<PAGE> 1
Pursuant to Rule 424B3
Registration No. 33-38438
PROSPECTUS SUPPLEMENT DATED, JULY 10, 1996
TO SOMANETICS CORPORATION PROSPECTUS DATED, APRIL 4, 1996
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 MAY 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)
<TABLE>
<CAPTION>
MICHIGAN 38-2394784
<S> <C>
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
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 July 1, 1996: 19,114,118
<PAGE> 2
PART I FINANCIAL INFORMATION
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
May 31, November 30,
ASSETS 1996 1995
------------- ------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 1,369,287 $ 941,426
Accounts receivable, net of allowance for doubtful accounts of
$194,000 at May 31, 1996 and November 30, 1995 . . . . . . . 309,478 443,859
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . 913,476 936,421
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . 44,723 72,161
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . 2,636,964 2,393,867
----------- -----------
PROPERTY AND EQUIPMENT (at cost):
Machinery and equipment . . . . . . . . . . . . . . . . . . . . 408,539 412,217
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . 192,749 193,339
Leasehold improvements . . . . . . . . . . . . . . . . . . . . 166,770 166,770
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 768,058 772,326
Less accumulated depreciation and amortization . . . . . . . . (712,172) (685,835)
----------- -----------
Net property and equipment . . . . . . . . . . . . . . . . . 55,886 86,491
----------- -----------
OTHER ASSETS:
Note receivable - related party . . . . . . . . . . . . . . . . 198,188 190,240
Patents and trademarks, net . . . . . . . . . . . . . . . . . . 82,585 86,041
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,586 104,616
----------- -----------
Total other assets . . . . . . . . . . . . . . . . . . . . . 398,359 380,897
----------- -----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,091,209 $ 2,861,255
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 185,350 $ 131,401
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . 174,780 416,356
----------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . . 360,130 547,757
----------- -----------
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, 18,985,418 and 17,768,552
shares at May 31, 1996 and November 30, 1995,
respectively . . . . . . . . . . . . . . . . . . . . . . . . 189,856 177,687
Additional paid-in capital. . . . . . . . . . . . . . . . . . . 30,367,359 29,023,318
Deficit accumulated during the development stage . . . . . . . (27,826,136) (26,907,350)
----------- -----------
Total shareholders' equity . . . . . . . . . . . . . . . . . 2,731,079 2,293,655
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . $ 3,091,209 $ 2,861,255
=========== ===========
</TABLE>
See notes to financial statements
2
<PAGE> 3
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended May 31, Ended May 31,
--------------------------- ---------------------------
1996 1995 1996 1995
----------- ------------ ----------- -----------
<C> <C> <C> <C> <C>
REVENUES:
Net Sales............................ $ 84,387 $ 672,646 $ 599,465 $ 906,625
Research and development activities -- ' -- ' -- ' -- '
----------- ------------ ----------- -----------
Total revenues..................... 84,387 672,646 599,465 906,625
COST OF SALES......................... 48,318 313,237 259,451 431,016
----------- ------------ ----------- -----------
GROSS MARGIN.......................... 36,069 359,409 340,014 475,609
----------- ------------ ----------- -----------
OPERATING EXPENSES:
Research, development, and
engineering....................... 52,732 122,279 102,668 190,564
Selling, general and administrative 609,386 935,340 1,199,716 1,850,919
----------- ------------ ----------- -----------
Total operating expenses........... 662,118 1,057,619 1,302,384 2,041,483
----------- ------------ ----------- -----------
OPERATING LOSS........................ (626,049) (698,210) (962,370) (1,565,874)
----------- ------------ ----------- -----------
OTHER INCOME (EXPENSE):
Interest income...................... 18,752 21,880 32,411 51,442
Interest expense..................... -- ' (214) -- ' (772)
Other................................ 8,100 918 11,173 925
----------- ------------ ----------- -----------
Total other income................. 26,852 22,584 43,584 51,595
----------- ------------ ----------- -----------
NET LOSS.............................. $ (599,197) $ (675,626) $ (918,786) $(1,514,279)
=========== ============ =========== ===========
NET LOSS PER COMMON SHARE............. $ (.03) $ (.04) $ (.05) $ (.09)
----------- ------------ ----------- -----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING............. 18,200,325 16,268,552 17,991,538 16,268,123
=========== ============ =========== ===========
<CAPTION>
Cumulative
for the Period
January 15, 1982
(Date of Inception)
To
May 31,
1996
------------
<S> <C>
REVENUES:
Net Sales............................ $ 5,550,198
Research and development activities 122,500
------------
Total revenues..................... 5,672,698
COST OF SALES......................... 2,501,567
------------
GROSS MARGIN.......................... 3,171,131
------------
OPERATING EXPENSES:
Research, development, and
engineering....................... 7,872,225
Selling, general and administrative 23,839,500
------------
Total operating expenses........... 31,711,725
------------
OPERATING LOSS........................ (28,540,594)
------------
OTHER INCOME (EXPENSE):
Interest income...................... 1,091,957
Interest expense..................... (231,225)
Other................................ (126,432)
------------
Total other income................. 734,300
------------
NET LOSS.............................. $(27,806,294)
============
NET LOSS PER COMMON SHARE............. $ (4.17)
------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING............. 6,661,553
============
</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 ADDITIONAL
PER SHARE PAID-IN
DATE SHARE SHARES VALUE CAPITAL
---- ----- ------ ----- -------
ISSUANCE OF COMMON SHARES:
<S> <C> <C> <C> <C> <C>
For shareholders' contributions of test equipment ......... January, 1982 $0.032 830,376 $ 8,304 $ 18,196
For cash .................................................. July, 1982 1.31 78,345 783 101,217
Net loss from January 15, 1982 (date of inception)
to November 30, 1982 ...................................
--------- ------- -----------
Balance at November 30, 1982 ................................ 908,721 9,087 119,413
For cash .................................................. December, 1982 1.31 39,172 392 50,608
For services .............................................. January, 1983 1.31 15,669 157 20,343
For cash, less issuance costs of $5,863 ................... July, 1983 2.62 116,243 1,162 297,139
For services .............................................. November, 1983 2.62 7,834 78 20,422
Net loss for the year ended November 30, 1983 .............
--------- ------- -----------
Balance at November 30, 1983 ................................ 1,087,639 10,876 507,925
For cash, less issuance costs December, 1983-
of $7,735 .............................................. April, 1984 2.62 194,212 1,943 498,503
For patents ............................................... February, 1984 2.62 48,944 489 127,580
For cash .................................................. November, 1984 3.51 37,303 373 130,563
Net loss for the year ended November 30, 1984 .............
--------- ------- -----------
Balance at November 30, 1984 ................................ 1,368,098 13,681 1,264,571
For cash, less issuance costs December, 1984-
of $3,726 .............................................. June, 1985 3.51 130,292 1,303 452,312
For cash .................................................. November, 1985 7.02 144,838 1,448 1,015,352
Net loss for the year ended November 30, 1985 .............
--------- ------- -----------
Balance at November 30, 1985 ................................ 1,643,228 16,432 2,732,235
Exercise of stock options for cash ........................ December, 1985 3.51 7,834 79 27,421
For cash .................................................. January, 1986 7.02 104,442 1,044 732,157
Net loss for the year ended November 30, 1986 .............
--------- ------- -----------
Balance at November 30, 1986 ................................ 1,755,504 17,555 3,491,813
For cash, less issuance costs March, 1987-
of $9,500 .............................................. September, 1987 5.11 103,591 1,036 518,364
Net loss for the year ended November 30, 1987 .............
--------- ------- -----------
Balance at November 30, 1987 ................................ 1,859,095 18,591 4,010,177
For cash, less issuance costs February, 1988-
of $10,500 ............................................. April, 1988 5.11 32,905 329 157,171
Net loss for the year ended November 30, 1988 .............
--------- ------- -----------
Balance at November 30, 1988 ................................ 1,892,000 18,920 4,167,348
For cash and the exchange of debt January, 1989-
due a shareholder ...................................... July, 1989 5.11 45,244 452 230,548
Net loss for the year ended November 30, 1989 .............
--------- ------- -----------
Balance at November 30, 1989 ................................ 1,937,244 19,372 4,397,896
For services .............................................. August, 1990 5.11 47,006 471 239,529
Net loss for the year ended November 30, 1990 .............
--------- ------- -----------
Balance at November 30, 1990 ................................ 1,984,250 19,843 4,637,425
For cash, less issuance costs of $1,630,241 ............... March, 1991 2.00 3,600,000 36,000 5,533,759
Unit Purchase Option ...................................... March, 1991 120
Redeemable Convertible Preferred Stock dividend ........... April, 1991
For cash, less issuance costs of $126,900 ................. April, 1991 2.00 540,000 5,400 947,700
Net loss for the year ended November 30, 1991 .............
--------- ------- -----------
Balance at November 30, 1991 ................................ 6,124,250 $61,243 $11,119,004
<CAPTION>
TOTAL
ACCUM- SHAREHOLDERS'
ULATED EQUITY
DEFICIT (DEFICIENCY)
------- ----------
ISSUANCE OF COMMON SHARES:
<S> <C> <C>
For shareholders' contributions of test equipment ......... $ - $ 26,500
For cash .................................................. 102,000
Net loss from January 15, 1982 (date of inception)
to November 30, 1982 ................................... (107,083) (107,083)
----------- ------------
Balance at November 30, 1982 ................................ (107,083) 21,417
For cash .................................................. 51,000
For services .............................................. 20,500
For cash, less issuance costs of $5,863 ................... 298,301
For services .............................................. 20,500
Net loss for the year ended November 30, 1983 ............. (291,986) (291,986)
----------- ------------
Balance at November 30, 1983 ................................ (399,069) 119,732
For cash, less issuance costs
of $7,735 .............................................. 500,446
For patents ............................................... 128,069
For cash .................................................. 130,936
Net loss for the year ended November 30, 1984 ............. (700,380) (700,380)
----------- ------------
Balance at November 30, 1984 ................................ (1,099,449) 178,803
For cash, less issuance costs
of $3,726 .............................................. 453,615
For cash .................................................. 1,016,800
Net loss for the year ended November 30, 1985 ............. (559,871) (559,871)
----------- ------------
Balance at November 30, 1985 ................................ (1,659,320) 1,089,347
Exercise of stock options for cash ........................ 27,500
For cash .................................................. 733,201
Net loss for the year ended November 30, 1986 ............. (1,222,772) (1,222,772)
----------- ------------
Balance at November 30, 1986 ................................ (2,882,092) 627,276
For cash, less issuance costs
of $9,500 .............................................. 519,400
Net loss for the year ended November 30, 1987 ............. (1,143,081) (1,143,081)
----------- ------------
Balance at November 30, 1987 ................................ (4,025,173) 3,595
For cash, less issuance costs
of $10,500 ............................................. 157,500
Net loss for the year ended November 30, 1988 ............. (352,311) (352,311)
----------- ------------
Balance at November 30, 1988 ................................ (4,377,484) (191,216)
For cash and the exchange of debt
due a shareholder ...................................... 231,000
Net loss for the year ended November 30, 1989 ............. (446,642) (446,642)
----------- ------------
Balance at November 30, 1989 ................................ (4,824,126) (406,858)
For services .............................................. 240,000
Net loss for the year ended November 30, 1990 ............. (1,328,518) (1,328,518)
----------- ------------
Balance at November 30, 1990 ................................ (6,152,644) (1,495,376)
For cash, less issuance costs of $1,630,241 ............... 5,569,759
Unit Purchase Option ...................................... 120
Redeemable Convertible Preferred Stock dividend ........... (19,843) (19,843)
For cash, less issuance costs of $126,900 ................. 953,100
Net loss for the year ended November 30, 1991 ............. (2,058,493) (2,058,493)
----------- ------------
Balance at November 30, 1991 ................................ $(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 ADDITIONAL
PER SHARE PAID-IN
DATE SHARE SHARES VALUE CAPITAL
---- ----- ------ ----- -------
<S> <C> <C> <C> <C> <C>
Balance at November 30, 1991...................................... 6,124,250 $ 61,243 $11,119,004
Exercise of Class A Warrants for cash, December, 1991-
less issuance costs of $702,917 ............................. May, 1992 3.00 4,139,000 41,390 11,672,693
February, 1992-
Exercise of Class B Warrants for cash .......................... November, 1992 4.00 34,055 341 135,879
July, 1992- 2.00-
Exercise of stock options for cash ............................. November, 1992 2.19 30,100 301 65,774
Net loss for year ended November 30, 1992 ......................
---------- -------- -----------
Balance at November 30, 1992 ..................................... 10,327,405 103,275 22,993,350
December, 1992-
Exercise of Class B Warrants for cash .......................... October, 1993 4.00 29,766 298 118,766
March, 1993-
Exercise of Class M Warrants for cash .......................... October, 1993 1.00 600,179 6,002 594,177
March, 1993- 2.00-
Exercise of Stock Options for cash ............................. September, 1993 4.38 3,100 31 13,119
Exercise of Unit Purchase
Options and Underlying Class A Warrants May, 1993- 3.00-
for cash .................................................... October, 1993 3.30 10,002 100 31,406
Net loss for the year ended November 30, 1993 ..................
---------- -------- -----------
Balance at November 30, 1993 ..................................... 10,970,452 109,706 23,750,818
For cash, less issuance costs of $490,790 ...................... August, 1994 0.80 5,297,000 52,970 3,693,840
Exercise of Stock Options for Cash........................... .. November, 1994 1.63-
3.59 100 1 201
Net loss for the year ended November 30, 1994 ..................
---------- -------- -----------
Balance at November 30, 1994 ..................................... 16,267,552 $162,677 $27,444,859
Exercise of Stock Options for Cash ............................. February, 1995 0.84 1,000 10 834
For cash, less issuance costs of $282,475 ...................... July, 1995 1.25 1,500,000 15,000 1,577,625
Net loss for the year ended November 30, 1995 ..................
---------- -------- -----------
Balance at November 30, 1995 ..................................... 17,768,552 $177,687 $29,023,318
Exercise of Stock Options for Cash ............................. January, 1996 0.84 20,000 200 16,675
February, 1996 0.84- 46,666 467 44,116
1.00
For cash, less issuance costs of $143,587 ...................... April, 1996 1.25 1,142,400 11,424 1,272,989
Exercise of Stock Options for Cash ............................. May, 1996 1.33 7,800 78 10,261
Net loss for the six month period ended
May 31, 1996 .................................................
---------- -------- -----------
Balance at May 31, 1996 .......................................... 18,985,418 $189,856 $30,367,359
========== ======== ===========
<CAPTION>
TOTAL
ACCUM- SHAREHOLDERS'
ULATED EQUITY
DEFICIT (DEFICIENCY)
------- ----------
<S> <C> <C>
Balance at November 30, 1991...................................... $ (8,230,980) $ 2,949,267
Exercise of Class A Warrants for cash,
less issuance costs of $702,917 ............................. 11,714,083
Exercise of Class B Warrants for cash .......................... 136,220
Exercise of stock options for cash ............................. 66,075
Net loss for year ended November 30, 1992 ...................... (5,390,637) (5,390,637)
------------ -----------
Balance at November 30, 1992 ..................................... (13,621,617) 9,475,008
Exercise of Class B Warrants for cash .......................... 119,064
Exercise of Class M Warrants for cash .......................... 600,179
Exercise of Stock Options for cash ............................. 13,150
Exercise of Unit Purchase
Options and Underlying Class A Warrants
for cash .................................................... 31,506
Net loss for the year ended November 30, 1993 .................. (6,135,830) (6,135,830)
------------ -----------
Balance at November 30, 1993 ..................................... (19,757,447) 4,103,077
For cash, less issuance costs of $490,790 ...................... 3,746,810
Exercise of Stock Options for Cash........................... ..
202
Net loss for the year ended November 30, 1994 .................. (4,331,500) (4,331,500)
------------ -----------
Balance at November 30, 1994 ..................................... $(24,088,947) $ 3,518,589
Exercise of Stock Options for Cash ............................. 844
For cash, less issuance costs of $282,475 ...................... 1,592,625
Net loss for the year ended November 30, 1995 .................. (2,818,403) (2,818,403)
------------ -----------
Balance at November 30, 1995 ..................................... $(26,907,350) $ 2,293,655
Exercise of Stock Options for Cash ............................. 16,875
44,583
For cash, less issuance costs of $143,587 ...................... 1,284,413
Exercise of Stock Options for Cash ............................. 10,339
Net loss for the six month period ended
May 31, 1996 ................................................. (918,786) (918,786)
------------ -----------
Balance at May 31, 1996 .......................................... $(27,826,136) $ 2,731,079
============ ===========
</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
Six Months (Date of Inception)
Ended May 31, ' to
---------------- May 31,
1996 ' 1995 ' 1996 '
---------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................. $ (918,786) $(1,514,279) $(27,806,294)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization......................................... 31,164 84,157 794,151
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............................ 134,381 (416,328) (309,478)
Inventory (increase) decrease...................................... 22,945 10,189 (913,476)
Prepaid expenses (increase) decrease............................... 27,438 13,076 (44,723)
Other assets (increase)............................................ (12,970) (17,393) (228,318)
Accounts payable increase.......................................... 53,949 119,522 185,350
Accrued liabilities increase (decrease)............................ (241,576) 29,903 174,780
---------- ----------- -------------
Net cash (used in) operations..................................... (903,455) (1,691,153) (27,695,079)
---------- ----------- ------------
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).............................. 2,897 (20,906) (839,250)
Disbursement under note receivable - related party....................... (7,948) (6,854) (198,188)
---------- ----------- ------------
Net cash (used in) provided by investing activities............... (5,051) 1,537,066 (1,037,438)
---------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Shares.................................. 1,356,210 844 30,121,647
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 (used in) provided by financing activities............... 1,336,367 (29,156) 30,101,804
---------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................................................. 427,861 (183,243) 1,369,287
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD................................................................ 941,426 840,245 -- '
---------- ----------- ------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD................................................................ $1,369,287 $ 657,002 $ 1,369,287
========== =========== ============
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 six-month periods ended May 31, 1996 and 1995 approximated $0 and $800, respectively.
</TABLE>
See notes to financial statements.
6
<PAGE> 7
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 1996
1. ORGANIZATION AND OPERATIONS
Somanetics Corporation (the "Company") is a Michigan corporation formed in
January 1982 to develop, manufacture and market computer-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. Operating results for the
six-month period ended May 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 $27,826,136 through May 31, 1996. The Company had working capital
of $2,276,834, cash and cash equivalents of $1,369,287, total current
liabilities of $360,130 and shareholders' equity of $2,731,079, as of May 31,
1996.
7
<PAGE> 8
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MAY 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 12 countries in the first six months of 1996.
The Company expects to begin marketing the Cerebral Oximeter in other
countries after complying with each country's local laws, and it expects to
begin marketing the Cerebral Oximeter in the United States as soon as it
completes product introduction activities and replaces existing Cerebral
Oximeters with the INVOS 3100A Cerebral Oximeter. 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 May 31, 1996 the Company had 16 employees. The Company expects to hire
21 additional employees before the end of the fiscal year, 12 in Sales and
Marketing, 4 in Manufacturing and Quality Control, 3 in Research, Development
and Engineering, and 2 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.
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
8
<PAGE> 9
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 1996
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 second quarter ended May 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 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.
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.
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.
The Company believes that the cash and cash equivalents on hand at May 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
9
<PAGE> 10
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 1996
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 isunable 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 third quarter ending August 31, 1996.
As of May 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. On June 19, 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 September 26, 1996. Any Class B Warrants
which have not been exercised before September 26, 1996 will no longer be
exercisable to purchase Common Shares. Holders of Class B Warrants will have
no further rights beyond September 26, 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 September 26, 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.
Also as of May 31, 1996, there were 750,000 redeemable warrants outstanding,
exercisable at $2.00 a share until July 13, 2000, and 571,200 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 July 2, 1996. Between June 1, 1996 and July 1, 1996,
126,000 of the warrants exercisable at $2.00 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.
10
<PAGE> 11
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31,1996
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>
May 31, 1996 November 30, 1995
------------ -----------------
<S> <C> <C>
Finished goods $385,150 $516,420
Work in process 306,388 219,076
Purchased components 221,938 200,925
-------- --------
Total $913,476 $936,421
======== ========
</TABLE>
Patents and Trademarks are recorded at cost and are being amortized on the
straight-line method over 17 years. Accumulated amortization was $29,148 and
$25,692 at May 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>
May 31, 1996 November 30, 1995
------------ -----------------
<S> <C> <C>
Professional fees $ 15,000 $ 75,702
Warranty 14,185 15,000
Insurance 12,489 --
Product Upgrades 150,280 149,954
Shareholder Lawsuits (Note 5) (17,174) 144,717
Other -- 30,983
-------- --------
Total $174,780 $416,356
======== ========
</TABLE>
11
<PAGE> 12
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 1996
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 its 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 May 31, 1996, for the uncollectibility of accounts receivable from
such distributors.
Under the domestic distributor replacement program, the Company believes
receivables previously reserved will ultimately become collected once the
Cerebral Oximeters owned or sold by United States distributors are replaced
with the INVOS 3100A Cerebral Oximeter. Distributors might terminate their
agreements with the Company or be terminated by the Company. Distributor
terminations may increase the Company's costs. In preparation for the
reintroduction of the Cerebral Oximeter in the United States, the Company has
terminated certain distributors and added new distributors. The Company will
be required to engage additional United States distributors for the Cerebral
Oximeter as a result of such terminations. The Company's inability to retain
distributors or engage replacement distributors 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, 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
12
<PAGE> 13
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 1996
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 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 $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 has entered into a Stipulation And Agreement Of Compromise And
Understanding (the "Agreement") with counsel for plaintiff Earl J. Jacobson.
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. The Agreement is subject to approval of the court and the
court's certification of the class, and at a hearing on June 28, 1996, the
court stated on the record that it would approve the Agreement and certify the
class. As of the date of this filing, the court has not yet issued a final
judgment approving the settlement, although the Company expects it will.
However, approximately 11 persons, including Benjamin Langford, have opted out
of
13
<PAGE> 14
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 1996
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. A hearing on the Company's motion to dismiss the action
is scheduled for July 17, 1996.
The ultimate outcome of the litigation cannot presently be determined. If the
Company must pay any significant additional amount to defend or settle either
of these lawsuits or if it must pay a significant judgment in connection with
either of these lawsuits, 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
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. The Company has been preparing its operations for commercial activity
in the United States and intends to devote the months ahead to completing
product introduction activities and replacing existing Cerebral Oximeters with
the INVOS 3100A Cerebral Oximeter. No assurance can be given that sales of the
Cerebral Oximeter and SomaSensor will increase, and it is not expected that
such sales will provide sufficient cash to fund the Company's operations in the
third quarter ending August 31, 1996.
14
<PAGE> 15
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 1996
LIQUIDITY AND CAPITAL RESOURCES
Somanetics Corporation is a development stage company formed to develop,
manufacture and market computer-based medical diagnostic and patient monitoring
equipment using INVOS(R) technology. Since inception (January 15, 1982), the
Company has incurred an accumulated deficit of $27,826,136 through May 31,
1996.
Net cash used in operations during the six-month period ended May 31, 1996 was
approximately $903,000. 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 $888,000, net of
depreciation and amortization expense), and (ii) decrease accrued liabilities
(approximately $242,000) primarily as a result of the (a) payment of
professional fees and (b) payment of expenses and settlement costs associated
with the class action lawsuits. These uses of cash were partially offset by
(i) a decrease in accounts receivable (approximately $134,000) due to reduced
sales in the second quarter, (ii) a $54,000 increase in accounts payable due to
increased legal expenses associated with the preparation and filing of year-end
and related public documents, and (iii) a decrease in inventory and prepaid
expenses (approximately $50,000). The reduction in inventory is due to reduced
purchasing activity while the Company awaited FDA clearance. 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.
As of May 31, 1996, the Company had working capital of $2,276,834 and cash and
cash equivalents of $1,369,287.
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
estimated 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
15
<PAGE> 16
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 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.
The Company believes that the cash and cash equivalents on hand at May 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, 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 and to conduct research and development
concerning additional potential applications of INVOS 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 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
16
<PAGE> 17
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 1996
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 third quarter ending August 31, 1996.
The Company did not receive any proceeds from the exercise of Class B or Class
M Warrants during the six-month period ended May 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 nine times, most recently to September 26, 1996. Any redeemable Class B
Warrants which have not been exercised before September 26, 1996, will no
longer be exercisable to purchase Common Shares. Holders of redeemable Class B
Warrants will have no further rights beyond September 26, 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 September 26, 1996.
As of July 1, 1996, the closing sale price of the Common Shares was $2.625.
As of May 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. 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 Company has the right to reduce the exercise price of the Class B
Warrants, extend the redemption date, or both. The maximum potential
redemption price for the Class B Warrants is $203,759, which the Company will
be required to pay in September 1996 if the Class B Warrants are redeemed.
Also as of May 31, 1996, there were 750,000 redeemable warrants outstanding,
exercisable at $2.00 a share until July 13, 2000, and 571,200 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 July 2, 1996. Between June 1, 1996 and July 1, 1996,
126,000 of the warrants exercisable at $2.00 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.
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.
17
<PAGE> 18
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 1996
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 its 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 May 31, 1996, for the uncollectibility of accounts receivable from
such distributors.
Under the domestic distributor replacement program, the Company believes
receivables previously reserved will ultimately become collected once the
Cerebral Oximeters owned or sold by United States distributors are replaced
with the INVOS 3100A Cerebral Oximeter. Distributors might terminate their
agreements with the Company or be terminated by the Company. Distributor
terminations may increase the Company's costs. In preparation for the
re-introduction of the Cerebral Oximeter in the United States, the Company has
terminated certain existing distributors and added new distributors. The
Company will be required to engage additional United States distributors for
the Cerebral Oximeter as a result of such terminations. The Company's
inability to retain distributors or engage replacement distributors could have
a material adverse effect on its ability to market and sell its product.
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 $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
18
<PAGE> 19
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 1996
the Jacobson case described above.
The Company has entered into a Stipulation And Agreement Of Compromise And
Understanding (the "Agreement") with counsel for plaintiff Earl J. Jacobson.
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. The Agreement is subject to approval of the court and the
court's certification of the class, and at a hearing on June 28, 1996, the
court stated on the record that it would approve the Agreement and certify the
class. As of the date of this filing, the court has not yet issued a final
judgment approving the settlement, although the Company expects it will.
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. A hearing on the Company's motion to dismiss the action is
scheduled for July 17, 1996.
The ultimate outcome of the litigation cannot presently be determined. If the
Company must pay any significant additional amount to defend or settle either
of these lawsuits or if it must pay a significant judgment in connection with
either of these lawsuits, 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 $27,806,294.
For the three and six-month periods ended May 31, 1996, the Company realized an
11% and a 39% reduction in the respective net losses over the same periods in
fiscal 1995. The decrease for the six-month period is primarily attributable
to a 36% reduction in operating expenses, partially offset by a 34% reduction
in sales.
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SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 1996
During the three-month periods ended May 31, 1996 and 1995, the Company
recognized revenues of $84,387 and $672,646, respectively. For the six-month
periods ended May 31, 1996 and 1995, the Company recognized revenues of
$599,465 and $906,625, respectively. The decrease in sales for the second
quarter of 1996, as compared to the second quarter of 1995, is primarily
attributable to lower sales to the Company's distributor in Japan and lower
sales in the European market. Sales during the second quarter of 1995 included
the shipment of an initial stocking order to Baxter Limited in Japan. The
decrease in sales for the six-month period was primarily attributable to
reduced shipments to Europe and to Baxter Limited in Japan.
Sales of refurbished units, commercial units and SomaSensors comprised
approximately 25%, 24% and 51%, respectively, of the Company's sales in the
second quarter of fiscal 1996 and 5%, 85%, and 10%, respectively, of the
Company's sales in the second quarter of fiscal 1995. Sales of refurbished
units, commercial units and SomaSensors comprised approximately 7%, 76% and
17%, respectively, of the Company's sales in the six months ended May 31, 1996,
and 8%, 80% and 12%, respectively, of the Company's sales in the six months
ended May 31, 1995. All 1996 and 1995 sales were export sales. Two
international distributors accounted for approximately 76% and 9%,
respectively, of total revenues for the six months ended May 31, 1996 and three
international distributors accounted for approximately 24%, 17% and 17%,
respectively, of total revenues for the three months ended May 31, 1996. Two
international distributors accounted for approximately 58% and 8%,
respectively, of total revenues in the six months ended May 31, 1995, and two
international distributors accounted for approximately 79% and 8%,
respectively, of total revenues in the three months ended May 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.
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 in the second half of fiscal 1996
to increase as
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SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 1996
a result of obtaining 510(k) clearance from the FDA, although
(i) the Company expects to devote the months ahead to completing product
introduction activities and replacing existing Cerebral Oximeters with the
INVOS 3100A Cerebral Oximeter, (ii) Baxter Limited is not expected to order
again until the fourth quarter and (iii) European sales appear to decrease
during the late July and August summer vacation season. 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 third quarter ending August 31, 1996.
Gross margin as a percentage of revenues for the quarters ended May 31, 1996
and 1995 were approximately 43% and 53%, respectively. Gross margin as a
percentage of revenues for the six-month periods ended May 31, 1996 and 1995
were approximately 57% and 52%, respectively. Gross margin as a percentage of
revenues decreased for the quarter ended May 31, 1996 from the fiscal 1995
level, primarily because 25% of total revenues in the three- month period ended
May 31, 1996 consisted of sales of refurbished Cerebral Oximeters, which are
sold approximately at cost, thereby reducing overall gross margin. Gross
margin as a percentage of revenues increased in the six-month period ended May
31, 1996 over the same period in 1995 primarily because a smaller portion of
revenues in 1996 were derived from sales of refurbished units. Excluding sales
of refurbished units, gross margins remained approximately the same as 1995.
Lower initial manufacturing, tooling and engineering costs and the reduced
level of personnel were offset by the lower level of sales over which fixed
costs of sales were spread.
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 initial manufacturing charges. However, the Company
expects to incur additional non-recurring tooling costs, initial manufacturing
costs and engineering costs in fiscal 1996 in connection with enhancements to
the SomaSensor and the production of the Cerebral Oximeter. Any new products or
enhancements developed during fiscal 1996 might also increase such costs. In
addition, the lower average selling prices of Cerebral Oximeters and SomaSensors
to United States distributors is expected to reduce the gross margin percentage.
The Company incurred research, development and engineering expenses of $52,732
and $122,274 for the fiscal quarters ended May 31, 1996 and 1995, respectively,
and $102,668 and $190,564 for the six-month periods ended May 31, 1996 and
1995, respectively. The decreases are primarily attributable to an
approximately $70,000 charge (in 1995) to
21
<PAGE> 22
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 1996
engineering expenses for obsolete purchased parts inventory relating to
engineering design changes to the Cerebral Oximeter model designed to comply
with TUV. 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, preparing the 510(k)
application and gaining the CE mark and CSA certification for the INVOS 3100A
Cerebral Oximeter. Research, development and engineering expenses are expected
to increase due to the Company's plans to (i) hire three more persons in this
department during fiscal 1996 to support new projects, and (ii) identify
and begin 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.
Selling, general and administrative expenses for the fiscal quarters ended May
31, 1996 and 1995 totaled $609,386 and $935,340, respectively, and $1,199,716
and $1,850,919 for the six-month periods ended May 31, 1996 and 1995,
respectively. For the three-month period ended May 31, 1996 over the same
period in 1995, the decrease is primarily due to a $211,000 reduction in
salaries, wages and related expenses, a $55,000 reduction in selling-related
expenses and a $37,000 reduction in facility expenses. The decrease for the
six-month period ended May 31, 1996 from the same period in 1995 is primarily
due to a $400,000 reduction in salaries, wages and related expenses, a $148,000
reduction in selling-related expenses and an $87,000 reduction in facility
expenses.
Salaries, wages, and related expenses, including expenses for temporary
employees and consulting services, decreased approximately $211,000, or 43%,
for the fiscal quarter ended May 31, 1995 over the fiscal quarter ended May 31,
1995, and approximately $400,000, or 40%, for the six-month period ended May
31, 1996 over the same period in 1995. The decreases for the three- and
six-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 24 employees at May 31, 1995 to 16 employees at May
31, 1996, incentive compensation accrual and consulting services. The Company
expects to hire 21 additional employees as needed, 12 in Sales and Marketing, 4
in Manufacturing and Quality Control, 3 in Research, Development and
Engineering and 2 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.
22
<PAGE> 23
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 1996
Selling expenses, including expenses for travel, entertainment, marketing,
clinical research and industry trade show participation, decreased
approximately $55,000, or 69%, for the fiscal quarter ended May 31, 1996 over
the fiscal quarter ended May 31, 1995, and approximately $148,000, or 77%, for
the six-month period ended May 31, 1996 over the same period in 1995. The
decreases for both periods were primarily due to reduced travel expenses
associated with training the Company's international distributors and reduced
expenses associated with trade show participation. The Company expects
selling, marketing and trade show expenses to increase in conjunction with
resumed marketing in the United States, engaging new United States distributors
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.
Monthly office expenses, including lease commitments, supplies, subscriptions
and related expenses decreased approximately $37,000, or 29%, for the
three-month period ended May 31, 1996, over the same period last year, and
approximately $87,000, or 33%, for the six- month period ended May 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 when the Company hires additional personnel.
Other income, including interest income and expense, increased approximately
$4,000 for the three-month period ended May 31, 1996 over the comparable
three-month period in fiscal 1995, and decreased approximately $8,000 for the
six-month period ended May 31, 1996 over the comparable six-month period in
fiscal 1995. The increase in the three-month period ended May 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 in the first half of the quarter. For the six-month period
ended May 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.
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<PAGE> 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings
For a description 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, at a hearing on June 28, 1996, the court stated on the
record that it would approve the Stipulation And Agreement of Compromise And
Understanding, regarding the settlement of the Jacobson action, and certify the
class. As of the date of this filing, the court has not yet issued a final
judgment approving the settlement, although the Company expects it will.
However, approximately 11 persons, including Benjamin Langford, have opted out
of the Jacobson action and this settlement and, 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. A hearing on the Company's motion to dismiss the action is scheduled
for July 17, 1996.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held on May 21, 1996. At
the Annual Meeting, Daniel S. Follis and James I. Ausman, M.D., Ph.D. were
elected as Directors of the Company, and the terms of office of Bruce J.
Barrett, H. Raymond Wallace and Gary D. Lewis as Directors of the Company
continued after the meeting. 12,866,877 votes were cast for Mr. Follis'
election and 236,100 votes were withheld from Mr. Follis' election. 12,976,477
votes were cast for Dr. Ausman's election, and 124,520 votes were withheld from
Dr. Ausman's election. There were no abstentions or broker non-votes in
connection with the election of the Directors at the Annual Meeting.
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<PAGE> 25
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment to Side Letter, dated June 18, 1996 among
Somanetics Corporation, Rauscher Pierce & Clark Ltd. and
Rauscher Pierce & Clark, Inc.
27.1 Financial Data Schedule
(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.
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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: July 10, 1996 By: /s/ Raymond W. Gunn
-------------------- ----------------------------------
Raymond W. Gunn
Executive Vice President and Chief
Financial Officer (Duly Authorized
and Principal Financial Officer)
26
