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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004

OR

|_| TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File number # 000-24547

Scientific Learning Corporation
(Exact name of registrant as specified in its charter)

Delaware 94-3234458
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)

300 Frank H. Ogawa Plaza, Suite 600
Oakland, California 94612
(510) 444-3500
(Address of Registrants principal executive offices, including zip code, and
telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|

The number of shares of the Registrant’s Common Stock, $.001 par value per share, outstanding at July 31, 2004 was 16,604,510.

 

SCIENTIFIC LEARNING CORPORATION

INDEX TO FORM 10-Q
FOR THE QUARTER ENDED June 30, 2004

    PAGE    
             
  PART 1. FINANCIAL INFORMATION      
             
Item 1.   Condensed Financial Statements:      
             
  Condensed Balance Sheets as of June 30, 2004 and December 31, 2003   3    
             
  Condensed Statement of Operations for the Three and Six Months      
            Ended June 30, 2004 and 2003   4    
             
  Condensed Statements of Cash Flows for the Six Months      
            Ended June 30, 2004 and 2003   5    
             
  Notes to Condensed Financial Statements   6    
             
Item 2. Management’s Discussion and Analysis of Financial Condition      
          and Results of Operations   9    
             
Item 3. Quantitative and Qualitative Disclosures about Market Risk   17    
             
Item 4. Controls and Procedures   17    
             
  PART II. OTHER INFORMATION      
       
Item 4.   Submission of Matters to a Vote of Security Holders   18    
             
Item 6. Exhibits and Reports on Form 8-K   18    
             
  Signature   20    

 

Page 2

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SCIENTIFIC LEARNING CORPORATION
CONDENSED BALANCE SHEETS
(In thousands)

June 30,
2004 		December 31,
2003
(Unaudited)
                 
Assets            
Current assets:    
  Cash and cash equivalents     $ 4,438   $ 3,648  
  Accounts receivable, net       15,760     5,117  
  Prepaid expenses and other current assets       922     1,134  
                 
      Total current assets       21,120     9,899  
                 
Property and equipment, net       685     537  
Notes receivable from current and former officers       3,114     3,114  
Other assets       1,939     2,004  
                 
Total assets     $ 26,858   $ 15,554  
Liabilities and stockholders’ deficit    
Current liabilities:    
  Accounts payable     $ 661   $ 481  
  Accrued liabilities       3,308     3,832  
  Borrowings under bank line of credit       3,000     —  
  Deferred revenue       22,826     16,233  
                 
      Total current liabilities       29,795     20,546  
                 
Deferred revenue, long-term       2,267     1,289  
Other liabilities       306     285  
                 
      Total liabilities       32,368     22,120  
                 
Stockholders’ deficit:    
   Common stock       75,326     74,460  
   Accumulated deficit       (80,836 )   (81,026 )
                 
      Total stockholders’ deficit       (5,510 )   (6,566 )
                 
Total liabilities and stockholders’ deficit     $ 26,858   $ 15,554  

See accompanying notes to condensed financial statements.

Page 3

 

 

SCIENTIFIC LEARNING CORPORATION
CONDENSED STATEMENT OF OPERATIONS
(In thousands, except share and per share amounts)
unaudited


  Three months ended June 30,   Six months ended June 30,  
2004
  2003
  2004
  2003
 
Revenues:                    
Products     $ 6,014   $ 6,217   $ 11,327   $ 11,548  
Service and support       1,809     1,140     3,637     2,186  
   Total revenues       7,823     7,357     14,964     13,734  
     
Cost of revenues:    
Cost of products       465     674     787     1,128  
Cost of service and support       1,201     837     2,420     1,766  
    Total cost of revenues       1,666     1,511     3,207     2,894  
                             
Gross profit       6,157     5,846     11,757     10,840  
     
Operating expenses:    
    Sales and marketing       3,699     3,367     7,522     6,640  
    Research and development       820     935     1,705     1,844  
    General and administrative       1,212     1,284     2,223     2,396  
                             
   Total operating expenses       5,731     5,586     11,450     10,880  
                             
Operating income (loss)       426     260     307     (40 )
                             
Other income from related party       28     —     63     —  
Interest expense , net       (97 )   (316 )   (176 )   (625 )
                             
Net income (loss) before income taxes     $ 357   $ (56 ) $ 194   $ (665 )
   Provision for income taxes       4     —     4     —  
Net income (loss)     $ 353   $ (56 ) $ 190   $ (665 )
                             
Basic net income (loss) per share:     $ 0.02   $ (0.00 ) $ 0.01   $ (0.04 )
                             
Shares used in computing basic net income (loss)       16,213,427     16,004,911     16,183,542     15,942,365  
                             
Diluted net income (loss) per share:     $ 0.02   $ (0.00 ) $ 0.01   $ (0.04 )
                             
Shares used in computing diluted net income (loss)       17,392,637     16,004,911     17,401,778     15,942,365  

See accompanying notes to condensed financial statements.

Page 4

 

 

SCIENTIFIC LEARNING CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited


  Six months ended June 30,  
2004
  2003
 
Operating Activities:            
Net income (loss)     $ 190   $ (665 )
Adjustments to reconcile net income (loss) to cash used in operating activities:    
      Depreciation and amortization       349     772  
      Amortization of deferred financing costs       199     608  
      Stock based compensation       103     144  
      Changes in operating assets and liabilities:    
         Accounts receivable       (10,643 )   (1,653 )
         Prepaid expenses and other current assets       13     552  
         Accounts payable       180     132  
         Accrued liabilities       (524 )   (979 )
         Deferred revenue       7,571     761  
         Other liabilities       21     105  
                 
Net cash used in operating activities       (2,541 )   (223 )
     
Investing Activities:    
      Purchases of property and equipment, net       (355 )   (102 )
      Other non-current assets       (77 )   (76 )
                 
Net cash used in investing activities       (432 )   (178 )
     
Financing Activities:    
Proceeds from issuance of common stock       763     194  
Borrowings under bank line of credit       3,000     2,000  
Repayments on borrowings under bank line of credit       —     (2,000 )
Net cash provided by financing activities       3,763     194  
                 
Increase (decrease) in cash and cash equivalents       790     (207 )
                 
Cash and cash equivalents at beginning of the period       3,648     4,613  
                 
Cash and cash equivalents at end of the period     $ 4,438   $ 4,406  
     
Supplemental disclosure:    
      Interest Paid     $ 29   $ 84  

See accompanying notes to condensed financial statements.

Page 5

 

 

Notes to Condensed Financial Statements

1. Summary of Significant Accounting Policies

Description of Business

Scientific Learning Corporation (the “Company”) is the leading provider of neuroscience-based software products that develop underlying cognitive skills required for reading and learning. The Company’s Fast ForWord® products are a series of reading intervention products for children, adolescents and adults. We sell primarily to K-12 schools through a direct sales force. The Company also sells to speech and language professionals. To support our products, we provide on-site and remote training and implementation services, as well as technical, professional and customer support and a wide variety of Web-based resources.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent that there are material differences between these estimates and actual results, our financial statements could be affected.

Interim Financial Information

The interim financial information as of June 30, 2004 and for the three and six months ended June 30, 2004 and 2003 is unaudited, but includes all normal recurring adjustments that the Company considers necessary for a fair presentation of its financial position at such date and its results of operations and cash flows for those periods.

These condensed financial statements and notes should be read in conjunction with the Company’s audited financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission.

Other Assets

Other assets consist of the following (in thousands):

June 30,
2004
       December 31,
2003
 
  Software development costs $ 3,089   $ 3,089  
  Less accumulated amortization   (2,521 )   (2,379 )
  Software development costs, net   568     710  
  Other non current assets   1,371     1,294  
    $ 1,939   $ 2,004  

Page 6

 

 

Notes to Condensed Financial Statements

1. Summary of Significant Accounting Policies (continued)

Accrued restructuring costs

In October 2003 the Company entered into an agreement with its landlord to terminate the lease for its Oakland headquarters and commence a new lease agreement for a reduced amount of space in the same building. This reduction in space is expected to decrease total lease payments by approximately $6.5 million (net of lease termination fees described below) through 2008. Under these agreements the Company paid an increased security deposit of $550,000 and lease termination fees totaling $1,370,000 through June 30, 2004. The balance of the lease termination fee, $880,000 will be paid in equal monthly installments through December 31, 2004. The term of the new lease agreement expires December 31, 2013.

The following table sets forth the restructuring activity during the quarter ended June 30, 2004 (in thousands):

Accrued restructuring
costs, beginning of
the period
  Cash paid
  Accrued
restructuring costs,
end of the period