict with any written or
oral agreement the Consultant has entered.
13. REPORTS. The Consultant shall keep the Company fully informed of the
Consultant's activities under this Agreement and, at the request of the Company,
shall discuss all matters relating to the conduct of Consultant's activities
hereunder with personnel designated by the Company. If requested by the
Company, the Consultant shall provide the Company with written reports
describing the Consultant's activities under this Agreement.
14. SUPPLIES. The Company shall provide the Consultant with premises,
supplies and equipment as mutually agreed from time to time, at which location
and with such equipment and supplies the Consultant shall perform the Consulting
Activities.
15. PROPERTY RIGHTS. The Consultant represents and warrants that except
as set forth on Appendix II and except for the inventions covered by the Patent,
the Consultant has not made patentable inventions within the Field of Activity
prior to the date of this Agreement. The Consultant agrees to assign to the
Company any and all right, title and interest in or to any and all inventions,
developments, designs, improvements, trade secrets, formulae, processes,
devices, instruments, techniques, know-how and data (the "Inventions," or,
individually, "Invention") whether or not patentable or registrable under
copyright or similar statutes, made or conceived or reduced to practice or
learned by the Consultant, either alone or jointly with others, during the term
of this Agreement and which result from Consulting Activities. In the event the
Consultant makes an Invention that is within the Field of Activity and is within
the scope of the Company's business plans while the Consultant is performing
work unrelated to the Consulting Activities, if the Company so requests, the
Consultant shall use reasonable best efforts to cause the Invention to be
assigned to the Company (subject to limitations on Consultant's efforts under
applicable UCSF policy), and if the Company so requests, the Consultant agrees
to assign to the Company any income due to the Consultant from such Invention.
16. CONTINUED COOPERATION. The Consultant agrees to assist the Company in
every proper way in obtaining and from time to time in enforcing United States
and foreign patents, copyrights, and other rights and protections relating to
the Company Inventions in any and all countries. To that end, the Consultant
agrees to execute, verify and deliver such documents and to perform such other
acts (including appearances as a witness) as the Company may reasonably request
for use in applying for, obtaining, sustaining and enforcing such patents,
copyrights and other rights and protections on the Company's Inventions. In
addition, the Consultant agrees to execute, verify and deliver assignments of
such patents, copyrights, and other rights and protections on the Company
Inventions to the Company or its designee. The Consultant's obligations under
this Section 16 shall continue after expiration or termination of this
5
<PAGE>
Agreement, and the Company shall compensate the Consultant at a reasonable rate
after such expiration or termination for Consultant's time and expenses related
to such requests for assistance by the Company. In the event the Company is
unable, after reasonable effort, to secure the Consultant's signature on any
document needed to apply for or prosecute any patent, copyright, or other right
or protection relating to any Invention of the Company, the Consultant hereby
irrevocably designates and appoints the Company and its duly authorized agents
as agent and attorney in fact, to act for and in the Consultant's behalf to
execute, verify and file any such applications and to do all other lawfully
permitted acts to further the prosecution and issuance of patents, copyrights,
and other rights and protections thereon with the same legal force and effect as
if executed by the Consultant.
17. CONFIDENTIAL INFORMATION. The term "Confidential Information" shall
mean all information the Company desires, for business reasons, to hold in
confidence. By way of illustration but not limitation, Confidential Information
includes (a) Inventions, as defined in Section 15 above and (b) plans for
research, development, new products, marketing and selling; information
regarding business plans, budgets and unpublished financial statements;
licenses; prices and costs; information concerning suppliers and customers; and
information regarding the skills and compensation of employees of or other
consultants to the Company. The Consultant agrees to hold all such Confidential
Information in strictest confidence and not to disclose or use any of the
Company's Confidential Information except as such use or disclosure may be
required in connection with work for the Company, unless an officer of the
Company expressly authorizes such disclosure or use. The Consultant further
agrees to assign to the Company any rights the Consultant has or may acquire in
such Confidential Information to the Company and agrees that all Confidential
Information shall be the sole property of the Company and its assigns.
18. PUBLICATION. The Company agrees not to interfere with, and in
principle supports, the Consultant's academic research and publication of
scientific findings. The Consultant agrees to submit any material related to
the Field of Activity to the Company for its review before publication and the
Consultant agrees not to make public disclosures relating to the Field of
Activity which the Company believes will have an adverse effect on the business
of the Company without the Company's prior consent.
19. DEFAULT. In the event of a material default or material breach of any
provision of this Agreement by either party, the non-defaulting party shall give
written notice of such default to the defaulting party pursuant to Section 21,
below. If the default or breach is not capable of a cure, or if capable of a
cure, is not cured within 60 days of the date of said notice, the non-defaulting
party shall have the right to terminate this Agreement, which right shall not be
such party's exclusive remedy.
20. MATERIALS. The Consultant agrees to maintain, in sufficient detail to
reflect properly all work done and results achieved in the performance of this
Agreement, such books, records, reports, research notes, charts, graphs,
comments, computations, analyses, recordings, photographs, and other graphic,
written or electronically stored data generated in connection with the
Consulting Activities to be performed hereunder. All such material shall become
the property of the Company when produced, whether or not delivered to the
Company, shall be subject to inspection by personnel designated by the Company
at reasonable times, and shall, together with any materials, equipment, supplies
or rights to the use and occupation of any
6
<PAGE>
premises furnished by the Company to the Consultant under this Agreement, be
delivered to the Company (together with any reproductions thereof) upon
expiration or termination of this Agreement. Upon such expiration or
termination, the Consultant shall not retain or dispose of any of the materials
(or reproductions thereof) covered hereunder, except by delivery to the Company.
21. NOTICE. All notices hereunder shall be in writing and shall be
delivered personally, by overnight delivery service, by fax or by first class
mail sent postage prepaid to the parties hereto at their respective addresses as
set forth on the signature page hereof. Either party may change its address by
written notice. Any notice hereunder shall be deemed delivered upon receipt,
which in the case of notice sent by overnight courier or by fax shall be deemed
to be the earlier of receipt or the next business day and which in the case of
the mail shall be deemed to be the earlier of receipt or five business days
after deposit in the US mail, postage prepaid. A business day is deemed to be
any day other than a Saturday, Sunday or federal holiday.
22. WAIVER. Failure on any occasion by either party to enforce any
provision of this Agreement shall not prevent its enforcement by such party on
any other occasion.
23. ENTIRE AGREEMENT. This Agreement constitutes the sole agreement of
the parties hereto relating to the subject matter hereof and supersedes all
prior agreements with respect to the subject matter hereof. This Agreement
shall not be amended, altered or modified other than by written agreement
between the parties hereto.
24. PREVIOUS INVENTIONS. The parties hereto acknowledge that the Company
will separately negotiate with the Regents of the University of California and
Rutgers to receive an exclusive license under all foreign and domestic rights
stemming from the Patent. The Company acknowledges that the Consultant shall
receive a portion of whatever sums are paid to the UCSF in respect of those
patent rights.
25. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of California, without giving effect to the principles of conflict of laws
thereof.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Consulting Agreement as
of the date first above set forth.
SCIENTIFIC LEARNING PRINCIPLES CORPORATION
By: /s/ Carleton A. Hostrom
----------------------------------------
Carleton A. Holstrom
Chief Financial Officer
Address: One Kearny Street
Suite 501
San Francisco, CA 94108
Facsimile: (415) 296-1481
Telephone: (415) 296-1470
CONSULTANT
/s/ Michael M. Merzenich
-------------------------------------------
Michael M. Merzenich, Ph.D
Address: 20 Hillpoint
San Francisco, CA 94117
Facsimile: (415) 476-1941
Telephone: (415) 665-5448
8
<PAGE>
APPENDIX I
Pre-existing consulting commitments are as follows:
COMPLETED BY DR. MERZENICH
I have terminated all other commercial consulting agreements.
Non-commercial agreements will be limited to: (i) U.S. and foreign government
research and education agencies, (ii) public and private universities and (iii)
non-commercial research centers and foundations.
9
<PAGE>
APPENDIX II
Consultant has conducted research at UCSF unrelated to Consulting Activities
that has led or may lead to other inventions that may be "related to" the
Patent, which may or may not be of interest to the Company and which may or may
not be covered by the Patent.
10
<PAGE>
MODIFICATION TO CONSULTING AGREEMENT
This Agreement ("Modification") modifies the Consulting Agreement ("Original
Agreement") dated September 20, 1996, between Scientific Learning Corporation
("Company") of Berkeley, California and Michael M. Merzenich, Ph.D.
("Consultant"). To the extent that there are any differences between the
Modification and the Original Agreement, the term(s) of the Modification
supercedes the corresponding term(s) of the Original Agreement. Accordingly,
Company and Consultant agree that:
1) As of December 15, 1997, Consultant has returned officially to the
University of California at San Francisco ("UCSF") as a full-time resident
faculty member.
2) Between December 15, 1997 and December 31, 1998, Consultant shall devote
20% of Consultant's total professional time on consulting activities for
the Company.
3) In consideration of the consulting activities provided by Consultant,
Company shall pay Consultant consulting fees of $2,167 per month for the
twelve months beginning January 1998 and ending December 1998. In
addition, Company shall pay Consultant a fee of $1,084 for services
rendered during the period of December 15, 1997 through December 31, 1997.
4) Company shall reimburse Consultant for reasonable and customary expenses
that Consultant incurs in connection with Company's business. Such
expenses are subject to the Company's current expense/purchase approval
policies. For example, all business travel must be approved in advance by
either the Chief Executive Officer or the Chief Financial Officer or their
designees.
5) Company shall coordinate with Consultant as needed with respect to
intellectual property matters that may arise with UCSF.
6) Consultant is responsible for ensuring that consulting for Company under
both the Original Agreement and this Modification is consistent with the
current policies of UCSF such as UCSF's conflict of interest policy.
Accepted and agreed by:
SCIENTIFIC LEARNING CORPORATION CONSULTANT
/s/ Frank Mattson /s/ Michael M. Merzenich
- --------------------------------- ---------------------------------
Authorized Signature Michael M. Merzenich, Ph. D.
Frank Mattson January 19, 1998
- --------------------------------- ---------------------------------
Printed Name Date
Chief Financial Officer
- ---------------------------------
Title
January 15, 1998
- ---------------------------------
Date
<PAGE>
EXHIBIT 10.11
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement") is entered into as of
this 19th day of September, 1996, by and between SCIENTIFIC LEARNING PRINCIPLES
CORPORATION, a California corporation (the "Company"), and PAULA A. TALLAL,
PH.D. (the "Consultant") to memorialize certain arrangements previously made
between the parties and to record their understanding of their business
arrangements.
RECITALS
WHEREAS, the Company proposes to develop products based on new technology
relating to language learning impairments;
WHEREAS, Consultant is a leading scientist in the forefront of developing
technology to assess and treat language learning impairment; and
WHEREAS, the Company and the Consultant desire to enter into a consulting
arrangement whereby the Company shall benefit from the Consultant's unique
knowledge and experience;
NOW, THEREFORE, in consideration of the mutual undertakings set forth
herein, the parties hereby agree as follows.
AGREEMENT
1. SCOPE. The purpose of this Agreement is to provide for the
performance by the Consultant of research, investigation and consultation on
behalf of the Company to advance and enable the Company to commercially exploit
research related to the inventions described in Pending U.S. Patent Application
Serial No. 08/351,803 entitled "Method and Device for Enhancing the Recognition
of Speech Among Speech Impaired Individuals," filed December 8, 1994 by Drs.
Merzenich, Jenkins, Schreiner, Tallal and Miller and assigned to the Regents of
the University of California and Rutgers-the State University of New Jersey (the
"Patent"), as well as other areas as shall from time to time be mutually agreed
upon by the parties hereto ("Field of Activity"). The Consultant's specific
consulting assignments within the Field of Activity and such other general
consulting services as the Company may reasonably request ("Consulting
Activities") shall be determined from time to time by the Chief Executive
Officer of the Company or by any other officer empowered by the Company's Board
of Directors to determine the Consultant's assignments.
2. TERM. This Agreement shall be deemed effective as of January 31, 1996
(the "Effective Date") and shall terminate on December 31, 2001, unless earlier
terminated pursuant to Section 19, below, or unless extended by mutual written
consent of the parties hereto.
3. TIME COMMITMENT.
(a) The parties acknowledge that during the period from the Effective
Date through May 31, 1996 the Consultant devoted twenty percent (20%) of the
Consultant's
<PAGE>
professional time available under Consultant's employment arrangements with
Rutgers-the State University of New Jersey ("Rutgers") to Consulting Activities.
(b) The parties acknowledge that during the period from June 1, 1996
through August 31, 1996, the Consultant devoted one hundred percent (100%) of
the Consultant's professional time to Consulting Activities.
(c) During the period from September 1, 1996 through December 31,
1996, the Consultant agrees to devote an aggregate of one (1) day per week of
the Consultant's total professional time available under Consultant's employment
arrangements with Rutgers-the State University of New Jersey ("Rutgers") to
Consulting Activities.
(d) The Consultant has advised the Company that the Consultant has
requested and received permission from Rutgers for an off campus sabbatical for
a period of one year commencing January 1, 1997. For the period from January 1,
1997 through December 31, 1997, the Consultant agrees to devote an aggregate of
100 percent of the Consultant's total professional time available under
Consultant's sabbatical leave, other than time engaged in Permitted Sabbatical
Activities (defined below), to Consulting Activities. "Permitted Sabbatical
Activities" means administrative activities, student advising activities,
scientific writing, grant supervision activities (for grants outside the Field
of Activity) at Rutgers, and lecturing activities, all of which activities shall
not exceed, on average, five (5) days per month.
(e) For the period commencing January 1, 1998 through September 30,
2001, the Consultant agrees to devote an aggregate of up to one day per week on
Consulting Activities. On or prior to July 1, 1997, the Company shall notify
the Consultant as to the amount of professional time the Company requires the
Consultant to reserve for Consulting Activities for the period from March 26,
1998 through December 31, 1998. On or prior to each successive July first, the
Company shall notify the Consultant as to the amount of professional time the
Company requires the Consultant to reserve for Consulting Activities for the
next calendar year during the term of this Agreement. The Company shall notify
the Consultant that it requires (a) one day per week of the Consultant's
professional time, in which case the Consultant shall reserve an average of one
day per week for Consulting Activities on behalf of the Company, (b) one-half
day per week of the Consultant's professional time, in which case the Consultant
shall reserve an average of one-half day per week for Consulting Activities on
behalf of the Company, or (c) less than one-half day per week of the
Consultant's professional time, in which case the Consultant shall reserve time
at the Consultant's own discretion. Any such notice may be hereinafter referred
to as "Anticipated Request."
(f) When Consultant is engaged in less than full-time work on behalf
of the Company, as described in paragraphs 3(a), (c) and (e), the parties
acknowledge that requests for the Consultant to engage in Consulting Activities
shall be of sufficient flexibility as to allow for reasonable accommodation of
the Consultant's personal and professional schedules.
4. COMPENSATION.
(a) The parties acknowledge that for the period from the Effective
Date through May 31, 1996, the Consultant shall receive no compensation from the
Company.
2
<PAGE>
(b) The parties acknowledge that for the period from June 1, 1996
through August 31, 1996, the Consultant received $44,629 as compensation from
the Company.
(c) For the period from September 1, 1996 through December 31, 1996,
the Consultant shall be paid $500 per day worked at the request of the Company
and shall work one (1) day per week for the Company.
(d) For the period commencing January 1, 1997 through December 31,
1997, during the Consultant's off campus sabbatical leave from Rutgers, pursuant
to Rutgers policy the Consultant shall be paid eighty percent (80%) salary by
Rutgers and an additional $2,976 per month by the Company; provided, however,
that for the period from June 1, 1997 through August 31, 1997 the Company shall
pay the Consultant $44,629 in lieu of the monthly fee.
(e) Pursuant to paragraph 3(e) above, the Company shall notify the
Consultant of the level of services requested for the subsequent calendar years
of this Agreement no later than the preceding July first. The Consultant's
compensation shall be set based upon the level of the Anticipated Requests and
the Company shall pay the Consultant consulting fees as follows: (a) if
Anticipated Requests for the period is twenty percent (20%) of the Consultant's
total professional time, then the Company agrees to pay the Consultant an amount
per year equal to the product of fifty-two (52) multiplied by the "Daily Rate"
(as defined below); (b) if Anticipated Requests for the period is ten percent
(10%) of the Consultant's total professional time, then the Company agrees to
pay the Consultant the greater of (i) an amount per year equal to the product
of twenty-six (26) multiplied by the Daily Rate or (ii) an amount equal to the
product of the Daily Rate multiplied by the number of days worked at the request
of the Company; and (c) if the Anticipated Request is less than one-half day per
week of the Consultant's total professional time, then the Company agrees to pay
the Consultant an amount equal to the Daily Rate multiplied by the number of
days worked at the request of the Company. For purposes of the calculations
described in the preceding sentence, the "Daily Rate" shall be as follows:
<TABLE>
<CAPTION>
DAILY RATE COMMENCING ENDING
<S> <C> <C>
$500 1/1/98 12/31/98
$550 1/1/99 12/31/99
$600 1/1/00 12/31/00
$650 1/1/01 12/31/01
</TABLE>
(f) Within thirty days following the end of any fiscal quarter in
which the Company reports net income exceeding $1,000,000, and the Company is
paying the Consultant based on the Daily Rate, the Company shall pay to the
Consultant an additional amount equal to fifty percent of the amount paid to the
Consultant during such quarter pursuant to paragraph 4(e).
(g) The Consultant acknowledges that a portion of such consulting
fees may be withheld by the Company and paid to taxing authorities, if and to
the extent that the Company determines it is obligated to do so under applicable
tax laws. Compensation shall be paid within 30 days of the rendering of
services, and may be prorated by the Company to coincide with the Company's
regular pay days.
3
<PAGE>
5. REIMBURSEMENTS. The Company agrees that it will reimburse Rutgers for
the compensation and benefit expenses incurred by Rutgers during the
Consultant's off campus sabbatical in the event that the Consultant does not
return to active employment at Rutgers and Rutgers seeks reimbursement of such
amounts under applicable Rutgers policy. It is agreed that the Company's
reimbursement obligation shall not exceed $200,000.
6. FRINGE BENEFITS. To the extent the Consultant is not eligible for
similar or superior benefits through the Consultant's relationship with Rutgers,
the Company agrees to provide the Consultant with at least the same non-wage
employment benefits as the Company routinely offers to its full-time employees.
7. EXPENSES. The Consultant shall be entitled to reimbursement by the
Company for all reasonable expenses the Consultant incurs in the conduct of
activities requested by the Company related to the Field of Activity.
8. RIGHTS OF FIRST REFUSAL. The Consultant agrees that prior to making
any requests to third parties for grants or sponsored research to support work
within the Field of Activity, the Consultant will present the Consultant's
proposed project to the Company and offer the Company the opportunity to support
such work in exchange for rights in resulting patents. If the Company declines
such opportunity, the Consultant may obtain support from other parties for such
work.
9. EXTERNAL CONSULTING. Notwithstanding any other provision of this
Agreement, prior to entering into a consulting arrangement with any other entity
(other than those existing commitments set forth on Appendix I ("External
Consulting Activities"), the Consultant agrees to notify the Company as to the
identity of such entity and the amount of the Consultant's professional time
proposed to be devoted to such External Consulting Activities. The Consultant
further agrees not to engage in External Consulting Activities if the Company
promptly notifies the Consultant that such proposed activities are with an
entity the Company deems to be a competitor with the Company or are activities
which the Company reasonably believes will conflict with the Company's business
objectives. During any period in which the Consultant's time commitment to the
Company pursuant to Section 3 above is one day or more per week, the Consultant
agrees not to engage in any External Consulting Activities, without the prior
approval of the Company (not to be unreasonably withheld).
10. CONSENTS. The Consultant agrees to obtain all consents and approvals
from Rutgers necessary to undertake and carry out the Consultant's obligations
under this Agreement. The parties acknowledge that this Agreement is intended
to comply with the policies of such institution in effect on the date hereof.
11. PERFORMANCE OF OBLIGATIONS. The Consultant represents and warrants
that the Consultant will perform the Consulting Activities obligations under
this Agreement (a) solely on the Consultant's own time, (b) solely with supplies
and equipment provided by the Company, as set forth in Section 14 below, and
(c) at such locations, excluding in all cases the campuses of Rutgers (unless
Company sponsored research is approved for conduct at Rutgers), as the Company
and the Consultant may mutually agree.
4
<PAGE>
12. NO CONFLICTS. The Consultant represents and warrants that the
Consultant's performance of this Agreement does not conflict with any written or
oral agreement the Consultant has entered.
13. REPORTS. The Consultant shall keep the Company fully informed of the
Consultant's activities under this Agreement and, at the request of the Company,
shall discuss all matters relating to the conduct of Consultant's activities
hereunder with personnel designated by the Company. If requested by the
Company, the Consultant shall provide the Company with written reports
describing the Consultant's activities under this Agreement.
14. SUPPLIES. The Company shall provide the Consultant with premises,
supplies and equipment as mutually agreed from time to time, at which location
and with such equipment and supplies the Consultant shall perform the Consulting
Activities.
15. PROPERTY RIGHTS. The Consultant represents and warrants that, except
for the inventions covered by the Patent, the Consultant has not made patentable
inventions within the Field of Activity prior to the date of this Agreement.
The Consultant agrees to assign to the Company any and all right, title and
interest in or to any and all inventions, developments, designs, improvements,
trade secrets, formulae, processes, devices, instruments, techniques, know-how
and data (the "Inventions," or, individually, "Invention") whether or not
patentable or registrable under copyright or similar statutes, made or conceived
or reduced to practice or learned by the Consultant, either alone or jointly
with others, during the term of this Agreement and which result from Consulting
Activities. In the event the Consultant makes an Invention that is within the
Field of Activity and is within the scope of the Company's business plans while
the Consultant is performing work unrelated to the Consulting Activities, if the
Company so requests, the Consultant shall use reasonable best efforts to cause
the Invention to be assigned to the Company (subject to limitations on
Consultant's efforts under applicable Rutgers policy), and if the Company so
requests, the Consultant agrees to assign to the Company any income due to the
Consultant from such Invention.
16. CONTINUED COOPERATION. The Consultant agrees to assist the Company in
every proper way in obtaining and from time to time in enforcing United States
and foreign patents, copyrights, and other rights and protections relating to
the Company Inventions in any and all countries. To that end, the Consultant
agrees to execute, verify and deliver such documents and to perform such other
acts (including appearances as a witness) as the Company may reasonably request
for use in applying for, obtaining, sustaining and enforcing such patents,
copyrights and other rights and protections on the Company's Inventions. In
addition, the Consultant agrees to execute, verify and deliver assignments of
such patents, copyrights, and other rights and protections on the Company
Inventions to the Company or its designee. The Consultant's obligations under
this Section 16 shall continue after expiration or termination of this
Agreement, and the Company shall compensate the Consultant at a reasonable rate
after such expiration or termination for Consultant's time and expenses related
to such requests for assistance by the Company. In the event the Company is
unable, after reasonable effort, to secure the Consultant's signature on any
document needed to apply for or prosecute any patent, copyright, or other right
or protection relating to any Invention of the Company, the Consultant hereby
irrevocably designates and appoints the Company and its duly authorized agents
as agent and attorney in fact, to act for and in the Consultant's behalf to
execute, verify and file any such
5
<PAGE>
applications and to do all other lawfully permitted acts to further the
prosecution and issuance of patents, copyrights, and other rights and
protections thereon with the same legal force and effect as if executed by the
Consultant.
17. CONFIDENTIAL INFORMATION. The term "Confidential Information" shall
mean all information the Company desires, for business reasons, to hold in
confidence. By way of illustration but not limitation, Confidential Information
includes (a) Inventions, as defined in Section 15 above and (b) plans for
research, development, new products, marketing and selling; information
regarding business plans, budgets and unpublished financial statements;
licenses; prices and costs; information concerning suppliers and customers; and
information regarding the skills and compensation of employees of or other
consultants to the Company. The Consultant agrees to hold all such Confidential
Information in strictest confidence and not to disclose or use any of the
Company's Confidential Information except as such use or disclosure may be
required in connection with work for the Company, unless an officer of the
Company expressly authorizes such disclosure or use. The Consultant further
agrees to assign to the Company any rights the Consultant has or may acquire in
such Confidential Information to the Company and agrees that all Confidential
Information shall be the sole property of the Company and its assigns.
18. PUBLICATION. The Company agrees not to interfere with, and in
principle supports, the Consultant's academic research and publication of
scientific findings. The Consultant agrees to submit any material related to
the Field of Activity to the Company for its review before publication and the
Consultant agrees not to make public disclosures relating to the Field of
Activity which the Company believes will have an adverse effect on the business
of the Company without the Company's prior consent.
19. DEFAULT. In the event of a material default or material breach of any
provision of this Agreement by either party, the non-defaulting party shall give
written notice of such default to the defaulting party pursuant to Section 21,
below. If the default or breach is not capable of a cure, or if capable of a
cure, is not cured within 60 days of the date of said notice, the non-defaulting
party shall have the right to terminate this Agreement, which right shall not be
such party's exclusive remedy.
20. MATERIALS. The Consultant agrees to maintain, in sufficient detail to
reflect properly all work done and results achieved in the performance of this
Agreement, such books, records, reports, research notes, charts, graphs,
comments, computations, analyses, recordings, photographs, and other graphic,
written or electronically stored data generated in connection with the
Consulting Activities to be performed hereunder. All such material shall become
the property of the Company when produced, whether or not delivered to the
Company, shall be subject to inspection by personnel designated by the Company
at reasonable times, and shall, together with any materials, equipment, supplies
or rights to the use and occupation of any premises furnished by the Company to
the Consultant under this Agreement, be delivered to the Company (together with
any reproductions thereof) upon expiration or termination of this Agreement.
Upon such expiration or termination, the Consultant shall not retain or dispose
of any of the materials (or reproductions thereof) covered hereunder, except by
delivery to the Company.
6
<PAGE>
21. NOTICE. All notices hereunder shall be in writing and shall be
delivered personally, by overnight delivery service, by fax or by first class
mail sent postage prepaid to the parties hereto at their respective addresses as
set forth on the signature page hereof. Either party may change its address by
written notice. Any notice hereunder shall be deemed delivered upon receipt,
which in the case of notice sent by overnight courier or by fax shall be deemed
to be the earlier of receipt or the next business day and which in the case of
the mail shall be deemed to be the earlier of receipt or five business days
after deposit in the US mail, postage prepaid. A business day is deemed to be
any day other than a Saturday, Sunday or federal holiday.
22. WAIVER. Failure on any occasion by either party to enforce any
provision of this Agreement shall not prevent its enforcement by such party on
any other occasion.
23. ENTIRE AGREEMENT. This Agreement constitutes the sole agreement of
the parties hereto relating to the subject matter hereof and supersedes all
prior agreements with respect to the subject matter hereof. This Agreement
shall not be amended, altered or modified other than by written agreement
between the parties hereto.
24. PREVIOUS INVENTIONS. The parties hereto acknowledge that the Company
will separately negotiate with the Regents of the University of California and
Rutgers to receive an exclusive license under all foreign and domestic rights
stemming from the Patent. The Company acknowledges that the Consultant shall
receive a portion of whatever sums are paid to the Rutgers in respect of those
patent rights.
25. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of California, without giving effect to the principles of conflict of laws
thereof.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Consulting Agreement as
of the date first above set forth.
SCIENTIFIC LEARNING PRINCIPLES CORPORATION
By: /s/ Carleton A. Holstrom
------------------------------------------
Carleton A. Holstrom
Chief Financial Officer
Address: One Kearny Street
Suite 501
San Francisco, CA 94108
Facsimile: (415) 296-1481
Telephone: (415) 296-1470
CONSULTANT
/s/ Paula A. Tallal
---------------------------------------------
Paula A. Tallal, Ph.D
Address: 3703 River Road
Lumberville, PA 18933
Facsimile: (201) 648-1272
Telephone: (201) 648-1080 x3200
8
<PAGE>
APPENDIX I
Pre-existing consulting commitments are as follows:
A. Grant and Public Policy Reviews
1. NIH
2. NSF
3. March of Dimes
4. Grant Foundation
5. Human Frontiers in Science Program
6. Rudel Foundation
B. Scientific Advisory Boards
1. Rodin Remediations Academy
2. March of Dimes
3. National Dyslexia Research Foundation
4. Santa Fe Institute
5. Rita Rudel Foundation
C. Consultant on Research Grant
1. Mt. Sinai School of Medicine
2. UCLA
3. NYU
4. Columbia University School of Medicine
5. Cambridge University School of Medicine
6. Children's Hospital, London
9
<PAGE>
MODIFICATION TO CONSULTING AGREEMENT
This Agreement ("Modification") modifies the Consulting Agreement ("Original
Agreement") dated September 19, 1996, between Scientific Learning Corporation
("Company") of Berkeley, California and Paula A. Tallal, Ph.D. ("Consultant").
To the extent that there are any differences between the Modification and the
Original Agreement, the term(s) of the Modification supercedes the corresponding
term(s) of the Original Agreement. Accordingly, Company and Consultant agree
that:
1) As of January 1, 1998, Consultant has returned officially to Rutgers
University as a full-time resident faculty member.
2) Between January 1, 1998 and December 31, 1998, Consultant shall devote an
average of one day per week on consulting activities for the Company.
3) In consideration of the consulting activities provided by Consultant,
Company shall pay Consultant consulting fees of $2,167 per month for the
twelve months beginning January 1998 and ending December 1998.
4) Company shall reimburse Consultant for reasonable and customary expenses
that Consultant incurs in connection with Company's business. Such
expenses are subject to the Company's current expense/purchase approval
policies. For example, all business travel must be approved in advanced by
either the Chief Executive Officer or the Chief Financial Officer or their
designees.
5) Consultant is responsible for ensuring that consulting for Company under
both the Original Agreement and this Modification is consistent with the
current policies of Rutgers University such as Rutgers University's
conflict of interest policy.
Accepted and agreed by:
SCIENTIFIC LEARNING CORPORATION CONSULTANT
/s/ Frank Mattson /s/ Paula A. Tallal
- ----------------------------------- -----------------------------------
Authorized Signature Paula A. Tallal, Ph. D.
Frank Mattson January 22, 1998
- ----------------------------------- -----------------------------------
Printed Name Date
Chief Financial Officer
- -----------------------------------
Title
January 15, 1998
- -----------------------------------
Date
<PAGE>
---------------------------
LOAN AND SECURITY AGREEMENT
----------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
1. ACCOUNTING AND OTHER TERMS. . . . . . . . . . . . . . . . . . . . . . .1
2. LOAN AND TERMS OF PAYMENT . . . . . . . . . . . . . . . . . . . . . . .1
2.1 Credit Extensions. . . . . . . . . . . . . . . . . . . . . . . . .1
2.2 Interest Rate, Payments. . . . . . . . . . . . . . . . . . . . . .2
2.3 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
3. CONDITIONS OF LOANS . . . . . . . . . . . . . . . . . . . . . . . . . .2
3.1 Conditions Precedent to Initial Credit Extension . . . . . . . . .3
3.2 Conditions Precedent to all Credit Extensions. . . . . . . . . . .3
4. CREATION OF SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . .3
4.1 Grant of Security Interest . . . . . . . . . . . . . . . . . . . .3
5. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . .3
5.1 Due Organization and Authorization . . . . . . . . . . . . . . . .3
5.2 Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
5.3 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
5.4 No Material Adverse Change in Financial Statements . . . . . . . .4
5.5 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
5.6 Regulatory Compliance. . . . . . . . . . . . . . . . . . . . . . .4
5.7 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . .4
5.8 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . .5
6. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . .5
6.1 Government Compliance. . . . . . . . . . . . . . . . . . . . . . .5
6.2 Financial Statements, Reports, Certificates. . . . . . . . . . . .5
6.3 Inventory; Returns . . . . . . . . . . . . . . . . . . . . . . . .5
6.4 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
6.5 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
6.6 Primary Accounts . . . . . . . . . . . . . . . . . . . . . . . . .6
6.7 Financial Covenants. . . . . . . . . . . . . . . . . . . . . . . .6
6.8 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . .7
7. NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . .7
7.1 Dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . .7
</TABLE>
i.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
7.2 Changes in Business, Ownership, Management or Business Locations .7
7.3 Mergers or Acquisitions. . . . . . . . . . . . . . . . . . . . . .7
7.4 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . .8
7.5 Encumbrance. . . . . . . . . . . . . . . . . . . . . . . . . . . .8
7.6 Distributions; Investments . . . . . . . . . . . . . . . . . . . .8
7.7 Transactions with Affiliates . . . . . . . . . . . . . . . . . . .8
7.8 Subordinated Debt. . . . . . . . . . . . . . . . . . . . . . . . .8
7.9 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
8. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . .8
8.1 Payment Default. . . . . . . . . . . . . . . . . . . . . . . . . .9
8.2 Covenant Default . . . . . . . . . . . . . . . . . . . . . . . . .9
8.3 Material Adverse Change. . . . . . . . . . . . . . . . . . . . . .9
8.4 Attachment . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
8.5 Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
8.6 Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . .9
8.7 Judgments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
8.8 Misrepresentations . . . . . . . . . . . . . . . . . . . . . . . 10
9. BANK'S RIGHTS AND REMEDIES. . . . . . . . . . . . . . . . . . . . . . 10
9.1 Rights and Remedies. . . . . . . . . . . . . . . . . . . . . . . 10
9.2 Power of Attorney. . . . . . . . . . . . . . . . . . . . . . . . 11
9.3 Accounts Collection. . . . . . . . . . . . . . . . . . . . . . . 11
9.4 Bank Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 11
9.5 Bank's Liability for Collateral. . . . . . . . . . . . . . . . . 11
9.6 Remedies Cumulative. . . . . . . . . . . . . . . . . . . . . . . 11
9.7 Demand Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . 12
10. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
11. CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER. . . . . . . . . . . . . . 12
12. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 12
12.1 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . 12
12.2 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
ii.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
12.3 Time of Essence. . . . . . . . . . . . . . . . . . . . . . . . . 13
12.4 Severability of Provision. . . . . . . . . . . . . . . . . . . . 13
12.5 Amendments in Writing, Integration . . . . . . . . . . . . . . . 13
12.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . 13
12.7 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
12.8 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . 13
13. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
13.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
iii.
<PAGE>
THIS LOAN AND SECURITY AGREEMENT dated February 13, 1998, between SILICON
VALLEY BANK ("Bank"), whose address is 3003 Tasman Drive, Santa Clara,
California 95054 with a loan production office located at 1731 Embarcadero, Ste.
220, Palo Alto, California 94303 and SCIENTIFIC LEARNING CORPORATION
("Borrower"), whose address is 1995 University Avenue, Suite 400. Berkeley,
California 94704 provides the terms on which Bank will lend to Borrower and
Borrower will repay Bank. The parties agree as follows:
1. ACCOUNTING AND OTHER TERMS
Accounting terms not defined in this Agreement will be construed following
GAAP Calculations and determinations must be made following GAAP. The term
"financial statements" includes the notes and schedules. The terms "including"
and "includes" always mean "including (or includes) without limitation," in this
or any Loan Document. This Agreement shall be construed to impart upon Bank a
duty to act reasonably at all times.
2. LOAN AND TERMS OF PAYMENT
2.1 CREDIT EXTENSIONS.
Borrower will pay Bank the unpaid principal amount of all Credit
Extensions and interest on the unpaid principal amount of the Credit Extensions.
2.1.1 TERM LOAN.
(A) Bank will make a Term Loan available to Borrower.
(b) Borrower will pay 15 equal installments of $16,136.37
in principal plus interest (the "Term Loan Payment"). Each Term Loan Payment is
payable on the 20th of each month, commencing April 20, 1998, during the term of
the loan. Borrower's final Term Loan Payment, due June 20, 1999, includes all
outstanding Term Loan principal and accrued interest.
(c) The Term Loan accrues interest at three percentage
points (3.000%) above the Prime Rate.
2.1.2 CASH MANAGEMENT FACILITY.
Borrower may use up to $45,000 for Bank's Cash Management
Services, which may include merchant services, direct deposit of payroll,
business credit card, and check cashing services identified in the Cash
Management Services Agreement (the "Cash Management Services"). All amounts
Bank pays for any Cash Management Services will be treated as a Credit Extension
and shall accrue interest at three percentage points (3.000%) above the Prime
Rate. The Cash Management Facility terminates on June 20, 1999, when all
amounts due under this facility are immediately payable.
2.1.3 EQUIPMENT ADVANCES.
1.
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(a) Through August 13, 1998 (the "Equipment Availability
End Date"), Bank will make advances ("Equipment Advance" and, collectively,
"Equipment Advances") not exceeding the Committed Equipment Line. The Equipment
Advances may only be used to finance Equipment and may not exceed 100% of the
equipment invoice excluding taxes, shipping, warranty charges, freight discounts
and installation expense.
(b) Interest accrues from the date of each Equipment
Advance at the rate in Section 2.2(a) and is payable monthly until the Equipment
Availability End Date occurs. Equipment Advances outstanding on the Equipment
Availability End Date are payable in twenty-four (24) equal monthly installments
of principal, plus accrued interest, beginning on the thirteenth (13th) of each
month following the Equipment Availability End Date and ending on August 13,
2000 (the "Equipment Maturity Date"). Equipment Advances when repaid may not be
reborrowed.
(c) To obtain an Equipment Advance, Borrower must notify
Bank (the notice is irrevocable) by facsimile no later than 3:00 p.m. Pacific
time 1 Business Day before the day on which the Equipment Advance is to be made.
The notice in the form of Exhibit B (Payment/Advance Form) must be signed by a
Responsible Officer or designee and include a copy of the invoice for the
Equipment being financed.
2.2 INTEREST RATE, PAYMENTS.
(a) INTEREST RATE. Equipment Advances accrue interest on the
outstanding principal balance at a per annum rate of three percentage points
(3.000%) above the Prime Rate. After an Event of Default. Obligations accrue
interest at five percentage points (5.000%) above the rate effective immediately
before the Event of Default. The interest rate increases or decreases when the
Prime Rate changes. Interest is computed on a 360 day year for the actual
number of days elapsed.
(b) PAYMENTS. Interest due on the Equipment Advances is payable on
the thirteenth (13th) of each month. Bank may debit any of Borrower's deposit
accounts including Account Number __________ for principal and interest payments
or any amounts Borrower owes Bank. Bank will notify Borrower when it debits
Borrower's accounts. These debits are not a set-off. Payments received after
12:00 noon Pacific time are considered received at the opening of business on
the next Business Day. When a payment is due on a day that is not a Business
Day, the payment is due the next Business Day and additional fees or interest
accrue.
2.3 FEES.
Borrower will pay:
(a) FACILITY FEE. A fully earned, non-refundable Facility Fee of
$1,125 due on the Closing Date; and
(b) BANK EXPENSES. All Bank Expenses (including reasonable
attorneys' fees and expenses) incurred through and after the date of this
Agreement, are payable when due.
3. CONDITIONS OF LOANS
2.
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3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION.
Bank's obligation to make the initial Credit Extension is subject to
the condition precedent that it receive the agreements, documents and fees it
requires.
3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS.
Bank's obligations to make each Credit Extension, including the
initial Credit Extension, is subject to the following:
(a) timely receipt of any Payment/Advance Form; and
(b) the representations and warranties in Section 5 must be
materially true on the date of the Payment/Advance Form and on the effective
date of each Credit Extension and no Event of Default may have occurred and be
continuing, or result from the Credit Extension. Each Credit Extension is
Borrower's representation and warranty on that date that the representations and
warranties of Section 5 remain true.
4. CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST.
Borrower grants Bank a continuing security interest in all presently
existing and later acquired Collateral to secure all Obligations and performance
of each of Borrower's duties under the Loan Documents. Except for Permitted
Liens, any security interest will be a first priority security interest in the
Collateral. Bank may place a "hold" on any deposit account pledged as
Collateral.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND AUTHORIZATION.
Borrower and each Subsidiary is duly existing and in good standing in
its state of formation and qualified and licensed to do business in, and in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be qualified.
The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formation documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which or by which it
is bound in which the default could cause a Material Adverse Change.
3.
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5.2 COLLATERAL.
Borrower has good title to the Collateral, free of Liens except
Permitted Liens. All Inventory is in all material respects of good and
marketable quality, free from material defects.
5.3 LITIGATION.
Except as shown in the Schedule, there are no actions or proceedings
pending or, to Borrower's knowledge, threatened by or against Borrower or any
Subsidiary in which an adverse decision could cause a Material Adverse Change.
5.4 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS.
All consolidated financial statements for Borrower, and any
Subsidiary, delivered to Bank fairly present in all material respects Borrower's
consolidated financial condition and Borrower's consolidated results of
operations. There has not been any material deterioration in Borrower's
consolidated financial condition since the date of the most recent financial
statements submitted to Bank.
5.5 SOLVENCY.
The fair salable value of Borrower's assets (including goodwill minus
disposition costs) exceeds the fair value of its liabilities; the Borrower is
not left with unreasonably small capital after the transactions in this
Agreement; and Borrower is able to pay its debts (including trade debts) as they
mature
5.6 REGULATORY COMPLIANCE.
Borrower is not an "investment company" or a company "controlled" by
an "investment company" under the Investment Company Act. Borrower is not
engaged as one of its important activities in extending credit for margin stock
(under Regulations G, T and U of the Federal Reserve Board of Governors).
Borrower has complied with the Federal Fair Labor Standards Act. Borrower has
not violated any laws, ordinances or rules, the violation of which could cause a
Material Adverse Change. None of Borrower's or any Subsidiary's properties or
assets has been used by Borrower or any Subsidiary or, to the best of Borrower's
knowledge, by previous Persons, in disposing, producing, storing, treating, or
transporting any hazardous substance other than legally. Borrower and each
Subsidiary has timely filed all required tax returns and paid, or made adequate
provision to pay, all taxes, except those being contested in good faith with
adequate reserves under GAAP. Borrower and each Subsidiary has obtained all
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all government authorities that are necessary to
continue its business as currently conducted.
5.7 SUBSIDIARIES.
Borrower does not own any stock, partnership interest or other equity
securities except for Permitted Investments.
4.
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5.8 FULL DISCLOSURE.
No representation, warranty or other statement of Borrower in any
certificate or written statement given to Bank contains any untrue statement of
a material fact or omits to state a material fact necessary to make the
statements contained in the certificates or statements misleading.
6. AFFIRMATIVE COVENANTS
Borrower will do all of the following:
6.1 GOVERNMENT COMPLIANCE.
Borrower will maintain its and all Subsidiaries' legal existence and
good standing in its jurisdiction of formation and maintain qualification in
each jurisdiction in which the failure to so qualify could have a material
adverse effect on Borrower's business or operations. Borrower will comply, and
have each Subsidiary comply, with all laws, ordinances and regulations to which
it is subject, noncompliance with which could have a material adverse effect on
Borrower's business or operations or cause a Material Adverse Change.
6.2 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.
(A) Borrower will deliver to Bank: (i) annual cash flow projections
(ii) as soon as available, but no later than 30 days after the last day of each
month, a company prepared consolidated balance sheet and income statement
covering Borrower's consolidated operations during the period, in a form and
certified by a Responsible Officer acceptable to Bank; (iii) as soon as
available, but no later than 120 days after the last day of Borrower's fiscal
year, audited consolidated financial statements prepared under GAAP,
consistently applied, together with an unqualified opinion on the financial
statements from an independent certified public accounting firm acceptable to
Bank; (iv) a prompt report of any legal actions pending or threatened against
Borrower or any Subsidiary that could result in damages or costs to Borrower or
any Subsidiary of $100,000 or more; and (v) budgets, sales projections,
operating plans or other financial information Bank requests.
(b) Within 30 days after the last day of each month, Borrower will
deliver to Bank with the monthly financial statements a Compliance Certificate
signed by a Responsible Officer in the form of Exhibit C.
6.3 INVENTORY; RETURNS.
Borrower will keep all Inventory in good and marketable condition,
free from material defects. Returns and allowances between Borrower and its
account debtors will follow Borrower's customary, practices as they exist at
execution of this Agreement. Borrower must promptly notify Bank of all returns,
recoveries, disputes and claims, that involve more than $50,000.
5.
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6.4 TAXES.
Borrower will make, and cause each Subsidiary to make. timely payment
of all material federal, state, and local taxes or assessments and will deliver
to Bank, on demand, appropriate certificates attesting to the payment.
6.5 INSURANCE.
Borrower will keep its business and the Collateral insured for risks
and in amounts, as Bank requests. Insurance policies will be in a form, with
companies, and in amounts that are satisfactory to Bank. All property policies
will have a lender's loss payable endorsement showing Bank as an additional loss
payee and all liability policies will show the Bank as an additional insured and
provide that the insurer must give Bank at least 20 days notice before canceling
its policy. At Bank's request, Borrower will deliver certified copies of
policies and evidence of all premium payments. Proceeds payable under any
policy will, at Bank's option, be payable to Bank on account of the Obligations.
6.6 PRIMARY ACCOUNTS.
Borrower will maintain its primary depository and operating accounts
with Bank.
6.7 FINANCIAL COVENANTS.
Borrower shall maintain a Liquidity Coverage ratio as follows:
Beginning with the month ended January 31, 1998 and for each of the months
ending February 28, 1998 and March 31, 1998, Borrower shall maintain a minimum
Liquidity Coverage ratio defined as, unrestricted cash plus 50% of Accounts
divided by the Total Potential Liability of 1.25 to 1.00;
Beginning with the month ending April 30, 1998, Borrower shall maintain a
minimum Liquidity Coverage ratio defined as, unrestricted cash plus 50% of
Accounts plus 50% of projected revenue for the following month, divided by the
Total Potential Liability of 1.25 to 1.00, increasing to 1.50 to 1.00 for the
months ending May 31, 1998 and June 30, 1998;
Borrower shall maintain a minimum Liquidity Coverage ratio defined as,
unrestricted cash plus 50% of Accounts divided by the Total Potential Liability
of 1.50 to 1.00 for the month ending July 31, 1998;
Borrower shall maintain a minimum Liquidity Coverage ratio defined as,
unrestricted cash plus 50% of Accounts divided by the Total Potential Liability
of 1.75 to 1.00 for the months ending August 31, 1998 and September 30, 1998;
and
Borrower shall maintain a minimum Liquidity Coverage ratio defined as,
unrestricted cash plus 50% of Accounts divided by the Total Potential Liability
of 2.00 to 1.00 for the months ending October 31, 1998 and thereafter.
6.
<PAGE>
Notwithstanding the foregoing, should Borrower fail to comply with the
above stated Liquidity Coverage ratio, it will not be deemed an Event of
Default, provided Borrower pledges cash to Bank to secure the outstandings under
the Committed Equipment Line until such time as Borrower meets or exceeds the
minimum Liquidity Coverage ratio for such period.
At such time as Borrower achieves two (2) consecutive quarters of
profitability, the minimum Liquidity Coverage ratio will be replaced with a
minimum Debt Service Coverage ratio of 1.50 to 1.00 defined as, net income plus
non-cash expenses plus interest expense, divided by the current portion of
amortizing debt plus interest expense, monitored on a rolling two (2)-quarter
basis.
6.8 FURTHER ASSURANCES.
Borrower will execute any further instruments and take further action
as Bank requests to perfect or continue Bank's security interest in the
Collateral or to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
Borrower will not do any of the following:
7.1 DISPOSITIONS.
Convey, sell, lease, transfer or otherwise dispose of (collectively
"Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of
its business or property, other than Transfers (i) of Inventory in the ordinary
course of business, (ii) of non-exclusive licenses and similar arrangements for
the use of the property of Borrower or its Subsidiaries in the ordinary course
of business, or (iii) of worn-out or obsolete Equipment.
7.2 CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR BUSINESS LOCATIONS.
Engage in or permit any of its Subsidiaries to engage in any business
other than the businesses currently engaged in by Borrower or have a material
change in its ownership of greater than 25%. Borrower will not, without at
least 30 days prior written notice, relocate its chief executive office or add
any new offices or business locations.
7.3 MERGERS OR ACQUISITIONS.
(i) Merge or consolidate, or permit any of its Subsidiaries to merge
or consolidate, with any other Person, or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person, if no Event of Default has occurred and is
continuing or would result from such action during the term of this Agreement or
result in a decrease of more than 25% of Tangible Net Worth; or (ii) merge or
consolidate a Subsidiary into another Subsidiary or into Borrower.
7.
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7.4 INDEBTEDNESS.
Create, incur, assume, or be liable for any Indebtedness, or permit
any Subsidiary to do so, other than Permitted Indebtedness.
7.5 ENCUMBRANCE.
Create, incur, or allow any Lien on any of its property, or assign or
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries to do so, except for Permitted Liens, or permit
any Collateral not to be subject to the first priority security interest granted
here.
7.6 DISTRIBUTIONS; INVESTMENTS.
Directly or indirectly acquire or own any Person, or make any
Investment in any Person, other than Permitted Investments, or permit any of its
Subsidiaries to do so. Pay any dividends or make any distribution or payment or
redeem, retire or purchase any capital stock without Bank's prior written
consent and provided further, that such payment, distribution, redemption,
retirement or purchase does not cause an Event of Default.
7.7 TRANSACTIONS WITH AFFILIATES.
Directly or indirectly enter or permit any material transaction with
any Affiliate except transactions that are in the ordinary course of Borrower's
business, on terms less favorable to Borrower than would be obtained in an arm's
length transaction with a non-affiliated Person.
7.8 SUBORDINATED DEBT.
Make or permit any payment on any Subordinated Debt, except under the
terms of the Subordinated Debt, or amend any provision in any document relating
to the Subordinated Debt without Bank's prior written consent.
7.9 COMPLIANCE.
Become an "investment company" or a company controlled by an
"investment company," under the Investment Company Act of 1940 or undertake as
one of its important activities extending credit to purchase or carry margin
stock, or use the proceeds of any Advance for that purpose; fail to meet the
minimum funding requirements of ERISA, permit a Reportable Event or Prohibited
Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair
Labor Standards Act or violate any other law or regulation, if the violation
could have a material adverse effect on Borrower's business or operations or
cause a Material Adverse Change, or permit any of its Subsidiaries to do so.
8. EVENTS OF DEFAULT
Any one of the following is an Event of Default:
8.
<PAGE>
8.1 PAYMENT DEFAULT.
If Borrower fails to pay any of the Obligations;
8.2 COVENANT DEFAULT.
If Borrower does not perform any obligation in Section 6 or violates
any covenant in Section 7 or does not perform or observe any other material
term, condition or covenant in this Agreement, any Loan Documents, or in any
agreement between Borrower and Bank and as to any default under a term,
condition or covenant that can be cured, has not cured the default within 10
days after it occurs, or if the default cannot be cured within 10 days or cannot
be cured after Borrower's attempts within 10 day period, and the default may be
cured within a reasonable time, then Borrower has an additional period (of not
more than 30 days) to attempt to cure the default. During the additional time,
the failure to cure the default is not an Event of Default (but no Credit
Extensions will be made during the cure period);
8.3 MATERIAL ADVERSE CHANGE.
(i) If there occurs a material impairment in the perfection or
priority of the Bank's security interest in the Collateral or in the value of
such Collateral which is not covered by adequate insurance or (ii) if the Bank
determines, based upon information available to it and in its reasonable
judgment, that there is a reasonable likelihood that Borrower will fail to
comply with one or more of the financial covenants in Section 6 during the next
succeeding financial reporting period (subject to the conditions provided
therein).
8.4 ATTACHMENT.
If any material portion of Borrower's assets is attached, seized,
levied on, or comes into possession of a trustee or receiver and the attachment,
seizure or levy is not removed in 10 days, or if Borrower is enjoined,
restrained, or prevented by court order from conducting a material part of its
business or if a judgment or other claim becomes a Lien on a material portion of
Borrower's assets. or if a notice of lien, levy, or assessment is filed against
any of Borrower's assets by any government agency and not paid within 10 days
after Borrower receives notice. These are not Events of Default if stayed or if
a bond is posted pending contest by Borrower (but no Credit Extensions will be
made during the cure period);
8.5 INSOLVENCY.
If Borrower becomes insolvent or if Borrower begins an Insolvency
Proceeding or an Insolvency Proceeding is begun against Borrower and not
dismissed or stayed within 30 days (but no Credit Extensions will be made before
any Insolvency Proceeding is dismissed);
8.6 OTHER AGREEMENTS.
If there is a default in any agreement between Borrower and a third
party that gives the third party the right to accelerate any Indebtedness
exceeding $100,000 or that could cause a Material Adverse Change;
9.
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8.7 JUDGMENTS.
If a money judgment(s) in the aggregate of at least $50,000 is
rendered against Borrower and is unsatisfied and unstayed for 10 days (but no
Advances will be made before the judgment is stayed or satisfied); or
8.8 MISREPRESENTATIONS.
If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any writing delivered to Bank or to
induce Bank to enter this Agreement or any Loan Document.
9. BANK'S RIGHTS AND REMEDIES
9.1 RIGHTS AND REMEDIES.
When an Event of Default occurs and continues Bank may, without notice
or demand, do any or ail of the following:
(a) Declare all Obligations immediately due and payable (but if an
Event of Default described in Section 8.5 occurs all Obligations are immediately
due and payable without any action by Bank);
(b) Stop advancing money or extending credit for Borrower's benefit
under this Agreement or under any other agreement between Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account
debtors for amounts, on terms and in any order that Bank considers advisable;
(d) Make any payments and do any acts it considers necessary or
reasonable to protect its security interest in the Collateral. Borrower will
assemble the Collateral if Bank requires and make it available as Bank
designates. Bank may enter premises where the Collateral is located, take and
maintain possession of any part of the Collateral, and pay, purchase, contest,
or compromise any Lien which appears to be prior or superior to its security
interest and pay all expenses incurred. Borrower grants Bank a license to enter
and occupy any of its premises, without charge, to exercise any of Bank's rights
or remedies;
(e) Apply to the Obligations any (i) balances and deposits of
Borrower it holds, or (ii) any amount held by Bank owing to or for the credit or
the account of Borrower;
(f) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale. and sell the Collateral; and
(g) Dispose of the Collateral according to the Code.
10.
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9.2 POWER OF ATTORNEY.
Effective only when an Event of Default occurs and continues, Borrower
irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's name
on any checks or other forms of payment or security; (ii) sign Borrower's name
on any invoice or bill of lading for any Account or drafts against account
debtors, (iii) make, settle, and adjust all claims under Borrower's insurance
policies; (iv) settle and adjust disputes and claims about the Accounts directly
with account debtors, for amounts and on terms Bank determines reasonable; and
(v) transfer the Collateral into the name of Bank or a third party as the Code
permits. Bank may exercise the power of attorney to sign Borrower's name on any
documents necessary to perfect or continue the perfection of any security
interest regardless of whether an Event of Default has occurred. Bank's
appointment as Borrower's attorney in fact, and all of Bank's rights and powers,
coupled with an interest, are irrevocable until all Obligations have been fully
repaid and performed and Bank's obligation to provide Credit Extensions
terminates.
9.3 ACCOUNTS COLLECTION.
When an Event of Default occurs and continues, Bank may notify any
Person owing Borrower money of Bank's security interest in the funds and verify
the amount of the Account. Borrower must collect all payments in trust for Bank
and, if requested by Bank, immediately deliver the payments to Bank in the form
received from the account debtor, with proper endorsements for deposit.
9.4 BANK EXPENSES.
If Borrower fails to pay any amount or furnish any required proof of
payment to third persons Bank may make all or part of the payment or obtain
insurance policies required in Section 6.5, and take any action under the
policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and
immediately due and payable, bearing interest at the then applicable rate and
secured by the Collateral. No payments by Bank are deemed an agreement to make
similar payments in the future or Bank's waiver of any Event of Default.
9.5 BANK'S LIABILITY FOR COLLATERAL.
If Bank complies with reasonable banking practices it is not liable
for: (a) the safekeeping of the Collateral; (b) any loss or damage to the
Collateral; (c) any diminution in the value of the Collateral; or (d) any act or
default of any carrier, warehouseman, bailee, or other person. Borrower bears
all risk of loss, damage or destruction of the Collateral.
9.6 REMEDIES CUMULATIVE.
Bank's rights and remedies under this Agreement, the Loan Documents,
and all other agreements are cumulative. Bank has all rights and remedies
provided under the Code, by law, or in equity. Bank's exercise of one right or
remedy is not an election, and Bank's waiver of any Event of Default is not a
continuing waiver. Bank's delay is not a waiver, election, or acquiescence. No
waiver is effective unless signed by Bank and then is only effective for the
specific instance and purpose for which it was given.
11.
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9.7 DEMAND WAIVER.
Borrower waives demand, notice of default or dishonor, notice of
payment and nonpayment notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Bank on which Borrower is
liable.
10. NOTICES
All notices or demands by any party about this Agreement or any other
related agreement must be in writing and be personally delivered or sent by an
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by telefacsimile to the addresses set forth at the beginning of
this Agreement. A Party may change its notice address by giving the other Party
written notice
11. CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER
California law governs the Loan Documents without regard to principles of
conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction
of the State and Federal courts in Santa Clara County, California.
BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS
WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT.
EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
12. GENERAL PROVISIONS
12.1 SUCCESSORS AND ASSIGNS.
This Agreement binds and is for the benefit of the successors and
permitted assigns of each party. Borrower may not assign this Agreement or any
rights under it without Bank's prior written consent which may be granted or
withheld in Bank's discretion. Bank has the right, without the consent of or
notice to Borrower, to sell, transfer, negotiate, or grant participation in all
or any part of, or any interest in, Bank's obligations, rights and benefits
under this Agreement.
12.2 INDEMNIFICATION.
Borrower will indemnify, defend and hold harmless Bank and its
officers, employees, and agents against: (a) all obligations, demands, claims,
and liabilities asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or Bank Expenses
incurred, or paid by Bank from, following, or consequential to transactions
between Bank and Borrower (including reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.
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12.3 TIME OF ESSENCE.
Time is of the essence for the performance of all obligations in this
Agreement.
12.4 SEVERABILITY OF PROVISION.
Each provision of this Agreement is severable from every other
provision in determining the enforceability of any provision.
12.5 AMENDMENTS IN WRITING, INTEGRATION.
All amendments to this Agreement must be in writing. This Agreement
represents the entire agreement about this subject matter, and supersedes prior
negotiations or agreements. All prior agreements, understandings,
representations, warranties, and negotiations between the parties about the
subject matter of this Agreement merge into this Agreement and the Loan
Documents.
12.6 COUNTERPARTS.
This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, are an original, and all taken together, constitute one Agreement.
12.7 SURVIVAL.
All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding. The
obligations of Borrower in Section 12.2 to indemnify Bank will survive until all
statutes of limitations for actions that may be brought against Bank have run.
12.8 CONFIDENTIALITY.
In handling any confidential information, Bank will exercise the same
degree of care that it exercises for its own proprietary information, but
disclosure of information may be made (i) to Bank's subsidiaries or affiliates
in connection with their business with Borrower, (ii) to prospective transferees
or purchasers of any interest in the Loans, (iii) as required by law,
regulation, subpoena, or other order, (iv) as required in connection with Bank's
examination or audit and (v) as Bank considers appropriate exercising remedies
under this Agreement. Confidential information does not include information
that either: (a) is in the public domain or in Bank's possession when disclosed
to Bank, or becomes part of the public domain after disclosure to Bank; or (b)
is disclosed to Bank by a third party, if Bank does not know that the third
party is prohibited from disclosing the information.
13.
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13. DEFINITIONS
13.1 DEFINITIONS.
In this Agreement:
"ACCOUNTS" are all existing and later arising accounts, contract rights,
and other obligations owed Borrower in connection with its sale or lease of
goods (including licensing software and other technology) or provision of
services, all credit insurance, guaranties, other security and all merchandise
returned or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"ADVANCE" or "ADVANCES" is a loan advance (or advances) under the Committed
Revolving Line.
"AFFILIATE" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.
"BANK EXPENSES" are all audit fees and expenses and reasonable costs or
expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including appeals or Insolvency Proceedings).
"BORROWER'S BOOKS" are all Borrower's books and records including ledgers,
records regarding Borrower's assets or liabilities, the Collateral, business
operations or financial condition and all computer programs or discs or any
equipment containing the information.
"BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on which
the Bank is closed.
"CASH MANAGEMENT SERVICES" are defined in Section 2.1.2.
"CLOSING DATE" is the date of this Agreement.
"CODE" is the California Uniform Commercial Code.
"COLLATERAL" is the property described on Exhibit A.
"COMMITTED EQUIPMENT LINE" is a Credit Extension of up to $450,000.
"CONTINGENT OBLIGATION" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation
14.
<PAGE>
in interest rates, currency exchange rates or commodity prices; but "Contingent
Obligation" does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined by
the Person in good faith; but the amount may not exceed the maximum of the
obligations under the guarantee or other support arrangement.
"CREDIT EXTENSION" is each Equipment Advance or advance under the Cash
Management Facility or any other extension of credit by Bank for Borrower's
benefit.
"EQUIPMENT" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"EQUIPMENT ADVANCE" is defined in Section 2.1.3.
"EQUIPMENT AVAILABILITY END DATE" is defined in Section 2.1.3.
"EQUIPMENT MATURITY DATE" is defined in Section 2.1.3.
"ERISA" is the Employment Retirement Income Security Act of 1974, and its
regulations.
"GAAP" is generally accepted accounting principles.
"INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred price
of property or services, such as reimbursement and other obligations for surety
bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.
"INSOLVENCY PROCEEDING" are proceedings by or against any Person under the
United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"INVENTORY" is present and future inventory in which Borrower has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody or
possession or in transit and including returns on any accounts or other proceeds
(including insurance proceeds) from the sale or disposition of any of the
foregoing and any documents of title.
"INVESTMENT" is any beneficial ownership of (including stock, partnership
interest or other securities) any Person, or any loan, advance or capital
contribution to any Person.
"LIEN" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
15.
<PAGE>
"LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes or
guaranties executed by Borrower or Guarantor, and any other present or future
agreement between Borrower and/or for the benefit of Bank in connection with
this Agreement, all as amended, extended or restated.
"MATERIAL ADVERSE CHANGE" is defined in Section 8.3.
"OBLIGATIONS" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including letters of credit and
Exchange Contracts and including interest accruing after Insolvency Proceedings
begin and debts, liabilities, or obligations of Borrower assigned to Bank.
"PERMITTED INDEBTEDNESS" is:
(a) Borrower's indebtedness to Bank under this Agreement or any
other Loan Document;
(b) Indebtedness existing on the Closing Date and shown on the
Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary course
of business; and
(e) Indebtedness secured by Permitted Liens.
"PERMITTED INVESTMENTS" are:
(a) Investments shown on the Schedule and existing on the Closing
Date; and
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States or its agency or any State maturing within 1
year from its acquisition, (ii) commercial paper maturing no more than 1 year
after its creation and having the highest rating from either Standard & Poor's
Corporation or Moody's Investors Service, Inc., and (iii) Bank's certificates of
deposit issued maturing no more than 1 year after issue.
"PERMITTED LIENS" are:
(a) Liens existing on the Closing Date and shown on the Schedule or
arising under this Agreement or other Loan Documents;
(b) Liens for taxes, fees, assessments or other government charges
or levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, IF they have no priority over
any of Bank's security interests;
(c) Purchase money Liens (i) on Equipment acquired or held by
Borrower or its Subsidiaries incurred for financing the acquisition of the
Equipment, or (ii) existing on
16.
<PAGE>
equipment when acquired, IF the Lien is confined to the property and
improvements and the proceeds of the equipment;
(d) Leases or subleases and licenses or sublicenses granted in the
ordinary course of Borrower's business and any interest or title of a lessor,
licensor or under any lease or license, IF the leases, subleases, licenses and
sublicenses permit granting Bank a security interest;
(e) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), BUT any extension,
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase.
"PERSON" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company association, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or government agency.
"PRIME RATE" is Bank's most recently announced "prime rate," even if it is
not Bank's lowest rate.
"RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"SCHEDULE" is any attached schedule of exceptions.
"SUBORDINATED DEBT" is debt incurred by Borrower subordinated to Borrower's
debt to Bank (and identified as subordinated by Borrower and Bank)-
"SUBSIDIARY" is for any Person, or any other business entity of which more
than 50% of the voting stock or other equity interests is owned or controlled,
directly or indirectly, by the Person or one or more Affiliates of the Person.
"TERM LOAN" is a loan of $242,046.41.
"TOTAL POTENTIAL LIABILITY" is all Obligations under this Agreement or that
certain QuickStart Loan and Security Agreement dated December 20, 1996, (and all
Schedules thereto), between Borrower and Bank and any other Obligations owing by
Borrower to Bank.
17.
<PAGE>
BORROWER:
SCIENTIFIC LEARNING CORPORATION
By: [signature]
-------------------------------
Title:
----------------------------
BANK:
SILICON VALLEY BANK
By: [signature]
-------------------------------
Title:
----------------------------
18.
<PAGE>
EXHIBIT A
The Collateral consists of all of Borrower's right, title and interest in
and to the following:
All goods and equipment now owned or hereafter acquired, including, without
limitation, all machinery, fixtures, vehicles (including motor vehicles and
trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above;
All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, leases, license agreements, franchise agreements,
blueprints, drawings, purchase orders, customer lists, route lists,
infringements, claims, computer programs, computer discs, computer tapes,
literature, reports, catalogs, design rights, income tax refunds, payments of
insurance and rights to payment of any kind, excluding patent and patent
applications;
All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower;
All documents, cash, deposit accounts, securities, securities entitlements,
securities accounts, investment property, letters of credit, certificates of
deposit, instruments and chattel paper now owned or hereafter acquired and
Borrower's Books relating to the foregoing;
All copyright rights, copyright applications, copyright registrations and
like protections in each work of authorship and derivative work thereof, whether
published or unpublished, now owned or hereafter acquired; all trade secret
rights, including all rights to unpatented inventions, know-how, operating
manuals, license rights and agreements and confidential information, now owned
or hereafter acquired; all mask work or similar rights available for the
protection of semiconductor chips, now owned or hereafter acquired; all claims
for damages by way of any past, present and future infringement of any of the
foregoing. NOTWITHSTANDING (i) THAT GRANTOR HAS GRANTED TO LENDER A SECURITY
INTEREST IN THE UNPATENTED INVENTIONS, TRADEMARKS, COPYRIGHTS, MASK WORKS AND,
(ii) THAT THE UNPATENTED INVENTIONS, TRADEMARKS, MASK WORKS AND COPYRIGHTS ARE
INCLUDED IN THE COLLATERAL, BANK SHALL NOT ENFORCE ITS SECURITY INTEREST IN THE
UNPATENTED INVENTIONS, TRADEMARKS, MASK WORKS, AND COPYRIGHTS, OTHER THAN SOLELY
TO THE EXTENT NECESSARY TO ENABLE FOR BANK TO ENFORCE ITS PERFECTED SECURITY
INTEREST IN THE COLLATERAL OTHER THAT THE UNPATENTED INVENTIONS, TRADEMARKS,
MASK WORKS AND COPYRIGHTS.
All Borrower's Books relating to the foregoing and any and all claims,
rights and interests in any of the above and all substitutions for, additions
and accessions to and proceeds thereof.
1.
<PAGE>
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:
---------------------------------
FAX#: (408) 496-2426 TIME:
---------------------------------
FROM: SCIENTIFIC LEARNING CORPORATION
----------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY:
-------------------------------------------------------
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:
-----------------------------------------------
PHONE NUMBER:
-------------------------------------------------------
FROM ACCOUNT# TO ACCOUNT#
-------------------- ------------------------
REQUESTED TRANSACTION TYPE REQUESTED DOLLAR AMOUNT
-------------------------- -----------------------
PRINCIPAL INCREASE (ADVANCE) $__________________________________
PRINCIPAL PAYMENT (ONLY) $__________________________________
INTEREST PAYMENT (ONLY) $__________________________________
PRINCIPAL AND INTEREST (PAYMENT) $__________________________________
OTHER INSTRUCTIONS:
-------------------------------------------------
All Borrower's representations and warranties in the Loan and
Security Agreement are true, correct and complete in all material
respects on the date of the telephone request for and Advance
confirmed by this Borrowing Certificate; but those representations
and warranties expressly referring to another date shall be true,
correct and complete in all material respects as of that date.
BANK USE ONLY
TELEPHONE REQUEST:
------------------
The following person is authorized to request the loan payment
transfer/loan advance on the advance designated account and is
known to me.
-------------------------------- ----------------------------
Authorized Requester Phone #
-------------------------------- ----------------------------
Received By (Bank) Phone #
----------------------------------------
Authorized Signature (Bank)
1.
<PAGE>
EXHIBIT C
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
3003 Tasman Drive
Santa Clara, CA 95054
FROM: SCIENTIFIC LEARNING CORPORATION
The undersigned authorized officer of SCIENTIFIC LEARNING CORPORATION
certifies that under the terms and conditions of the Loan and Security Agreement
between Borrower and Bank (the "Agreement"), (i) Borrower is in complete
compliance for the period ending __________ with all required covenants except
as noted below and (ii) all representations and warranties in the Agreement are
true and correct in all material respects on this date. Attached are the
required documents supporting the certification. The Officer certifies that
these are prepared in accordance with Generally Accepted Accounting Principles
(GAAP) consistently applied from one period to the next except as explained in
an accompanying letter or footnotes. The Officer acknowledges that no
borrowings may be requested at any time or date of determination that Borrower
is not in compliance with any of the terms of the Agreement, and that compliance
is determined not just at the date this certificate is delivered.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
REPORTING COVENANT REQUIRED COMPLIES
Monthly financial statements + CC Monthly within 30 days Yes No
Annual (Audited) FYE within 120 days Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
Maintain on a Monthly Basis:
Minimum Liquidity See below ___: 1.00 Yes No
Minimum Debt Service Coverage See below ____:1.00 Yes No
Beginning with the month ended January 31, 1998 and for each of the months
ending February 28, 1998 and March 31, 1998, Borrower shall maintain a minimum
Liquidity Coverage ratio defined as, unrestricted cash plus 50% of Accounts
divided by the Total Potential Liability of 1.25 to 1.00;
Beginning with the month ending April 30, 1998, Borrower shall maintain a
minimum Liquidity Coverage ratio defined as, unrestricted cash plus 50% of
Accounts plus 50% of projected revenue for the following month, divided by the
Total Potential Liability of 1.25 to 1.00, increasing to 1.50 to 1.00 for the
months ending May 31, 1998 and June 30, 1998;
1.
<PAGE>
Borrower shall maintain a minimum Liquidity Coverage ratio defined as,
unrestricted cash plus 50% of Accounts divided by the Total Potential Liability
of 1.50 to 1.00 for the month ending July 31, 1998;
Borrower shall maintain a minimum Liquidity Coverage ratio defined as,
unrestricted cash plus 50% of Accounts divided by the Total Potential Liability
of 1.75 to 1.00 for the months ending August 31, 1998 and September 30, 1998;
and
Borrower shall maintain a minimum Liquidity Coverage ratio defined as,
unrestricted cash plus 50% of Accounts divided by the Total Potential Liability
of 2.00 to 1.00 for the months ending October 31, 1998 and thereafter.
Notwithstanding the foregoing, should Borrower fail to comply with the
above stated Liquidity Coverage ratio, it will not be deemed an Event of
Default, provided Borrower pledges cash to Bank to secure the outstandings under
the Committed Equipment Line until such time as Borrower meets or exceeds the
minimum Liquidity Coverage ratio for such period.
At such time as Borrower achieves two (2) consecutive quarters of
profitability, the minimum Liquidity Coverage ratio will be replaced with a
minimum Debt Service Coverage ratio of 1.50 to 1.00 defined as, net income plus
non-cash expenses plus interest expense, divided by the current portion of
amortizing debt plus interest expense, monitored on a rolling two (2)-quarter
basis.
COMMENTS REGARDING EXCEPTIONS: See Attached. BANK USE ONLY
Sincerely, Received by:
----------------------
AUTHORIZED SIGNER
SCIENTIFIC LEARNING CORPORATION Date:
--------------------------
/s/ FRANK M. MATTSON Verified:
- ------------------------------------ ----------------------
Signature AUTHORIZED SIGNER
CFO Date:
- ------------------------------------ --------------------------
Compliance Status: Yes No
4/15/98
- ------------------------------------
Date
2.
<PAGE>
SILICON VALLEY BANK
PRO FORMA INVOICE FOR LOAN CHARGES
BORROWER: SCIENTIFIC LEARNING CORPORATION
LOAN OFFICER: Greg Olsen
DATE: February 13, 1998
<TABLE>
<S> <C>
Equipment Line Loan Fee $1,125.00
Credit Report 35.00
UCC Filing Fee 20.00
IP Filing Fee *
TOTAL FEE DUE $1,180.00
---------
---------
</TABLE>
* $550.00 TO BE TAKEN FROM LOAN FEE
Please indicate the method of payment:
/ / A check for the total amount is attached.
/X/ Debit DDA # 3300018829 for the total amount.
/ / Loan proceeds
Borrower:
By: /s/ [signature]
------------------------------------------------
(Authorized Signer)
- ----------------------------------------------
Silicon Valley Bank (Date)
Account Officer's Signature
1.
<PAGE>
CORPORATE BORROWING RESOLUTION
Borrower: SCIENTIFIC LEARNING Bank: Silicon Valley Bank
CORPORATION 1731 Embarcadero, Ste. 220
1995 University Avenue, Suite 400 Palo Alto, CA 94303
Berkeley, CA 94704
I, THE UNDERSIGNED SECRETARY OR ASSISTANT SECRETARY OF SCIENTIFIC LEARNING
CORPORATION ("BORROWER"), HEREBY CERTIFY that Borrower is a corporation duly
organized and existing under and by virtue of the laws of the State of De[aware.
I FURTHER CERTIFY that at a meeting of the Directors of Borrower (or by
other duly authorized corporate action in lieu of a meeting), duly called and
held, at which a quorum was present and voting, the following resolutions were
adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers,
employees, or agents of Borrower, whose actual signatures are shown below:
NAMES POSITIONS ACTUAL SIGNATURES
- --------------------- ------------------------ ---------------------
- --------------------- ------------------------ ---------------------
- --------------------- ------------------------ ---------------------
- --------------------- ------------------------ ---------------------
acting for and on behalf of Borrower and as its act and deed be, and they hereby
are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers of
Borrower and Bank, such sum or sums of money as in their judgment should be
borrowed.
EXECUTE LOAN DOCUMENTS. To execute and deliver to Bank the loan documents
of Borrower, on Bank's forms, at such rates of interest and on such terms
as may be agreed upon, evidencing the sums of money so borrowed or any
indebtedness of Borrower to Bank, and also to execute and deliver to Bank
one or more renewals, extensions, modifications, refinancings,
consolidations, or substitutions for one or more of the loan documents, or
any portion of the loan documents.
GRANT SECURITY. To grant a security interest to Bank in any of Borrower's
assets, which security interest shall secure all of Borrower's obligations
to Bank
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness
payable to or belonging to
<PAGE>
1.
Borrower or in which Borrower may have an interest, and either to receive
cash for the same or to cause such proceeds to be credited to the account
of Borrower with Bank, or to cause such other disposition of the proceeds
derived therefrom as they may deem advisable.
LETTERS OF CREDIT. To execute letter of credit applications and other
related documents pertaining to Bank's issuance of letters of credit.
FOREIGN EXCHANGE CONTRACTS. To execute and deliver foreign exchange
contracts, either spot or forward, from time to time, in such amount as, in
the judgment of the officer or officers herein authorized.
ISSUE WARRANTS. To issue warrants to purchase Borrower's capital stock,
for such class, series and number, and on such terms, as an officer of
Borrower shall deem appropriate.
FURTHER ACTS. In the case of tines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder,
and in all cases, to do and perform such other acts and things, to pay any
and all fees and costs, and to execute and deliver such other documents and
agreements, including agreements waiving the right to a trial by jury, as
they may in their discretion deem reasonably necessary or proper in order
to carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
Resolutions and performed prior to the passage of these resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of Borrower's agreements or commitments in effect at the
time notice is given.
I FURTHER CERTIFY that the persons named above are principal officers of
the Borrower and occupy the positions set opposite their respective names; that
the foregoing Resolutions now stand of record on the books of the Borrower; and
that they are in full force and effect and have not been modified or revoked in
any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on February 13, 1998 and
attest that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X
- -------------------------------------
*Secretary or Assistant Secretary
X
- -------------------------------------
* NOTE: In case the Secretary or other certifying officer is designated by
the foregoing resolutions as one of the signing officers, this resolution
should also be signed by a second Officer or Director of Borrower.
2.
<PAGE>
CERTAIN CONFIDENTIAL INFORMATION
CONTAINED IN THIS DOCUMENT, MARKED BY
BRACKETS, HAD BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO RULE
406 OF THE SECURITIES ACT OF 1933, AS
AMENDED.
EXHIBIT 10.13
EXCLUSIVE LICENSE AGREEMENT
BETWEEN
THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
AND
SCIENTIFIC LEARNING PRINCIPLES CORPORATION
FOR
TRAINING AIDS FOR REMEDIATION OF LEARNING DISABILITIES
UC CASE NO. 94-069-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. LIFE OF PATENT EXCLUSIVE GRANT . . . . . . . . . . . . . . . . . . . . 3
3. SUBLICENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4. PAYMENT TERMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5. LICENSE-ISSUE FEE. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6. MILESTONE PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 7
7. EARNED ROYALTIES AND MINIMUM ANNUAL ROYALTIES. . . . . . . . . . . . . 7
8. DUE DILIGENCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
9. PROGRESS AND ROYALTY REPORTS . . . . . . . . . . . . . . . . . . . . . 9
10. BOOKS AND RECORDS. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
11. LIFE OF THE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . 10
12. TERMINATION BY THE REGENTS . . . . . . . . . . . . . . . . . . . . . . 11
13. TERMINATION BY THE LICENSEE. . . . . . . . . . . . . . . . . . . . . . 11
14. DISPOSITION OF LICENSED PRODUCTS ON HAND UPON TERMINATION. . . . . . . 12
15. USE OF NAMES AND TRADEMARKS. . . . . . . . . . . . . . . . . . . . . . 12
16. LIMITED WARRANTY . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
17. PATENT PROSECUTION AND MAINTENANCE . . . . . . . . . . . . . . . . . . 14
18. PATENT MARKING . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
19. PATENT INFRINGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 16
20. INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
21. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
22. ASSIGNABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
23. NO WAIVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
24. FAILURE TO PERFORM . . . . . . . . . . . . . . . . . . . . . . . . . . 20
25. GOVERNING LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
26. GOVERNMENT APPROVAL OR REGISTRATION. . . . . . . . . . . . . . . . . . 20
27. EXPORT CONTROL LAWS. . . . . . . . . . . . . . . . . . . . . . . . . . 21
28. SECRECY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
29. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
i
<PAGE>
EXCLUSIVE LICENSE AGREEMENT
THIS LICENSE AGREEMENT (the "Agreement") is made effective this 27th day of
September, 1996 (the "Effective Date") between THE REGENTS OF THE UNIVERSITY OF
CALIFORNIA, a California corporation having its statewide administrative offices
at 300 Lakeside Drive, 22nd Floor, Oakland, California 94612-3550, ("The
Regents"), and SCIENTIFIC LEARNING PRINCIPLES CORPORATION, a California
corporation having a principal place of business at One Kearney Street, Suite
501, San Francisco, California 94108, (the "Licensee").
BACKGROUND
1. Certain inventions, generally characterized as "Training Aids for the
Remediation of Learning Disabilities" (collectively the "Invention"), were made
in the course of research at the University of California, San Francisco by Drs.
Michael Merzenich, William Jenkins, Christoph Schreiner and by Drs. Paula Tallal
and Steven Miller at Rutgers-the State University of New Jersey ("Rutgers") and
are covered by Regents' Patent Rights as defined below;
2. The Regents and Rutgers have entered into an inter-institutional
agreement whereby The Regents is authorized to enter into this Agreement on
behalf of both The Regents and Rutgers;
3. The Licensee and The Regents have executed a Letter of Intent (U.C.
Control No. 96-30-0452) dated January 9, 1996;
4. The Licensee wishes to obtain rights from The Regents for the
commercial development, use, and sale of products from the Invention, and The
Regents is willing to grant
1.
<PAGE>
those rights so that the invention may be developed to its fullest and the
benefits enjoyed by the general public; and
5. The Licensee is a "small business firm" as defined in 15 U.S.C.
Section 632;
6. Both parties recognize and agree that royalties due under this
Agreement will be paid on both pending patent applications and issued patents:
In view of the foregoing, the parties agree:
1. DEFINITIONS
1.1 "REGENTS' PATENT RIGHTS" means any subject matter claimed in or
covered by any of the following: Pending U.S. Patent Application Serial No.
08/351,803 entitled "Method and Device for Enhancing the Recognition of Speech
Among Speech-Impaired Individuals" filed December 8, 1994 by Drs. Merzenich,
Jenkins, Schreiner, Tallal, and Miller and assigned to The Regents and to
Rutgers; and continuing applications thereof including divisions and
substitutions but excluding continuation-in-part applications except to the
extent that the claims are enabled by the parent case; any patents issuing on
said applications including reissues, reexaminations and extensions; and any
corresponding foreign applications or patents.
1.2 "LICENSED PRODUCT" means any material that is either covered by
Regents' Patent Rights, that is produced by the Licensed Method, or that the use
of which would constitute, but for the license granted to the Licensee under
this Agreement, an infringement of any pending or issued claim within Regents'
Patent Rights.
1.3 "LICENSED METHOD" means any method that is covered by Regents' Patent
Rights, the use of which would constitute, but for the license granted to the
Licensee under this Agreement, an infringement of any pending or issued claim
within Regents' Patent Rights.
2.
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1.4 "NET SALES" means the total of the gross invoice prices of Licensed
Products sold or Licensed Methods performed by the Licensee, an Affiliate or a
sublicensee, less the sum of the following actual and customary deductions where
applicable: cash, trade, or quantity discounts; sales, use, tariff,
import/export duties or other excise taxes imposed on particular sales;
transportation charges and allowances; reserves for bad debts (not to exceed 3
%) or credits to customers because of rejections or returns. For purposes of
calculating Net Sales, transfers to an Affiliate or sublicensee for end use by
the Affiliate or sublicensee will be treated as sales at list price.
1.5 "AFFILIATE" means any corporation or other business entity in which
the Licensee owns or controls, directly or indirectly, at least fifty percent
(50%) of the outstanding stock or other voting rights entitled to elect
directors, or in which the Licensee is owned or controlled directly or
indirectly by at least fifty percent (50%) of the outstanding stock or other
voting rights entitled to elect directors; but in any country where the local
law does not permit foreign equity participation of at least fifty percent
(50%), then an "Affiliate" includes any company in which the Licensee owns or
controls or is owned or controlled by, directly or indirectly, the maximum
percentage of outstanding stock or voting rights permitted by local law.
2. LIFE OF PATENT EXCLUSIVE GRANT.
2.1 Subject to the limitations set forth in this Agreement, The Regents
grants to the Licensee a world-wide license under Regents' Patent Rights to
make, have made, use, sell, offer to sell and import Licensed Products and to
practice Licensed Methods.
2.2 Except as otherwise provided in this Agreement, the license granted in
Paragraph 2.1 is exclusive for the life of the Agreement.
2.3 The Regents and Rutgers reserves the right to use the Invention for
educational and research purposes.
3.
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3. SUBLICENSES.
3.1 The Regents also grants to the Licensee the right to issue sublicenses
to third parties to make, have made, use, sell, offer to sell and import
Licensed Products and to practice Licensed Method, as long as the Licensee has
current exclusive rights thereto under this Agreement. Throughout the term of
each sublicense, the Licensee shall ensure compliance by sublicensee with, to
the extent applicable, all of the rights and obligations due to the Regents and
Rutgers contained in this Agreement.
3.2 The Licensee shall promptly provide The Regents with a copy of each
sublicense issued; collect and guarantee payment of all payments due The Regents
based on sublicensee's sales; and summarize and deliver all reports due The
Regents based on sublicensee's sales.
3.3 Upon termination of this Agreement for any reason, The Regents, at its
sole discretion, shall determine whether the Licensee shall cancel or assign to
The Regents any and all sublicenses.
3.4 Licensee shall pay to The Regents consideration from sublicensing or
transferring the rights licensed to Licensee as follows:
3.4.1 ROYALTIES - the greater of: (i) [ * ] of the royalty income
received by Licensee and/or its Affiliates from any sublicensee in
consideration of the sublicense grant or rights transfer; or (ii) the
royalty based on sublicensee's Net Sales in accordance with the royalty
schedule in Article 7 (EARNED ROYALTIES AND MINIMUM ANNUAL ROYALTIES).
3.4.2 NON-ROYALTY CONSIDERATION - [ * ] of all non-royalty
consideration, received by Licensee and its Affiliates in consideration of
the sublicense grant or rights transfer, except for the portion thereof
which is designated and demonstrably used by Licensee solely for its
development of Licensed Products and Licensed Methods, excluding equity
payments, bona fide loans and other payments not associated with the
sublicense.
[ * ]Confidential Treatment Requested
4.
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4. PAYMENT TERMS.
4.1 Paragraphs 1.1, 1.2, and 1.3 define Regents' Patent Rights, Licensed
Products and Licensed Methods so that royalties are payable on products and
methods covered by both pending patent applications and issued patents.
Royalties will accrue in each country for the duration of Regents' Patent Rights
in that country and are payable to The Regents when Licensed Products are
invoiced. or if not invoiced, when delivered to a third party.
4.2 Licensee shall pay earned royalties quarterly on or before February
28, May 31, August 31 and November 30 of each calendar year. Each payment will
be for earned royalties accrued within the Licensee's most recently completed
calendar quarter.
4.3 All monies due The Regents are payable in United States dollars. When
Licensed Products are sold for monies other than United States dollars, the
Licensee shall first determine the earned royalty in the currency of the country
in which Licensed Products were sold and then convert the amount into equivalent
United States funds, using the exchange rate quoted in the Wall Street Journal
on the last business day of the reporting period.
4.4 Royalties earned on sales occurring in any country outside the
United States may not be reduced by any taxes, fees, or other charges imposed
by the government of such country on the payment of royalty income. The
Licensee is also responsible for all bank transfer charges. Notwithstanding
this, all payments made by the Licensee in fulfillment of The Regents' tax
liability in any particular country will be credited against earned royalties
or fees due The Regents for that country.
4.5 If at any time legal restrictions prevent the prompt remittance of
royalties by the Licensee from any country where a Licensed Product is sold, the
Licensee shall convert the amount owed to The Regents into United States funds
and shall pay The Regents directly from its U.S. source of funds for as long as
the legal restrictions apply.
4.6 If any patent or patent claim within Regents' Patent Rights is held
invalid in a final decision by a court of competent jurisdiction and last resort
and from which no appeal has or can be taken, all obligation to pay royalties
based on that patent or claim or any claim
5.
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patentably indistinct therefrom will cease as of the date of final decision.
The Licensee will not, however, be relieved from paying any royalties that
accrued before the final decision or that are based on another patent or
claim not involved in the final decision. or that are based on The Regents'
property rights.
4.7 In the event payments, rebillings or fees are not received by The
Regents when due, the Licensee shall pay to The Regents interest charges at a
rate of [ * ] per annum. Interest is calculated from the date payment was due
until actually received by The Regents.
5. LICENSE-ISSUE FEE.
5.1 The Licensee shall pay to The Regents a LICENSE-ISSUE FEE of Two
Hundred Thousand dollars ($200,000) payable as follows: Fifty Thousand
dollars ($50,000) within seven days after the Effective Date; Fifty Thousand
dollars ($50,000) on August 31, 1997 and One Hundred Thousand dollars
($100,000) on February 28, 1998. This fee is non-refundable, non-cancelable,
and is not an advance against royalties.
5.2 The Licensee shall also grant to Rutgers three hundred ninety-three
thousand five hundred seventy-six (393,576) shares of series A preferred stock
within thirty (30) days of execution of this Agreement.
6. MILESTONE PAYMENTS.
6.1 The Licensee shall also pay to The Regents a royalty in the form of
a milestone payments of [ * ] Dollars [ * ] upon Licensee reaching [ * ]
Dollars [ * ] in cumulative Net Sales of Licensed Products or Licensed
Methods: [ * ] Dollars [ * ] upon Licensee reaching [ * ] Dollars [ * ] in
cumulative Net Sales of Licensed Products or Licensed Methods; and [ * ]
Dollars [ * ] upon Licensee reaching [ * ] Dollars
[ * ]Confidential Treatment Requested
6.
<PAGE>
($[ * ]) in cumulative Net Sales of Licensed Products and Licensed Methods.
Milestone payments are non-refundable and not an advance against earned
Royalties.
7. EARNED ROYALTIES AND MINIMUM ANNUAL ROYALTIES.
7.1 The Licensee shall also pay to The Regents AN EARNED ROYALTY as
follows: [ * ] of the first [ * ] Dollars [ * ] of cumulative Net Sales of
Licensed Products or Licensed Methods; [ * ] thereafter until cumulative Net
Sales reaches [ * ] Dollars [ * ]; and [ * ] of the cumulative Net Sales of
Licensed Products and Licensed Methods in excess of [ * ] Dollars [ * ].
7.2 The Licensee shall pay to The Regents a MINIMUM ANNUAL ROYALTY of
[ * ] Dollars [ * ] beginning with the year of the first commercial sale of
Licensed Product; [ * ] dollar [ * ] in the second year of first commercial
sale and [ * ] Dollars [ * ] per year for the life of Regents Patent Rights.
For the first year of commercial sales, the Licensee's obligation to pay the
minimum annual royalty will be pro-rated for the number of months remaining
in that calendar year when commercial sales commence and will be due the
following February 28, to allow for crediting of the pro-rated year's earned
royalties. For subsequent years, the minimum annual royalty will be paid to
The Regents by February 28 of each year and will be credited against the
earned royalty due for the calendar year in which the minimum payment was
made.
8. DUE DILIGENCE.
8.1 The Licensee, on execution of this Agreement, shall diligently proceed
with the development, manufacture and sale of Licensed Products and shall
earnestly and diligently endeavor to market the same within a reasonable time
after execution of this Agreement and in quantities sufficient to meet market
demands.
[ * ]Confidential Treatment Requested
7.
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8.2 The Licensee shall endeavor to obtain all necessary governmental
approvals for the manufacture, use and sale of Licensed Products.
8.3 The Licensee shall:
8.3.1 complete a second round of financing by April 30, 1997;
8.3.2 commence beta-testing of Licensed Products by December 31,
1996:
8.3.3 make commercially reasonable efforts to market and sell
Licensed Products in the United States by November 30, 1997;
and
8.3.4 act in a commercially reasonable manner to fill the market
demand for Licensed Products following commencement of
marketing at any time during the exclusive period of this
Agreement.
8.4 If the Licensee is unable to perform any of the above provisions, then
The Regents has the right and option to either terminate this Agreement or
reduce the Licensee's exclusive license to a nonexclusive license. This right,
if exercised by The Regents, supersedes the rights granted in Article 2 (GRANT).
8.5 In addition to the obligations set forth above, the Licensee shall
spend an aggregate of not less than [ * ] Dollars [ * ] for the development
of Licensed Products during the first year of this Agreement.
9. PROGRESS AND ROYALTY REPORTS.
9.1 Beginning February 28, 1997 and semi-annually thereafter, the Licensee
shall submit to The Regents a progress report covering the Licensee's (and any
Affiliate or sublicensee's) activities related to the development and testing of
all Licensed Products and the obtaining of the governmental approvals necessary
for marketing. Progress reports are required for each Licensed Product until the
first commercial sale of that Licensed Product occurs in the United States and
shall be again required if commercial sales of such Licensed Product are
suspended or discontinued.
9.2 Progress reports submitted under Paragraph 9.1 shall include, but are
not limited to, the following topics:
[ * ]Confidential Treatment Requested
8.
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* summary of work completed
* key scientific discoveries
* summary of work in progress
* current schedule of anticipated events or milestones
* market plans for introduction of Licensed Products, and
* a summary, of resources (dollar value) spent in the
reporting period.
9.3 The Licensee has a continuing responsibility to keep The Regents
informed of the large/small business entity status (as defined by the United
States Patent and Trademark Office) of itself and its sublicensees and
Affiliates.
9.4 The Licensee shall report to The Regents in its immediately subsequent
progress and royalty report the date of first commercial sale of a Licensed
Product in each country.
9.5 After the first commercial sale of a Licensed Product anywhere in the
world, the Licensee shall make quarterly royalty reports to The Regents on or
before each February 28, May 31, August 31, and November 30 of each year. Each
royalty report will cover the Licensee's most recently completed calendar
quarter and will show (a) the gross sales and Net Sales of Licensed Products
sold during the most recently completed calendar quarter; (b) the number of each
type of Licensed Product sold; (c) the royalties, in U.S. dollars, payable with
respect to sales of Licensed Products; (d) the method used to calculate the
royalty; and (e) the exchange rates used.
9.6 If no sales of Licensed Products have been made during any reporting
period, a statement to this effect is required.
10. BOOKS AND RECORDS.
10.1 The Licensee shall keep accurate books and records showing all
Licensed Products manufactured, used, and/or sold under the terms of this
Agreement. Books and records must be preserved for at least five (5) years from
the date of the royalty payment to which they pertain.
9.
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10.2 Books and records must be open to inspection by representatives or
agents of The Regents at reasonable times. The Regents shall bear the fees and
expenses of examination but if an error in royalties of more than five percent
(5 %) underpayment of the total royalties due for any year is discovered in any
examination then the Licensee shall bear the fees and expenses of that
examination.
11. LIFE OF THE AGREEMENT.
11.1 Unless otherwise terminated by operation of law or by acts of the
parties in accordance with the terms of this Agreement, this Agreement will be
in force from the Effective
Date until the last-to-expire patent licensed under this Agreement; or until the
last patent application licensed under this Agreement is abandoned and no patent
in Regents' Patent Rights ever issues.
11.2 Any termination of this Agreement will not affect the rights and
obligations set forth in the following Articles:
Article 10 Books and Records
Article 14 Disposition of Licensed Products on Hand on
Termination
Article 15 Use of Names and Trademarks
Article 20 Indemnification
Article 24 Failure to Perform
Article 28 Secrecy
12. TERMINATION BY THE REGENTS.
12.1 If the Licensee fails to perform or violates any term of this
Agreement, then The Regents may give written notice of default (Notice of
Default) to the Licensee. If the Licensee fails to repair the default within
sixty (60) days of the effective date of Notice of Default, The Regents may
terminate this Agreement and its licenses by a second written notice (Notice of
Termination). If a Notice of Termination is sent to the Licensee, this Agreement
will automatically terminate on the effective date of that notice. Termination
will not relieve the Licensee of its obligation to pay any fees owing at the
time of termination and will not impair any accrued right of The Regents. These
notices are subject to Article 21 (Notices).
10.
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13. TERMINATION BY THE LICENSEE.
13.1 The Licensee has the right at any time to terminate this Agreement in
whole or as to any portion of Regents' Patent Rights by giving notice in writing
to The Regents. Notice of termination will be subject to Article 21 (Notices)
and termination of this Agreement will be effective sixty (60) days from the
effective date of notice.
13.2 Any termination under the above paragraph does not relieve the
Licensee of any obligation or liability accrued under this Agreement prior to
termination or rescind any payment made to The Regents or anything done by
Licensee prior to the time termination becomes effective. Termination does not
affect in any manner any rights of The Regents arising under this Agreement
prior to termination.
14. DISPOSITION OF LICENSED PRODUCTS ON HAND UPON TERMINATION.
14.1 Upon termination of this Agreement the Licensee is entitled to dispose
of all previously made or partially made Licensed Products, but no more, within
a period of one hundred and twenty (120) days provided that the sale of those
Licensed Products is subject to the terms of this Agreement, including but not
limited to the rendering of reports and payment of royalties required under this
Agreement.
15. USE OF NAMES AND TRADEMARKS.
15.1 Nothing contained in this Agreement confers any right to use in
advertising, publicity, or other promotional activities any name, trade name,
trademark, or other designation of either party hereto (including contraction,
abbreviation or simulation of any of the foregoing). Unless required by law, the
use by the Licensee of the name "The Regents of
11.
<PAGE>
the University of California" or the name of any campus of the University of
California is prohibited.
16. LIMITED WARRANTY.
16.1 The Regents warrants to the Licensee that it has the lawful right to
grant this license.
16.2 This license and the associated Invention are provided WITHOUT
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER
WARRANTY, EXPRESS OR IMPLIED. THE REGENTS AND RUTGERS MAKE NO
REPRESENTATION OR WARRANTY THAT THE LICENSED PRODUCTS OR LICENSED METHODS WILL
NOT INFRINGE ANY PATENT OR OTHER PROPRIETARY RIGHT.
16.3 IN NO EVENT MAY THE REGENTS OR RUTGERS BE LIABLE FOR ANY INCIDENTAL,
SPECIAL OR CONSEQUENTIAL DAMAGES RESULTING FROM EXERCISE OF THIS LICENSE OR THE
USE OF THE INVENTION OR LICENSED PRODUCTS.
16.4 This Agreement does not:
16.4.1 express or imply a warranty or representation as to the
validity or scope of any of Regents' Patent Rights;
16.4.2 express or imply a warranty or representation that anything
made, used, sold, offered for sale or imported or otherwise
disposed of under any license granted in this Agreement is
or will be free from infringement of patents of third
parties;
16.4.3 obligate The Regents or Rutgers to' bring or prosecute
actions or suits against third parties for patent
infringement except as provided in Article 19;
12.
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16.4.4 confer by implication, estoppel or otherwise any license or
rights under any patents of The Regents other than Regents'
Patent Rights as defined in this Agreement, regardless of
whether those patents are dominant or subordinate to
Regent's Patent Rights: or
16.4.5 obligate The Regents to furnish any know-how not provided in
Regents' Patent Rights.
17. PATENT PROSECUTION AND MAINTENANCE.
17.1 As long as the Licensee has paid patent costs as provided for in this
Article, The Regents shall diligently endeavor to prosecute and maintain the
United States and foreign patents comprising Regents' Patent Rights using
counsel of its choice, and The Regents shall provide the Licensee with copies of
all relevant documentation so that the Licensee may be informed of the
continuing prosecution and the Licensee agrees to keep this documentation
confidential. The Regent' counsel will take instructions only from The Regents,
and all patents and patent applications under this Agreement will be assigned
solely to The Regents.
17.2 The Regents shall use all reasonable efforts to amend any patent
application to include claims reasonably requested by the Licensee to protect
the products contemplated to be sold under this Agreement.
17.3 The Licensee shall apply for an extension of the term of any patent
included within Regents' Patent Rights if appropriate under the Drug Price
Competition and Patent Term Restoration Act of 1984 and/or European, Japanese
and other foreign counterparts of this Law. The Licensee shall prepare all
documents, and The Regents agrees to execute the documents and to take
additional action as the Licensee reasonably requests in connection therewith.
17.4 If either party receives notice pertaining to infringement or
potential infringement of any issued patent included within Regents' Patent
Rights under the Drug Price Competition and Patent Term Restoration Act of 1984
(and/or foreign counterparts of this Law), that party shall notify the other
party within ten (10) days after receipt of notice of infringement.
13.
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17.5 The Licensee shall bear the costs of preparing, filing, prosecuting
and maintaining all United States and foreign patent applications
contemplated by this Agreement. Costs billed by The Regents' counsel will be
rebilled to the Licensee and are due within thirty (30) days of rebilling by
The Regents. These costs include patent prosecution costs for the Invention
incurred by The Regents prior to the execution of this Agreement and any
patent prosecution costs that may be incurred for patentability opinions,
re-examination, re-issue, interferences, or inventorship determinations.
Prior costs will be due on execution of this Agreement and billing by The
Regents and are at least approximately $7,798.00.
17.6 The Licensee may request The Regents to obtain patent protection on
the Invention in foreign countries if available and if it so desires. The
Licensee shall notify The Regents of its decision to obtain or maintain foreign
patents not less than sixty (60) days prior to the deadline for any payment,
filing, or action to be taken in connection therewith. This notice concerning
foreign filing must be in writing, must identify the countries desired, and must
reaffirm the Licensee's-obligation to underwrite the costs thereof. The absence
of such a notice from the Licensee to The Regents will be considered an election
not to obtain or maintain foreign rights.
17.7 The Licensee's obligation to underwrite and to pay patent prosecution
costs will continue for so long as this Agreement remains in effect, but the
Licensee may terminate its obligations with respect to any given patent
application or patent upon three (3) months written notice to The Regents. The
Regents will use its best efforts to curtail patent costs when a notice of
termination is received from the Licensee. The Regents may prosecute and
maintain such application(s) or patent(s) at its sole discretion and expense,
but the Licensee will have no further right or licenses thereunder. Non-payment
of patent costs may be deemed by The Regents as an election by the Licensee not
to maintain application(s) or patent(s).
17.8 The Regents may file, prosecute or maintain patent applications at
its own expense in any country in which the Licensee has not elected to file,
prosecute, or maintain patent applications in accordance with this Article,
and those applications and resultant patents will not be subject to this
Agreement.
14.
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18. PATENT MARKING.
18.1 The Licensee shall mark all Licensed Products made, used or sold under
the terms of this Agreement, or their containers, in accordance with the
applicable patent marking laws.
19. PATENT INFRINGEMENT.
19.1 If the Licensee or The Regents learns of the substantial infringement
of any patent licensed under this Agreement, that party shall call the other
party's attention thereto in writing and provide them with reasonable evidence
of infringement. Neither party will notify a third party of the infringement of
any of Regents' Patent Rights without first obtaining consent of the other
party, which consent will not be unreasonably denied. Both parties shall use
their best efforts in cooperation with each other to terminate infringement
without litigation.
19.2 The Licensee may request that The Regents take legal action against
the infringement of Regents' Patent Rights. Request must be in writing and must
include reasonable evidence of infringement and damages to the Licensee. If the
infringing activity has not abated within ninety (90) days following the
effective date of request, The Regents then has the right to:
19.2.1 commence suit on its own account; or
19.2.2 refuse to participate in the suit,
and The Regents shall give notice of its election in writing to the Licensee by
the end of the one-hundredth (100th) day after receiving notice of written
request from the Licensee. The Licensee may thereafter bring suit for patent
infringement, at its own expense, if and only if The Regents
15.
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elects not to commence suit and if the infringement occurred during the
period and in a jurisdiction where the Licensee had exclusive rights under
this Agreement. Licensee may join The Regents' suit unless The Regents
determine that there are conflict of interest or other institutional issues
involved in the suit. If, however, the Licensee elects to bring suit in
accordance with this paragraph, The Regents may thereafter join that suit at
its own expense. If Licensee elects to bring suit, it may defer payment of up
to fifty percent (50%) of the earned royalties, due under this Agreement from
Net Sales in the county in which the suit is brought, to fund the suit.
Licensee shall promptly remit payment to The Regents of any such deferred
royalties no later than sixty (60) days after settlement; dismissal; or other
termination of the trial court action.
19.3 Legal action as is decided on will be at the expense of the party
bringing suit and all damages recovered thereby will belong to the party
bringing suit, but legal action brought jointly by The Regents and the Licensee
and fully participated in by both will be at the joint expense of the parties
and all recoveries will be allocated in the following order: (I) to each party
reimbursement in equal amounts of the attorney's costs, fees, and other related
expenses to the extent each party paid for such costs, fees and expenses until
all such costs, fees, and expenses are consumed for each party; and (ii) any
remaining amount will be shared as follows: of any recoveries recovered for
direct damages, twenty-five percent (25%) shall be paid to the Regents and
seventy-five percent (75%) shall be paid to the Licensee; of any recoveries
recovered for enhanced damages, one-half shall be paid to the Regents and
one-half shall be retained by the Licensee.
19.4 Each party shall cooperate with the other in litigation proceedings
instituted hereunder, but at the expense of the party bringing suit except
for suits brought jointly. Litigation will be controlled by the party
bringing the suit except for suits brought jointly, except that The Regents
may be represented by counsel of its choice in any suit brought by the
Licensee.
16.
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20. INDEMNIFICATION.
20.1 The Licensee shall indemnify, hold harmless and defend The Regents and
Rutgers, their respective officers, employees, and agents; the sponsors of the
research that led to the Invention; and the inventors of the patents and patent
applications in Regents' Patent Rights and their employers against any and all
claims, suits, losses, liabilities, damages, costs. fees, and expenses resulting
from or arising out of exercise of this license or any sublicense. This
indemnification includes, but is not limited to, any product liability.
20.2 The Licensee, at its sole cost and expense, shall insure its
activities in connection with the work under this Agreement and obtain, keep in
force and maintain insurance as follows, or an equivalent program of self
insurance:
20.3 Comprehensive or commercial form general liability insurance
(contractual liability included) with limits as follows:
* Each Occurrence $1,000,000
* Products/Completed Operations Aggregate $2,000,000
* Personal and Advertising Injury $1,000,000
* General Aggregate (commercial form only) $3,000,000
Licensee agrees to review whether these limits should be increased in accordance
with the level of sales of Licensed Product; such review to be conducted every,
five (5) years from the effective date of this Agreement in coordination with
The Regents. The coverage and limits referred to under the above do not in any
way limit the liability of the Licensee. The Licensee shall furnish The Regents
with certificates of insurance showing compliance with all requirements.
Certificates must:
* Provide for thirty (30) days' advance written notice to The
Regents and Rutgers of any modification.
* Indicate that The Regents and Rutgers has been endorsed as
an additional Insured under the coverage referred to under
the above.
* Include a provision that the coverage will be primary. and
will not participate with nor will be excess over any valid
and collectable insurance
17.
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or program of self-insurance carried or maintained by The
Regents or by Rutgers.
20.4 The Regents shall notify the Licensee in writing of any claim or suit
brought against The Regents or Rutgers in respect of which The Regents or
Rutgers intends to invoke the provisions of this Article. The Licensee shall
keep The Regents and Rutgers informed on a current basis of its defense of any
claims under this Article. There shall be no settlement of a claim for which
indemnification is sought under this Article 20 without the consent of the
indemnifying party, such consent not to be unreasonably withheld.
21. NOTICES.
21.1 Any notice or payment required to be given to either party is properly
given and effective (a) on the date of delivery if delivered in person or (b)
five (5) days after mailing if mailed by first-class certified mail, postage
paid, to the respective addresses given below, or to another address as is
designated by written notice given to the other party.
In the case of the Licensee: SCIENTIFIC LEARNING PRINCIPLES CORPORATION
One Kearney Street, Suite 501
San Francisco, CA 94108
Attention: Controller
In the case of The Regents: THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
Office of Technology Transfer
1320 Harbor Bay Parkway, Suite 150
Alameda, California 94502
Attention: Executive Director
Research Administration and
Technology Transfer
Referring to: UC Case No. 94-069
18.
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22. ASSIGNABILITY.
22.1 The payments under this Agreement may be assigned by The Regents. This
Agreement is personal to the Licensee and assignable by the Licensee only with
the written consent of The Regents, which consent will not be unreasonably
withheld. This Agreement is assignable by the Licensee to the surviving entity
of a merger.
23. NO WAIVER.
23.1 No waiver by either party of any default of this Agreement may be
deemed a waiver of any subsequent or similar default.
24. FAILURE TO PERFORM.
24.1 If either party finds it necessary to undertake legal action against
the other on account of failure of performance due under this Agreement, then
the prevailing party is entitled to reasonable attorney's fees in addition to
costs and necessary disbursements.
25. GOVERNING LAWS.
25.1 THIS AGREEMENT WILL BE INTERPRETED AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF CALIFORNIA, but the scope and validity of any patent or
patent application will be governed by the applicable laws of the country of the
patent or patent application.
26. GOVERNMENT APPROVAL OR REGISTRATION.
26.1 Licensee shall notify The Regents if it becomes aware that this
Agreement is subject to any U.S. or foreign government reporting or approval
requirement. Licensee shall
19.
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make all necessary filings and pay all costs including fees, penalties, and
all other out-of-pocket costs associated with such reporting or approval
process.
27. EXPORT CONTROL LAWS.
27.1 The Licensee shall observe all applicable United States and foreign
laws with respect to the transfer of Licensed Products and related technical
data to foreign countries, including, without limitation, the International
Traffic in Arms Regulations (ITAR) and the Export Administration Regulations.
28. SECRECY.
28.1 With regard to confidential information ("Data"), which can be oral or
written or both, received from The Regents regarding this Invention, the
Licensee agrees:
28.1.1 not to use the Data except for the sole purpose of
performing under the terms of this Agreement;
28.1.2 to safeguard Data against disclosure to others with the same
degree of care as it exercises with its own data of a
similar nature;
28.1.3 not to disclose Data to others (except to its employees,
agents or consultants who are bound to the Licensee by a
like obligation of confidentiality) without the express
written permission of The Regents, except that the Licensee
is not prevented from using or disclosing any of the Data
that:
28.1.3.1 the Licensee can demonstrate by written records
was previously known to it;
28.1.3.2 is now, or becomes in the future, public knowledge
other than through acts or omissions of the
Licensee; or
28.1.3.3 is lawfully obtained by the Licensee from sources
independent of The Regents; and
20.
<PAGE>
28.1.4 that the secrecy obligations of the Licensee with
respect to Data will continue for a period ending
five (5) years from the termination date of this
Agreement.
29. MISCELLANEOUS.
29.1 The headings of the several sections are inserted for convenience of
reference only and are not intended to be a part of or to affect the meaning or
interpretation of this Agreement.
29.2 This Agreement is not binding on the parties until it has been signed
below on behalf of each party. It is then effective as of the Effective Date.
29.3 No amendment or modification of this Agreement is valid or binding on
the parties unless made in writing and signed on behalf of each party.
29.4 This Agreement embodies the entire understanding of the parties and
supersedes all previous Communications, representations or understandings,
either oral or written, between the parties relating to the subject matter
hereof.
29.5 In case any of the provisions contained in this Agreement is held to
be invalid, illegal, or unenforceable in any respect, that invalidity,
illegality or unenforceability will not affect any other provisions of this
Agreement, and this Agreement will be construed as if the invalid, illegal, or
unenforceable provisions had never been contained in it.
29.6 This Agreement will be governed by the laws of the State of California
and the United States of America.
21.
<PAGE>
IN WITNESS WHEREOF, both The Regents and the Licensee have executed this
Agreement, in duplicate originals, by their respective and duly authorized
officers on the day and year written.
SCIENTIFIC LEARNING PRINCIPLES THE REGENTS OF THE UNIVERSITY OF
CORPORATION: CALIFORNIA:
By:/s/ [signature] By:/s/ [signature]
---------------------------- -----------------------------
(Signature) (Signature)
Name:David E. Charron Name: Director, OTM
-------------------------- University of California,
(Please Print) San Francisco
Title:Vice President Date: September 27, 1996
------------------------- ---------------------------
Date:September 27, 1996
---------------------------
22.
<PAGE>
AMENDMENT NO. 1
TO LICENSE AGREEMENT OF SEPTEMBER 27, 1996 BETWEEN THE REGENTS AND
SCIENTIFIC LEARNING CORPORATION COVERING TRAINING AIDS FOR THE
REMEDIATION OF LEARNING DISABILITIES
Effective January 1, 1999, The Regents of the University of California, a
California corporation having its statewide administrative offices at 1111
Franklin Street, Oakland, California 94607-5200 ("The Regents"), and acting
through its Office of Technology Management, 745 Parnassus Avenue, Box 1209,
San Francisco, California 94143-1209, and Scientific Learning Corporation, a
California corporation having a principal place of business at 1995
University Avenue, Suite 400, Berkeley, California 94704-1074 ("SLC"), agree
to this license amendment as follows:
AMENDMENT
1.1 The Regents and SLC agree to amend Article 1.4 of the License as follows:
"1.4 "Net Sales" means the total of the gross invoice prices of Licensed
Products sold or Licensed Methods performed by the Licensee, an Affiliate, or
a sublicensee, less the sum of the following actual and customary deductions
where applicable: cash, trade, or quantity discounts; sales, use, tariff,
import/export duties or other excise taxes imposed on particular sales;
transportation charges and allowances; reserves for bad debts (not to exceed
3%) or credits to customers because of rejections or returns; and reasonable
fees for training and supporting users of Licensed Products. As of the
effective date of this Amendment, [ * ] of the current $850 gross invoice
price of Licensed Product and Licensed Methods is attributed to such
training and support services. Should the proportion of the training and
support services relative to such price increase or decrease, the increased
or decreased proportion shall be promptly reported by licensee to The
Regents. Any decrease shall be immediately applied. However, any increased
proportion shall not be deducted until approved in writing by the Regents,
which approval will not be unreasonably withheld upon receipt by the Regents of
supporting data requested by the Regents. For purposes of calculating Net
Sales, transfers to an Affiliate or sublicensee for end use by the Affiliate
or sublicensee will be treated as sales at list price."
1.2 The Regents and SLC furthermore agree that this Amendment is not
retroactive and applies to the calculation of Net Sales made after January 1,
1999.
IN WITNESS WHEREOF, the parties hereto have executed this agreement in
duplicate originals by their duly authorized officers or representatives.
SCIENTIFIC LEARNING THE REGENTS OF THE
CORPORATION UNIVERSITY OF CALIFORNIA
By: /s/ Frank Mattson By: /s/ Joel B. Kirschbaum
--------------------------- ------------------------------
(Signature) (Signature)
Name: Frank Mattson Name: Joel B. Kirschbaum
------------------------- ---------------------------
(Please Print) (Please Print)
Title: CFO Title: Interim Director
------------------------ ---------------------------
Date: 3/15/99 Date: 3/18/99
------------------------- ----------------------------
[ * ]Confidential Treatment Requested
<PAGE>
LEASE AGREEMENT
BETWEEN
GBC-UNIVERSITY AVENUE ASSOCIATES, L.P.
AS "LANDLORD"
AND
SCIENTIFIC LEARNING CORPORATION, A DELAWARE CORPORATION
AS "TENANT"
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
<S> <C> <C>
1. PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. TERM; POSSESSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3. RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
4. SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5. USE AND COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . . . . . 8
6. TENANT IMPROVEMENTS & ALTERATIONS . . . . . . . . . . . . . . . . . . . 10
7. MAINTENANCE AND REPAIRS . . . . . . . . . . . . . . . . . . . . . . . . 12
8. TENANT'S TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
9. UTILITIES AND SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . 13
10. EXCULPATION AND INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . 15
11. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
12. DAMAGE OR DESTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . 18
13. CONDEMNATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
14. ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . . . . . . . . . . 21
15. DEFAULT AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . 24
16. LATE CHARGE AND INTEREST . . . . . . . . . . . . . . . . . . . . . . . . 26
17. WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
18. ENTRY, INSPECTION AND CLOSURE . . . . . . . . . . . . . . . . . . . . . 27
19. SURRENDER AND HOLDING OVER . . . . . . . . . . . . . . . . . . . . . . . 27
20. ENCUMBRANCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
21. ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS . . . . . . . . . . . . . 29
22. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
23. ATTORNEYS' FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
24. QUIET POSSESSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
25. SECURITY MEASURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
26. FORCE MAJEURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
27. RULES AND REGULATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 31
28. LANDLORD'S LIABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . 31
29. CONSENTS AND APPROVALS . . . . . . . . . . . . . . . . . . . . . . . . . 32
30. BROKERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
</TABLE>
i.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
SECTION PAGE
<S> <C> <C>
31. INTENTIONALLY OMITTED . . . . . . . . . . . . . . . . . . . . . . . . . 32
32. ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
33. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
34. AUTHORITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
</TABLE>
ii.
<PAGE>
BASIC LEASE INFORMATION
LEASE DATE: For identification purposes only, the date of this
Lease is July 31, 1997
LANDLORD: GBC-University Associates, L.P.
TENANT: Scientific Learning Corporation, a Delaware corporation
PROJECT: Golden Bear Center Building
BUILDING ADDRESS: 1995 University Avenue, Berkeley, California
RENTABLE AREA OF
BUILDING: 160,587 square feet
PREMISES: Floor: Fourth (4th)
Suite Number: 400
Rentable Area: 34,257
TERM: 60 full calendar months (plus any partial month at the
beginning of the Term)
SCHEDULED
COMMENCEMENT DATE: September 1, 1997
EXPIRATION DATE: The last day of the 60th full calendar month in the
Term
BASE RENT: Month 01-12 $56,524.05 per month
Month 13-24 $73,652.20 per month
Month 25-36 $77,078.25 per month
Month 37-48 $80,503.95 per month
Month 49-60 $83,929.65 per month
BASE YEAR: The calendar year 1997
TENANT'S SHARE: Twenty-one and thirty-three hundredths percent (21.33%)
SECURITY DEPOSIT: Eighty-three thousand three hundred and forty-six
dollars ($83,346.00), and the Letter of Credit
referenced in Section 3 of Exhibit D
LANDLORD'S ADDRESS
FOR PAYMENT OF RENT: GBC-University Associates, L.P.
File #72846
P.O. Box 61000
San Francisco, CA 94161-2846
BUSINESS HOURS: 7:30 a.m. to 6:00 p.m.
1.
<PAGE>
LANDLORD'S ADDRESS
FOR NOTICES: William Wilson & Associates
1390 Willow Pass Road, Suite 320
Concord, CA 94520-5240
with a copy to:
William Wilson & Associates
2929 Campus Drive, Suite 450
San Mateo, CA 94403
TENANT'S ADDRESS
FOR NOTICES: At the Premises
ACCESS CARD DEPOSIT: Waived per Section 25
BROKER(S): Colliers Damner Pike
GUARANTOR(S): N/A
PROPERTY MANAGER: William Wilson & Associates
ADDITIONAL PROVISIONS: (1) Parking (2) Extension Option (3) Letter of Credit
EXHIBITS:
Exhibit A: The Premises
Exhibit B: Construction Rider
Exhibit C: Building Rules
Exhibit D: Additional Provisions
The Basic Lease Information set forth above is part of the Lease. In the
event of any conflict between any provision in the Basic Lease Information and
the Lease, the Lease shall control.
THIS LEASE is made as of the Lease Date set forth in the Basic Lease
Information, by and between the Landlord identified in the Basic Lease
Information ("Landlord"), and the Tenant identified in the Basic Lease
Information ("Tenant"). Landlord and Tenant hereby agree as follows:
1. PREMISES. Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, upon the terms and subject to the conditions of this Lease, the office
space identified in the Basic Lease Information as the Premises (the
"PREMISES"), in the Building located at the address specified in the Basic Lease
Information (the "BUILDING"). The approximate configuration and location of the
Premises is shown on EXHIBIT A. Landlord and Tenant agree that the rentable
area of the Premises for all purposes under this Lease shall be the Rentable
Area specified in the Basic Lease Information. The Building, together with the
parking facilities serving the Building (the "PARKING FACILITY"), and the
parcel(s) of land on which the Building and the Parking
2.
<PAGE>
Facility are situated (collectively, the "PROPERTY"), is part of the Project
identified in the Basic Lease Information (the "PROJECT").
2. TERM; POSSESSION. The term of this Lease (the "TERM") shall commence on
the Commencement Date as described below and, unless sooner terminated, shall
expire on the Expiration Date set forth in the Basic Lease Information (the
"EXPIRATION DATE"). The "COMMENCEMENT DATE" shall be the earlier of (a) the
date on which Landlord tenders possession of the Premises to Tenant, with all of
Landlord's construction obligations, if any, "SUBSTANTIALLY COMPLETED" as
provided in the Construction Rider attached as EXHIBIT B (the "CONSTRUCTION
RIDER") or, in the event of any "TENANT DELAY," as defined in the Construction
Rider, the date on which Landlord could have done so had there been no such
Tenant Delay; or (b) the date upon which Tenant, with Landlord's written
permission, actually occupies and conducts business in any portion of the
Premises. The parties anticipate that the Commencement Date will occur on or
about the Scheduled Commencement Date set forth in the Basic Lease Information
(the "SCHEDULED COMMENCEMENT DATE"); PROVIDED, HOWEVER, that Landlord shall not
be liable for any claims, damages or liabilities if the Premises are not ready
for occupancy by the Scheduled Commencement Date. When the Commencement Date
has been established, Landlord and Tenant shall at the request of either party
confirm the Commencement Date and Expiration Date in writing.
3. RENT.
3.1 BASE RENT. Tenant agrees to pay to Landlord the Base Rent set forth
in the Basic Lease Information, without prior notice or demand, on the first day
of each and every, calendar month during the Term, except that Base Rent for the
first full calendar month in which Base Rent is payable shall be paid upon
Tenant's execution of this Lease and Base Rent for any partial month at the
beginning of the Term shall be paid on the Commencement Date. Base Rent for any
partial month at the beginning or end of the Term shall be prorated based on the
actual number of days in the month.
If the Basic Lease Information provides for any change in Base Rent by
reference to years or months (without specifying particular dates), the change
will take effect on the applicable annual or monthly anniversary of the
Commencement Date (which won't necessarily be the first day of a calendar
month).
3.2 ADDITIONAL RENT: INCREASES IN OPERATING COSTS AND TAXES.
(a) DEFINITIONS.
(1) "BASE OPERATING COSTS" means Operating Costs for the
calendar year specified as the Base Year in the Basic Lease Information
(excluding therefrom, however, any Operating Costs of a nature that would not
ordinarily be incurred on an annual, recurring basis).
(2) "BASE TAXES" means Taxes for the calendar year specified as
the Base Year in the Basic Lease Information.
3.
<PAGE>
(3) "OPERATING COSTS" means, subject to the exclusions below,
all costs of managing, operating, maintaining and repairing the Property,
including all costs, expenditures, fees and charges for: (A) operation,
maintenance and repair of the Property (including maintenance, repair and
replacement of glass, the roof covering or membrane, and landscaping); (B)
utilities and services (including telecommunications facilities and equipment,
recycling programs and trash removal), and associated supplies and materials;
(c) compensation (including employment taxes and fringe benefits) for persons
who perform duties in connection with the operation, management, maintenance and
repair of the Building, such compensation to be appropriately allocated for
persons who also perform duties unrelated to the Building, up to and including
the grade of Building Manager; (D) property (including coverage for earthquake
and flood if carried by Landlord), liability, rental income and other insurance
relating to the Property, and expenditures for deductible amounts paid under
such insurance; (E) licenses, permits and inspections; (F) complying with the
requirements of any law, statute, ordinance or governmental rule or regulation
or any orders pursuant thereto (collectively "LAWS"); (G) amortization of
capital improvements required to comply with Laws, or which are intended to
reduce Operating Costs or improve the utility, efficiency or capacity of any
Building System, with interest on the unamortized balance at the rate paid by
Landlord on funds borrowed to finance such capital improvements (or, if Landlord
finances such improvements out of Landlord's funds without borrowing, the rate
that Landlord would have paid to borrow such funds, as reasonably determined by
Landlord), over such useful life as Landlord shall reasonably determine; (H) an
office in the Project for the management of the Property, including expenses of
furnishing and equipping such office in a commercially reasonable manner, and
the rental value of any space occupied for such purposes; (I) property
management fees at commercially reasonable rates, generally commensurate with
management fees charged for similar scope and quality of services for other
buildings in the vicinity of the Building, of comparable size, quality and age
as the Building; (J) accounting, legal and other professional services incurred
in connection with the operation of the Property and the calculation of
Operating Costs and Taxes; (K) a reasonable allowance for depreciation on
machinery and equipment used to maintain the Property and on other personal
property owned by Landlord in the Property (including window coverings and
carpeting in common areas); (L) contesting the validity or applicability of any
Laws that may affect the Property; (M) the Building's share of any shared or
common area maintenance fees and expenses (including costs and expenses of
operating, managing, owning and maintaining the Parking Facility and the common
areas of the Project and any fitness center or conference center in the
Project); and (N) any other cost, expenditure, fee or charge, whether or not
hereinbefore described, which in accordance with generally accepted property
management practices would be considered an expense of managing, operating,
maintaining and repairing the Property. Operating Costs for any calendar year,
including the Base Year, during which average occupancy of the Building is less
than one hundred percent (100%) shall be calculated based upon the Operating
Costs that would have been incurred if the Building had an average occupancy of
one hundred percent (100%) during the entire calendar year.
Operating Costs shall not include (i) capital improvements (except as
otherwise provided above); (ii) costs of special services rendered to individual
tenants (including Tenant) for which a special charge is made; (iii) interest
and principal payments on loans or indebtedness secured by the Building; (iv)
costs of improvements for Tenant or other tenants of the
4.
<PAGE>
Building; (v) costs of services or other benefits of a type which are not
available to Tenant but which are available to other tenants or occupants, and
costs for which Landlord is reimbursed by other tenants of the Building other
than through payment of tenants' shares of increases in Operating Costs and
Taxes; (vi) leasing commissions, attorneys' fees and other expenses incurred in
connection with leasing space in the Building or enforcing such leases; (vii)
depreciation or amortization, other than as specifically enumerated in the
definition of Operating Costs above; (viii) costs, fines or penalties incurred
due to Landlord's violation of any Law; (ix) costs, fines or penalties incurred
due to Landlord's violation of any terms or conditions of this Lease or any
other lease relating to the Building or Property, or due to Landlord's
negligence or willful misconduct; (x) overhead profit increments paid to
Landlord's subsidiaries or affiliates for management or other services on or to
the Building or for supplies or other materials to the extent that the cost of
the services, supplies or materials exceeds the cost that would have been paid
had the services, supplies or materials been provided by unaffiliated parties on
a competitive basis; (xi) all interest, loan fees, and other carrying costs
related to any mortgage or deed of trust and all rental payable under any ground
or underlying lease, or any lease for any equipment ordinarily considered to be
of a capital nature, to the extent such capital cost would not be includible in
Operating Costs (except janitorial equipment that is not affixed to the
Building); (xii) any compensation paid to clerks, attendants, or other persons
in commercial concessions operated by Landlord; (xiii) advertising and
promotional expenditures; (xiv) costs of repairs and other work occasioned by
fire, windstorm, or other casualty of an insurable nature, to the extent that
insurance proceeds (exclusive of any deductible) are actually received, less the
costs incurred in obtaining such proceeds; and (xv) the cost of correcting any
building code or other violations of law that were violations prior to the
Commencement Date.
(4) "TAXES" means: all real property taxes and general, special
or district assessments or other governmental impositions, of whatever kind,
nature or origin, imposed on or by reason of the ownership or use of the
Property; governmental charges, fees or assessments for transit or traffic
mitigation (including area-wide traffic improvement assessments and
transportation system management fees), housing, police, fire or other
governmental service or purported benefits to the Property; personal property
taxes assessed on the personal property of Landlord used in the operation of the
Property; service payments in lieu of taxes and taxes and assessments of every
kind and nature whatsoever levied or assessed in addition to, in lieu of or in
substitution for existing or additional real or personal property taxes on the
Property or the personal property described above; any increases in the
foregoing caused by changes in assessed valuation, tax rate or other factors or
circumstances; and the reasonable cost of contesting by appropriate proceedings
the amount or validity of any taxes, assessments or charges described above, but
excluding any of the foregoing to the extent assessed based on the value of
above standard office tenant improvements other than Tenant's. To the extent
paid by Tenant or other tenants as "TENANT'S TAXES" (as defined in Section 8 -
TENANT'S TAXES), "Tenant's Taxes" shall be excluded from Taxes.
(5) "TENANT'S SHARE" means the Rentable Area of the Premises
divided by the total Rentable Area of the Building, as set forth in the Basic
Lease Information. If the Rentable Area of the Building is changed or the
Rentable Area of the Premises is changed by Tenant's leasing of additional space
hereunder or for any other reason, Tenant's Share shall be adjusted accordingly.
5.
<PAGE>
(b) ADDITIONAL RENT.
(1) Tenant shall pay Landlord as "ADDITIONAL RENT" for each
calendar year or portion thereof, commencing one (1) year after the Commencement
Date, and thereafter throughout the Term, Tenant's Share of the sum of (x) the
amount (if any) by which Operating Costs for such period exceed Base Operating
Costs, and (y) the amount (if any) by which Taxes for such period exceed Base
Taxes.
(2) Prior to the end of the Base Year and each calendar year
thereafter, Landlord shall notify Tenant of Landlord's estimate of Operating
Costs, Taxes and Tenant's Additional Rent for the following calendar year.
Commencing on the first day of January of each calendar year and continuing on
the first day of every month thereafter in such year, Tenant shall pay to
Landlord one-twelfth (1/12th) of the estimated Additional Rent. If Landlord
thereafter reasonably estimates that Operating Costs or Taxes for such year will
vary from Landlord's prior estimate, Landlord may, by notice to Tenant, revise
the estimate for such year (and Additional Rent shall thereafter be payable
based on the revised estimate).
(3) As soon as reasonably practicable after the end of the Base
Year and each calendar year thereafter, Landlord shall furnish Tenant a
statement with respect to such year, showing Operating Costs, Taxes and
Additional Rent for the year, and the total payments made by Tenant with respect
thereto. Unless Tenant raises any objections to Landlord's statement within
ninety (90) days after receipt of the same, such statement shall conclusively be
deemed correct and Tenant shall have no right thereafter to dispute such
statement or any item therein or the computation of Additional Rent based
thereon. If Tenant does object to such statement, then Landlord shall provide
Tenant with reasonable verification of the figures shown on the statement and
the parties shall negotiate in good faith to resolve any disputes. If the
parties are unable to resolve such disputes, Landlord and Tenant shall agree
upon an independent certified public accountant, who shall audit the statement,
and Landlord's calculation of Operating Costs, Taxes and Tenant's share of any
increases in the same. Such accountant's determination shall be binding on
Landlord and Tenant. Tenant shall pay the cost of any such audit, unless the
audit shows that the Landlord's statement overstated the Tenant's share of
increases in Operating Costs and Taxes for the year by more than 7% of the
actual amount of the same, in which case Landlord shall pay the cost of the
audit. Any objection of Tenant to Landlord's statement and resolution of any
dispute shall not postpone the time for payment of any amounts due Tenant or
Landlord based on Landlord's statement, nor shall any failure of Landlord to
deliver Landlord's statement in a timely manner relieve Tenant of Tenant's
obligation to pay any amounts due Landlord based on Landlord's statement.
(4) If Tenant's Additional Rent as finally determined for any
calendar year exceeds the total payments made by Tenant on account thereof,
Tenant shall pay Landlord the deficiency within thirty (30) days of Tenant's
receipt of Landlord's statement. If the total payments made by Tenant on
account thereof exceed Tenant's Additional Rent as finally determined for such
year, Tenant's excess payment shall be credited toward the rent next due from
Tenant under this Lease. For any partial calendar year at the beginning or end
of the Term, Additional Rent shall be prorated on the basis of a 365-day year by
computing Tenant's Share of the increases in Operating Costs and Taxes for the
entire year and then prorating such amount for the number of days during such
year included in the Term. Notwithstanding the termination of
6.
<PAGE>
this Lease, Landlord shall pay to Tenant or Tenant shall pay to Landlord, as the
case may be, within ten (10) days after Tenant's receipt of Landlord's final
statement for the calendar year in which this Lease terminates, the difference
between Tenant's Additional Rent for that year, as finally determined by
Landlord, and the total amount previously paid by Tenant on account thereof.
If for any reason Base Taxes or Taxes for any year during the Term are
reduced, refunded or otherwise changed, Tenant's Additional Rent shall be
adjusted accordingly. If Taxes are temporarily reduced as a result of space in
the Building being leased to a tenant that is entitled to an exemption from
property taxes or other taxes, then for purposes of determining Additional Rent
for each year in which Taxes are reduced by any such exemption, Taxes for such
year shall be calculated on the basis of the amount the Taxes for the year would
have been in the absence of the exemption. The obligations of Landlord to
refund any overpayment of Additional Rent and of Tenant to pay any Additional
Rent not previously paid shall survive the expiration of the Term.
Notwithstanding anything to the contrary in this Lease, if there is at any time
a decrease in Taxes below the amount of the Taxes for the Base Year, then for
purposes of calculating Additional Rent for the year in which such decrease
occurs and all subsequent periods, Base Taxes shall be reduced to equal the
Taxes for the year in which the decrease occurs.
3.3 PAYMENT OF RENT. All amounts payable or reimbursable by Tenant under
this Lease, including late charges and interest (collectively, "RENT"), shall
constitute rent and shall be payable and recoverable as rent in the manner
provided in this Lease. All sums payable to Landlord on demand under the terms
of this Lease shall be payable within ten (10) days after notice from Landlord
of the amounts due. All rent shall be paid without offset, recoupment or
deduction in lawful money of the United States of America to Landlord at
Landlord's Address for Payment of Rent as set forth in the Basic Lease
Information, or to such other person or at such other place as Landlord may from
time to time designate.
4. SECURITY DEPOSIT. On execution of this Lease, Tenant shall deposit with
Landlord the amount specified in the Basic Lease Information as the Security
Deposit, and Tenant shall deliver to Landlord the "LETTER OF CREDIT" pursuant to
the provisions contained in Section 3 of Exhibit D below (collectively, the
"SECURITY DEPOSIT"), as security for the performance of Tenant's obligations
under this Lease. Landlord may (but shall have no obligation to) use the
security deposit, including any proceeds of the Letter of Credit, or any portion
thereof, to cure any Event of Default under this Lease or to compensate Landlord
for any damage Landlord incurs as a result of Tenant's failure to perform any of
Tenant's obligations hereunder. In such event Tenant shall pay to Landlord on
demand an amount sufficient to replenish the Security Deposit. If Tenant is not
in default at the expiration or termination of this Lease, Landlord shall return
to Tenant the Security Deposit or the balance thereof then held by Landlord and
not applied as provided above within fourteen (14) days after the Lease shall
have expired or terminated and Tenant shall have vacated the Premises in the
condition required hereunder. Landlord may commingle the Security Deposit with
Landlord's general and other funds. Landlord shall not be required to pay
interest on the Security Deposit to Tenant.
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5. USE AND COMPLIANCE WITH LAWS.
5.1 USE. The Premises shall be used and occupied for general business
office purposes and for no other use or purpose. Tenant shall comply with all
present and future Laws relating to Tenant's use or occupancy of the Premises
(and make any repairs, alterations or improvements as required to comply with
all such Laws), and shall observe the "BUILDING RULES" (as defined in Section 27
- - RULES AND REGULATIONS). Notwithstanding the foregoing or anything else to the
contrary contained in this Lease, except as set forth in Section 3.2 above,
Tenant shall not be responsible for compliance with any laws, codes, ordinances
or other governmental directives where such compliance is not related
specifically to Tenant's use and occupancy of the Premises. For example, if any
governmental authority should require the Building or the Premises to be
structurally strengthened against earthquake, or should require the removal of
"HAZARDOUS MATERIALS" from the Premises that were not arising from or in
connection with the "Handling by Tenant" of "Hazardous Materials" at or about
the Property or Tenant's failure to comply in full with all "ENVIRONMENTAL
REQUIREMENTS" with respect to the Premises (as the foregoing terms are defined
in Section 5.2 below), and such measures are imposed as a general requirement
applicable to all tenants rather than as a condition to Tenant's specific use or
occupancy of the Premises, such work shall be performed by and at the sole cost
of Landlord, subject to the provisions of Section 3.2 of this Lease. Tenant
shall not do, bring, keep or sell anything in or about the Premises that is
prohibited by, or that will cause a cancellation of or an increase in the
existing premium for, any insurance policy covering the Property or any part
thereof. Tenant shall not permit the Premises to be occupied or used in any
manner that will constitute waste or a nuisance, or disturb the quiet enjoyment
of or otherwise annoy other tenants in the Building. Without limiting the
foregoing, the Premises shall not be used for classroom training activities
(except that Tenant may conduct classroom training sessions for up to 36
attendees at a time, not to exceed three (3) Business Days every other week),
practice of medicine or any of the healing arts, providing social services, for
any governmental use (including embassy or consulate use), or for personnel
agency, walk-in or walk-up customer service office (I.E., Tenant may provide
customer service by telephone), studios for radio, television or other media
(except that Tenant may use portions of the Premises for a sound studio for its
own use in adding sound effects to compact discs, CD-ROM's or other products),
travel agency or reservation center operations or uses. Tenant shall not,
without the prior consent of Landlord, (i) bring into the Building or the
Premises anything that may cause substantial noise, odor or vibration, overload
the floors in the Premises or the Building or any of the heating, ventilating
and air-conditioning ("HVAC"), mechanical, elevator, plumbing, electrical, fire
protection, life safety, security or other systems in the Building ("BUILDING
SYSTEMS"), or jeopardize the structural integrity of the Building or any part
thereof; (ii) connect to the utility systems of the Building any apparatus,
machinery. or other equipment other than typical office equipment; or (iii)
connect to any electrical circuit in the Premises any equipment or other load
with aggregate electrical power requirements in excess of 80% of the rated
capacity of the circuit.
5.2 HAZARDOUS MATERIALS.
(a) DEFINITIONS.
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(1) "HAZARDOUS MATERIALS" shall mean any substance: (A) that now
or in the future is regulated or governed by, requires investigation or
remediation under, or is defined as a hazardous waste, hazardous substance,
pollutant or contaminant under any governmental statute, code, ordinance,
regulation, rule or order, and any amendment thereto, including the
Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C.
Section 9601 et seq., and the Resource Conservation and Recovery Act, 42 U.S.C.
Section 6901 et seq., or (B) that is toxic, explosive, corrosive, flammable,
radioactive, carcinogenic, dangerous or otherwise hazardous, including gasoline,
diesel fuel, petroleum hydrocarbons, polychlorinated biphenyls (PCBs), asbestos,
radon and urea formaldehyde foam insulation.
(2) "ENVIRONMENTAL REQUIREMENTS" shall mean all present and
future Laws, orders, permits, licenses, approvals, authorizations and other
requirements of any kind applicable to Hazardous Materials.
(3) "HANDLED BY TENANT" and "HANDLING BY TENANT" shall mean and
refer to any installation, handling, generation, storage, use, disposal,
discharge, release, abatement, removal, transportation, or any other activity of
any type by Tenant or its agents, employees, contractors, licensees, assignees,
sublessees, transferees or representatives (collectively, "REPRESENTATIVES") or
its guests, customers, invitees, or visitors (collectively, "VISITORS"), at or
about the Premises in connection with or involving Hazardous Materials.
(4) "ENVIRONMENTAL LOSSES" shall mean all costs and expenses of
any kind, damages, including foreseeable and unforeseeable consequential
damages, fines and penalties incurred in connection with any violation of and
compliance with Environmental Requirements and all losses of any kind
attributable to the diminution of value, loss of use or adverse effects on
marketability or use of any portion of the Premises or Property.
(b) TENANT'S ACKNOWLEDGEMENT AND COVENANTS. Tenant acknowledges that
it has received and had an opportunity to review a copy of that certain
Environmental Site Assessment prepared with respect to the Building by AllWest
Environmental, Inc., dated June 13, 1994. No Hazardous Materials shall be
Handled by Tenant at or about the Premises or Property without Landlord's prior
written consent, which consent may be granted, denied, or conditioned upon
compliance with Landlord's requirements, all in Landlord's absolute discretion.
Notwithstanding the foregoing, normal quantities and use of those Hazardous
Materials customarily used in the conduct of general office activities, such as
copier fluids and cleaning supplies ("PERMITTED HAZARDOUS MATERIALS"), may be
used and stored at the Premises without Landlord's prior written consent,
provided that Tenant's activities at or about the Premises and Property and the
Handling by Tenant of all Hazardous Materials shall comply at all times with all
Environmental Requirements. At the expiration or termination of the Lease,
Tenant shall promptly remove from the Premises and Property all Hazardous
Materials Handled by Tenant at the Premises or the Property. Tenant shall keep
Landlord fully and promptly informed of all Handling by Tenant of Hazardous
Materials other than Permitted Hazardous Materials. Tenant shall be responsible
and liable for the compliance with all of the provisions of this Section by all
of Tenant's Representatives and Visitors, and all of Tenant's obligations under
this Section (including its indemnification obligations under paragraph (e)
below) shall survive the expiration or termination of this Lease.
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(c) COMPLIANCE. Tenant shall at Tenant's expense promptly take all
actions required by any governmental agency or entity in connection with or as a
result of the Handling by Tenant of Hazardous Materials at or about the Premises
or Property, including inspection and testing, performing all cleanup, removal
and remediation work required with respect to those Hazardous Materials,
complying with all closure requirements and post-closure monitoring, and filing
all required reports or plans. All of the foregoing work and all Handling by
Tenant of all Hazardous Materials shall be performed in a good, safe and
workmanlike manner by consultants qualified and licensed to undertake such work
and in a manner that will not interfere with any other tenant's quiet enjoyment
of the Property or Landlord's use, operation, leasing and sale of the Property.
Tenant shall deliver to Landlord prior to delivery to any governmental agency,
or promptly after receipt from any such agency, copies of all permits,
manifests, closure or remedial action plans, notices, and all other documents
relating to the Handling by Tenant of Hazardous Materials at or about the
Premises or Property. If any lien attaches to the Premises or the Property in
connection with or as a result of the Handling by Tenant of Hazardous Materials,
and Tenant does not cause the same to be released, by payment, bonding or
otherwise, within ten (10) days after the attachment thereof, Landlord shall
have the right but not the obligation to cause the same to be released and any
sums expended by Landlord (plus Landlord's administrative costs) in connection
therewith shall be payable by Tenant on demand.
(d) LANDLORD'S RIGHTS. Landlord shall have the right, but not the
obligation, to enter the Premises at any reasonable time (i) to confirm Tenant's
compliance with the provisions of this Section 5.2, and (ii) to perform Tenant's
obligations under this Section if Tenant has failed to do so after reasonable
notice to Tenant. Landlord shall also have the right to engage qualified
Hazardous Materials consultants to inspect the Premises and review the Handling
by Tenant of Hazardous Materials, including review of all permits, reports,
plans, and other documents regarding same. Tenant shall pay to Landlord on
demand the costs of Landlord's consultants' fees and all costs incurred by
Landlord in performing Tenant's obligations under this Section. Landlord shall
use reasonable efforts to minimize any interference with Tenant's business
caused by Landlord's entry into the Premises, but Landlord shall not be
responsible for any interference caused thereby, except as set forth in Section
10 below.
(e) TENANT'S INDEMNIFICATION. Tenant agrees to indemnify, defend,
protect and hold harmless Landlord and its partners or members and its or their
partners, members, directors, officers, shareholders, employees and agents from
all Environmental Losses and all other claims, actions, losses, damages,
liabilities, costs and expenses of every kind, including reasonable attorneys',
experts' and consultants' fees and costs, incurred at any time and arising from
or in connection with the Handling by Tenant of Hazardous Materials at or about
the Property or Tenant's failure to comply in full with all Environmental
Requirements with respect to the Premises.
6. TENANT IMPROVEMENTS & ALTERATIONS.
6.1 Landlord and Tenant shall perform their respective obligations with
respect to design and construction of any improvements to be constructed and
installed in the Premises (the "TENANT IMPROVEMENTS"), as provided in the
Construction Rider (PROVIDED, HOWEVER, that Tenant shall not be required to
obtain Landlord's prior approval for minor, non-structural
10.
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Alterations that do not affect any of the Building Systems, are not visible from
the exterior of the Premises, and cost less than Twenty Thousand Dollars
($20,000), so long as Tenant gives Landlord notice of the proposed Alterations
at least ten (10) days prior to commencement of the Alterations and complies
with all of the following provisions, except that Tenant shall not be required
to obtain Landlord's approval of any plans or specifications therefor). Except
for any Tenant Improvements to be constructed by Tenant as provided in the
Construction Rider, Tenant shall not make any alterations, improvements or
changes to the Premises, including installation of any security system or
telephone or data communication wiring, ("ALTERATIONS"), without Landlord's
prior written consent. Any such Alterations shall be completed by Tenant at
Tenant's sole cost and expense: (i) with due diligence, in a good and
workmanlike manner, using new materials; (ii) in compliance with plans and
specifications approved by Landlord; (iii) in compliance with the construction
rules and regulations promulgated by Landlord from time to time; (iv) in
accordance with all applicable Laws (including all work, whether structural or
non-structural, inside or outside the Premises, required to comply fully with
all applicable Laws and necessitated by Tenant's work); and (v) subject to all
conditions which Landlord may in Landlord's reasonable discretion impose. Such
conditions may include requirements for Tenant to: (i) provide payment or
performance bonds or additional insurance (from Tenant or Tenant's contractors,
subcontractors or design professionals); (ii) use the general contractor
designated by Landlord, so long as the fees to be charged by such general
contractor shall not exceed those that would be charged in an arms'-length
transaction; and (iii) remove all or part of the Alterations prior to or upon
expiration or termination of the Term, as designated by Landlord. If Tenant so
requests, subcontracts shall be competitively bid by subcontractors approved by
Landlord. Notwithstanding anything to the contrary herein, (a) Tenant shall not
be required to remove (1) any of the initial tenant improvements constructed by
or on behalf of Tenant, or (2) any alterations or additions for which Tenant has
obtained Landlord's consent unless at the time Tenant requested such consent
Tenant also requested that Landlord indicate that such removal will be required
and Landlord did not so indicate; and (b) Tenant shall be entitled to remove the
following described items: None [Tenant to provide list for Landlord approval].
If any work outside the Premises, or any work on or adjustment to any of the
Building Systems, is required in connection with or as a result of Tenant's
work, such work shall be performed at Tenant's expense by contractors designated
by Landlord. Landlord's right to review and approve (or withhold approval of)
Tenant's plans, drawings, specifications, contractor(s) and other aspects of
construction work proposed by Tenant is intended solely to protect Landlord, the
Property and Landlord's interests. No approval or consent by Landlord shall be
deemed or construed to be a representation or warranty by Landlord as to the
adequacy, sufficiency, fitness or suitability thereof or compliance thereof with
applicable Laws or other requirements. Except as otherwise provided in
Landlord's consent, or as described above, all Alterations shall upon
installation become pan of the realty and be the property of Landlord.
6.2 Before making any Alterations, Tenant shall submit to Landlord for
Landlord's prior approval reasonably detailed final plans and specifications
prepared by a licensed architect or engineer, a copy of the construction
contract, including the name of the contractor and all subcontractors proposed
by Tenant to make the Alterations and a copy of the contractor's license.
Tenant shall reimburse Landlord upon demand for any expenses reasonably incurred
by Landlord in connection with any Alterations made by Tenant, including
reasonable fees charged by Landlord's contractors or consultants to review plans
and specifications prepared by Tenant and to update the existing as-built plans
and specifications of the Building to reflect the
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Alterations. Tenant shall obtain all applicable permits, authorizations and
governmental approvals and deliver copies of the same to Landlord before
commencement of any Alterations.
6.3 Tenant shall keep the Premises and the Property free and clear of all
liens arising out of any work performed, materials furnished or obligations
incurred by Tenant. If any such lien attaches to the Premises or the Property,
and Tenant does not cause the same to be released by payment, bonding or
otherwise within ten (10) days after the attachment thereof, Landlord shall have
the right but not the obligation to cause the same to be released, and any sums
expended by Landlord (plus Landlord's administrative costs) in connection
therewith shall be payable by Tenant on demand with interest thereon from the
date of expenditure by Landlord at the Interest Rate (as defined in Section 16.2
- - INTEREST). Tenant shall give Landlord at least ten (10) days' notice prior to
the commencement of any Alterations and cooperate with Landlord in posting and
maintaining notices of non-responsibility in connection therewith.
6.4 Subject to the provisions of Section 5 - USE AND COMPLIANCE WITH LAWS
and the foregoing provisions of this Section, Tenant may install, maintain and
remove furnishings, equipment, movable partitions, business equipment and other
trade fixtures ("TRADE FIXTURES") in the Premises, provided that the Trade
Fixtures do not become an integral part of the Premises or the Building. Tenant
shall promptly repair any damage to the Premises or the Building caused by any
installation or removal of such Trade Fixtures.
7. MAINTENANCE AND REPAIRS.
7.1 By taking possession of the Premises Tenant agrees that the Premises
are then in a good and tenantable condition. During the Term, Tenant at
Tenant's expense but under the direction of Landlord, shall repair and maintain
the Premises, including the interior walls, floor coverings, ceiling (ceiling
tiles and grid), Tenant Improvements, Alterations, fire extinguishers, outlets
and fixtures, and any appliances (including dishwashers, hot water heaters and
garbage disposers) in the Premises, in a first class condition, and keep the
Premises in a clean, safe and orderly condition.
7.2 Landlord shall maintain or cause to be maintained in reasonably good
order, condition and repair, the structural portions of the roof, foundations,
floors and exterior walls of the Building, the Building Systems, and the public
and common areas of the Property, such as elevators, stairs, corridors and
restrooms; PROVIDED, HOWEVER, that Tenant shall pay the cost of repairs for any
damage occasioned by Tenant's use of the Premises or the Property or any act or
omission of Tenant or Tenant's Representatives or Visitors, to the extent (if
any) not covered by the property insurance that Landlord is required to maintain
hereunder. Landlord shall be under no obligation to inspect the Premises.
Tenant shall promptly report in writing to Landlord any defective condition
known to Tenant which Landlord is required to repair. As a material part of the
consideration for this Lease, Tenant hereby waives any benefits of any
applicable existing or future Law, including the provisions of California Civil
Code Sections 1932(1 ), 1941 and 1942, that allows a tenant to make repairs at
its landlord's expense.
7.3 Landlord hereby reserves the right, at any time and from time to time,
without liability to Tenant, and without constituting an eviction, constructive
or otherwise, or entitling
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Tenant to any abatement of rent or to terminate this Lease or otherwise
releasing Tenant from any of Tenant's obligations under this Lease:
(a) To make alterations, additions, repairs, improvements to or in or
to decrease the size of area of, all or any part of the Building, the fixtures
and equipment therein, and the Building Systems;
(b) To change the Building's name or street address;
(c) To install and maintain any and all signs on the exterior and
interior of the
Building;
(d) To reduce, increase, enclose or otherwise change at any time and
from time to time the size, number, location, lay-out and nature of the common
areas (including the Parking Facility) and other tenancies and premises in the
Property and to create additional rentable areas through use or enclosure of
common areas; and
(e) If any governmental authority promulgates or revises any Law or
imposes mandatory or voluntary controls or guidelines on Landlord or the
Property relating to the use or conservation of energy or utilities or the
reduction of automobile or other emissions or reduction or management of traffic
or parking on the Property (collectively "CONTROLS"), to comply with such
Controls, whether mandatory or voluntary, or make any alterations to the
Property related thereto.
In exercising its rights under this Section 7.3, Landlord will use reasonable
efforts to minimize any interruption to or disruption of Tenant's use of the
Premises.
8. TENANT'S TAXES. "TENANT'S TAXES" shall mean (a) all taxes, assessments,
license fees and other governmental charges or impositions levied or assessed
against or with respect to Tenant's personal property or Trade Fixtures in the
Premises, whether any such imposition is levied directly against Tenant or
levied against Landlord or the Property, (b) all rental, excise, sales or
transaction privilege taxes arising out of this Lease (excluding, however, state
and federal personal or corporate income taxes measured by the income of
Landlord from all sources) imposed by any taxing authority upon Landlord or upon
Landlord's receipt of any rent payable by Tenant pursuant to the terms of this
Lease ("RENTAL TAX"), and (c) any increase in Taxes attributable to inclusion of
a value placed on Tenant's personal property, Trade Fixtures or Alterations.
Tenant shall pay any Rental Tax to Landlord in addition to and at the same time
as Base Rent is payable under this Lease, and shall pay all other Tenant's Taxes
before delinquency (and, at Landlord's request, shall furnish Landlord
satisfactory evidence thereof). If Landlord pays Tenant's Taxes or any portion
thereof, Tenant shall reimburse Landlord upon demand for the amount of such
payment, together with interest at the Interest Rate from the date of Landlord's
payment to the date of Tenant's reimbursement.
9. UTILITIES AND SERVICES.
9.1 DESCRIPTION OF SERVICES. Landlord shall furnish to the Premises:
reasonable amounts of heat, ventilation-and air-conditioning during the Business
Hours specified in the
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Basic Lease Information ("BUSINESS HOURS") on weekdays except public holidays
("BUSINESS DAYS"); reasonable amounts of electricity and water; and janitorial
services five days a week (except public holidays). Landlord shall also provide
the Building with normal fluorescent tube replacement, window washing, elevator
service (24 hours a day, subject to Landlord's security requirements), and
common area toilet room supplies. Any additional utilities or services that
Landlord may agree to provide (including lamp or tube replacement for other than
Building Standard lighting fixtures) shall be at Tenant's sole expense.
9.2 PAYMENT FOR ADDITIONAL UTILITIES AND SERVICES.
(a) Upon request by Tenant in accordance with the procedures
reasonably established by Landlord from time to time for furnishing HVAC service
at times other than Business Hours on Business Days, Landlord shall furnish such
service to Tenant and Tenant shall pay for such services on an hourly basis at
the then prevailing rate established for the Building by Landlord, which shall
not exceed Landlord's actual costs therefor (including without limitation
electrical costs, depreciation and overtime compensation). Landlord's current
charge for after-hours HVAC is $30 per hour, which includes all of the foregoing
costs.
(b) If the temperature otherwise maintained in any portion of the
Premises by the HVAC systems of the Building is affected as a result of (i) any
lights, machines or equipment used by Tenant in the Premises, or (ii) the
occupancy of the Premises by more than one person per 150 square feet of
rentable area, then Landlord shall have the right to install any machinery or
equipment reasonably necessary to restore the temperature, including
modifications to the standard air-conditioning equipment. The cost of any such
equipment and modifications, including the cost of installation and any
additional cost of operation and maintenance of the same, shall be paid by
Tenant to Landlord upon demand.
(c) If Tenant's usage of electricity, water or any other utility
service exceeds the use of such utility Landlord reasonably determines to be
typical, normal and customary. for the Building, Landlord may determine the
amount of such excess use by any reasonable means (including the installation at
Landlord's request but at Tenant's expense of a separate meter or other
measuring device) and charge Tenant for the cost of such excess usage. In
addition, Landlord may impose a reasonable charge for the use of any additional
or unusual janitorial services required by Tenant because of any unusual Tenant
Improvements or Alterations, the carelessness of Tenant or the nature of
Tenant's business (including hours of operation).
9.3 INTERRUPTION OF SERVICES. In the event of an interruption in, or
failure or inability to provide any of the services or utilities described in
Section 9.1 - "Description of Services" (a "SERVICE FAILURE"), such Service
Failure shall not, regardless of its duration, constitute an eviction of Tenant,
constructive or otherwise, or impose upon Landlord any liability whatsoever,
including, but not limited to, liability for consequential damages or loss of
business by Tenant or, except as provided herein, entitle Tenant to an abatement
of rent or to terminate this Lease.
(a) If any Service Failure not caused by Tenant or its
Representatives and caused by an occurrence on the Property prevents Tenant from
reasonably using a material portion of the Premises and Tenant in fact ceases to
use such portion of the Premises, Tenant shall be entitled to an abatement of
Base Rent and Additional Rent with respect to the portion of
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the Premises that Tenant is prevented from using by reason of such Service
Failure in the following circumstances: (i) if Landlord fails to commence
reasonable efforts to remedy the Service Failure within three (3) Business Days
following the occurrence of the Service Failure, and such failure has persisted
and continuously prevented Tenant from using a material portion of the Premises
during that period, the abatement of rent shall commence on the fourth Business
Day following the Service Failure and continue until Tenant is no longer so
prevented from. using such portion of the Premises; and (ii) if the Service
Failure in all events is not remedied within twenty (20) days following the
occurrence of the Service Failure and Tenant in fact does not use such portion
of the Premises for an uninterrupted period of twenty (20) days or more by
reason of such Service Failure, the abatement of rent shall commence no later
than the twenty-first day following the occurrence of the Service Failure and
continue until Tenant is no longer so prevented from using such portion of the
Premises.
(b) If a Service Failure is caused by Tenant or its Representatives,
Landlord shall nonetheless remedy the Service Failure, at the expense of Tenant,
pursuant to Landlord's maintenance and repair obligations under Section 7 -
"Maintenance and Repair" or Section 12.1 -"Landlord's Duty to Repair," as the
case may be, but Tenant shall not be entitled to an abatement of rent or to
terminate this Lease as a result of any such Service Failure.
(c) Notwithstanding Tenant's entitlement to rent abatement under the
preceding provisions, Tenant shall continue to pay Tenant's then current rent
until such time as Landlord and Tenant agree on the amount of the rent
abatement. If Landlord and Tenant are unable to agree on the amount of such
abatement within ten (10) Business Days of the date they commence negotiations
regarding the abatement, then either party may submit the matter to binding
arbitration pursuant to Sections 1280 et seq. of the California Code of Civil
Procedure.
(d) In addition to the foregoing provisions, if there is a Service
Failure not caused by Tenant or its Representatives and caused by an occurrence
on the Property and such Service Failure prevents Tenant from conducting its
business in the Premises in the manner in which Tenant intends to conduct such
business, and (i) Landlord fails to commence reasonable efforts to remedy the
Service Failure within ninety (90) days following the occurrence of the Service
Failure, or (ii) the Service Failure in all events is not remedied within one
(1) year following its occurrence and Tenant in fact does not conduct any
business in the Premises for an uninterrupted period of one (1) year or more,
Tenant shall have the right to terminate this Lease by written notice delivered
to Landlord within ten (10) Business Days following the event described in
clauses (i) or (ii) above giving rise to the right to terminate.
(e) Where the cause of a Service Failure is within the control of a
public utility or other public or quasi-public entity outside Landlord's
control, notification to such utility or entity of the Service Failure and
request to remedy the failure shall constitute "reasonable efforts" by Landlord
to remedy the Service Failure.
(f) Tenant hereby waives the provisions of California Civil Code
Section 1932(1) or any other applicable existing or future law, ordinance or
governmental regulation permitting the termination of this Lease due to such
interruption, failure or inability.
10. EXCULPATION AND INDEMNIFICATION.
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10.1 LANDLORD'S INDEMNIFICATION OF TENANT. Landlord shall indemnify,
protect, defend and hold Tenant harmless from and against any claims, actions,
liabilities, damages, costs or expenses, including reasonable attorneys' fees
and costs incurred in defending against the same ("CLAIMS") asserted by any
third party against Tenant for loss, injury or damage, to the extent such loss,
injury or damage is caused by the willful misconduct or negligent acts or
omissions of Landlord or its authorized representatives.
10.2 TENANT'S INDEMNIFICATION OF LANDLORD. Tenant shall indemnify,
protect, defend and hold Landlord and Landlord's authorized representatives
harmless from and against Claims arising from (a) the acts or omissions of
Tenant or Tenant's Representatives or Visitors in or about the Property, or (b)
any construction or other work undertaken by Tenant on the Premises (including
any design defects), or (c) any breach or default under this Lease by Tenant, or
(d) any loss, injury or damage, howsoever and by whomsoever caused, to any
person or property, occurring in or about the Premises during the Term,
excepting only Claims described in this clause (d) to the extent they are caused
by the willful misconduct or negligent acts or omissions of Landlord or its
authorized representatives.
10.3 DAMAGE TO TENANT AND TENANT'S PROPERTY. Landlord shall not be liable
to Tenant for any loss, injury or other damage to Tenant or to Tenant's property
in or about the Premises or the Property from any cause (including defects in
the Property, or in any equipment in the Property; fire, explosion or other
casualty; bursting, rupture, leakage or overflow of any plumbing or other pipes
or lines, sprinklers, tanks, drains, drinking fountains or washstands in, above,
or about the Premises or the Property; or acts of other tenants in the Property)
unless such loss, injury or other damage is caused by the gross negligence,
willful misconduct or breach of this Lease by Landlord or Landlord's authorized
representatives and is covered by any insurance carried or required to be
carried by Landlord hereunder. Tenant hereby waives all claims against Landlord
for any such loss, injury or damage and the cost and expense of defending
against claims relating thereto, including any loss, injury or damage caused by
Landlord's negligence (active or passive) or willful misconduct.
Notwithstanding any other provision of this Lease to the contrary, in no event
shall Landlord be liable to Tenant for any punitive or consequential damages or
damages for loss of business by Tenant.
10.4 SURVIVAL. The obligations of the parties under this Section 10 shall
survive the expiration or termination of this Lease.
11. INSURANCE.
11.1 TENANT' S INSURANCE.
(a) LIABILITY INSURANCE. Tenant shall maintain in full force
throughout the Term, commercial general liability insurance providing coverage
on an occurrence form basis with limits of not less than Two Million Dollars
($2,000,000.00) each occurrence for bodily injury and property damage combined,
Two Million Dollars ($2,000,000.00) annual general aggregate, and Two Million
Dollars ($2,000,000.00) products and completed operations annual aggregate.
Tenant's liability insurance policy or policies shall: (i) include premises and
operations liability coverage, products and completed operations liability
coverage, broad form property damage coverage including completed operations,
blanket contractual liability coverage
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including, to the maximum extent possible, coverage for the indemnification
obligations of Tenant under this Lease, and personal and advertising injury
coverage; (ii) provide that the insurance company has the duty to defend all
insureds under the policy; (iii) provide that defense costs are paid in addition
to and do not deplete any of the policy limits; (iv) cover liabilities arising
out of or incurred in connection with Tenant's use or occupancy of the Premises
or the Property; (v) extend coverage to cover liability for the actions of
Tenant's Representatives and Visitors; and (iv) designate separate limits for
the Property. Each policy of liability insurance required by this Section
shall: (i) contain a cross liability endorsement or separation of insureds
clause; (ii) provide that any waiver of subrogation rights or release prior to a
loss does not void coverage; (iii) provide that it is primary, to and not
contributing with, any policy of insurance carried by Landlord covering the same
loss; (iv) provide that any failure to comply with the reporting provisions
shall not affect coverage provided to Landlord, its partners, property managers
and Mortgagees; and (v) name Landlord, its partners, the Property Manager
identified in the Basic Lease Information (the "PROPERTY MANAGER"), and such
other parties in interest as Landlord may from time to time reasonably designate
to Tenant in writing, as additional insureds. Such additional insureds shall be
provided at least the same extent of coverage as is provided to Tenant under
such policies. All endorsements effecting such additional insured status shall
be at least as broad as additional insured endorsement form number CG 20 11 11
85 promulgated by the Insurance Services Office.
(b) PROPERTY INSURANCE. Tenant shall at all times maintain in effect
with respect to any Alterations and Tenant's Trade Fixtures and personal
property, commercial property insurance providing coverage, on an "all risk" or
"special form" basis, in an amount equal to at least 90% of the full replacement
cost of the covered property. Tenant may carry such insurance under a blanket
policy, provided that such policy provides coverage equivalent to a separate
policy. During the Term, the proceeds from any such policies of insurance shall
be used for the repair or replacement of the Alterations, Trade Fixtures and
personal property so insured. Landlord shall be provided coverage under such
insurance to the extent of its insurable interest and, if requested by Landlord,
both Landlord and Tenant shall sign all documents reasonably necessary or proper
in connection with the settlement of any claim or loss under such insurance.
Landlord will have no obligation to carry insurance on any Alterations or on
Tenant's Trade Fixtures or personal property.
(c) REQUIREMENTS FOR ALL POLICIES. Each policy of insurance required
under this Section 11.1 shall: (i) be in a form, and written by an insurer,
reasonably acceptable to Landlord, (ii) be maintained at Tenant's sole cost and
expense, and (iii) require at least thirty (30) days' written notice to Landlord
prior to any cancellation, nonrenewal or modification of insurance coverage.
Insurance companies issuing such policies shall have rating classifications of
"A" or better and financial size category ratings of "VII" or better according
to the latest edition of the A.M. Best Key Rating Guide. All insurance
companies issuing such policies shall be admitted careers licensed to do
business in the state where the Property is located. Any deductible amount
under such insurance shall not exceed $5,000. Tenant shall provide to Landlord,
upon request, evidence that the insurance required to be caused by Tenant
pursuant to this Section, including any endorsement effecting the additional
insured status, is in full force and effect and that premiums therefor have been
paid.
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(d) UPDATING COVERAGE. Tenant shall increase the amounts of
insurance as required by any Mortgagee, and, not more frequently than once every
three (3) years, as recommended by Landlord's insurance broker, if, in the
reasonable opinion of either of them, the amount of insurance then required
under this Lease is not adequate. Any limits set forth in this Lease on the
amount or type of coverage required by Tenant's insurance shall not limit the
liability of Tenant under this Lease.
(e) CERTIFICATES OF INSURANCE. Prior to occupancy of the Premises by
Tenant, and not less than thirty (30) days prior to expiration of any policy
thereafter, Tenant shall furnish to Landlord a certificate of insurance
reflecting that the insurance required by this Section is in force, accompanied
by an endorsement showing the required additional insureds satisfactory to
Landlord in substance and form. Notwithstanding the requirements of this
paragraph, Tenant shall at Landlord's request provide to Landlord a certified
copy of each insurance policy required to be in force at any time pursuant to
the requirements of this Lease or its Exhibits.
11.2 LANDLORD'S INSURANCE. During the Term, to the extent such coverages
are available at a commercially reasonable cost, Landlord shall maintain in
effect insurance on the Building with responsible insurers, on an "all risk" or
"special form" basis, insuring the Building and the Tenant Improvements in an
mount equal to at least 90% of the replacement cost thereof, excluding land,
foundations, footings and underground installations. Landlord may, but shall
not be obligated to, carry insurance against additional perils and/or in greater
amounts.
11.3 MUTUAL WAIVER OF RIGHT OF RECOVERY & WAIVER OF SUBROGATION. Landlord
and Tenant each hereby waive any right of recovery against each other and the
partners, managers, members, shareholders, officers, directors and authorized
representatives of each other for any loss or damage that is covered by any
policy of property insurance maintained by either party. (or required by this
Lease to be maintained) with respect to the Premises or the Property or any
operation therein, regardless of cause, including negligence (active or passive)
of the party benefiting from the waiver. If any such policy of insurance
relating to this Lease or to the Premises or the Property does not permit the
foregoing waiver or if the coverage under any such policy would be invalidated
as a result of such waiver, the party maintaining such policy shall obtain from
the insurer under such policy a waiver of all right of recovery by way of
subrogation against either party in connection with any claim, loss or damage
covered by such policy.
12. DAMAGE OR DESTRUCTION.
12.1 LANDLORD'S DUTY TO REPAIR.
(a) If all or a substantial part of the Premises are rendered
untenantable or inaccessible by damage to all or any part of the Property from
fire or other casualty then, unless either party is entitled to and elects to
terminate this Lease pursuant to Sections 12.2 - LANDLORD'S RIGHT TO TERMINATE
and 12.3 - TENANT'S RIGHT TO TERMINATE, Landlord shall, at its expense, use
reasonable efforts to repair and restore the Premises and/or the Property, as
the case may be, to substantially their former condition to the extent permitted
by then applicable Laws; PROVIDED, HOWEVER, that in no event shall Landlord have
any obligation for repair or restoration beyond the extent of insurance proceeds
received by Landlord for such repair or restoration, or for any of Tenant's
personal property, Trade Fixtures or Alterations.
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(b) If Landlord is required or elects to repair damage to the
Premises and/or the Property, this Lease shall continue in effect, but Tenant's
Base Rent and Additional Rent shall be abated with regard to any portion of the
Premises that Tenant is prevented from using by reason of such damage or its
repair from the date of the casualty until substantial completion of Landlord's
repair of the affected portion of the Premises as required under this Lease. In
no event shall Landlord be liable to Tenant by reason of any injury to or
interference with Tenant's business or property arising from fire or other
casualty or by reason of any repairs to any part of the Property necessitated by
such casualty. Notwithstanding Tenant's entitlement to rent abatement under the
preceding provisions, Tenant shall continue to pay Tenant's then current rent
until such time as Landlord and Tenant agree on the amount of the rent
abatement. Landlord and Tenant agree to negotiate in good faith with respect to
the amount of such abatement; and if Landlord and Tenant are unable to agree on
the amount of such abatement within ten (10) Business Days of the date they
commence negotiations regarding the abatement, then either party may submit the
matter to binding arbitration pursuant to Sections 1280 et seq. of the
California Code of Civil Procedure.
12.2 LANDLORD'S RIGHT TO TERMINATE. Landlord may elect to terminate this
Lease following damage by fire or other casualty under the following
circumstances:
(a) If, in the reasonable judgment of Landlord, the Premises and the
Property cannot be substantially repaired and restored under applicable Laws
within one (1) year from the date of the casualty;
(b) If, in the reasonable judgment of Landlord, adequate proceeds are
not, for any reason (other than Landlord's failure to maintain the insurance
required hereunder), made available to Landlord from Landlord's insurance
policies (and/or from Landlord's funds made available for such purpose, at
Landlord's sole option) to make the required repairs;
(c) If the Building is damaged or destroyed to the extent that, in
the reasonable judgment of Landlord, the cost to repair and restore the Building
would exceed twenty-five percent (25%) of the full replacement cost of the
Building, whether or not the Premises are at all damaged or destroyed; or
(d) If the fire or other casualty, occurs during the last year of the
Term.
If any of the circumstances described in subparagraphs (a), (b), (c) or (d) of
this Section 12.2 occur or arise, Landlord shall give Tenant notice within one
hundred and twenty (120) days after the date of the casualty, specifying whether
Landlord elects to terminate this Lease as provided above and, if not,
Landlord's estimate of the time required to complete Landlord's repair
obligations under this Lease.
12.3 TENANT'S RIGHT TO TERMINATE. Landlord shall give notice to Tenant of
Landlord's election to rebuild or not to rebuild the Premises within one hundred
twenty (120) days after the date of the casualty, and such notice shall specify
Landlord's architect's or engineer's estimate as to the time required to rebuild
or restore the Premises. If all or a substantial part of the Premises are
rendered untenantable or inaccessible by damage to all or any part of the
Property from fire or other casualty, and Landlord does not elect to terminate
as
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provided above, then Tenant may elect to terminate this Lease if Landlord's
estimate of the time required to complete Landlord's repair obligations under
this Lease is greater than one (1) year, in which event Tenant may elect to
terminate this Lease by giving Landlord notice of such election to terminate
within thirty (30) days after Landlord's notice to Tenant pursuant to this
Section 12. If Landlord fails to restore the Premises (including reasonable
means of access thereto) by the later of one (I) year after the casualty or
sixty (60) days after the estimated date for completion of Landlord's repair,
Tenant, at any time thereafter until such rebuilding is completed, may terminate
this Lease by delivering written notice to Landlord of such election, in which
event this Lease will terminate as of the date of the giving of such notice.
12.4 WAIVER. Landlord and Tenant each hereby waive the provisions of
California Civil Code Sections 1932(2), 1933(4) and any other applicable
existing or future Law permitting the termination of a lease agreement in the
event of damage or destruction under any circumstances other than as provided in
Sections 12.2 - LANDLORD'S RIGHT TO TERMINATE and 12.3 - TENANT'S RIGHT TO
TERMINATE.
13. CONDEMNATION.
13.1 DEFINITIONS.
(a) "AWARD" shall mean all compensation, sums, or anything of value
awarded, paid or received on a total or partial Condemnation.
(b) "CONDEMNATION" shall mean (i) a permanent taking (or a temporary
taking for a period extending beyond the end of the Term) pursuant to the
exercise of the power of condemnation or eminent domain by any public or
quasi-public authority, private corporation or individual having such power
("CONDEMNOR"), whether by legal proceedings or otherwise, or (ii) a voluntary
sale or transfer by Landlord to any such authority, either under threat of
condemnation or while legal proceedings for condemnation are pending.
(c) "DATE OF CONDEMNATION" shall mean the earlier of the date that
title to the property taken is vested in the Condemnor or the date the Condemnor
has the right to possession of the property being condemned.
13.2 EFFECT ON LEASE.
(a) If the Premises are totally taken by Condemnation, this Lease
shall terminate as of the Date of Condemnation. If a portion but not all of the
Premises is taken by Condemnation, this Lease shall remain in effect; PROVIDED,
HOWEVER, that if the portion of the Premises remaining after the Condemnation
will be unsuitable for Tenant's continued use, then upon notice to Landlord
within thirty (30) days after Landlord notifies Tenant of the Condemnation,
Tenant may terminate this Lease effective as of the Date of Condemnation.
(b) If twenty-five percent (25%) or more of the Project or of the
parcel(s) of land on which the Building is situated or of the Parking Facility
or of the floor area in the Building is taken by Condemnation, or if as a result
of any Condemnation the Building is no longer reasonably suitable for use as an
office building, whether or not any portion of the
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Premises is taken, Landlord may elect to terminate this Lease, effective as of
the Date of Condemnation, by notice to Tenant within thirty (30) days after the
Date of Condemnation.
(c) If all or a portion of the Premises is temporarily taken by a
Condemnor for a period not extending beyond the end of the Term, this Lease
shall remain in full force and effect.
13.3 RESTORATION. If this Lease is not terminated as provided in Section
13.2 - EFFECT ON LEASE, Landlord, at its expense, shall diligently proceed to
repair and restore the Premises to substantially its former condition (to the
extent permitted by then applicable Laws) and/or repair and restore the Building
to an architecturally complete office building; PROVIDED, HOWEVER, that
Landlord's obligations to so repair and restore shall be limited to the amount
of any Award received by Landlord and not required to be paid to any Mortgagee
(as defined in Section 20.2 below). In no event shall Landlord have any
obligation to repair or replace any improvements in the Premises beyond the
amount of any Award received by Landlord for such repair or to repair or replace
any of Tenant's personal property, Trade Fixtures, or Alterations.
13.4 ABATEMENT AND REDUCTION OF RENT. If any portion of the Premises is
taken in a Condemnation or is rendered permanently untenantable by repairs
necessitated by the Condemnation, and this Lease is not terminated, the Base
Rent and Additional Rent payable under this Lease shall be proportionally
reduced as of the Date of Condemnation based upon the percentage of rentable
square feet in the Premises so taken or rendered permanently untenantable. In
addition, if this Lease remains in effect following a Condemnation and Landlord
proceeds to repair and restore the Premises, the Base Rent and Additional Rent
payable under this Lease shall be abated during the period of such repair or
restoration to the extent such repairs prevent Tenant's use of the Premises.
13.5 AWARDS. Any Award made shall be paid to Landlord, and Tenant hereby
assigns to Landlord, and waives all interest in or claim to, any such Award,
including any claim for the value of the unexpired Term; PROVIDED, HOWEVER, that
Tenant shall be entitled to receive, or to prosecute a separate claim for, an
Award for a temporary taking of the Premises or a portion thereof by a Condemnor
where this Lease is not terminated (to the extent such Award relates to the
unexpired Term), or an Award or portion thereof separately designated for
relocation expenses or the interruption of or damage to Tenant's business or as
compensation for Tenant's personal property, Trade Fixtures or Alterations.
13.6 WAIVER. Landlord and Tenant each hereby waive the provisions of
California Code of Civil Procedure Section 1265.130 and any other applicable
existing or future Law allowing either party to petition for a termination of
this Lease upon a partial taking of the Premises and/or the Property.
14. ASSIGNMENT AND SUBLETTING.
14.1 LANDLORD'S CONSENT REQUIRED. Except in connection with a permitted
transfer to an "AFFILIATE" (as defined in Section 14.9 - TRANSFER TO AFFILIATE,
below) Tenant shall not assign this Lease or any interest therein, or sublet or
license or permit the use or occupancy of the Premises or any part thereof by or
for the benefit of anyone other than Tenant, or in any other
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manner transfer all or any part of Tenant's interest under this Lease (each and
all a "TRANSFER"), without the prior written consent of Landlord, which consent
(subject to the other provisions of this Section 14) shall not be unreasonably
withheld. If Tenant is a business entity, any direct or indirect transfer of
fifty percent (50%) or more of the ownership interest of the entity (whether in
a single transaction or in the aggregate through more than one transaction)
shall be deemed a Transfer. Notwithstanding any provision in this Lease to the
contrary, Tenant shall not mortgage, pledge, hypothecate or otherwise encumber
this Lease or all or any part of Tenant's interest under this Lease.
14.2 REASONABLE CONSENT.
(a) Prior to any proposed Transfer, Tenant shall submit in writing to
Landlord (i) the name and legal composition of the proposed assignee, subtenant,
user or other transferee (each a "PROPOSED TRANSFEREE"); (ii) the nature of the
business proposed to be carried on in the Premises; (iii) a copy of the proposed
assignment, sublease or other agreement governing the proposed Transfer; and
(except in the case of a Proposed Transferee that is an Affiliate) (iv) a
current balance sheet, income statements for the last two years and such other
reasonable financial and other information concerning the Proposed Transferee as
Landlord may request. Within fifteen (15) Business Days after Landlord receives
all such information it shall notify Tenant whether it approves or disapproves
such Transfer or if it elects to proceed under Section 14.7 -LANDLORD'S RIGHT TO
SPACE.
(b) Tenant acknowledges and agrees that, among other circumstances
for which Landlord could reasonably withhold consent to a proposed Transfer, it
shall be reasonable for Landlord to withhold consent where (i) the Proposed
Transferee does not intend itself to occupy the entire portion of the Premises
assigned or sublet, (ii) Landlord reasonably disapproves of the Proposed
Transferee's business operating ability or history, reputation or
creditworthiness or the character of the business to be conducted by the
Proposed Transferee at the Premises, (iii) the Proposed Transferee is a
governmental agency or unit, or, if Landlord has space available to accommodate
such Proposed Transferee, an existing tenant in the Project, (iv) the proposed
Transfer would violate any "exclusive" rights of any tenants in the Project, (v)
Landlord or Landlord's agent has shown space in the Building to the Proposed
Transferee or responded to any inquiries from the Proposed Transferee or the
Proposed Transferee's agent concerning availability of space in the Building, at
any time within the preceding nine months, if Landlord has space available to
accommodate such Proposed Transferee, or (vi) Landlord otherwise reasonably
determines that the proposed Transfer would have the effect of decreasing the
value of the Building or increasing the expenses associated with operating,
maintaining and repairing the Property. In no event may Tenant publicly
advertise all or any portion of the Premises for assignment or sublease at a
rental less than that then sought by Landlord for a direct lease (non-sublease)
of comparable space in the Project.
14.3 EXCESS CONSIDERATION. If Landlord consents to the Transfer, Tenant
shall pay to Landlord as Additional Rent, within ten (10) days after receipt by
Tenant, two-thirds (2/3) of all "Sublease Profits" (as defined below).
"Sublease Profits" shall mean any consideration paid by any transferee (the
"TRANSFEREE") for the Transfer, including, in the case of a sublease, the excess
of the rent and other consideration payable by the subtenant over the amount of
Base Rent and Additional Rent payable hereunder applicable to the subleased
space, less any and all direct,
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out-of-pocket expenses and cash concessions, including costs for necessary
Alterations, reasonable brokerage commissions and reasonable attorneys' fees and
costs, paid by Tenant to procure the assignee or subtenant, all of which costs
shall be amortized at an annual interest rate of 10% over the term of the
assignment or sublease.
14.4 NO RELEASE OF TENANT. No consent by Landlord to any Transfer shall
relieve Tenant of any obligation to be performed by Tenant under this Lease,
whether occurring before or after such consent, assignment, subletting or other
Transfer. Each Transferee shall be jointly and severally liable with Tenant
(and Tenant shall be jointly and severally liable with each Transferee) for the
payment of rent (or, in the case of a sublease, rent in the amount set forth in
the sublease) and for the performance of all other terms and provisions of this
Lease. The consent by Landlord to any Transfer shall not relieve Tenant or any
such Transferee from the obligation to obtain Landlord's express prior written
consent to any subsequent Transfer by Tenant or any Transferee. The acceptance
of rent by Landlord from any other person (whether or not such person is an
occupant of the Premises) shall not be deemed to be a waiver by Landlord of any
provision of this Lease or to be a consent to any Transfer.
14.5 EXPENSES AND ATTORNEYS' FEES. Tenant shall pay to Landlord on demand
all reasonable costs and expenses (including reasonable attorneys' fees, not to
exceed $1,000.00) incurred by Landlord in connection with reviewing or
consenting to any proposed Transfer (including any request for consent to, or
any waiver of Landlord's rights in connection with, any security interest in any
of Tenant's property at the Premises).
14.6 EFFECTIVENESS OF TRANSFER. Prior to the date on which any permitted
Transfer (whether or not requiring Landlord's consent) becomes effective, Tenant
shall deliver to Landlord a counterpart of the fully executed Transfer document
and Landlord's standard form of Consent to Assignment Or Consent to Sublease
executed by Tenant and the Transferee in which each of Tenant and the Transferee
confirms its obligations pursuant to this Lease. Failure or refusal of a
Transferee to execute any such instrument shall not release or discharge the
Transferee from liability as provided herein. The voluntary, involuntary or
other surrender of this Lease by Tenant, or a mutual cancellation by Landlord
and Tenant, shall not work a merger, and any such surrender or cancellation
shall, at the option of Landlord, either terminate all or any existing subleases
or operate as an assignment to Landlord of any or all of such subleases.
14.7 LANDLORD'S RIGHT TO SPACE.
(a) Notwithstanding any of the above provisions of this Section to
the contrary, except in connection with a Transfer to an Affiliate, if Tenant
notifies Landlord that it desires to enter into a Transfer, Landlord, in lieu of
consenting to such Transfer, may elect (x) in the case of an assignment or a
sublease of the entire Premises, to terminate this Lease, or (y) in the case of
a sublease of less than the entire Premises for the remainder of the Term, to
terminate this Lease as it relates to the space proposed to be subleased by
Tenant. In such event, this Lease will terminate (or the space proposed to be
subleased will be removed from the Premises subject to this Lease and the Base
Rent and Tenant's Share under this Lease shall be proportionately reduced) on
the date the Transfer was proposed to be effective, and Landlord may lease such
space to any party, including the prospective Transferee identified by Tenant.
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(b) Notwithstanding the foregoing provisions of Section 14.3 and
14.7(a) to the contrary, Tenant shall have the right to sublease up to 14,000
rentable square feet of the Premises for up to twenty-four (24) months, and
Landlord's right to recapture under Section 14.7(a) shall not apply to such a
sublease; however, Tenant shall pay to Landlord as Additional Rent, within ten
(10) days after receipt by Tenant, one hundred percent (100%) of all Sublease
Profits (as defined in Section 14.3). Any extension or renewal of such a
sublease shall be subject to Sections 14.3 and 14.7(a).
14.8 ASSIGNMENT OF SUBLEASE RENTS. Tenant hereby absolutely and
irrevocably assigns to Landlord any and all rights to receive rent and other
consideration from any sublease and agrees that Landlord, as assignee or as
attorney-in-fact for Tenant for purposes hereof, or a receiver for Tenant
appointed on Landlord's application may (but shall not be obligated to) collect
such rents and other consideration and apply the same toward Tenant's
obligations to Landlord under this Lease; PROVIDED, HOWEVER, that Landlord
grants to Tenant at all times prior to occurrence of any breach or default by
Tenant a revocable license to collect such rents (which license shall
automatically and without notice be and be deemed to have been revoked and
terminated immediately upon any Event of Default).
14.9 TRANSFER TO AFFILIATE. Notwithstanding the foregoing provisions of
this Section 14 to the contrary, Tenant may assign this Lease or sublet the
Premises or any portion thereof, without Landlord's consent, to any corporation
or other entity which controls, is controlled by, or is under common control
with Tenant, or to any corporation or other entity resulting from a merger or
consolidation with Tenant, or to any person or entity which acquires
substantially all the assets of Tenant as a going concern (collectively, an
"AFFILIATE"), provided that the Affiliate assumes in writing all of Tenant's
obligations under this Lease.
14.10 PUBLIC OFFERING OR FINANCING. Notwithstanding any other
provision contained herein to the contrary, (i) Tenant shall be permitted to
offer shares of Tenant's stock at a public offering on any public stock exchange
without Landlord's consent; and any such sale of shares of Tenant's stock at a
public offering on any public stock exchange shall not constitute a "Transfer"
for the purposes of this Section 14; and (ii) Tenant shall be permitted to sell
or transfer share of Tenant's stock in connection with any BONA FIDE financing
or capitalization for the benefit of Tenant; PROVIDED, HOWEVER, in each case
Tenant shall provide to Landlord the notice required under Section 14.2(a)(i)
above.
15. DEFAULT AND REMEDIES.
15.1 EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an "EVENT OF DEFAULT" by Tenant:
(a) Tenant fails to make any payment of rent when due, or any amount
required to replenish the security deposit as provided in Section 4 above, if
payment in full is not received by Landlord within three (3) days after written
notice that it is due.
(b) Tenant abandons the Premises and fails to pay rent when due and
to collect mail and packages and otherwise maintain the Premises in a neat and
orderly condition and as otherwise required under this Lease.
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(c) Tenant fails timely to deliver any subordination document,
estoppel certificate or financial statement requested by Landlord within the
applicable time period specified in Sections 20 - ENCUMBRANCES - and 21 -
ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS - below.
(d) Tenant violates the restrictions on Transfer set forth in Section
14 -ASSIGNMENT AND SUBLETTING.
(e) Tenant ceases doing business as a going concern; makes an
assignment for the benefit of creditors; is adjudicated an insolvent, files a
petition (or files an answer admitting the material allegations of a petition)
seeking relief under any state or federal bankruptcy or other statute, law or
regulation affecting creditors' rights; all or substantially all of Tenant's
assets are subject to judicial seizure or attachment and are not released within
30 days, or Tenant consents to or acquiesces in the appointment of a trustee,
receiver or liquidator for Tenant or for all or any substantial part of Tenant's
assets.
(f) Tenant fails, within ninety (90) days after the commencement of
any proceedings against Tenant seeking relief under any state or federal
bankruptcy or other statute, law or regulation affecting creditors' rights, to
have such proceedings dismissed, or Tenant fails, within ninety (90) days after
an appointment, without Tenant's consent or acquiescence, of any trustee,
receiver or liquidator for Tenant or for all or any substantial part of Tenant's
assets, to have such appointment vacated.
(g) Tenant fails to perform or comply with any provision of this
Lease other than those described in (a) through (f) above, and (i) Tenant does
not fully cure such failure within fifteen (15) days after notice to Tenant, or
(ii) if such failure does not jeopardize or impair the quiet enjoyment of any
other occupant of the Building or create any threat of release of any Hazardous
Materials, Tenant does not fully cure such failure within thirty (30) days after
notice to Tenant, or (iii) if such failure does not jeopardize or impair the
quiet enjoyment of any other occupant of the Building or create any threat of
release of any Hazardous Materials, and such failure cannot be cured within such
thirty (30)-day period, Tenant fails within such thirty (30)-day period to
commence, and thereafter diligently proceed with, all actions necessary to cure
such failure as soon as reasonably possible but in all events within ninety (90)
days of such notice; PROVIDED, HOWEVER, that if Landlord in Landlord's
reasonable judgment determines that such failure cannot or will not be cured by
Tenant within such ninety (90) days, then such failure shall constitute an Event
of Default immediately upon such notice to Tenant.
15.2 REMEDIES. Upon the occurrence of an Event of Default, Landlord shall
have the following remedies, which shall not be exclusive but shall be
cumulative and shall be in addition to any other remedies now or hereafter
allowed by law:
(a) Landlord may terminate Tenant's right to possession of the
Premises at any time by written notice to Tenant. Tenant expressly acknowledges
that in the absence of such written notice from Landlord, no other act of
Landlord, including re-entry into the Premises, efforts to relet the Premises,
reletting of the Premises for Tenant's account, storage of Tenant's personal
property and Trade Fixtures, acceptance of keys to the Premises from Tenant or
exercise of any other rights and remedies under this Section, shall constitute
an acceptance of
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Tenant's surrender of the Premises or constitute a termination of this Lease or
of Tenant's right to possession of the Premises. Upon such termination in
writing of Tenant's right to possession of the Premises, as herein provided,
this Lease shall terminate and Landlord shall be entitled to recover damages
from Tenant as provided in California Civil Code Section 1951.2 and any other
applicable existing or future Law providing for recovery of damages for such
breach, including the worth at the time of award of the amount by which the rent
which would be payable by Tenant hereunder for the remainder of the Term after
the date of the award of damages, including Additional Rent as reasonably
estimated by Landlord, exceeds the amount of such rental loss as Tenant proves
could have been reasonably avoided, discounted at the discount rate published by
the Federal Reserve Bank of San Francisco for member banks at the time of the
award plus one percent (1%).
(b) Landlord shall have the remedy described in California Civil Code
Section 1951.4 (Landlord may continue this Lease in effect after Tenant's breach
and abandonment and recover rent as it becomes due, if Tenant has the right to
sublet or assign, subject only to reasonable limitations).
(c) Landlord may cure the Event of Default at Tenant's expense. If
Landlord pays any sum or incurs any expense in curing the Event of Default,
Tenant shall reimburse Landlord upon demand for the amount of such payment or
expense with interest at the Interest Rate from the date the sum is paid or the
expense is incurred until Landlord is reimbursed by Tenant.
(d) Landlord may remove all Tenant's property from the Premises, and
such property may be stored by Landlord in a public warehouse or elsewhere at
the sole cost and for the account of Tenant. If Landlord does not elect to
store any or all of Tenant's property left in the Premises, Landlord may
consider such property to be abandoned by Tenant, and Landlord may thereupon
dispose of such property in any manner deemed appropriate by Landlord. Any
proceeds realized by Landlord on the disposal of any such property shall be
applied first to offset all expenses of storage and sale, then credited against
Tenant's outstanding obligations to Landlord under this Lease, and any balance
remaining after satisfaction of all obligations of Tenant under this Lease shall
be delivered to Tenant.
16. LATE CHARGE AND INTEREST.
16.1 LATE CHARGE. If any payment of rent is not received by Landlord when
due, Tenant shall pay to Landlord on demand as a late charge an additional
amount equal to four percent (4%) of the overdue payment; PROVIDED, HOWEVER,
that for the first instance of late payment during any 12-month period, not to
exceed three (3) instances of late payment during the Term, no late charge shall
be imposed. A late charge shall not be imposed more than once on any particular
installment not paid when due, but imposition of a late charge on any payment
not made when due does not eliminate or supersede late charges imposed on other
(prior) payments not made when due or preclude imposition of a late charge on
other installments or payments not made when due.
16.2 INTEREST. In addition to the late charges referred to above, which
are intended to defray Landlord's costs resulting from late payments, any
payment from Tenant to Landlord not
26.
<PAGE>
paid when due shall at Landlord's option bear interest from the date due until
paid to Landlord by Tenant at the rate of fifteen percent (15%) per annum or the
maximum lawful rate that Landlord may charge to Tenant under applicable laws,
whichever is less (the "INTEREST RATE"). Acceptance of any late charge and/or
interest shall not constitute a waiver of Tenant's default with respect to the
overdue sum or prevent Landlord from exercising any of its other rights and
remedies under this Lease.
17. WAIVER. No provisions of this Lease shall be deemed waived by Landlord
unless such waiver is in a writing signed by Landlord. The waiver by Landlord
of any breach of any provision of this Lease shall not be deemed a waiver of
such provision or of any subsequent breach of the same or any other provision of
this Lease. No delay or omission in the exercise of any right or remedy of
Landlord upon any default by Tenant shall impair such right or remedy or be
construed as a waiver. Landlord's acceptance of any payments of rent due under
this Lease shall not be deemed a waiver of any default by Tenant under this
Lease (including Tenant's recurrent failure to timely pay rent) other than
Tenant's nonpayment of the accepted sums, and no endorsement or statement on any
check or payment or in any letter or document accompanying any check or payment
shall be deemed an accord and satisfaction. Landlord's consent to or approval
of any act by Tenant requiring Landlord's consent or approval shall not be
deemed to waive or render unnecessary Landlord's consent to or approval of any
subsequent act by Tenant.
18. ENTRY, INSPECTION AND CLOSURE. Upon reasonable oral or written notice to
Tenant (and without notice in emergencies), Landlord and its authorized
representatives may enter the Premises at all reasonable times to: (a) determine
whether the Premises are in good condition, (b) determine whether Tenant is
complying with its obligations under this Lease, (c) perform any maintenance or
repair of the Premises or the Building that Landlord has the right or obligation
to perform, (d) install or repair improvements for other tenants where access to
the Premises is required for such installation or repair, (e) serve, post or
keep posted any notices required or allowed under the provisions of this Lease,
(f) show the Premises to prospective brokers, agents, buyers, transferees,
Mortgagees or tenants, or (g) do any other act or thing necessary for the safety
or preservation of the Premises or the Building. When reasonably necessary and
upon 24 hours' notice (except in cases of emergency) Landlord may temporarily
close entrances, doors, corridors, elevators or other facilities in the Building
without liability to Tenant by reason of such closure. Landlord shall conduct
its activities under this Section in a manner that will minimize inconvenience
to Tenant without incurring additional expense to Landlord. In no event shall
Tenant be entitled to an abatement of rent on account of any entry by Landlord
and Landlord shall not be liable in any manner for any inconvenience, loss of
business or other damage to Tenant or other persons arising out of Landlord's
entry on the Premises in accordance with this Section. No action by Landlord
pursuant to this paragraph shall constitute an eviction of Tenant, constructive
or otherwise, entitle Tenant to an abatement of rent or to terminate this Lease
or otherwise release Tenant from any of Tenant's obligations under this Lease.
19. SURRENDER AND HOLDING OVER.
19.1 SURRENDER. Upon the expiration or termination of this Lease, Tenant
shall surrender the Premises and all Tenant Improvements and Alterations to
Landlord broom-clean and in their original condition, except for reasonable wear
and tear, damage from casualty or
27.
<PAGE>
condemnation and any changes resulting from approved Alterations; PROVIDED,
HOWEVER, that prior to the expiration or termination of this Lease Tenant shall,
if requested by Landlord, remove all telephone and other cabling installed in
the Building by Tenant and remove from the Premises all Tenant's personal
property and any Trade Fixtures and all Alterations that Landlord has elected to
require Tenant to remove as provided in Section 6.1 - TENANT IMPROVEMENTS &
ALTERATIONS, and repair any damage caused by such removal. If such removal is
not completed before the expiration or termination of the Term, Landlord shall
have the right (but no obligation) to remove the same, and Tenant shall pay
Landlord on demand for all costs of removal and storage thereof and for the
rental value of the Premises for the period from the end of the Term through the
end of the time reasonably required for such removal. Landlord shall also have
the right to retain or dispose of all or any portion of such property if Tenant
does not pay all such costs and retrieve the property within ten (10) days after
notice from Landlord (in which event title to all such property described in
Landlord's notice shall be transferred to and vest in Landlord). Tenant waives
all Claims against Landlord for any damage or loss to Tenant resulting from
Landlord's removal, storage, retention, or disposition of any such property.
Upon expiration or termination of this Lease or of Tenant's possession,
whichever is earliest, Tenant shall surrender all keys to the Premises or any
other part of the Building and shall deliver to Landlord all keys for or make
known to Landlord the combination of locks on all safes, cabinets and vaults
that may be located in the Premises. Tenant's obligations under this Section
shall survive the expiration or termination of this Lease.
19.2 HOLDING OVER. If Tenant (directly or through any Transferee or other
successor-in-interest of Tenant) remains in possession of the Premises after the
expiration or termination of this Lease, Tenant's continued possession shall be
on the basis of a tenancy at the sufferance of Landlord. No act or omission by
Landlord, other than its specific written consent, shall constitute permission
for Tenant to continue in possession of the Premises, and if such consent is
given or declared to have been given by a court judgment, Landlord may terminate
Tenant's holdover tenancy at any time upon seven (7) days written notice. In
such event, Tenant shall continue to comply with or perform all the terms and
obligations of Tenant under this Lease, except that the monthly Base Rent during
Tenant's holding over shall be 150% of the Base Rent payable in the last full
month prior to the termination hereof. Acceptance by Landlord of rent after
such termination shall not constitute a renewal or extension of this Lease; and
nothing contained in this provision shall be deemed to waive Landlord's right of
re-entry or any other right hereunder or at law. Tenant shall indemnify, defend
and hold Landlord harmless from and against all Claims arising or resulting
directly or indirectly from Tenant's failure to timely surrender the Premises,
including (i) any rent payable by or any loss, cost, or damages claimed by any
prospective tenant of the Premises, and (ii) Landlord's damages as a result of
such prospective tenant rescinding or refusing to enter into the prospective
lease of the Premises by reason of such failure to timely surrender the
Premises.
20. ENCUMBRANCES.
20.1 SUBORDINATION. This Lease is expressly made subject and subordinate
to any mortgage, deed of trust, ground lease, underlying lease or like
encumbrance affecting any part of the Property or any interest of Landlord
therein which is now existing or hereafter executed or recorded ("ENCUMBRANCE");
PROVIDED, HOWEVER, that such subordination shall only be effective, as to future
Encumbrances, if the holder of the Encumbrance agrees that this Lease shall
survive
28.
<PAGE>
the termination of the Encumbrance by lapse of time, foreclosure or otherwise so
long as Tenant is not in default under this Lease. Provided the conditions of
the preceding sentence are satisfied, Tenant shall execute and deliver to
Landlord, within ten (10) days after written request therefor by Landlord and in
a form reasonably requested by Landlord, any additional documents evidencing the
subordination of this Lease with respect to any such Encumbrance and the
nondisturbance agreement of the holder of any such Encumbrance. If the interest
of Landlord in the Property is transferred pursuant to or in lieu of proceedings
for enforcement of any Encumbrance, Tenant shall immediately and automatically
attorn to the new owner, and this Lease shall continue in full force and effect
as a direct lease between the transferee and Tenant on the terms and conditions
set forth in this Lease. Landlord agrees to use reasonable efforts to obtain a
non-disturbance agreement from the holder of the existing Encumbrance under
which the holder of the Encumbrance shall agree that this Lease shall survive
the termination of the Encumbrance by lapse of time, foreclosure, or otherwise
so long as Tenant is not in default under this Lease beyond any applicable cure
period.
20.2 MORTGAGEE PROTECTION. Tenant agrees to give any holder of any
Encumbrance covering any part of the Property ("MORTGAGEE"), by registered mail,
a copy of any notice of default served upon Landlord, provided that prior to
such notice Tenant has been notified in writing (by way of notice of assignment
of rents and leases, or otherwise) of the address of such Mortgagee. If
Landlord shall have failed to cure such default within thirty (30) days from the
effective date of such notice of default, then the Mortgagee shall have an
additional thirty (30) days within which to cure such default or if such default
cannot be cured within that time, then such additional time as may be necessary
to cure such default (including the time necessary to foreclose or otherwise
terminate its Encumbrance, if necessary to effect such cure), and this Lease
shall not be terminated so long as such remedies are being diligently pursued.
21. ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS.
21.1 ESTOPPEL CERTIFICATES.
(a) Within ten (10) days after written request therefor, Tenant shall
execute and deliver to Landlord, in a form provided by or satisfactory to
Landlord, a certificate stating that this Lease is in full force and effect,
describing any amendments or modifications hereto, acknowledging that this Lease
is subordinate or prior, as the case may be, to any Encumbrance and stating any
other information Landlord may reasonably request, including the Term, the
monthly Base Rent, the date to which Rent has been paid, the amount of any
security, deposit or prepaid rent, whether either party hereto is in default
under the terms of the Lease, and whether Landlord has completed its
construction obligations hereunder (if any). Tenant irrevocably constitutes,
appoints and authorizes Landlord as Tenant's special attorney-in-fact for such
purpose to complete, execute and deliver such certificate if Tenant fails timely
to execute and deliver such certificate as provided above. Any person or entity
purchasing, acquiring an interest in or extending financing with respect to the
Property shall be entitled to rely upon any such certificate. If Tenant falls
to deliver such certificate within ten (10) days after Landlord's second written
request therefor, Tenant shall be liable to Landlord for any damages incurred by
Landlord including any profits or other benefits from any financing of the
Property or any interest therein which are lost or made unavailable as a result,
directly or indirectly, of Tenant's failure or refusal to timely execute or
deliver such estoppel certificate.
29.
<PAGE>
(b) Within ten (10) days after written request therefor, Landlord
shall execute and deliver to Tenant, in a form provided by or satisfactory to
Tenant, a certificate stating that this Lease is in full force and effect,
describing any amendments or modifications hereto, acknowledging that this Lease
is subordinate or prior, as the case may be, to any Encumbrance and stating any
other information Tenant may reasonably request, including the Term, the monthly
Base Rent, the date to which Rent has been paid, the amount of any security,
deposit or prepaid rent, and whether either party hereto is in default under the
terms of the Lease.
21.2 FINANCIAL STATEMENTS. Within ten (10) days after written request
therefor, but not more than once a year, Tenant shall deliver to Landlord a copy
of the financial statements (including at least a year end balance sheet and a
statement of profit and loss) of Tenant (and of each guarantor of Tenant's
obligations under this Lease), if any, for each of the three most recently
completed years, prepared in accordance with generally accepted accounting
principles (and, if such is Tenant's normal practice, audited by an independent
certified public accountant), all then available subsequent interim statements,
and such other financial information as may reasonably be requested by Landlord
or required by any Mortgagee.
22. NOTICES. Any notice, demand, request, consent or approval that either party
desires or is required to give to the other party under this Lease shall be in
writing and shall be served personally, delivered by messenger or courier
service, or sent by U.S. certified mail, return receipt requested, postage
prepaid, addressed to the other party at the party's address for notices set
forth in the Basic Lease Information. Any notice required pursuant to any Laws
may be incorporated into, given concurrently with or given separately from any
notice required under this Lease. Notices shall be deemed to have been given
and be effective on the earlier of (a) receipt (or refusal of delivery or
receipt); or (b) one (1) day after acceptance by the independent service for
delivery, if sent by independent messenger or courier service, or three (3) days
after mailing if sent by mail in accordance with this Section. Either party may
change its address for notices hereunder, effective fifteen (15) days after
notice to the other party complying with this Section. If Tenant sublets the
Premises, notices from Landlord shall be effective on the subtenant when given
to Tenant pursuant to this Section.
23. ATTORNEYS' FEES. In the event of any dispute between Landlord and Tenant in
any way related to this Lease, the non-prevailing party shall pay to the
prevailing party all reasonable attorneys' fees and costs and expenses of any
type incurred by the prevailing party in connection with any action or
proceeding (including any appeal and the enforcement of any judgment or award),
whether or not the dispute is litigated or prosecuted to final judgment. The
"prevailing party" shall be determined based upon an assessment of which party's
major arguments or positions taken in the action or proceeding could fairly be
said to have prevailed (whether by compromise, settlement, abandonment by the
other party of its claim or defense, final decision, after any appeals, or
otherwise) over the other party's major arguments or positions on major disputed
issues.
24. QUIET POSSESSION. Subject to Tenant's full and timely performance of all of
Tenant's obligations under this Lease and subject to the terms of this Lease,
including Section 20 - ENCUMBRANCES, Tenant shall have the quiet possession of
the Premises throughout the Term as against any persons or entities lawfully
claiming by, through or under Landlord.
30.
<PAGE>
25. SECURITY MEASURES. Landlord may, but shall be under no obligation to,
implement security measures for the Property, such as the registration or search
of all persons entering or leaving the Building, requiring identification for
access to the Building, evacuation of the Building for cause, suspected cause,
or for drill purposes, the issuance of magnetic pass cards or keys for Building
or elevator access and other actions that Landlord deems necessary or
appropriate to prevent any threat of property loss or damage, bodily injury or
business interruption; PROVIDED, HOWEVER, that such measures shall be
implemented in a way as not to inconvenience tenants of the Building
unreasonably. Landlord uses an access card system for access to the Building
garage, and has waived the standard requirement of a $25 deposit for each
after-hours Building garage access card issued to Tenant. However, Tenant shall
be responsible for any loss, theft or breakage of any such cards, which must be
returned by Tenant to Landlord upon expiration or earlier termination of the
Lease. Tenant shall pay Landlord the replacement charge (currently $25) for any
card not so returned. Landlord shall at all times have the right to change,
alter or reduce any such security services or measures. Tenant shall cooperate
and comply with, and cause Tenant's Representatives and Visitors to cooperate
and comply with, such security measures. Landlord, its agents and employees
shall have no liability to Tenant or its Representatives or Visitors for the
implementation or exercise of, or the failure to implement or exercise, any such
security measures or for any resulting disturbance of Tenant's use or enjoyment
of the Premises.
26. FORCE MAJEURE. If Tenant or Landlord is delayed, interrupted or prevented
from performing any of its obligations under this Lease, including Landlord's
obligations under the Construction Rider, and such delay, interruption or
prevention is due to fire, act of God, governmental act, strike, labor dispute,
unavailability of materials or any other cause outside the reasonable control of
Tenant or Landlord, excepting Tenant's financial inability, then the time for
performance of the affected obligations of such party shall be extended for a
period equivalent to the period of such delay, interruption or prevention.
27. RULES AND REGULATIONS. Tenant shall be bound by and shall comply with the
rules and regulations attached to and made a part of this Lease as EXHIBIT C to
the extent those rules and regulations are not in conflict with the terms of
this Lease, as well as any reasonable rules and regulations hereafter adopted by
Landlord for all tenants of the Building, upon notice to Tenant thereof
(collectively, the "BUILDING RULES"). Landlord shall not be responsible to
Tenant or to any other person for any violation of, or failure to observe, the
Building Rules by any other tenant or other person.
28. LANDLORD'S LIABILITY. The term "Landlord," as used in this Lease, shall
mean only the owner or owners of the Building at the time in question. In the
event of any conveyance of title to the Building, then from and after the date
of such conveyance, the transferor Landlord shall be relieved of all liability
with respect to Landlord's obligations to be performed under this Lease after
the date of such conveyance. Notwithstanding any other term or provision of
this Lease, the liability of Landlord for its obligations under this Lease is
limited solely to Landlord's interest in the Building as the same may from time
to time be encumbered, and no personal liability, shall at any time be asserted
or enforceable against any other assets of Landlord or against Landlord's
partners or members or its or their respective partners, shareholders, members,
directors, officers or managers on account of any of Landlord's obligations or
actions under this Lease.
31.
<PAGE>
29. CONSENTS AND APPROVALS.
29.1 DETERMINATION IN GOOD FAITH. Wherever the consent, approval, judgment
or determination of Landlord is required or permitted under this Lease, Landlord
may exercise its good faith business judgment in granting or withholding such
consent or approval or in making such judgment or determination without
reference to any extrinsic standard of reasonableness, unless the specific
provision contained in this Lease providing for such consent, approval, judgment
or determination specifies that Landlord's consent or approval is not to be
unreasonably withheld, or that such judgment or determination is to be
reasonable, or otherwise specifies the standards under which Landlord may
withhold its consent. If it is determined that Landlord failed to give its
consent where it was required to do so under this Lease, Tenant shall be
entitled to injunctive relief but shall not to be entitled to monetary damages
or to terminate this Lease for such failure.
29.2 NO LIABILITY IMPOSED ON LANDLORD. The review and/or approval by
Landlord of any item or matter to be reviewed or approved by Landlord under the
terms of this Lease or any Exhibits or Addenda hereto shall not impose upon
Landlord any liability for the accuracy or sufficiency of any such item or
matter or the quality or suitability of such item for its intended use. Any
such review or approval is for the sole purpose of protecting Landlord's
interest in the Property, and no third parties, including Tenant or the
Representatives and Visitors of Tenant or any person or entity claiming by,
through or under Tenant, shall have any rights as a consequence thereof.
30. BROKERS. Landlord shall pay the fee or commission of the broker or brokers
identified in the Basic Lease Information (the "BROKER") in accordance with
Landlord's separate written agreement with the Broker, if any. Landlord and
Tenant warrant and represent to each other that in the negotiating or making of
the lease, neither Tenant nor Landlord nor anyone acting on their behalf has
dealt with any real estate broker or finder who might be entitled to a fee or
commission for this Lease other than the Broker. Landlord and Tenant each agree
to indemnify and hold each other harmless from the claim or claims, including
costs, expenses and attorneys fees incurred by the party seeking
indemnification, asserted by any other broker or finder for a fee or commission
based upon any dealings with or statements made by the other party or its
representatives.
31. INTENTIONALLY OMITTED
32. ENTIRE AGREEMENT. This Lease, including the Exhibits and any Addenda
attached hereto, and the documents referred to herein, if any, constitute the
entire agreement between Landlord and Tenant with respect to the leasing of
space by Tenant in the Building, and supersede all prior or contemporaneous
agreements, understandings, proposals and other representations by or between
Landlord and Tenant, whether written or oral, all of which are merged herein.
Neither Landlord nor Landlord's agents have made any representations or
warranties with respect to the Premises, the Building, the Project or this Lease
except as expressly set forth herein, and no rights, easements or licenses shall
be acquired by Tenant by implication or otherwise unless expressly set forth
herein. The submission of this Lease for examination does not constitute an
option for the Premises and this Lease shall become effective as a binding
agreement only upon execution and delivery thereof by Landlord to Tenant.
32.
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33. MISCELLANEOUS. This Lease may not be amended or modified except by a
writing signed by Landlord and Tenant. Subject to Section 14 - ASSIGNMENT AND
SUBLETTING and Section 28 - LANDLORD'S LIABILITY, this Lease shall be binding on
and shall inure to the benefit of the parties and their respective successors,
assigns and legal representatives. The determination that any provisions hereof
may be void, invalid, illegal or unenforceable shall not impair any other
provisions hereof and all such other provisions of this Lease shall remain in
full force and effect. The unenforceability, invalidity or illegality of any
provision of this Lease under particular circumstances shall not render
unenforceable, invalid or illegal other provisions of this Lease, or the same
provisions under other circumstances. This Lease shall be construed and
interpreted in accordance with the laws (excluding conflict of laws principles)
of the State in which the Building is located. The provisions of this Lease
shall be construed in accordance with the fair meaning of the language used and
shall not be strictly construed against either party, even if such party drafted
the provision in question. When required by the context of this Lease, the
singular includes the plural. Wherever the term "including" is used in this
Lease, it shall be interpreted as meaning "including, but not limited to" the
matter or matters thereafter enumerated. The captions contained in this Lease
are for purposes of convenience only and are not to be used to interpret or
construe this Lease. If more than one person or entity is identified as Tenant
hereunder, the obligations of each and all of them under this Lease shall be
joint and several. Time is of the essence with respect to this Lease, except as
to the conditions relating to the delivery of possession of the Premises to
Tenant. Neither Landlord nor Tenant shall record this Lease.
34. AUTHORITY. If Tenant is a corporation, partnership, limited liability
company or other form of business entity, each of the persons executing this
Lease on behalf of Tenant warrants and represents that Tenant is a duly
organized and validly existing entity, that Tenant has full right and authority
to enter into this Lease and that the persons signing on behalf of Tenant are
authorized to do so and have the power to bind Tenant to this Lease. Tenant
shall provide Landlord upon request with evidence reasonably satisfactory to
Landlord confirming the foregoing representations.
33.
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have entered into this Lease as of
the date first above written.
TENANT: LANDLORD:
SCIENTIFIC LEARNING CORPORATION, GBC-UNIVERSITY ASSOCIATES, L.P.,
A Delaware corporation A California limited partnership
By: Opportunity Capital Partners,
By: /s/ Frank Mattson a California limited partnership
---------------------------- Administrative General Partner
Name: Frank Mattson
---------------------- By: Office Opportunity Corporation,
Title: CFO a California limited partnership
--------------------- Administrative General Partner
By: By: /s/ John Hamilton
---------------------------- ---------------------------------
Name: Name: John Hamilton
---------------------- ---------------------------
Title: Title:
--------------------- --------------------------
By: /s/ [signature]
---------------------------------
Name: [name]
---------------------------
Title: CFO
--------------------------
34.
<PAGE>
EXHIBIT A
ATTACHED TO AND FORMING A PART OF
LEASE AGREEMENT
DATED AS OF JULY 8, 1997
BETWEEN
GBC-UNIVERSITY ASSOCIATES, AS LANDLORD,
AND
SCIENTIFIC LEARNING CORPORATION, AS TENANT ("LEASE")
THE PREMISES
INITIALS:
Landlord [INIT]
Tenant [INIT]
1.
<PAGE>
EXHIBIT B
ATTACHED TO AND FORMING A PART OF
LEASE AGREEMENT
DATED AS OF JULY 8, 1997
BETWEEN
GBC-UNIVERSITY ASSOCIATES, AS LANDLORD,
AND
SCIENTIFIC LEARNING CORPORATION, AS TENANT ("LEASE")
CONSTRUCTION RIDER
1. TENANT IMPROVEMENTS. Landlord shall with reasonable diligence through
a contractor designated by Landlord (which contractor may be an affiliate of
Landlord) cause to be installed in the Premises new building standard carpet and
shall cause all interior walls in the Premises to be painted with building
standard paint (the foregoing are hereinafter referred to as the "TENANT
IMPROVEMENTS") in good and workmanlike manner, and in compliance with all
applicable laws, codes and regulations. Upon request by Landlord, Tenant shall
designate in writing an individual authorized to act as Tenant's Representative
with respect to all approvals, directions and authorizations pursuant to this
Construction Rider.
Following execution of this Lease, Landlord shall proceed with reasonable
diligence to cause the Tenant Improvements to be Substantially Completed on or
prior to the Scheduled Commencement Date. The Tenant Improvements shall be
deemed to be "SUBSTANTIALLY COMPLETED" when they have been completed in
accordance with the Final Construction Documents except for finishing details,
minor omissions, decorations and mechanical adjustments of the type normally
found on an architectural "punch list". (The definition of Substantially
Completed shall also define the terms "SUBSTANTIAL COMPLETION" and
"SUBSTANTIALLY COMPLETE.")
Following Substantial Completion of the Tenant Improvements and before
Tenant takes possession of the Premises (or as soon thereafter as may be
reasonably practicable and in any event within 30 days after Substantial
Completion), Landlord and Tenant shall inspect the Premises and jointly prepare
a "punch list" of agreed items of construction remaining to be completed.
Landlord shall complete the items set forth in the punch list as soon as
reasonably possible. Tenant shall cooperate with and accommodate Landlord and
Landlord's contractor in completing the items on the punch list.
1.3. COST OF TENANT IMPROVEMENTS. Landlord shall pay the cost of the
Tenant Improvements described in Section 1 above. If Tenant requests any
additional work the same shall be at Tenant's sole cost ("ADDITIONAL COST"),
including, but not limited to, usual markups for overhead, supervision and
profit. Tenant shall pay Landlord 50% of any Additional Cost based upon the
Final Cost Estimate prior to the commencement of construction of the Tenant
Improvements. The balance of the actual Additional Cost shall be paid to
Landlord upon Substantial Completion of the Tenant Improvements, within ten (10)
days after receipt of Landlord's invoice therefor. Landlord will use reasonable
care in preparing the cost estimates,
1.
<PAGE>
but they are estimates only and do not limit Tenant's obligation to pay for the
actual Additional Cost of the Tenant Improvements, whether or not it exceeds the
estimated amounts.
1.4. CHANGES. If Tenant requests any change, addition or alteration
in or to any Final Construction Documents ("CHANGES") Landlord shall cause the
Space Planner to prepare additional Plans implementing such Change. Tenant
shall pay the cost of preparing additional Plans within ten (10) days after
receipt of Landlord's invoice therefor. As soon as practicable after the
completion of such additional Construction Documents, Landlord shall notify
Tenant of the estimated cost of the Changes. Within three (3) working days
after receipt of such cost estimate, Tenant shall notify Landlord in writing
whether Tenant approves the Change. If Tenant approves the Change, Landlord
shall proceed with the Change and Tenant shall be liable for any Additional Cost
resulting from the Change. If Tenant fails to approve the Change within such
three (3) day period, construction of the Tenant Improvements shall proceed as
provided in accordance with the original Construction Documents.
1.5. DELAYS. Tenant shall be responsible for, and shall pay to
Landlord, any and all costs and expenses reasonably incurred by Landlord in
connection with any delay in the commencement or completion of any Tenant
Improvements and any increase in the cost of Tenant Improvements caused by (i)
Tenant's failure to submit information to the Space Planner or approve any Space
Plan, Construction Documents or cost estimates within the time periods required
herein, (ii) any delays in obtaining any items or materials constituting part of
the Tenant Improvements requested by Tenant, (iii) any Changes, or (iv) any
other delay requested or caused by Tenant (collectively, "TENANT DELAYS").
2. DELIVERY OF PREMISES. Upon Substantial Completion of the Tenant
Improvements, Landlord shall deliver possession of the Premises to Tenant. If
Landlord has not Substantially Completed the Tenant Improvements and tendered
possession of the Premises to Tenant on or before the Scheduled Commencement
Date specified in Section 2 - TERM; POSSESSION of the Lease, or if Landlord is
unable for any other reason to deliver possession of the Premises to Tenant on
or before such date, neither Landlord nor its representatives shall be liable to
Tenant for any damage resulting from the delay in completing such construction
obligations and/or delivering possession to Tenant and the Lease shall remain in
full force and effect unless and until it is terminated under the express
provisions of this Paragraph or the Lease. If any delays in Substantially
Completing the Tenant Improvements are attributable to Tenant Delays, then the
Premises shall be deemed to have been Substantially Completed and delivered to
Tenant on the date on which Landlord could have Substantially Completed the
Premises and tendered the Premises to Tenant but for such Tenant Delays.
Notwithstanding the foregoing, if the Commencement Date has not occurred or
been deemed to have occurred within four (4) months after the Scheduled
Commencement Date, either party, by written notice to the other party given
within ten (10) days after the expiration of such four (4) month period, may
terminate this Lease without any liability to the other party. If Tenant fails
to perform any of Tenant's obligations under this Construction Rider within the
time periods specified herein, Landlord may, in lieu of terminating the Lease
under the foregoing provisions, treat such failure of performance as an Event of
Default under the Lease.
2.
<PAGE>
3. ACCESS TO PREMISES. Landlord shall allow Tenant and Tenant's
Representatives to enter the Premises prior to the Commencement Date to permit
Tenant to make the Premises ready for its use and occupancy; PROVIDED, HOWEVER,
that prior to such entry of the Premises, Tenant shall provide evidence
reasonably satisfactory to Landlord that Tenant's insurance, as described in
Section 11.1 - TENANT'S INSURANCE of the Lease, shall be in effect as of the
time of such entry. Such permission may be revoked at any time upon twenty-four
(24) hours' notice, and Tenant and its Representatives shall not interfere with
Landlord or Landlord's contractor in completing the Building or the Tenant
Improvements.
Tenant agrees that Landlord shall not be liable in any way for any injury,
loss or damage which may occur to any of Tenant's property placed upon or
installed in the Premises prior to the Commencement Date, the same being at
Tenant's sole risk, and Tenant shall be liable for all injury, loss or damage to
persons or property arising as a result of such entry into the Premises by
Tenant or its Representatives.
4. OWNERSHIP OF TENANT IMPROVEMENTS. All Tenant Improvements, whether
installed by Landlord or Tenant, shall become a part of the Premises, shall be
the property of Landlord and, subject to the provisions of the Lease, shall be
surrendered by Tenant with the Premises, without any compensation to Tenant, at
the expiration or termination of the Lease in accordance with the provisions of
the Lease.
INITIALS:
Landlord [INIT]
Tenant [INIT]
3.
<PAGE>
EXHIBIT C
ATTACHED TO AND FORMING A PART OF
LEASE AGREEMENT
DATED AS OF JULY 8, 1997
BETWEEN
GBC-UNIVERSITY ASSOCIATES, AS LANDLORD,
AND
SCIENTIFIC LEARNING CORPORATION, AS TENANT ("LEASE")
BUILDING RULES
The following Building Rules are additional provisions of the foregoing
Lease to which they are attached. The capitalized terms used herein have the
same meanings as these terms are given in the Lease.
1. USE OF COMMON AREAS. Tenant will not obstruct the sidewalks, halls,
passages, exits, entrances, elevators of stairways of the Building ("COMMON
AREAS"), and Tenant will not use the Common Areas for any purpose other than
ingress and egress to and from the Premises. The Common Areas, except for the
sidewalks, are not open to the general public and Landlord reserves the right to
control and prevent access to the Common Areas of any person whose presence, in
Landlord's opinion, would be prejudicial to the safety, reputation and interests
of the Building and its tenants.
2. NO ACCESS TO ROOF. Tenant has no right of access to the roof of the
Building and will not install, repair or replace any antenna, aerial, aerial
wires, fan, air-conditioner or other device on the roof of the Building, without
the prior written consent of Landlord. Any such device installed without such
written consent is subject to removal at Tenant's expense without notice at any
time. In any event Tenant will be liable for any damages or repairs incurred or
required as a result of its installation, use, repair, maintenance or removal of
such devices on the roof and agrees to indemnify and hold harmless Landlord from
any liability, loss, damage, cost or expense, including reasonable attorneys'
fees, arising from any activities of Tenant or of Tenant's Representatives on
the roof of the Building.
3. SIGNAGE. No sign, placard, picture, name, advertisement or notice
visible from the exterior of the Premises will be inscribed, painted, affixed or
otherwise displayed by Tenant on or in any part of the Building without the
prior written consent of Landlord. Landlord reserves the right to adopt and
furnish Tenant with general guidelines relating to signs in or on the Building.
All approved signage will be inscribed, painted or affixed at Tenant's expense
by a person approved by Landlord, which approval will not be unreasonably
withheld.
4. PROHIBITED USES. The Premises will not be used for manufacturing, for
the storage of merchandise held for sale to the general public, for lodging or
for the sale of goods to the general public. Tenant will not permit any
commercial food preparation on the Premises except that Tenant may use
Underwriters' Laboratory approved equipment for brewing coffee, tea, hot
chocolate and similar beverages and for heating food in a microwave oven,
toaster or
1.
<PAGE>
toaster oven, so long as such use is in accordance with all applicable federal,
state and city laws, codes, ordinances, rules and regulations.
5. JANITORIAL SERVICES. Tenant will not employ any person for the
purpose of cleaning the Premises or permit any person to enter the Building for
such purpose other than Landlord's janitorial service, except with Landlord's
prior written consent. Tenant will not necessitate, and will be liable for the
cost of, any undue amount of janitorial labor by reason of Tenant's carelessness
in or indifference to the preservation of good order and cleanliness in the
Premises. Janitorial service will not be furnished to areas in the Premises on
nights when such areas are occupied after 9:30 p.m., unless such service is
extended by written agreement to a later hour in specifically designated areas
of the Premises.
6. KEYS AND LOCKS. Landlord will furnish Tenant, free of charge, two
keys to each door or lock in the Premises. Landlord may make a reasonable
charge for any additional or replacement keys. Tenant will not duplicate any
keys, alter any locks or install any new or additional lock or bolt on any door
of its Premises or on any other part of the Building without the prior written
consent of Landlord and, in any event, Tenant will provide Landlord with a key
for any such lock. On the termination of the Lease, Tenant will deliver to
Landlord all keys to any locks or doors in the Building which have been obtained
by Tenant.
7. FREIGHT. Upon not less than twenty-four hours prior notice to
Landlord, which notice may be oral, an elevator will be made available for
Tenant's use for transportation of freight, subject to such scheduling as
Landlord in its discretion deems appropriate. Tenant shall not transport
freight in loads exceeding the weight limitations of such elevator. Landlord
reserves the right to prescribe the weight, size and position of all equipment,
materials, furniture or other property brought into the Building, and no
property will be received in the Building or carried up or down the freight
elevator or stairs except during such hours and along such routes and by such
persons as may be designated by Landlord. Landlord reserves the right to
require that heavy objects will stand on wood strips of such length and
thickness as is necessary to properly distribute the weight. Landlord will not
be responsible for loss of or damage to any such property from any cause, and
Tenant will be liable for all damage or injuries caused by moving or maintaining
such property.
8. NUISANCES AND DANGEROUS SUBSTANCES. Tenant will not conduct itself or
permit Tenant's Representatives or Visitors to conduct themselves, in the
Premises or anywhere on or in the Property in a manner which is offensive or
unduly annoying to any other Tenant or Landlord's property managers. Tenant
will not install or operate any phonograph, radio receiver, musical instrument,
or television or other similar device in any part of the Common Areas and shall
not operate any such device installed in the Premises in such manner as to
disturb or annoy other tenants of the Building. Tenant will not use or keep in
the Premises or the Property any kerosene, gasoline or other combustible fluid
or material other than limited quantities thereof reasonably necessary for the
maintenance of office equipment, or, without Landlord's prior written approval,
use any method of heating or air conditioning other than that supplied by
Landlord. Tenant will not use or keep any foul or noxious gas or substance in
the Premises or permit or suffer the Premises to be occupied or used in a manner
offensive or objectionable to Landlord or other occupants of the Building by
reason of noise, odors or vibrations, or interfere
2.
<PAGE>
in any way with other tenants or those having business therein. Tenant will not
bring or keep any animals in or about the Premises or the Property.
9. BUILDING NAME AND ADDRESS. Without Landlord's prior written consent,
Tenant will not use the name of the Building in connection with or in promoting
or advertising Tenant's business except as Tenant's address.
10. BUILDING DIRECTORY. A directory for the Building will be provided for
the display of the name and location of tenants. Landlord reserves the right to
approve any additional names Tenant desires to place in the directory and, if so
approved, Landlord may assess a reasonable charge for adding such additional
names.
11. WINDOW COVERINGS. No curtains, draperies, blinds, shutters, shades,
awnings, screens or other coverings, window ventilators, hangings, decorations
or similar equipment shall be attached to, hung or placed in, or used in or with
any window of the Building without the prior written consent of Landlord, arid
Landlord shall have the right to control all lighting within the Premises that
may be visible from the exterior of the Building.
12. FLOOR COVERINGS. Tenant will not lay or otherwise affix linoleum,
tile, carpet or any other floor covering to the floor of the Premises in any
manner except as approved in writing by Landlord. Tenant will be liable for the
cost of repair of any damage resulting from the violation of this rule or the
removal of any floor covering by Tenant or its contractors, employees or
invitees.
13. WIRING AND CABLING INSTALLATIONS. Landlord will direct Tenant's
electricians and other vendors as to where and how data, telephone, and
electrical wires and cables are to be installed. No boring or cutting for wires
or cables will be allowed without the prior written consent of Landlord. The
location of burglar alarms, smoke detectors, telephones, call boxes and other
office equipment affixed to the Premises shall be subject to the written
approval of Landlord.
14. OFFICE CLOSING PROCEDURES. Tenant will see that the doors of the
Premises are closed and locked and that all water faucets, water apparatus and
utilities are shut off before Tenant or its employees leave the Premises, so as
to prevent waste or damage. Tenant will be liable for all damage or injuries
sustained by other tenants or occupants of the Building or Landlord resulting
from Tenant's carelessness in this regard or violation of this rule. Tenant
will keep the doors to the Building corridors closed at all times except for
ingress and egress.
15. PLUMBING FACILITIES. The toilet rooms, toilets, urinals, wash bowls
and other apparatus shall not be used for any purpose other than that for which
they were constructed and no foreign substance of any kind whatsoever shall be
disposed of therein. Tenant will be liable for any breakage, stoppage or damage
resulting from the violation of this rule by Tenant, its employees or invitees.
16. USE OF HAND TRUCKS. Tenant will not use or permit to be used in the
Premises or in the Common Areas any hand tracks, carts or dollies except those
equipped with rubber tires and side guards or such other equipment as Landlord
may approve.
3.
<PAGE>
17. REFUSE. Tenant shall store all Tenant's trash and garbage within the
Premises or in other facilities designated By Landlord for such purpose. Tenant
shall not place in any trash box or receptacle any material which cannot be
disposed of in the ordinary and customary manner of removing and disposing of
trash and garbage in the city in which the Building is located without being in
violation of any law or ordinance governing such disposal. All trash and
garbage removal shall be made in accordance with directions issued from time to
time by Landlord, only through such Common Areas provided for such purposes and
at such times as Landlord may designate. Tenant shall comply with the
requirements of any recycling program adopted by Landlord for the Building.
18. SOLICITING. Canvassing, peddling, soliciting and distribution of
handbills or any other written materials in the Building are prohibited, and
Tenant will cooperate to prevent the same.
19. PARKING. Tenant will use, and cause Tenant's Representatives and
Visitors to use, any parking spaces to which Tenant is entitled under the Lease
in a manner consistent with Landlord's directional signs and markings in the
Parking Facility. Specifically, but without limitation, Tenant will not park,
or permit Tenant's Representatives or Visitors to park, in a manner that impedes
access to and from the Building or the Parking Facility or that violates space
reservations for handicapped drivers registered as such with the California
Department of Motor Vehicles. Landlord may use such reasonable means as may be
necessary to enforce the directional signs and markings in the Parking Facility,
including but not limited to towing services, and Landlord will not be liable
for any damage to vehicles towed as a result of non-compliance with such parking
regulations.
20. FIRE, SECURITY AND SAFETY REGULATIONS. Tenant will comply with all
safety, security, fire protection and evacuation measures and procedures
established by Landlord or any governmental agency.
21. RESPONSIBILITY FOR THEFT. Tenant assumes any and all responsibility
for protecting the Premises from theft, robbery and pilferage, which includes
keeping doors locked and other means of entry to the Premises closed.
22. SALES AND AUCTIONS. Tenant will not conduct or permit to be conducted
any sale by auction in, upon or from the Premises or elsewhere in the Property,
whether said auction be voluntary, involuntary, pursuant to any assignment for
the payment of creditors or pursuant to any bankruptcy or other insolvency
proceeding.
23. WAIVER OF RULES. Landlord may waive any one or more of these Building
Rules for the benefit of any particular tenant or tenants, but no such waiver by
Landlord will be construed as a waiver of such Building Rules in favor of any
other tenant or tenants nor prevent Landlord from thereafter enforcing these
Building Rules against any or all of the tenants of the Building.
24. EFFECT ON LEASE. These Building Rules are in addition to, and shall
not be construed to in any way modify or amend, in whole or in part, the terms,
covenants, agreements and conditions of the Lease. Continued violation of these
Building Rules following receipt of
4.
<PAGE>
written notice constitutes a failure to fully perform the provisions of the
Lease, as referred to in Section 15.1 - "EVENTS OF DEFAULT".
25. NON-DISCRIMINATORY ENFORCEMENT. Subject to the provisions of the
Lease (and the provisions of other leases with respect to other tenants),
Landlord shall use reasonable efforts to enforce these Building Rules in a
non-discriminatory manner, but in no event shall Landlord have any liability for
any failure or refusal to do so (and Tenant's sole and exclusive remedy for any
such failure or refusal shall be injunctive relief preventing Landlord from
enforcing any of the Building Rules against Tenant in a manner that
discriminates against Tenant).
26. ADDITIONAL AND AMENDED RULES. Landlord reserves the right to rescind
or amend these Building Rules and/or adopt any other and reasonable rules and
regulations as in its judgment may from time to time be needed for the safety,
care and cleanliness of the Building and for the preservation of good order
therein.
INITIALS:
Landlord [INIT]
Tenant [INIT]
5.
<PAGE>
EXHIBIT D
ATTACHED TO AND FORMING A PART OF
LEASE AGREEMENT
DATED AS OF JULY 8, 1997
BETWEEN
GBC-UNIVERSITY ASSOCIATES, AS LANDLORD,
AND
SCIENTIFIC LEARNING CORPORATION, AS TENANT ("LEASE")
ADDITIONAL PROVISIONS RIDER
1. PARKING.
(a) TENANT'S PARKING RIGHTS. Landlord shall provide Tenant, on an
unassigned and non-exclusive basis, for use by Tenant and Tenant's
Representatives and Visitors, at the users' sole risk, up to sixty-eight (68)
parking spaces in the Parking Facility which spaces shall be available at the
then prevailing monthly charge which is currently $80.00 per month per parking
space. If Tenant leases additional office space pursuant to this Lease,
Landlord shall provide Tenant, also on an unassigned, non-exclusive and
unlabelled basis, one (1) additional parking space in the Parking Facility for
each two hundred fifty (250) rentable square feet of additional office space
leased to Tenant. The parking spaces to be made available to Tenant hereunder
may contain a reasonable mix of spaces for compact cars and up to ten percent
(10%) of the unassigned spaces may also be designated by Landlord as Building
visitors' parking.
(b) AVAILABILITY OF PARKING SPACES. Landlord shall take reasonable
actions to ensure the availability of the parking spaces leased by Tenant, but
Landlord does not guarantee the availability of those spaces at all times
against the actions of other tenants of the Building and users of the Parking
Facility. Access to the Parking Facility may, at Landlord's option, be
regulated by card, pass, bumper sticker, decal or other appropriate
identification issued by Landlord. Landlord retains the right to revoke the
parking privileges of any user of the Parking Facility who violates the rules
and regulations governing use of the Parking Facility (and Tenant shall be
responsible for causing any employee of Tenant or other person using parking
spaces allocated to Tenant to comply with all parking rules and regulations).
(c) ASSIGNMENT AND SUBLETTING. Notwithstanding any other provision
of the Lease to the contrary, Tenant shall not assign its rights to the parking
spaces or any interest therein, or sublease or otherwise allow the use of all or
any part of the parking spaces to or by any other person, except in connection
with a permitted assignment or sublease, or except with Landlord's prior written
consent, which may be granted or withheld by Landlord in its sole discretion.
In the event of any separate assignment or sublease of parking space rights that
is approved by Landlord, Landlord shall be entitled to receive, as additional
Rent hereunder, one hundred percent (100%) of any profit received by Tenant in
connection with such assignment or sublease.
1.
<PAGE>
(d) CONDEMNATION, DAMAGE OR DESTRUCTION. In the event the Parking
Facility is the subject of a Condemnation, or is damaged or destroyed, and this
Lease is not terminated, and if in such event the available number of parking
spaces in the Parking Facility is permanently reduced, then Tenant's rights to
use parking spaces hereunder may, at the election of Landlord, thereafter be
reduced in proportion to the reduction of the total number of parking spaces in
the Parking Facility. In such event, Landlord reserves the right to reduce the
number of parking spaces to which Tenant is entitled or to relocate some or all
of the parking spaces to which Tenant is entitled to other areas in the Parking
Facility.
2. EXTENSION OPTION.
Provided that Scientific Learning Corporation has not assigned this
Lease or sublet any or all of the Premises (it being intended that all rights
pursuant to this provision are and shall be personal to the original Tenant
under this Lease and shall not be transferable or exercisable for the benefit of
any Transferee, except for Transfers to Affiliates permitted under Section
14.9), and provided Tenant is not in default beyond any applicable cure period
under this Lease at the time of exercise or at any time thereafter until the
beginning of any such extension of the Term, Tenant shall have the option (the
"EXTENSION OPTION") to extend the Term for one (1) additional consecutive period
of five (5) years (each an "EXTENSION PERIOD"), by giving written notice to
Landlord of the exercise of any such Extension Option at least nine (9) months,
but not more than twelve (12) months, prior to the expiration of the initial
Term. The exercise of any Extension Option by Tenant shall be irrevocable and
shall cover the entire Premises leased by Tenant pursuant to this Lease. Upon
such exercise, the term of the Lease shall automatically be extended for the
applicable Extension Period without the execution of any further instrument by
the parties; provided that Landlord and Tenant shall, if requested by either
party, execute and acknowledge an instrument confirming the exercise of the
Extension Option. Any Extension Option shall terminate if not exercised
precisely in the manner provided herein. Any extension of the Term shall be
upon all the terms and conditions set forth in this Lease and all Exhibits
thereto, except that: (i) Tenant shall have no further option to extend the Term
of the Lease, other than as specifically set forth herein; (ii) Landlord shall
not be obligated to contribute funds toward the cost of any remodeling,
renovation, alteration or improvement work in the Premises; and (iii) Base Rent
for any such Extension Period shall be ninety-five percent (95%) of the then
Fair Market Base Rental (as defined below) for the Premises for the space and
term involved, which shall be determined as set forth below.
(a) "FAIR MARKET BASE RENTAL" shall mean the "fair market" Base Rent
at the time or times in question for the applicable space, based on the
prevailing rentals then being charged to new tenants in the Building and new
tenants in other office buildings in the general vicinity of the Building of
comparable size, location, quality and age as the Building for leases with terms
equal to the Extension Period, taking into account the creditworthiness and
financial strength of the tenant, the financial guaranties provided by the
tenant (if any), the value of market landlord concessions (including the value
of construction, renovation, moving and other allowances or rent credits), the
desirability, location in the building, size and quality of the space. tenant
finish allowance and/or tenant improvements, included services, operating
expenses and tax and expense stops or other escalation clauses, and brokerage
commissions, for the space in the Building for which Fair Market Base Rental is
being determined and for comparable space in the buildings which are being used
for comparison. Fair Market Base Rental shall also reflect
2.
<PAGE>
the then prevailing rental structure for comparable office buildings in the
general vicinity of the Property, so that if, for example, at the time Fair
Market Base Rental is being determined the prevailing rental structure for
comparable space and for comparable lease terms includes periodic rental
adjustments or escalations, Fair Market Base Rental shall reflect such rental
structure.
(b) Landlord and Tenant shall endeavor to agree upon the Fair Market
Base Rental. If they are unable to so agree within thirty (30) days after
receipt by Landlord of Tenant's notice of exercise of the Extension Option, then
within ten (10) days after the expiration of that period each party, at its cost
and by giving written notice to the other party, shall appoint a licensed real
estate broker with at least five (5) years of experience in leasing office
buildings, and who is active in the leasing of office space in the general
vicinity of the Property. If a party does not appoint a broker within ten (10)
days after the other party has given written notice of the name of its broker,
the single broker appointed shall be the sole broker and shall determine the
Fair Market Base Rental. If the two brokers are appointed by the parties as
stated in this paragraph, they shall meet promptly and attempt to determine the
Fair Market Base Rental. If they are unable to agree within thirty (30) days
after the second broker has been appointed, they shall attempt to elect a third
broker meeting the qualifications stated in this paragraph within ten (10) days
after the last day the two brokers are given to determine the Fair Market Base
Rental. If they are unable to agree on the third broker, either of the parties
to this Lease, by giving ten (10) days' prior written notice to the other party,
can apply to the then president of the county real estate board of the county in
which the premises are located, or to the presiding judge of the superior court
of that county, for the selection of a third broker who meets the qualifications
stated in this paragraph. Each of the parties shall bear the fees and costs of
its own broker, and one-half of the cost of appointing the third broker and of
paying the third broker's fees and costs. The third broker, however selected,
shall be a person who has not previously acted as an exclusive agent for either
party.
Within thirty (30) days after the selection of the third broker, a majority
of the brokers shall determine the Fair Market Base Rental. If a majority of
the brokers are unable to determine the Fair Market Base Rental within the
stipulated period of time, the three appraisals shall be added together and
their total divided by three; the resulting quotient shall be the Fair Market
Base Rental; PROVIDED, HOWEVER, that if the low appraisal is more than ten
percent (10%) lower than the middle appraisal, the low appraisal shall be
disregarded, and if the high appraisal is more than ten percent (10%) higher
than the middle appraisal, the high appraisal shall be disregarded. If one
appraisal is disregarded, the remaining two appraisals shall be added together
and their total divided by two; and the resulting quotient shall be the Fair
Market Base Rental. After the Fair Market Base Rental has been determined, the
brokers shall immediately notify the parties.
(c) In the event the Fair Market Base Rental for any Extension Period
has not been determined at such time as Tenant is obligated to pay Base Rent for
such Extension Period, Tenant shall pay as Base Rent pending such determination,
the Base Rent in effect for such space immediately prior to the Extension
Period; PROVIDED, that upon the determination of the applicable Fair Market Base
Rental, any shortage of Base Rent paid shall be paid to Landlord by Tenant.
3.
<PAGE>
(d) In no event shall the Base Rent during any Extension Period be
less than $2.17, which is the average effective Base Rent in effect over the
original Term, PLUS the average monthly Tenant's Share of Operating Costs and
Taxes payable by Tenant pursuant to Section 3.2(b)(1) for the twelve (12) month
period prior to such Extension Period.
(e) The term of this Lease, whether consisting of the Initial Term
alone or the Initial Term as extended by any Extension Period (if any Extension
Option is exercised), is referred to in this Lease as the "Term."
3. LETTER OF CREDIT.
(a) Tenant shall deliver to Landlord a clean, unconditional
irrevocable, transferable letter of credit (the "Letter of Credit") in form, and
issued by a financial institution ("ISSUER") satisfactory to Landlord. The
Letter of Credit shall be provided to Landlord prior to the Commencement Date
and Tenant taking occupancy of the Premises under the Lease, and shall be in the
amount of $350,000.00, name Landlord as the beneficiary thereunder, and provide
that draws thereunder will be honored upon receipt by Issuer of a written
statement signed by Landlord stating that Landlord is entitled to draw down on
the Letter of Credit. Landlord shall be entitled to draw the entire amount
under the Letter of Credit if either (i) Tenant commits an Event of Default
under this Lease, (ii) Tenant does not deliver to Landlord a replacement letter
of credit from Issuer or another financial institution satisfactory to Landlord
in the amount and form of the initial Letter of Credit no later than one month
before the expiration date of the then existing Letter of Credit, or (iii) upon
a proposed sale or lease of the Building Tenant does not deliver to any the new
landlord a replacement Letter of Credit pursuant to the provisions of (d) below.
Any amount drawn under the Letter of Credit shall be held by Landlord as a
security deposit, subject to the terms of Section 4. If Tenant fails to deliver
the Letter of Credit to Landlord when required, such failure shall constitute an
Event of Default under the Lease.
(b) Reduction or Elimination of Letter of Credit.
(i) Provided that there has been no Event of Default under the
Lease, annually on each anniversary of the Commencement Date, Landlord will
reduce the Letter of Credit requirement by $70,000.
(ii) Provided that there has been no Event of Default under the
Lease, and provided Tenant has pre-tax net income of at least $4,500,000.00
during the preceding portion of the calendar year either on the anniversary of
the Commencement Date or on December 31 of any year, then upon request by
Tenant, Landlord will reduce the Letter of Credit requirement to an amount equal
to $83,000.00; and provided that there has been no Event of Default under the
Lease, and provided Tenant has pre-tax net income of at least $5,500,000.00
during the preceding portion of the calendar year either on the anniversary of
the Commencement Date or on December 31 of any year, then upon request by
Tenant, Landlord will reduce the Letter of Credit requirement to zero. Any
request by Tenant for a reduction or elimination of the Letter of Credit
requirement shall be accompanied by a financial statement audited by an
independent certified public accountant or certified by the Chief Financial
Officer of Tenant, PROVIDED, HOWEVER, that if Landlord reduces or eliminates the
Letter of Credit requirement based upon a certified but unaudited financial
statement, Tenant shall provide
4.
<PAGE>
Landlord with an audited financial statement promptly following the end of
Tenant's fiscal year (but in all events by ninety (90) days after the end of
Tenant's fiscal year), and if such audited financial statement does not support
the reduction or elimination of the Letter of Credit requirement, the
requirement shall be reinstated.
(iii) If an initial public offering of Tenant's stock is made on
any public stock exchange resulting in a market capitalization of at least
$100,000,000.00, and if there has been no Event of Default under the Lease
during the preceding eighteen (18) months, then Landlord shall waive the
requirement of the Letter of Credit.
(c) Tenant shall not assign or encumber or attempt to assign or
encumber the Letter of Credit and neither Landlord nor its successors or assigns
shall be bound by any such assignment or encumbrance or attempted assignment or
encumbrance.
(d) If Landlord shall be holding the Letter of Credit as security,
then, in the event of a proposed sale or lease of the Building by Landlord,
Tenant will, upon ten (10) Business Days' notice, at its sole cost and expense,
cause the issuing bank to consent to the assignment or to issue a substitute
letter of credit on identical terms except for the stated beneficiary, from the
same issuing bank or another bank acceptable to Landlord in Landlord's sole
discretion, naming the new landlord as the beneficiary thereof upon delivery by
Landlord of the then outstanding Letter of Credit.
INITIALS:
Landlord [INIT]
Tenant [INIT]
5.
<PAGE>
EXHIBIT 10.15
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.
</TABLE>
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(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.
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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.
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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.
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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
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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,
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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.
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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.
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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
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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.
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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.
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(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.
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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
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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
<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 January 15,
1999 in the Registration Statement (Form S-1) and related Prospectus of
Scientific Learning Corporation for the registration of shares of its Common
Stock.
Walnut Creek, California
April , 1999
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon completion of
stockholder approval of the two-for-three reverse stock split described in Note
8 to the financial statements.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
April 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
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<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> YEAR YEAR 3-MOS 3-MOS
3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1998 DEC-31-1998
DEC-31-1999
<PERIOD-START> JAN-01-1996 JAN-01-1997 JAN-01-1998 JAN-01-1998
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0
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<CURRENT-ASSETS> 0 2,900 7,468 0
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2,454
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0
0 8,002 18,940 0
23,836
0 2,355 2,355 0
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<COMMON> 0 520 2,930 0
3,504
<OTHER-SE> 0 (7,939) (19,367) 0
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<TOTAL-LIABILITY-AND-EQUITY> 0 4,456 9,121 0
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<SALES> 0 2,249 4,462 603
1,076
<TOTAL-REVENUES> 0 2,962 5,166 647
1,340
<CGS> 0 481 784 127
181
<TOTAL-COSTS> 0 949 1,398 161
333
<OTHER-EXPENSES> 2,611 7,148 13,686 2,254
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<LOSS-PROVISION> 0 0 0 0
0
<INTEREST-EXPENSE> 1 32 922 11
9
<INCOME-PRETAX> (2,497) (5,058) (10,748) (1,748)
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<INCOME-TAX> 0 0 0 0
0
<INCOME-CONTINUING> 0 0 (10,748) (1,748)
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<DISCONTINUED> 0 0 0 0
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<EXTRAORDINARY> 0 0 0 0
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<CHANGES> 0 0 0 0
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<NET-INCOME> (2,497) (5,058) (10,748) (1,748)
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<EPS-PRIMARY> (1.02) (1.90) (3.88) (0.64)
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