<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended AUGUST 31, 1996
OR
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
---------------- -------------
Commission file number 0-19095
SOMANETICS CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2394784
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1653 EAST MAPLE ROAD,
TROY, MICHIGAN
48083-4208
(Address of principal executive offices)
(Zip Code)
(810) 689-3050
(Registrant's 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
------------ ------------
Number of common shares outstanding at October 3, 1996: 19,185,101
<PAGE> 2
PART I FINANCIAL INFORMATION
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, November 30,
1996 1995
ASSETS ------------ --------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 829,008 $ 941,426
Accounts receivable, net of allowance for doubtful accounts of $0
at August 31, 1996 and $194,000 at November 30, 1995........... 314,133 443,859
Inventory........................................................ 991,960 936,421
Prepaid expenses................................................. 43,352 72,161
----------- -----------
Total current assets........................................... 2,178,453 2,393,867
----------- -----------
PROPERTY AND EQUIPMENT (at cost):
Machinery and equipment.......................................... 452,158 412,217
Furniture and fixtures........................................... 192,749 193,339
Leasehold improvements........................................... 166,770 166,770
----------- -----------
Total.......................................................... 811,677 772,326
Less accumulated depreciation and amortization................... (726,810) (685,835)
----------- -----------
Net property and equipment..................................... 84,867 86,491
----------- -----------
OTHER ASSETS:
Note receivable - related party.................................. 202,125 190,240
Patents and trademarks, net...................................... 80,857 86,041
Other............................................................ 129,201 104,616
----------- -----------
Total other assets............................................. 412,183 380,897
----------- -----------
TOTAL ASSETS....................................................... $ 2,675,503 $ 2,861,255
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................. $ 262,143 $ 131,401
Accrued liabilities.............................................. 32,263 416,356
----------- -----------
Total current liabilities........................................ 294,406 547,757
----------- -----------
COMMITMENTS AND CONTINGENCIES...................................... -- --
REDEEMABLE CONVERTIBLE PREFERRED SHARES............................ -- 19,843
SHAREHOLDERS' EQUITY:
Preferred shares, authorized, 1,000,000 shares of $.01 par value;
no shares issued or outstanding................................ -- --
Common shares, authorized, 30,000,000 shares of $.01 par
value; issued and outstanding, 19,154,118 and 17,768,552
shares at August 31, 1996 and November 30, 1995,
respectively................................................... 191,543 177,687
Additional paid-in capital....................................... 30,679,632 29,023,318
Deficit accumulated during the development stage................. (28,490,078) (26,907,350)
----------- -----------
Total shareholders' equity..................................... 2,381,097 2,293,655
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......................... $ 2,675,503 $ 2,861,255
=========== ===========
</TABLE>
See notes to financial statements
2
<PAGE> 3
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
for the Period
January 15, 1982
Three Months Nine Months (Date of Inception)
Ended August 31, Ended August 31, To
--------------------------- ---------------------------- August 31,
1996 1995 1996 1995 1996
----------- ----------- ----------- ----------- ------------------
<C> <C> <C> <C> <C> <C>
REVENUES:
Net Sales............................. $ 99,541 $ 171,652 $ 699,006 $ 1,078,277 $ 5,649,738
Research and development activities... -- -- -- -- 122,500
----------- ----------- ----------- ----------- ------------
Total revenues....................... 99,541 171,652 699,006 1,078,277 5,772,238
COST OF SALES.......................... 67,700 93,192 327,151 524,208 2,569,266
----------- ----------- ----------- ----------- ------------
GROSS MARGIN........................... 31,841 78,460 371,855 554,069 3,202,972
----------- ----------- ----------- ----------- ------------
OPERATING EXPENSES:
Research, development, and
engineering........................ 44,685 50,232 147,353 240,796 7,916,910
Selling, general and administrative... 678,766 923,150 1,878,482 2,774,069 24,518,265
----------- ----------- ----------- ----------- ------------
Total operating expenses............. 723,451 973,382 2,025,835 3,014,865 32,435,175
----------- ----------- ----------- ----------- ------------
OPERATING LOSS......................... (691,610) (894,922) (1,653,980) (2,460,796) (29,232,203)
----------- ----------- ----------- ----------- ------------
OTHER INCOME (EXPENSE):
Interest income....................... 19,569 20,425 51,980 71,867 1,111,525
Interest expense...................... -- -- -- (772) (231,225)
Other................................. 8,099 1,066 19,272 1,991 (118,333)
----------- ----------- ----------- ----------- ------------
Total other income................... 27,668 21,491 71,252 73,086 761,967
----------- ----------- ----------- ----------- ------------
NET LOSS............................... $ (663,942) $ (873,431) $(1,582,728) $(2,387,710) $(28,470,236)
=========== =========== =========== =========== ============
NET LOSS PER COMMON SHARE.............. $ (.03) $ (.05) $ (.09) $ (.14) $ (4.07)
----------- ----------- ----------- ----------- ------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING.............. 19,109,288 17,067,465 18,365,476 16,536,516 6,986,968
=========== =========== =========== =========== ============
</TABLE>
See notes to financial statements
3
<PAGE> 4
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED)
(1 OF 2)
<TABLE>
<CAPTION>
PRICE
PER SHARE
DATE SHARE SHARES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
ISSUANCE OF COMMON SHARES:
For shareholders' contributions of test equipment ......... January, 1982 $ 0.032 830,376 $ 8,304
For cash .................................................. July, 1982 1.31 78,345 783
Net loss from January 15, 1982 (date of inception)
to November 30, 1982 ...................................
--------- -------
Balance at November 30, 1982 ................................ 908,721 9,087
For cash .................................................. December, 1982 1.31 39,172 392
For services .............................................. January, 1983 1.31 15,669 157
For cash, less issuance costs of $5,863 ................... July, 1983 2.62 116,243 1,162
For services .............................................. November, 1983 2.62 7,834 78
Net loss for the year ended November 30, 1983 .............
--------- -------
Balance at November 30, 1983 ................................ 1,087,639 10,876
For cash, less issuance costs December, 1983-
of $7,735 .............................................. April, 1984 2.62 194,212 1,943
For patents ............................................... February, 1984 2.62 48,944 489
For cash .................................................. November, 1984 3.51 37,303 373
Net loss for the year ended November 30, 1984 .............
--------- -------
Balance at November 30, 1984 ................................ 1,368,098 13,681
For cash, less issuance costs December, 1984-
of $3,726 .............................................. June, 1985 3.51 130,292 1,303
For cash .................................................. November, 1985 7.02 144,838 1,448
Net loss for the year ended November 30, 1985 .............
--------- -------
Balance at November 30, 1985 ................................ 1,643,228 16,432
Exercise of stock options for cash ........................ December, 1985 3.51 7,834 79
For cash .................................................. January, 1986 7.02 104,442 1,044
Net loss for the year ended November 30, 1986 .............
--------- -------
Balance at November 30, 1986 ................................ 1,755,504 17,555
For cash, less issuance costs March, 1987-
of $9,500 .............................................. September, 1987 5.11 103,591 1,036
Net loss for the year ended November 30, 1987 .............
--------- -------
Balance at November 30, 1987 ................................ 1,859,095 18,591
For cash, less issuance costs February, 1988-
of $10,500 ............................................. April, 1988 5.11 32,905 329
Net loss for the year ended November 30, 1988 .............
--------- -------
Balance at November 30, 1988 ................................ 1,892,000 18,920
For cash and the exchange of debt January, 1989-
due a shareholder ...................................... July, 1989 5.11 45,244 452
Net loss for the year ended November 30, 1989 .............
--------- -------
Balance at November 30, 1989 ................................ 1,937,244 19,372
For services .............................................. August, 1990 5.11 47,006 471
Net loss for the year ended November 30, 1990 .............
--------- -------
Balance at November 30, 1990 ................................ 1,984,250 19,843
For cash, less issuance costs of $1,630,241 ............... March, 1991 2.00 3,600,000 36,000
Unit Purchase Option ...................................... March, 1991
Redeemable Convertible Preferred Stock dividend ........... April, 1991
For cash, less issuance costs of $126,900 ................. April, 1991 2.00 540,000 5,400
Net loss for the year ended November 30, 1991 .............
--------- -------
Balance at November 30, 1991 ................................ 6,124,250 $61,243
<CAPTION>
TOTAL
ADDITIONAL ACCUM- SHAREHOLDERS'
PAID-IN ULATED EQUITY
CAPITAL DEFICIT (DEFICIENCY)
---------- ------- ------------
<S> <C> <C> <C>
ISSUANCE OF COMMON SHARES:
For shareholders' contributions of test equipment ......... $ 18,196 $ - $ 26,500
For cash .................................................. 101,217 102,000
Net loss from January 15, 1982 (date of inception)
to November 30, 1982 ................................... (107,083) (107,083)
----------- ------------ -------------
Balance at November 30, 1982 ................................ 119,413 (107,083) 21,417
For cash .................................................. 50,608 51,000
For services .............................................. 20,343 20,500
For cash, less issuance costs of $5,863 ................... 297,139 298,301
For services .............................................. 20,422 20,500
Net loss for the year ended November 30, 1983 ............. (291,986) (291,986)
----------- ------------ -------------
Balance at November 30, 1983 ................................ 507,925 (399,069) 119,732
For cash, less issuance costs
of $7,735 .............................................. 498,503 500,446
For patents ............................................... 127,580 128,069
For cash .................................................. 130,563 130,936
Net loss for the year ended November 30, 1984 ............. (700,380) (700,380)
----------- ------------ -------------
Balance at November 30, 1984 ................................ 1,264,571 (1,099,449) 178,803
For cash, less issuance costs
of $3,726 .............................................. 452,312 453,615
For cash .................................................. 1,015,352 1,016,800
Net loss for the year ended November 30, 1985 ............. (559,871) (559,871)
----------- ------------ -------------
Balance at November 30, 1985 ................................ 2,732,235 (1,659,320) 1,089,347
Exercise of stock options for cash ........................ 27,421 27,500
For cash .................................................. 732,157 733,201
Net loss for the year ended November 30, 1986 ............. (1,222,772) (1,222,772)
----------- ------------ -------------
Balance at November 30, 1986 ................................ 3,491,813 (2,882,092) 627,276
For cash, less issuance costs
of $9,500 .............................................. 518,364 519,400
Net loss for the year ended November 30, 1987 ............. (1,143,081) (1,143,081)
----------- ------------ -------------
Balance at November 30, 1987 ................................ 4,010,177 (4,025,173) 3,595
For cash, less issuance costs
of $10,500 ............................................. 157,171 157,500
Net loss for the year ended November 30, 1988 ............. (352,311) (352,311)
----------- ------------ -------------
Balance at November 30, 1988 ................................ 4,167,348 (4,377,484) (191,216)
For cash and the exchange of debt
due a shareholder ...................................... 230,548 231,000
Net loss for the year ended November 30, 1989 ............. (446,642) (446,642)
----------- ------------ -------------
Balance at November 30, 1989 ................................ 4,397,896 (4,824,126) (406,858)
For services .............................................. 239,529 240,000
Net loss for the year ended November 30, 1990 ............. (1,328,518) (1,328,518)
----------- ------------ -------------
Balance at November 30, 1990 ................................ 4,637,425 (6,152,644) (1,495,376)
For cash, less issuance costs of $1,630,241 ............... 5,533,759 5,569,759
Unit Purchase Option ...................................... 120 120
Redeemable Convertible Preferred Stock dividend ........... (19,843) (19,843)
For cash, less issuance costs of $126,900 ................. 947,700 953,100
Net loss for the year ended November 30, 1991 ............. (2,058,493) (2,058,493)
----------- ------------ -------------
Balance at November 30, 1991 ................................ $11,119,004 $(8,230,980) $ 2,949,267
</TABLE>
4
<PAGE> 5
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED)
(2 OF 2)
<TABLE>
<CAPTION>
PRICE
PER SHARE
DATE SHARE SHARES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Balance at November 30, 1991................................. 6,124,250 $ 61,243
Exercise of Class A Warrants for cash, December, 1991-
less issuance costs of $702,917 ........................ May, 1992 3.00 4,139,000 41,390
February, 1992-
Exercise of Class B Warrants for cash ..................... November, 1992 4.00 34,055 341
July, 1992- 2.00-
Exercise of stock options for cash ........................ November, 1992 2.19 30,100 301
Net loss for year ended November 30, 1992 .................
---------- --------
Balance at November 30, 1992 ................................ 10,327,405 103,275
December, 1992-
Exercise of Class B Warrants for cash ..................... October, 1993 4.00 29,766 298
March, 1993-
Exercise of Class M Warrants for cash ..................... October, 1993 1.00 600,179 6,002
March, 1993- 2.00-
Exercise of Stock Options for cash ........................ September, 1993 4.38 3,100 31
Exercise of Unit Purchase
Options and Underlying Class A Warrants May, 1993- 3.00-
for cash ............................................... October, 1993 3.30 10,002 100
Net loss for the year ended November 30, 1993 .............
---------- --------
Balance at November 30, 1993 ................................ 10,970,452 109,706
For cash, less issuance costs of $490,790 ................. August, 1994 0.80 5,297,000 52,970
Exercise of Stock Options for Cash......................... November, 1994 1.63-
3.59 100 1
Net loss for the year ended November 30, 1994 .............
---------- --------
Balance at November 30, 1994 ................................ 16,267,552 162,677
Exercise of Stock Options for Cash ........................ February, 1995 0.84 1,000 10
For cash, less issuance costs of $282,475 ................. July, 1995 1.25 1,500,000 15,000
Net loss for the year ended November 30, 1995 .............
---------- --------
Balance at November 30, 1995 ................................ 17,768,552 177,687
Exercise of Stock Options for Cash ........................ January, 1996 0.84 20,000 200
February, 1996 0.84- 46,666 467
1.00
For cash, less issuance costs of $143,587 ................. April, 1996 1.25 1,142,400 11,424
Exercise of Stock Options for Cash ........................ May, 1996 1.33 7,800 78
Exercise of Stock Options for Cash ........................ June, 1996 .84- 2,700 27
1.47
Exercise of Warrants for Cash ............................. June, 1996- 1.75- 166,000 1,660
July, 1996 2.00
Net loss for the nine month period ended
August 31, 1996 .........................................
---------- --------
Balance at August 31, 1996 .................................. 19,154,118 $191,543
========== ========
<CAPTION>
TOTAL
ADDITIONAL ACCUM- SHAREHOLDERS'
PAID-IN ULATED EQUITY
CAPITAL DEFICIT (DEFICIENCY)
---------- ------- ------------
<S> <C> <C> <C>
Balance at November 30, 1991................................. $11,119,004 $ (8,230,980) $ 2,949,267
Exercise of Class A Warrants for cash,
less issuance costs of $702,917 ........................ 11,672,693 11,714,083
Exercise of Class B Warrants for cash ..................... 135,879 136,220
Exercise of stock options for cash ........................ 65,774 66,075
Net loss for year ended November 30, 1992 ................. (5,390,637) (5,390,637)
----------- ------------- -----------
Balance at November 30, 1992 ................................ 22,993,350 (13,621,617) 9,475,008
Exercise of Class B Warrants for cash ..................... 118,766 119,064
Exercise of Class M Warrants for cash ..................... 594,177 600,179
Exercise of Stock Options for cash ........................ 13,119 13,150
Exercise of Unit Purchase
Options and Underlying Class A Warrants
for cash ............................................... 31,406 31,506
Net loss for the year ended November 30, 1993 ............. (6,135,830) (6,135,830)
----------- ------------- -----------
Balance at November 30, 1993 ................................ 23,750,818 (19,757,447) 4,103,077
For cash, less issuance costs of $490,790 ................. 3,693,840 3,746,810
Exercise of Stock Options for Cash.........................
201 202
Net loss for the year ended November 30, 1994 ............. (4,331,500) (4,331,500)
----------- ------------- -----------
Balance at November 30, 1994 ................................ 27,444,859 (24,088,947) 3,518,589
Exercise of Stock Options for Cash ........................ 834 844
For cash, less issuance costs of $282,475 ................. 1,577,625 1,592,625
Net loss for the year ended November 30, 1995 ............. (2,818,403) (2,818,403)
----------- ------------- -----------
Balance at November 30, 1995 ................................ 29,023,318 (26,907,350) 2,293,655
Exercise of Stock Options for Cash ........................ 16,675 16,875
44,116 44,583
For cash, less issuance costs of $143,587 ................. 1,272,989 1,284,413
Exercise of Stock Options for Cash ........................ 10,261 10,339
Exercise of Stock Options for Cash ........................ 3,283 3,310
Exercise of Warrants for Cash ............................. 308,990 310,650
Net loss for the nine month period ended
August 31, 1996 ......................................... (1,582,728) (1,582,728)
----------- ------------- -----------
Balance at August 31, 1996 .................................. $30,679,632 $(28,490,078) $ 2,381,097
=========== ============= ===========
</TABLE>
See notes to financial statements
5
<PAGE> 6
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
for the Period
January 15, 1982
Nine Months (Date of Inception)
Ended August 31, to
-------------------------------- August 31,
1996 1995 1996
----------- ----------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................... $(1,582,728) $(2,387,710) $(28,470,236)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization........................................ 47,530 113,028 810,517
Expenses paid through the issuance of common shares.................. -- -- 408,068
Loss on disposal of property......................................... -- -- 44,861
Changes in assets and liabilities:
Accounts receivable (increase) decrease............................ 129,726 72,552 (314,133)
Inventory (increase)............................................... (55,539) (43,556) (991,960)
Prepaid expenses (increase) decrease............................... 28,809 19,713 (43,352)
Other assets (increase)............................................ (24,585) (16,793) (239,933)
Accounts payable increase.......................................... 130,742 10,926 262,143
Accrued liabilities increase (decrease)............................ (384,093) 27,707 32,263
----------- ----------- ------------
Net cash (used in) operations..................................... (1,710,138) (2,204,132) (28,501,762)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities..................................... -- -- (12,166,540)
Proceeds from sale of marketable securities............................ -- 1,564,826 12,166,540
Acquisition of property and equipment (net)............................ (40,722) (18,157) (882,869)
Disbursement or accrual for note receivable - related party............ (11,885) (11,083) (202,125)
----------- ----------- ------------
Net cash (used in) provided by investing activities............... (52,607) 1,535,586 (1,084,994)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Shares................................ 1,670,170 1,589,564 30,435,607
Redemption of Convertible Preferred Shares............................. (19,843) -- (19,843)
Proceeds from issuance of notes payable and long-term debt............. -- -- 2,515,223
Repayments of notes payable and long-term debt......................... -- (30,000) (2,515,223)
----------- ----------- ------------
Net cash provided by financing activities......................... 1,650,327 1,559,564 30,415,764
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................................................ (112,418) 891,017 829,008
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD.............................................................. 941,426 840,245 --
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD.............................................................. $ 829,008 $ 1,731,262 $ 829,008
=========== =========== ============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
See Statements of Shareholders' Equity (Deficiency) for details of shares
issued in exchange for noncash consideration.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest for the nine-month periods ended August 31, 1996 and
1995 approximated $0 and $800, respectively.
See notes to financial statements.
6
<PAGE> 7
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
1. ORGANIZATION AND OPERATIONS
Somanetics Corporation (the "Company") is a Michigan corporation formed in
January 1982 to develop, manufacture and market processor-based medical
diagnostic and patient monitoring equipment. The equipment utilizes the
Company's "In Vivo Optical Spectroscopy," or "INVOS(R)" technology to provide
analyses of human blood and tissue. The Company is in the development stage
and has incurred research, product development and other expenses involved in
designing, developing, marketing and selling its products, as well as devoting
efforts to raising capital.
The Company is using its INVOS technology in processor-based medical equipment
(the INVOS Cerebral Oximeter and related single-patient use SomaSensor(R)) that
non-invasively and continuously monitors trends in regional hemoglobin oxygen
saturation of blood in the brain of an individual.
2. FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited interim financial statements of Somanetics
Corporation have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, such financial statements do
not include all of the information and footnotes normally included in the
Company's annual financial statements prepared in accordance with generally
accepted accounting principles, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
The accompanying unaudited interim financial statements reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. All such
adjustments are of a normal recurring nature, except those described in Note
5 and those not material to the Company's financial condition. Operating
results for the nine-month period ended August 31, 1996, are not necessarily
indicative of the results that may be expected for the year ending November 30,
1996, although the Company expects to continue to incur operating losses for
the foreseeable future. These financial statements should be read in
conjunction with the financial statements and footnotes thereto for the year
ended November 30, 1995 included in the Company's Annual Report on Form 10-K
for the fiscal year ended November 30, 1995.
The Company is in the development stage and, accordingly, has not achieved
sales necessary to support operations. The Company has incurred an accumulated
deficit of $28,490,078 through August 31, 1996. The Company had working
capital of $1,884,047, cash and cash equivalents of $829,008, total current
liabilities of $294,406 and shareholders' equity of $2,381,097, as of August
31, 1996.
7
<PAGE> 8
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
Although on June 6, 1996 the Company received clearance from the FDA to market
the Cerebral Oximeter in the United States, the Company's current financial
condition and recent results of operations and the status of its product
marketing efforts and sales have been affected by the process of obtaining such
clearance. On November 22, 1993, the Company received notification that the
FDA had rescinded the Company's 510(k) clearance to market the Cerebral
Oximeter. As a result, all commercial sales of the Company's products were
suspended and the Company notified its United States distributors to stop
selling the Cerebral Oximeter and to advise their customers to stop using the
device. In February 1994, the Company resumed marketing its products in
several foreign countries, including Japan, its largest market outside the
United States.
On February 1, 1995, the Company filed a new 510(k) application with the FDA.
On October 5, 1995, the Company received a written response from the FDA,
stating that the FDA could not determine if the device was substantially
equivalent to a legally marketed device, and that the FDA considered the
Company's 510(k) submission to be withdrawn. On February 13, 1996, the Company
filed a new 510(k) application with the FDA presenting additional information
not previously considered by the agency, identifying alternative predicate
devices and offering revisions to its product and its labeling. On June 6,
1996, the Company received clearance to market the INVOS 3100A Cerebral
Oximeter in the United States.
The Company currently is marketing Cerebral Oximeters and SomaSensors in 25
foreign countries, with sales in 13 countries in the first nine months of
1996. The Company expects to begin marketing the Cerebral Oximeter in other
countries after complying with each country's local laws. The Company began
marketing the Cerebral Oximeter in the United States on a limited basis in the
third quarter; most of the third quarter was devoted to product introduction
activities and replacing existing Cerebral Oximeters with the INVOS 3100A
Cerebral Oximeter. Product introduction activities, including engaging United
States distributors and hiring direct sales personnel, are expected to
continue into the fourth quarter. There can be no assurance that sales will
continue or increase as a result of such marketing efforts, or that, even if
they increase, they will provide sufficient cash to fund the Company's
operations or make the Company profitable.
As of August 31, 1996 the Company had 21 employees and four consultants. The
Company expects to hire 16 additional employees before the end of the fiscal
year, 12 in Sales and Marketing (three of whom have been hired), 1 in Research
and development (who has been hired), 2 in Manufacturing and Quality Control
(both of whom have been hired) and 1 in Administration. The Company expects to
incur these expenses before receiving substantially increased proceeds from
sales of its products, and such expenses will continue even if revenues do not
increase. Therefore, in the short-run, they are expected to increase the
Company's net losses.
8
<PAGE> 9
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
Management believes that markets exist for the products the Company has
developed; however, there is an inherent uncertainty associated with the
success of such new products. The likelihood of success of the Company must be
considered in view of the Company's limited resources and current financial
condition, the problems and expenses frequently encountered in connection with
formation of a new business, the ability to raise new funds, the development
and application of new technology, and the competitive environment in which the
Company intends to operate.
The net proceeds from previous sales of securities were sufficient to fund the
Company's working capital requirements into the third quarter ended August 31,
1996. Current sales are not sufficient to fund operations. On April 2, 1996,
the Company completed the placement of 571,200 Units, at a price of $2.50 per
Unit, for gross proceeds of $1,428,000, through an offering complying with
Regulation S under the Securities Act of 1933, as amended. The net proceeds to
the Company, after deducting the placement agents' fee and the expenses of the
offering, were approximately $1,284,000. Each Unit consists of two
newly-issued Common Shares, par value $0.01 per share, and one warrant to
purchase one Common Share.
The Warrants are immediately exercisable and transferable separately from the
Common Shares. Each Warrant entitles the holder to purchase one Common Share at
an initial exercise price of $1.75 per share, subject to adjustment, at any
time through April 1, 2001, unless earlier redeemed. The Warrants are
redeemable for $0.01 by the Company at any time if certain conditions are met.
The Company also granted the placement agent warrants to purchase 114,240
Common Shares at $1.25 per share exercisable during the four-year period
beginning April 2, 1997.
Pursuant to an amended agreement with Rauscher Pierce & Clark, Inc. and
Rauscher Pierce & Clark Limited (collectively, the "Placement Agent") in
connection with the Regulation S offering, the Company has agreed to permit a
person designated by the Placement Agent to attend meetings of the Company's
Board of Directors until the 1998 Annual Meeting of Shareholders and to
participate in discussions at such meetings. The Placement Agent has not yet
designated such person. The Company is no longer required by its agreements
with the Placement Agent to expand the size of its Board of Directors by two
persons or to appoint persons nominated or acceptable to the Placement Agent to
fill the vacancies.
Also during the third quarter, the Company received net proceeds of $313,961
from the exercise of various outstanding warrants and stock options.
Effective February 28, 1996, the Company redeemed all of its outstanding
Convertible Preferred Shares for $.01 per share at a total redemption cost to
the Company of approximately $19,843, and instead of the Convertible Preferred
Shares formerly issuable
9
<PAGE> 10
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
upon the exercise of certain options, the Company will pay $.01 to the person
exercising such options for each Convertible Preferred Share otherwise
receivable.
The Company believes that the cash and cash equivalents on hand at August 31,
1996 will be sufficient to sustain the Company's operations at budgeted levels
and its needs for liquidity into the fourth quarter of fiscal 1996. By that
time the Company will be required to raise additional cash either through
additional sales of products, through sales of securities, by incurring
additional indebtedness or by some combination of the foregoing. If the
Company is unable to raise additional cash by that time, it will be required to
further reduce or discontinue its operations.
The expected uses of the Company's cash and cash equivalents are based on
certain estimates and assumptions made by the Company. Such estimates and
assumptions are subject to change as a result of actual experience. There can
be no assurance that actual capital requirements necessary to market the
Cerebral Oximeter and SomaSensor, to develop enhancements to, and product
extensions of, the Cerebral Oximeter, to conduct research and development
concerning additional potential applications of INVOS technology and for
working capital will not be substantially greater than current estimates.
The Company does not believe that product sales will be sufficient to fund the
Company's operations in the fourth quarter ending November 30, 1996.
In September 1996, the Company received approximately, $29,400 from the
exercise of the remaining 30,983 outstanding Class M Warrants.
The Company proposes to offer up to 1,500,000 Common Shares, par value $.01 a
share, in an offering complying with Regulation S under the Securities Act of
1933, as amended (the "Act"). The Common Shares offered will not be registered
under the Act and may not be offered or sold in the United States or to a U.S.
person absent registration or an applicable exemption from the registration
requirements. However, such sales are subject to negotiation of definitive
agreements and the identification of sufficient interested buyers. There can
be no assurance that the Company will be able to raise additional cash.
As of August 31, 1996, there were 4,075,179 redeemable Class B Warrants and
5,001 non-redeemable Class B Warrants outstanding, all exercisable at $3.89 per
share, subject to adjustment. On September 13, 1996, the Company announced the
extension of the redemption date for its redeemable Class B Warrants, and the
expiration date for its non-redeemable Class B Warrants, to November 14, 1996.
Any Class B Warrants which have not been exercised before November 14, 1996
will no longer be exercisable to purchase Common Shares. Holders of Class B
Warrants will have no further rights beyond November 14, 1996, except to
receive, upon surrender of the Class B Warrant certificates evidencing redeemed
10
<PAGE> 11
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
Class B Warrants, payment of the redemption price of $.05 for each redeemable
Class B Warrant outstanding and not already exercised as of November 14, 1996.
There can be no assurance that additional Class B Warrant holders will
exercise their Warrants and it is unlikely they will do so as long as the
exercise price exceeds the market price of the Common Shares. The Company has
the right to reduce the exercise price of the Class B Warrants, to extend the
redemption date or both. If the proposed offering of Common Shares (described
above) is successful and if the Company determines not to further extend the
redemption date of its Class B Warrants, the Company expects to use a portion
of the proceeds of that offering to redeem its outstanding Class B Warrants.
Also as of August 31, 1996, there were 604,000 redeemable warrants outstanding,
exercisable at $2.00 a share until July 13, 2000, and 551,200 redeemable
warrants outstanding exercisable at $1.75 a share until April 1, 2001. These
warrants were issued in the Company's 1995 and 1996 Regulation S securities
offerings. The conditions permitting the Company to redeem these warrants have
not been met as of October 1, 1996. Between June 1, 1996 and July 12, 1996,
146,000 of the warrants exercisable at $2.00 a share and 20,000 of the warrants
exercisable at $1.75 a share had been exercised. There can be no assurance
that additional warrants will be exercised and it is unlikely that they will be
exercised if the exercise price exceeds the market price of the Common Shares.
The Company has the right to reduce the exercise price of these warrants.
Effective March 19, 1996, all outstanding Unit Purchase Options expired. None
of the Unit Purchase Options had been exercised between December 1, 1995 and
March 19, 1996.
The Company has no commitments for additional loans.
These factors, among others, raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventory is stated at the lower of cost or market on a first-in, first-out
(FIFO) basis. Inventory consists of:
<TABLE>
<CAPTION>
August 31, 1996 November 30, 1995
--------------- -----------------
<S> <C> <C>
Finished goods $455,343 $516,420
Work in process 305,412 219,076
Purchased components 231,205 200,925
-------- --------
Total $991,960* $936,421
======== ========
</TABLE>
* Net of an approximately $153,000 reserve for obsolete and excess inventory.
11
<PAGE> 12
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
Patents and Trademarks are recorded at cost and are being amortized on the
straight-line method over 17 years. Accumulated amortization was $30,876 and
$25,692 at August 31, 1996 and November 30, 1995, respectively.
Loss Per Common Share is computed using the weighted average number of Common
Shares outstanding during each period. Common Shares issuable under stock
options and warrants have not been considered in the computation of the net
loss per Common Share because such inclusion would be antidilutive.
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
August 31, 1996 November 30, 1995
--------------- -----------------
<S> <C> <C>
Professional fees $ 17,391 $ 75,702
Warranty 13,651 15,000
Insurance 3,122
Product Upgrades 32,848 149,954
Shareholder Lawsuits (Note 5) (34,719) 144,717
Other - 30,983
-------- --------
Total $ 32,263 $416,356
======== ========
</TABLE>
For a description of the change in the reserve for product upgrades, see Note
5.
5. COMMITMENTS AND CONTINGENCIES
Before the Company received FDA clearance to market the Cerebral Oximeter in
the United States, several domestic distributors of the INVOS Cerebral Oximeter
expressed their desire to terminate their distributor agreements with the
Company. The Company does not believe that their distributor agreements
require it to accept returns of products sold to distributors in connection
with a termination of the distribution agreement. The Company, however,
reserved $194,000 at November 30, 1995, for the uncollectibility of accounts
receivable from such distributors.
The Company terminated 11 of its 15 domestic distributors in fiscal 1996.
12
<PAGE> 13
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
Because of the significant change in the composition of the Company's U.S.
distributors, the change in the product being marketed by the U.S. distributors
(the INVOS 3100A, rather than the INVOS 3100), and the changed terms and
conditions applicable to the new and continuing distributors, the Company wrote
off substantially all of its receivables from domestic distributors in exchange
for the return of their, and their customers', old INVOS 3100 Cerebral Oximeters
and SomaSensors.
Additionally, in the third quarter ended August 31, 1996, the Company reversed
its reserves for the extra cost of exchanging new INVOS 3100A Cerebral Oximeters
with such persons for their old devices, for the costs of upgrading the old
devices for resale and for the cost of replacing SomaSensors recalled in
1993.
Additional distributors might terminate their agreements with the Company or be
terminated by the Company. Distributor terminations may increase the Company's
costs. There can be no assurance that the Company will be able to replace
distributors desiring to terminate their distribution agreements, engage
distributors or direct sales employees in additional territories, or retain its
existing distributors. The Company's inability to retain distributors or
engage replacement distributors or direct sales employees could have a material
adverse effect on its ability to market and sell its product.
Purchasers of eight units (out of a total of eighteen units) of the INVOS 2100
System, a product previously marketed by the Company have requested refunds
claiming, in some cases, that the device identified too many women as having a
high risk of breast cancer. The Company believes that the devices are
functioning as intended and that the purchasers have no contractual or other
right to return the devices and are not entitled to refunds. No provision has
been recorded in the financial statements for any refunds that may become due
to such purchasers or for any product liability claims because the Company
believes that successful assertion of the claims does not appear probable and
the ultimate amount of the loss, if any,
13
<PAGE> 14
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
cannot be reasonably estimated. If the Company must refund all or a
significant portion of the sales price for the INVOS 2100, or is exposed to any
product liability claims, its financial condition and liquidity could be
adversely affected.
The Company has not received any correspondence or inquiries regarding the
INVOS 2100 since fiscal 1991, except for a letter dated August 3, 1994, from
the FDA warning manufacturers of breast transillumination devices that these
devices are in violation of the Federal Food Drug and Cosmetics Act ("the Act")
in that their labeling is false or misleading and fails to bear adequate
directions for use. The Company responded to the FDA by explaining the INVOS
2100 had not been available for sale by the Company commercially or otherwise
since January 1989. The Company has not received any correspondence or
inquiries regarding the INVOS 2100 since fiscal 1991 (other than the August 3,
1994 letter from the FDA) and believes the devices currently in the domestic
marketplace are no longer being used, based on the manner in which the unit is
to be used and the instructions in the user manual. The Company believes no
further action is required.
On March 14, 1994, a shareholder of the Company filed suit in the United States
District Court for the Eastern District of Michigan, individually and on behalf
of all others similarly situated, against the Company, four of its present and
former directors and four other officers, former officers or employees of the
Company in an action captioned Jacobson, et al v. Somanetics Corporation, et
al. The plaintiff alleged that various registration statements filed under the
Securities Act of 1933, various reports filed under the Securities Exchange Act
of 1934 and various annual reports and press releases contained material
misstatements and omissions and that the Company and the named officers, former
officers and employees of the Company made material misstatements and
omissions. The plaintiffs sought recovery pursuant to Sections 11, 12(2) and
15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, Rule 10b-5 under the Securities Exchange Act of 1934 and
under common law for (i) rescission of their investment and compensation for
the lost use of the money invested, (ii) other compensatory damages, (iii)
punitive damages in the amount of $10,000,000, (iv) consequential damages, (v)
reasonable attorneys' fees, (vi) costs and disbursements and (vii) such other
relief as the court may deem just and proper.
On April 25, 1994, another shareholder of the Company filed suit in the United
States District Court for the Eastern District of Michigan, individually and on
behalf of all others similarly situated, against the Company and Gary D. Lewis,
the Company's former Chairman of the Board, in an action captioned Benjamin
Langford v. Somanetics Corporation and Gary D. Lewis. The allegations, relief
requested and consequences of the action are similar to those in the Jacobson
case described above.
The Company entered into a Stipulation And Agreement Of Compromise And
Understanding (the "Agreement") with counsel for plaintiff Earl J. Jacobson.
On July 3, 1996 the court
14
<PAGE> 15
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
issued a final judgment approving the Agreement and certifying the class.
The Agreement (along with an understanding with the Company's insurance
company) requires the Company to pay $250,000 in cash, less the amount of its
legal fees incurred in this action, and the Company's insurance company is
required to pay $250,000 in cash, plus the amount the Company has incurred in
attorneys' fees. Pursuant to the Agreement, the Company and its insurance
company paid an aggregate of $500,000 to an escrow agent in the second quarter
ended May 31, 1996. However, approximately 11 persons, including Benjamin
Langford, have opted out of the Jacobson action and this settlement and,
therefore, are not barred by the settlement from pursuing their own claims
against the Company. Mr. Langford's action is still pending against the
Company, although it is no longer a class action. The Company's motion to
dismiss the Langford action was denied and discovery is proceeding.
The ultimate outcome of the Langford litigation cannot presently be determined.
If the Company must pay any additional significant amount to defend or settle
the Langford lawsuit or if it must pay a significant judgment in connection
with this lawsuit, its financial condition and liquidity could be materially
adversely affected, and capital intended for use in the marketing of the
Cerebral Oximeter or to develop enhancements to, or product extensions of, the
Cerebral Oximeter or other products may have to be reallocated to satisfy any
such requirements. In addition, any such expenses will, when incurred, have
the effect of increasing the Company's net loss (or decreasing its net income)
during the periods in which they are incurred.
The Company may become subject to product liability claims by patients or
doctors and may become a defendant in product liability or malpractice
litigation. The Company has obtained product liability insurance and an
umbrella policy. There can be no assurance that the Company will be able to
retain such insurance or that such insurance would be sufficient to protect the
Company against such product liability.
6. SUBSEQUENT EVENTS
In September 1996, the Company entered into a Master Distribution Agreement with
MedLink Europe, an operational services company located in Amsterdam, with
offices in other parts of Europe. MedLink helps U.S.-based companies execute
their marketing activities throughout Europe, and is expected to provide the
Company with sales and marketing support as well as distribution, customer
service and technical and product service.
The Company has entered into a Consulting Order with NeuroPhysics Corporation,
of Groton, Massachusetts, a research and development company, pursuant to which
the Company is supporting NeuroPhysics' research into the feasibility and
development of prototypes of four new products. In exchange, NeuroPhysics has
granted the Company certain rights in the new products, subject to the rights
of the United States Federal government, which is also funding
15
<PAGE> 16
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
the research, in the new products and a royalty in favor of NeuroPhysics.
The potential new products are noninvasive, in vivo, near-infrared
spectroscopy devices that monitor liver oxygenation for assessing and
controlling hemorrahagic shock, locate and assess subdural hematomas in
head trauma patients, monitor certain blood gases and monitor fetal cerebral
blood oxygenation during labor and delivery. There can be no assurance that
the Company will be able to successfully apply the INVOS technology or related
technologies in the development of commercially viable products or that
competitors will not develop and market similar products before the Company
does.
16
<PAGE> 17
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1996
LIQUIDITY AND CAPITAL RESOURCES
Somanetics Corporation is a development stage company formed to develop,
manufacture and market processor-based medical diagnostic and patient
monitoring equipment using INVOS(R) technology. Since inception (January 15,
1982), the Company has incurred an accumulated deficit of $28,490,078 through
August 31, 1996.
Net cash used in operations during the nine-month period ended August 31, 1996
was approximately $1,710,000. Cash was used primarily to (i) fund the
Company's net loss, consisting primarily of selling, general and administrative
expenses and research, development and engineering expenses (approximately
$1,535,000, net of depreciation and amortization expense), (ii) decrease
accrued liabilities (approximately $384,000) primarily as a result of the (a)
payment of professional fees, (b) payment of expenses and settlement costs
associated with the class action lawsuits, (c) reversal of its reserve to
exchange unpaid domestic INVOS 3100 Cerebral Oximeters for new INVOS 3100A's
and upgrade the INVOS 3100's received, (d) reversal of its reserve to replace
the 1993 recalled domestic SomaSensors, and (e) exchange of paid INVOS 3100's
for new INVOS 3100A's, and (iii) increase inventory (approximately $56,000) as
a result of increased manufacturing activity in preparation for domestic sales
and returns of INVOS 3100's before shipment of replacement INVOS 3100A's.
These uses of cash were partially offset by (i) a decrease in accounts
receivable (approximately $130,000) due to reduced sales, and (ii) a $131,000
increase in accounts payable due to increased legal and professional expenses,
slower payment of trade payables and increased inventory purchases. Management
expects working capital requirements to increase if sales increase.
Effective February 28, 1996, the Company redeemed all of its outstanding
Convertible Preferred Shares for $.01 per share at a total redemption cost to
the Company of approximately $19,843, and instead of the Convertible Preferred
Shares formerly issuable upon the exercise of certain options, the Company will
pay $.01 to the person exercising such options for each Convertible Preferred
Share otherwise receivable.
On April 2, 1996, the Company completed the placement of 571,200 Units, at a
price of $2.50 per Unit, for gross proceeds of $1,428,000, through an offering
complying with Regulation S under the Securities Act of 1933, as amended. The
net proceeds to the Company, after deducting the placement agents' fee and the
expenses of the offering, were approximately $1,284,000. Each Unit consists of
two newly-issued Common Shares, par value $0.01 per share, and one warrant to
purchase one Common Share.
The Warrants are immediately exercisable and transferable separately from the
Common Shares. Each Warrant entitles the holder to purchase one Common Share at
an initial exercise
17
<PAGE> 18
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1996
price of $1.75 per share, subject to adjustment, at any time through April 1,
2001, unless earlier redeemed. The Warrants are redeemable for $0.01 by the
Company at any time after July 2, 1996, if certain conditions are met.
The Company also granted the placement agent warrants to purchase 114,240
Common Shares at $1.25 per share exercisable during the four-year period
beginning April 2, 1997.
Between June 1, 1996 and July 12, 1996, 146,000 warrants issued in the
Company's 1995 Regulation S offering and exercisable at $2.00 a share, and
20,000 warrants issued in the Company's 1996 Regulation S offering and
exercisable at $1.75 a share, were exercised, and the Company paid the
placement agent in such offerings a $16,350 fee in connection with those
exercises. Also, during the first three quarters of fiscal 1996, the Company
has received approximately $75,000 from the exercise of employee stock options.
As of August 31, 1996, the Company had working capital of $1,884,047 and cash
and cash equivalents of $829,008.
The Company believes that the cash and cash equivalents on hand at August 31,
1996 will be sufficient to sustain the Company's operations at budgeted levels
and its needs for liquidity into the fourth quarter of fiscal 1996. By that
time the Company will be required to raise additional cash either through
additional sales of products, through sales of securities, by incurring
additional indebtedness or by some combination of the foregoing. If the
Company is unable to raise additional cash by that time, it will be required to
reduce or discontinue its operations.
The expected uses of the Company's cash and cash equivalents are based on
certain estimates and assumptions made by the Company. Such estimates and
assumptions are subject to change as a result of actual experience, and there
can be no assurance that actual capital requirements necessary to market the
Cerebral Oximeter and SomaSensor, to develop enhancements to, and product
extensions of, the Cerebral Oximeter, to conduct research and development
concerning additional potential applications of INVOS and other technology and
for working capital will not be substantially greater than current estimates.
Although on June 6, 1996 the Company received clearance from the FDA to market
the Cerebral Oximeter in the United States, the Company's current financial
condition and recent results of operations and the status of its product
marketing efforts and sales have been affected by the process of obtaining such
clearance. On November 22, 1993, the Company received notification that the
FDA had rescinded the Company's 510(k) clearance to market the Cerebral
Oximeter. As a result, all commercial sales of the Company's products were
suspended and the Company notified its United States distributors to stop
selling the Cerebral Oximeter and to advise their customers to stop using the
device. In February 1994, the Company resumed
18
<PAGE> 19
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1996
marketing its products in several foreign countries, including Japan, its
largest market outside the United States.
On February 1, 1995, the Company filed a new 510(k) application with the FDA.
On October 5, 1995, the Company received a written response from the FDA,
stating that the FDA could not determine if the device was substantially
equivalent to a legally marketed device, and that the FDA considered the
Company's 510(k) submission to be withdrawn. On February 13, 1996, the Company
filed the new 510(k) application with the FDA presenting additional information
not previously considered by the agency, identifying alternative predicate
devices and offering revisions to its product and its labeling. On June 6,
1996, the Company received clearance to market the INVOS Cerebral Oximeter in
the United States.
The Company does not believe that product sales will be sufficient to fund the
Company's operations in the fourth quarter ending November 30, 1996.
In September 1996, the Company received approximately $29,400 from the exercise
of the remaining 30,983 outstanding Class M Warrants.
The Company proposes to offer up to 1,500,000 Common Shares, par value $.01 a
share, in an offering complying with Regulation S under the Securities Act of
1933, as amended (the "Act"). The Common Shares offered will not be registered
under the Act and may not be offered or sold in the United States or to a U.S.
person absent registration or an applicable exemption from the registration
requirements. However, such sales are subject to negotiation of definitive
agreements and the identification of sufficient interested buyers. There can
be no assurance that the Company will be able to raise additional cash.
The Company did not receive any proceeds from the exercise of Class B Warrants
during the nine-month period ended August 31, 1996. As of March 31, 1992, the
Company gave notice of the redemption of the redeemable Class B Warrants at
$.05 per Class B Warrant. The Company has extended the redemption date ten
times, most recently to November 14, 1996. Any redeemable Class B Warrants
which have not been exercised before November 14, 1996, will no longer be
exercisable to purchase Common Shares. Holders of redeemable Class B Warrants
will have no further rights beyond November 14, 1996, except to receive, upon
surrender of the Class B Warrant certificates evidencing redeemed Class B
Warrants, payment of the redemption price of $.05 for each redeemable Class B
Warrant outstanding and not already exercised as of November 14, 1996. As of
October 1, 1996, the closing sale price of the Common Shares was $2.063. As of
August 31, 1996, 4,080,180 Class B Warrants were outstanding, including 5,001
non-redeemable Class B Warrants, each exercisable to purchase one Common Share
at $3.89 a share, subject to adjustment. There can be no assurance that
additional Class B Warrant holders will exercise their Warrants and it is
unlikely that they will do so as long as the exercise price exceeds the market
price of the Common Shares. The
19
<PAGE> 20
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1996
Company has the right to reduce the exercise price of the Class B Warrants,
extend the redemption date, or both. If the proposed offering of Common Shares
(described above) is successful and if the Company determines not to further
extend the redemption date of its Class B Warrants, the Company expects to use
a portion of the proceeds of that offering to redeem its outstanding Class B
Warrants. The maximum potential redemption price for the Class B Warrants is
$203,759, which the Company will be required to pay in November 1996 if the
Class B Warrants are redeemed.
Also as of August 31, 1996, there were 604,000 redeemable warrants outstanding,
exercisable at $2.00 a share until July 13, 2000, and 551,200 redeemable
warrants outstanding exercisable at $1.75 a share until April 1, 2001. These
warrants were issued in the Company's 1995 and 1996 Regulation S securities
offerings. The conditions permitting the Company to redeem these warrants have
not been met as of October 1, 1996. There can be no assurance that additional
warrants will be exercised and it is unlikely that they will be exercised if
the exercise price exceeds the market price of the Common Shares. The Company
has the right to reduce the exercise price of these warrants.
Effective March 19, 1996, all outstanding Unit Purchase Options expired. None
of the Unit Purchase Options had been exercised between December 1, 1995 and
March 19, 1996.
The Company has no loan commitments.
There can be no assurance that even if the Company receives additional capital,
it will be able to achieve the level of sales necessary to sustain its
operations. There can be no assurance that the Company will be able to obtain
any funds on terms acceptable to the Company and at times required by the
Company through sales of the Company's products, sales of securities or loans
in sufficient quantities.
Before the Company received FDA clearance to market the Cerebral Oximeter in
the United States, several domestic distributors of the INVOS Cerebral Oximeter
expressed their desire to terminate their distributor agreements with the
Company. The Company does not believe that their distributor agreements
require it to accept returns of products sold to distributors in connection
with a termination of the distribution agreement. The Company, however, has
reserved $194,000 at November 30, 1995, for the uncollectibility of accounts
receivable from such distributors.
The Company terminated 11 of its 15 domestic distributors in fiscal 1996, and
plans to have 6 United States distributors for its products and additional
employees selling its product directly in the remaining territories. The Company
has entered into new distribution agreements with three of its four existing
United States distributors on different terms and conditions, including
different prices. It expects to add the remaining three
20
<PAGE> 21
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1996
distributors and additional direct sales personnel in fiscal 1996. There can
be no assurance that the Company will be able to replace its terminated
United States distributors, and any inability to retain distributors or
engage replacement distributors could have a material adverse effect on its
ability to market and sell its product. Because of the significant change in
the composition of the Company's U.S. distributors, the change in the product
being marketed by the U.S. distributors (the INVOS 3100A, rather than the INVOS
3100), and the changed terms and conditions applicable to the new and
continuing distributors, the Company wrote off substantially all of its
receivables from domestic distributors in exchange for the return of their, and
their customers', old INVOS 3100 Cerebral Oximeters and SomaSensors (which
returns resulted in a $68,000 recovery of bad debts in the third quarter ended
August 31, 1996). Because the Company has more INVOS 3100 Cerebral Oximeters
that it expects to sell in the next year, the Company accrued a reserve for the
value of the devices in excess of one year's supply in the third quarter ended
August 31, 1996 (approximately $47,300).
The Company intends to upgrade the returned INVOS 3100 Cerebral Oximeters and
sell them in countries that do not require compliance with the standards met by
the INVOS 3100A Cerebral Oximeter. In addition, the Company intends to sell
(rather than exchange) INVOS 3100A Cerebral Oximeters to United States
distributors and customers who had not paid for the INVOS 3100 Cerebral
Oximeters they returned to the Company. Therefore, in the third quarter ended
August 31, 1996, the Company reversed its $57,200 reserve for the extra cost of
exchanging new INVOS 3100A Cerebral Oximeters with such persons for their old
devices and for the costs of upgrading the old devices for resale. Continuing
distributors and customers who paid for their INVOS 3100 Cerebral Oximeters
will be permitted to exchange their old devices for a new one. As a result,
each distributor and customer will only pay once and will receive a new model
Cerebral Oximeter. The Company also reversed its $27,000 reserve for the cost
of replacing SomaSensors recalled in 1993.
On March 14, 1994, a shareholder of the Company filed suit in the United States
District Court for the Eastern District of Michigan, individually and on behalf
of all others similarly situated, against the Company, four of its present and
former directors and four other officers, former officers or employees of the
Company in an action captioned Jacobson, et al v. Somanetics Corporation, et
al. The plaintiff alleges that various registration statements filed under the
Securities Act of 1933, various reports filed under the Securities Exchange Act
of 1934 and various annual reports and press releases contained material
misstatements and omissions and that the Company and the named officers, former
officers and employees of the Company made material misstatements and
omissions. The plaintiffs seek recovery pursuant to Sections 11, 12(2) and 15
of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, Rule 10b-5 under the Securities Exchange Act of 1934 and
under common law for (i) rescission of their investment and compensation for
the lost use of the money invested, (ii) other compensatory damages, (iii)
punitive damages in the amount of
21
<PAGE> 22
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1996
$10,000,000, (iv) consequential damages, (v) reasonable attorney's fees, (vi)
costs and disbursements and (vii) such other relief as the court may deem just
and proper.
On April 25, 1994, another shareholder of the Company filed suit in the United
States District Court for the Eastern District of Michigan, individually and on
behalf of all others similarly situated, against the Company and Gary D. Lewis,
the Company's former Chairman of the Board, in an action captioned Benjamin
Langford v. Somanetics Corporation and Gary D. Lewis. The allegations, relief
requested and consequences of the action are similar to those in the Jacobson
case described above.
The Company entered into a Stipulation And Agreement Of Compromise And
Understanding (the "Agreement") with counsel for plaintiff Earl J. Jacobson.
On July 3, 1996 the court issued a final judgement approving the Agreement and
certifying the class. The Agreement (along with an understanding with the
Company's insurance company) requires the Company to pay $250,000 in cash, less
the amount of its legal fees incurred in this action, and the Company's
insurance company is required to pay $250,000 in cash, plus the amount the
Company has incurred in attorneys' fees. Pursuant to the Agreement, the
Company and its insurance company paid an aggregate of $500,000 to an escrow
agent in the second quarter ended May 31, 1996. However, approximately 11
persons, including Benjamin Langford, have opted out of the Jacobson action and
this settlement and, therefore, are not barred by the settlement from pursuing
their own claims against the Company. Mr. Langford's action is still pending
against the Company although it is no longer a class action. The Company's
motion to dismiss the action was denied and discovery is proceeding.
The ultimate outcome of the Langford litigation cannot presently be determined.
If the Company must pay any significant additional amount to defend or settle
the Langford lawsuit or if it must pay a significant judgment in connection
with this lawsuit, its financial condition and liquidity could be materially
adversely affected, and capital intended for use in the marketing of the
Cerebral Oximeter or to develop enhancements to, or product extensions of, the
Cerebral Oximeter or other products may have to be reallocated to satisfy any
such requirements. In addition, any such expenses will, when incurred, have
the effect of increasing the Company's net loss (or decreasing its net income)
during the periods in which they are incurred.
RESULTS OF OPERATIONS
Since the Company's inception (January 15, 1982) its primary activities have
consisted of research and development of the INVOS technology, the INVOS 2100,
the INVOS Cerebral Oximeter and the related disposable SomaSensor. The Company
is in the development stage and has accumulated losses of $28,470,236.
22
<PAGE> 23
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1996
For the three and nine-month periods ended August 31, 1996, the Company
realized a 24% and a 34% reduction in the respective net losses over the same
periods in fiscal 1995. The decrease for the nine-month period is primarily
attributable to a 33% reduction in operating expenses, partially offset by a
35% reduction in sales.
During the three-month periods ended August 31, 1996 and 1995, the Company
recognized revenues of $99,541 and $171,652, respectively. For the nine-month
periods ended August 31, 1996 and 1995, the Company recognized revenues of
$699,006 and $1,078,277, respectively. The decrease in sales for the third
quarter of 1996, as compared to the third quarter of 1995, is primarily
attributable to a more than 20% decrease in the average selling price of
Cerebral Oximeters to distributors and lower sales in the European market.
The decrease in sales for the nine-month period was primarily attributable to
a more than 20% decrease in the average selling price of Cerebral Oximeters to
distributors and reduced shipments to Europe and to Baxter Limited in Japan.
Sales of refurbished units, commercial units and SomaSensors comprised
approximately 43%, 26% and 31%, respectively, of the Company's sales in the
third quarter of fiscal 1996 and 19%, 45%, and 36%, respectively, of the
Company's sales in the third quarter of fiscal 1995. Sales of refurbished
units, commercial units and SomaSensors comprised approximately 12%, 70% and
18%, respectively, of the Company's sales in the nine months ended August 31,
1996, and 9%, 74% and 17%, respectively, of the Company's sales in the nine
months ended August 31, 1995. All 1995 and approximately 70% (for the third
quarter) and approximately 95% (for the first nine months) of 1996 sales were
export sales. Two international distributors accounted for approximately 68%
and 14%, respectively, of total revenues for the nine months ended August 31,
1996 and three international distributors accounted for approximately 49%, 25%
and 9%, respectively, of total revenues for the three months ended August 31,
1996. Two international distributors accounted for approximately 53% and 12%,
respectively, of total revenues in the nine months ended August 31, 1995, and
two international distributors accounted for approximately 30% and 26%,
respectively, of total revenues in the three months ended August 31, 1995.
As described above in "Liquidity and Capital Resources," all commercial sales
were suspended in late November 1993, upon notification from the FDA that it
was rescinding the Company's 510(k) clearance. FDA clearance is necessary to
allow the Company to market its product in the United States. On June 6, 1996,
the Company received clearance from the United States Food and Drug
Administration to market its INVOS 3100A Cerebral Oximeter in the United
States. See "Liquidity and Capital Resources" for a description of the effects
of the FDA's rescission of the Company's 510(k) clearance in 1993 on the
Company's distributors and terminations of distributors.
23
<PAGE> 24
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1996
There can be no assurance that the publication of adverse results from research
regarding the Cerebral Oximeter, the events leading to a voluntary recall of
SomaSensors in October 1993, the FDA's rescission of the Company's 510(k)
clearance for the Cerebral Oximeter in 1993, the FDA's actions relating to the
INVOS 2100 and the Company's financial condition will not adversely affect the
Company's reputation or its ability to market and sell its device.
The Company expects Cerebral Oximeter sales to increase from third quarter 1996
levels, although Baxter Limited is not expected to order again until the first
or second quarter of fiscal 1997 and the Company expects to continue to engage
its remaining United States distributors and hire direct sales personnel in the
fourth quarter of fiscal 1996. The Company expects sales of the disposable
SomaSensor to become a larger portion of the Company's revenues in the future
after the Company sells a significant number of Cerebral Oximeters to
distributors and they are resold to hospitals. No assurance can be given that
sales of the Cerebral Oximeter and SomaSensor will provide sufficient cash to
fund the Company's operations, and the Company does not believe that product
sales will be sufficient to fund the Company's operations in the fourth quarter
ending November 30, 1996.
Gross margin as a percentage of revenues for the quarters ended August 31, 1996
and 1995 were approximately 32% and 46%, respectively. Gross margin as a
percentage of revenues for the nine-month periods ended August 31, 1996 and
1995 were approximately 53% and 51%, respectively. Gross margin as a
percentage of revenues decreased for the quarter ended August 31, 1996 from the
fiscal 1995 level, primarily because 43% of total revenues in the three-month
period ended August 31, 1996 consisted of sales of refurbished Cerebral
Oximeters, which are sold approximately at cost, thereby reducing overall gross
margin and an increase in the cost of the SomaSensor, partially offset by an
approximately 10% decrease in materials cost for the Cerebral Oximeter. Gross
margin as a percentage of revenues increased in the nine-month period ended
August 31, 1996 over the same period in 1995 primarily because the materials
cost for the oximeter has decreased approximately 10%, partially offset by an
increase in the cost of the SomaSensor and increased sales of refurbished
Cerebral Oximeters. Excluding sales of refurbished units, gross margins
increased slightly over the same period in 1995 primarily as a result of lower
material costs for the oximeter, partially offset by lower average selling
prices for the Cerebral Oximeter.
The direct and indirect costs to manufacture Cerebral Oximeters are expected to
decline as a percentage of sales as and if (i) the Company increases sales,
production and volume purchases, and (ii) the Company ceases to incur
non-recurring tooling and manufacturing charges. However, the Company expects
to incur additional non-recurring tooling costs, manufacturing costs and
engineering costs in fiscal 1996 in connection with enhancements to the
SomaSensor and the production of the INVOS 3100A Cerebral Oximeter. Any new
products or enhancements developed during fiscal 1996 might also increase such
costs. In
24
<PAGE> 25
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1996
addition, margins might be favorably impacted if direct sales by the
Company in the United States increase the Company's average selling price of
its products.
The Company incurred research, development and engineering expenses of $44,685
and $50,232 for the fiscal quarters ended August 31, 1996 and 1995,
respectively, and $147,353 and $240,796 for the nine-month periods ended August
31, 1996 and 1995, respectively. The decrease for the nine-month period is
primarily attributable to an approximately $70,000 charge (in 1995) to
engineering expenses for obsolete purchased parts inventory relating to
engineering design changes to the Cerebral Oximeter model designed to comply
with TUV. The decrease for the three-month period is primarily attributable to
one fewer engineer. Research, development and engineering activities in fiscal
1996 consisted primarily of defending the previous 510(k) applications,
preparing and filing a new 510(k) application in February 1996, developing
improvements to the SomaSensor and completing modifications to the INVOS
Cerebral Oximeter requested by the FDA. Such activities in fiscal 1995
consisted primarily of developing improvements to the SomaSensor, evaluating
the results of the clinical trials supporting the 510(k) submission (for the
nine-month period), preparing and defending the 510(k) application and gaining
the CE mark and CSA certification for the INVOS 3100A Cerebral Oximeter (for
the nine-month period) and purchasing materials.
Research, development and engineering expenses are expected to increase due to
(i) the hiring of three additional persons in this department since May 31,
1996 to support new projects, and (ii) projects for new product development,
testing and possible future marketing. The Company expects to incur research,
development and engineering expense to develop and test product extensions of
the Cerebral Oximeter for use on newborns in operating rooms and intensive care
units, enhancements to the Cerebral Oximeter and other uses of the Company's
technology and related technologies. The Company has entered into a Consulting
Order with NeuroPhysics Corporation pursuant to which the Company is supporting
NeuroPhysics' research into the feasibility and development of prototypes of
four new products. See Note 6 of Notes to Financial Statements. The Company
expects this order to increase its research and development expenses by
approximately $11,000 a month.
Selling, general and administrative expenses for the fiscal quarters ended
August 31, 1996 and 1995 totaled $678,766 and $923,150, respectively, and
$1,878,482 and $2,774,069 for the nine-month periods ended August 31, 1996 and
1995, respectively. For the three-month period ended August 31, 1996 over the
same period in 1995, the decrease is primarily due to a $101,000 reduction in
salaries, wages and related expenses, a $75,000 reduction in other fees, a
$45,000 reduction in facility expenses, a $68,000 bad debt recovery, a
$57,000 reversal of the Cerebral Oximeter exchange and upgrade reserve, a
$27,000 reversal of the reserve for replacing SomaSensors recalled in 1993,
partially offset by a $47,000 reserve accrued for excess INVOS 3100 Cerebral
Oximeters in inventory and a $40,000 increase in selling-related expenses. The
decrease for the nine-month period ended August 31, 1996 from the same
25
<PAGE> 26
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1996
period in 1995 is primarily due to a $499,000 reduction in salaries, wages and
related expenses, a $107,000 reduction in selling-related expenses, a $132,000
reduction in facility expenses, a $104,000 reduction in other fees, a $68,000
bad debt recovery, a $57,000 reversal of the Cerebral Oximeter exchange and
upgrade reserve, and a $27,000 reversal of the reserve for replacing
SomaSensors recalled in 1993, partially offset by a $47,000 reserve accrued for
excess INVOS 3100 Cerebral Oximeters in inventory.
Salaries, wages, and related expenses, including expenses for temporary
employees and consulting services, decreased approximately $101,000, or 21%,
for the fiscal quarter ended August 31, 1996 over the fiscal quarter ended
August 31, 1995, and approximately $499,000, or 34%, for the nine-month period
ended August 31, 1996 over the same period in 1995. The decreases for the
three- and nine-month periods over the comparable periods in 1995 are primarily
attributable to reductions in payroll and related benefits as a result of a
reduction in workforce from an average of 25 employees during the periods ended
August 31, 1995 to an average of 18-19 employees during the periods ended
August 31, 1996, and for the nine-month period, reductions in the incentive
compensation accrual and consulting services. The Company has hired 11
employees (and four consultants) since May 31, 1996 and expects to hire 10
additional employees as needed, 9 in Sales and Marketing and 1 in
Administration during the remainder of fiscal 1996 which will increase
salaries, wages and related expenses in the future. The Company expects to
incur these expenses before receiving substantially increased proceeds from
sales of its products, and such expenses will continue even if revenues do not
increase. Therefore, in the short-run, they are expected to increase the
Company's net losses.
Selling expenses, including expenses for travel, entertainment, marketing,
clinical research and industry trade show participation, increased
approximately $40,000, or 41%, for the fiscal quarter ended August 31, 1996
over the fiscal quarter ended August 31, 1995, and decreased approximately
$107,000, or 37%, for the nine-month period ended August 31, 1996 over the same
period in 1995. The increase for the three-month period ended August 31, 1996
over the same period in 1995 is primarily attributable to additional
distributor support and demonstration units placed in the domestic market
place, partially offset by a reduction in clinical research and travel-related
expenses associated with training the Company's international distributors.
The decrease for the nine-month period was primarily due to reduced clinical
research and travel-expenses associated with training the Company's
international distributors and reduced expenses associated with trade show
participation. The Company expects selling, marketing, travel, entertainment
and trade show expenses to increase in conjunction with resumed marketing in
the United States, engaging and training new United States distributors and
additional direct sales personnel and supporting existing distributors and
increased sales efforts in the international markets. Clinical research
expenses are expected to increase as the Company tests product extensions of
the Cerebral Oximeter in a clinical setting.
26
<PAGE> 27
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1996
Monthly office expenses, including lease commitments, supplies, subscriptions
and related expenses decreased approximately $45,000, or 34%, for the
three-month period ended August 31, 1996, over the same period last year, and
approximately $132,000, or 33%, for the nine- month period ended August 31,
1996 over the same period in 1995, primarily due to the reduction in personnel
and the expiration of operating lease commitments. The Company expects these
expenses to increase as the Company hires additional personnel.
As described in "Liquidity and Capital Resources", in the third quarter ended
August 31, 1996, (i) returns of INVOS 3100 Cerebral Oximeters by domestic
distributors whose receivables had been written off resulted in a $68,000
recovery of bad debts, (ii) the Company accrued a $47,300 reserve for the value
of INVOS 3100 Cerebral Oximeters in excess of one year's supply, (iii) the
Company reversed its $57,200 reserve for the extra cost of exchanging new INVOS
3100A Cerebral Oximeters for INVOS 3100 Cerebral Oximeters held by domestic
distributors who had not yet paid for their devices, and the cost of upgrading
the old devices for a new one, and (iv) the Company reversed its $27,000
reserve for the replacement of SomaSensors recalled in 1993. These amounts are
included in Selling, General and Administrative expenses for the third quarter
ended August 31, 1996.
Other income, including interest income and expense, increased approximately
$6,000 for the three-month period ended August 31, 1996 over the comparable
three-month period in fiscal 1995, and decreased approximately $2,000 for the
nine-month period ended August 31, 1996 over the comparable nine-month period
in fiscal 1995. The increase in the three-month period ended August 31, 1996
over the same period last year, is the result of sub-lease income received on a
portion of the Company's facilities, partially offset by a reduction in
interest income primarily as a result of the lower balance of cash available
for investment. For the nine-month period ended August 31, 1996, the reduction
is the result of reduced interest income, partially offset by sub-lease income
from a portion of the Company's facilities. The Company expects interest
income to decrease as it continues to use cash in its operations, unless its
proposed offering of Common Shares is successful, thereby increasing its cash
available for investment purposes.
Each of the above statements regarding future revenues or expenses may be a
"forward looking statement" within the meaning of the Securities Exchange Act
of 1934. Such statements are subject to important factors that could cause
actual results to differ materially from those in the forward-looking
statement, including the factors set forth in this Management's Discussion and
Analysis of Financial Condition and Results of Operations, and the factors set
forth under the caption "Risk Factors" on pages 15-25 of the prospectus
included in Post-Effective Amendment No. 6 to the Company's Registration
Statement on Form S-1 (file no. 33-38438; effective April 4, 1996).
27
<PAGE> 28
PART II OTHER INFORMATION
Item 1. Legal Proceedings
For a description of the settlement effective July 3, 1996 of a suit filed by a
shareholder of the Company on March 14, 1994 in the United States District
Court for the Eastern District of Michigan, individually and on behalf of all
others similarly situated, against the Company, four current and former
directors and four other officers, former officers or employees of the Company
in an action captioned Jacobson, et al v. Somanetics Corporation, et al, see
Note 5 of Notes to Financial Statements included in Part I of this Report,
which description is incorporated in this Item 1 by reference.
For a description of a suit filed by another shareholder of the Company on
April 25, 1994 in the United States District Court for the Eastern District of
Michigan, individually and on behalf of all others similarly situated, against
the Company and Gary D. Lewis, the Company's former Chairman, in an action
captioned Benjamin Langford v. Somanetics Corporation and Gary D. Lewis, see
Note 5 of Notes to Financial Statements included in Part I of this Report,
which description is incorporated in this Item 1 by reference.
As described in Note 5, on July 3, 1996, the court issued a final judgement
approving the Stipulation And Agreement of Compromise And Understanding,
regarding the settlement of the Jacobson action, and certifying the class.
However, approximately 11 persons, including Benjamin Langford, have opted out
of the Jacobson action and this settlement and, therefore, are not barred by
the settlement from pursuing their own claims against the Company. Mr.
Langford's action is still pending against the Company, although it is no
longer a class action. The Company's motion to dismiss the Langford action was
denied and discovery is proceeding.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Engagement Letter, dated as of
September 9, 1996, between Somanetics Corporation and
Gruntal & Co., Incorporated.
10.2 Consulting Order, dated as of October
1, 1996, among Somanetics Corporation and NeuroPhysics
Corporation, Hugh F. Stoddart and Hugh A. Stoddart,
Ph.D., as Consultants.
27.1 Financial Data Schedule
28
<PAGE> 29
(b) Reports on Form 8-K
The Company filed a Form 8-K, dated April 3, 1996, to announce under
Item 5 that it had completed the placement of 571,200 Units, at a
price $2.50 per Unit, for gross proceeds of $1,428,000 through an
offering complying with Regulation S under the Securities Act of
1933, as amended (the "Act"). Each Unit consists of two
newly-issued Common Shares, par value $0.01 per share, and one
warrant to purchase one Common Share.
The Warrants are immediately exercisable and transferable separately
from the Common Shares. Each Warrant entitles the holder to
purchase one Common Share at an initial exercise price of $1.75 per
share, subject to adjustment, at any time through April 1, 2001,
unless earlier redeemed. The Warrants are redeemable for $0.01 by
the Company at any time after July 2, 1996, if certain conditions
are met.
The Company also announced that it had granted the placement agent
warrants to purchase 114,240 Common Shares at $1.25 per share
exercisable during the four-year period beginning April 2, 1997.
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Somanetics Corporation
----------------------------
(Registrant)
Date: October 11, 1996 By: /s/ Raymond W. Gunn
-----------------------
Raymond W. Gunn
Executive Vice President
and Chief Financial Officer
(Duly Authorized and
Principal Financial Officer)
30
<PAGE> 31
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
10.1 Engagement Letter, dated as of September
9, 1996, between Somanetics Corporation
and Gruntal & Co., Incorporated
10.2 Consulting Order, dated as of October 1,
1996, among Somanetics Corporation and
NeuroPhysics Corporation, Hugh F. Stoddart
and Hugh A. Stoddart, Ph.D., as Consultants
27.1 Financial Data Schedule
</TABLE>
31
<PAGE> 1
EXHIBIT 10.1
[GRUNTAL CAPITAL MARKETS LETTERHEAD]
September 9, 1996
Mr. Raymond W. Gunn
Executive Vice President & Chief Financial Officer
Somanetics Corporation
1653 East Maple Road,
Troy, MI 48083-4208
Dear Mr. Gunn:
This is to acknowledge and confirm the terms of our agency agreement
("Agreement"). Gruntal & Co., Incorporated ("GCI") hereby agrees to render
services to Somanetics Corporation (the "Company") as its exclusive selling
agent for the terms and transactions specified herein.
1. GCI shall act as selling agent for the Company in connection with the
Company's intention to secure financing, via a private placement as more fully
set forth on Exhibit A, which shall be conducted pursuant to Regulation S under
the Securities Act of 1933. Either party shall have the right to terminate this
Agreement if the contemplated financing is not completed within 60 days from
the date of this Agreement.
2. In the event that GCI raises financing for or on behalf of the Company
during the period of this engagement, the Company shall pay to GCI, at the
closing of such transaction, a success fee of eight percent (8.0%) of the gross
proceeds received by the Company. The Company has the right to reject any and
all prospective investors in the contemplated financing as well as the terms,
amounts and provisions which may be proposed for the contemplated financing in
the exercise of its sole and arbitrary discretion. Any use or disclosure of any
offering brochure or similar materials must be approved by the Company in
advance.
3. The Company agrees to reimburse GCI for its reasonable actual and
accountable out-of-pocket expenses related to the transaction including,
without limitation, transportation, lodging, meals, postage, telephone expenses
and legal fees incurred in connection with the transaction up to $25,000;
provided that any single expense in excess of $1,000 shall be approved in
advance in writing by the Company. Such expenses shall be billed and payable as
and when incurred, regardless of whether the transaction is consummated.
4. In the event this engagement is terminated and a transaction is closed
with any party introduced by GCI to the Company pursuant to this Agreement and
not otherwise known to the Company, is closed within twelve months from the
date of termination, then the above fee arrangement will prevail; provided that
such fees shall not be payable in connection with any of the following: (i) the
issuance, sale, exercise or redemption of options or warrants to or from
<PAGE> 2
Mr. Raymond W. Gunn
September 9, 1996 [GRUNTAL LOGO]
Page 2
employees, executives, officers, directors of or to the Company, or (ii) the
issuance or sale of capital stock upon the exercise of outstanding or
authorized option or warrants, the redemption of such options or warrants, or
the adjustment of such options or warrants pursuant to anti-dilution provisions
of such options or warrants.
5. The Company shall:
a. indemnify GCI, its parents, affiliates and/or subsidiaries and
each of their respective officers, directors, employees and
agents (collectively, the "Indemnified Parties") and hold them
harmless against any losses, claims, damages, expenses or
liabilities to which the Indemnified Parties may become subject
arising in any manner out of or in connection with the rendering
of services by GCI hereunder, unless it is judicially determined
by final order, without any further right to appeal, that such
losses, claims, damages, expenses or liabilities resulted
primarily from the gross negligence, bad faith or willful
misconduct of GCI; and
b. reimburse GCI immediately for any legal or other expenses
reasonably incurred by it in connection with investigating,
preparing to defend or defending any lawsuits, claims or other
proceedings arising in any manner out of or in connection with
the rendering of services by GCI hereunder; provided, however,
that in the event a final judicial determination is made to the
effect specified in paragraph 5(a) above, the Indemnified
Parties will remit to the Company any amount reimbursed under
this paragraph 5(b).
The Company agrees that the indemnification and reimbursement
commitments set forth in this paragraph shall apply whether or not the
Indemnified Parties are a formal party to any such lawsuits, claims or other
proceedings and that in the event the Indemnified Parties are a formal party to
any such lawsuits, claims or other proceedings, the Indemnified Parties are
entitled to retain one separate counsel of their choice for all Indemnified
Parties in connection with any of the matters to which such commitments relate
and that such commitments shall extend upon the terms set forth in this
paragraph to any Indemnified Party.
6. The Company and GCI agree that if any indemnification or reimbursement
sought pursuant to the preceding paragraph is judicially determined by final
order, without any further right to appeal, to be unavailable then, whether or
not GCI is entitled to indemnification or reimbursement, the Company and GCI
shall contribute to the losses, claims, damages, liabilities and expenses for
which such indemnification or reimbursement is held unavailable in such
proportion as is appropriate to reflect the relative benefits to the Company on
the one hand, and GCI on the other, in connection with the transaction to which
such indemnification or reimbursement is related, and other equitable
considerations; provided, however, that in no event shall the amount to be
contributed by GCI or any other Indemnified Party exceed the amount of the fee
actually received by GCI hereunder.
<PAGE> 3
Mr. Raymond W. Gunn
September 9, 1996 [GRUNTAL LOGO]
Page 3
7. This Agreement sets forth the entire understanding of the parties
relating to the subject matter hereof, and supersedes and cancels any prior
communications, understandings and agreements between the parties relating to
the subject matter of this Agreement. This Agreement cannot be modified, or
changed, nor can any of its provisions be waived, except by written agreement
signed by all parties.
8. This Agreement shall be governed by the laws of the State of New York.
The Company and GCI each hereby agrees that service of process upon it by
registered mail at the address shown in this Agreement shall be deemed adequate
and lawful.
9. The Company represents that the undersigned is authorized to sign on
behalf of and legally bind the Company.
Please confirm that the foregoing correctly sets forth our understanding by
signing the enclosed copy of this letter where provided and returning it to us.
Very truly yours,
GRUNTAL & CO., INCORPORATED
By: Jack Weinstein
-------------------------------
Jack Weinstein
Managing Director
Gruntal Capital Markets
Agreed and accepted on the 10 day
of September, 1996
SOMANETICS CORPORATION
By: Raymond W. Gunn
--------------------------------
Raymond W. Gunn
Executive Vice President & Chief Financial Officer
<PAGE> 4
[GRUNTAL LOGO]
EXHIBIT A
SOMANETICS CORPORATION
PROPOSED TERMS - REGULATION S
SEPTEMBER 9, 1996
ISSUER: Somanetics Corporation (the "Company").
SYMBOL: SMTS.
REGULATION S OFFERING: Common Shares to be issued under an exemption
from registration, pursuant to Regulation S.
AMOUNT: $2 million.
SECURITIES TO BE PURCHASED: Common Shares.
OFFERING PRICE: Expected to be a 25% discount to the 5 day
average closing sale price.
INVESTORS: Institutional.
USE OF PROCEEDS: Working capital and operating expenses to
market INVOS Cerebral Oximeter, and redeem
Class B Warrants not to exceed $205,000.
CLOSING DATE: Four weeks from the Company's approval to
proceed with offering.
DOCUMENTS: Legal papers to be provided by Company and
reviewed by buyer's securities counsel.
GRUNTAL'S FEES: a) A fee of 8% on gross proceeds raised.
b) The Company shall reimburse Gruntal for up to
$25,000 of its reasonable out-of-pocket
expenses, including the fees and expenses of
its counsel. Such expenses shall be payable
whether or not the offering closes.
<PAGE> 1
EXHIBIT 10.2
CONSULTING ORDER
OCTOBER 1, 1996
To: Hugh F. Stoddart
NeuroPhysics Corporation
Hugh A. Stoddart
From: Somanetics Corporation
Re: Request for Consulting Services Pursuant to the Consulting Agreement,
dated February 28, 1983
Pursuant to the Consulting Agreement, dated as of February 28, 1983,
as amended (the "Consulting Agreement"), between Somanetics Corporation (the
"Company") and Hugh F. Stoddart ("HFS"), the Company desires to execute and
deliver to HFS, Hugh A. Stoddart ("HAS") and NeuroPhysics Corporation ("NPC",
and together with HFS and HAS, the "Consultants") this Consulting Order (the
"Order") requesting consulting services in connection with the Company's
existing products and the development of new products. With respect to the
development of the new products, the Company desires to become NPC's
"commercialization partner", which for purposes of this Order means an entity
with the rights and obligations of the Company with respect to such new
products as set forth in this Order.
This Order is made on the terms and conditions contained in this Order
and in the Consulting Agreement, which Consulting Agreement is incorporated
into this Order by reference. For purposes of this Order, HAS and NPC agree to
be bound by, and NPC shall cause its directors, officers, employees and agents
to comply with, the terms and conditions of the Consulting Agreement as if they
were the "Consultant" as defined in the Consulting Agreement. HFS shall
continue to be bound by the Consulting Agreement as the Consultant.
1. New Products and Other Consulting Services.
a. New Products. Consultants will conduct research into the
feasibility of the following potential new products (the "New Products"):
i. Liver Monitor. A non-invasive, near-infrared,
portable, liver oxygenation monitor for assessing and controlling
hemorrhagic shock (the "Liver Monitor").
ii. Subdural Hematoma Detection Device. A non-invasive,
near-infrared, portable device for locating and assessing subdural
hematomas in trauma patients with head injuries (the "Subdural
Hematoma Device").
iii. Blood Gas Monitor. A non-invasive, near-infrared,
portable, in vivo blood gas monitor for quickly estimating O2, CO,
met-hemoglobin and other potential variables in vivo (the "Blood Gas
Monitor").
<PAGE> 2
iv. Fetal Monitor. A non-invasive, near-infrared, device
for measuring the oxygen saturation of the blood in the brain of a
fetus during birth (the "Fetal Monitor").
b. New Product Development Activities. For each of the proposed
New Products, Consultants shall do the following:
i. Develop Prototypes. Develop and engineer
experimental apparatus or product prototypes of the New Product
suitable for validation testing to determine whether the New Product
can be used to perform the functions described in paragraph 1.a., for
example, monitoring changes in liver oxygenation, detecting and
assessing subdural hematomas in the head, measuring blood gasses in
vivo and monitoring fetal cerebral blood oxygenation during birth.
ii. Validation Testing. In conjunction with the Company,
identify and work with leaders in the medical fields served by the New
Product at teaching hospitals and universities to determine the need
for the New Product and the required validation and clinical trials to
determine its feasibility and efficacy. Design and participate in
validation testing of the New Product, comparing its measurements to
existing techniques for obtaining the same or similar information to
determine whether the prototype device is able to perform the
functions described in paragraph 1.a.
iii. Assist in Developing Manufacturing Prototype. If the
Company determines to continue to develop the New Product after
reviewing the results of the validation testing, assist the Company in
the development and engineering of a production version of the New
Product and manufacturing and assembly processes and procedures for
the New Product.
iv. Assist in Designing and Executing Clinical Tests. If
the Company determines to continue to develop the New Product, assist
the Company in designing and executing preliminary and definitive
clinical tests necessary to demonstrate the efficacy of the New
Product and to obtain regulatory approvals (including in connection
with applications under Section 510(k) of the Federal Food, Drug and
Cosmetics Act) for commercial sales of the New Product, and assist the
Company in identifying and engaging independent researchers to conduct
such tests.
v. Assist in Obtaining Regulatory Approvals and
Intellectual Property Protection. If the Company determines to sell a
New Product commercially, assist the Company in preparing and
defending any applications for regulatory (or self-regulatory)
approvals necessary for such sales, including 510(k) applications
submitted to the United States Food and Drug Administration. Also, if
the Company determines to sell a New Product commercially, assist the
Company in preparing patent and other intellectual property
applications and registrations.
-2-
<PAGE> 3
vi. Training. Train Company personnel in the technology
developed pursuant to this Order.
c. General and Ongoing Consulting. With respect to the Company's
Cerebral Oximeter and related SomaSensor and any of the New Products after
commercial sales have begun, Consultants will provide ongoing (i) technical and
general consulting and advice, and (ii) assistance with product designs, all at
the request of the Company. Such consulting, advice and assistance shall be in
connection with improvements to, or further developments or enhancements of,
such products, support for such products and product development efforts with
respect to such products. Examples of subjects of such consulting, advice and
assistance include additional algorithm development, additional sensor
development, proposed product enhancements, problem solving, research and
development planning for the Company, and advice and assistance regarding
interaction with, reports to, and responses to, the United States Food and Drug
Administration. At the request of the Company, Consultants shall also evaluate
papers regarding such products or competing products, Company or third party
patents relating to such products and the products themselves, including
complaints regarding alleged defects in such products. Consultants shall also
inform the Company of any developments or improvements relating to the
Company's products or technology.
d. Timing. The New Product development activities described in
this Order shall be performed within the time periods set forth in the Project
Schedule, attached as Exhibit A. The general and ongoing consulting activities
described in paragraph 1.c (the "General Consulting") shall be performed at
such places and times as are mutually acceptable to the Company and the
Consultants.
e. Reports. Consultants shall provide the Company with progress
reports within 10 business days after each milestone identified in the Project
Schedule, attached as Exhibit A, is reached and within 10 business days after
the end of each of the Company's fiscal quarters (currently ending at the end
of February, May, August and November each year). Such reports shall include
the status of the Consultants' product development and testing activities and
the results of such activities (including the efficacy of the tested products),
the milestones accomplished, any changes in the estimated timing of remaining
tasks and such additional information as shall be requested by the Company.
f. Company Assistance. The Company will assist Consultants in
the performance of their duties under this Order only to the extent it
determines it has the resources to do so and is willing to do so.
2. Technology Access and Ownership.
a. Existing Technology. The Company has provided and is
providing Consultants with access to its proprietary technology solely to
permit the Consultants to comply with their obligations under this Order and
the Consulting Agreement. The parties acknowledge and agree that the Company
remains the sole and exclusive owner of such technology.
-3-
<PAGE> 4
b. Technology Developed Pursuant to this Order.
i. Research and Development Product Ownership.
Consultants acknowledge and agree that the Company is the sole and
exclusive owner of the Research and Development Product, as described
in Section 6 of the Consulting Agreement and paragraphs 2.b.ii and
2.b.iii, subject only to (i) the rights of the United States Federal
Government pursuant to FAR 52.227-11 attached as Exhibit B ("FAR
227-11") in the "subject invention" (as defined in FAR 227-11) with
respect to NPC's agreements with the National Institutes of Health and
the United States Army relating to any of the New Products and this
Order (the "Government Rights"), (ii) the royalties provided in
paragraph 3.c, (iii) the potential license in favor of NPC described
in paragraph 2.d, (iv) any prohibition under NPC's agreements with the
National Institutes of Health and the United States Army relating to
any of the New Products and this Order (the "Government Agreements")
against NPC's assignment to the Company of all of its right, title and
interest in and to the "subject invention" (as defined in FAR 227-11)
with respect to such Government Agreements, in which case the Company
shall have the rights described in paragraph 2.c.ii with respect to
such "subject invention", and (v) the rights potentially retained by
the Consultants pursuant to paragraph 4.b.
ii. Covered Technologies Definition. Consultants
acknowledge and agree that for purposes of the Consulting Agreement
and this Order, "Covered Technologies" shall mean and include (i) the
electrical, mechanical and optical (visible and infrared) technologies
of in vivo optical spectrophotometry, spatially selective in vivo
optical spectrophotometry and optical imaging, whether by transmission
or reflection, involving or relating in any way to, or for use in
connection with, the examination and characterization of internal body
tissues, structures and/or composition, and (ii) any technologies
(including new technologies discovered or developed by Consultants)
discovered or developed in connection with, or included in, the
products described in this Order (including the New Products) or in
connection with any other work by any of the Consultants for the
Company or in connection with any of the Company's products or
technology.
iii. Research and Development Product Definition.
Consultants acknowledge and agree that for purposes of the Consulting
Agreement and this Order, "Research and Development Product" shall
include (in addition to the matters included in the definition of
Research and Development Product in the Consulting Agreement) anything
conceived, invented or developed by any of the Consultants in
connection with, or included in, the products described in this Order
(including the New Products) or in connection with any other work by
any of the Consultants for the Company or in connection with any of
the Company's products or technology, including any product concepts,
products, prototypes and breadboards.
-4-
<PAGE> 5
c. FAR 227-11.
i. Reports, Breadboards and Prototypes. The Company
acknowledges that NPC and the other Consultants are required by FAR
227-11 and the Government Agreements to submit reports and
breadboards, experimental apparatus or prototypes to the United States
Army or the National Institutes of Health, as the case may be, with
respect to the "subject invention" (as defined in FAR 227-11) in
connection with the research and development of the applicable New
Product funded, in part, by the applicable agency. The Company
consents to the provision of such reports, breadboards, experimental
apparatus and prototypes to the United States Army and the National
Institutes of Health, as the case may be, pursuant to FAR 227-11 and
the Government Agreements, provided that (i) the Consultants shall
meet periodically with the Company to discuss the status of the
development of the New Products and the confidential nature of such
reports, prototypes, experimental apparatus, breadboards and other
matters relating to the New Products, (ii) before submitting them to
the applicable agency, the Consultants shall mark such reports,
prototypes, experimental apparatus and breadboards, or such portions
of them as shall be designated by the Company, as confidential as
requested by the Company, (iii) the Consultants shall also use their
best efforts to mark all such reports, prototypes, experimental
apparatus and breadboards as confidential to the extent they reflect
Research and Development Product or other intellectual property of the
Company that is not otherwise explicitly, consciously, properly,
legally and generally known in any industry in which the Company is
engaged (other than by breach of this Order, the Consulting Agreement
or the Confidentiality Agreement), and (iv) the Consultants shall
submit a copy of such reports, prototypes, experimental apparatus and
breadboards to the Company within a reasonable time after submitting
them to the applicable agency.
ii. Title to Subject Invention. Upon request by the
Company, Consultants shall elect in writing to retain title to any
invention pursuant to FAR 227-11 and any similar requirement.
Consultants shall do all acts, execute and deliver all documents, and
obtain all consents, necessary or requested by the Company to transfer
to, or confirm in, the Company all right, title and interest in and
to, the Research and Development Product, subject only to (i) the
Government Rights, (ii) the royalties provided in paragraph 3.c, (iii)
the potential license in favor of NPC described in paragraph 2.d, and
(iv) the next sentence. To the extent any such right, title or
interest can not be transferred into the Company's name, the
Consultants (i) shall transfer or otherwise provide to the Company
whatever right, title and interest in such Research and Development
Product as can be transferred or provided to the Company to put the
Company as closely as possible into the same position it would have
been in if such right, title and interest could be, and had been,
transferred into the Company's name, and (ii) hereby grant the Company
an exclusive, irrevocable, worldwide, license, with the right to
sublicense and assign the license without consent, and use, make,
operate and practice such right, title and interest in such Research
and Development Product and to manufacture, make, use and sell the
related products, subject only to (i) the Government Rights, (ii) the
royalties provided in paragraph 3.c, and (iii) the potential license
in favor of NPC described in paragraph 2.d.
-5-
<PAGE> 6
Consultants will not enter into any subcontracts with respect to, or
assign, any of their rights or obligations under this Order without
the Company's prior express written consent.
d. Discontinued Development or Commercialization.
i. Grant of License to NPC. The Company, in its sole
discretion, may terminate development of any or all of the New
Products at any time by notice to the Consultants pursuant to
paragraph 4.a, and the development of any or all of the New Products
may otherwise terminate pursuant to paragraph 4.a. If any of the
following occurs with respect to a New Product (each considered
separately):
(1) the project under this Order (and related
retainer fee provided in paragraph 3.a) relating to such New
Products is terminated pursuant to paragraph 4.a before the
development activities relating to that New Product are
completed ("Development Termination"), or
(2) within a reasonable time, determined by good
faith negotiation between NPC and the Company (but in no event
less than 18 months), after the Company receives clearance
from the United States Food and Drug Administration to market
such New Product in the United States (the "Commercialization
Deadline"), the Company has not begun commercial sales of that
New Product ("Commercialization Termination"), or
(3) the development activities relating to such New
Product have been completed and the Company notifies
Consultants in writing within 10 years after the first
commercial sale of such New Product that it has determined to
cease commercial sales of that New Product ("Sales
Termination"),
then, effective on the date (i) of termination pursuant to paragraph
4.a with respect to a Development Termination, (ii) of the
Commercialization Deadline with respect to a Commercialization
Termination, or (iii) set forth in the notice of Sales Termination, as
the case may be, the Company grants NPC the "License" (as defined in
paragraph 2.d.ii) with respect to the applicable New Product.
ii. "License". For purposes of this Order, the "License"
means
(1) an exclusive, irrevocable, worldwide, license,
with the right to sublicense and assign the license, to use,
make, operate and practice all of the Company's right, title
and interest in the Research and Development Product used in
the New Product(s) subject to Development Termination,
Commercialization Termination or Sales Termination, but only
to the extent necessary to manufacture, make, use and sell the
New Product(s) subject to Development Termination,
Commercialization Termination or Sales Termination,
-6-
<PAGE> 7
(2) a non-exclusive, irrevocable, worldwide, license,
with the right to sublicense and assign the license, to use,
make, operate and practice all of the Company's right, title
and interest in the Research and Development Product used in
the New Product(s) subject to Development Termination,
Commercialization Termination or Sales Termination, and
(3) a non-exclusive, irrevocable, worldwide, license,
with the right to sublicense and assign the license, to use,
make, operate and practice all of the Company's right, title
and interest in the Company's other proprietary technology, if
any, used in the New Product(s) subject to Development
Termination, Commercialization Termination or Sales
Termination, but only to the extent necessary to manufacture,
make, use and sell the New Product(s) subject to Development
Termination, Commercialization Termination or Sales
Termination,
all on the terms and conditions set forth in this paragraph 2.d,
subject only to (i) the Government Rights, (ii) the royalties provided
in paragraph 2.d.iv, and (iii) the rights retained by the Company
where NPC is not given exclusive rights.
iii. Additional Terms and Conditions of Licenses. NPC may
not assign, or grant any sublicenses of, the License (or any part of
the License) without the Company's prior written consent, which
consent shall not be unreasonably withheld. In connection with the
License, any permitted assignment of the License and any permitted
sublicense, Consultants may not disclose or use any of the Company's
trade secrets or other secret, confidential or proprietary
information, or violate the Confidentiality Agreement described in
paragraph 5.a., without the Company's prior written consent, which
consent shall not be unreasonably withheld. The Company shall be
deemed to have reasonably withheld its consent to any such assignment
or sublicense of the License (or any part of the License) or any such
disclosure, use or violation, if it does not consent because it may
suffer any financial damage or harm if it consents. Financial damage
or harm shall not be the sole reason the Company may withhold consent,
but shall be in addition to any other reason the Company may have to
reasonably withhold consent.
iv. Company Royalty. The Consultants shall pay
Somanetics a royalty fee with respect to "net sales" of each New
Product received within 10 years from the later of the date of the
first commercial sale of such New Product or the granting of the
License to NPC, on the same terms and conditions as the royalty
payable to NPC and described in paragraph 3.c, except that (i) the
parties are reversed, (ii) there is no deduction for any retainer
fees, (iii) the royalty shall apply to the License pursuant to this
paragraph 2.d, and (iv) the royalty fee may be reduced as described in
the next sentence. The royalty fee shall be reduced as follows if a
Development Termination of the applicable New Product occurs before
phase II of the related Government Agreement with respect to the
applicable New Product is completed:
-7-
<PAGE> 8
(1) if the Development Termination of the applicable
New Product occurs within 12 months of the date the retainer
(described in paragraph 3.a) with respect to such New Product
begins to accrue, no royalty fee shall be payable by the
Consultants with respect to net sales of such New Product.
(2) if the Development Termination of the applicable
New Product occurs 12 or more months after the date the
retainer (described in paragraph 3.a) with respect to such New
Product begins to accrue, but before phase II of the related
Government Agreement with respect to the applicable New
Product is completed, the royalty fee payable by the
Consultants with respect to net sales of such New Product
shall equal 50% of the royalty fee otherwise payable under
this paragraph 2.d.iv.
(3) if the Development Termination of the applicable
New Product occurs on or after the date phase II of the
related Government Agreement with respect to the applicable
New Product is completed, the royalty fee shall be payable by
the Consultants with respect to net sales of such New Product
shall equal 100% of the royalty fee payable under this
paragraph 2.d.iv.
v. No Further Development Obligations; Product
Liability. If the Company terminates development of any or all of the
New Products at any time by notice to the Consultants pursuant to
paragraph 4, the Company shall not be responsible for any further
development of such New Product or any funding or assistance in
connection with any further development of such New Product undertaken
by any of the Consultants or any third party. In addition,
Consultants, and not the Company, shall be responsible for any product
liability or similar claims, including without limitation claims based
on the design or efficacy of such New Product, to the extent such New
Product is manufactured or sold by any of the Consultants, by any of
their distributors or by any sublicensee of any of the Consultants.
3. Fees. As full and exclusive compensation to the Consultants for the
performance of their services and duties under this Agreement, the Company
shall pay the following:
a. New Product Retainers. The Company shall pay NPC the
following monthly retainers in connection with the product development
activities described in paragraph 1.b for the following New Products:
<TABLE>
<CAPTION>
New Product Monthly Retainer Amount
----------- -----------------------
<S> <C>
Liver Monitor $2,500
Subdural Hematoma Device $2,500
Blood Gas Monitor $2,500
Fetal Monitor $3,500
</TABLE>
-8-
<PAGE> 9
Such retainers shall be paid in advance on the first business day of each
calendar month for that calendar month and shall be pro rated for partial
months of service. Such retainers for the Liver Monitor, Subdural Hematoma
Device and Blood Gas Monitor shall begin accruing as of September 1, 1996.
Such retainer for the Fetal Monitor shall begin accruing as of October 1, 1996.
Such retainers shall continue to accrue until the related project is terminated
pursuant to paragraph 4 or otherwise ends.
b. General Consulting Retainer and Fees. The Company shall pay
NPC $2,880 a month in connection with the General Consulting services described
in paragraph 1.c. Such retainer shall be paid in arrears on the last business
day of each calendar month for that calendar month and shall be pro rated for
partial months of service. In addition, the Company shall pay NPC, within 30
days after receiving NPC's invoice for such services, $72 an hour for each
additional hour of General Consulting services described in paragraph 1.c
provided by HAS or HFS in excess of an aggregate of 40 hours of such General
Consulting services provided by the two of them pursuant to this Order in any
one calendar month. Consultants shall inform the Company if HAS's and HFS's
General Consulting services are expected to exceed 40 hours in any month, and
shall not perform such services in that month unless approved by the Company.
Such retainers shall continue to accrue until terminated pursuant to paragraph
4.b. The General Consulting and the retainer provided in this paragraph 3.b
supersede any written or oral agreement between the Company and any of the
Consultants relating to any of the General Consulting services and any related
fees, including Section 5(b) of the Consulting Agreement and any letter
agreement between any of the Consultants and the Company.
c. Royalties. The Company shall pay NPC a royalty fee with
respect to "net sales" of each New Product received within 10 years from the
date of the first commercial sale of such New Product, if commercial sales of
such New Product begin within five years of the date of this Order. Such
royalty fee for each New Product shall equal the following percentages of the
following cumulative "net sales" of the following New Products, less (i) the
amount of such royalty fee previously paid to NPC with respect to the
applicable New Product, and (ii) 50% of the retainer fee paid to NPC pursuant
to paragraph 3.a with respect to the applicable New Product:
<TABLE>
<CAPTION>
Subdural Blood
Liver Hematoma Gas Fetal
Cumulative Net Sales Monitor Device Monitor Monitor
- -------------------- ------- ------ ------- -------
<S> <C> <C> <C> <C>
Less than $25 million 1.50% 1.50% 1.50% 2.00%
$25 million to $50 million 1.25% 1.25% 1.25% 1.75%
$50 million to $75 million 1.00% 1.00% 1.00% 1.50%
$75 million to $100 million 0.75% 0.75% 0.75% 1.25%
Greater than $100 million 0.50% 0.50% 0.50% 1.00%
</TABLE>
The royalty fee shall be payable quarterly within 60 days after the end of each
of the Company's fiscal quarters with respect to "net sales" of the New
Products through the end of such fiscal
-9-
<PAGE> 10
quarter. For purposes of this royalty fee, if the Company sells the New
Product, "net sales" means the net amount actually paid to, and collected by,
the Company for the commercial sale by the Company of the applicable New
Product, net of (i) any freight, packaging and crating, transportation
insurance, taxes or other charges collected by the Company, and (ii) any
subsequent payments by the Company for discounts, rebates, returns, allowances,
credits, reductions, or diminution of any nature whatsoever. For purposes of
this royalty fee, if a third party sells the New Product pursuant to a license
from the Company (not including licenses pursuant to paragraph 2.d) or a sale
of any Research and Development Product relating to the applicable New Product
by the Company or any other transfer by the Company of the right to
manufacture, make, use and sell the applicable New Product (not including
licenses pursuant to paragraph 2.d), "net sales" means, at the Company's
election, either (i) the same thing it means when the Company sells the New
Product, except that the third party shall be substituted for the Company in
the definition, or (ii) the same thing it means in the Company's agreement with
the third party, if any, as used to calculate the Company's royalty on such
sale. If a party assumes the Company's obligation to pay such royalties with
respect to such third party's sales of New Products, the Company shall be
relieved of its obligation to pay such royalties with respect to such third
party's sales of New Products. If the applicable New Product is incorporated
into a larger product sold as a unit, the portion of the "net sales" of the
unit that is deemed attributable to the New Product for purposes of this
royalty fee shall be the same as the portion of the Company's total cost of
goods sold with respect to such unit represented by the New Product (determined
in accordance with generally accepted accounting principles).
d. Sale of Technology Fee. The Company shall also pay the
following sale of technology fee in addition to any of the other fees described
in this paragraph 3:
i. When Payable. If the Company assigns all or any part
of this Order relating to a New Product to a third party pursuant to
paragraph 5.d, or sells or licenses to a third party any Research and
Development Product relating to a New Product and obtained pursuant to
this Order, or otherwise transfers to a third party the right to
manufacture and sell any New Products (each, a "Transaction"), all
before ten years after the date of this Order, the Company shall pay
NPC a sale fee equal to the "percentage" (defined below) of the "net
proceeds" (defined below) actually received by the Company as
consideration for the Transaction. The sale fee shall be payable
within 60 days after the Company actually receives any such net
proceeds. For purposes of this paragraph 3.d, a business combination
involving the Company (including any merger, share exchange, stock
sale or sale of substantially all of the Company's assets) shall not
constitute an assignment, sale, license or other transfer and no
Transaction will be deemed to have occurred as a result of such
business combination.
ii. "Percentage". For purposes of this sale fee, the
"percentage" means the percentage negotiated by the Company and NPC in
good faith before the consummation of the Transaction, which shall not
in any event exceed 1%.
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<PAGE> 11
iii. "Net Proceeds". For purposes of this sale fee, "net
proceeds" means any cash and the fair market value of any property
actually paid to, and collected by, the Company as consideration for
the Transaction, less (i) any non-lump sum royalty or other non-lump
sum amounts paid to the Company based on the third party's sales of
the applicable New Product(s), and (ii) the Company's expenses of
engaging in the Transaction, including any taxes actually payable by
the Company as a result of such Transaction. If the Transaction is
part of a larger transaction, the Company shall in good faith allocate
the proceeds of the larger transaction between the Transaction and the
rest of the transaction.
e. Expenses. The Company shall pay or reimburse NPC for all
reasonable, ordinary and necessary business travel expenses, including meals
and lodging, incurred by Consultants in connection with performing their duties
under this Order, for which NPC will submit appropriate invoices and which
otherwise comply with Company policies concerning reimbursement of business
expenses. NPC will provide the Company with applicable receipts upon the
Company's request. The Company will not reimburse Consultants for any other
expenses they incur in the course of performing this Order or otherwise, unless
otherwise approved by the Company in advance in writing, and unless so
approved, Consultants shall bear all such expenses.
4. Term.
a. New Products. The Company may, in its sole discretion, at any
time and from time to time, upon at least 120 days prior written notice to NPC,
terminate any or all of the projects under this Order (and related retainer
fees provided in paragraph 3.a) relating to one or more of the New Products,
all without any future obligations of Company, except as otherwise provided in
paragraphs 2.d, 3.c, 3.d and 3.e. With respect to each New Product, considered
separately, if the Company fails to pay the retainer fee described in paragraph
3.a with respect to such New Product when due and such failure is not "Cured"
(as defined in paragraph 4.a.i) within the "Cure Period" (as defined in
paragraph 4.a.ii), the project under this Order (and related retainer fee
provided in paragraph 3.a) relating to that New Product shall terminate as of
the end of the "Cure Period" or, if earlier, 120 days after written notice from
the Company to NPC pursuant to this paragraph 4.a terminating the project under
this Order relating to that New Product, and the Consultants shall have the
rights described in paragraphs 2.d and 4.c with respect to that New Product.
If not previously terminated by the Company, the retainer fees provided in
paragraph 3.a with respect to a particular New Product shall terminate when the
development activities relating to that New Product are completed.
i. "Cured". For purposes of this Order, "Cured" means
that through the date of the applicable payment the Company paid in
full (i) all of the expenses due pursuant to paragraph 3.e, (ii) any
sale of technology fee due pursuant to paragraph 3.d, (iii) any
royalties due pursuant to paragraph 3.c, (iv) all of the General
Consulting retainers and fees due pursuant to paragraph 3.b, and (v)
all of the retainers due pursuant to paragraph 3.a with respect to the
applicable New Product. If the Company's payments are sufficient to
pay in full the amounts described in clauses (i) through (iv) of this
-11-
<PAGE> 12
paragraph 4.a.i through the date of the applicable payment, but not
all of the retainers due pursuant to paragraph 3.a, for purposes of
determining whether the payment failure has been Cured with respect to
a particular New Product, the remaining amount paid shall be applied
to the retainers for the New Product(s) designated by the Company, or
if not designated by the Company, in the order in which the New
Products are listed in paragraph 3.a.
ii. "Cure Period". For purposes of this Order, the "Cure
Period" with respect to any particular failure to pay the retainer fee
due pursuant to paragraph 3.a with respect to a particular New Product
when due shall mean the period beginning on the date such fee was due
and ending on the later of (i) 120 days after that date, and (ii) 30
days after the date the Company receives notice from NPC stating (A)
that the Company has failed to pay retainer fees due pursuant to
paragraph 3.a (identifying the amount and nature of the fees not
paid), (B) the last day for making such payment without terminating
the project under this Order relating to the New Product(s) (i.e., the
end of the Cure Period), and (C) that if the Company fails to make
such payment by that date, the Consultants will have the rights
described in paragraphs 2.d and 4.c of this Order, including potential
transfer of rights in the applicable New Product(s) to NPC.
b. General Consulting. The term of the General Consulting under
this Order (and the related retainer fees provided in paragraph 3.b) shall
continue through the February 28th that is at least 30 days after the
Consultants give, or the Company gives, written notice to the other of the
termination of such General Consulting (the "General Consulting Termination
Notice"), unless sooner terminated at the option of the Consultants or the
Company if the other party shall fail, refuse or neglect to perform its
obligations under this Order and such default shall continue for ten days
following receipt of notice given by the terminating party to the defaulting
party. Notwithstanding anything in this paragraph 4.b to the contrary, neither
party may give the General Consulting Termination Notice until, for each of the
New Products, (i) the development activities relating to that New Product are
completed, (ii) the project under this Order relating to that New Product is
terminated, or (iii) the Company has given NPC notice of the termination of the
project under this Order relating to that New Product pursuant to paragraph
4.a. If the Company fails to pay the retainer fee described in paragraph 3.b
when due and such failure is not "Remedied" (as defined in paragraph 4.b.i)
within the "Remedy Period" (as defined in paragraph 4.b.ii), (i) the term of
the General Consulting under this Order (and related retainer fee provided in
paragraph 3.b) shall terminate as of the date it would have terminated if the
General Consulting Termination Notice were given on the first day otherwise
permitted under this paragraph 4.b and after such failure, and (ii) the
Consultants shall retain, and the Company shall not own, the new Research and
Development Product conceived, invented or developed by any of the Consultants
only in connection with the General Consulting and only during the period with
respect to which the Company does not pay the related retainer fee provided in
paragraph 3.b.
i. "Remedied". For purposes of this Order, "Remedied"
means that through the date of the applicable payment the Company paid
in full (i) all of the expenses due
-12-
<PAGE> 13
pursuant to paragraph 3.e, (ii) any sale of technology fee due
pursuant to paragraph 3.d, (iii) any royalties due pursuant to
paragraph 3.c, and (iv) all of the General Consulting retainers and
fees due pursuant to paragraph 3.b.
ii. "Remedy Period". For purposes of this Order, the
"Remedy Period" with respect to any particular failure to pay the
retainer fee due pursuant to paragraph 3.b when due shall mean the
period beginning on the date such fee was due and ending on the later
of (i) 120 days after that date, and (ii) 30 days after the date the
Company receives notice from NPC stating (A) that the Company has
failed to pay retainer fees due pursuant to paragraph 3.b (identifying
the amount and nature of the fees not paid), (B) the last day of the
Remedy Period, and (C) that if the Company fails to make such payment
by that date, the Consultants will have the rights described in
paragraph 4.b of this Order, including potential transfer of rights in
some General Consulting Research and Development Product.
c. Remedy for Early Termination. Consultants' sole and exclusive
remedies for any failure by the Company to pay the retainer fees provided in
paragraph 3.a when due, including with respect to the 120 days after the
Company has given NPC notice of termination pursuant to paragraph 4.a, shall be
(i) to collect such retainer fees that are due, and (ii) to receive any rights
provided in paragraph 2.d as and when provided in paragraph 2.d. Consultants'
sole and exclusive remedies for any failure by the Company to pay the retainer
fees provided in paragraph 3.b when due, shall be (i) to collect such retainer
fees that are due, and (ii) to receive any rights provided in paragraph 4.b as
and when provided in paragraph 4.b.
5. Miscellaneous.
a. Confidentiality Agreement. Simultaneously with the execution
of this Order, each of the Consultants is executing and delivering to the
Company a Confidentiality Agreement. Consultants acknowledge and agree that
all matters relating to this Order and any activities performed pursuant to
this Order are deemed privileged, confidential, proprietary and/or secret
information pertaining to the Research and Development Product or pertaining to
the business of the Company for purposes of the Consulting Agreement, except to
the extent explicitly, consciously, properly, legally and generally known in
any industry in which the Company is engaged (other than by breach of this
Order, the Consulting Agreement or the Confidentiality Agreement).
b. Representations, Warranties and Covenants. The Consultants,
jointly and severally, represent and warrant to, and covenant with, the Company
that
i. the performance of this Order by each Consultant does not,
and will not, breach any agreement of such Consultant to keep
confidential any proprietary information acquired by any of the
Consultants before the date of this Order;
-13-
<PAGE> 14
ii. to the best of the Consultants' knowledge, the performance
of this Order by the Consultants does not and will not breach any term
of any agreement or arrangement any Consultant may have with others or
any court order, judgment, decree or other obligation of any
Consultant;
iii. to the best of the Consultants' knowledge, none of the
Consultants has entered into, or will enter into, any agreement or
arrangement of any nature which will be in conflict with this Order or
any of the duties, obligations or agreements of any of the Consultants
with the Company or the Company's ownership and exclusive control of
the Research and Development Product, except as described in paragraph
2.b.i in connection with the Government Agreements;
iv. to the best of the Consultants' knowledge, no consent or
approval of any third party, government or regulatory authority is
required for any of the Consultants to execute, deliver and perform
their obligations under this Order, except as set forth in FAR 227-11
and the Government Agreements;
v. Consultants will comply with all laws, regulations and
orders in connection with their performance of their obligations under
this Order;
vi. Consultants will comply with the Government Agreements,
FAR 227-11 and all other applicable regulations and obligations
relating to such contracts, the New Products, this Order or any
combination of the foregoing;
vii. to the best of the Consultants' knowledge, Consultants
and the products and technologies they develop, including the New
Products and the Research and Development Product they develop
pursuant to, or in connection with, this Order, do not and will not
infringe on the rights of any third party; and
viii. this Order has been duly authorized by each of the
Consultants and is a valid and binding obligation of each of them,
enforceable in accordance with its terms.
c. Copies of Funding Agreements. Consultants shall provide the
Company, as soon as practicable, with a copy of all funding proposals and
agreements received by them from third parties with respect to any of the
Company's products or technology, including the Government Agreements.
d. Binding Effect; Assignment. This Order shall be binding upon
and inure to the benefit of the parties to this Agreement and their respective
permitted successors and assigns. This Order is personal to each of the
Consultants, and none of the Consultants may assign or transfer any of their
rights or delegate any of their obligations under this Order without the prior
written consent of the Company, and any purported assignment or transfer by any
of the Consultants shall be void. The Company may assign its rights and
delegate its duties under this Order without the consent of any of the
Consultants, and the Company shall have no further
-14-
<PAGE> 15
obligations under this Order after any such assignment and delegation. Any
assignee of the Company shall be deemed to be the Company for all purposes of
this Order, and such assignment shall not be deemed to be a termination by the
Company of the development of any or all of the New Products.
e. Consulting Agreement Continues. Except as modified by this
Order, the Consulting Agreement shall continue in full force according to its
terms and is ratified. The terms of the Consulting Agreement shall apply to
this Order, but in the event of any conflict between the terms of this Order
and the Consulting Agreement, this Order shall control.
If this Order correctly expresses our agreement and you accept this
Order, please sign and date this Order in the spaces provided below.
SOMANETICS CORPORATION
By: /s/ RAYMOND W. GUNN
------------------------------------
Raymond W. Gunn
Its: Executive Vice President
The terms of this Order are accepted and agreed to:
NEUROPHYSICS CORPORATION
By: /s/ HUGH A. STODDART Dated: October 1, 1996
--------------------------------
Its: PRESIDENT
----------------------
/s/ HUGH F. STODDART Dated: October 1, 1996
- -----------------------------------
Hugh F. Stoddart
/s/ HUGH A. STODDART Dated: October 1, 1996
- -----------------------------------
Hugh A. Stoddart
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SOMANETICS CORPORATION AS OF, AND FOR THE NINE MONTHS
ENDED, AUGUST 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> AUG-31-1996
<CASH> 829,008
<SECURITIES> 0
<RECEIVABLES> 314,133
<ALLOWANCES> 0
<INVENTORY> 991,960
<CURRENT-ASSETS> 2,178,453
<PP&E> 811,677
<DEPRECIATION> 726,810
<TOTAL-ASSETS> 2,675,503
<CURRENT-LIABILITIES> 294,406
<BONDS> 0
0
0
<COMMON> 191,543
<OTHER-SE> 2,189,554
<TOTAL-LIABILITY-AND-EQUITY> 2,675,503
<SALES> 699,006
<TOTAL-REVENUES> 699,006
<CGS> 327,151
<TOTAL-COSTS> 327,151
<OTHER-EXPENSES> 2,025,835
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,582,728)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,582,728)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,582,728)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
