SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
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by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
SCIENTIFIC LEARNING
CORPORATION
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(Name of Registrant as Specified In Its Charter)
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SCIENTIFIC LEARNING CORPORATION
1995 University Avenue, Suite 400
Berkeley, CA 94704
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 18, 2000
TO THE STOCKHOLDERS OF SCIENTIFIC LEARNING CORPORATION:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of SCIENTIFIC
LEARNING CORPORATION, a Delaware corporation (the "Company"), will be held on
Thursday, May 18, 2000 at 10:00 a.m. local time at the Company's principal
executive office at 1995 University Avenue, Suite 400, Berkeley, CA 94704, for
the following purposes:
1. To elect three directors to hold office until the 2003 Annual Meeting of
Stockholders.
2. To approve an amendment to the 1999 Equity Incentive Plan (the "Incentive
Plan") to increase the aggregate number of shares authorized for issuance
under the Incentive Plan by 1,100,000 shares.
3. To ratify the selection of Ernst & Young LLP as independent auditors of the
Company for its fiscal year ending December 31, 2000.
4. To transact such other business as may properly come before the meeting or
any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on March 31, 2000, as
the record date for the determination of stockholders entitled to notice of and
to vote at this Annual Meeting and at any adjournment or postponement thereof.
By Order of the Board of Directors
[SIGNATURE]
LINDA L. CARLONI
Secretary
Berkeley, California
April 12, 2000
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER
OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN
THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR
REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF
MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE
GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE
NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER
NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD
HOLDER A PROXY ISSUED IN YOUR NAME.
SCIENTIFIC LEARNING CORPORATION
1995 University Avenue, Suite 400
Berkeley, CA 94704
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
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INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
Scientific Learning Corporation, a Delaware corporation ("Scientific Learning"
or the "Company"), for use at the Annual Meeting of Stockholders to be held on
May 18, 2000, at 10:00 a.m. local time at the Company's principal executive
office at 1995 University Avenue, Suite 400, Berkeley, CA 94704 (the "Annual
Meeting"), or at any adjournment or postponement thereof, for the purposes set
forth herein and in the accompanying Notice of Annual Meeting. The Company
intends to mail this proxy statement and accompanying proxy card on or about
April 12, 2000, to all stockholders entitled to vote at the Annual Meeting.
SOLICITATION
The Company will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing and mailing of this proxy statement, the proxy
card and any additional information furnished to stockholders. Copies of
solicitation materials will be furnished to banks, brokerage houses, fiduciaries
and custodians holding in their names shares of Common Stock beneficially owned
by others to forward to such beneficial owners. The Company may reimburse
persons representing beneficial owners of Common Stock for their costs of
forwarding solicitation materials to such beneficial owners. Original
solicitation of proxies by mail may be supplemented by telephone, telegram or
personal solicitation by directors, officers or other regular employees of the
Company. No additional compensation will be paid to directors, officers or other
regular employees for such services.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Common Stock at the close of business on
March 31, 2000 will be entitled to notice of and to vote at the Annual Meeting.
At the close of business on March 31, 2000, the Company had outstanding and
entitled to vote 11,141,288 shares of Common Stock. Each holder of record of
Common Stock on such date will be entitled to one vote for each share held on
all matters to be voted upon at the Annual Meeting. All votes will be tabulated
by the inspector of election appointed for the meeting, who will separately
tabulate affirmative and negative votes, abstentions and broker non-votes.
Abstentions will be counted towards the tabulation of votes cast on proposals
presented to the stockholders and will have the same effect as negative votes.
Broker non-votes are counted towards a quorum, but are not counted for any
purpose in determining whether a matter has been approved.
REVOCABILITY OF PROXIES
Any person giving a proxy has the power to revoke it at any time before it
is voted. It may be revoked by filing with the Secretary of the Company at the
Company's principal executive office, 1995 University Avenue, Suite 400,
Berkeley, CA 94704, a written notice of revocation or a duly executed proxy
bearing a later date, or it may be revoked by attending the meeting and voting
in person. Attendance at the meeting will not, by itself, revoke a proxy.
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STOCKHOLDER PROPOSALS
The deadline for submitting a stockholder proposal for inclusion in the
Company's proxy statement and form of proxy for the Company's 2001 annual
meeting of stockholders pursuant to Rule 14a-8 of the Securities and Exchange
Commission is December 12, 2000. Stockholders wishing to submit proposals or
director nominations that are not to be included in such proxy statement and
proxy must do so by the close of business on the tenth (10(th)) day following
the delivery of the Notice of the Annual Meeting. Stockholders are also advised
to review the Company's Bylaws, which contain additional requirements with
respect to advance notice of stockholder proposals and director nominations.
PROPOSAL 1
ELECTION OF DIRECTORS
The Company's Certificate of Incorporation and Bylaws provide that the Board
of Directors will be divided into three classes, each class consisting, as
nearly as possible, of one-third of the total number of directors, with each
class having a three-year term. Vacancies on the Board of Directors may be
filled only by persons elected by a majority of the remaining directors. A
director elected by the Board of Directors to fill a vacancy (including a
vacancy created by an increase in the number of directors) will serve for the
remainder of the full term of the class of directors in which the vacancy
occurred and until such director's successor is elected and qualified.
The Board of Directors is presently composed of seven members. There are
three directors in the class whose term of office expires in 2000. Each of the
nominees for election to this class is currently a director of the Company. If
elected at the Annual Meeting, each of the nominees would serve until the 2003
annual meeting and until his or her successor is elected and has qualified, or
until such director's earlier death, resignation or removal.
Directors are elected by a plurality of the votes present in person or
represented by proxy and entitled to vote at the meeting. Shares represented by
executed proxies will be voted, if authority to do so is not withheld, for the
election of the three nominees named below. In the event that any nominee should
be unavailable for election as a result of an unexpected occurrence, such shares
will be voted for the election of such substitute nominee as management may
propose. Each person nominated for election has agreed to serve if elected, and
management has no reason to believe that any nominee will be unable to serve.
Set forth below is biographical information for each person nominated and
each person whose term of office as a director will continue after the Annual
Meeting, with ages shown as of February 29, 2000.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH NAMED NOMINEE.
NOMINEES FOR ELECTION FOR A THREE-YEAR TERM EXPIRING AT THE 2003 ANNUAL MEETING
CARLETON A. HOLSTROM, age 64, is a founder and has been a director since
February 1996. From February 1996 to January 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, the State University of New Jersey, 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.
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DR. PAULA A. TALLAL, age 52, 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.
JAMES E. THOMAS, age 39, has been a director since November 1996. Since
1989, he has been employed by E.M. Warburg, Pincus & Co., LLC, a global private
equity firm (or its predecessors), where he currently serves as Managing
Director. Prior to 1989, Mr. Thomas was a Vice President of Goldman Sachs
International in London. Mr. Thomas was nominated to our Board of Directors in
accordance with rights held by Warburg, Pincus Ventures, L.P. ("Ventures")
relating to an equity agreement. As 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." Mr. Thomas is also a
director of Celtrix Pharmaceuticals, Inc., Transkaryotic Therapies, Inc. 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.
DIRECTORS CONTINUING IN OFFICE UNTIL THE 2001 ANNUAL MEETING
SHERYLE J. BOLTON, age 53, 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, healthcare 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, an 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.
DAVID A. TANNER, age 41, has been a director since January 1999. Mr. Tanner
has been a Managing Director of Quadrangle Partners, LLC since March 2000.
Between June 1998 and March 2000, Mr. Tanner served as 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 was nominated to our Board in accordance with rights held by LF SL
Holding LLC, relating to a voting agreement. See "Certain Transactions."
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.
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DIRECTORS CONTINUING IN OFFICE UNTIL THE 2002 ANNUAL MEETING
DR MICHAEL M. MERZENICH, age 57, 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 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. In May 1999, Dr. Merzenich was elected a member of the National Academy
of Sciences for distinguished and continuing achievements in original research.
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.
RODMAN W. MOORHEAD III, age 56, has been a director since June 1998.
Mr. Moorhead has been employed since 1973 by E.M. Warburg, Pincus & Co., LLC, a
global 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.
As 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." Mr. Moorhead is a director of Cambridge
Academies, Inc., Coventry Health Care, Inc., ElderTrust, Phycor, Inc. and
Transkaryotic Therapies, Inc. 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.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended December 31, 1999, the Board of Directors held
four meetings. The Board has an audit committee, a compensation committee, a
single-person non-officer stock option committee and a development committee.
The audit committee reviews our internal accounting procedures and consults
with and reviews the services provided by our independent auditors. The audit
committee is composed of three non-employee directors; Messrs. Holstrom, Tanner
and Thomas. It met twice during 1999.
The compensation committee reviews and recommends the compensation and
benefits matters to the Board of Directors. Except as described below, the
compensation committee also administers the issuance of stock options and other
awards under our equity incentive plan. The compensation committee is composed
of two non-employee directors: Messrs. Holstrom and Moorhead. It met five times
during 1999 and acted by unanimous written consent once. A single-person
non-officer stock option committee, composed of Ms. Bolton, the Company's Chief
Executive Officer, is authorized to administer the issuance of stock options to
non-senior executive employees. This single-person committee acted 11 times in
1999.
The development committee reviews criteria for selection of members to the
Board of Directors. No procedure has been established for the consideration of
nominees recommended by stockholders. The development committee is composed of
one non-employee director, Mr. Moorhead, one employee director, Ms. Bolton and
one consultant director, Dr. Tallal. It met once during 1999.
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During the fiscal year ended December 31, 1999, each Board member attended
75% or more of the aggregate of the meetings of the Board and of the committees
on which he or she served, held during the period for which he or she was a
director or committee member, respectively.
PROPOSAL 2
APPROVAL OF AN AMENDMENT TO THE 1999 EQUITY INCENTIVE PLAN
In April 1999, the Board adopted, and in May 1999 the stockholders
subsequently approved, the Company's 1999 Equity Incentive Plan ("Incentive
Plan"), which is an amended, restated and retitled version of the Company's
option plan adopted in February 1996 and amended in September 1996 (the "Prior
Plan").
In March, 2000, the Board amended the Incentive Plan, subject to stockholder
approval, to increase the number of shares of Common Stock authorized for
issuance under the Incentive Plan from a total of 2,192,666 shares to a total of
3,292,666 shares. The Board adopted this amendment in order to ensure that the
Company can continue to grant stock options at levels determined appropriate by
the Board.
As of February 29, 2000, awards (net of canceled or expired awards) covering
an aggregate of 1,774,876 shares of the Company's Common Stock were outstanding
under the Incentive Plan and options covering an aggregate of 404,776 shares had
been exercised. Only 13,014 shares of Common Stock (plus any shares that might
in the future be returned to the Incentive Plan as a result of cancellations or
expiration of awards or the reacquisition by the Company of issued shares)
remained available for future grant under the Incentive Plan as of February 29,
2000.
Stockholders are requested in this Proposal 2 to approve the amendment to
the Incentive Plan. The affirmative vote of the holders of a majority of the
shares present in person or represented by proxy and entitled to vote at the
meeting will be required to approve the amendment to the Incentive Plan.
Abstentions will be counted toward the tabulation of votes cast on proposals
presented to the stockholders and will have the same effect as negative votes.
Broker non-votes are counted towards a quorum, but are not counted for any
purpose in determining whether this matter has been approved.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 2.
The essential features of the Incentive Plan are outlined below:
GENERAL
The Incentive Plan provides for the grant of incentive stock options,
nonstatutory stock options, stock appreciation rights, stock bonuses and
restricted stock purchase awards (collectively "awards"). Incentive stock
options granted under the Incentive Plan are intended to qualify as "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"). Nonstatutory stock options granted under the
Incentive Plan are not intended to qualify as incentive stock options under the
Code. Stock appreciation rights granted under the Incentive Plan may be tandem
rights, concurrent rights or independent rights. See "Federal Income Tax
Information" for a discussion of the tax treatment of awards. To date, the
Company has granted only stock options under the Plan.
PURPOSE
The Board adopted the Incentive Plan to provide a means by which employees,
directors and consultants of the Company and its affiliates may be given an
opportunity to purchase stock in the Company, to assist in retaining the
services of such persons, to secure and retain the services of persons capable
of filling such positions and to provide incentives for such persons to exert
maximum efforts for
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the success of the Company and its affiliates. All of the approximately 210
employees, directors and consultants of the Company and its affiliates are
eligible to participate in the Incentive Plan.
ADMINISTRATION
The Board has delegated administration of the Incentive Plan to the
compensation committee. Except as described below and subject to the provisions
of the Incentive Plan, the compensation committee has the power to construe and
interpret the Incentive Plan and to determine the persons to whom and the dates
on which awards will be granted, the number of shares of Common Stock to be
subject to each award, the time or times during the term of each award within
which all or a portion of such award may be exercised, the exercise price, the
type of consideration and other terms of the award. A single-person non-officer
stock option committee, composed of Ms. Bolton, the Company's Chief Executive
Officer, is authorized to administer the issuance of stock options to non-senior
executive employees.
ELIGIBILITY
Incentive stock options and stock appreciation rights appurtenant thereto
may be granted under the Incentive Plan only to employees (including officers)
of the Company and its affiliates. Employees (including officers), directors,
and consultants of both the Company and its affiliates are eligible to receive
all other types of awards under the Incentive Plan. Non-employee directors of
the Company's affiliates are eligible to receive awards other than incentive
stock options under the Incentive Plan.
No incentive stock option may be granted under the Incentive Plan to any
person who, at the time of the grant, owns (or is deemed to own) stock
possessing more than 10% of the total combined voting power of the Company or
any affiliate of the Company, unless the 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 a participant during any calendar year (under
the Incentive Plan and all other such plans of the Company and its affiliates)
may not exceed $100,000.
No employee may be granted options and stock appreciation rights under the
Incentive Plan exercisable for more than 420,000 shares of Common Stock during
any calendar year ("Section 162(m) Limitation").
STOCK SUBJECT TO THE INCENTIVE PLAN
Subject to this Proposal, an aggregate of 2,192,666 shares of Common Stock
is currently reserved for issuance under the Incentive Plan. If awards granted
under the Incentive Plan expire or otherwise terminate without being exercised,
the shares of Common Stock not acquired pursuant to such awards again becomes
available for issuance under the Incentive Plan.
TERMS OF OPTIONS
The following is a description of the permissible terms of options under the
Incentive Plan. Individual option grants may be more restrictive as to any or
all of the permissible terms described below.
EXERCISE PRICE; PAYMENT. The exercise price of incentive stock options may
not be less than 100% of the fair market value of the stock subject to the
option on the date of the grant and, in some cases (see "Eligibility" above),
may not be less than 110% of such fair market value. The exercise price of
nonstatutory options may be set by the Board. If options were granted with
exercise prices below market value, deductions for compensation attributable to
the exercise of such options could be limited by Section 162(m) of the Code. See
"Federal Income Tax Information." As of March 31, 2000, the closing
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price of the Company's Common Stock as reported on the Nasdaq National Market
System was $25.625 per share.
The exercise price of options granted under the Incentive Plan must be paid
either in cash at the time the option is exercised or at the discretion of the
Board, (i) by delivery of other Common Stock of the Company, (ii) pursuant to a
deferred payment arrangement or (iii) in any other form of legal consideration
acceptable to the Board.
REPRICING. In the event of a decline in the value of the Company's Common
Stock, the Board has the authority to offer participants the opportunity to
replace outstanding higher priced options with new lower priced options.
OPTION EXERCISE. Options granted under the Incentive Plan may become
exercisable in cumulative increments ("vest") as determined by the Board. Shares
covered by currently outstanding options under the Incentive Plan typically vest
at the rate of 1/48(th) or 1/60(th) per month during the participant's
employment by, or service as a director or consultant to, the Company or an
affiliate (collectively, "service"). Shares covered by options granted in the
future under the Incentive Plan may be subject to different vesting terms. The
Board has the power to accelerate the time during which an option may vest or be
exercised. In addition, options granted under the Incentive Plan may permit
exercise prior to vesting, but in such event the participant may be required to
enter into an early exercise stock purchase agreement that allows the Company to
repurchase unvested shares, generally at their exercise price, should the
participant's service terminate before vesting. To the extent provided by the
terms of an option, a participant may satisfy any federal, state or local tax
withholding obligation relating to the exercise of such option by a cash payment
upon exercise, by authorizing the Company to withhold a portion of the stock
otherwise issuable to the participant, by delivering already-owned Common Stock
of the Company or by a combination of these means.
TERM. The maximum term of options under the Incentive Plan is 10 years,
except that in certain cases (see "Eligibility") the maximum term is five years.
Options under the Incentive Plan generally terminate three months after
termination of the participant's service unless (i) such termination is due to
the participant's permanent and total disability (as defined in the Code), in
which case the option may, but need not, provide that it may be exercised (to
the extent the option was exercisable at the time of the termination of service)
at any time within 12 months of such termination; (ii) the participant dies
before the participant's service has terminated, or within three months after
termination of such service, in which case the option may, but need not, provide
that it may be exercised (to the extent the option was exercisable at the time
of the participant's death) within 18 months of the participant's death by the
person or persons to whom the rights to such option pass by will or by the laws
of descent and distribution; or (iii) the option by its terms specifically
provides otherwise. A participant may designate a beneficiary who may exercise
the option following the participant's death. Individual option grants by their
terms may provide for exercise within a longer period of time following
termination of service.
RESTRICTIONS ON TRANSFER. The participant may not transfer an incentive
stock option otherwise than by will or by the laws of descent and distribution.
During the lifetime of the participant, only the participant may exercise an
incentive stock option. Nonstatutory stock options are transferable if the
option agreement so provides. Shares subject to repurchase by the Company under
an early exercise stock purchase agreement may be subject to restrictions on
transfer that the Board deems appropriate.
TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK
PAYMENT. The Board determines the purchase price under a restricted stock
purchase agreement. The purchase price of stock acquired pursuant to a
restricted stock purchase agreement under the Incentive Plan must be paid either
in cash at the time the option is exercised or at the discretion of the Board,
(i) by delivery of other Common Stock of the Company, (ii) pursuant to a
deferred payment
7
arrangement or (iii) in any other form of legal consideration acceptable to the
Board. The Board may award stock bonuses in consideration of past services
without a purchase payment.
VESTING. Shares of stock sold or awarded under the Incentive Plan may, but
need not be, subject to a repurchase option in favor of the Company in
accordance with a vesting schedule as determined by the Board.
RESTRICTIONS ON TRANSFER. Rights under a stock bonus or restricted stock
bonus agreement may not be transferred except where such assignment is required
by law or expressly authorized by the terms of the applicable stock bonus or
restricted stock purchase agreement.
STOCK APPRECIATION RIGHTS
The Incentive Plan authorizes three types of stock appreciation rights.
TANDEM STOCK APPRECIATION RIGHTS. Tandem stock appreciation rights are tied
to an underlying option and require the participant to elect whether to exercise
the underlying option or to surrender the option for an appreciation
distribution equal to the market price of the vested shares purchasable under
the surrendered option less the aggregate exercise price payable for such
shares. Appreciation distributions payable upon exercise of tandem stock
appreciation rights must be made in cash.
CONCURRENT STOCK APPRECIATION RIGHTS. Concurrent stock appreciation rights
are tied to an underlying option and are exercised automatically at the same
time the underlying option is exercised. The participant receives an
appreciation distribution equal to the market price of the vested shares
purchased under the option less the aggregate exercise price payable for such
shares. Appreciation distributions payable upon exercise of concurrent stock
appreciation rights must be made in cash.
INDEPENDENT STOCK APPRECIATION RIGHTS. Independent stock appreciation
rights are granted independently of any option and entitle the participant to
receive upon exercise an appreciation distribution equal to the market price of
a number of shares equal to the number of share equivalents to which the
participant is vested under the independent stock appreciation right less the
fair market value of such number of shares of stock on the date of grant of the
independent stock appreciation rights. Appreciation distributions payable upon
exercise of independent stock appreciation rights may, at the Board's
discretion, be made in cash, in shares of stock or a combination thereof.
ADJUSTMENT PROVISIONS
Transactions not involving receipt of consideration by the Company, such as
a merger, consolidation, reorganization, stock dividend, or stock split, may
change the class and number of shares of Common Stock subject to the Incentive
Plan and outstanding awards. In that event, the Incentive Plan will be
appropriately adjusted as to the class and the maximum number of shares of
Common Stock subject to the Incentive Plan and the Section 162(m) Limitation,
and outstanding awards will be adjusted as to the class, number of shares and
price per share of Common Stock subject to such awards.
EFFECT OF CERTAIN CORPORATE EVENTS
The Incentive Plan provides that, in the event of a dissolution, liquidation
or sale of substantially all of the assets of the Company, specified types of
merger, or other corporate reorganization ("change in control"), any surviving
corporation will be required to either assume awards outstanding under the
Incentive Plan or substitute similar awards for those outstanding under the
Incentive Plan. If any surviving corporation declines to assume awards
outstanding under the Incentive Plan, or to substitute similar awards, then,
with respect to participants whose service has not terminated, the vesting and
the time during which such awards may be exercised will be accelerated. An
outstanding award will terminate if the participant does not exercise it before
a change in control. The acceleration of an award in the event of an
8
acquisition or similar corporate event may be viewed as an anti-takeover
provision, which may have the effect of discouraging a proposal to acquire or
otherwise obtain control of the Company.
DURATION, AMENDMENT AND TERMINATION
The Board may suspend or terminate the Incentive Plan without stockholder
approval or ratification at any time or from time to time. Unless sooner
terminated, the Incentive Plan will terminate on May 17, 2009.
The Board may also amend the Incentive Plan at any time or from time to
time. However, no amendment will be effective unless approved by the
stockholders of the Company within 12 months before or after its adoption by the
Board if the amendment would (i) modify the requirements as to eligibility for
participation (to the extent such modification requires stockholder approval in
order for the Incentive Plan to satisfy Section 422 of the Code, if applicable,
or Rule 16b-3 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")); (ii) increase the number of shares reserved for issuance upon exercise
of awards; or (iii) change any other provision of the Incentive Plan in any
other way if such modification requires stockholder approval in order to comply
with Rule 16b-3 of the Exchange Act or satisfy the requirements of Section 422
of the Code or any securities exchange listing requirements. The Board may
submit any other amendment to the Incentive Plan for stockholder approval,
including, but not limited to, amendments intended to satisfy the requirements
of Section 162(m) of the Code regarding the exclusion of performance-based
compensation from the limitation on the deductibility of compensation paid to
certain employees.
FEDERAL INCOME TAX INFORMATION
Long-term capital gains currently are generally subject to lower tax rates
than ordinary income or short-term capital gains. The maximum long-term capital
gains rate for federal income tax purposes is currently 20% while the maximum
ordinary income rate and short-term capital gains rate is effectively 39.6%.
Slightly different rules may apply to participants who acquire stock subject to
certain repurchase options or who are subject to Section 16(b) of the Exchange
Act.
INCENTIVE STOCK OPTIONS. Incentive stock options under the Incentive Plan
are intended to be eligible for the favorable federal income tax treatment
accorded "incentive stock options" under the Code.
There generally are no federal income tax consequences to the participant or
the Company by reason of the grant or exercise of an incentive stock option.
However, the exercise of an incentive stock option may increase the
participant's alternative minimum tax liability, if any.
If a participant holds stock acquired through exercise of an incentive stock
option for at least two years from the date on which the option is granted and
at least one year from the date on which the shares are transferred to the
participant upon exercise of the option, any gain or loss on a disposition of
such stock will be a long-term capital gain or loss if the participant held the
stock for more than one year.
Generally, if the participant disposes of the stock before the expiration of
either of these holding periods (a "disqualifying disposition"), then at the
time of disposition the participant will realize taxable ordinary income equal
to the lesser of (i) the excess of the stock's fair market value on the date of
exercise over the exercise price, or (ii) the participant's actual gain, if any,
on the purchase and sale. The participant's additional gain or any loss upon the
disqualifying disposition will be a capital gain or loss, which will be
long-term or short-term depending on whether the stock was held for more than
one year.
To the extent the participant recognizes ordinary income by reason of a
disqualifying disposition, the Company will generally be entitled (subject to
the requirement of reasonableness, the provisions of Section 162(m) of the Code
and the satisfaction of a tax reporting obligation) to a corresponding business
expense deduction in the tax year in which the disqualifying disposition occurs.
9
NONSTATUTORY STOCK OPTIONS, RESTRICTED STOCK PURCHASE AWARDS AND STOCK
BONUSES. Nonstatutory stock options, restricted stock purchase awards and stock
bonuses granted under the Incentive Plan generally have the following federal
income tax consequences:
There are no tax consequences to the participant or the Company by reason of
the grant. Upon acquisition of the stock, the participant normally will
recognize taxable ordinary income equal to the excess, if any, of the stock's
fair market value on the acquisition date over the purchase price. However, to
the extent the stock is subject to certain types of vesting restrictions, the
taxable event will be delayed until the vesting restrictions lapse unless the
participant elects to be taxed on receipt of the stock. With respect to
employees, the Company is generally required to withhold from regular wages or
supplemental wage payments an amount based on the ordinary income recognized.
Subject to the requirement of reasonableness, the provisions of Section 162(m)
of the Code and the satisfaction of a tax reporting obligation, the Company will
generally be entitled to a business expense deduction equal to the taxable
ordinary income realized by the participant.
Upon disposition of the stock, the participant will recognize a capital gain
or loss equal to the difference between the selling price and the sum of the
amount paid for such stock plus any amount recognized as ordinary income upon
acquisition (or vesting) of the stock. Such gain or loss will be long-term or
short-term depending on whether the stock was held for more than one year.
Slightly different rules may apply to participants who acquire stock subject to
certain repurchase options or who are subject to Section 16(b) of the Exchange
Act.
STOCK APPRECIATION RIGHTS. No taxable income is realized upon the receipt
of a stock appreciation right, but upon exercise of the stock appreciation right
the fair market value of the shares (or cash in lieu of shares) received must be
treated as compensation taxable as ordinary income to the participant in the
year of such exercise. Generally, with respect to employees, the Company is
required to withhold from the payment made on exercise of the stock appreciation
right or from regular wages or supplemental wage payments an amount based on the
ordinary income recognized. Subject to the requirement of reasonableness,
Section 162(m) of the Code and the satisfaction of a reporting obligation, the
Company will be entitled to a business expense deduction equal to the taxable
ordinary income recognized by the participant.
POTENTIAL LIMITATION ON COMPANY DEDUCTIONS. Section 162(m) of the Code
denies a deduction to any publicly-held corporation for compensation paid to
certain "covered employees" in a taxable year to the extent that compensation to
such covered employee exceeds $1 million. It is possible that compensation
attributable to awards, when combined with all other types of compensation
received by a covered employee from the Company, may cause this limitation to be
exceeded in any particular year.
Certain kinds of compensation, including qualified "performance-based
compensation," are disregarded for purposes of the deduction limitation. In
accordance with Treasury regulations issued under Section 162(m), compensation
attributable to stock options and stock appreciation rights will qualify as
performance-based compensation if the award is granted by a compensation
committee comprised solely of "outside directors" and either (i) the plan
contains a per-employee limitation on the number of shares for which such awards
may be granted during a specified period, the per-employee limitation is
approved by the stockholders, and the exercise price of the award is no less
than the fair market value of the stock on the date of grant, or (ii) the award
is granted (or exercisable) only upon the achievement (as certified in writing
by the compensation committee) of an objective performance goal established in
writing by the compensation committee while the outcome is substantially
uncertain, and the award is approved by stockholders.
Compensation attributable to restricted stock and stock bonuses will qualify
as performance-based compensation, provided that: (i) the award is granted by a
compensation committee comprised solely of "outside directors" and (ii) the
purchase price of the award is no less than the fair market value of the stock
on the date of grant. Stock bonuses qualify as performance-based compensation
under the Treasury
10
regulations only if (i) the award is granted by a compensation committee
comprised solely of "outside directors," (ii) the award is granted (or
exercisable) only upon the achievement of an objective performance goal
established in writing by the compensation committee while the outcome is
substantially uncertain, (iii) the compensation committee certifies in writing
prior to the granting (or exercisability) of the award that the performance goal
has been satisfied and (iv) prior to the granting (or exercisability) of the
award, stockholders have approved the material terms of the award (including the
class of employees eligible for such award, the business criteria on which the
performance goal is based, and the maximum amount--or formula used to calculate
the amount--payable upon attainment of the performance goal).
NEW PLAN BENEFITS
It is not possible to determine at this time the number of shares of Common
Stock covered by awards under the Incentive Plan that may be granted in the
future to any executive officer, director, consultant, employee or group
thereof.
PROPOSAL 3
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors has selected Ernst & Young LLP ("Ernst & Young") as
the Company's independent auditors for the fiscal year ending December 31, 2000
and has further directed that management submit the selection of independent
auditors for ratification by the stockholders at the Annual Meeting. Ernst &
Young has audited the Company's financial statements since its inception in
1996. Representatives of Ernst & Young are expected to be present at the Annual
Meeting, will have an opportunity to make a statement if they so desire and will
be available to respond to appropriate questions.
Stockholder ratification of the selection of Ernst & Young as the Company's
independent auditors is not required by the Company's Bylaws or otherwise.
However, the Board of Directors is submitting the selection of Ernst & Young to
the stockholders for ratification as a matter of good corporate practice. If the
stockholders fail to ratify the selection, the audit committee and the Board of
Directors will reconsider whether or not to retain that firm. Even if the
selection is ratified, the Audit Committee and the Board of Directors in their
discretion may direct the appointment of different independent auditors at any
time during the year if they determine that such a change would be in the best
interests of the Company and its stockholders.
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and entitled to vote at the Annual Meeting will
be required to ratify the selection of Ernst & Young.
11
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of February 29, 2000 by: (1) each director and
nominee for director; (2) each of the executive officers named in the Summary
Compensation Table; (3) all executive officers and directors of the Company as a
group; and (4) all those known by the Company to be beneficial owners of more
than five percent of its Common Stock.
SHARES BENEFICIALLY
OWNED(1)
--------------------------
BENEFICIAL OWNER NUMBER PERCENT
- ---------------- --------- --------
Warburg, Pincus Ventures, LP (2)............................ 3,661,638 34.2
466 Lexington Avenue
New York, NY 10017
HLM Management Co., Inc..................................... 567,067 5.4
222 Berkeley St.
Boston, MA 02116
LF SL Holding LLC (3)....................................... 555,555 5.2
30 Rockefeller Plaza, 62(nd) Floor
New York, NY 10020
Sheryle J. Bolton (4)....................................... 472,200 4.3
Dr. Michael Merzenich (5)................................... 620,991 5.9
Dr. Paula A. Tallal (6)..................................... 690,901 6.5
Frank M. Mattson (7)........................................ 175,242 1.6
Diane H. Church (8)......................................... 106,091 1.0
Bernard G. Fraenkel (9)..................................... 89,079 *
James A. Mills (10)......................................... 71,283 *
Anita M. Kopec (11)......................................... 13,334 *
Carleton A. Holstrom (12)................................... 179,891 1.7
Rodman W. Moorhead III (2)(13).............................. 3,661,638 34.2
James E. Thomas (2)(13)..................................... 3,661,638 34.2
David A. Tanner (14)........................................ 555,555 5.2
All directors and executive officers as a group
(16 persons) (15)......................................... 8,263,598 69.3
- ------------------------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the Securities
and Exchange Commission (the "SEC"). Unless otherwise indicated in the
footnotes to this table and subject to community property laws where
applicable, the Company believes that each of the stockholders named in this
table has sole voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentages are based on
10,591,468 shares outstanding on February 29, 2000, adjusted as required by
rules promulgated by the SEC.
(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
12
and may be deemed to control both Warburg, Pincus & Co. and E.M. Warburg,
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, was affiliated with Lazard Capital
Partners LLC, the Managing Member of LF SL Holding LLC, when LF SL Holding
LLC acquired the shares it owns. Mr. Tanner was a Managing Director of
Lazard Freres & Co. LLC, the Managing Member of Lazard Capital Partners LLC,
until March 2000. Mr. Tanner has no current affiliation with LF SL Holding
LLC or Lazard Capital Partners LLC.
(4) Includes 408,333 shares subject to immediately exercisable stock options,
284,722 shares of which will be vested as of April 29, 2000 and the
remaining 123,611 shares which would be subject to repurchase if purchased
prior to vesting.
(5) Includes 233,332 shares of common stock beneficially owned directly by
Dr. Merzenich and 387,659 shares of common stock held in the Merzenich
Family Trust.
(6) Includes 557,568 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 147,223 shares subject to immediately exercisable stock options,
16,212 of which will be vested as of April 29, 2000 and the remaining
131,011 shares which would be subject to repurchase if purchased prior to
vesting.
(8) Includes 94,996 shares subject to immediately exercisable stock options,
18,710 shares of which will be vested as of April 29, 2000 and the remaining
76,286 shares which would be subject to repurchase if purchased prior to
vesting.
(9) Includes 88,000 shares subject to immediately exercisable stock options,
19,858 of which will be vested as of April 29, 2000 and the remaining 68,142
shares would be subject to repurchase if purchased prior to vesting.
(10) Includes 66,132 shares subject to immediately exercisable stock options,
11,993 shares of which will be vested as of April 29, 2000 and the remaining
54,139 shares which would be subject to repurchase if purchased prior to
vesting.
(11) Ms. Kopec resigned as an executive officer in June 1999.
(12) Includes 154,315 shares held by the Holstrom Family Limited Partnership and
5,000 shares subject to fully vested and immediately exercisable stock
options.
(13) All of the shares indicated as owned by Messrs. Moorhead and Thomas are
owned directly by Warburg, Pincus Ventures, L.P and are included because of
each individual's affiliation with Warburg, Pincus Ventures, L.P.
Messrs. Moorhead and Thomas are both our directors. Mr. Thomas is a Managing
Director of E.M. Warburg, Pincus & Co., LLC and a general partner of
Warburg, Pincus & Co. Mr. Moorhead is a Senior Managing Director of E.M.
Warburg, Pincus & Co., LLC and a general partner of Warburg, Pincus & Co. 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 Warburg, Pincus Ventures. Each of Messrs. Moorhead and Thomas
disclaim beneficial ownership of these shares within the meaning of
Rule 13d-3 under the Securities Exchange Act of 1934.
(14) Includes 555,555 shares held by LF SL Holding LLC. See note 3 regarding
Mr. Tanner's prior affiliation with Lazard Capital Partners LLC, the
Managing Member of LF SL Holding LLC.
(15) Includes the information in notes (1) through (14), as applicable.
13
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
requires the Company's directors and executive officers, and persons who own
more than ten percent of a registered class of the Company's equity securities,
to file with the SEC initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Officers,
directors and greater than ten percent stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file. To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1999, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with, except that one
report covering one transaction was filed late by each of Dr. Michael M.
Merzenich, our Chief Scientific Officer and director and by David A. Tanner, a
director.
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
The members of the Board of Directors are also eligible for reimbursement
for their expenses incurred in connection with attendance at Board meetings in
accordance with Company policy.
Each non-employee director of the Company also receives stock option grants
under the 1999 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan"). Only directors who are not employees of the Company or representatives
of a major stockholder are eligible to receive options under the Directors'
Plan. Options granted under the Directors' Plan are intended by the Company not
to qualify as incentive stock options under the Internal Revenue Code.
Option grants under the Directors' Plan are non-discretionary. On July 22 of
each year (or the next business day should such date be a legal holiday), each
eligible director who has served as an eligible director since our July 1999
initial public offering will be automatically granted under the Directors' Plan,
without further action by the Company, the Board of Directors or the
stockholders of the Company, an option to purchase 5,000 shares of common stock
of the Company. Any individual who becomes a non-employee director after our
1999 initial public offering will automatically be granted an initial grant of
5,000 shares upon being elected to the Board of Directors and an annual grant of
5,000 shares on each anniversary of the date the non-employee director was first
elected as a member of the Board of Directors during his or her service as a
non-employee director. No other options may be granted at any time under the
Directors' Plan. The exercise price of options granted under the Directors' Plan
is equal to the fair market value of the common stock subject to the option on
the date of the option grant. In the event of a merger of the Company with or
into another corporation or a consolidation, acquisition of assets or other
change-in-control transaction involving the Company, each option either will be
assumed or an equivalent option will be substituted by the successor corporation
or will terminate prior to the change of control if not assumed or substituted.
Mr. Holstrom received fees of $3,500 for his attendance at Board and
committee meetings in 1999. During the last fiscal year, the Company also
granted options covering 5,000 shares to Mr. Holstrom under the Directors' Plan,
at an exercise price per share of $16.00. The fair market value of such Common
Stock on the date of grant was $16.00 per share (based on the initial public
offering price reported on the Nasdaq National Market for the date of grant). As
of December 31, 1999, no options had been exercised under the Directors' Plan.
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.
14
The amounts paid to Dr. Merzenich or Dr. Tallal under their consulting
agreements did not exceed $60,000 in 1999.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY OF COMPENSATION
As permitted by the rules promulgated by the SEC, the following table shows
for the fiscal years ended December 31, 1999 and December 31, 1998, compensation
awarded or paid to, or earned by, the Company's Chief Executive Officer and its
other four most highly compensated executive officers at December 31, 1999 (the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE(1)
LONG-TERM COMPENSATION
--------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------- --------------------------- --------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING ALL OTHER
COMPEN- STOCK OPTIONS/ LTIP COMPEN-
SALARY BONUS SATION AWARDS SARS(2) PAYOUTS SATION
NAME AND PRINCIPAL YEAR ($) ($) ($) ($) (#) ($) ($)
POSITION -------- -------- -------- --------- ---------- -------------- -------- ---------
Sheryle J. Bolton(3) 1999 235,000 -- -- -- 150,000 -- --
President and Chief 1998 220,000 -- -- -- 16,666 -- --
Executive Officer
Frank M. Mattson(4) 1999 185,000 -- -- -- 101,000 -- --
Chief Operating 1998 166,000 -- -- -- 19,000 -- --
Officer and Executive
Vice President
Diane H. Church(5) 1999 135,000 10,000 -- -- 55,000 -- --
Vice President, Sales 1998 127,000 -- -- -- 2,333 -- --
James A. Mills(6) 1999 138,093 -- -- -- 35,000 -- --
Vice President, 1998 103,757 -- -- -- 10,332 -- --
Marketing
Bernard G. Fraenkel(7) 1999 117,509 -- -- -- 70,000 -- --
Vice President, Engineering 1998 -- -- -- -- -- -- --
Anita M. Kopec(8) 1999 161,276 -- 22,000(9) -- 0 -- --
Vice President, Sales 1998 44,945 -- -- -- 66,666 -- --
- ------------------------
(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) See the table under "Option Grants in Last Fiscal Year" for a detailed
description of the 1999 option grants. All option grants in this table were
granted under our 1999 Equity Incentive Plan and have a term of 10 years.
The option grants for Ms. Bolton and Messrs. Mattson and Fraenkel 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. The exercise price per
share of each option was equal to the fair market value of the common stock
as determined by the board of directors on the date of grant.
15
(3) Ms. Bolton has served as our Chief Executive Officer and as a director since
November 1996 and as our President since June 1997.
(4) Mr. Mattson has served as Chief Operating Officer since January 2000 and
Executive Vice President since March 2000. He served as our Chief Financial
Officer from January 1997 to January 2000 and as our Secretary from
June 1997 through March 2000.
(5) Ms. Church has served in her current position since June 1999, having
previously served as Vice President, Private Channel Sales since
August 1997.
(6) Mr. Mills has served in his current position since April 1999, having
previously served as Director of Marketing since August 1998. He joined the
Company in July 1997 as Director, Business Development.
(7) Mr. Fraenkel has served in his current position since April 1999.
(8) Ms. Kopec served as Senior Vice President and Director, School Group from
October 1998 to June 1999. She exercised the above-referenced option as to
13,334 shares, constituting the vested portion at the time she ceased to be
an employee. The unvested remaining shares subject to the option were
cancelled.
(9) Represents a relocation allowance.
16
STOCK OPTION GRANTS AND EXERCISES
The Company grants options to its executive officers under its 1999 Equity
Incentive Plan (the "Incentive Plan"). As of February 29, 2000, options to
purchase a total of 1,774,876 shares were outstanding under the Incentive Plan
and options to purchase 13,014 shares remained available for grant thereunder.
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
50% of our combined voting power, the vesting of stock awards will be
accelerated immediately upon the occurrence of this event.
The following tables show for the fiscal year ended December 31, 1999,
certain information regarding options granted to, exercised by, and held at year
end by, the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
------------------------
NUMBER % OF POTENTIAL REALIZABLE
OF SECURI- TOTAL VALUE AT ASSUMED
TIES UNDER- OPTIONS/ ANNUAL RATES OF
LYING SARS STOCK PRICE
OPTIONS/ GRANTED TO EXERCISE APPRECIATION FOR
SARS EMPLOYEES OR BASE EXPIRA- OPTION TERM (4)
GRANTED IN FISCAL PRICE TION ---------------------
(#) (1) YEAR (2) ($/SH) (3) DATE 5% ($) 10% ($)
NAME ----------- ---------- ---------- -------- --------- ---------
Sheryle J. Bolton............... 100,000 12.3 11.25 05/17/09 707,506 1,792,960
50,000 6.1 17.625 10/28/09 554,621 1,405,134
Frank M. Mattson................ 76,000 9.3 11.25 05/17/09 537,705 1,362,650
25,000 3.1 17.625 10/28/09 277,310 702,567
Diane H. Church................. 55,000 6.7 11.25 05/17/09 389,129 986,128
James A. Mills.................. 10,000 1.2 11.25 04/22/09 70,751 179,296
25,000 3.1 11.25 05/17/09 176,877 448,240
Bernard G. Fraenkel............. 70,000 8.6 6.00 03/11/09 264,136 669,372
Anita M. Kopec.................. -- -- -- --
- ------------------------
(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 Messrs. Mattson and Fraenkel 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 815,337 shares subject to options granted to our
employees in 1999, 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 based on the term of the option at its
time of grant (ten years). It is calculated by assuming that the stock price
on the date of grant appreciates at the indicated annual rate, compounded
annually for the entire term of the option and that the option is exercised
and sold on the last day of its term for the appreciated stock price. These
amounts represent certain assumed rates of appreciation only, in accordance
with the rules of the SEC, and do not reflect the Company's estimate or
projection of future stock price performance. Actual gains, if any, are
dependent on the actual future performance of the Company's common stock and
no gain to the optionee is possible unless the stock price increases over
the option term.
17
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1999 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, 1999.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT THE-MONEY OPTIONS AT
DECEMBER 31, 1999 (1) DECEMBER 31, 1999 (2)
SHARES ------------------------- -------------------------
ACQUIRED
ON VALUE
EXERCISE REALIZED UN- UN-
NAME (#) ($) EXERCISABLE EXERCISABLE EXERCISABLE EXERCISABLE
- --------------------------------- -------- -------- ----------- ----------- ----------- -----------
Sheryle J. Bolton................ 66,666 20,000 266,667 -- 9,653,346 --
-- -- 16,666 -- 508,313 --
-- -- 100,000 -- 2,525,000 --
-- -- 50,000 -- 943,750 --
Frank M. Mattson................. 25,276 6,417 21,390 -- 774,318 --
2,500 1,500 5,333 -- 209,405 --
-- -- 15,000 -- 513,750 --
-- -- 4,000 -- 122,222 --
-- -- 76,000 -- 1,919,000 --
-- -- 25,000 -- 471,875 --
Diane H. Church.................. 10,554 6,332 22,779 -- 817,767 --
116 696 2,217 -- 67,619 --
-- -- 55,000 -- 1,388,750 --
James A. Mills................... -- -- 10,000 -- 359,000 --
-- -- 333 -- 11,905 --
-- -- 9,999 -- 304,970 --
-- -- 35,000 -- 883,750 --
Bernard G. Fraenkel.............. -- -- 70,000 -- 2,135,000 --
Anita M. Kopec................... -- -- 66,666 -- 2,033,313 --
- ------------------------
(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 1/48(th) per
month for Ms. Bolton and Messrs. Mattson and Fraenkel and at a rate of
1/60(th) per month for Ms. Church and Mr. Mills. See "Security Ownership of
Certain Beneficial Owners and Management."
(2) Based on the difference between the exercise price and the fair market value
of the common stock at close of market on December 31, 1999, which was
$36.50.
18
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION
THIS SECTION IS NOT "SOLICITING MATERIAL," IS NOT DEEMED "FILED" WITH THE
SEC AND IS NOT TO BE INCORPORATED BY REFERENCE IN ANY FILING OF THE COMPANY
UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934 WHETHER
MADE BEFORE OR AFTER THE DATE HEREOF AND IRRESPECTIVE OF ANY GENERAL
INCORPORATION LANGUAGE IN ANY SUCH FILING.
Thc Compensation Committee of the Board of Directors of Scientific Learning
Corporation is currently composed of two non-employee directors:
Messrs. Moorhead and Holstrom. Mr. Holstrom was one of the initial members of
the Compensation Committee when it was first formed in March 1997. Mr. Moorhead
joined the Compensation Committee in April 1999 when it was reconstituted in
connection with the Company's initial public offering of its common stock.
The Compensation Committee is responsible for establishing the Company's
overall compensation programs for all its employees, including its executives.
In addition, the Compensation Committee is responsible for evaluating the
performance and setting the compensation of the Company's Chief Executive
Officer. The Committee also is responsible for reviewing and approving the
compensation of the Named Executive Officers and for reviewing their
performance. The Compensation Committee also administers the Company's 1999
Equity Incentive Plan, with responsibility for determining the awards to be made
under the plan to the Company's executive officers and to other eligible
individuals. A single-person non-officer stock option committee, composed of
Ms. Bolton, the Company's Chief Executive Officer, is authorized to administer
the issuance of stock options to non-senior executive employees.
Generally, the Compensation Committee reviews compensation programs for
executive officers in the fall of each year, with most changes to such
compensation programs commencing at the beginning of the following year.
However, in 1999, the Compensation Committee also reviewed executive
compensation mid-year prior to the Company's initial public offering of its
common stock. Consequently, compensation paid to executive officers in 1999
reflects both decisions made in 1998 that were effected at the beginning of 1999
as well as decisions made in the summer of 1999 that were effected prior to the
Company's initial public offering.
COMPENSATION PHILOSOPHY
The goals of the compensation program are to align compensation with
business objectives and performance and to enable the Company to attract and
retain the highest quality executive officers and other key employees, reward
them for the Company's progress and motivate them to enhance long-term
stockholder value. Key elements of this philosophy are as follows:
- Thc Company pays competitively with comparable technology companies,
both inside and outside its industry, with which the Company competes
for talent. To ensure that compensation is competitive, the Company
compares its practices with technology companies and uses these
parameters to determine executive compensation.
- Because the Company is not yet profitable, the Company provides no or
limited short-term incentives such as cash bonuses. When limited cash
bonuses are awarded, they are designed to acknowledge individual
performance and to generate rewards that bring total compensation to
competitive levels.
- The Company provides significant equity-based incentives for executives
and other key employees to ensure that they are motivated over the long
term to respond to the Company's business challenges and opportunities
as owners and not just as employees. In connection with this
philosophy, the Company currently takes into consideration the equity
of the Company held by an executive officer and accordingly certain
officers may receive smaller compensation packages than other officers
of the Company with comparable responsibilities.
19
BASIS FOR DETERMINING COMPETITIVE COMPENSATION
In reviewing competitive pay practices for the purposes of establishing
salary, bonus and option increases to be effective at the beginning of 2000, the
Compensation Committee reviewed information on the 1999 compensation levels of
executive officers at public technology companies of comparable size, measured
in terms of revenues and number of employees.
These comparable companies were not identical to the companies used in the
performance graph, but reflected the broader pool of technology companies in
which the Company competes for employees. For purposes of setting the salary,
bonus and option components of the compensation program for 1999, similar
information was reviewed by the Compensation Committee in the summer of 1999 and
related information regarding private company practices in these sectors was
reviewed in the fall of 1998.
1999 EXECUTIVE COMPENSATION
BASE SALARY. The Committee annually reviews each executive officer's base
salary. When reviewing base salaries, the Committee considers individual and
corporate performance, levels of responsibility, prior experience, breadth of
knowledge, equity position in the Company and competitive pay practices. In
general, the Company sets its salaries for executive officers, including the
CEO, at levels it believes are necessary to attract and retain personnel in
today's competitive environment. The Committee believes that personnel generally
should receive total compensation at or above median levels for comparable
technology companies. Based on the information it reviewed, the Committee
determined to increase base salaries for the Company's executive officers and
accordingly base salaries for executive officers were increased by 7% to 12% for
1999 compared to 1998.
CASH INCENTIVE COMPENSATION. In accordance with its compensation
philosophy, the Company does not have a formal cash bonus program for executive
officers. The only cash bonus paid to an executive officer in 1999 was a $10,000
bonus paid to Diane Church in January 1999. No other cash bonuses were paid to
executive officers in 1999.
LONG-TERM INCENTIVES. Stock options typically have been granted to
executive officers when the executive first joins the Company, in connection
with a significant change in responsibilities and, occasionally, to bring an
executive's equity position in line with the Company's overall compensation
philosophy. The Committee may also grant additional stock options to executives
to continue to retain such executives and to provide additional long-term
incentives. The number of shares subject to each stock option granted is based
upon anticipated future contribution, past performance, levels of
responsibility, prior experience, breadth of knowledge and competitive option
practices as well as the current equity position of the executive. In general,
in recognition that its philosophy regarding cash bonuses results in overall
cash compensation that often is below the median for comparable positions at
comparable technology companies, the Committee generally sets target option
levels above the median, often targeting the second highest quartile. As
described above however, an executive's existing equity in the Company may
result in options being set at a lower level. Stock options generally become
exercisable over a four-year or five-year period and are granted at a price that
is equal to the fair market value of the Company's common stock on the date of
grant. In 1999, stock options were granted, at the Committee's discretion, to
four executive officers who were not Named Executive Officers and to all of the
Named Executive Officers (except for one Named Executive Officer who left the
Company during 1999), as either incentives for these individuals to become
employees or as adjustments in response to competitive practices.
CORPORATE PERFORMANCE AND CHIEF EXECUTIVE OFFICER COMPENSATION
Ms. Bolton's base salary at the beginning of 1999 as President and Chief
Executive Officer was $235,000, reflecting a $15,000 increase from 1998. This
increase was approved by the Committee in 1998 and effected at the beginning of
1999. Following the Committee's review of her total compensation program and
competitive practices in May 1999, Ms. Bolton was granted an additional stock
option for
20
100,000 shares of common stock. In addition, when the Committee evaluated
Ms. Bolton's performance in October 1999 for purposes of determining her
compensation for 2000, Ms. Bolton was granted an additional stock option for
50,000 shares of common stock. The Committee uses the same procedures described
above for the other executive officers in setting the annual base salary and
stock option awards for the Chief Executive Officer. In particular, in
evaluating Ms. Bolton's base salary and stock option awards, the Committee
considered individual and corporate performance, level of responsibility, prior
experience, breadth of knowledge, equity position in the Company and competitive
pay practices. Ms. Bolton's compensation was based on the Committee's subjective
evaluation of her and the Company's performance during the prior year.
Ms. Bolton's overall compensation was not specifically tied to any particular
financial performance criteria, although the Committee did take into
consideration the milestones achieved by the Company in 1999, including its
initial public offering of its common stock. The Committee believes
Ms. Bolton's total compensation for 1999 was appropriate given the Company's
size and financial performance at that time.
LIMITATION ON DEDUCTION OF COMPENSATION PAID TO CERTAIN EXECUTIVE OFFICERS
Section 162(m) of the Code limits the Company to a deduction for federal
income tax purposes of no more than $1 million of compensation paid to certain
Named Executive Officers in a taxable year. Compensation above $1 million may be
deducted if it is "performance-based compensation" within the meaning of the
Code.
The Compensation Committee has determined that stock options granted under
the Company's 1999 Equity Incentive Plan with an exercise price at least equal
to the fair market value of the Company's common stock on the date of grant
shall be treated as "performance-based compensation." Provisions contained in
the 1999 Equity Incentive Plan, which has been approved by the Company's
stockholders, allow any compensation recognized by a Named Executive Officer as
a result of the grant of such a stock option to be deductible by the Company.
From the members of the Compensation Committee of Scientific Learning
Corporation.
Rodman W. Moorhead, III
Carleton A. Holstrom
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As noted above, the Company's compensation committee consists of
Mr. Holstrom and Mr. Moorhead. None of the members of the compensation committee
has been an officer or employee of the Company, except that Mr. Holstrom served
as the Company's Chief Financial Officer from February 1996 to January 1997. No
executive officer of the Company serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving on the Company's board of directors or compensation committee.
PERFORMANCE MEASUREMENT COMPARISON
The following graph compares the cumulative total stockholder return on
Scientific Learning Common Stock during the period beginning with its initial
public offering on July 22, 1999 and ending December 31, 1999, with the
cumulative total return during the same period of (i) the Nasdaq (US) Market
Index and (ii) a Scientific Learning constructed peer group index. The companies
in this peer group index were selected on the basis of similarity in nature of
their business and include SmartForce, Student Advantage, Inc., Advantage
Learning Systems, Inc., Harcourt General, Inc., National Computer
Systems, Inc., Scholastic Corporation and Sylvan Learning Systems Inc. The
comparison assumes $100 was invested on July 22, 1999 in the Scientific Learning
Common Stock and in each of the foregoing indices. It also assumes reinvestment
of dividends. The stock price performance shown in the graph below should not be
considered indicative of potential future stock price performance.
21
[PERFORMANCE CHART]
CERTAIN TRANSACTIONS
The sales of preferred stock described and identified in the table below
were converted into our common stock in July 1999 in connection with our initial
public offering. As shown in the table below, from December 1998 to
January 1999, we issued an aggregate of 1,666,666 shares of Series D preferred
stock at a price of $9.00 per share to certain entities affiliated with members
of our Board of Directors. See "Security Ownership of Certain Beneficial Owners
and Management."
AGGREGATE CONSIDER-
INVESTOR SERIES D PREFERRED STOCK ATION
- -------- ------------------------ -------------------
Warburg, Pincus Ventures, L.P. (1)..................... 1,111,111 $9,999,999
LF SL Holding LLC (2).................................. 555,555 $4,999,995
- ------------------------
(1) Messrs. Moorhead and Thomas, our directors, are affiliated with Warburg,
Pincus Ventures.
(2) At the time of this transaction, Mr. Tanner, one of our directors, was
affiliated with Lazard Capital Partners LLC, the Managing Member of LF SL
Holding LLC.
Ms. Bolton, Mr. Mattson and Ms. Church have acquired shares of our common
stock through the exercise of options. See "Aggregated Option Exercises in
Fiscal 1999 and Year-End Option Values."
The former holders of our Series B, C and D preferred stock are entitled to
registration rights with respect to the common stock issued upon conversion of
the Series B, C or D preferred stock.
In connection with the issuance of Series B preferred stock and the warrants
to purchase Series C preferred stock, we entered into an agreement that requires
us, 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. In addition, Warburg, Pincus Ventures has
agreed that it will use its best efforts to vote a sufficient number of its
shares to elect one individual nominated by LF SL Holding LLC as long as LF SL
22
Holding LLC continues to own at least fifty percent of the shares it acquired in
January 1999 as referenced above.
In June 1998, we obtained a $3.0 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 expire on May 31, 2003. Additionally, in order to enable us to
repay the outstanding balance on 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 rights under a patent
application filed by Drs. Tallal, Merzenich, Jenkins and Miller, among others,
and subsequently assigned to The Regents and Rutgers, the State University of
New Jersey. One patent under this application was granted by the United States
Patent and Trademark Office in September 1998 and several applications are
pending. 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 2000, 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 Series A preferred stock which
were converted upon the closing of our July 1999 initial public offering into
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 approximately
$612,016 for royalty and milestone payments under the license for the year ended
December 31, 1999. Pursuant to separate patent policies of The Regents 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 Drs. Merzenich, Jenkins and Miller under the
universities' patent policies have not exceeded $60,000 per year. The amount
distributed to Dr. Tallal under the universities' patent policies were
approximately $87,000 for the year ended December 31, 1999. 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 $70,000 for the year ended
December 31, 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.
23
OTHER MATTERS
The Board of Directors knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters are properly brought
before the meeting, it is the intention of the persons named in the accompanying
proxy to vote on such matters in accordance with their best judgment.
By Order of the Board of Directors
[SIGNATURE]
LINDA L. CARLONI
Secretary
April 12, 2000
A COPY OF THE COMPANY'S ANNUAL REPORT TO THE SECURITIES AND EXCHANGE
COMMISSION ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 IS AVAILABLE
WITHOUT CHARGE UPON WRITTEN REQUEST TO: SECRETARY, SCIENTIFIC LEARNING
CORPORATION, 1995 UNIVERSITY AVENUE, SUITE 400, BERKELEY, CA 94704.
24
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 MAY 17, 1999
APPROVED BY STOCKHOLDERS MAY 28, 1999
AMENDED MARCH 8, 2000
APPROVED BY STOCKHOLDERS MAY __, 2000
TERMINATION DATE: MAY 17, 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.
A-1
(b) "BOARD" means the Board of Directors of the Company.
(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
A-2
the greatest volume of trading in Common Stock) on the trading day prior to
the day of 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.
A-3
(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
A-4
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 Three Million Two Hundred Ninety Two
Thousand Six Hundred Sixty Six (3,292,666) 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:
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(a) TERM. No Incentive Stock Option shall be exercisable after the
expiration of ten (10) years from the date it was granted.
(b) PRICE. The exercise price of each Incentive Stock Option shall be not
less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted, but the exercise
price of each Nonstatutory Stock Option shall be any price determined by the
Board in its sole discretion. Notwithstanding the foregoing, an Incentive
Stock Option may be granted with an exercise price lower than that set forth
in the preceding sentence if such Incentive Stock Option is granted pursuant
to an assumption or substitution for another option in a manner satisfying
the provisions of Section 424(a) of the Code.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash or (ii) at the discretion of the Board (A) by
delivery to the Company of other Common Stock of the Company, (B) according
to a deferred payment (however, payment of the common stock's "par value," as
defined in the Delaware General Corporation Law, shall not be made by
deferred payment), or other arrangement (which may include, without limiting
the generality of the foregoing, the use of other Common Stock of the
Company) with the person to whom the Option is granted or to whom the Option
is transferred pursuant to subsection 6(d), or (C) in any other form of legal
consideration that may be acceptable to the Board.
In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be
interest under the deferred payment arrangement.
(d) TRANSFERABILITY. An Incentive Stock Option shall not be transferable
except by will or by the laws of descent and distribution, and shall be
exercisable during the lifetime of the person to whom the Option is granted
only by such person. A Nonstatutory Stock Option may be transferred to the
extent provided in the Option Agreement; provided that if the Option
Agreement does not expressly permit the transfer of a Nonstatutory Stock
Option, the Nonstatutory Stock Option shall not be transferable except by
will, by the laws of descent and distribution or pursuant to a domestic
relations order satisfying the requirements of Rule 16 of the Exchange Act
and shall be exercisable during the lifetime of the person to whom the Option
is granted only by such person or any transferee pursuant to a domestic
relations order. Notwithstanding the foregoing, the person to whom the
Option is granted may, by delivering written notice to the Company, in a form
satisfactory to the Company, designate a third party who, in the event of the
death of the Optionee, shall thereafter be entitled to exercise the Option.
(e) VESTING. The total number of shares of stock subject to an Option
may, but need not, be allotted in periodic installments (which may, but need
not, be equal). The Option Agreement may provide that from time to time
during each of such installment periods, the Option may become exercisable
("vest") with respect to some or all of the shares allotted to that period,
and may be exercised with respect to some or all of the shares allotted to
such period and/or any prior period as to which the Option became vested but
was not fully exercised. The Option may be subject to such other terms and
conditions on the time or times when it may be exercised (which may be based
on performance or other criteria) as the Board may deem appropriate. The
vesting provisions of
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individual Options may vary. The provisions of this subsection 6(e) are
subject to any Option provisions governing the minimum number of shares as to
which an Option may be exercised.
(f) TERMINATION OF THE OPTIONEE'S CONTINUOUS SERVICE. In the event an
Optionee's Continuous Service terminates (other than upon the Optionee's
death or Disability), the Optionee may exercise his or her Option (to the
extent that the Optionee was entitled to exercise it at the date of
termination) but only within such period of time ending on the earlier of (i)
the date three (3) months after the termination of the Optionee's Continuous
Service (or such longer or shorter period specified in the Option Agreement),
or (ii) the expiration of the term of the Option as set forth in the Option
Agreement. If, after termination, the Optionee does not exercise his or her
Option within the time specified in the Option Agreement, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.
An Optionee's Option Agreement may also provide that, if the exercise of
the Option following the termination of the Optionee's Continuous Service
(other than upon the Optionee's death or Disability) would be prohibited at
any time solely because the issuance of shares would violate the registration
requirements under the Securities Act, then the Option shall terminate on the
earlier of (i) the expiration of the term of the Option as described in
subsection 6(a) or (ii) the expiration of a period of three (3) months after
the termination of the Optionee's Continuous Service during which the
exercise of the Option would not be in violation of such registration
requirements (if such provisions would result in an extension of the time
during which the Option may be exercised beyond the period described in the
first paragraph of this subsection 6(f)).
(g) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Service
terminates as a result of the Optionee's Disability, the Optionee may
exercise his or her Option (to the extent that the Optionee was entitled to
exercise it at the date of termination), but only within such period of time
ending on the earlier of (i) the date twelve (12) months following such
termination (or such longer or shorter period specified in the Option
Agreement, or (ii) the expiration of the term of the Option as set forth in
the Option Agreement. If, at the date of termination, the Optionee is not
entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become
available for issuance under the Plan. If, after termination, the Optionee
does not exercise his or her Option within the time specified herein, the
Option shall terminate, and the shares covered by such Option shall revert to
and again become available for issuance under the Plan.
(h) DEATH OF OPTIONEE. In the event of the death of an Optionee during,
or within a period specified in the Option after the termination of, the
Optionee's Continuous Service, the Option may be exercised (to the extent the
Optionee was entitled to exercise the Option at the date of death) by the
Optionee's estate, by a person who acquired the right to exercise the Option
by bequest or inheritance or by a person designated to exercise the option
upon the Optionee's death pursuant to subsection 6(d), but only within the
period ending on the earlier of (i) the date eighteen (18) months following
the date of death (or such longer or shorter period specified in the Option
Agreement), or (ii) the expiration of the term of such Option as set forth in
the Option Agreement. If, at the time of death, the Optionee was not
entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become
available for issuance under the Plan. If, after death, the Option is not
exercised within the time specified herein, the Option shall
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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.
A-8
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
A-9
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.
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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
A-11
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
A-12
(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
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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.
A-14
DETACH HERE
PROXY
SCIENTIFIC LEARNING CORPORATION
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 18, 2000
The undersigned hereby appoints Sheryle J. Bolton and Frank M. Mattson and
each of them as attorneys and proxies of the undersigned with full power of
substitution to vote all of the shares of stock of Scientific Learning
Corporation which the undersigned is entitled to vote at the Annual Meeting of
Stockholders of Scientific Learning Corporation to be held at the
headquarters of Scientific Learning Corporation at 1995 University Avenue,
Suite 400, Berkeley, California on May 18, 2000 at 10:00 A.M. local time, and
at any and all postponements, continuations and adjournments thereof, with
all power that the undersigned would possess if personally present upon and in
respect of the following matters and in accordance with the following
instructions, with discretionary authority as to any and all other matters
that may properly come before the meeting.
UNLESS A CONTARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR ALL
NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSALS 2 AND 3 AS MORE SPECIFICALLY
DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE INDICATED,
THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
- ----------- -----------
SEE REVERSE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE SIDE
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DETACH HERE
/ X / PLEASE MARK
VOTES AS IN
THIS EXAMPLE.
MANAGEMENT RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR LISTED BELOW AND FOR
PROPOSALS 2 AND 3.
1. To elect three directors to hold office until the 2003 Annual Meeting of
Stockholders.
NOMINEES: (01) Carleton A. Holstrom, (02) Dr. Paula A. Tallal
and (03) James E. Thomas
FOR WITHHELD
/ / / /
/ /__________________________
For all nominees except as
noted above
2. To approve the amendment of the Company's 1999 Equity Incentive Plan, to
increase the number of shares authorized for issuance thereunder, as
described in the proxy statement.
FOR AGAINST ABSTAIN
/ / / / / /
3. To ratify selection of Ernst & Young LLP as independent accountants of the
Company for its fiscal year ending December 31, 2000.
FOR AGAINST ABSTAIN
/ / / / / /
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT / /
Please vote, date and promptly return this proxy in the enclosed return
envelope which is postage prepaid if mailed in the United States.
Please sign exactly as your name appears hereon. If the stock is registered
in the name of two or more persons, each should sign. Executors,
administrators, trustees, guardians and attorneys-in-fact should add their
titles. If signer is a corporation please give full corporate name and have a
duly authorized officer sign, stating title. If signer is a partnership,
please sign in partnership name by authorized person.
Signature: _______________________Date: _____________
Signature: ______________________Date: _____________