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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[_] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER #000-24547
SCIENTIFIC LEARNING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3234458
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1995 University Avenue, Suite 400
Berkeley, California 94704
(510) 665-6700
(Address of Registrants principal executive offices, including zip
code, and telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of the Registrant's Common Stock, $.001 par value
per share, outstanding at October 31, 1999 was 10,486,851.
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SCIENTIFIC LEARNING CORPORATION
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements (Unaudited):
Balance Sheets as of September 30, 1999 and December 31, 1998........... 3
Statements of Operations for the Three and Nine Months
Ended September 30, 1999 and 1998.............................. 4
Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998.............................. 5
Notes to Financial Statements........................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............. 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 14
Item 2. Changes in Securities and Use of Proceeds............................... 14
Item 3. Defaults Upon Senior Securities......................................... 15
Item 4. Submission of Matters to a Vote of Security Holders..................... 15
Item 5. Other Information....................................................... 15
Item 6. Exhibits and Reports on Form 8-K........................................ 15
Signature............................................................... 16
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCIENTIFIC LEARNING CORPORATION
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 33,404 $ 6,362
Accounts receivable, net 2,111 799
Prepaid expenses and other current assets 1,680 307
---------- ----------
Total current assets 37,195 7,468
Restricted cash deposit -- 280
Property and equipment, net 1,686 1,278
Other assets 94 95
---------- ----------
TOTAL ASSETS $ 38,975 $ 9,121
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 467 $ 731
Accrued liabilities 1,170 1,249
Deferred revenue 3,262 1,649
Current portion of borrowings under bank line of credit -- 278
Current portion of capital lease obligations 1 18
---------- ----------
Total current liabilities 4,900 3,925
Borrowings under bank line of credit -- 121
Other liabilities 219 217
Redeemable convertible preferred stock (Series B, C and D) -- 18,940
Stockholders' equity (deficit):
Convertible preferred stock (Series A) -- 2,355
Common stock 62,652 2,930
Deferred compensation (703) (1,064)
Accumulated deficit (28,093) (18,303)
---------- ----------
Total stockholders' equity (deficit) 33,856 (14,082)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 38,975 $ 9,121
========== ==========
See accompanying notes to financial statements.
</TABLE>
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SCIENTIFIC LEARNING CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Programs $ 3,606 $ 2,101 $ 6,355 $ 3,673
Services 295 263 937 491
---------- ---------- ---------- ----------
Total revenues 3,901 2,364 7,292 4,164
Cost of revenues:
Programs 509 344 969 638
Services 428 234 1,006 408
---------- ---------- ---------- ----------
Total cost of revenues 937 578 1,975 1,046
---------- ---------- ---------- ----------
Gross profit 2,964 1,786 5,317 3,118
Operating expenses:
Sales and marketing 2,968 1,668 9,105 4,122
Research and development 1,170 750 2,642 2,095
General and administrative 1,438 1,268 3,816 3,041
---------- ---------- ---------- ----------
Total operating expenses 5,576 3,686 15,563 9,258
---------- ---------- ---------- ----------
Operating loss (2,612) (1,900) (10,246) (6,140)
Interest income (expense), net 316 (210) 456 (241)
---------- ---------- ---------- ----------
Net loss $ (2,296) $ (2,110) $ (9,790) $ (6,381)
========== ========== ========== ==========
Basic and diluted net loss per share $ (0.26) $ (0.76) $ (2.02) $ (2.31)
========== ========== ========== ==========
Shares used in computing basic and diluted
net loss per share 8,762,145 2,783,843 4,857,189 2,763,721
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
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SCIENTIFIC LEARNING CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (9,790) $ (6,381)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 577 390
Amortization of deferred compensation 639 678
Interest expense on stock warrant -- 233
Changes in operating assets and liabilities:
Accounts receivable (1,312) (230)
Prepaid expenses and other current assets (1,373) (724)
Accounts payable (264) 506
Accrued liabilities (329) 495
Deferred revenue 1,613 456
Other liabilities 3 143
---------- ----------
Net cash used in operating activities (10,236) (4,434)
INVESTING ACTIVITIES:
Restricted cash deposit 280 70
Purchases of property and equipment, net (985) (491)
---------- ----------
Net cash used in investing activities (705) (421)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 33,503 41
Proceeds from issuance of preferred stock 4,896 --
Borrowing under line of credit -- 3,363
Repayments of borrowing under bank line of credit (399) (160)
Repayments of capital lease obligations (17) (21)
---------- ----------
Net cash provided by financing activities 37,983 3,223
---------- ----------
Increase (decrease) in cash and cash equivalents 27,042 (1,632)
Cash and cash equivalents at beginning of period 6,362 2,699
---------- ----------
Cash and cash equivalents at end of period $ 33,404 $ 1,067
========== ==========
</TABLE>
See accompanying notes to financial statements.
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NOTES TO FINANCIAL STATEMENTS
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 proprietary neuroscience-based programs and other
educational products and services designed to increase human learning and
performance. The Company's revenues have been derived primarily from two
programs, Fast ForWord and Fast ForWord Two, which focus on children aged four
to 13. The Company's programs and products are delivered through a variety of
distribution channels, including sales to public schools, referrals from 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 September 30, 1999 and for the
three and nine months ended September 30, 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 nine months ended September 30, 1999 are not
necessarily indicative of results that may be expected for any future periods.
These financial statements and notes should be read in conjunction with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1998, included in the Company's prospectus dated July 21, 1999
comprising part of the Company's Registration Statement on Form S-1, as amended,
filed with the Securities and Exchange Commission, SEC File No. 333-76981.
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". Basic net
loss per share has been computed using 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.
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The calculation of basic and diluted net loss per share, as well as
basic and diluted pro forma net loss per share showing the effect of the
conversion of preferred stock to common upon completion of the initial public
offering, is as follows (in thousands, except share and per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Historical:
Net loss $ (2,296) $ (2,110) $ (9,790) $ (6,381)
========= ========== ========== ==========
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share 8,762,145 2,783,843 4,857,189 2,763,721
========== ========== ========== ==========
Basic and diluted net loss per share $ (0.26) $ (0.76) $ (2.02) $ (2.31)
========== ========== ========== ==========
Pro forma:
Net loss $ (2,296) $ (2,110) $ (9,790) $ (6,381)
========== ========== ========== ==========
Shares used in computing basic and diluted
net loss per share (from above) 8,762,145 2,783,843 4,857,189 2,763,721
Adjustment to reflect the effect of the
assumed conversion of preferred stock from
the date of issuance 1,194,294 3,398,814 3,871,405 3,398,814
---------- ---------- ---------- ----------
Weighted average shares used in computing pro
forma basic and diluted net loss per share 9,956,439 6,182,657 8,728,594 6,162,535
========== ========== ========== ==========
Pro forma basic and diluted net loss per share $ (0.23) $ (0.34) $ (1.12) $ (1.04)
========== ========== ========== ==========
</TABLE>
2. COMPREHENSIVE LOSS
The Company has no items of other comprehensive income (loss), and
accordingly the comprehensive loss is the same as the net loss for all periods
reported.
3. STOCK SPLIT
On April 22, 1999, the Board of Directors approved, and on May 28, 1999
the stockholders approved, 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 split, the Board of Directors
authorized, and the stockholders approved, 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.
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4. INITIAL PUBLIC OFFERING
On July 22, 1999, the Company issued 2,300,000 shares of common stock
at an initial public offering price of $16.00 per share. The net proceeds to the
Company from that offering were approximately $33.2 million after deducting the
underwriters' discount and offering expenses. Effective immediately prior to the
closing of the initial public offering of its common stock, the Board of
Directors authorized, and the stockholders approved, 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. In addition, upon
completion of the initial public offering, each outstanding share of the
Company's convertible preferred stock was automatically converted into one share
of common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements herein that are not purely historical are
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from the results discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed herein within this quarterly report on Form 10-Q, our
Registration Statement on Form S-1, as amended, SEC File No. 333-77133, and
other documents filed with the Securities and Exchange Commission, which factors
are incorporated herein by reference. All forward-looking statements included in
this document are based on information available to us on the date hereof, and
we assume no obligation to update any such forward-looking statements or to
update the reasons why actual results could differ from those projected in the
forward-looking statements.
The following should be read in conjunction with the audited financial
statements and the notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations included in our Registration
Statement on Form S-1, as amended, SEC File No. 333-77133.
OVERVIEW
We develop, market and sell proprietary neuroscience-based programs and
other educational products and services designed to increase human learning and
performance. Our programs employ patented, adaptive technologies and are
Internet-enabled. Language and reading skills are the foundation for all
learning, and we have developed programs to help children learn how to read or
become better readers. Our Fast ForWord programs are intensive, computer-based
training programs that focus on improving critical language and reading skills.
Fast ForWord and Fast ForWord Two focus primarily on the learning needs of
children aged four to 13, are based on scientific research and have been field
tested using scientific methods.
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We offer professional development seminars in which educators, speech
and language professionals and other professionals can learn about recent
developments in brain research and the practical application of our programs as
well as earn continuing education credit. We also offer installation and
technical training to large customers such as schools. Our programs, products
and services are delivered through a variety of distribution channels, including
sales to public schools, referrals from speech and language professionals in
private practice and direct-to-consumer channels.
During the second quarter of 1999, we introduced Away We Go!-TMskill
building software for children of developmental ages four to seven along with
Away We Go! Bookshelf-TM-, a series of storybooks on CD-ROM and audio CDs. We
also launched BrainConnection.com-TM-, which we intend to be a leading source
for information on research on the brain and how that applies to our daily
lives. In addition, we intend to sell our own products and programs as well as
other learning products on BrainConnection.com-TM-.
In the third quarter of 1999, we announced the release of Reading
Edge-TM-, a new computerized reading assessment program designed to identify
children at risk for reading problems in grades K - 2 and provide later
screening of older students who are struggling with reading skills.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, various
financial data expressed as a percentage of revenues (unless otherwise noted).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -------------------------
1999 1998 1999 1998
------------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Programs 92.4% 88.9% 87.2% 88.2%
Services 7.6 11.1 12.8 11.8
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
Programs (1) 14.1 16.4 15.2 17.4
Services (2) 145.1 89.0 107.4 83.1
Total cost of 24.0 24.5 27.1 25.1
revenues
Gross margin 76.0% 75.5% 72.9% 74.9%
</TABLE>
(1) Program costs are expressed as a percentage of program revenues.
(2) Service costs are expressed as a percentage of service revenues.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1998
REVENUES. Total revenues increased by $1.5 million, or 65.0%, to $3.9
million for the three months ended September 30, 1999 and increased by $3.1
million, or 75.1%, to $7.3 million for the nine months ended September 30,
1999, compared to the same periods in 1998. Program revenues increased by
$1.5 million, or 71.6%, to $3.6 million for the quarter ended September 30,
1999 and increased by $2.7 million, or 73.0%, to $6.4 million for the nine
months ended September 30, 1999, compared to the same periods in 1998 because
of increased program activations in speech and language professional
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and public school markets. Service revenues increased by $32,000, or 12.2%,
to $295,000 for the quarter ended September 30, 1999 and increased by
$446,000, or 90.8%, to $937,000 for the nine months ended September 30, 1999
compared to the same periods in 1998 due to increased number of professional
development seminars for both public schools and speech and language
professionals in private practice and software installations in schools.
COST OF REVENUES. Total cost of revenues increased by $359,000, or 62.1%,
to $937,000 for the quarter ended September 30, 1999 and increased by $929,000,
or 88.8%, to $2.0 million for the nine months ended September 30, 1999, compared
to the same periods in 1998. As a percentage of revenues, cost of revenues
decreased to 24.0% from 24.5% for the quarter ended September 30, 1999, and
increased to 27.1% from 25.1% for the nine months ended September 30, 1999. Cost
of program revenues decreased to 14.1% from 16.4% for the quarter ended
September 30, 1999 and decreased to 15.2% from 17.4% for the nine months ended
September 30, 1999 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 increased to 145.1% from 89.0% for
the quarter ended September 30, 1999 and increased to 107.4% from 83.1% for the
nine months ended September 30, 1999, due to costs of training and installations
of Fast ForWord programs in public schools. To encourage schools to adopt Fast
ForWord, we have offered discounts on training and installation services.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased
$1.3 million, or 78.0%, to $3.0 million for the quarter ended September 30,
1999, and increased $5.0 million, or 120.9%, to $9.1 million for the nine months
ended September 30, 1999, compared to the same periods in 1998. This increase
was primarily attributable to increased personnel, marketing and travel costs.
We expect further increases in 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 $420,000, or 56.0%, to $1.2 million for the quarter ended September
30, 1999, and increased $547,000, or 26.1%, to $2.6 million for the nine months
ended September 30, 1999, compared to the same periods in 1998. We expect to
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 our neuroscience expertise.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $170,000, or 13.4%, to $1.4 million for the quarter ended September
30, 1999, and increased $775,000, or 25.5%, to $3.8 million for the nine months
ended September 30, 1999, compared to the same periods in 1998. 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 and nine months ended September 30, 1999 and September 30, 1998 as
we incurred losses during such periods.
FACTORS THAT MAY AFFECT 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 those discussed herein with this
quarterly report on Form 10-Q, as contained in our Registration Statement on
Form S-1, as amended, SEC File No. 333-77133, under the heading "Risk Factors",
and as
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disclosed in other documents filed with the Securities and Exchange
Commission. Significant fluctuations in future quarterly operating results
may be caused by many factors including, among others:
- the demand for technology-based education and training programs
and products;
- the size and timing of product orders and implementation;
- the revenue mix among our programs, 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 and the programs and
services of our competitors;
- 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;
- our ability to protect and maintain our intellectual property rights;
- the number and timing of Fast ForWord training seminars for
educators, speech and language professionals and other professionals;
and
- general economic and market conditions.
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.
As a result of all the foregoing factors, and in light of our limited
operating history, 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. It is likely that our future quarterly
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operating results from time to time will not meet the expectations of market
analysts or investors, which may have an adverse effect on the price of our
common stock.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $10.2 million for the nine months
ended September 30, 1999, as compared to $4.4 million in the comparable period
of 1998 resulting primarily from operating losses of $9.8 million and increases
in accounts receivable and prepaid expenses of $1.3 million and $1.4 million,
respectively, partially offset by increases in deferred revenue of $1.6 million.
A substantial portion of the increases in accounts receivable and deferred
revenue relates to increased sales to public schools. The increase in prepaid
expenses is due primarily to increased inventory of marketing, sales and
training materials.
Cash used in investing activities was $705,000 for the nine months ended
September 30, 1999, as compared to $421,000 in the comparable period of 1998.
The cash outlays consisted principally of the acquisition of computer equipment,
furniture and fixtures.
These cash needs were primarily financed through the sale of $15.8
million of convertible preferred stock in December 1998 and January 1999, and
the net proceeds of $33.2 million from our initial public offering of common
stock in July 1999. As of September 30, 1999, we had cash and cash equivalents
of $33.4 million. We believe that the net proceeds from our initial public
offering will be sufficient to finance our presently anticipated operating
losses, planned capital expenditure requirements and internal growth for at
least the next 18 months.
We currently have no significant long-term obligations which extend
beyond 18 months except in connection with the lease of our corporate office
facility which requires minimum lease payments of approximately $80,000 per
month through September 2002. During the next 18 months, we may need to expand
our corporate office facilities which would require us to commit to additional
lease obligations.
YEAR 2000 ISSUES
Our Year 2000 (Y2K) plan has been implemented by our Y2K task force
headed by the Director of Information Technology. The Y2K plan applies to both
our internal business systems and products, as well as compliance by our
external customers and providers. There were six phases of the plan:
organizational awareness, inventory, assessment, planning, execution and
validation.
We completed the inventory, assessment and planning phases of
substantially all critical internal business systems in August 1998. The
execution and validation phases were completed in the third quarter of 1999. We
believe we are Y2K compliant on all critical systems that rely on the calendar
year. During the second quarter of 1999, we completed the inventory and
assessment phase with respect to suppliers, service providers and contractors
and determined that our suppliers, service providers and contractors
demonstrated Y2K readiness.
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
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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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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. 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. A hypothetical increase or decrease in market interest rates by 10%
from the market interest rates at September 30, 1999 would not cause the fair
value of our cash and cash equivalents to change by a material amount. Declines
in interest rates over time will however reduce our interest income.
We considered the provisions of Financial Reporting Release No. 48,
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments." We had no
holdings of derivative financial or commodity instruments at June 30, 1999. Our
revenue, capital expenditures and nearly all of our expenses are transacted in
U.S. dollars. We believe we have minimal exposure to financial market risks
associate with changes in foreign currency exchange rates at this time.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is involved in legal proceedings in the
ordinary course of business. None of such proceedings are expected to have a
material impact on our business, results of operations or financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Between July 1, 1999 and September 30, 1999, an aggregate of 4,482
shares of common stock were issued to employees upon exercise of options with
exercise prices ranging from $0.26 to $6.00. The consideration received for such
shares was $7,585.08. These sales of common stock made pursuant to the exercise
of stock options were made in reliance on Rule 701 under the Securities Act of
1933, as amended (the "Securities Act") or on Section 4(2) of the Securities
Act. The purchasers in each case represented their intention to acquire the
securities for investment only and not with a view to the distribution thereof.
Appropriate legends were 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.
Our Registration Statement (SEC File No. 333-77133) for our initial
public offering became effective July 21, 1999, covering an aggregate of
2,645,000 shares of common stock, including the underwriters' over-allotment
option. Commencing July 22, 1999, we issued 2,300,000 shares of our common stock
at an initial public offering price of $16.00 per share. Net offering proceeds
were approximately $33.2 million. The managing underwriters were Merrill Lynch &
Co., Thomas Weisel Partners LLC and Pacific Growth Equities, Inc. The aggregate
underwriting fees were approximately $2.6 million.
Upon the closing of the initial public offering in July 1999, all
outstanding shares of our preferred stock were automatically converted, on a
one-for-one basis, into shares of common stock. All warrants to purchase
preferred stock outstanding after the closing of the initial public offering,
when and if exercised, will be converted into the number of shares of common
stock the holder would have received if the warrant had been exercised and the
preferred stock received thereupon had been simultaneously converted immediately
prior to the closing of the initial public offering. Following the closing of
the initial public offering, the Company filed an amendment to its Amended and
Restated Certificate of Incorporation with the Delaware Secretary of State which
authorizes One Million (1,000,000) shares of undesignated preferred stock. For
additional information about our capital stock, please refer to "Description of
Capital Stock" in our Registration Statement, as amended (SEC File No.
333-77133) filed with the Securities and Exchange Commission.
The use of proceeds does not represent a material change in the use of
proceeds as described in our prospectus dated July 21, 1999, comprising part of
our Registration Statement on Form S-1, as amended, filed with the Securities
and Exchange Commission, SEC File No. 333-77133.
14
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5: OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
3.3* Form of Amended and Restated Certificate of Incorporation
3.4* Form of Amended and Restated Bylaws
4.2* Registration Rights Agreement, dated as of October 1, 1996, as amended
on November 14, 1996.
10.1* Form of Indemnity Agreement with each of our directors and executive
officers.
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 1999 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.
27 Financial Data Schedule
</TABLE>
- -------
* Incorporated by reference to the same numbered exhibit previously filed
with the Company's Registration Statement on Form S-1 (SEC File
No.333-77133).
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during
the quarter ended September 30, 1999.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCIENTIFIC LEARNING CORPORATION
(Registrant)
- ---------------------------------
FRANK M. MATTSON
Chief Financial Officer and Secretary
(Authorized Officer and Principal Financial and Accounting Officer)
Dated: November 4, 1999
16
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
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<PP&E> 3,179
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0
0
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<INCOME-PRETAX> (2,296)
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