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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (fee required)
For the fiscal year ended NOVEMBER 30, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (no fee required)
For the transition period from TO Commission File No. 0-19095
SOMANETICS CORPORATION
(Exact name of Registrant as specified in its charter)
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MICHIGAN
(State or other jurisdiction of 38-2394784
incorporation or organization) (I.R.S. Employer Identification No.)
1653 EAST MAPLE ROAD, TROY, MICHIGAN 48083-4208
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (810) 689-3050
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON SHARES, PAR VALUE $.01 PER SHARE
-------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the Common Shares held by non-affiliates of the
Registrant as of January 17, 1997, computed by reference to the closing sale
price as reported by Nasdaq on such date, was approximately $25,261,335.
The number of the Registrant's Common Shares outstanding as of January
17, 1997 was 22,853,514
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1997 Annual Meeting of Shareholders,
scheduled to be held March 25, 1997, are incorporated by reference in Part III,
if the Proxy Statement is filed no later than March 30, 1997.
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SOMANETICS CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1996
TABLE OF CONTENTS
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PART I
PAGE
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Item 1. Business............................................................................... 2
Item 2. Properties............................................................................. 26
Item 3. Legal Proceedings...................................................................... 26
Item 4. Submission of Matters to a Vote of Security Holders.................................... 26
Supplemental Item. Executive Officers of the Registrant.......................................... 27
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.................. 28
Item 6. Selected Financial Data................................................................ 29
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 31
Item 8. Financial Statements and Supplementary Data............................................ 44
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 66
PART III
Item 10. Directors and Executive Officers of Registrant......................................... 67
Item 11. Executive Compensation................................................................. 67
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 67
Item 13. Certain Relationships and Related Transactions......................................... 67
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 68
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PART I
ITEM 1. BUSINESS
GENERAL
Somanetics Corporation (the "Company"), a development stage company, is a
Michigan corporation formed in January 1982 to develop, manufacture and market
processor-based medical diagnostic and patient monitoring equipment using In
Vivo Optical Spectroscopy (INVOS(R)) technology, principally for use in
hospital critical care units, especially the operating rooms and intensive care
units. INVOS technology may be used to analyze various characteristics of
human blood and tissue by measuring and analyzing low-intensity visible and
near infrared light transmitted into portions of the body. The Company has
developed a method of reducing extraneous spectroscopic data caused by
surrounding bone, muscle and other tissue, thereby allowing it to gather
information about portions of the body which previously could not be analyzed
using traditional spectroscopy.
The Company has developed the Somanetics INVOS Cerebral Oximeter (the "Cerebral
Oximeter") and the related disposable SomaSensor(R) which use INVOS technology
to noninvasively and continuously monitor trends in regional hemoglobin oxygen
saturation of blood in the brain of an individual. The Cerebral Oximeter is a
compact, portable monitor consisting of a small disposable sensor that
transmits and receives light, a computer to analyze the data and a monitor to
display the results. The Cerebral Oximeter is intended for use on patients who
have a risk of inadequate oxygen delivery to the brain and who are located in
any critical care areas of the hospital, including the operating room, recovery
room, emergency room and intensive care units. Brain oxygen saturation
information is especially important in many surgical procedures, particularly
relating to cranial surgery and major neurological, cardiac and vascular
repairs, as well as in the treatment of patients with head injuries or strokes.
Left untreated, a severe lack of blood oxygen in the brain can cause permanent
brain damage or death within minutes.
The Company also intends to explore other applications of its INVOS technology
and related technologies. As described below under the caption "RECENT
DEVELOPMENTS - PRODUCTS AND MARKETING", 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.
RECENT DEVELOPMENTS:
Product and Marketing
On November 22, 1993, the Company received notification that the FDA had
rescinded the Company's previous 510(k) clearance to market the INVOS 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
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several foreign countries, including Japan, its largest market outside the
United States. 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 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. As of January 17, 1997, the Company had 26
international distributors, 6 domestic distributors, 16 direct sales personnel
and 1 international sales consultant. During fiscal 1996, the Company sold its
products to 14 of its international distributors and devoted most of its United
States marketing to entering into distribution agreements with distributors,
hiring direct sales personnel and replacing existing Cerebral Oximeters with
the INVOS 3100A Cerebral Oximeter. There can be no assurance that the Company
will be successful or profitable in marketing the Cerebral Oximeter and the
related SomaSensor.
The Company also intends to use its consulting and clinical research
relationships to help identify and develop additional products. The Company
intends to focus its efforts on developing product extensions of the Cerebral
Oximeter for use on newborns in operating rooms and intensive care units and
enhancements to the Cerebral Oximeter. The Company also intends to explore
other applications of the Company's INVOS 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. 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 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 hemorrhagic shock, locate and assess subdural hematomas in head
trauma patients, monitor certain blood gasses 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.
The Company attends market specific trade shows in order to introduce and
promote its Cerebral Oximeter and to meet persons with an interest in
submitting peer-reviewed papers to appropriate anaesthesia and neurological
publications and to major national meetings. A total of 30 presentations
concerning the Cerebral Oximeter were presented to 20 meetings in fiscal year
1996, and 13 peer-reviewed articles mentioning the Cerebral Oximeter were
published. While the Company believes favorable peer review is a key element
to a product's success in
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the medical equipment industry, there can be no assurance that additional papers
will be submitted or that any such papers will accomplish the Company's
objectives. While the other publications in fiscal 1996 have been generally
favorable, some researchers have published adverse results after using the
product beyond its indicated use. There can be no assurance that these
publications, the Company's financial condition and the FDA's rescission of the
Company's previous 510(k) clearance for the Cerebral Oximeter will not
adversely affect the Company's reputation or its ability to market and sell its
device.
In September 1996, the Company entered into a Master Distributor 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 advice.
As of January 17, 1997, the Company had entered into distribution agreements
with 26 international specialty medical dealers, covering 74 countries outside
the United States. Seven of these countries require the Company to comply with
additional regulatory requirements prior to sale. During fiscal 1996, the
Company sold its products to 14 of its international distributors. The Company
has granted extended payment terms to some of its international distributors.
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 did not believe that its distributor agreements required
it to accept returns of products sold to distributors in connection with a
termination of the distribution agreement. The Company, however, reserved for
the uncollectibility of accounts receivable from such distributors.
The Company terminated 11 of its 15 domestic distributors in fiscal 1996, and
currently has 6 United States distributors for its products and additional
employees selling its products directly in the remaining domestic territories.
The Company entered into new distribution agreements with its four remaining
and two new United States distributors on different terms and conditions,
including different prices. It also hired 12 direct sales personnel in fiscal
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 ($68,000 from Somatek, Inc. plus the previously reserved amounts)
in exchange for the return of their, and their customers', old INVOS 3100
Cerebral Oximeters and SomaSensors (which returns resulted in a $121,150
recovery of bad debts in fiscal 1996). Because the Company has more INVOS 3100
Cerebral Oximeters than it expects to sell in the next year, the Company
recorded a reserve for the value of the devices in excess of one year's supply
in fiscal 1996 (approximately $150,000).
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
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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 fiscal 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 were permitted to exchange their old devices for
a new one. As a result, each distributor and customer only paid once and
received a new model Cerebral Oximeter. The Company also reversed its $27,600
reserve for the cost of replacing SomaSensors recalled in 1993. The net effect
of the foregoing on the Company's 1996 results of operations was an increase of
approximately $12,000 in selling, general and administrative expenses.
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 in additional territories, or retain its existing distributors.
The Company's inability to engage, replace or retain distributors could have a
material adverse effect on its ability to market and sell its product.
In December 1996, the Company was allowed an additional patent relating to its
INVOS technology and Cerebral Oximeter.
Capital and Finances
During fiscal 1996, the Company redeemed all of its 1,984,250 outstanding
Convertible Preferred Shares for $0.01 each, or $19,843, and all 4,075,179
outstanding redeemable Class B Warrants on November 14, 1996 for $0.05 each, or
$203,759. Also, on March 20, 1996, the remaining approximately 144,340
outstanding Unit Purchase Options expired, on September 26, 1996, the remaining
30,983 outstanding Class M Warrants were exercised for $0.95 a common share,
and on November 14, 1996, the remaining 5,001 outstanding non-redeemable Class
B Warrants expired.
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;
these conditions have not been met as of January 17, 1997.
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During fiscal 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 April 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 fiscal 1996, the
Company received approximately $75,000 from the exercise of employee stock
options.
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.
Also, on November 21, 1996, the Company completed the placement of 3,668,413
newly-issued Common Shares, par value $0.01 per share, at a price of $1.15 per
share 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, the expenses of the offering and $129,318 of other
deferred offering costs, were approximately $3,568,000.
The Company believes that the cash and cash equivalents on hand at November 30,
1996 will be sufficient to sustain the Company's operations at budgeted levels
and its needs for liquidity into the third quarter of fiscal 1997. 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 technology and related
technologies 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 fiscal 1997.
The Company has entered into a Letter Agreement, dated as of January 10, 1997,
pursuant to which the Company has exclusively retained a managing underwriter
to underwrite a proposed public offering by the Company of 1,200,000
newly-issued Common Shares (subject to, and after giving effect to, the
proposed one-for-ten reverse stock split being submitted for shareholder
approval at the 1997 Annual Meeting of Shareholders). The Company has also
agreed to grant the underwriter an option to purchase an additional 180,000
Common Shares to cover over-allotments and a five-year warrant to purchase an
amount of shares equal to 10% of the Common Shares sold in the offering at an
exercise price equal to 120% of the purchase price for the Common Shares in the
offering. Among other things, the offering is contingent on consummation of
the reverse split and the satisfactory completion of a due diligence
investigation of the Company by the underwriter and its agents. Any such
offering will be made only by means of a prospectus. In addition, the type and
amount of security, if any, that might ultimately be issued in any such
offering have not
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yet been definitively determined and will be dependent on negotiations with the
underwriter, market conditions and management's then current estimate of the
proceeds necessary or desired to sustain the Company's operations. There can
be no assurance that such offering will occur or that the Company will be able
to raise any capital or capital in amounts it desires, or on terms and
conditions acceptable to the Company.
The Company has no loan commitments.
The Company has incurred substantial expenses in developing the INVOS
technology, the INVOS 2100 (a former product no longer being sold by the
Company), the INVOS Cerebral Oximeter and the related disposable SomaSensor
and, accordingly, had an accumulated deficit at November 30, 1996 of
$30,211,053. As of November 30, 1996, the Company had working capital of
$3,861,775, cash and cash equivalents of $3,291,911, total current liabilities
of $618,142 and shareholders' equity of $4,053,599.
During fiscal 1994, two shareholders of the Company filed two purported class
action lawsuits against the Company alleging various securities law violations,
one of which was settled in fiscal 1996. 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 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, and
the settlement of that lawsuit, see Note 7 of Notes to Financial Statements
included in Item 8 of this Report.
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, former Chairman of the Board, in an action
captioned Benjamin Langford v. Somanetics Corporation and Gary D. Lewis, see
Note 7 of Notes to Financial Statements included in Item 8 of this Report.
The foregoing 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.
Personnel
The Company reduced its workforce from 54 employees to 30 as of January 1994.
The Company had 16 employees as of May 31, 1996 and has hired 21 additional
employees and four consultants through January 17, 1997. The Company expects
to hire two additional employees in Sales and Marketing before the end of the
first fiscal quarter of 1997 and expects to hire 11 additional employees in
fiscal 1997 (one in Management, two in Administration, four more in Sales and
Marketing, one in Medical Affairs, one in Quality Control, one in
Manufacturing, and one in Service). The Company expects to incur these
expenses before
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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. As of January 17, 1997, the Company had 37 employees and four
consultants.
Effective November 4, 1996, Gary D. Lewis resigned as a director of the
Company. The size of the Board was reduced to four members, and Bruce J.
Barrett was changed from a Class II director to a Class III director to make
the number of directors in each class as nearly equal as possible. Mr. Barrett
will now serve until the 1998 Annual Meeting of Shareholders and until his
successor is duly elected and qualified, or until his earlier death,
resignation or removal. On November 6, 1996, Gary D. Lewis paid the Company
$175,000 (the outstanding principal amount of the loan at the time) in full
satisfaction of all of his obligations under the loan made by the Company to
him on February 1, 1993, and the Company discharged the second mortgage and
released the security interests securing the loan and wrote off approximately
$29,750 of accrued interest with respect to that loan.
Effective December 26, 1995, Larry Layman II resigned as the Company's Vice
President, Sales and Marketing. Effective December 1, 1996, the Board of
Directors approved an increase in Raymond W. Gunn's base salary to $110,250,
and the extension of Mr. Gunn's employment agreement through November 30, 1997.
In light of the lack of 1995 bonuses, lack of increases in 1996 salaries and
lack of a 1996 bonus plan, and to facilitate the retention of the Company's
employees and to align their interests with the interests of the Company's
shareholders, in December 1995, in exchange for the cancellation of certain
outstanding stock options, most of which were granted subject to shareholder
approval, the Company granted stock options to purchase an aggregate of 689,000
Common Shares (most of which were granted independent of the Company's stock
option plans and none of which was granted subject to shareholder approval) to
each then current employee of the Company and two advisors to the Company,
including options to purchase 165,000, 150,000 and 50,000 Common Shares granted
to Messrs. Barrett, Gunn and Layman, respectively, the Company's then current
President and Chief Executive Officer, Executive Vice President and Chief
Financial Officer, and Vice President, Sales and Marketing, respectively.
Except for the options granted to officers, the new options cover the same
number of shares and are subject to substantially the same terms and conditions
as the options previously granted to such persons under the 1991 Incentive
Stock Option Plan (the "Plan"), except that (i) the exercise price of the new
options is the fair market value of the Company's Common Shares as of the date
of grant ($0.50 a share), (ii) the new options become exercisable in one-fourth
cumulative annual increments beginning December 22, 1996 and expire December
22, 2005, and (iii) the new options are not subject to shareholder approval.
The new options granted to officers are the same as those granted to other
persons, except that (i) the exercise price of the new options granted to
officers is the same as the exercise price of their cancelled options ($1.3125
a share), and (ii) the new options granted to the officers become exercisable
at the same times as the cancelled options: one-fourth cumulative annual
increments beginning March 13, 1996.
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In addition, in December 1995 and January 1996, the Company granted options to
purchase an additional 624,850 Common Shares (most of which were granted
independent of the Company's stock option plans) to officers and employees of,
and advisors to, the Company, including options to purchase 267,000 and 141,000
Common Shares granted to Messrs. Barrett and Gunn, respectively.
Pursuant to an amended agreement with Rauscher Pierce & Clark, Inc. and
Rauscher Pierce & Clark Limited (collectively, the "Placement Agent") in
connection with the April 2, 1996 Regulation S offering, the Company 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 designated
Mr. Alan Nash as the designee.
Facilities
The Company leases approximately 23,000 square feet of office, assembly and
warehouse space in a stand-alone building in Troy, Michigan. On July 22, 1994,
the Company extended the lease on its office, assembly and warehouse space
through December 1997. The minimum lease payments as of November 30, 1996
through the end of the extended lease, including the option period, is
$199,000, excluding other occupancy costs. The Company believes that,
depending on sales of the Cerebral Oximeter, its current facility is more than
suitable and adequate for its current needs, including assembly of the Cerebral
Oximeter by the Company and conducting Company operations in compliance with
prescribed FDA/GMP guidelines, and will allow for substantial expansion of the
Company's business and number of employees. The Company is subleasing a
portion of its warehouse space on a month-to-month basis for $2,700 per month.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company's business consists of a single industry segment.
NARRATIVE DESCRIPTION OF BUSINESS
INVOS TECHNOLOGY:
Optical Spectroscopy
The Company's technology relies primarily on the physics of optical
spectroscopy, which is the interpretation of the interaction between matter and
light. Spectrometers and spectrophotometers function primarily by shining
light through matter and measuring the extent to which such light is
transmitted through, or scattered or absorbed by, matter. Doctors and
scientists can use spectrophotometers to determine the concentrations, or
relative concentrations, of substances. These devices measure the relative
intensities of predetermined wavelengths of light received by light sensors in
the device after being transmitted into a substance (using a sufficient number
of wavelengths).
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The atoms in a molecule in a particular substance vibrate at unique
frequencies. Only light waves that match a particular molecule's vibrational
frequency are absorbed by the molecule, and such absorption occurs in
characteristic and predictable ways. Devices using spectrophotometers can
measure the reaction of light to vibrating molecules and allow doctors to draw
specific conclusions based on the measured reaction. The absorption,
transmission and scattering data become much more difficult to evaluate with
human tissue containing numerous molecules. Analysis of human tissue,
therefore, requires more sophisticated empirical methods.
Doctors have been able to examine human blood and tissue using optical
spectroscopy. Although most human tissue is opaque to ordinary light, certain
wavelengths penetrate tissue more easily than others. Therefore, by shining
light of appropriate wavelengths into the body and measuring its transmission,
scattering and absorption, or a combination, doctors can obtain information
about the molecules existing within the matter under scrutiny. Optical
spectroscopy was first used clinically in the 1940s at the Sloan-Kettering
Institute for cancer research. Currently, the pulse oximeter, for example, a
commercially available device, uses optical spectroscopy to determine the
oxygen saturation of the blood in the arteries in peripheral tissue, such as in
a finger or an earlobe. By identifying the hemoglobin molecules and the
oxygenated hemoglobin molecules and measuring the relative amount of such
molecules, oxygen saturation of hemoglobin can be measured.
INVOS Technology
INVOS technology also measures the composition of substances by detecting the
effect they have on particular wavelengths of light. INVOS transmits
low-intensity visible and near infrared light through a portion of the body and
detects the manner in which the molecules of the exposed substance interact
with light at specific wavelengths. INVOS detects this interaction by
measuring the intensity of the various wavelengths of light received by light
sensors.
The use of optical spectroscopy in vivo (in the body) has not generally been
useful when the substances to be measured were surrounded by, were behind, or
were near bones, muscle or other tissue, because the transmission, scattering
and absorption of the transmitted light produces extraneous data that
interferes with analysis of the data from the area being examined. Differences
in skin pigment also affect results. The Company has developed a method of
reducing the effect on the measurements of extraneous spectroscopic data caused
by surrounding bone, muscle and other tissue. This method allows data to be
gathered from areas of the body which could not previously be analyzed using
spectroscopy. The Company and independent researchers have demonstrated that
visible and near infrared light are able to penetrate brain tissue. The INVOS
technology has been shown to measure the presence of certain substances in the
brain. Now that the Company has FDA 510(k) clearance, the Company expects to
focus its efforts on developing extensions of the Cerebral Oximeter for use on
children and newborns and enhancements to the Cerebral Oximeter. The Company
also intends to explore other applications of its INVOS technology and related
technologies. As described above under the caption "RECENT DEVELOPMENTS -
PRODUCTS AND MARKETING", the
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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.
The Company believes that this INVOS technology will enable it to develop
products which safely provide primary information about the patient's
physiology and metabolism without invading the patient's body, without
ionization (which occurs when x-rays are used and may be dangerous in some
instances) and without the often expensive and time-consuming delays involved
in laboratory analysis.
CEREBRAL OXIMETER:
INVOS Cerebral Oximeter Technology
Hypoxia (insufficiency of oxygen delivery) is a common mechanism for the
eventual adverse outcome for many surgical procedures. Additional patients
experience permanent brain damage. Studies suggest that insufficiency of
oxygen delivery to the brain is a frequent cause of these problems.
In major complex surgical procedures, especially major neurological, cardiac
and vascular repairs, low blood flow or pressure may be induced or may occur,
which can have detrimental effects on blood oxygen saturation in the brain.
Immediate information concerning brain oxygen saturation changes would help the
anesthesiologist and surgeons take appropriate corrective action through the
introduction of medications, anesthetic agents or mechanical intervention.
However, because of the unconscious state of the patient, an anesthesiologist
is unable to observe ordinary physical responses to make a determination.
Because of the short period of time that the brain is able to survive without
sufficient oxygen, immediate, accurate information is of vital importance to
the anesthesiologist. Currently, several different diagnostic methods are used
to detect blood oxygen levels or inadequate oxygen delivery.
The brain is the human organ least tolerant of oxygen deprivation. Without
oxygen, brain cells die within a few minutes and are not replaced, potentially
resulting in paralysis, severe and complex disabilities or death. Within
minutes of oxygen deprivation, irreversible brain damage may occur.
Oxygen molecules are carried to the brain by hemoglobin molecules contained in
the blood. Hemoglobin, passing through the lungs, bonds with oxygen and is
pumped by the heart through arteries and capillaries to the brain. Brain cells
extract the oxygen and the blood carries away carbon dioxide through the
capillaries and veins back to the lungs. Oxygen saturation is the term that
describes the percentage of hemoglobin molecules contained in a given amount of
blood which are bound to oxygen molecules. By measuring the effect on specific
wavelengths of light caused by oxygenated hemoglobin contained in blood in the
region of the brain being monitored, the Cerebral Oximeter can monitor changes
in the approximate oxygen saturation of the hemoglobin in the area of the brain
being monitored.
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<PAGE> 13
The light from the Cerebral Oximeter's sensor is able to penetrate the
patient's brain, and monitor changes in the approximate oxygen saturation of
the hemoglobin contained in the blood vessels inside the brain in the region
under examination. The information received from the sensor is transmitted to
the Cerebral Oximeter's computer which, through a series of calculations, is
able to reduce the influence on the light caused by extraneous tissue, such as
the skin, muscle and skull of the patient.
The Cerebral Oximeter monitors changes in the approximate oxygen
saturation in all blood vessels in the region being monitored. Under normal
circumstances, in the head, these blood vessels consist of approximately (by
volume) 75% of veins, 20% of arteries and 5% of capillaries. Thus, the
Cerebral Oximeter's measurement is dominated by the blood in the veins.
Regional oxygen saturation of the predominantly venous blood in the blood
vessels in and supplying the brain is most helpful because such information is
a direct indicator of insufficient blood or oxygen supply or high brain oxygen
consumption. Devices such as pulse oximeters only determine the oxygen
saturation of blood in the arteries in a particular portion of the body, not
necessarily the adequacy of oxygen delivery to the brain or other portions of
the body.
The Cerebral Oximeter
The Cerebral Oximeter is a compact, portable monitor measuring 12 inches wide,
6 inches high and 13 inches deep and weighing approximately 15 pounds. It
consists of a small disposable sensor which transmits and receives light,
connected to a computer which analyzes the data and a monitor to display and
print the results. The Cerebral Oximeter can be placed at a patient's bedside
in the operating room, recovery room, emergency room or intensive care units.
After being adhered to a patient's forehead, the sensor continuously sends
predetermined wavelengths of low-intensity near infrared and visible light into
the patient's head through the scalp, muscle and bone into the brain tissue.
The Cerebral Oximeter then measures and analyzes the intensity of the light
scattered by the blood and tissue in the area being monitored and received by
the sensor. After analysis by the Cerebral Oximeter's internal computer, a
digital display provides a continuous reading of the changes in the approximate
regional brain oxygen saturation in the area being monitored.
The Cerebral Oximeter may be used by physicians on patients who have a risk of
inadequate oxygen delivery to the brain and who are located in any critical
care areas of the hospital, including the emergency room or intensive care
units on patients with head injuries or strokes. In the operating room, the
Cerebral Oximeter may be used on patients having brain and other surgeries
involving risk of inadequate oxygen delivery or decreases in blood flow, such
as any heart surgery, transplant surgery or surgeries involving major blood
vessels, such as a carotid endarterectomy, which is the removal of blockage in
the carotid artery.
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<PAGE> 14
Existing Diagnostic Methods
The neurological exam is the generally used method for evaluating the brain.
The patient is tested for signs of brain damage by testing limb strength, limb
sensation, patient orientation, speech, response to commands, and the
functioning of eyes and pupils. The neurological exam measures only
manifestations of injuries and cannot be performed on unconscious patients.
Skin color is also a commonly used method for determining whether sufficient
oxygen is reaching various body parts.
Pulse oximetry is currently the standard method used by
anesthesiologists during surgery to monitor arterial hemoglobin oxygen
saturation. The pulse oximeter uses near infrared spectroscopy, similar to
that used by the Cerebral Oximeter, to measure the oxygen saturation in the
arteries in peripheral tissue, typically a finger or an earlobe. The technique
distinguishes between blood and other extraneous tissue such as bone and muscle
by using the pulsation of arterial blood. The effectiveness of pulse oximetry
is dependent upon the strong pulse of the patient. In addition, the technique
measures the oxygen saturation of blood in the arteries in a particular portion
of the body, not necessarily the adequacy of oxygen delivery to other portions
of the body.
With Invasive Jugular Bulb Catheter Monitoring, blood is drawn from a patient's
jugular vein, and the oxygen content, acidity and other blood gases are
analyzed directly from the removed blood. By analyzing venous blood, this
method provides information about the adequacy of oxygen delivery to the brain.
However, the procedure is able to provide information only for the point in
time at which the blood is removed from the vein and it is invasive, in that
blood must be removed from a vein in the neck near the base of the brain. It
measures global saturation of the venous blood in the brain, not regional
saturation.
Transcranial doppler (TCD) is a relatively new modality for measuring cranial
hemodynamics during carotid surgery. One or two transducers are placed
temporally, just in front of the ear and focused on the middle cerebral artery.
Doppler ultrasound bounces high frequency sound waves off the blood flowing
toward the transducer giving a relative read-out of "flow-velocity". Assuming
the artery does not change diameter and the transducer is not moved during the
case, relative changes in hemodynamics can be detected as well as emboli moving
down the vessel. TCD cannot be used in 5-10% of the population where the
temporal bone is too thick; additionally, TCD is technically difficult during
carotid surgery.
Surgeons may also monitor brain function, typically during procedures in which
oxygen delivery to the brain is threatened, by using an Electroencephalogram
("EEG"). It measures neural activity directly, which can be affected by
anesthetic agents or by decreased oxygen supply. However, EEG may be
ineffective in any procedure involving suppressed neural activity, such as
operations involving deep anesthesia or induced hypothermia (lowered body
temperature), such as organ transplants.
Several different imaging techniques, such as CAT scan, Magnetic Resonance
Imaging, Positron Emission Tomography and Single Photon Emission Computerized
Tomography, may also be used to measure brain condition or activity. However,
these are generally expensive procedures which may only be performed in
dedicated facilities. They are generally used as
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<PAGE> 15
diagnostic tests to detect anatomical abnormalities, such as tumors or
blood clots, or cellular metabolism or blood flow. They would not currently
appear to be practical for generating continuous measurements or for use in an
operating room or for patient monitoring.
Less frequently, physicians may use Intracranial Pressure monitoring to monitor
the pressure inside the patient's skull. This invasive monitor involves the
placement of a sensor in the intracranial space through a drilled hole. There,
it measures the pressure on the brain which may increase as a secondary effect
of certain brain damage or head injuries.
Measurement of carbon dioxide in the expired gas of patients under anesthesia
can provide an early indication of a ventilation problem, which may result in
an oxygen delivery problem. However, a low blood oxygen level, including a low
blood oxygen level in the brain, may not be associated with an abnormal carbon
dioxide level.
The Cerebral Oximeter is noninvasive, generates no ionizing radiation and
produces no known hazardous effects. The Company believes that it can provide
physicians with continuous information concerning changes in the approximate
oxygen saturation of the hemoglobin in the blood in specific regions of the
brain. It is portable and it should be an inexpensive alternative to the above
diagnostic methods. Unlike pulse oximetry, a standard of care in anesthesia
which derives its measurement from pulsating arterial blood, the Cerebral
Oximeter is not dependent on a pulsatile flow to function. The measurement
provided by the Cerebral Oximeter is a combination of arterial, venous and
capillary oxygenation.
The Cerebral Oximeter is intended to provide surgeons, anesthesiologists, and
other medical professionals with a patient safety monitor to identify
immediately adult brain oxygen imbalances and to further serve as a tool to
guide therapeutic interventions, which could affect brain oxygen supply and
demand.
The data from the Cerebral Oximeter, however, may be adversely affected by the
following: (i) major changes in the ratio of arterial to venous blood vessel
volume, (ii) major changes in blood volume or hematocrit (the ratio of volume
of red blood cells to volume of whole blood), (iii) excessive ambient light,
(iv) electrical interference, (v) the presence of dyshemoglobins (hemoglobin
molecules that do not release their oxygen), (vi) dyes in the blood, and (vii)
placing the SomaSensor over sinus cavities, tumors, swelling containing blood
or other anomalies.
Development of the Cerebral Oximeter
In 1982, the Company commenced research and development efforts with respect to
INVOS technology in connection with the development of a spectroscopic
instrument for the measurement of breast tissue abnormalities. The Somanetics
INVOS 2100 System (the "INVOS 2100") used the same INVOS technology as the
Cerebral Oximeter. By transmitting low-intensity visible and near-infrared
light through a woman's breast and measuring the effects the breast tissue had
on the light, the INVOS 2100 could be used to analyze certain compositional and
physiological properties of the breast. The measurements were analyzed to
estimate the risk of a patient developing breast cancer. The INVOS 2100
gathered information
14
<PAGE> 16
concerning glandular, fibrous and fatty tissue as well as hemoglobin
and extracellular water. Subsequently, the Company commenced investigations
with respect to the application of INVOS technology to the measurement of
changes in cellular metabolism in the brain. The INVOS 2100 drew conclusions
concerning a condition or risk based upon measurements of several elements.
The Cerebral Oximeter monitors changes in one element, oxyhemoglobin, or brain
oxygen saturation, directly. Accordingly, the Company believed that it could
demonstrate more easily the effectiveness of the Cerebral Oximeter to potential
customers. Early studies conducted in conjunction with the Henry Ford
Neurosurgical Institute, Detroit, Michigan, demonstrated the ability of the
Company's INVOS technology to make certain measurements which were highly
correlated to controlled changes in animal brain cell metabolism.
In 1988, the Company began clinical studies of the Cerebral Oximeter on
human patients in operating rooms, emergency rooms and intensive care units at
Henry Ford Hospital, Detroit, and later at Bowman Gray School of Medicine,
North Carolina, and Mount Sinai Medical Center, New York. On June 6, 1996, the
Company received clearance from the FDA to market the Cerebral Oximeter in the
United States. The Company continues to sponsor clinical research for
marketing purposes. The research consists primarily of comparing the
measurements obtained from the Cerebral Oximeter to the data obtained from
existing diagnostic methods, including EEG, Transcranial Doppler and Invasive
Jugular Bulb Catheter Monitoring. There can be no assurance that hospitals
will buy it in sufficient quantities to support the Company's operations.
MARKETING
The Company sells the Cerebral Oximeter through its sales and marketing
employees and independent specialty distributors to hospitals for use on
patients with head trauma or cerebral vascular disease, or at risk of brain
hypoxia (insufficiency of oxygen delivery) or ischemia (tissue oxygen
starvation due to the obstruction of the inflow of arterial blood), in any
critical care areas of the hospital, including the operating room, recovery
room, intensive care units and emergency care room. Purchasers of the Cerebral
Oximeter will also be required to purchase disposable sensors on a regular
basis. The sensor may only be used once because its effectiveness is not
warranted by the Company after one use and because the sensor may become
contaminated after one use.
The Company did not have any backlog of firm orders as of January 17, 1997.
The Company has been able to fill its firm orders within days of their receipt.
The Company does not believe that its current backlog is necessarily
indicative of trends in its business, especially because the Company is in the
development stage and did not regain its FDA 510(k) clearance until June 1996.
For a description of the current status of the Company's marketing efforts, see
"Recent Developments - Products and Marketing".
The Company has engaged distributors for some new markets cleared for
distribution and replaced some distributors that terminated their distribution
agreements. On March 15, 1995,
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<PAGE> 17
the Company announced the engagement of Baxter Limited as its exclusive
distributor in Japan. On April 10, 1995, the Company received its license from
the Japanese Ministry of Health and Welfare to market its product in Japan. In
September 1996, the Company entered into a Master Distributor 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 product advice. In January 1994, the sales and marketing
staff was reduced from 12 to 5 as a result of the FDA's rescission of the
Company's 510(k). As of January 17, 1997, there were 18 employees and one
consultant in the sales and marketing department, with two more budgeted to be
hired in the first fiscal quarter of 1997 and four more budgeted to be hired
during the remainder of fiscal 1997.
As of January 17, 1997, the Company had entered into distribution
agreements with 26 international specialty medical dealers, covering 74
countries outside the United States. Seven of these countries require the
Company to comply with additional regulatory requirements prior to sale.
During fiscal 1996, the Company sold its products to 14 of its international
distributors. The Company has granted extended payment terms to some of its
international distributors.
For a description of the restructuring of the Company's United States
distribution, see "Recent Developments - Products and Marketing."
The Company's distributors also distribute other products, some of which may
compete with the Company's products or may provide greater revenues to the
distributor than are provided by the Company. There can be no assurance that
the Company will be able to replace distributors desiring to terminate their
distribution agreements, engage distributors in additional territories, or
retain its existing distributors, or that existing distributors will not incur
conflicting obligations before, and will remain motivated until, the Company
begins commercial shipments in the territories served by such distributors.
With the June 1996 FDA 510(k) clearance, the Company intends to devote its
sales efforts equally between the United States and foreign markets.
The Company sells the Cerebral Oximeter primarily to neuro anesthesiologists,
cardiothoracic and vascular surgeons, anesthesiologists and neurosurgeons in
hospitals. The Company believes that neuro anesthesiologists, cardiothoracic
and vascular surgeons, anesthesiologists and neurosurgeons are the most
sensitive to cerebral vascular disease and the prevention of ischemic and
hypoxic events. The Company's strategy is to attempt to establish the efficacy
of the Cerebral Oximeter and related disposable SomaSensor through publication
of peer reviewed papers and through its clinical research program. In
addition, the Company's independent distributors and direct sales personnel are
expected to contact leading neuro anesthesiologists, cardiothoracic and
vascular surgeons, anesthesiologists, neurosurgeons, critical care physicians
and others who might use the product at teaching institutions and private
hospitals. The Company and its distributors have initially concentrated on
sales to the major teaching hospitals in selected foreign markets in which the
Company has commenced commercial sales and the 2,000 largest United States
hospitals and on the use of the Cerebral Oximeter in operating rooms at
teaching hospitals, departments of the hospitals, universities,
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<PAGE> 18
clinics and leading health institutions. Later, marketing efforts are
expected to expand to (i) major teaching hospitals in other foreign markets,
and (ii) smaller hospitals and the use of the Cerebral Oximeter in the recovery
room or post anesthesia care unit ("PACU"), intensive care unit ("ICU"), and
emergency room ("ER").
The Company has also attended and plans to attend market specific trade
shows in order to introduce and promote its Cerebral Oximeter and to meet
persons with an interest in submitting peer reviewed papers to appropriate
anesthesia and neurological publications and to major national meetings. A
total of 30 presentations concerning the Cerebral Oximeter were presented to 20
meetings in fiscal year 1996, and 13 peer-reviewed articles mentioning the
Cerebral Oximeter were published. While the Company believes favorable peer
review is a key element to a product's success in the medical equipment
industry, there can be no assurance that additional papers will be submitted or
that any such papers will accomplish the Company's objectives. While the other
publications in fiscal 1996 have been generally favorable, some researchers
have published adverse results after using the product beyond its indicated
use. There can be no assurance that these publications, the Company's financial
condition and the FDA's rescission of the Company's 510(k) clearance for the
Cerebral Oximeter will not adversely affect the Company's reputation or its
ability to market and sell its device.
The Company also intends to use its clinical trial relationships to help
identify and develop additional products. Now that the Company has FDA 510(k)
clearance, the Company expects to focus its efforts on developing extensions of
the Cerebral Oximeter for use on children and newborns and enhancements to the
Cerebral Oximeter. The Company also intends to explore other applications of
its INVOS technology and related technologies. As described above under the
caption "RECENT DEVELOPMENTS - PRODUCTS AND MARKETING", 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.
Because the medical community is often skeptical of new companies and new
technologies, the Company might be unable to gain access to potential customers
to attempt to demonstrate the operation and efficacy of the Cerebral Oximeter.
Even if the Company gains access to potential customers, no assurance can be
given that members of the medical community will perceive a need for or accept
the Cerebral Oximeter. In fiscal year 1996, the Company continued to support
clinical research programs with third party clinicians and researchers intended
to demonstrate the need for, and efficacy of, the Cerebral Oximeter with the
specific objective of publishing the results in peer reviewed journals. The
Company expects such programs to continue in 1997. In addition, although the
Company believes its current distributors to be knowledgeable and although the
Company has a training program for new distributors concerning the Company's
technology and the Cerebral Oximeter, independent distributors might not have
sufficient knowledge about, or familiarity with, the Company's technology or
the Cerebral Oximeter to demonstrate adequately its operation and efficacy.
In addition, hospital capital equipment purchasing decisions are often made by
hospital committees that might not include the user of the device. If so, the
Company will also have to convince such committees to purchase the Company's
device. Even if the Company is
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<PAGE> 19
successful in convincing doctors, hospitals, clinics and other
potential users of the Cerebral Oximeter of their need for the Cerebral
Oximeter, they might be unwilling or unable to commit funds to the purchase of
the Cerebral Oximeter due to institutional budgetary constraints or decreases
in capital expenditures. The Company has designed a leasing program, including
a no-capital leasing program, to lower the capital initially required to obtain
the Cerebral Oximeter. The Company intends to test market its program
domestically before expanding it worldwide. Some purchasers might also be
reluctant to purchase the device from the Company for fear that it will be
unable to satisfy warranty obligations in connection with, supply replacement
parts for, and supply disposable sensors for, the Cerebral Oximeter or to
continue in existence in the future.
The Company provides a one-year warranty on the Cerebral Oximeter, which the
Company will satisfy by repairing or exchanging those in need of repair. The
Company also expects to offer maintenance agreements and service for the
Cerebral Oximeter for a fee after the warranty expires. The Company's service
department currently consists of one person. The Company intends to increase
its service personnel commensurate with product service demand.
The Company has not had significant prior experience in the marketing of
medical capital equipment. Consequently, there can be no assurance that the
marketing efforts of the Company will be successful on a scale necessary to
enable the Company to attain profitability.
The Cerebral Oximeter has not had extensive use in commercial setting and has
not been evaluated for every medical procedure in which it might be used.
There can be no assurance that further research or use of the device will not
reveal unexpected problems with its operation or performance, especially in
connection with medical procedures for which the device has not yet been
evaluated. Although the Company's testing of the Cerebral Oximeter to date
indicates clinical utility, subsequent performance problems could result in
unanticipated expense and could adversely affect future sales of the device.
The following table shows the approximate percentage of net sales for major
product classifications for the past three years:
<TABLE>
<CAPTION>
Years Ended November 30,
----------------------------
Product 1996 1995 1994
- ------- -------- -------- --------
<S> <C> <C> <C>
Refurbished Cerebral Oximeters 14% 10% 0%
Commercial Cerebral Oximeters 63% 74% 84%
SomaSensors 23% 16% 16%
------- ------- -------
Total 100% 100% 100%
======= ======= =======
</TABLE>
The following table shows the approximate percentage of United States and
export net sales for the past three years:
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<PAGE> 20
<TABLE>
<CAPTION>
Years Ended November 30,
----------------------------
Type of Sale 1996 1995 1994
- ------------ -------- -------- --------
<S> <C> <C> <C>
United States 4% 0% 0%
Export 96% 100% 100%
------- ------- -------
Total 100% 100% 100%
======= ======= =======
</TABLE>
Two international distributors accounted for approximately 62% and 15% of total
revenues for fiscal 1996, approximately 53% and 13% of total revenues for
fiscal 1995 and approximately 43% and 10% of total revenues in fiscal year
1994. The Company's distributor in Japan, has been the Company's largest
customer in each of fiscal 1996, 1995 and 1994. The Company is dependent on
its sales to Baxter Limited, and the loss of Baxter Limited as a customer would
have a material adverse effect on the Company's business.
MANUFACTURING
The Company is currently assembling the Cerebral Oximeter in its
facilities in Troy, Michigan, from components purchased from outside suppliers.
The Company believes that each component is generally available from several
potential suppliers, although loss of any particular supplier could have an
adverse effect on the Company's ability to assemble the Company's products
timely. The disposable sensor, the printed circuit boards, other mechanical
components, and the cabinet are the primary components that must be
manufactured according to specifications provided by the Company. Although the
Company is currently dependent on one manufacturer of the SomaSensor, the
Company believes that several potential suppliers are available to manufacture
these components. The Company would, however, require approximately three to
four months to change SomaSensor suppliers.
The Company does not currently intend to manufacture on a commercial scale the
disposable sensor or the components of the Cerebral Oximeter. The Company
expects that it will be dependent to a significant extent on other entities for
commercial scale manufacturing of the disposable sensor and of components for
its products, and on their ability to manufacture and deliver, on a timely
basis, sufficient quantities of the disposable sensor and of components for its
products in compliance with the Company's own quality standards and in required
cases in compliance with FDA Good Manufacturing Practice regulations. The
Company is also dependent on its own ability to inspect adequately and
accurately such third parties' work and on its ability and capacity to assemble
Cerebral Oximeters on a commercial scale.
RESEARCH AND DEVELOPMENT
During fiscal 1996, additional efforts were made to improve the disposable
SomaSensor and considerable work was performed evaluating the results of the
clinical trials that supported the 510(k) submission and defending the 510(k)
application. The Company focused its efforts after FDA 510(k) clearance on
product-line extensions of the Cerebral Oximeter for use on children and
newborns in operating rooms and intensive care units and enhancements to the
Cerebral Oximeter. The Company also intends to explore other applications of
its INVOS technology and related technologies. As described above under the
caption "RECENT DEVELOPMENTS - PRODUCTS AND MARKETING", 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.
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<PAGE> 21
The Company's research and development strategy relating to a proposed new
product is to identify and work with leaders in the field at teaching
hospitals, departments of the hospitals, universities, clinics or leading
health institutions (the "Hospital"). After obtaining clearance or approval
for clinical studies from the FDA or the Hospital's Institutional Review Board
(whichever is appropriate), the Company would provide a prototype of the
product to the Hospital, and the Hospital would provide the space, staff and
clinical testing of the prototype product. A prototype of the Cerebral
Oximeter for use on children and newborns was being developed; however, in
November 1993 when the FDA rescinded the Company's 510(k), research and
development of new products was suspended. The Company is expected to begin
clinical trials for pediatric use after completing development of a prototype.
The Company has become affiliated with a sponsoring hospital in connection with
human testing of the proposed Cerebral Oximeter for use on children and
newborns. No other clinical trials of new products have been performed.
The Company's proposed marketing strategy for new products is to
attempt to establish relationships with physicians and researchers in
particular market segments to determine market needs, to obtain experimentation
support and to properly define the required clinical trials. New products
require extensive testing and regulatory clearance before they can be marketed,
and substantial customer education concerning product use, advantages and
effectiveness. In addition, the Company's products might meet market
resistance in their primary markets because of price resistance to major
capital equipment and fixed reimbursement amounts from medical insurers for the
procedures in which the Company's products might be used. There can be no
assurance that the Company will be able to successfully apply the INVOS
technology in the development of commercially viable products or that
competitors will not develop and market similar products before the Company
does.
During fiscal years 1996, 1995 and 1994 the Company spent $235,354, $285,893
and $549,737, respectively, on research, development and engineering.
COMPETITION
The Company competes indirectly with numerous others in the development,
manufacture and marketing of medical equipment that is used in existing
diagnostic techniques for surgical and critical care patient diagnosis and
monitoring (see "Cerebral Oximeter - Existing Diagnostic Methods"), many of
which are large medical companies with longer histories in the medical
equipment industry than the Company, well established reputations, customer
relationships and marketing, distribution and service networks, larger product
lines than the Company and greater management, financial and technical
resources. The Company also competes with suppliers of capital equipment of
various types for limited hospital capital equipment budgets. In addition, the
large installed base of pulse oximeters poses a significant marketing challenge
to the introduction of new oximetry equipment such as the Company's. A number
of other companies market products which use optical spectroscopy for in vivo
patient examination, including measurement of blood oxygen levels, or have
announced intentions to enter markets which the Company is considering
entering. In addition, numerous patents have been issued to others involving
optical spectroscopy and the interaction of light with tissue and many of these
could have relevance to or even cover technology used by the Company; further,
some of
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<PAGE> 22
these relate to the use of optical spectroscopy in vivo in the area of
cranial metabolism monitoring, the primary use of the Cerebral Oximeter. No
patent infringement claims have been made against the Company, but it has not
obtained an opinion from its patent counsel that the Cerebral Oximeter does not
infringe any of the numerous patents issued to others. The Company is not
aware of any commercial product developed from the patented technology of
others relating to cranial metabolism monitoring, although such devices have
been sold for research or evaluation.
There can be no assurance that these potential competitors will not
duplicate the Company's technological achievements in the future or will not
develop products which directly compete with the Company's products in existing
or intended markets. The Company's technology primarily represents
improvements or adaptations of known optical spectroscopy technology, which
might be duplicated or discovered through its patents, reverse engineering or
both. The Company believes that a manufacturer's reputation for producing
accurate, reliable and technically advanced products, references from users,
features (speed, safety, ease of use, patient convenience and range of
applicability), product effectiveness and price are the principal competitive
factors in the medical equipment industry. There can be no assurance that the
publication by one group of researchers of adverse results from tests of the
Cerebral Oximeter in situations beyond its indicated use, the Company's
financial condition and the FDA's rescission of the Company's 510(k) clearance
will not adversely affect the Company's reputation or its ability to market and
sell its device.
PROPRIETARY INFORMATION
The Company's initial United States patent, covering the in vivo tissue
examination technology developed in conjunction with the INVOS 2100 and its
predecessor the SOMA 100, was allowed and issued in 1986 and will expire on
October 14, 2003. The corresponding Canadian patent was issued in 1987. In
addition, the corresponding European Community patent was granted in 1990, and
the corresponding patent in Japan was granted in 1991.
The Company has filed other patent applications in the United States and
foreign countries with respect to other aspects of its technology relating to
the interaction of light with tissue, and eleven of these additional
applications have now been issued as patents in the United States while others
remain pending. The eleven additional United States patents expire on February
16, 2005, February 18, 2006, April 4, 2006, August 18, 2009, August 25, 2009,
June 6, 2011, July 8, 2013, July 11, 2014, December 26, 2012, August 29, 2014,
and December 15, 2014, respectively. Although the Company believes and asserts
that one or more of its issued patents cover some of the underlying technology
used in the Cerebral Oximeter, there can be no assurance that any such
assertion would be successful, and only seven of the issued patents expressly
refer to examination of the brain or developments involving the Cerebral
Oximeter. If the Company files additional applications, there can be no
assurance that any such applications will be allowed or that any issued patents
would be upheld or afford meaningful protection against competition.
Furthermore, many patents have previously been issued to others involving
optical spectroscopy and the interaction of light with tissue, some of which
relate to the use of optical
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<PAGE> 23
spectroscopy in the area of cranial metabolism monitoring, the primary
use of the Cerebral Oximeter. No patent infringement claims have been asserted
against the Company, but it has not obtained an opinion from its patent counsel
that the Cerebral Oximeter does not infringe any of the numerous patents
already issued. If it were determined that the Company's products infringed
any claims of an issued patent, the Company could be enjoined from making or
selling such products or forced to obtain a license in order to continue the
manufacture or sale of the product involved, requiring payment of a licensing
fee or royalties of unknown magnitude on sales of the product. In addition,
the Company could be liable for substantial damages, and even the defense of
patent litigation can be extremely expensive. There can be no assurance that
if any such license were required, it would be available, or available on terms
acceptable to the Company. There can be no assurance that claims for
infringement will not be asserted against the Company. Any inability to obtain
required licenses on favorable terms, or at all, would adversely affect the
Company's business.
The Company's patents are basically directed to methods and apparatus for
introducing light into a body part and receiving, measuring and analyzing the
resulting light. The patented methods also involve determining and analyzing
the light transmissivity of various body parts of a single subject, as well as
of body parts of different subjects, which provides a standard against which a
single subject can be compared. Certain of these and other developments of the
Company enable the Cerebral Oximeter to monitor oxygen saturation changes and
reduce extraneous information from bone, muscle and other tissue in the region
being measured.
In addition to its patent rights, the Company has obtained U.S. Trademark
Registrations for its trademarks "SOMANETICS," "SOMAGRAM," "INVOS,"
"SOMASENSOR" and "WINDOW TO THE BRAIN," and has also obtained registrations of
its basic mark, "SOMANETICS," in thirteen foreign countries.
The Company also relies on trade secret, copyright and other laws to protect
its technology, but believes that neither its patents nor other legal rights
will necessarily prevent others from developing or from using similar or
related technology to compete against the Company's products. Moreover, the
Cerebral Oximeter might be susceptible to reverse engineering, allowing
competitors to obtain the Company's proprietary technology. The Company is
aware that a number of companies are interested and may have patents in similar
or related technological areas involving interaction of light with tissue.
There can be no assurance that any issued patents will provide the Company with
significant competitive advantages, or that challenges will not be instituted
against the validity or enforceability of any patents owned by the Company or,
if instituted, that such challenges will not be successful. The cost of
litigation to uphold the validity of a patent and prevent infringement can be
very substantial and could be beyond the Company's means even if the Company
could otherwise prevail. Furthermore, there can be no assurance that others
will not independently develop similar technologies, duplicate the Company's
technology or design around the patented aspects of the Company's technology or
that the Company will not infringe patents or other rights owned by others.
22
<PAGE> 24
REGULATION
Because the Company distributes "medical devices" as defined under the Federal
Food, Drug, and Cosmetic Act ("FD&C Act"), the Company and its products are
subject to regulation by the FDA and the corresponding agencies of the states
and foreign countries in which the Company sells its products. Accordingly,
the Company is required to comply with FDA regulations governing the
manufacture, distribution and labeling of its products. This includes certain
Good Manufacturing Practice ("GMP") regulations in the processing or
manufacture of the devices. States and foreign countries could have similar
requirements. In addition, the Company is subject to periodic inspections by
the FDA, and may be subject to inspections by state and foreign agencies. If
the FDA believes that its legal requirements have not been fulfilled, it has
extensive enforcement powers, including the ability to bar products from the
market, to prohibit the operation of manufacturing facilities and to require
recalls of devices from customer locations.
Before being distributed commercially, the Company's medical devices must
undergo FDA review of a pre-market notification ("510(k)"). A 510(k) is
submitted in instances where the manufacturer claims that the device in
question is "substantially equivalent" to a legally marketed device. A
manufacturer must file a 510(k) with the FDA at least 90 days before it
proposes to distribute the device commercially. The FDA can determine whether
the device is or is not equivalent to a legally marketed device within this
90-day period, although this process generally takes longer than 90 days. A
device requiring a 510(k) may not be marketed in the United States until FDA
clearance has been obtained.
In a Notice of Adverse Findings letter dated February 22, 1988, the FDA
notified the Company that certain of its GMP's with regard to the processing
and assembly of the INVOS 2100 were deficient. The Company also underwent an
FDA GMP audit in 1992. The Company believes it corrected any noted
deficiencies to the FDA's satisfaction.
During 1985, the Company applied for and received 510(k) clearance to market
its SOMA 100 device as an adjunctive technique for the evaluation of the
breast. The SOMA 100 was considered by the FDA to be substantially equivalent
to other legally marketed transillumination devices. The Company was not
required to perform clinical trials to obtain 510(k) clearance of its SOMA 100
device. The INVOS 2100 was an update of the SOMA 100. The Company did not
submit a new 510(k) pre-market notification to the FDA because the Company
believed the changes made in the INVOS 2100 version were not significant and
did not affect the safety or effectiveness of the device.
In 1988, the FDA advised the Company of its belief that the claims in the
Company's advertising and packaging for the INVOS 2100 with regard to the
system's ability to determine or assess the risk of breast cancer were not
covered by the FDA 510(k) clearance for the device. The Company received 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 Cosmetic Act in that their labeling is false or misleading and
fails to bear adequate directions for use. The FDA requested the Company to
inform FDA of steps taken with regard to future production and distribution and
with regard to previously distributed devices. The Company responded to the
FDA by explaining the INVOS 2100 had
23
<PAGE> 25
not been available for sale by the Company commercially or otherwise
since January, 1989. The Company had 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 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.
For a history and a description of the current FDA clearance to market the
Cerebral Oximeter in the United States, see "Recent Developments - Products and
Marketing".
There can be no assurance that the Cerebral Oximeter will be successfully or
profitably marketed by the Company. There can be no assurance that if and when
any additional products are developed by the Company, they will receive FDA
clearance. If any clearances are denied or rescinded, sales of the Company's
products in the United States would be prohibited during the period the Company
does not have such clearances. In such cases the Company would consider
shipping its products internationally and/or assembling them overseas if
permissible, and if the Company determines its product to be ready for
commercial shipment. The FDA's current policy is that a medical device not in
commercial distribution in the United States, but which needs a 510(k)
substantially equivalent determination to be entered into domestic commercial
distribution, can be exported without the submission of an export request and
prior FDA clearance provided that (i) a Company believes the device can be
found to be substantially equivalent through a 510(k) submission; (ii) the
device is intended for export; (iii) the device is in accord with the
specifications of the foreign purchaser, and (iv) other conditions of the
export provisions of the Food, Drug and Cosmetic Act have been met.
INSURANCE
Because the Cerebral Oximeter is intended to be used in critical care hospital
units with patients who may be seriously ill or may be undergoing dangerous
procedures, the Company may be exposed to serious potential product liability
claims. From time to time, patients on whom the Cerebral Oximeter is being
used will sustain injury or death relating to his or her medical treatment or
condition. If litigation is initiated because of such injury, the Company may
be sued, and regardless of whether it is ultimately determined to be liable,
the Company may incur significant legal expenses. In addition, product
liability litigation could damage the Company's reputation and therefore impair
its marketing ability. Such litigation could also impair the Company's ability
to retain products liability insurance or make such insurance more expensive.
The Company has obtained products liability insurance along with an umbrella
policy. The Company also maintains coverage for property damage or loss,
general liability, business interruption, travel-accident, directors' and
officers' liability and workers' compensation. Such insurance is costly and
even though it has been obtained, there can be no assurance that the amount of
insurance carried by the Company will be sufficient to protect it fully in the
event of a major defect in the Cerebral Oximeter.
24
<PAGE> 26
EMPLOYEES
At January 17, 1997, the Company had 37 employees and four consultants. The
Company expects to increase its workforce in 1997 as it resumes sales and
marketing activities in the United States, including two additional sales and
marketing employees expected to be hired in the first fiscal quarter of 1997,
and 11 additional employees in fiscal 1997 (one in Management, two in
Administration, four more in Sales and Marketing, one in Medical Affairs, one
in Quality Control, one in Manufacturing, and one in Service). The Company
believes that its future success is dependent, in large part, on its ability to
attract and retain highly qualified management, marketing, technical and
administrative personnel. The Company's ability to retain existing employees
and attract new employees may be adversely affected by its current financial
situation.
The Company's employees are not represented by a union or subject to a
collective bargaining agreement. The Company believes that its relations with
its current employees are good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company is located in Troy, Michigan and has no other locations. The
Company's export sales for the fiscal years ended November 30, 1996, 1995 and
1994 were approximately $745,000, $1,336,000 and $938,500, respectively.
25
<PAGE> 27
ITEM 2. PROPERTIES
The Company has entered into a lease expiring December 31, 1997, for 23,392
square feet of office, assembly and warehouse space in a stand-alone building
in Troy, Michigan. Approximately 12,000 square feet is office space for
administration, including sales and marketing, engineering, accounting and
other administrative activities. On July 22, 1994, the Company extended the
lease of its office, assembly and warehouse space through December 1997. The
minimum lease payments as of November 30, 1996 through the end of the extended
lease, including the option period, total $199,000, excluding other occupancy
costs. The Company leases this building to accommodate its anticipated needs
for space, especially in light of the Company's decision to assemble the
Cerebral Oximeter itself. The Company believes that, depending on sales of the
Cerebral Oximeter, its current facility is more than suitable and adequate for
its current needs, including assembly of the Cerebral Oximeter by the Company
and conducting Company operations in compliance with prescribed FDA/GMP
guidelines, and will allow for substantial expansion of the Company's business
and number of employees. The Company has subleased a portion of its warehouse
space on a month-to-month basis for $2,700 per month.
ITEM 3. 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, and the settlement of that lawsuit in fiscal
1996, see Note 7 of Notes to Financial Statements included in Item 8 of this
Report, which description is incorporated in this Item 3 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, former Chairman of the Board, in an action
captioned Benjamin Langford v. Somanetics Corporation and Gary D. Lewis, see
Note 7 of Notes to Financial Statements included in Item 8 of this Report,
which description is incorporated in this Item 3 by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year ended November 30, 1996.
26
<PAGE> 28
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company and the positions held by them
are as follows:
<TABLE>
<CAPTION>
Executive
Officer
Name Since Age Position
---- --------- --- --------
<S> <C> <C> <C>
Bruce J. Barrett 6/94 37 President and Chief Executive Officer
Raymond W. Gunn 2/91 38 Executive Vice President, Chief Financial
Officer, Treasurer and Secretary
</TABLE>
Officers of the Company serve at the discretion of the Board of Directors.
BIOGRAPHICAL INFORMATION
Effective June 1, 1994, Bruce J. Barrett became the Company's President and
Chief Executive Officer. Mr. Barrett previously served, from June 1993 until
May 31, 1994, as the Director, Hospital Products Division for Abbott
Laboratories, Ltd., a health care equipment manufacturer and distributor, and
from September 1989 until May 1993 as the Director, Sales and Marketing for
Abbott Critical Care Systems, a division of Abbott Laboratories, Inc., a health
care equipment manufacturer and distributor. From September 1981 until June
1987, he served as the group product manager of hemodynamic monitoring products
of Baxter Edwards Critical Care, an affiliate of Baxter International, Inc.,
another health care equipment manufacturer and distributor. Mr. Barrett has
been a director of the Company since June 1, 1994.
Mr. Raymond W. Gunn, CPA, has served as the Company's Executive Vice President
and Secretary since May 1993 and as its Chief Financial Officer and Treasurer
since February 1991. From November 1992 to May 1993, he served as the
Company's Vice President, Finance and Administration and Assistant Secretary.
From February 1991, to November 1992, Mr. Gunn served as the Company's Vice
President, Finance. Prior experience includes a financial manager with Pulte
Home Corporation and a senior accountant with Deloitte Haskins & Sells.
Messrs. Gunn and Barrett are each parties to employment agreements with the
Company pursuant to which they are required to be elected to the offices with
the Company they currently hold.
27
<PAGE> 29
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's Common Shares trade in the over-the-counter market
and are quoted in the National Association of Securities
Dealers, Inc. Automated Quotation ("NASDAQ") System under the
trading symbol SMTS. On November 30, 1994, the Company's
securities were delisted from The Nasdaq Stock Market and were
traded in the over-the-counter market. As of December 27, 1994,
the Common Shares were re-listed on, and are quoted in, The Nasdaq
SmallCap Market. The following table sets forth high and low
closing bid quotations for the Company's securities as reported by
NASDAQ:
<TABLE>
<CAPTION>
COMMON
SHARES
------------
<S> <C> <C>
FISCAL YEAR ENDED NOVEMBER 30, 1995 HIGH LOW
----------------------------------- ----- -----
FIRST QUARTER 2/28/95 $1.31 $ .75
SECOND QUARTER 5/31/95 $1.81 $1.13
THIRD QUARTER 8/31/95 $1.81 $ .88
FOURTH QUARTER 11/30/95 $ .94 $ .50
FISCAL YEAR ENDED NOVEMBER 30, 1996 HIGH LOW
----------------------------------- ----- -----
FIRST QUARTER 2/29/96 $1.75 $ .41
SECOND QUARTER 5/31/96 $2.50 $1.00
THIRD QUARTER 8/31/96 $4.00 $1.44
FOURTH QUARTER 11/30/96 $2.31 $1.25
</TABLE>
The bid quotations set forth above reflect inter-dealer prices,
without retail markup, mark-down, or commission and may not
necessarily represent actual transactions.
The number of record holders of the Company's Common Shares at
January 17, 1997, was 613.
The Company has never paid cash dividends on its Common Shares.
The Company intends to retain future earnings, if any, to
provide funds for the operation of its business and, accordingly,
has no plans to pay cash dividends in the future.
28
<PAGE> 30
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of November 30, 1996,
1995, 1994, 1993 and 1992, for each of the years in the five-year
period ended November 30, 1996 and for the period from inception
(January 15, 1982) through November 30, 1996 have been derived from
the audited financial statements of the Company, certain of which
appear in Item 8 of this Report together with the report of
Deloitte & Touche LLP, independent auditors, whose report includes
an explanatory paragraph relating to an uncertainty concerning the
Company's ability to continue as a going concern. The selected
financial data should be read in conjunction with the financial
statements and notes thereto included in Item 8 of this Report and
with Management's Discussion and Analysis of Financial Condition
and Results of Operations included in Item 7 of this Report.
<TABLE>
<CAPTION>
PERIOD FROM
STATEMENT OF INCEPTION
LOSS DATA FOR THE FISCAL YEAR ENDED NOVEMBER 30, (JANUARY 15, 1982)
--------------------------------------------------------------------------- TO NOVEMBER 30,
1996 1995 1994 1993 1992 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Sales (1) $778,200 $1,335,970 $938,531 $1,547,412 $50,255 $ 5,728,932
Net loss (3,303,703) (2,818,403) (4,331,500) (6,135,830) (5,390,637) (30,191,211)
Net loss per Common Share (2) (.18) (.17) (.34) (.57) (.60) (4.13)
Weighted average number
of Common Shares
outstanding (2) 18,667,506 16,843,681 12,697,427 10,678,743 9,052,101 7,311,014
NOVEMBER 30,
---------------------------------------------------------------------------
BALANCE SHEET DATA 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Working capital $3,861,775 $1,846,110 $2,981,968 $3,325,543 $8,776,412
Total assets 4,671,741 2,861,255 4,326,528 5,141,679 10,309,832
Total liabilities 618,142 567,600 807,939 1,038,602 834,824
Long-term debt and
redeemable Convertible
Preferred Shares 0 19,843 19,843 59,843 79,843
Shareholders' equity (3) (4) 4,053,599 2,293,655 3,518,589 4,103,077 9,475,008
</TABLE>
(1) The revenue recorded prior to the fiscal year ended
November 30, 1991 consists primarily of product sales revenue from
sales of the INVOS 2100. Marketing of the INVOS 2100 has been
discontinued. Revenue recorded in the fiscal year ended November
30, 1992 and 1991, relates to the sale of Cerebral Oximeters
primarily to specialty dealers for demonstration purposes only.
Revenue recorded in fiscal years 1996, 1995, 1994 and 1993 relate
primarily to the sale of Cerebral Oximeters and SomaSensors for
commercial use. For a description of the current status of the
Company's marketing efforts, the loss of, and regaining, FDA
clearance to market the Cerebral Oximeter in the United States,
and the resulting changes in the Company's operations, see "Recent
Developments-Products and Marketing"; "Personnel"; and
"Management's Discussion and Analysis of Financial Condition and
29
<PAGE> 31
Results of Operations-Liquidity and Capital Resources." Thus, the
selected financial data presented above may not be indicative of
the results to be expected for fiscal 1997.
(2) See Note 4 of Notes to Financial Statements included in
Item 8 of this Report for information with respect to the
calculation of per share data.
(3) See Statements of Shareholders' Equity (Deficiency) of
the Financial Statements included in Item 8 of this report for an
analysis of Common Share transactions for the period from January
15, 1982 through November 30, 1996.
(4) The Company believes its accumulated deficit has
increased and shareholders' equity has decreased since November
30, 1996.
30
<PAGE> 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 technology. Since inception (January 15,
1982), the Company has incurred an accumulated deficit of $30,211,053 through
November 30, 1996.
Net cash used in operations during fiscal 1996 was approximately $2,815,000.
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 $3,237,000, net of
depreciation and amortization expense), and (ii) decrease accrued liabilities
primarily due to (A) the reversal of the reserves to replace unpaid domestic
Cerebral Oximeters and SomaSensors and upgrade the Cerebral Oximeters received,
(B) use of the reserves to replace international Cerebral Oximeters, and (C)
payment of expenses and settlement costs associated with the class action
lawsuits (approximately $162,000). These uses of cash were partially offset by
(i) a decrease in accounts receivable (approximately $252,000) primarily due to
lower sales in fiscal 1996 and higher bad debt expenses, (ii) a decrease in
other assets (approximately $88,000) primarily due to the elimination of
deferred offering costs, and (iii) an increase in accounts payable
(approximately $233,000) primarily due to increased expenses and inventory
purchases in preparation for selling and marketing efforts in the United States
combined with slower payment. Management expects working capital requirements
to increase if sales increase.
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 did not believe that its distributor agreements required
it to accept returns of products sold to distributors in connection with a
termination of the distribution agreement. The Company, however, reserved for
the uncollectibility of accounts receivable from such distributors.
The Company terminated 11 of its 15 domestic distributors in fiscal 1996, and
currently has 6 United States distributors for its products and additional
employees selling its products directly in the remaining territories. The
Company entered into new distribution agreements with its four remaining and
two new United States distributors on different terms and conditions, including
different prices. It also hired 12 direct sales personnel in fiscal 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 (including
$68,000 from Somatek, Inc. plus the previously reserved amounts) in
31
<PAGE> 33
exchange for the return of their, and their customers', old INVOS 3100 Cerebral
Oximeters and SomaSensors (which returns resulted in a $121,150 recovery of
bad debts in fiscal 1996). Because the Company has more INVOS 3100 Cerebral
Oximeters than it expects to sell in the next year, the Company recorded a
reserve for the value of the devices in excess of one year's supply in fiscal
1996 (approximately $150,000).
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 fiscal 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 were permitted to exchange
their old devices for a new one. As a result, each distributor and customer
only paid once and received a new model Cerebral Oximeter. The Company also
reversed its $27,600 reserve for the cost of replacing SomaSensors recalled in
1993. The net effect of the foregoing on the Company's 1996 results of
operations was an increase of approximately $12,000 in selling, general and
administrative expenses.
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 in additional territories, or retain its existing distributors.
The Company's inability to engage, replace or retain distributors could have a
material adverse effect on its ability to market and sell its product.
The Company's principal sources of operating funds have been the proceeds of
equity and debt investments from sales of the Company's Common Shares and
notes. See Statements of Shareholders' Equity (Deficiency) of the Company's
Financial Statements included in Item 8 of this Report. These funds were used
primarily to fund the Company's losses in connection with the development of
the INVOS technology, the INVOS 2100, the INVOS Cerebral Oximeter and the
related disposable SomaSensor. The Company believes that its accumulated
deficit will continue to increase for the foreseeable future.
Effective February 28, 1996, the Company redeemed all of its outstanding
Convertible Preferred Shares for $0.01 per share at a total redemption cost to
the Company of approximately $20,000, and instead of the Convertible Preferred
Shares formerly issuable upon the exercise of certain options, the Company will
pay $0.01 to the person exercising such options for each Convertible Share
otherwise receivable. Also, on March 19, 1996, all 144,339.66 outstanding Unit
Purchase Options expired.
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
32
<PAGE> 34
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;
these conditions have not been met as of January 17, 1997.
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.
During fiscal 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 April 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 fiscal 1996, the
Company received approximately $75,000 from the exercise of employee stock
options.
Also during fiscal 1994, two shareholders of the Company filed two purported
class action lawsuits against the Company alleging various securities law
violations, one which was settled in fiscal 1996. 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 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, and the settlement of that lawsuit, see Note 7 of Notes to Financial
Statements included in Item 8 of this Report.
On September 26, 1996, the remaining 30,983 outstanding Class M Warrants were
exercised for $0.95 a common share, and on November 14, 1996, the remaining
5,001 outstanding non-redeemable Class B Warrants expired.
On November 6, 1996, Gary D. Lewis paid the Company $175,000 (the outstanding
principal amount of the loan at the time) in full satisfaction of all of his
obligations under the loan made by the Company to him on February 1, 1993, and
the Company discharged the second mortgage and released the security interests
securing the loan and wrote off approximately $29,750 of accrued interest with
respect to that loan.
Effective November 14, 1996, the Company redeemed all of its outstanding
redeemable Class B Warrants for $0.05 per warrant at a total redemption cost to
the Company of approximately $204,000.
33
<PAGE> 35
Also, on November 21, 1996, the Company completed the placement of 3,668,413
newly-issued Common Shares, par value $0.01 per share, at a price of $1.15 per
share 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, the expenses of the offering and $129,318 of other
deferred offering costs, were approximately $3,568,000.
As of November 30, 1996 the Company had working capital of $3,861,775, and cash
and cash equivalents of $3,291,911, total current liabilities of $618,142 and
shareholder's equity of $4,053,599. The Company has no loan commitments.
The Company expects that its primary needs for liquidity in fiscal 1997 will be
(i) to fund its losses and sustain its operations, including funding (a)
marketing costs for the Cerebral Oximeter; (b) additional sales and marketing,
manufacturing, service, quality control, medical affairs, management and
administrative personnel expected to be hired in fiscal 1997; (c) further
development and testing of enhancements to, and product extensions of, the
Cerebral Oximeter; and (d) additional research and development projects, and
(ii) for working capital, including increased accounts receivable and
inventories of components and sales units to satisfy expected commercial sales
orders. In addition, management has budgeted approximately $120,000 for
capital expenditures during fiscal 1997.
As a result of the Company's ability to market and sell the Cerebral Oximeter
in the United States, the Company has increased its operating costs and
workforce from 20 employees as of November 30, 1995, to 32 employees as of
November 30, 1996. In addition, the Company has budgeted to add 18 sales and
marketing, medical affairs, management, manufacturing, service, quality
control, and administrative employees in fiscal 1997, five of which have been
hired as of January 17, 1997 and an additional two of which are expected to be
hired in the first quarter of fiscal 1997. As a result of such increases, the
Company believes that the cash and cash equivalents on hand at November 30,
1996 will be sufficient to sustain the Company's operations at budgeted levels
and its needs for liquidity into the third quarter of fiscal 1997. 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 use 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 technology and related
technologies and for working capital will not be substantially greater than
current estimates.
On November 22, 1993, the Company received notification that the FDA had
rescinded the Company's previous 510(k) clearance to market the INVOS Cerebral
Oximeter. As a result, all commercial sales of the Company's products were
suspended and the Company notified its
34
<PAGE> 36
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 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.
As of January 17, 1997, the Company had 26 international distributors, 6
domestic distributors, 16 direct sales personnel and 1 international sales
consultant. During fiscal 1996, the Company sold its products to 14 of its
international distributors and devoted most of its United States marketing to
entering into distribution agreements with distributors, hiring direct sales
personnel and replacing existing Cerebral Oximeters with the INVOS 3100A
Cerebral Oximeter. There can be no assurance that the Company will be
successful or profitable in marketing the Cerebral Oximeter and the related
SomaSensor.
The Company does not believe that product sales will be sufficient to fund the
Company's operations in fiscal 1997.
The Company has entered into a Letter Agreement, dated as of January 10, 1997,
pursuant to which the Company has exclusively retained a managing underwriter
to underwrite a proposed public offering by the Company of 1,200,000
newly-issued Common Shares (subject to, and after giving effect to, the
proposed one-for-ten reverse stock split being submitted for shareholder
approval at the 1997 Annual Meeting of Shareholders). The Company has also
agreed to grant the underwriter an option to purchase an additional 180,000
Common Shares to cover over-allotments and a five-year warrant to purchase an
amount of shares equal to 10% of the Common Shares sold in the offering at an
exercise price equal to 120% of the purchase price for the Common Shares in the
offering. Among other things, the offering is contingent on consummation of
the reverse split and the satisfactory completion of a due diligence
investigation of the Company by the underwriter and its agents. Any such
offering will be made only by means of a prospectus. In addition, the type and
amount of security, if any, that might ultimately be issued in any such
offering have not yet been definitively determined and will be dependent on
negotiations with the underwriter, market conditions and management's then
current estimate of the proceeds necessary or desired to sustain the Company's
operations. There can be no assurance that such offering will occur or that
the Company will be able to raise any capital or capital in amounts it desires,
or on terms and conditions acceptable to the Company.
Also as of November 30, 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 April 1996
Regulation S securities offerings. The conditions permitting the Company to
redeem these warrants have not been met as of January 17, 1997. In addition,
the placement agents and their transferees hold warrants to purchase 529,700
Common Shares exercisable at $1.25 a share, 150,000 warrants exercisable at
$1.44 a share, and 114,240 warrants exercisable at $1.25 a share. There can be
no assurance that additional warrants will be exercised and it is unlikely
that they will
35
<PAGE> 37
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. The report of the Company's Independent Auditors
contains an explanatory paragraph relating to an uncertainty concerning the
Company's ability to continue as a going concern. See "Independent Auditors
Report" accompanying the Financial Statements in Item 8 of this Report.
For a description of a lawsuit alleging various securities law violations filed
by a 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, former
Chairman of the Board, in an action captioned Benjamin Langford v. Somanetics
Corporation and Gary D. Lewis, see Note 7 of Notes to Financial Statements
included in Item 8 of this Report.
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.
The Company's ability to use its accumulated net operating loss carryforwards
to offset future income, if any, for income tax purposes, is limited due to the
Initial Public Offering ("IPO") of its securities in March 1991. See Note 6 of
Notes to Financial Statements included in Item 8 of this Report.
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 $30,191,211.
During the fiscal years ended November 30, 1996, 1995 and 1994, the Company
recognized revenues of $778,200, $1,335,970 and $938,531, respectively. The
decrease in sales for the year ended November 30, 1996 was primarily
attributable to a more than 20% decrease in the
36
<PAGE> 38
average selling price of commercial Cerebral Oximeters to distributors and
reduced shipments to Europe and to Baxter Limited in Japan. The increase in
sales for the year ended November 30, 1995, as compared to the year ended
November 30, 1994, can be attributed to sales to Baxter Limited, the Company's
distributor in Japan, and increased sales to distributors in South America,
partially offset by lower sales to the Company's former Japanese distributor in
the first quarter and the sale of refurbished older model Cerebral Oximeters at
substantially lower prices than new model Cerebral Oximeters. Approximately
96%, 100% and 100% of the Company's net sales in fiscal 1996, 1995 and 1994,
respectively, were export sales. Sales of refurbished units, commercial units
and SomaSensors comprised approximately 14%, 63% and 23%, respectively, of the
Company's fiscal year 1996 sales, 10%, 74% and 16%, respectively, of the
Company's fiscal year 1995 sales and 0%, 84% and 16%, respectively, of the
Company's fiscal year 1994 sales.
Two international distributors accounted for approximately 62% and 15%,
respectively, of total revenues for fiscal year 1996, approximately 53% and
13%, respectively, of total revenues for fiscal year 1995 and approximately 43%
and 10% of total revenues for fiscal year 1994. The Company terminated its
Japanese distributor effective January 28, 1995. On March 15, 1995, the Company
announced the engagement of Baxter Limited as its exclusive distributor in
Japan. On April 10, 1995, the Company received its license from the Japanese
Ministry of Health and Welfare to market its product in Japan.
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. The Company resumed
international sales in February 1994, and the Company received 510(k) clearance
to market the Cerebral Oximeter in the United States in June 1996. For
descriptions of (i) the Company's resumption of international sales, (ii)
changes in the Company's distributors, (iii) the Company's receipt of 510(k)
clearance in 1996, and (iv) the Company's need to raise additional capital to
sustain operations, see "Liquidity and Capital Resources."
There can be no assurance that the publication of adverse results from research
regarding the Cerebral Oximeter, the FDA's rescission of the Company's 510(k)
clearance for the Cerebral Oximeter 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 fourth quarter
1996 levels. The Company expects to hire direct sales personnel in the first
quarter of fiscal 1997. 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 provide
sufficient cash to fund the Company's operations in the first quarter ending
February 28, 1997. 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 its distributors
and they are resold to hospitals.
Gross margin as a percentage of revenues in fiscal 1996 was approximately 49%
and in each of the fiscal years 1995 and 1994 was approximately 51%. Gross
margin as a percentage of
37
<PAGE> 39
revenues decreased in fiscal 1996 from fiscal 1995 primarily because 14% of
total revenues in fiscal 1996 consisted of sales of refurbished Cerebral
Oximeters, which are sold approximately at cost, thereby reducing overall gross
margin, lower average selling prices for commercial Cerebral Oximeters and an
increase in the cost of the SomaSensor, partially offset by an approximately 10%
decrease in materials cost for the Cerebral Oximeter in fiscal 1996. Excluding
sales of refurbished units, gross margins were relatively unchanged from fiscal
1995 to fiscal 1996; lower material costs for the Cerebral Oximeter were offset
by the lower average selling prices for commercial Cerebral Oximeters and the
increased cost of the SomaSensor. Comparing fiscal 1995 gross margins to fiscal
1994 gross margins, lower initial manufacturing, tooling and engineering costs
in fiscal 1995, the reduced level of personnel in fiscal 1995 and the higher
level of sales over which fixed costs of sales were spread in fiscal 1995, were
offset by an increased allocation of overhead costs in fiscal 1995, as a result
of the reallocation of space and indirect labor required for manufacturing,
increased costs of the SomaSensor in fiscal 1995 and the sale of refurbished
units in fiscal 1995 approximately at cost, thereby reducing overall gross
margins.
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. Any new products or
enhancements developed during fiscal 1997 might increase such costs. In
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.
However, sales of refurbished devices in 1997 could have an adverse impact on
gross margins.
The Company incurred research, development and engineering expenses of
$235,354, $285,893 and $549,737 for the years ended November 30, 1996, 1995 and
1994, respectively. The decrease in fiscal 1996 is primarily attributable to
an approximately $70,000 charge in fiscal 1995 to engineering expenses for
obsolete purchased parts inventory relating to engineering design changes to
the Cerebral Oximeter model designed to comply with TUV, partially offset by
increased consulting fees in fiscal 1996 in connection with new product
development since the Company received 510(k) clearance for the Cerebral
Oximeter. The decrease in fiscal 1995 is attributable to reductions in
research, development, and engineering personnel from three at November 30,
1994 to two at November 30, 1995, decreased engineering consulting services and
clinical testing in fiscal 1995 (incurred in 1994 in connection with preparing
the Cerebral Oximeter Model 3100A for commercial sale and in connection with
the Company's 510(k) application), and discontinued development of extensions
of and enhancements to the Cerebral Oximeter and other INVOS technology (except
for the INVOS 3100A Cerebral Oximeter), partially offset by an approximately
$70,000 charge in the second quarter to engineering expenses for obsolete
purchased parts inventory relating to engineering design changes to the INVOS
3100A Cerebral Oximeter and costs associated with the issuance of two patents
relating to the Company's INVOS technology and Cerebral Oximeter.
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,
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<PAGE> 40
developing improvements to the SomaSensor, completing modifications to the
INVOS Cerebral Oximeter requested by the FDA, beginning development of
product-line extensions of the Cerebral Oximeter for use on children and
newborns in operating rooms and intensive care units and enhancements to the
Cerebral Oximeter, and, through NeuroPhysics, researching the feasibility and
developing prototypes of four new products.
Research, development and engineering expense in fiscal 1995 is attributable to
(i) the salaries and wages of research, development and engineering personnel,
engaged primarily in engineering improvements to the disposable SomaSensor,
(ii) evaluating the results of the clinical trials that support the 510(k)
submission, (iii) preparing and defending the new 510(k) application, (iv)
working to gain the CE mark and CSA and UL certifications for the Cerebral
Oximeter, and (v) material costs.
Research, development and engineering expense in fiscal 1994 consisted
primarily of (i) salaries and wages of research, development and engineering
personnel, engaged primarily in developing the Cerebral Oximeter model designed
to comply with TUV, as well as improvements to the disposable SomaSensor,
designing protocols for, and evaluating the results of, the clinical trials
that support the 510(k) submission, (ii) consulting fees, (iii) material costs
and (iv) testing fees.
The Company expects research, development and engineering expense to increase
for fiscal 1997 as a result of the two persons hired in fiscal 1996 after the
second quarter to support new projects and the one person planned to be hired
in fiscal 1997 in Medical Affairs and increased new product development and
testing efforts. The Company and expects to incur research, development and
engineering expense to develop and test product extensions of the Cerebral
Oximeter for use on children and newborns in operating rooms and intensive care
units, enhancements to the Cerebral Oximeter and other uses of the Company's
INVOS 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 Item 1 of this Report under the caption
"Business-Recent Developments-Products and Marketing." 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 years ended November 30,
1996, 1995, and 1994, totaled $3,549,939, $3,302,751 and $4,346,858,
respectively. The increase for fiscal 1996 is primarily attributable to a
$217,000 increase in selling-related expenses, one-time charges of $175,000 for
write-downs of excess refurbished and obsolete inventory, an increase in
non-productive, indirect labor and overhead of $197,000, a $71,000 increase in
warranty expenses, and increases in shareholder relations and various fees of
$25,000, partially offset by a decrease of $237,000 in salaries and wages, a
$25,000 decrease in professional fees, a $134,000 decrease in occupancy costs
principally due to the expiration of operating leases and a decrease in
depreciation and amortization expenses of $67,000.
The $121,500 bad debt recovery (resulting from the returns of INVOS 3100
Cerebral Oximeters by domestic distributors whose receivables had been written
off), $57,200 reversal of the reserve for
39
<PAGE> 41
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, and $27,600 reversal
of the reserve for replacing SomaSensors recalled in 1993, were partially offset
by a $150,000 reserve accrued for excess INVOS 3100 Cerebral Oximeters in
inventory and obsolete inventory and a $46,000 reserve for doubtful accounts
taken in connection with receivables from some foreign distributors. These
amounts are included in Selling, General and Administrative expenses for fiscal
1996.
The decrease in selling, general and administrative expenses for fiscal year
1995 as compared to fiscal year 1994 is primarily due to a $542,000 reduction
in legal and accounting fees, a $254,000 reduction in salaries, wages and
related expenses, a $76,000 reduction in depreciation expense as a result of
some assets becoming fully depreciated, a $58,000 reduction in facility
expenses, and a $51,000 reduction in expenses to get sales, partially offset by
the $72,000 settlement with a former distributor in Japan.
Salaries, wages, and related expenses, including expenses for temporary
employees and outside consulting services, decreased approximately $237,000 for
the year ended November 30, 1996 over the year ended November 30, 1995,
primarily due to a reduction in payroll and related benefits of $340,000,
partially offset by an increase in temporary and contract labor of
approximately $38,000, an increase in consulting services of approximately
$46,000 and a net increase in other related expenses of approximately $19,000.
Salaries, wages, and related expenses, including expenses for temporary
employees and outside consulting services, decreased approximately $254,000 for
the year ended November 30, 1995 over the year ended November 30, 1994,
primarily due to a reduction in consulting expenses of $83,000, and a $112,000
reduction in payroll and related benefits. The decrease in payroll and related
benefits is the result of a reduction in workforce from 26 employees at
November 30, 1994, to 20 employees at November 30, 1995.
The Company expects salaries, wages and related expenses to increase
approximately $2.4 million in 1997 because of additional employees and
consultants. During fiscal 1996 after May 31, 1996 the Company hired 16
employees and four consultants. During fiscal 1997, the Company has budgeted
to add 18 sales and marketing, medical affairs, management, manufacturing,
service, quality control, and administrative personnel. 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 $217,000 for the year ended November 30, 1996 over fiscal 1995,
primarily due to the increased provision of Cerebral Oximeters for clinical
research ($82,000), the costs associated with equipping direct U.S. sales
personnel with demonstration equipment ($75,000) and the added cost of
promotional equipment and materials in the U.S. ($134,000). Such increases
were partially offset by a
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<PAGE> 42
decrease in travel and related expenses of $73,000, due to fewer international
trips and 2 fewer employees in sales and marketing for approximately seven
months of the fiscal year.
Selling expenses including expenses for travel, entertainment, marketing,
clinical research, and industry trade show participation decreased
approximately $51,000 for the year ended November 30, 1995 over the same period
in 1994, primarily due to the $115,400 accrual in fiscal 1994 in connection
with the plan to replace INVOS 3100 Cerebral Oximeters with Cerebral Oximeters
designed to comply with TUV, clinical trial expenses in fiscal 1994 associated
with the 510(k) filed on February 1, 1995, and a reduction in advertising
expenses in fiscal 1995, partially offset by an increase in trade show
participation and travel expenses.
Selling, travel, entertainment, marketing, clinical research, industry trade
show participation and related expenses are expected to increase approximately
$375,000 in fiscal 1997 in connection with (i) supporting the Company's
domestic distributor network, (ii) resumed marketing in the United States,
(iii) engaging and training additional direct sales personnel, (iv) supporting
the Company's international distributor network and increased selling efforts
in international markets, and (v) commencing and maintaining the marketing
clinical studies to support the clinical utility of the Cerebral Oximeter in a
variety of procedures. Clinical research expenses are also expected to increase
if and when the Company tests product extensions of the Cerebral Oximeter in a
clinical setting. During 1997, the Company expects to participate in several
international and domestic trade shows and conventions, increase support to
existing distributors, add additional international distributors and increase
product awareness through advertising and promotional campaigns.
For the fiscal year ended November 30, 1996, as compared to the fiscal year
ended in 1995, professional fees and expenses decreased approximately $25,000,
primarily as a result of a reduction in professional fees and related expenses
incurred in connection with the obtaining 510(k) clearance for the Cerebral
Oximeter and lower patent fees. As of November 30, 1996, the Company had
accrued approximately $102,000 in legal and accounting fees. See Notes 5 and 7
of Notes to Financial Statements included in this report.
For the fiscal year ended November 30, 1995, as compared to the fiscal year
ended in 1994, professional fees and expenses decreased approximately $542,000,
primarily as a result of a reduction in professional fees and related expenses
incurred in connection with the FDA's rescission of the Company's 510(k) and
the related impact on the Company's regulatory filings and lower patent fees.
As of November 30, 1995, the Company had accrued $75,702 in legal and
professional fees.
The Company's monthly office expenses, including lease commitments, supplies,
subscriptions, equipment rentals and related expenses decreased approximately
$134,000 for the year ended November 30, 1996, over the year ended November 30,
1995, primarily due to the reduction in personnel and the expiration of
operating lease commitments ($103,000). The Company expects these expenses to
increase as the Company hires additional personnel. For the year ended November
30, 1995, over the year ended November 30, 1994, a $79,000
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<PAGE> 43
reduction was due primarily to the reduction in personnel and the expiration
of operating lease commitments.
Interest expense for the fiscal years ended November 30, 1996, 1995, and 1994
totaled $449, $772 and $3,892, respectively. Interest expense incurred during
fiscal year 1996 was due to the bridge loan of $205,000 from Rauscher Pierce &
Clark, Inc., used to redeem the Class B Warrants on November 14, 1996. The
bridge loan and related interest were paid out of the proceeds of the
Regulation S offering on November 21, 1996. Interest incurred in fiscal 1995
and 1994 is primarily due to the secured note payable to a bank incurred during
November 1991.
Interest income totaled $61,603, $94,769 and $68,290, for the years ended
November 30, 1996, 1995 and 1994, respectively. The decrease in interest
income for the fiscal year ended November 30, 1996 and 1995 over the fiscal
years ended November 30, 1995 and 1994, respectively, is primarily due to the
use of cash in operations, partially offset by interest income from the
investment of the cash received from the Regulation S offerings in November
1996, April 1996, July 1995 and August 1994. The Company expects interest
income to decrease as the Company uses cash in its operations.
Other income increased to $27,372 in fiscal 1996, primarily as a result of
sublease income received on a portion of the Company's facilities.
In March 1995, The Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of,"
which requires the Company to review for impairment long-lived assets, certain
identifiable intangibles, and goodwill related to those assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. In certain situations, an impairment loss would be
recognized. SFAS 121 is effective for the Company's 1997 fiscal year. The
Company is evaluating the impact of the new standard on its financial position,
results of operations, and cash flows and expects the effect to be immaterial.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock Based
Compensation" which also will be effective for the Company's 1997 fiscal year.
The Company does not expect SFAS 123 to have a material impact on its financial
position, results of operations, or cash flows. SFAS 123 allows companies
which have stock-based compensation arrangements with employees to adopt a new
fair-value basis of accounting for stock options and other equity instruments,
or it allows companies to continue to apply the existing accounting rules under
APB Opinion 25 "Accounting for Stock Issued to Employees," but requires
additional financial footnote disclosure. The Company expects to continue to
account for stock-based compensation arrangements under APB Opinion 25 and will
include additional footnote disclosure in its fiscal 1997 annual report.
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EFFECTS OF INFLATION
The Company does not believe that inflation has had a significant impact on its
financial position or results of operations in the past three years.
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" in the prospectus included in the
Company's Registration Statement on Form S-3 (file no. 33-60260).
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<PAGE> 45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
To the Board of Directors and Shareholders of
Somanetics Corporation
Troy, Michigan
We have audited the accompanying balance sheets of Somanetics Corporation (the
"Company") (a development stage company) as of November 30, 1996 and 1995 and
the related statements of loss, shareholders' equity (deficiency) and cash
flows for the years ended November 30, 1996, 1995 and 1994 and for the period
from January 15, 1982 (date of inception) to November 30, 1996. Our audits
also included the financial statement schedule listed in the index at Item 14.
These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements and the financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at November 30, 1996 and 1995
and the results of its operations and its cash flows for the years ended
November 30, 1996, 1995 and 1994 and for the period from January 15, 1982 (date
of inception) to November 30, 1996 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
The Company is in the development stage as of November 30, 1996. As discussed
in Note 2 to the financial statements, the Company's attainment of profitable
operations is dependent upon future events, including obtaining adequate
financing, maintaining regulatory approval and achieving market acceptance and
demand for its product at levels adequate to support the Company's cost
structure.
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<PAGE> 46
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is a development stage
enterprise engaged in developing, manufacturing and marketing processor-based
medical diagnostic and patient monitoring equipment. As discussed in Note 2 to
the financial statements, conditions exist which raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
/s/ DELOITTE & TOUCHE LLP
- --------------------------
DELOITTE & TOUCHE LLP
Detroit, Michigan
January 24, 1997
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SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
November 30,
ASSETS 1996 1995
-------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 4 )............................. $ 3,291,911 $ 941,426
Accounts receivable, net of allowance for doubtful accounts of
approximately $46,000 and $194,000 at November 30, 1996
and 1995, respectively (Note 9).............................. 191,436 443,859
Inventory (Note 4 )............................................. 931,135 936,421
Prepaid expenses................................................ 65,435 72,161
------------ ------------
Total current assets......................................... 4,479,917 2,393,867
------------ ------------
PROPERTY AND EQUIPMENT: (Note 4 )
Machinery and equipment......................................... 479,757 412,217
Furniture and fixtures.......................................... 193,343 193,339
Leasehold improvements.......................................... 166,770 166,770
------------ ------------
Total......................................................... 839,870 772,326
Less accumulated depreciation and amortization.................. (743,775) (685,835)
------------ ------------
Net property and equipment................................... 96,095 86,491
------------ ------------
OTHER ASSETS:
Note receivable - related party (Note 9)........................ - 190,240
Patents and trademarks, net (Note 4)............................ 79,129 86,041
Other (Note 3).................................................. 16,600 104,616
------------ ------------
Total other assets............................................ 95,729 380,897
------------ ------------
TOTAL ASSETS...................................................... $ 4,671,741 $ 2,861,255
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................ $ 364,032 $ 131,401
Accrued liabilities (Notes 5 and 7)............................. 254,110 416,356
------------ ------------
Total current liabilities..................................... 618,142 547,757
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 11).................... - -
REDEEMABLE CONVERTIBLE PREFERRED SHARES: (Note 3)
Authorized, 2,116,648 shares of $.01 par value; 1,984,250
shares issued and outstanding at November 30,
1995.......................................................... - 19,843
SHAREHOLDERS' EQUITY: (Notes 3 and 11)
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, 22,853,514 and 17,768,552
shares at November 30, 1996 and 1995, respectively............ 228,537 177,687
Additional paid-in capital...................................... 34,036,115 29,023,318
Deficit accumulated during the development stage................ (30,211,053) (26,907,350)
------------ ------------
Total shareholders' equity.................................... 4,053,599 2,293,655
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................ $ 4,671,741 $ 2,861,255
============ ============
</TABLE>
See notes to financial statements
46
<PAGE> 48
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF LOSS
<TABLE>
<CAPTION>
Cumulative
for the Period
January 15, 1982
For the Years Ended November 30, (Date of Inception)
------------------------------------------------------- to November 30,
1996 1995 1994 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Net sales (Notes 4, 9 and 10)........ $ 778,200 $ 1,335,970 $ 938,531 $ 5,728,932
Research and development activities.. - - - 122,500
----------- ----------- ----------- ------------
Total revenues...................... 778,200 1,335,970 938,531 5,851,432
COST OF SALES......................... 385,136 657,614 464,322 2,627,251
----------- ----------- ----------- ------------
Gross margin......................... 393,064 678,356 474,209 3,224,181
----------- ----------- ----------- ------------
OPERATING EXPENSES:
Research, development and engineering
(Note 4)............................ 235,354 285,893 549,737 8,004,911
Selling, general and administrative
(Note 9)............................ 3,549,939 3,302,751 4,346,858 26,189,722
----------- ----------- ----------- ------------
Total operating expenses............ 3,785,293 3,588,644 4,896,595 34,194,633
----------- ----------- ----------- ------------
OPERATING LOSS........................ (3,392,229) (2,910,288) (4,422,386) (30,970,452)
----------- ----------- ----------- ------------
OTHER INCOME (EXPENSE):
Interest income...................... 61,603 94,769 68,290 1,121,148
Interest expense..................... (449) (772) (3,892) (231,674)
Other................................ 27,372 (2,112) 26,488 (110,233)
----------- ----------- ----------- ------------
Total other income.................. 88,586 91,885 90,886 779,241
----------- ----------- ----------- ------------
NET LOSS.............................. $(3,303,703) $(2,818,403) $(4,331,500) $(30,191,211)
=========== =========== =========== ============
NET LOSS PER COMMON SHARE
(Note 4)............................. $ (0.18) $ (0.17) $ (0.34) $ (4.13)
=========== =========== =========== ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
(Note 4)............................. 18,667,506 16,843,681 12,697,427 7,311,014
=========== =========== =========== ============
</TABLE>
See notes to financial statements
47
<PAGE> 49
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(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
</TABLE>
<TABLE>
<CAPTION> TOTAL
ACCUM- SHAREHOLDERS'
ULATED EQUITY
DEFICIT (DEFICIENCY)
----------- -------------
<S> <C> <C>
ISSUANCE OF COMMON SHARES:
For shareholders' contributions of test equipment ......... January, 1982 $ - $ 26,500
For cash .................................................. July, 1982 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 .................................................. December, 1982 51,000
For services .............................................. January, 1983 20,500
For cash, less issuance costs of $5,863 ................... July, 1983 298,301
For services .............................................. November, 1983 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 December, 1983-
of $7,735 .............................................. April, 1984 500,446
For patents ............................................... February, 1984 128,069
For cash .................................................. November, 1984 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 December, 1984-
of $3,726 .............................................. June, 1985 453,615
For cash .................................................. November, 1985 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 ........................ December, 1985 27,500
For cash .................................................. January, 1986 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 March, 1987-
of $9,500 .............................................. September, 1987 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 February, 1988-
of $10,500 ............................................. April, 1988 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 January, 1989-
due a shareholder ...................................... July, 1989 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 .............................................. August, 1990 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 ............... March, 1991 5,569,759
Unit Purchase Option ...................................... March, 1991 120
Redeemable Convertible Preferred Stock dividend ........... April, 1991 (19,843) (19,843)
For cash, less issuance costs of $126,900 ................. April, 1991 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>
48
<PAGE> 50
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(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
January, 1996- 0.84-
Exercise of Stock Options for Cash ......................... June, 1996 1.47 77,166 772 74,335
For cash, less issuance costs of $143,587 .................. April, 1996 1.25 1,142,400 11,424 1,272,989
Exercise of Warrants for Cash, less issuance June, 1996- 0.95-
costs of $16,350 ........................................... September, 1996 2.00 196,983 1,970 338,113
For cash, less issuance costs of $650,872 .................. November, 1996 1.15 3,668,413 36,684 3,531,119
Redemption of B Warrants .................................. November, 1996 0.05 (203,759)
Net loss for the year ended November 30, 1996 ..............
---------- -------- -----------
Balance at November 30, 1996 ................................. 22,853,514 $228,537 $34,036,115
========== ======== ===========
</TABLE>
<TABLE>
<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, December, 1991-
less issuance costs of $702,917 ........................ May, 1992 11,714,083
February, 1992-
Exercise of Class B Warrants for cash ..................... November, 1992 136,220
July, 1992-
Exercise of stock options for cash .......................... November, 1992 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
December, 1992-
Exercise of Class B Warrants for cash ..................... October, 1993 119,064
March, 1993-
Exercise of Class M Warrants for cash ..................... October, 1993 600,179
March, 1993-
Exercise of Stock Options for cash ......................... September, 1993 13,150
Exercise of Unit Purchase
Options and Underlying Class A Warrants ................. May, 1993-
for cash ................................................ October, 1993 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 .................. August, 1994 3,746,810
Exercise of Stock Options for Cash.......................... November, 1994
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 ......................... February, 1995 844
For cash, less issuance costs of $282,475 .................. July, 1995 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
January, 1996-
Exercise of Stock Options for Cash ......................... June, 1996 75,107
For cash, less issuance costs of $143,587 .................. April, 1996 1,284,413
Exercise of Warrants for Cash, less issuance June, 1996-
costs of $16,350 ........................................... September, 1996 340,083
For cash, less issuance costs of $650,872 .................. November, 1996 3,567,803
Redemption of B Warrants .............. November, 1996 (203,759)
Net loss for the year ended November 30, 1996 .............. (3,303,703) (3,303,703)
------------ ----------
Balance at November 30, 1996 ................................. $(30,211,053) $4,053,599
============ ==========
</TABLE>
See notes to financial statements
49
<PAGE> 51
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
for the Period
January 15, 1982
For the Years Ended November 30, (Date of Inception)
------------------------------------------------ to November 30,
1996 1995 1994 1996
------------- ----------- ----------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net loss................................................. $(3,303,703) $(2,818,403) $(4,331,500) $(30,191,211)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization........................... 66,222 133,128 209,030 829,209
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................ 252,423 (17,913) (11,631) (191,436)
Inventory (increase) decrease.......................... 5,286 (61,452) (24,379) (931,135)
Prepaid expenses (increase) decrease................... 6,726 (8,083) 45,942 (65,435)
Other assets (increase) decrease....................... 88,016 (9,545) 59,218 (127,332)
Accounts payable increase (decrease)................... 232,631 (98,807) (138,409) 364,032
Accrued liabilities increase (decrease)................ (162,246) (111,532) (62,254) 254,110
----------- ----------- ----------- ------------
Net cash (used in) operations........................... (2,814,645) (2,992,607) (4,253,984) (29,606,269)
----------- ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities....................... - - (2,075,044) (12,166,540)
Proceeds from sale of marketable securities.............. - 1,564,826 2,700,979 12,166,540
Acquisition of property and equipment.................... (68,914) (19,267) (12,334) (911,061)
Proceeds (investment) under note receivable-related party 190,240 (15,240) 25,000 -
----------- ----------- ----------- ------------
Net cash provided by (used in) investing activities..... 121,326 1,530,319 638,601 (911,061)
----------- ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares.................. 5,267,406 1,593,469 3,747,012 34,032,843
Redemption of Redeemable Convertible Preferred Shares.... (19,843) - - (19,843)
Redemption of Class B Warrants........................... (203,759) - - (203,759)
Proceeds from notes payable and long term debt.......... 205,000 - - 2,515,223
Repayment of notes payable and long term debt............ (205,000) (30,000) (30,000) (2,515,223)
----------- ----------- ----------- ------------
Net cash provided by financing activities............... 5,043,804 1,563,469 3,717,012 33,809,241
----------- ----------- ----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................. 2,350,485 101,181 101,629 3,291,911
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............ 941,426 840,245 738,616 -
----------- ----------- ----------- ------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD................................................... $ 3,291,911 $ 941,426 $ 840,245 $ 3,291,911
=========== =========== =========== ============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
See Statements of Shareholders Equity (Deficiency) for details of shares issued
in exchange for non-cash consideration.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest for the years ended November 30, 1996, 1995 and 1994
approximated $450, $1,000, and $4,000, respectively.
See notes to financial statements
50
<PAGE> 52
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 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 disposable SomaSensor(R)) that
noninvasively and continuously monitors trends in regional hemoglobin oxygen
saturation of blood in the brain of an individual.
2. FINANCIAL STATEMENT PRESENTATION
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 $30,211,053 through November 30, 1996. The Company had working
capital of $3,861,775, cash and cash equivalents of $3,291,911, total current
liabilities of $618,142 and shareholders' equity of $4,053,599, as of November
30, 1996.
On November 22, 1993, the Company received notification that the FDA had
rescinded the Company's previous 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 June 6, 1996 the Company received clearance from the FDA to
market the INVOS 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.
As of January 17, 1997, the Company had 26 international distributors, 6
domestic distributors, 16 direct sales personnel and 1 international sales
consultant. During fiscal 1996, the Company sold its products to 14 of its
international distributors and devoted most of its United States marketing to
51
<PAGE> 53
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996
entering into distribution agreements with distributors, hiring direct sales
personnel and replacing existing Cerebral Oximeters with the INVOS 3100A
Cerebral Oximeter. There can be no assurance that the Company will be
successful or profitable in marketing the Cerebral Oximeter and the related
SomaSensor.
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 the sales of Common Shares and Units in the Regulation S
offerings in July 1995 and April and November 1996 (Note 3) and exercises of
warrants and options, were sufficient to fund the Company's working capital
requirements for the fiscal year ended November 30, 1996. Current sales are
not sufficient to fund operations. During fiscal 1996, the Company received
approximately $4.9 million in net proceeds from the sale of Common Shares and
Units in offerings complying with Regulation S under the Securities Act of
1933, as amended (Note 3). In addition, during fiscal 1996, the Company
received approximately $.4 million in proceeds from the exercise of warrants
issued in Regulation S offerings, Class M Warrants and stock options (Notes 3
and 8).
The Company believes that the cash and cash equivalents on hand at November 30,
1996 will be sufficient to sustain the Company's operations at budgeted levels
and its needs for liquidity into the third quarter of fiscal 1997. By that
time the Company will be required to raise additional cash either through
additional sales of products, through sales of securities, by incurring
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. 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 related
technologies and for working capital will not be substantially greater than
current estimates.
52
<PAGE> 54
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996
The Company does not believe that product sales will be sufficient to fund the
Company's operations in fiscal 1997.
The Company has entered into a Letter Agreement, dated as of January 10, 1997,
pursuant to which the Company has exclusively retained a managing underwriter
to underwrite a proposed public offering by the Company of 1,200,000
newly-issued Common Shares (subject to, and after giving effect to, the
proposed one-for-ten reverse stock split being submitted for shareholder
approval at the 1997 Annual Meeting of Shareholders) (Note11). There can be no
assurance that such offering will occur or that the Company will be able to
raise any capital or capital in amounts it desires, or on terms and conditions
acceptable to the Company.
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 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.
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. STOCK OFFERINGS AND COMMON SHARES
The Company has authorized 30,000,000 Common Shares (par value $0.01 per
share), which entitle the holders to one vote per share. The Company has also
authorized 1,000,000 Preferred Shares (par value $.01 per share).
Pursuant to a registration statement under the Securities Act of 1933, in March
and April 1991, the Company sold to the public 1,380,000 units, consisting of
4,140,000 Common Shares (par value $0.01 per share), and 4,140,000 redeemable
Class A Warrants. 4,139,000 Class A Warrants were exercised, each entitling
the holder to one Common Share and one Class B Warrant, and 1,000 Class A
Warrants were redeemed in 1992. 63,821 Class B Warrants were exercised in 1992
and 1993. The Company redeemed all 4,075,179 then outstanding redeemable Class
B Warrants on November 14, 1996, at $.05 per Class B Warrant, or approximately
$203,759.
53
<PAGE> 55
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996
On March 27, 1991, the Company sold, for $120 to the underwriter an option to
purchase up to 120,000 units at $9.90 a unit, subject to adjustment, until
March 20, 1996 (the "Unit Purchase Option"). Such units were identical to the
units sold to the public, except that Class A and Class B Warrants were not
redeemable by the Company. 1,667 Unit Purchase Options and the 5,001
underlying Class A Warrants were exercised in fiscal 1993. The Company issued
10,002 Common Shares and 5,001 non-redeemable Class B Warrants as a result of
such exercises. As a result of various anti-dilution adjustments, there were
approximately 144,340 Unit Purchase Options outstanding on March 19, 1996, all
of which expired unexercised on that date. The 5,001 non-redeemable Class B
Warrants expired unexercised on November 14, 1996.
On February 28, 1996, the Company redeemed all of its outstanding Convertible
Preferred Shares for $0.01 per share at a total redemption cost to the Company
of approximately $19,843.
In September 1990, the Company issued notes in exchange for notes outstanding
held by some of the Company's shareholders. The shareholders were also issued
warrants (the "Exchange Warrants") to purchase 45,000 common shares at $2.00
per share (exercisable for five years beginning March 27, 1992). The notes
were repaid in fiscal 1991.
On August 2, 1994, the Company completed the placement of 5,297,000
newly-issued Common Shares, par value $.01 per share, at a price of $.80 per
share through an offering complying with Regulation S under the Securities Act
of 1933, as amended (the "Act"). Gross proceeds from the offering were
$4,237,600. The Company also granted the placement agent warrants to purchase
529,700 Common Shares at $1.25 per share exercisable during the four-year
period beginning August 2, 1995. The net proceeds to the Company, after
deducting the placement agent's fee and expenses of the offering, were
approximately $3.7 million. The Common Shares offered were not registered
under the Act and may not be offered or sold in the United States without
registration or an applicable exemption from registration requirements.
On July 14, 1995 the Company completed the placement of 750,000 Units, at a
price of $2.50 per Unit, for gross proceeds of $1,875,000, 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 $1,593,000. Each Unit consists of
two newly-issued Common Shares, par value $0.01 per share, and one warrant to
purchase one Common Share.
54
<PAGE> 56
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996
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 $2.00 per share, subject to adjustment, at any
time through July 13, 2000, unless earlier redeemed. The Warrants are
redeemable for $0.01 by the Company at any time after January 13, 1996, if
certain conditions are met; these conditions had not been met as of January 24,
1997.
The Company also granted the placement agent warrants to purchase 150,000
Common Shares at $1.4375 per share exercisable during the four-year period
beginning July 14, 1996.
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;
these conditions have not been met as of January 24, 1997.
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 April 2, 1996 Regulation S offering, the Company 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.
Also, on November 21, 1996, the Company completed the placement of 3,668,413
newly-issued Common Shares, par value $0.01 per share, at a price of $1.15 per
share through an offering complying with Regulation S under the Securities Act
of 1933, as amended. The net proceeds to the Company were approximately
$3,568,000.
55
<PAGE> 57
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996
During fiscal 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 April 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. As of November 30, 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 April 1996 Regulation S securities offerings. The conditions permitting
the Company to redeem these warrants have not been met as of January 24, 1997.
In addition, the placement agents and their transferees hold warrants to
purchase 529,700 Common Shares exercisable at $1.25 a share, 150,000 Common
Shares exercisable at $1.44 a share and 114,240 Common Shares exercisable at
$1.25 a share. 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.
Common shares reserved for future issuance upon exercise of stock options and
warrants as discussed above at November 30, 1996, are as follows:
<TABLE>
<S> <C>
1983 Stock Option Plan (note 8)..................... 93,158
1991 Incentive Stock Option Plan (note 8)........... 1,102,887
1993 Director Stock Option Plan (note 8)............ 239,980
Options Granted Independent of Option Plans (note 8) 1,713,417
Exchange Warrants................................... 45,000
Placement Agent Warrants............................ 793,940
Regulation S Warrants............................... 1,155,200
---------
Total reserved for future issuance 5,143,582
=========
</TABLE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents consist of short-term, interest-bearing investments maturing
within three months of their acquisition by the Company.
Inventory is stated at the lower of cost or market on a first-in, first-out
(FIFO) basis. Inventory consists of:
56
<PAGE> 58
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996
<TABLE>
<CAPTION>
November 30,
1996 1995
---- ----
<S> <C> <C> <C>
Finished goods $437,079 $516,420
Work in process 307,510 219,076
Purchased components 386,996 296,003
--------- ---------
Sub-total 1,131,585 1,031,499
Less reserve for
obsolete and excess
inventory (200,450) (95,078)
--------- ---------
Total $931,135 $936,421
========= =========
</TABLE>
Property and Equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets, which range from three to five years.
Patents and Trademarks are recorded at cost and are being amortized on the
straight-line method over 17 years. Accumulated amortization was $32,604 and
$25,692 at November 30, 1996 and 1995, respectively.
Revenue Recognition occurs upon shipment to customers.
Research, Development and Engineering costs are expensed as incurred.
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.
Accounting Pronouncements In March 1995, The Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
To Be Disposed Of," which requires the Company to review for impairment
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In certain situations, an
impairment loss would be recognized. SFAS 121 is effective for the Company's
1997 fiscal year. The Company is evaluating the impact of the new standard on
its financial position, results of operations, and cash flows and expects the
effect to be immaterial.
57
<PAGE> 59
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock Based
Compensation" which also will be effective for the Company's 1997 fiscal year.
The Company does not expect SFAS 123 to have a material impact on its financial
position, results of operations, or cash flows. SFAS 123 allows companies
which have stock-based compensation arrangements with employees to adopt a new
fair-value basis of accounting for stock options and other equity instruments,
or it allows companies to continue to apply the existing accounting rules under
APB Opinion 25 "Accounting for Stock Issued to Employees," but requires
additional financial footnote disclosure. The Company expects to continue to
account for stock-based compensation arrangements under APB Opinion 25 and will
include additional footnote disclosure in its fiscal 1997 annual report.
Use Of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses for each fiscal period. Actual results could differ from
those estimated.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
November 30,
--------------------
1996 1995
---- ----
<S> <C> <C>
Professional Fees.............................. $101,697 $ 75,702
Shareholder Lawsuits (Note 7).................. - 144,717
Product Upgrades............................... 18,261 149,954
Warranty....................................... 12,421 15,000
Accrued Insurance.............................. 32,231 --
Other.......................................... 89,500 30,983
-------- --------
Total.......................................... $254,110 $416,356
======== ========
</TABLE>
6. INCOME TAX
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes ("SFAS No. 109"), as of December 1, 1993. This
statement supersedes the provisions of APB No. 11 which was previously used by
the Company. Prior years' financial statements were not restated and the
adoption of SFAS No. 109 had no impact on net income for the year ended
November 30, 1994.
58
<PAGE> 60
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996
Deferred income taxes, under SFAS 109, reflect the estimated future tax effect
of (i) temporary differences between the amount of assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws and
regulations, and (ii) net operating loss and tax credit carryforwards. The
Company's deferred tax assets primarily represent the tax benefit of net
operating loss carryforwards and research and general business tax credit
carryforwards. The Company had deferred tax assets of approximately $9,124,000
and $8,103,000 for the years ended November 30, 1996 and 1995, respectively,
which were entirely offset by valuation allowances, due to the uncertainty of
utilizing such assets against future earnings, prior to their expiration. The
components of deferred income tax assets as of November 30, 1996 and 1995 were
as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
(in thousands)
Net operating loss carryforwards $ 8,718 $ 7,581
Accrued liabilities 139 255
Research and general business tax credit carryforwards 267 267
------- -------
Subtotal 9,124 8,103
Valuation allowance (9,124) (8,103)
------- -------
Deferred tax asset $ -- $ --
======= =======
</TABLE>
As of November 30, 1996, net operating loss carryforwards of approximately
$25.6 million were available for Federal income tax purposes. The Company's
ability to use the net operating loss carryforwards incurred on or before March
27, 1991 (the date the Company completed its initial public offering) is
limited to approximately $296,000 per year. Research and business general tax
credits of $267,000 are also available to offset future taxes. These losses
and credits expire, if unused, at various dates from 1997 through 2011.
Utilization of the Company's net operating loss carryforwards, tax credit
carryforwards and certain future deductions could be restricted, in the event
of future changes in the Company's equity structure, by provisions contained in
the Tax Reform Act of 1986.
7. COMMITMENTS AND CONTINGENCIES
On September 10, 1991 the Company entered into a lease agreement for a 23,392
square foot, stand-alone office, assembly and warehouse facility. The lease
expires December 31, 1997.
Operating and building lease expense for the years ended November 30, 1996,
1995, and 1994 was approximately $173,500, $278,000 and $294,000, respectively.
Approximate future minimum lease commitments are as follows:
59
<PAGE> 61
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996
<TABLE>
<CAPTION>
Year ended November 30,
- -----------------------
<S> <C> <C>
1997 ................................ $184,000
1998 ................................ 15,000
---------
Total........................... $199,000
=========
</TABLE>
In December 1991, the Company amended and restated its profit sharing plan to
include a 401(k) plan covering substantially all employees. Under provisions
of the plan, participants may contribute, annually, between 1% and 15% of their
compensation. The Company, at the discretion of its Board of Directors, may
contribute matching contributions or make other annual discretionary
contributions to the plan, all of which, together with the participants'
contributions, cannot exceed 15% of the total compensation paid by the Company
to eligible employees. No Company matching or discretionary contributions were
made to the plan for the years ended November 30, 1996, 1995 or 1994.
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 in
additional territories, or retain its existing distributors. The Company's
inability to engage, replace or retain 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 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.
60
<PAGE> 62
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996
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 judgment approving the Agreement and
certifying the class. The Agreement (along with an understanding with the
Company's insurance company) required 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 was 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, 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. Management
believes it has substantial defenses to the Langford claim.
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.
At November 30, 1996, the Company had employment agreements with Bruce J.
Barrett, its President and Chief Executive Officer ("Mr. Barrett"), and Raymond
W. Gunn, its Executive Vice President and Chief Financial Officer ("Mr. Gunn").
The employment agreements, as amended, expire May 31, 1997 for Mr. Barrett and
November 30, 1997 for Mr. Gunn, unless earlier terminated as provided in the
agreements. Messrs. Barrett and Gunn were entitled to receive annual base
salaries which at November 30, 1996 were $195,000 and $105,000,
61
<PAGE> 63
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996
respectively, plus potential discretionary bonuses. Both parties have agreed
not to compete with the Company during specified periods.
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
maintain such insurance or that such insurance would be sufficient to protect
the Company against such product liability.
8. STOCK OPTION PLANS
In January 1983 and in February 1991, the Company adopted stock option plans
(the "1983 Plan" and the "1991 Plan," respectively) for key management
employees, directors, consultants and advisors of the Company. The plans
provide for the issuance of options by the Company to purchase a maximum of
156,689 Common Shares under the 1983 Plan, and 1,150,000 Common Shares under
the 1991 Plan. In addition, the Company granted options to employees
independent of the plans ("Non-Plan"). Awards and expirations under the 1983
Plan, 1991 Plan and Non-Plan during the years ended November 30, 1996, 1995 and
1994 are listed below.
Except for one option granted before the Company's initial public offering, the
exercise price of all options equals or exceeds the fair market value of the
underlying shares at the date of grant. At November 30, 1996, no additional
options may be granted under the 1983 Plan and 3,567 Common Shares were
available for options to be granted under the 1991 Plan.
In January 1993, the Company adopted the Somanetics Corporation 1993 Director
Stock Option Plan (the "Directors Plan"). The Directors Plan provides up to
240,000 Common Shares for the grant of options to purchase 15,000 shares every
three years beginning June 30, 1993 and ending June 30, 2002, to each director
who is not an officer or employee of the Company. In addition, each director
who is not an officer or employee of the Company and who first becomes a
director of the Company after the date the Directors Plan was adopted is
automatically granted an option to purchase a pro-rata portion of 15,000 Common
Shares.
62
<PAGE> 64
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996
<TABLE>
<CAPTION>
1983 PLAN 1991 PLAN NON PLAN DIRECTORS PLAN
-------------- -------------- ------------ -----------------
COMMON PRICE RANGE COMMON PRICE RANGE COMMON PRICE RANGE COMMON PRICE RANGE
SHARES PER SHARE SHARES PER SHARE SHARES- PER SHARE SHARES - PER SHARE
------ ----------- ------ ----------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding
November 30, 1993 154,265 $1.31-$3.63 842,500 $2.00-$5.69 -0- 45,000 $3.59
(1)
Options granted - - 1,230,166 $ .84-$1.63 550,000 $1.00-$1.25 20,228 $1.50
Options exercised - - (80) $1.63 - - (20) $3.59
Options canceled - - (927,233) $1.47-$5.69 - - (10,000) $3.59
------ --------- ----------- -------- -------
Options outstanding
November 30, 1994 154,265 $1.31-$3.63 1,145,353 $ .84-$4.25 550,000 $1.00-$1.25 55,208 $1.50-$3.59
Options granted - - 769,500 $1.19-$1.31 46,667 $1.47-$2.00 -
Options exercised - - (1,000) $.84 - -
Options canceled (61,107) $2.00-$3.63 (255,933) $.84-$4.25 - -
------- --------- -------- ------ -----------
Options outstanding
November 30, 1995 93,158 $1.31-$3.63 1,657,920 $.84-$4.25 596,667 $1.00-$2.00 55,208 $1.50-$3.59
Options granted - - 237,950 $.50 1,355,400 $.50-$2.31 60,000 $2.63
Options exercised - - (35,033) $.84-$1.47 (34,333) $1.00-$1.31 - -
Options canceled - - (761,517) $.50-$1.47 (204,317) $.50-$1.31 (10,000) $2.63
------- --------- --------- -------
Options outstanding
November 30, 1996 93,158 $1.31-$3.63 1,099,320 $.50-$4.25 1,713,417 $.50-$2.31 105,208 $1.50-$3.59
(2)(3) ======= ========= ========= ======= ===========
(1) Plus 132,398 redeemable Convertible Preferred Shares.
(2) Exercise dates range from February 21, 1991 to November 18, 2006.
(3) Options to purchase 1,775,086 Common Shares were exercisable at November 30, 1996.
Also, see Note 11 herein for proposal to adopt a new employee stock option plan.
</TABLE>
63
<PAGE> 65
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996
9. RELATED PARTY TRANSACTIONS
The Company received legal services from certain shareholders. Services from
such parties amounted to approximately $348,570, $236,000 and $439,000 during
the years ended November 30, 1996, 1995 and 1994, respectively.
The Company and Gary D. Lewis entered into an Agreement and Release, dated and
effective as of February 1, 1995. Pursuant to the agreement the Company has
agreed to provide Mr. Lewis with (A) $150,000 a year for two years, (B) the
same health, medical and dental benefits as are provided to the Company's
executive officers from time to time for two years.
On November 6, 1996, Gary D. Lewis paid the Company $175,000 (the outstanding
principal amount of the loan at the time) in full satisfaction of all of his
obligations under the loan made by the Company to him on February 1, 1993, and
the Company discharged the second mortgage and released the security interests
securing the loan and wrote off approximately $29,750 of accrued interest with
respect to that loan.
The Company recognized no revenue in fiscal 1996, 1995 and 1994, respectively,
from Somatek, Inc., one of the Company's domestic distributors whose principal
owner is a director of the Company. Approximately $68,000 of trade receivables
from Somatek, Inc. were written-off during the fiscal year ended November 30,
1996.
10. MAJOR CUSTOMERS AND FOREIGN SALES
The Company had two distributors which accounted for approximately 62% (Japan)
and 15% (Latin America) of total sales for fiscal year 1996, two distributors
which accounted for approximately 53% (Japan) and 13% (Latin America) of total
sales for fiscal year 1995 and two distributors which accounted for
approximately 43% (Japan) and 10% (Latin America) of total sales for fiscal
year 1994.
Additionally, total sales for the years ended November 30, 1996, 1995 and 1994
include approximately $745,000, $1,336,000 and $939,000, respectively, of sales
to foreign customers.
64
<PAGE> 66
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996
11. SUBSEQUENT EVENTS (UNAUDITED)
On January 15, 1997, the Company's Board of Directors approved an amendment and
restatement of the Company's Restated Articles of Incorporation to (i) effect a
one-for-ten reverse stock split of the Company's Common Shares while keeping
6,000,000 authorized Common Shares, at a par value of $0.01, and (ii) remove
provisions relating to the Convertible Preferred Shares redeemed February 28,
1996, all subject to shareholder approval at the 1997 Annual Meeting of
Shareholders.
In addition, on January 15, 1997, the Company's Board of Directors approved the
Somanetics Corporation 1997 Stock Option Plan, pursuant to which 295,000 Common
Shares (after giving effect to the one-for-ten reverse stock split described
above) are reserved for issuance pursuant to options to be granted to key
employees, directors, consultants and advisors of the Company, all subject to
approval of the reverse stock split described above, subject to shareholder
approval at the 1997 Annual Meeting of Shareholders.
Also at its January 15, 1997 meeting, the Company's Board of Directors granted
ten-year stock options independent of the Company's stock option plans to
purchase an aggregate of 127,000 Common Shares at $1.31 a share (the then
current market price). Such options were granted to eight new employees of the
Company.
The Company has entered into a Letter Agreement, dated as of January 10, 1997,
pursuant to which the Company has exclusively retained a managing underwriter
to underwrite a proposed public offering by the Company of 1,200,000
newly-issued Common Shares (subject to, and after giving effect to, the
proposed one-for-ten reverse stock split being submitted for shareholder
approval at the 1997 Annual Meeting of Shareholders). The Company has also
agreed to grant the underwriter an option to purchase an additional 180,000
Common Shares to cover over-allotments and a five-year warrant to purchase an
amount of shares equal to 10% of the Common Shares sold in the offering at an
exercise price equal to 120% of the purchase price for the Common Shares in the
offering. Among other things, the offering is contingent on consummation of
the reverse split and the satisfactory completion of a due diligence
investigation of the Company by the underwriter and its agents. Any such
offering will be made only by means of a prospectus. In addition, the type and
amount of security, if any, that might ultimately be issued in any such
offering have not yet been definitively determined and will be dependent on
negotiations with the underwriter, market conditions and management's then
current estimate of the proceeds necessary or desired to sustain the Company's
operations. There can be no assurance that such offering will occur or that
the Company will be able to raise any capital or capital in amounts it desires,
or on terms and conditions acceptable to the Company.
65
<PAGE> 67
ITEM. 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
66
<PAGE> 68
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 regarding executive officers of the
Company is included in the Supplemental Item in Part I of this Report, and is
incorporated in this Item 10 by reference. The information required by this
Item 10 regarding directors of the Company will be set forth under the caption
"Election of Director" in the Company's Proxy Statement in connection with the
1997 Annual Meeting of Shareholders scheduled to be held March 25, 1997, and is
incorporated in this Item 10 by reference. The information required by this
Item 10 concerning compliance with Section 16(a) of the Securities Exchange Act
of 1934 will be set forth under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement in connection with the
1997 Annual Meeting of Shareholders scheduled to be held March 25, 1997, and is
incorporated in this Item 10 by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 concerning executive compensation will
be set forth under the caption "Executive Compensation" in the Company's Proxy
Statement in connection with the 1997 Annual Meeting of Shareholders scheduled
to be held March 25, 1997, and is incorporated in this Item 11 by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 concerning security ownership of
certain beneficial owners and management will be set forth under the captions
"Voting Securities and Principal Holders" and "Election of Director" in the
Company's Proxy Statement in connection with the 1997 Annual Meeting of
Shareholders scheduled to be held March 25, 1997, and is incorporated in this
Item 12 by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 concerning certain relationships and
related transactions will be set forth under the caption "Certain Transactions"
or "Compensation Committee Interlocks and Insider Participation" in the
Company's Proxy Statement in connection with the 1997 Annual Meeting of
Shareholders scheduled to be held March 25, 1997, and is incorporated in this
Item 13 by reference.
67
<PAGE> 69
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(1) Financial Statements
The following financial statements of the Company are included in
response to Item 8 of this Report:
Independent Auditors' Report
Balance Sheets - November 30, 1996 and 1995
Statements of Loss - For Each of the Three Years in the
Period Ended November 30, 1996 and Cumulative for the
Period From Inception (January 15, 1982) to November 30,
1996
Statements of Shareholders' Equity (Deficiency) - for the
Period From Inception (January 15, 1982) to November 30,
1996
Statements of Cash Flows - For Each of the Three Years in the
Period Ended November 30, 1996 and Cumulative for the
Period From Inception (January 15, 1982) to November 30,
1996
Notes to Financial Statements
(2) Financial Statement Schedule
The following financial statement schedule of the Company is
included in response to Item 8 of this Report:
Schedule II - Valuation and Qualifying Accounts and Reserves for
the Years Ended November 30, 1996, 1995 and 1994.
(3) Exhibits
The Exhibits to this Report are as set forth in the "Index to
Exhibits" on pages 72 to 78 of this Report. Each management
contract or compensatory plan or arrangement filed as an exhibit to
this Report is identified in the "Index to Exhibits" with an
asterisk before the exhibit number.
(b) Reports on Form 8-K
The Company filed a Form 8-K, dated November 21, 1996, to announce under
Item 5 that it had completed the placement of 3,668,413 newly-issued Common
Shares, par value $0.01 per share, at $1.15 per share, for gross proceeds
of $4,218,675 through an offering complying with Regulation S under the
Securities Act of 1993, as amended.
68
<PAGE> 70
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
for the years ended November 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Column B Column C Column D Column E
-------- ---------------------------- -------- ----------
Additions
----------------------------
(2) Charged to
Balance at Charged to Other (1) (3) Balance at
Beginning Costs and Accounts, Deductions, End of
of Period Expenses Describe Describe Period
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended November 30, 1996 $193,766 $46,056 -- $193,775 $46,047
Year ended November 30, 1995 224,509 -- -- 30,743 $193,766
Year ended November 30, 1994 105,000 212,257 -- 92,748 $224,509
Note: (1) Write-Off uncollectible accounts, net of recoveries
Note: (2) Reserve of additional uncollectible accounts, net of recoveries
Inventory reserve for obsolescence:
Year ended November 30, 1996 $95,078 $170,554 -- $65,182 $200,450
Year ended November 30, 1995 25,000 70,078 -- 0 95,078
Year ended November 30, 1994 25,000 70,741 -- 70,741 25,000
Note: (3) Write-off obsolete, excess inventory, net of recoveries
</TABLE>
<PAGE> 71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: February 5, 1997 By: /s/ Bruce J. Barrett
--------------------------------
Bruce J. Barrett
President & Chief Executive Officer
70
<PAGE> 72
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Bruce J. Barrett President and Chief February 5, 1997
- ---------------------------- Executive Officer and a
Bruce J. Barrett Director (Principal
Executive Officer)
/s/ H. Raymond Wallace Chairman of the Board of February 5 , 1997
- ---------------------------- Directors
H. Raymond Wallace
/s/ Raymond W. Gunn Executive Vice President and February 5, 1997
- ---------------------------- Chief Financial Officer
Raymond W. Gunn (Principal Financial Officer
and Principal Accounting
Officer)
/s/ Daniel S. Follis Director February 5, 1997
- ----------------------------
Daniel S. Follis
/s/ James I. Ausman Director February 5, 1997
- ----------------------------
James I. Ausman, M.D., Ph.D.
</TABLE>
71
<PAGE> 73
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<S> <C> <C>
3(i) Restated Articles of Incorporation of Somanetics Corporation, as N/A
amended, incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
February 29, 1992.
3(ii) Amended and Restated Bylaws of Somanetics Corporation, N/A
incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8 filed with the Securities and
Exchange Commission on June 16, 1995.
10.1 Lease Agreement, dated September 10, 1991, between Somanetics N/A
Corporation and WS Development Company, incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1991.
10.2 Extension of Lease, between Somanetics Corporation and WS N/A
Development Company, dated July 22, 1994, incorporated by
reference to Exhibit 10.11 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1994.
10.3 Change in ownership of Lease Agreement for 1653 E. Maple Road, N/A
Troy, MI 48083, dated September 12, 1994, between Somanetics
Corporation and First Industrial, L.P., incorporated by
reference to Exhibit 10.12 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1994.
*10.4 Somanetics Corporation Amended and Restated 1983 Stock Option N/A
Plan, incorporated by reference to Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the fiscal year ended November
30, 1991.
*10.5 Somanetics Corporation Amended and Restated 1991 Incentive Stock N/A
Option Plan, incorporated by reference to Exhibit 10.5 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1991.
*10.6 Fourth Amendment to Somanetics Corporation 1991 Incentive Stock N/A
Option Plan, incorporated by reference to Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1992.
*10.7 Amended and Restated Fifth Amendment to Somanetics Corporation N/A
1991 Incentive Stock Option Plan, incorporated by reference to
Exhibit 10.10 to the Company's Annual Report on Form 10-K for
the fiscal year ended November 30, 1995.
</TABLE>
72
<PAGE> 74
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<S> <C> <C>
*10.8 Somanetics Corporation 1993 Director Stock Option Plan, N/A
incorporated by reference to Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the fiscal year ended November
30, 1992.
*10.9 Somanetics Corporation 1997 Stock Option Plan. ____
*10.10 Somanetics Corporation 1995 Employee Incentive Plan, N/A
incorporated by reference to Exhibit 10.18 to the Company's
Quarterly Report on Form 10-Q for the quarter ended August 31,
1994.
*10.11 Somanetics Corporation 1997 Employee Incentive Compensation ____
Program.
*10.12 Amended and Restated Somanetics Corporation Plan and Trust, N/A
incorporated by reference to Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the fiscal year ended November
30, 1991.
*10.13 Smith Barney Shearson Flexible Prototype Standardized 401(k) N/A
Plan Adoption Agreement #3, amending and restating the
Somanetics Corporation Plan and Trust, incorporated by reference
to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended August 31, 1995.
*10.14 Employment Agreement, dated as of December 1, 1992, between N/A
Somanetics Corporation and Raymond W. Gunn, incorporated by
reference to Exhibit 10.14 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1992.
*10.15 Employment Agreement, dated May 13, 1994, between Somanetics N/A
Corporation and Bruce J. Barrett, incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended May 31, 1994.
*10.16 Amendment to Employment Agreement, dated as of February 23, N/A
1994, between Somanetics Corporation and Raymond W. Gunn,
incorporated by reference to Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the fiscal year ended November
30, 1993.
*10.17 Amendment to Employment Agreement, dated as of July 21, 1994, N/A
between Somanetics Corporation and Bruce J. Barrett,
incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended August 31,
1994.
</TABLE>
73
<PAGE> 75
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<S> <C> <C>
*10.18 Amendment to Employment Agreement, dated as of July 21, 1994, N/A
between Somanetics Corporation and Raymond W. Gunn, incorporated
by reference to Exhibit 10.3 to the Company's Quarterly Report
on Form 10-Q for the quarter ended August 31, 1994.
*10.19 Amendment to Employment Agreement, dated as of December 1, 1995, N/A
between Somanetics Corporation and Raymond W. Gunn, incorporated
by reference to Exhibit 10.20 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1995.
*10.20 Amendment to Employment Agreement, dated as of November 18, ____
1996, between Somanetics Corporation and Raymond W. Gunn.
*10.21 Stock Option Agreement, dated May 16, 1994, between Somanetics N/A
Corporation and Bruce J. Barrett, incorporated by reference to
Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for
the quarter ended August 31, 1994.
*10.22 Stock Option Agreement, dated July 21, 1994, between Somanetics N/A
Corporation and Bruce J. Barrett, incorporated by reference to
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for
the quarter ended August 31, 1994.
*10.23 Stock Option Agreement, dated July 21, 1994, between Somanetics N/A
Corporation and Gary D. Lewis, incorporated by reference to
Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for
the quarter ended August 31, 1994.
*10.24 Stock Option Agreement, dated July 21, 1994, between Somanetics N/A
Corporation and Raymond W. Gunn, incorporated by reference to
Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for
the quarter ended August 31, 1994.
*10.25 Stock Option Agreements, dated July 20, 1995, between Somanetics N/A
Corporation and Richard Farkas, incorporated by reference to
Exhibit 10.28 to the Company's Annual Report on Form 10-K for
the fiscal year ended November 30, 1995.
*10.26 Form of Stock Option Agreement, dated December 22, 1995, between N/A
Somanetics Corporation and various employees, incorporated by
reference to Exhibit 10.29 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1995.
*10.27 Form of Stock Option Agreement, dated December 22, 1995, between N/A
Somanetics Corporation and various officers, incorporated by
reference to Exhibit 10.30 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1995.
</TABLE>
74
<PAGE> 76
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<S> <C> <C>
*10.28 Form of new Stock Option Agreement, dated December 22, 1995, N/A
between Somanetics Corporation and various employees,
incorporated by reference to Exhibit 10.31 to the Company's
Annual Report on Form 10-K for the fiscal year ended November
30, 1995.
*10.29 Form of Stock Option Agreement, dated January 5, 1996, between N/A
Somanetics Corporation and two officers, incorporated by
reference to Exhibit 10.32 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1995.
*10.30 Form of Stock Option Agreement, dated as of June 3, 1996, ____
between Somanetics Corporation and three employees.
*10.31 Form of Stock Option Agreement, dated as of September 10, 1996, ____
between Somanetics Corporation and six employees.
*10.32 Form of Stock Option Agreement, dated as of November 18, 1996, ____
between Somanetics Corporation and six employees.
*10.33 Form of Stock Option Agreement, dated as of January 15, 1997, ____
between Somanetics Corporation and eight employees.
*10.34 Consulting Agreement, dated February 28, 1983, as amended, N/A
between Somanetics Corporation and Hugh F. Stoddart,
incorporated by reference to Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the fiscal year ended November
30, 1991.
*10.35 Consulting Order, dated as of October 1, 1996, among Somanetics N/A
Corporation and NeuroPhysics Corporation, Hugh F. Stoddart and
Hugh A. Stoddart, Ph.D., as Consultants, incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1996.
*10.36 Agreement and Release, dated as of February 1, 1995, between N/A
Somanetics Corporation and Gary D. Lewis, incorporated by
reference to Exhibit 10.27 to Post-Effective Amendment No. 5 to
the Company's Registration Statement on Form S-1 (file no.
33-38438) filed with the Securities and Exchange Commission on
March 30, 1995.
*10.37 Amendment to Stock Option Agreement, dated as of February 1, N/A
1995, between Somanetics Corporation and Gary D. Lewis, amending
July 21, 1994 Stock Option Agreement, incorporated by reference
to Exhibit 10.31 to Post-Effective Amendment No. 5 to the
Company's Registration Statement on Form S-1 (file no. 33-38438)
filed with the Securities and Exchange Commission on March 30,
1995.
10.38 Current Form of Somanetics Corporation Confidentiality Agreement N/A
used for testing hospitals and clinics, incorporated by
reference to Exhibit 10.22 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1992.
</TABLE>
75
<PAGE> 77
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<S> <C> <C>
10.39 Current Form of Somanetics Corporation Confidentiality Agreement N/A
used for the Company's employees and agents, incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1992.
10.40 Assignments, dated October 6, 1983, January 23, 1986, February N/A
11, 1986 and February 11, 1986, from Gary D. Lewis to Somanetics
Corporation in connection with the Company's INVOS(R)
technology, incorporated by reference to Exhibit 10.17 to the
Company's Registration Statement on Form S-1 (file no.
33-38438).
10.41 Assignments, dated October 5, 1983, August 28, 1985, February N/A
11, 1986, February 12, 1986, and September 24, 1986, from Hugh
F. Stoddart to Somanetics Corporation in connection with the
Company's INVOS(R) technology, incorporated by reference to
Exhibit 10.18 to the Company's Registration Statement on Form
S-1 (file no. 33-38438).
10.42 Form of Note and Warrant issued in exchange for old notes on N/A
September 1, 1990, incorporated by reference to Exhibit 10.21 to
the Company's Registration Statement on Form S-1 (file no.
33-38438).
10.43 Warrant Agreement, dated as of August 2, 1994, between N/A
Somanetics Corporation and Rauscher Pierce & Clark Limited,
incorporated by reference to Exhibit 10.15 to the Company's
Quarterly Report on Form 10-Q for the quarter ended August 31,
1994.
10.44 Form of Warrant to Purchase Common Stock of Somanetics N/A
Corporation, dated as of August 2, 1994, between Somanetics
Corporation and Rauscher Pierce & Clark Limited, incorporated by
reference to Exhibit 10.16 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1994.
10.45 Engagement Letter, dated as of June 6, 1995, among Somanetics N/A
Corporation, Rauscher Pierce & Clark Limited and Rauscher Pierce
& Clark, Inc., incorporated by reference to Exhibit 10.6 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
May 31, 1995.
</TABLE>
76
<PAGE> 78
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<S> <C> <C>
10.46 Form of Purchase Agreement, between Somanetics Corporation and N/A
purchasers of Units in the 1995 Regulation S Offering,
incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended August 31,
1995.
10.47 Form of Warrant, between Somanetics Corporation and purchasers N/A
of Units in the 1995 Regulation S Offering, incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1995.
10.48 Warrant Agreement, dated as of July 14, 1995, between Somanetics N/A
Corporation and Rauscher Pierce & Clark Limited, incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1995.
10.49 Warrant to Purchase Common Stock of Somanetics Corporation, N/A
dated as of July 14, 1995, between Somanetics Corporation and
Rauscher Pierce & Clark Limited, incorporated by reference to
Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for
the quarter ended August 31, 1995.
10.50 Side Letter, dated as of July 14, 1995, among Somanetics N/A
Corporation, Rauscher Pierce & Clark Limited and Rauscher Pierce
& Clark, Inc., incorporated by reference to Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
August 31, 1995.
10.51 Engagement Letter, dated as of March 25, 1996, among Somanetics N/A
Corporation, Rauscher Pierce & Clark Limited and Rauscher Pierce
& Clark, Inc., incorporated by reference to Exhibit 10.57 to
Post-Effective Amendment No. 6 to the Company's Registration
Statement on Form S-1 (file no. 33-38438).
10.52 Form of Purchase Agreement, between Somanetics Corporation and N/A
purchasers of Units in the April 1996 Regulation S Offering,
incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended February 29,
1996.
10.53 Form of Warrant, between Somanetics Corporation and purchasers N/A
of Units in the April 1996 Regulation S Offering, incorporated
by reference to Exhibit 10.3 to the Company's Quarterly Report
on Form 10-Q for the quarter ended February 29, 1996.
</TABLE>
77
<PAGE> 79
<TABLE>
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<S> <C> <C>
10.54 Warrant Agreement, dated as of April 2, 1996, between Somanetics N/A
Corporation and Rauscher Pierce & Clark Limited, incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended February 29, 1996.
10.55 Warrant to Purchase Common Stock of Somanetics Corporation, N/A
dated as of April 2, 1996, between Somanetics Corporation and
Rauscher Pierce & Clark Limited, incorporated by reference to
Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for
the quarter ended February 29, 1996.
10.56 Side Letter, dated as of April 2, 1996, among Somanetics N/A
Corporation, Rauscher Pierce & Clark Limited and Rauscher Pierce
& Clark, Inc., incorporated by reference to Exhibit 10.6 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
February 29, 1996.
10.57 Amendment to Side Letter, dated as of June 18, 1996, among N/A
Somanetics Corporation, Rauscher Pierce & Clark Limited and
Rauscher Pierce & Clark, Inc., incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended May 31, 1996.
10.58 Engagement Letter, dated as of October 23, 1996, among ____
Somanetics Corporation, Rauscher Pierce & Clark Limited and
Rauscher Pierce & Clark, Inc.
10.59 Amendment to Engagement Letter, dated as of November 1, 1996, ____
among Somanetics Corporation, Rauscher Pierce & Clark Limited
and Rauscher Pierce & Clark, Inc.
10.60 Form of Purchase Agreement, between Somanetics Corporation and ____
purchasers of Units in the November 1996 Regulation S Offering.
10.61 Placement Agent Agreement, dated as of November 21, 1996, among ____
Somanetics Corporation, Rauscher Pierce & Clark Limited and
Rauscher Pierce & Clark, Inc.
10.62 Letter Agreement, dated as of January 10, 1997, between ____
Somanetics Corporation and Brean Murray & Co., Inc.
23.1 Independent Auditors' Consent. ____
27.1 Financial Data Schedule. ____
</TABLE>
78
<PAGE> 1
EXHIBIT 10.9
SOMANETICS CORPORATION
1997 STOCK OPTION PLAN
1. Definitions: As used herein, the following terms shall have the
following meanings:
(a) "Code" shall mean the Internal Revenue Code of 1986, as amended,
and the applicable rules and regulations thereunder.
(b) "Committee" shall mean, (i) with respect to administration of
the Plan regarding Participants who are subject to Section 16(a) and (b)
of the Exchange Act, a committee meeting the standards of Rule 16b-3 of
the Rules and Regulations under the Exchange Act, or any similar
successor rule, appointed by the Board of Directors of the Company to
perform any of the functions and duties of the Committee under the Plan,
or the Board of Directors as a whole, and (ii) with respect to
administration of the Plan regarding all other Participants, such
committee or the Board of Directors of the Company, as described in
clause (i), or such other committee or entity appointed by the Board of
Directors of the Company to perform any of the functions and duties of
the Committee under the Plan.
(c) "Common Shares" shall mean the Common Shares, par value $.01 per
share, of the Company.
(d) "Company" shall mean Somanetics Corporation, a Michigan
corporation, or any successor thereof.
(e) "Discretion" shall mean the sole discretion of the Committee,
with no requirement whatsoever that the Committee follow past practices,
act in a manner consistent with past practices, or treat any key
employee, director, consultant or advisor in a manner consistent with the
treatment afforded other key employees, directors, consultants or
advisors with respect to the Plan or otherwise.
(f) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations thereunder.
(g) "Incentive Option" shall mean an option to purchase Common
Shares which meets the requirements set forth in the Plan and also is
intended to be, and qualifies as, an incentive stock option within the
meaning of Section 422 of the Code.
(h) "Nonqualified Option" shall mean an option to purchase Common
Shares which meets the requirements set forth in the Plan but is not
intended to be, or does not qualify as, an incentive stock option within
the meaning of the Code.
<PAGE> 2
(i) "Participant" shall mean any individual designated by the
Committee under Paragraph 6 for participation in the Plan.
(j) "Plan" shall mean this Somanetics Corporation 1997 Stock Option
Plan.
(k) "Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations thereunder.
(l) "Subsidiary" shall mean any corporation or other entity in which
the Company has a direct or indirect ownership interest of 50% or more of
the total combined voting power of all classes of outstanding voting
equity interests.
2. Purpose of Plan: The purpose of the Plan is to provide key employees
(including officers), directors, consultants and advisors of the Company and
its Subsidiaries (collectively, "key employees") with an increased incentive to
make significant and extraordinary contributions to the long-term performance
and growth of the Company and its Subsidiaries, to join the interests of key
employees, directors, consultants and advisors with the interests of the
shareholders of the Company, and to facilitate attracting and retaining key
employees, directors, consultants and advisors of exceptional ability.
3. Administration: The Plan shall be administered by the Committee.
Subject to the provisions of the Plan, the Committee shall determine, from
those eligible to be Participants under the Plan, the persons to be granted
stock options, the amount of stock to be optioned to each such person, the time
such options shall be granted and the terms and conditions of any stock
options. Such terms and conditions may, in the Committee's Discretion,
include, without limitation, provisions providing for termination of the
option, forfeiture of the gain on any option exercises or both if the
Participant competes with the Company or otherwise acts contrary to the
Company's interests, and provisions imposing restrictions, potential forfeiture
or both on shares acquired upon exercise of options granted pursuant to this
Plan. The Committee may condition any grant on the potential Participant's
agreement to such terms and conditions.
Subject to the provisions of the Plan, the Committee is authorized to
interpret the Plan, to promulgate, amend and rescind rules and regulations
relating to the Plan and to make all other determinations necessary or
advisable for its administration. Interpretation and construction of any
provision of the Plan by the Committee shall, unless otherwise determined by
the Board of Directors of the Company, be final and conclusive. A majority of
the Committee shall constitute a quorum, and the acts of a majority of the
members present at any meeting at which a quorum is present, or acts approved
in writing by a majority of the Committee, shall be the acts of the Committee.
4. Indemnification: In addition to such other rights of indemnification
as they may have, the members of the Committee shall be indemnified by the
Company in connection with any claim, action, suit or proceeding relating to
any action taken or failure to act under or in connection with the Plan or any
option granted hereunder to the full extent provided for under
-2-
<PAGE> 3
the Company's articles of incorporation or bylaws with respect to
indemnification of directors of the Company.
5. Maximum Number of Shares Subject to Plan: The maximum number of shares
with respect to which stock options may be granted under the Plan shall be an
aggregate of 295,000 Common Shares, which may consist in whole or in part of
authorized and unissued or reacquired Common Shares. Unless the Plan shall
have been terminated, shares covered by the unexercised portion of canceled,
expired or otherwise terminated options under the Plan shall again be available
for option and sale.
Subject to Paragraph 16, the number and type of shares subject to each
outstanding stock option, the option price with respect to outstanding stock
options, the aggregate number and type of shares remaining available under the
Plan, and the maximum number and type of shares that may be granted to any
Participant in any fiscal year of the Company pursuant to Paragraph 6, shall be
subject to such adjustment as the Committee, in its Discretion, deems
appropriate to reflect such events as stock dividends, stock splits,
recapitalizations, mergers, statutory share exchanges or reorganizations of or
by the Company; provided that no fractional shares shall be issued pursuant to
the Plan, no rights may be granted under the Plan with respect to fractional
shares, and any fractional shares resulting from such adjustments shall be
eliminated from any outstanding option.
6. Participants: The Committee shall determine and designate from time to
time, in its Discretion, those key employees (including officers), directors,
consultants and advisors of or to the Company or any Subsidiary to whom options
are to be granted and who thereby become Participants under the Plan; provided,
however, that (a) Incentive Options shall be granted only to employees (as
defined in the Code) of the Company or a corporate Subsidiary, to the extent
required by Section 422 of the Code, or any successor provision, and (b) no
Participant may be granted stock options to purchase more than 200,000 Common
Shares in the aggregate in any fiscal year of the Company, subject to any
adjustments provided in the final paragraph of Paragraph 5 and in Paragraph 16.
7. Allotment of Shares: The Committee shall determine and fix the number
of Common Shares to be offered to each Participant; provided that no Incentive
Option may be granted under the Plan to any one Participant which would result
in the aggregate fair market value, determined as of the date the option is
granted, of the underlying stock with respect to which Incentive Options are
exercisable for the first time by such individual during any calendar year
(under all of such plans of the Company and its parent and Subsidiary
corporations) exceeding $100,000.
8. Option Price: Subject to the rules set forth in this Paragraph 8, the
Committee, in its Discretion, shall establish the option price at the time any
option is granted. With respect to an Incentive Option, such option price
shall not be less than 100% of the fair market value of the stock on the date
on which such option is granted; provided that with respect to an Incentive
Option granted to an employee who at the time of the grant owns (after applying
the
-3-
<PAGE> 4
attribution rules of Section 424(d) of the Code) more than 10% of the total
combined voting stock of the Company or of any parent or Subsidiary, the option
price shall not be less than 110% of the fair market value of the stock subject
to the Incentive Option on the date such option is granted. With respect to a
Nonqualified Option, the option price shall be not less than the par value, if
any, of the Common Shares. Fair market value of a share shall be determined by
the Committee and may be determined by using the closing sale price of the
Company's stock on any exchange or other market on which the Common Shares
shall be traded on such date, or if there is no sale on such date, on the next
following date on which there is a sale, or the average of the closing bid and
asked prices in any market or quotation system in which the Common Shares shall
be listed or traded on such date. The option price will be subject to
adjustment in accordance with the provisions of Paragraphs 5 and 16 of the
Plan.
9. Granting and Exercise of Options: The granting of options under the
Plan shall be effected in accordance with determinations made by the Committee
pursuant to the provisions of the Plan, by execution of instruments in writing
in form approved by the Committee. Such instruments shall constitute binding
contracts between the Company and the Participant.
Subject to the terms of the Plan, the Committee, in its Discretion, may
grant to Participants Incentive Options, Nonqualified Options or any
combination thereof. Each option granted under the Plan shall designate the
number of shares covered thereby, if any, with respect to which the option is
an Incentive Option and the number of shares covered thereby, if any, with
respect to which the option is a Nonqualified Option.
Subject to the terms of the Plan, each option granted under the Plan shall
be exercisable at any such time or times or in any such installments as may be
determined by the Committee in its Discretion; provided that the aggregate fair
market value (determined as of the date the option is granted) of the
underlying stock with respect to which Incentive Options are exercisable for
the first time by such individual during any calendar year (under all of such
plans of the Company and its parent and Subsidiary corporations) shall not
exceed $100,000. Except as provided in Paragraph 13, options may be exercised
only while the Participant is an employee, director, consultant or advisor of
the Company or a Subsidiary.
Notwithstanding any other term or provision of this Plan, but subject to
the requirements of the Code with respect to Incentive Options that are
intended to remain Incentive Options, in connection with a Participant ceasing
to be an employee of the Company or a Subsidiary for any reason, the stock
option agreement may provide for the acceleration of, or the Committee may
accelerate, in its Discretion (exercised at the date of the grant of the stock
option or after the date of grant), in whole or in part, the time or times or
installments with respect to which any option granted under this Plan shall be
exercisable in connection with termination of a Participant's employment with
the Company or a Subsidiary, subject to any restrictions, terms and conditions
fixed by the Committee either at the date of the award or at the date it
exercises such Discretion.
Successive stock options may be granted to the same Participant, whether
or not the option or options previously granted to such Participant remain
unexercised. A Participant may exercise
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<PAGE> 5
any option granted under the Plan, if then exercisable, notwithstanding that
options granted to such Participant prior to the option then being exercised
remain unexercised.
10. Payment of Option Price: At the time of the exercise in whole or in
part of any option granted under this Plan, payment in full in cash, or with
the consent of the Committee, in its Discretion, in Common Shares or by a
promissory note payable to the order of the Company which is acceptable to the
Committee, shall be made by the Participant for all shares so purchased. Such
payment may, with the consent of the Committee, in its Discretion, also consist
of a cash down payment and delivery of such a promissory note in the amount of
the unpaid exercise price. In the Discretion of, and subject to such
conditions as may be established by, the Committee, payment of the option price
may also be made by the Company retaining from the shares to be delivered upon
exercise of the stock option that number of shares having a fair market value
on the date of exercise equal to the option price of the number of shares with
respect to which the Participant exercises the option. In the Discretion of
the Committee, a Participant may exercise an option, if then exercisable, in
whole or in part, by delivery to the Company of written notice of the exercise
in such form as the Committee may prescribe, accompanied by irrevocable
instructions to a stock broker to promptly deliver to the Company full payment
for the shares with respect to which the option is exercised from the proceeds
of the stock broker's sale of or loan against some or all of the shares. Such
payment may also be made in such other manner as the Committee determines is
appropriate, in its Discretion. No Participant shall have any of the rights of
a shareholder of the Company under any option until the actual issuance of
shares to such Participant, and prior to such issuance no adjustment shall be
made for dividends, distributions or other rights in respect of such shares,
except as provided in Paragraphs 5 and 16.
11. Transferability of Option: Except as otherwise provided in this
Paragraph 11, (i) to the extent required by Section 422 of the Code, or any
successor section, but only with respect to Incentive Options, or (ii) to the
extent determined by the Committee in its Discretion (either by resolution or
by a provision in, or amendment to, the option), (a) no option granted under
the Plan to a Participant shall be transferable by such Participant otherwise
than (1) by will, or (2) by the laws of descent and distribution or, (3) with
respect to Nonqualified Options only (unless permitted by Section 422 of the
Code or any successor section), pursuant to a qualified domestic relations
order as defined in the Code or Title I of the Employee Retirement Income
Security Act, or the rules thereunder, and (b) such option shall be
exercisable, during the lifetime of the Participant, only by the Participant.
The Committee may, in its Discretion, authorize all or a portion of the
options to be granted to an optionee to be on terms which permit transfer by
such optionee to, and the exercise of such option by, (i) the spouse, children
or grandchildren of the optionee ("Immediate Family Members"), (ii) a trust or
trusts for the exclusive benefit of such Immediate Family Members, (iii) a
partnership in which such Immediate Family Members are the only partners, or
(iv) such other persons or entities as determined by the Committee, in its
Discretion, on such terms and conditions as the Committee, in its Discretion,
may determine; provided that (y) the stock option agreement pursuant to which
such options are granted must be approved by the Committee and
-5-
<PAGE> 6
must expressly provide for transferability in a manner consistent with this
Paragraph 11, and (z) subsequent transfers of transferred options shall be
prohibited except for transfers the original optionee would be permitted to
make (if he or she were still the owner of the option) in accordance with this
Paragraph 11.
Following transfer, any such options shall continue to be subject to the
same terms and conditions as were applicable immediately before transfer,
provided that for purposes of Paragraphs 9, 10, 14, 16 and 18 the term
"Participant" shall be deemed to refer to the transferee. The events of
termination of employment of Paragraph 13 shall continue to be applied with
respect to the original optionee, following which the options shall be
exercisable by the transferee only to the extent, and for the periods,
specified in Paragraph 13. The original optionee shall remain subject to
withholding taxes and related requirements upon exercise provided in Paragraph
15. The Company shall have no obligation to provide any notice to any
transferee, including, without limitation, notice of any termination of the
option as a result of termination of the original optionee's employment with,
or other service to, the Company.
12. Continuance of Employment; No Right to Continued Employment: The
Committee may require, in its Discretion, that any Participant under the Plan
to whom an option shall be granted shall agree in writing as a condition of the
granting of such option to remain in his or her position as an employee,
director, consultant or advisor of the Company or a Subsidiary for a designated
minimum period from the date of the granting of such option as shall be fixed
by the Committee.
Nothing contained in the Plan or in any option granted pursuant to the
Plan, nor any action taken by the Committee hereunder, shall confer upon any
Participant any right with respect to continuation of employment, consultation
or other service by or to the Company or a Subsidiary nor interfere in any way
with the right of the Company or a Subsidiary to terminate such person's
employment, consultation or other service at any time.
13. Termination of Employment; Expiration of Options: Subject to the
other provisions of the Plan, including, without limitation, Paragraphs 9 and
16 and this Paragraph 13, all rights to exercise options shall terminate when a
Participant ceases to be an employee, director, consultant or advisor of or to
the Company or a Subsidiary for any cause, except that the Committee may, in
its Discretion, permit the exercise of all or any portion of the options
granted to such Participant
(i) for a period not to exceed three months following such
termination with respect to Incentive Options that are intended to remain
Incentive Options if such termination is not due to death or permanent
disability of the Participant,
(ii) for a period not to exceed one year following termination of
employment with respect to Incentive Options that are Intended to remain
Incentive Options if termination of employment is due to the death or
permanent disability of the Participant, and
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<PAGE> 7
(iii) for a period not to extend beyond the expiration date with
respect to Nonqualified Options or Incentive Options that are not
intended to remain Incentive Options,
all subject to any restrictions, terms and conditions fixed by the Committee
either at the date of the award or at the date it exercises such Discretion.
In no event, however, shall an option be exercisable after its expiration date,
and, unless the Committee in its Discretion determines otherwise (pursuant to
Paragraph 9 or Paragraph 16), an option may only be exercised after termination
of a Participant's employment, consultation or other service by or to the
Company to the extent exercisable on the date of such termination or to the
extent exercisable as a result of the reason for such termination. The
Committee may evidence the exercise of its Discretion under this Paragraph 13
in any manner it deems appropriate, including by resolution or by a provision
in, or amendment to, the option.
If not sooner terminated, each stock option granted under the Plan shall
expire not more than 10 years from the date of the granting thereof; provided
that with respect to an Incentive Option granted to a Participant who, at the
time of the grant, owns (after applying the attribution rules of Section 424(d)
of the Code) more than 10% of the total combined voting stock of all classes of
stock of the Company or of any parent or Subsidiary, such option shall expire
not more than 5 years after the date of granting thereof.
14. Investment Purpose: If the Committee in its Discretion determines
that as a matter of law such procedure is or may be desirable, it may require a
Participant, upon any exercise of any option granted under the Plan or any
portion thereof and as a condition to the Company's obligation to deliver
certificates representing the shares subject to exercise, to execute and
deliver to the Company a written statement, in form satisfactory to the
Committee, representing and warranting that the Participant's purchase of
Common Shares upon exercise thereof shall be for such person's own account, for
investment and not with a view to the resale or distribution thereof and that
any subsequent sale or offer for sale of any such shares shall be made either
pursuant to (a) a Registration Statement on an appropriate form under the
Securities Act, which Registration Statement has become effective and is
current with respect to the shares being offered and sold, or (b) a specific
exemption from the registration requirements of the Securities Act, but in
claiming such exemption the Participant shall, prior to any offer for sale or
sale of such shares, obtain a favorable written opinion from counsel for or
approved by the Company as to the availability of such exemption. The Company
may endorse an appropriate legend referring to the foregoing restriction upon
the certificate or certificates representing any shares issued or transferred
to the Participant upon exercise of any option granted under the Plan.
15. Withholding Payments: If upon the exercise of any Nonqualified Option
or a disqualifying disposition (within the meaning of Section 422 of the Code)
of shares acquired upon exercise of an Incentive Option, there shall be payable
by the Company or a Subsidiary any amount for income tax withholding, in the
Committee's Discretion, either the Participant shall pay such amount to the
Company, or the amount of Common Shares delivered by the Company to the
Participant shall be appropriately reduced, to reimburse the Company or such
Subsidiary
-7-
<PAGE> 8
for such payment. The Company or any of its Subsidiaries shall have
the right to withhold the amount of such taxes from any other sums or property
due or to become due from the Company or any of its Subsidiaries to the
Participant upon such terms and conditions as the Committee shall prescribe.
The Company may also defer issuance of the stock upon exercise of such option
until payment by the Participant to the Company of the amount of any such tax.
The Committee may, in its Discretion, permit Participants to satisfy such
withholding obligations, in whole or in part, by electing to have the amount of
Common Shares delivered or deliverable by the Company upon exercise of a stock
option appropriately reduced, or by electing to tender Common Shares back to
the Company subsequent to exercise of a stock option to reimburse the Company
or such Subsidiary for such income tax withholding, subject to such rules and
regulations, if any, as the Committee may adopt. The Committee may make such
other arrangements with respect to income tax withholding as it shall
determine.
16. Extraordinary Transactions: In case the Company (i) consolidates with
or merges into any other corporation or other entity and is not the continuing
or surviving entity of such consolidation or merger, or (ii) permits any other
corporation or other entity to consolidate with or merge into the Company and
the Company is the continuing or surviving entity but, in connection with such
consolidation or merger, the Common Shares are changed into or exchanged for
stock or other securities of any other corporation or other entity or cash or
any other assets, or (iii) transfers all or substantially all of its properties
and assets to any other corporation or other person or entity, or (iv)
dissolves or liquidates, or (v) effects a capital reorganization or
reclassification in such a way that holders of Common Shares shall be entitled
to receive stock, securities, cash or other assets with respect to or in
exchange for the Common Shares, then, and in each such case, proper provision
shall be made so that, each Participant holding a stock option upon the
exercise of such option at any time after the consummation of such
consolidation, merger, transfer, dissolution, liquidation, reorganization or
reclassification (each transaction, for purposes of this Paragraph 16, being
herein called a "Transaction"), shall be entitled to receive (at the aggregate
option price in effect for all Common Shares issuable upon such exercise
immediately prior to such consummation and as adjusted to the time of such
Transaction), in lieu of Common Shares issuable upon such exercise prior to
such consummation, the stock and other securities, cash and assets to which
such Participant would have been entitled upon such consummation if such
Participant had so exercised such stock option in full immediately prior
thereto (subject to adjustments subsequent to such Transaction provided for in
Paragraph 5).
Notwithstanding anything in the Plan to the contrary, in connection with
any Transaction and effective as of a date selected by the Committee, which
date shall, in the Committee's judgment, be far enough in advance of the
Transaction to permit Participants holding stock options to exercise their
options and participate in the Transaction as a holder of Common Shares, the
Committee, acting in its Discretion without the consent of any Participant, may
effect one or more of the following alternatives with respect to all of the
outstanding stock options (which alternatives may be made conditional on the
occurrence of the applicable Transaction and which may, if permitted by law,
vary among individual Participants): (a) accelerate the time at which stock
options then outstanding may be exercised so that such stock options may be
exercised in full for a limited period of time on or before a specified date
fixed by the Committee
-8-
<PAGE> 9
after which specified date all unexercised stock options and all rights of
Participants thereunder shall terminate; (b) accelerate the time at which stock
options then outstanding may be exercised so that such stock options may be
exercised in full for their then remaining term; or (c) require the mandatory
surrender to the Company of outstanding stock options held by such Participants
(irrespective of whether such stock options are then exercisable) as of a date,
before or not later than sixty days after such Transaction, specified by the
Committee, and in such event the Company shall thereupon cancel such stock
options and shall pay to each Participant an amount of cash equal to the excess
of the fair market value of the aggregate Common Shares subject to such stock
option, determined as of the date such Transaction is effective, over the
aggregate option price of such shares, less any applicable withholding taxes;
provided, however, the Committee shall not select an alternative (unless
consented to by the Participant) such that, if a Participant exercised his or
her accelerated stock option pursuant to alternative (a) or (b) and
participated in the Transaction or received cash pursuant to alternative (c),
the alternative would result in the Participant's owing any money by virtue of
the operation of Section 16(b) of the Exchange Act. If all such alternatives
have such a result, the Committee shall, in its Discretion, take such action to
put such Participant in as close to the same position as such Participant would
have been in had alternative (a), (b) or (c) been selected but without
resulting in any payment by such Participant pursuant to Section 16(b) of the
Exchange Act. Notwithstanding the foregoing, with the consent of affected
Participants, each with respect to such Participant's option only, the
Committee may in lieu of the foregoing make such provision with respect to any
Transaction as it deems appropriate.
17. Effectiveness of Plan: This Plan shall be effective on the date the
Board of Directors of the Company adopts this Plan, provided that the
shareholders of the Company approve the Plan within 12 months before or after
its adoption by the Board of Directors. Options may be granted before
shareholder approval of this Plan, but each such option shall be subject to
shareholder approval of this Plan. No option granted under this Plan shall be
exercisable unless and until this Plan shall have been approved by the
Company's shareholders.
18. Termination, Duration and Amendments to the Plan: The Plan may be
abandoned or terminated at any time by the Board of Directors of the Company.
Unless sooner terminated, the Plan shall terminate on the date ten years after
the earlier of its adoption by the Board of Directors or its approval by the
shareholders of the Company, and no stock options may be granted under the Plan
thereafter. The termination of the Plan shall not affect the validity of any
option which is outstanding on the date of termination.
For the purpose of conforming to any changes in applicable law or
governmental regulations, or for any other lawful purpose, the Board of
Directors shall have the right, with or without approval of the shareholders of
the Company, to amend or revise the terms of this Plan or any option agreement
under this Plan at any time; provided, however, that (i) to the extent required
by Section 162(m) of the Code and related regulations, or any successor rule,
but only with respect to amendments or revisions affecting Participants whose
compensation is subject to Section 162(m) of the Code, and to the extent
required by Section 422 of the Code, or any successor section, but only with
respect to Incentive Options, no such amendment or revision
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<PAGE> 10
shall increase the maximum number of shares in the aggregate which are subject
to this Plan (subject, however, to the provisions of Paragraphs 5 and 16)
without the approval or ratification of the shareholders of the Company, and
(ii) no such amendment or revision shall change the option price (except as
contemplated by Paragraphs 5 and 16) or alter or impair any option which shall
have been previously granted under this Plan, in a manner adverse to a
Participant, without the consent of such Participant.
As adopted by the Board of Directors on January 15, 1997.
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<PAGE> 1
EXHIBIT 10.11
1997 EMPLOYEE INCENTIVE
COMPENSATION PROGRAM
OBJECTIVES: To enable Somanetics Corporation to attract, motivate, and
retain first-class people to deliver on its 1997 Plan
objectives.
STRUCTURE: All non-commissioned, full-time employees will participate in
the 1997 Employee Incentive Compensation Program. Potential
incentive pay-out per employee will be based on the
employee's position, salary level, and performance against
pre-defined Company and/or individual objectives. Actual
pay-out will be based on performance.
One-half of the potential pay-out for each management/key
employee participant will be based on the achievement of the
Company's year-to-date revenue targets, reviewed and paid
quarterly. The other one-half of the potential pay-out for each
employee will be based on the achievement of individual
objectives and paid at the end of the year. Participants not
designated as management or key employees (e.g. clerical,
full-time manufacturing, etc.) will have 100% of their pay-out
based on the achievement of the Company's year-to-date revenue
targets, reviewed and paid quarterly.
The potential for over achievement pay-out will be available
based on a pre-defined formula. Over achievement pay-outs, if
any, will be made at the end of the year.
<PAGE> 2
QUARTERLY REVENUE COMPONENT
Each participant's potential quarterly incentive compensation pay-out will be
based on the Company's performance against its year-to-date revenue objective
(reviewed quarterly) as well as the participant's salary level and pay-out
rate. Each individual will receive an actual quarterly incentive compensation
pay-out based on the following formula:
<TABLE>
<S> <C> <C>
Company's Year-to-Date Employee's Salary multiplied
% to its Revenue Plan X FACTOR X by their Pay-Out Rate X .125
at the end of each Fiscal Quarter
</TABLE>
The "FACTOR" is an index of performance that serves to accelerate the reduction
in pay-out for performance below 100% to Plan and accelerate the increase in
pay-out for performance above 100% to Plan as defined below:
<TABLE>
<CAPTION>
% TO PLAN FACTOR
--------- ------
<S> <C>
<70 0
70 to 80 .50
80 to 90 .80
90 to 100 1.00
100 to 110 1.125
110 to 125 1.25
>125 1.50
</TABLE>
Pay-outs for this portion of the Incentive Compensation Program will be made at
the end of each quarter based on Year-to-Date performance. Payments will be made
for "catching up" as the year unfolds. For example, people can still make their
full first quarter bonus by catching up to 100% in the second quarter. Any over
achievement pay-out will be reserved for year-end distribution.
<PAGE> 3
INDIVIDUAL OBJECTIVES COMPONENT
Each management and key employee participant will be assigned pre-defined
objectives for the 1997 Plan year. Certain key objectives will be identified
for the purpose of impacting incentive compensation calculations and weighted
according to level of importance. Pay-outs for incentive compensation associated
with an employee's performance against their individual objectives will be made
at year-end based on the following formula:
% of Company's Company's
Objectives X Salary X Pay-out Rate X 0.5 X % to its X % to its
Achieved Revenue Plan Profit Plan
Management will retain a +/-20% discretion on an individual's performance
against objectives to deflate, or accentuate, the pay-out for those who either
succeeded despite their efforts or failed in spite of their efforts. At
management's discretion, individuals who achieve less than 50% of their
objectives will receive no pay-out.
<PAGE> 4
BASIC RULES
- - This Plan shall be administered by the Company's Compensation Committee,
which is authorized to interpret this plan, to make, amend, and rescind rules
and regulations relating to this plan, to make awards under this plan, and
to make all other determinations under this plan necessary or advisable for
its administration.
- - All determinations, interpretations, and constructions made by the
Compensation Committee shall be final and conclusive.
- - The Board reserves the right to pay bonuses to participants beyond those, if
any, called for by this plan.
<PAGE> 5
BASIC RULES (CONTINUED)
- - Rights under this plan may not be transferred, assigned, or pledged.
- - Nothing in this plan confers on any participant any right to continued
employment, nor interfere with the Company's right to terminate an
employee's employment.
- - Revenue and net income will be as reported in the Company's Form 10-K.
<PAGE> 6
BASIC RULES (CONTINUED)
- - Earned pay-outs are intended to be made after the end of the month following
the close of each fiscal quarter based on year-to-date performance, however,
actual pay-outs will be made as soon as practicable after sales and net
income are determined and the bonus calculation is confirmed by the
Compensation Committee.
- - Payments will be made for catching up on a year-to-date basis. For example,
if the Company finishes the first quarter below Plan, employees can recoup
their full first quarter bonus not earned by catching up to 100% to Plan
year-to-date by the end of the second quarter.
<PAGE> 7
BASIC RULES (CONTINUED)
- - Employee must be a full-time employee in good standing at time of pay-out to
receive "any" pay-out.
- - Any over achievement pay-out earned due to actual revenue in excess of the
1997 Plan will be paid after year-end. There is "no cap" on the bonus
potential for this plan.
- - Employee participation in the program will be suspended during periods of
sick days beyond the allowable amount, short term or long-term disability
periods, or any other extended leave of absence.
<PAGE> 1
EXHIBIT 10.20
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT ("Amendment") is made as of
November 18, 1996, between Somanetics Corporation, a Michigan corporation (the
"Company"), and Raymond W. Gunn ("Employee").
RECITALS
A. Employee and the Company entered into the Employment Agreement,
dated as of December 1, 1992, as amended February 23, 1994, July 21, 1994, and
December 1, 1995 (the "Agreement").
B. Employee and the Company desire to renew and amend the Agreement.
THEREFORE, Company and Employee agree as follows:
1. Amendment. Effective before the expiration of the term of
Employee's employment under the Agreement, the first sentence of Section 2 of
the Agreement is replaced with the following: "The term of Employee's
employment under this Agreement shall begin on the date first written above and
shall continue for five years, unless earlier terminated pursuant to Section
4."
2. No Other Change. Except as modified by this Amendment, the
Agreement shall continue in full force according to its terms and is hereby
ratified.
IN WITNESS WHEREOF, the Company and Employee have executed this
Amendment as of the date set forth in the introductory paragraph of this
Amendment.
SOMANETICS CORPORATION
By:
----------------------------
Its:
--------------------
--------------------------------
RAYMOND W. GUNN
<PAGE> 1
EXHIBIT 10.30
STOCK OPTION AGREEMENT
Dated as of: June 3, 1996
To: [________________________]
Pursuant to resolutions of the Board of Directors of Somanetics
Corporation, a Michigan corporation (the "Company"), the Company hereby grants
to you an option (the "Option") to purchase up to ______________ (_____) Common
Shares, par value $.01 per share, of the Company (the "Shares") at $__.__ per
Share, upon the terms and conditions contained herein.
1. The Option herein granted may not be transferred by you otherwise than
by will or by the laws of descent and distribution, and during your lifetime
the Option is exercisable only by you.
2. (a) Subject to the other terms of this Option, you may exercise the
Option in accordance with the following schedule:
(i) Between the date of this Option and June 3, 1997, none of the
Shares may be purchased,
(ii) Commencing June 3, 1997 one-fourth (1/4) of the Shares may be
purchased.
(iii) Commencing June 3, 1998, an additional one-fourth (1/4), of the
Shares may be purchased.
(iv) Commencing June 3, 1999, an additional one-fourth (1/4), of the
Shares may be purchased.
(v) Commencing June 3, 2000, the final one-fourth (1/4) of the Shares
may be purchased.
Notwithstanding anything in this Option to the contrary, the Option shall be
exercisable to purchase all of the Shares immediately, to the extent not
already purchased, (i) ten (10) business days before the consummation of a
"Transaction" as defined in Paragraph 17 of the Somanetics Corporation 1991
Incentive Stock Option Plan (the "1991 Plan"), which definition is incorporated
into this Option by reference and shall bind you and the Company as if set
forth in full in this Option, and (ii) upon the acquisition by any person,
entity or group (as defined pursuant to Section 13(d) of the Securities
Exchange Act of 1934, as amended) of 51% or more of the Company's outstanding
voting securities.
<PAGE> 2
(b) Subject to earlier termination in accordance with the provisions of
Paragraphs 11, 12 and 14 of the 1991 Plan (which provisions are incorporated
into this option by reference and shall bind you and the Company as if set
forth in full in this Option; references in such Paragraphs 11, 12 and 14 to
"Participant", "option", "Nonqualified Option" and "Plan" shall be deemed
references to you, this Option, this Option and this Option, respectively, for
all purposes under this Option), the Option shall expire (to the extent not
previously exercised) on june 3, 2006.
3. The Option shall be exercised by giving a written notice of exercise to
the Treasurer of the Company. Such notice shall specify the number of Shares
to be purchased and shall be accompanied by payment in full (in the manner set
forth in Paragraph 9 of the 1991 Plan, which paragraph is incorporated into
this Option by reference and shall bind you and the Company as if set forth in
full in this Option) of the aggregate option price for the number of Shares
purchased. The Company shall cause the Common Shares underlying the Option to
be registered with the Securities and Exchange Commission pursuant to the
Securities Act of 1933, as amended, on the appropriate form and as required
under any applicable state or foreign securities or Blue Sky laws. Such
exercise shall be effective only upon the actual receipt of such written notice
and of the option price, and no rights or privileges of a shareholder of the
Company in respect of any of the Shares issuable upon the exercise of any part
of the Option shall inure to you, or any other person entitled to exercise the
Option, unless and until certificates representing such Shares shall have been
issued, and prior to such issuance no adjustment shall be made for dividends,
distributions or other rights in respect of such Shares, except as provided in
paragraphs 6 and 7.
4. If upon the exercise of the Option there shall be payable by the
Company or a subsidiary any amount for income tax withholding, in the Company's
Board of Directors' sole discretion, either you shall pay such amount to the
Company, or the number of Shares delivered by the Company to you shall be
appropriately reduced, to reimburse the Company for such payment. The
Company's Board of Directors may, in its sole discretion, permit you to satisfy
such withholding obligations, in whole or in part, by electing to have the
number of Shares delivered or deliverable by the Company upon exercise of this
Option appropriately reduced, or by electing to tender Common Shares back to
the Company subsequent to exercise of the Option, to reimburse the Company for
such income tax withholding. The Company's Board of Directors may make such
other arrangements with respect to income tax withholding as it shall
determine.
5. It is understood and agreed that nothing contained in this Agreement,
nor any action taken by the Board, shall confer upon you any right with respect
to the continuation of your employment by the Company or any subsidiary, nor
interfere in any way with the right of the Company or a subsidiary to terminate
your employment at any time.
-2-
<PAGE> 3
6. The provisions set forth in Paragraph 17 of the 1991 Plan are
incorporated into this Option by reference and shall bind you and the Company
as if set forth in full in this Option. References in such Paragraph 17 to
"Participant", "stock option" and "Plan" shall be deemed references to you,
this Option and this Option, respectively, for all purposes under this Option.
7. Subject to Paragraph 17 of the 1991 Plan, the number and type of shares
subject to the Option and the option price with respect to the Option shall be
subject to such adjustment as the Committee (as defined in Paragraph 1(b) of
the 1991 Plan, which definition is incorporated into this Option by reference
and shall bind you and the Company as if set forth in full in this Option), in
its discretion, deems appropriate to reflect such events as stock dividends,
stock splits, recapitalizations, mergers, statutory share exchanges or
reorganizations of or by the Company, such adjustments to be the same as the
adjustments such Committee deems appropriate for options outstanding under the
1991 Plan; provided that no adjustment shall be made in connection with any
conversion of the Company's outstanding Convertible Preferred Shares. However,
no fractional shares shall be issued pursuant to the Option, and any fractional
shares resulting from such adjustments shall be eliminated from this Option.
Very truly yours,
SOMANETICS CORPORATION,
a Michigan corporation
By_______________________
Its______________________
The above is agreed to and
accepted.
__________________________
Dated:____________________
-3-
<PAGE> 1
EXHIBIT 10.31
STOCK OPTION AGREEMENT
Dated as of: September 10, 1996
To: [See List of Option Grants]
Pursuant to resolutions of the Board of Directors of Somanetics
Corporation, a Michigan corporation (the "Company"), the Company hereby grants
to you an option (the "Option") to purchase up to ______________ (_____) Common
Shares, par value $.01 per share, of the Company (the "Shares") at $__.__ per
Share, upon the terms and conditions contained herein.
1. The Option herein granted may not be transferred by you otherwise than
by will or by the laws of descent and distribution, and during your lifetime
the Option is exercisable only by you.
2. (a) Subject to the other terms of this Option, you may exercise the
Option in accordance with the following schedule:
(i) Between the date of this Option and September 10, 1997, none of the
Shares may be purchased,
(ii) Commencing September 10, 1997 one-fourth (1/4) of the Shares may
be purchased.
(iii) Commencing September 10, 1998, an additional one-fourth (1/4), of
the Shares may be purchased.
(iv) Commencing September 10, 1999, an additional one-fourth (1/4), of
the Shares may be purchased.
(v) Commencing September 10, 2000, the final one-fourth (1/4) of the
Shares may be purchased.
Notwithstanding anything in this Option to the contrary, the Option shall be
exercisable to purchase all of the Shares immediately, to the extent not
already purchased, (i) ten (10) business days before the consummation of a
"Transaction" as defined in Paragraph 17 of the Somanetics Corporation 1991
Incentive Stock Option Plan (the "1991 Plan"), which definition is incorporated
into this Option by reference and shall bind you and the Company as if set
forth in full in this Option, and (ii) upon the acquisition by any person,
entity or group (as defined pursuant to Section 13(d) of the Securities
Exchange Act of 1934, as amended) of 51% or more of the Company's outstanding
voting securities.
<PAGE> 2
(b) Subject to earlier termination in accordance with the provisions of
Paragraphs 11, 12 and 14 of the 1991 Plan (which provisions are incorporated
into this option by reference and shall bind you and the Company as if set
forth in full in this Option; references in such Paragraphs 11, 12 and 14 to
"Participant", "option", "Nonqualified Option" and "Plan" shall be deemed
references to you, this Option, this Option and this Option, respectively, for
all purposes under this Option), the Option shall expire (to the extent not
previously exercised) on September 10, 2006.
3. The Option shall be exercised by giving a written notice of exercise to
the Treasurer of the Company. Such notice shall specify the number of Shares
to be purchased and shall be accompanied by payment in full (in the manner set
forth in Paragraph 9 of the 1991 Plan, which paragraph is incorporated into
this Option by reference and shall bind you and the Company as if set forth in
full in this Option) of the aggregate option price for the number of Shares
purchased. The Company shall cause the Common Shares underlying the Option to
be registered with the Securities and Exchange Commission pursuant to the
Securities Act of 1933, as amended, on the appropriate form and as required
under any applicable state or foreign securities or Blue Sky laws. Such
exercise shall be effective only upon the actual receipt of such written notice
and of the option price, and no rights or privileges of a shareholder of the
Company in respect of any of the Shares issuable upon the exercise of any part
of the Option shall inure to you, or any other person entitled to exercise the
Option, unless and until certificates representing such Shares shall have been
issued, and prior to such issuance no adjustment shall be made for dividends,
distributions or other rights in respect of such Shares, except as provided in
paragraphs 6 and 7.
4. If upon the exercise of the Option there shall be payable by the
Company or a subsidiary any amount for income tax withholding, in the Company's
Board of Directors' sole discretion, either you shall pay such amount to the
Company, or the number of Shares delivered by the Company to you shall be
appropriately reduced, to reimburse the Company for such payment. The
Company's Board of Directors may, in its sole discretion, permit you to satisfy
such withholding obligations, in whole or in part, by electing to have the
number of Shares delivered or deliverable by the Company upon exercise of this
Option appropriately reduced, or by electing to tender Common Shares back to
the Company subsequent to exercise of the Option, to reimburse the Company for
such income tax withholding. The Company's Board of Directors may make such
other arrangements with respect to income tax withholding as it shall
determine.
5. It is understood and agreed that nothing contained in this Agreement,
nor any action taken by the Board, shall confer upon you any right with respect
to the continuation of your employment by the Company or any subsidiary, nor
interfere in any way with the right of the Company or a subsidiary to terminate
your employment at any time.
-2-
<PAGE> 3
6. The provisions set forth in Paragraph 17 of the 1991 Plan are
incorporated into this Option by reference and shall bind you and the Company
as if set forth in full in this Option. References in such Paragraph 17 to
"Participant", "stock option" and "Plan" shall be deemed references to you,
this Option and this Option, respectively, for all purposes under this Option.
7. Subject to Paragraph 17 of the 1991 Plan, the number and type of shares
subject to the Option and the option price with respect to the Option shall be
subject to such adjustment as the Committee (as defined in Paragraph 1(b) of
the 1991 Plan, which definition is incorporated into this Option by reference
and shall bind you and the Company as if set forth in full in this Option), in
its discretion, deems appropriate to reflect such events as stock dividends,
stock splits, recapitalizations, mergers, statutory share exchanges or
reorganizations of or by the Company, such adjustments to be the same as the
adjustments such Committee deems appropriate for options outstanding under the
1991 Plan; provided that no adjustment shall be made in connection with any
conversion of the Company's outstanding Convertible Preferred Shares. However,
no fractional shares shall be issued pursuant to the Option, and any fractional
shares resulting from such adjustments shall be eliminated from this Option.
Very truly yours,
SOMANETICS CORPORATION,
a Michigan corporation
By______________________
Its_____________________
The above is agreed to and
accepted.
__________________________
Dated:____________________
-3-
<PAGE> 1
EXHIBIT 10.32
STOCK OPTION AGREEMENT
Dated as of: November 18, 1996
To: [See Exhibit B]
Pursuant to resolutions of the Board of Directors of Somanetics
Corporation, a Michigan corporation (the "Company"), the Company hereby grants
to you an option (the "Option") to purchase up to ______________ (_____) Common
Shares, par value $.01 per share, of the Company (the "Shares") at $__.__ per
Share, upon the terms and conditions contained herein.
1. The Option herein granted may not be transferred by you otherwise than
by will or by the laws of descent and distribution, and during your lifetime
the Option is exercisable only by you.
2. (a) Subject to the other terms of this Option, you may exercise the
Option in accordance with the following schedule:
(i) Between the date of this Option and November 18, 1997, none of the
Shares may be purchased,
(ii) Commencing November 18, 1997 one-fourth (1/4) of the Shares may be
purchased.
(iii) Commencing November 18, 1998, an additional one-fourth (1/4), of
the Shares may be purchased.
(iv) Commencing November 18, 1999, an additional one-fourth (1/4), of
the Shares may be purchased.
(v) Commencing November 18, 2000, the final one-fourth (1/4) of the
Shares may be purchased.
Notwithstanding anything in this Option to the contrary, the Option shall be
exercisable to purchase all of the Shares immediately, to the extent not
already purchased, (i) ten (10) business days before the consummation of a
"Transaction" as defined in Paragraph 17 of the Somanetics Corporation 1991
Incentive Stock Option Plan (the "1991 Plan"), which definition is incorporated
into this Option by reference and shall bind you and the Company as if set
forth in full in this Option, and (ii) upon the acquisition by any person,
entity or group (as defined pursuant to Section 13(d) of the Securities
Exchange Act of 1934, as amended) of 51% or more of the Company's outstanding
voting securities.
<PAGE> 2
(b) Subject to earlier termination in accordance with the provisions of
Paragraphs 11, 12 and 14 of the 1991 Plan (which provisions are incorporated
into this option by reference and shall bind you and the Company as if set
forth in full in this Option; references in such Paragraphs 11, 12 and 14 to
"Participant", "option", "Nonqualified Option" and "Plan" shall be deemed
references to you, this Option, this Option and this Option, respectively, for
all purposes under this Option), the Option shall expire (to the extent not
previously exercised) on November 18, 2006.
3. The Option shall be exercised by giving a written notice of exercise to
the Treasurer of the Company. Such notice shall specify the number of Shares
to be purchased and shall be accompanied by payment in full (in the manner set
forth in Paragraph 9 of the 1991 Plan, which paragraph is incorporated into
this Option by reference and shall bind you and the Company as if set forth in
full in this Option) of the aggregate option price for the number of Shares
purchased. The Company shall cause the Common Shares underlying the Option to
be registered with the Securities and Exchange Commission pursuant to the
Securities Act of 1933, as amended, on the appropriate form and as required
under any applicable state or foreign securities or Blue Sky laws. Such
exercise shall be effective only upon the actual receipt of such written notice
and of the option price, and no rights or privileges of a shareholder of the
Company in respect of any of the Shares issuable upon the exercise of any part
of the Option shall inure to you, or any other person entitled to exercise the
Option, unless and until certificates representing such Shares shall have been
issued, and prior to such issuance no adjustment shall be made for dividends,
distributions or other rights in respect of such Shares, except as provided in
paragraphs 6 and 7.
4. If upon the exercise of the Option there shall be payable by the
Company or a subsidiary any amount for income tax withholding, in the Company's
Board of Directors' sole discretion, either you shall pay such amount to the
Company, or the number of Shares delivered by the Company to you shall be
appropriately reduced, to reimburse the Company for such payment. The
Company's Board of Directors may, in its sole discretion, permit you to satisfy
such withholding obligations, in whole or in part, by electing to have the
number of Shares delivered or deliverable by the Company upon exercise of this
Option appropriately reduced, or by electing to tender Common Shares back to
the Company subsequent to exercise of the Option, to reimburse the Company for
such income tax withholding. The Company's Board of Directors may make such
other arrangements with respect to income tax withholding as it shall
determine.
5. It is understood and agreed that nothing contained in this Agreement,
nor any action taken by the Board, shall confer upon you any right with respect
to the continuation of your employment by the Company or any subsidiary, nor
interfere in any way with the right of the Company or a subsidiary to terminate
your employment at any time.
-2-
<PAGE> 3
6. The provisions set forth in Paragraph 17 of the 1991 Plan are
incorporated into this Option by reference and shall bind you and the Company
as if set forth in full in this Option. References in such Paragraph 17 to
"Participant", "stock option" and "Plan" shall be deemed references to you,
this Option and this Option, respectively, for all purposes under this Option.
7. Subject to Paragraph 17 of the 1991 Plan, the number and type of shares
subject to the Option and the option price with respect to the Option shall be
subject to such adjustment as the Committee (as defined in Paragraph 1(b) of
the 1991 Plan, which definition is incorporated into this Option by reference
and shall bind you and the Company as if set forth in full in this Option), in
its discretion, deems appropriate to reflect such events as stock dividends,
stock splits, recapitalizations, mergers, statutory share exchanges or
reorganizations of or by the Company, such adjustments to be the same as the
adjustments such Committee deems appropriate for options outstanding under the
1991 Plan; provided that no adjustment shall be made in connection with any
conversion of the Company's outstanding Convertible Preferred Shares. However,
no fractional shares shall be issued pursuant to the Option, and any fractional
shares resulting from such adjustments shall be eliminated from this Option.
Very truly yours,
SOMANETICS CORPORATION,
a Michigan corporation
By__________________________
Its_________________________
The above is agreed to and
accepted.
__________________________
Dated:____________________
-3-
<PAGE> 1
EXHIBIT 10.33
STOCK OPTION AGREEMENT
Dated as of: January 15, 1997
To: [See List of Option Grants]
Pursuant to resolutions of the Board of Directors of Somanetics
Corporation, a Michigan corporation (the "Company"), the Company hereby grants
to you an option (the "Option") to purchase up to ______________ (_____) Common
Shares, par value $.01 per share, of the Company (the "Shares") at $__.__ per
Share, upon the terms and conditions contained herein.
1. The Option herein granted may not be transferred by you otherwise than
by will or by the laws of descent and distribution, and during your lifetime
the Option is exercisable only by you.
2. (a) Subject to the other terms of this Option, you may exercise the
Option in accordance with the following schedule:
(i) Between the date of this Option and January 15, 1998, none of the
Shares may be purchased,
(ii) Commencing January 15, 1998 one-fourth (1/4) of the Shares may be
purchased.
(iii) Commencing January 15, 1999, an additional one-fourth (1/4), of
the Shares may be purchased.
(iv) Commencing January 15, 2000, an additional one-fourth (1/4), of
the Shares may be purchased.
(v) Commencing January 15, 2001, the final one-fourth (1/4) of the
Shares may be purchased.
Notwithstanding anything in this Option to the contrary, the Option shall be
exercisable to purchase all of the Shares immediately, to the extent not
already purchased, (i) ten (10) business days before the consummation of a
"Transaction" as defined in Paragraph 17 of the Somanetics Corporation 1991
Incentive Stock Option Plan (the "1991 Plan"), which definition is incorporated
into this Option by reference and shall bind you and the Company as if set
forth in full in this Option, and (ii) upon the acquisition by any person,
entity or group (as defined pursuant to Section 13(d) of the Securities
Exchange Act of 1934, as amended) of 51% or more of the Company's outstanding
voting securities.
<PAGE> 2
(b) Subject to earlier termination in accordance with the provisions of
Paragraphs 11, 12 and 14 of the 1991 Plan (which provisions are incorporated
into this option by reference and shall bind you and the Company as if set
forth in full in this Option; references in such Paragraphs 11, 12 and 14 to
"Participant", "option", "Nonqualified Option" and "Plan" shall be deemed
references to you, this Option, this Option and this Option, respectively, for
all purposes under this Option), the Option shall expire (to the extent not
previously exercised) on January 15, 2007.
3. The Option shall be exercised by giving a written notice of exercise to
the Treasurer of the Company. Such notice shall specify the number of Shares
to be purchased and shall be accompanied by payment in full (in the manner set
forth in Paragraph 9 of the 1991 Plan, which paragraph is incorporated into
this Option by reference and shall bind you and the Company as if set forth in
full in this Option) of the aggregate option price for the number of Shares
purchased. The Company shall cause the Common Shares underlying the Option to
be registered with the Securities and Exchange Commission pursuant to the
Securities Act of 1933, as amended, on the appropriate form and as required
under any applicable state or foreign securities or Blue Sky laws. Such
exercise shall be effective only upon the actual receipt of such written notice
and of the option price, and no rights or privileges of a shareholder of the
Company in respect of any of the Shares issuable upon the exercise of any part
of the Option shall inure to you, or any other person entitled to exercise the
Option, unless and until certificates representing such Shares shall have been
issued, and prior to such issuance no adjustment shall be made for dividends,
distributions or other rights in respect of such Shares, except as provided in
paragraphs 6 and 7.
4. If upon the exercise of the Option there shall be payable by the
Company or a subsidiary any amount for income tax withholding, in the Company's
Board of Directors' sole discretion, either you shall pay such amount to the
Company, or the number of Shares delivered by the Company to you shall be
appropriately reduced, to reimburse the Company for such payment. The
Company's Board of Directors may, in its sole discretion, permit you to satisfy
such withholding obligations, in whole or in part, by electing to have the
number of Shares delivered or deliverable by the Company upon exercise of this
Option appropriately reduced, or by electing to tender Common Shares back to
the Company subsequent to exercise of the Option, to reimburse the Company for
such income tax withholding. The Company's Board of Directors may make such
other arrangements with respect to income tax withholding as it shall
determine.
5. It is understood and agreed that nothing contained in this Agreement,
nor any action taken by the Board, shall confer upon you any right with respect
to the continuation of your employment by the Company or any subsidiary, nor
interfere in any way with the right of the Company or a subsidiary to terminate
your employment at any time.
-2-
<PAGE> 3
6. The provisions set forth in Paragraph 17 of the 1991 Plan are
incorporated into this Option by reference and shall bind you and the Company
as if set forth in full in this Option. References in such Paragraph 17 to
"Participant", "stock option" and "Plan" shall be deemed references to you,
this Option and this Option, respectively, for all purposes under this Option.
7. Subject to Paragraph 17 of the 1991 Plan, the number and type of shares
subject to the Option and the option price with respect to the Option shall be
subject to such adjustment as the Committee (as defined in Paragraph 1(b) of
the 1991 Plan, which definition is incorporated into this Option by reference
and shall bind you and the Company as if set forth in full in this Option), in
its discretion, deems appropriate to reflect such events as stock dividends,
stock splits, recapitalizations, mergers, statutory share exchanges or
reorganizations of or by the Company, such adjustments to be the same as the
adjustments such Committee deems appropriate for options outstanding under the
1991 Plan; provided that no adjustment shall be made in connection with any
conversion of the Company's outstanding Convertible Preferred Shares. However,
no fractional shares shall be issued pursuant to the Option, and any fractional
shares resulting from such adjustments shall be eliminated from this Option.
Very truly yours,
SOMANETICS CORPORATION,
a Michigan corporation
By______________________
Its_____________________
The above is agreed to and
accepted.
__________________________
Dated:____________________
-3-
<PAGE> 1
EXHIBIT 10.58
[RAUSCHER PIERCE & CLARK LETTERHEAD]
23 October, 1996
Bruce Barrett Esq
President and Chief Executive Officer
Somanetics Corporation
1653 E. Maple Road
Troy
Michigan 48083-4208
USA
PRIVATE AND CONFIDENTIAL
Dear Bruce,
You have indicated that Somanetics Corporation (the "Company") desires to
retain Rauscher Pierce & Clark, Inc. and its wholly-owned subsidiary, Rauscher
Pierce & Clark Limited (together, the "Placement Agent") to serve as the
Company's exclusive financial advisor in connection with a proposed private
placement of securities (the "Placement"). The securities to be placed in the
Placement (the "Securities") will consist of up to 1,500,000 of newly issued
shares of the Company or such other securities as may be subsequently agreed
between the Company and the Placement Agent. The Placement will be structured
and conducted in all respects to meet all the requirements of Regulation S
under the Securities Act of 1933, as amended (the "Securities Act"). This
agreement (the "Agreement") sets forth (i) the services to be provided by the
Placement Agent in connection with this Placement; (ii) the professional fees
and expenses payable to the Placement Agent in exchange for their services; and
(iii) general terms and conditions of the engagement.
In connection with the proposed Placement, the Company and the Placement Agent
hereby agree as follows:
1. The Company hereby appoints the Placement Agent as its exclusive agent to
arrange the Placement on a "best efforts" basis during the 30-day period
commencing on the date hereof (the "Offering Period"), which period may be
extended by mutual written agreement of the parties hereto. Subject to
the terms and conditions herein set forth, the Placement Agent accepts
such appointment and shall endeavour to identify sources for the
Placement. (each, a "Source") Such agency shall continue until the earlier
to
<PAGE> 2
2
occur of termination of the Offering Period or termination by the Company
or the Placement Agent of this Agreement upon ten days' prior notice,
except that in any event, the Placement Agent's agency shall terminate at
the date the Placement has been closed. In the event the
arrangement of the Placement is commenced and this Agreement is terminated
by any party hereto for any reason or indications of interest for the
Placement are not received by the end of the Offering Period, the
Placement Agent's agency and this Agreement shall terminate without
further obligation of either the Placement Agent or the Company to the
other except as provided in this Paragraph I and in Paragraphs 3, 4 and 6
below. The Company shall have the right to reject any and all proposed
sources of the Placement as well as the terms, amounts and provisions
which may be proposed for the Placement for any reason the Company deems
reasonable in the exercise of its sole and arbitrary discretion.
Notwithstanding the foregoing, in the event that a potential Source is
contacted and introduced, as provided herein, by the Placement Agent to
the Company during the Offering Period and the Source provides the
Placement or an alternative financing arrangement to the Company after the
expiration of the Offering Period, at any time during one (1) year from
the date of commencement of the Offering Period, the Placement Agent shall
be entitled to the same fees provided for below with respect to such
arrangement as if the arrangement had occurred during the Offering Period;
provided that such fees shall not be payable in connection with any of the
following: (i) the issuance or sale of any options or warrants to any
employee, executive, officer, director, agent, advisor or consultant to
the Company, (ii) the issuance or sale by the Company of any capital stock
pursuant to (A) the exercise of any of the foregoing options or warrants,
(B) the exercise of any options or warrants previously issued and
outstanding or authorised on the closing date of the Placement, or (C) the
issuance or sale by the Company of any options, warrants, convertible
securities or capital stock pursuant to anti-dilution provisions
applicable to the Company or its securities Further, if the Company elects
to pursue an alternative financial arrangement, merger or other
transaction in lieu of the placement during the Offering Period and the
Placement Agent has identified investors within the Offering Period who
are qualified subscribers under Regulation S and are ready, willing and
able to purchase the Securities on or before the end of the Offering
Period on such terms and conditions as are acceptable to the Company, or
decides not to proceed with the closing for the Placement for any other
reason, then the Company shall pay the full fees provided for below as if
the Placement had been completed.
2. The Placement Agent will assist and advise the Company through all phases
of the placement process. Services to be provided will include without
limitation: (i) assisting the Company with preparation of a Placement
Memorandum for the arrangement of the Placement which shall contain such
information as we may mutually determine may be required; (ii)
identification of prospective Sources; (iii) distribution of the Placement
Memorandum and other offering documents to and contact of prospective
Sources following approval by the Company of such placement memorandum and
of such distribution; (iv) arranging meetings and accompanying the Company
in meeting with prospective Sources in Europe (v) evaluating preliminary
indications of interest, and assisting Sources in conducting due
diligence; (vi) assisting the Company and its counsel through the process
of negotiating and drafting definitive documents; and (vii) assisting in
the closing. The Placement Agent shall not, in fulfilling its obligations
hereunder, act as underwriter for the Securities, and is in no way
obligated, directly or
Rauscher Pierce & Clark
<PAGE> 3
3
indirectly, to advance its own funds to purchase any of the Securities
subscribed for in the Placement.
3. In exchange for the services set forth in Paragraph 2, the Company agrees
to reimburse the Placement Agent for all reasonable out-of-pocket expenses
incurred on this project at the request of the Company, including any
reasonable legal expenses; provided, however, that such expenses for the
Placement Agent and for the Placement Agent's legal counsel shall not
exceed $20,000 without the Company's prior consent, excluding
disbursements of such legal counsel and travel by the Placement Agent
agreed in advance with the Company. Such expense reimbursement is not
contingent upon the successful completion of the transaction contemplated
hereunder, and shall be payable as incurred by the Placement Agent and
billed to the Company from time to time.
4. Upon the closing of the Placement to one or more sources and the receipt
by the Company of the proceeds thereof, the Company shall pay the
Placement Agent a fee ("Placement Fee") equal to 10% of the aggregate
gross proceeds from the Placement. The Placement Fee shall be payable in
cash at closing.
5. (a) Prior to the sale of Securities pursuant to the Placement to
any Source or any person advising such Source, they shall
be furnished information by the I Company pertaining to the
Company and the terms and conditions of the Placement and
will be given the opportunity by the Company to ask questions
and receive answers concerning the Company and the terms and
conditions of the Placement.
(b) The Company agrees that all written information provided to
any Source or to the Placement Agent and their agents by the
Company (the "Written Communications"), and all oral
communications provided to any Source or the Placement Agent and
their agents by the Company, will not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements, in light of the circumstances
in which they were made, not misleading as of the point in time
given.
(c) The Company covenants that it shall promptly notify the
Placement Agent if, because of the occurrence of any event or
condition, the passing of time or otherwise, any of the Written
Communications or any oral communications of the Company and its
officers or directors to the Placement Agent or any Source which
relate to the offer and sale of Securities pursuant to the
Placement contain any untrue statement of a material fact or
omit to state a material fact necessary to make the
communications, in light of the circumstances under which they
were made, not misleading. The Written Communications (and any
Oral Communications) shall be amended in form and substance
satisfactory to the Placement Agent and the Company so that
after giving effect to such amendment, the Written
Communications (and attendant oral communications) will not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements, in light of
the circumstances under which they were made, not misleading.
Rauscher Pierce & Clark
<PAGE> 4
4
(d) The Company shall furnish or make available to the Placement
Agent or its authorised representatives any and all
documentation and information reasonably requested by the
Placement Agent in connection with their due diligence
efforts regarding this Placement.
(e) As a primary consideration for this Agreement, the Placement
Agent will plan, arrange for and accompany the Company's
executive officers on a trip to Europe to meet prospective
Sources whom the Placement Agent shall have identified and
contacted in advance.
6. In addition to the amounts which the Company has herein agreed to pay to
the Placement Agent, the Company shall defend, indemnify, and hold the
Placement Agent and officers, directors, agents, employees and controlling
persons harmless against any losses, claims, damages, or liabilities
(including, without limitation, court costs and reasonable attorneys'
fees) to which the Placement Agent and officers, directors, agents,
employees and controlling persons may become subject, as described in
Schedule I to this Agreement which is to be considered an integral part of
this Agreement.
7. Each of the parties understands and agrees that this commitment letter is
being executed by their respective authorised representatives and is not
subject to any further approvals or ratification in order to become a
binding obligation of each of them.
8. The Company understands that the Placement Agent's engagement hereunder
may involve work in the United Kingdom which will or may be described as
"investment business" for the purposes of the UK Financial Services Act
1986 (the "FSA"). This work will be undertaken by Rauscher Pierce & Clark
Ltd, which is a member of The Securities and Futures Authority (the
"SFA"). On the basis of the information the Company has supplied and on
the basis of the Company's experience and understanding in relation to
investments, we have categorised the Company as a nonprivate customer. As
a consequence of this categorisation, the Company will lose the
projections afforded to private customers under the SFA Rules, including
the right to sue Rauscher Pierce & Clark Ltd. for damages under Section 62
of the FSA and the fight of access to the Customer Arbitration Scheme of
the SFA; provided, however, that nothing in the foregoing shall act to
waive any right which the Company may have under any other applicable law
or under any agreement with the Placement Agent, including, without
limitation, this Agreement.
This Agreement shall be governed by and constituted in accordance with the laws
of the State of Michigan without regard to the conflict of law provision
thereof, If the foregoing correctly sets forth our mutual understanding of
these arrangements, please so indicate by signing and returning to us the
enclosed copy of this Agreement.
Rauscher Pierce & Clark
<PAGE> 5
5
We are delighted to have this opportunity to assist the Company and we look
forward to committing the resources of Rauscher Pierce & Clark towards the
prompt arrangement of the Placement on the best available terms.
Yours sincerely,
RAUSCHER PIERCE & CLARK, INC.
AGREED TO AND ACCEPTED THIS
By: [SIG]
---------------------------- 25 day of October 1996
RAUSCHER PIERCE & CLARK LIMITED
SOMANETICS CORPORATION
By: [SIG]
----------------------------
By: BRUCE BARRETT
---------------------------------
Bruce Barrett
President and Chief Executive Officer
Rauscher Pierce & Clark
<PAGE> 6
6
SCHEDULE I
1. The Company agrees to defend, indemnify, and hold the Placement Agent, and
its respective officers, directors, agents, employees and
controlling persons (each an "Indemnified Party") harmless from and
against any losses, claims, damages or liabilities (including, without
limitation, court costs and reasonable attorneys' fees) to which any such
Indemnified Party may become subject insofar as the same arises from an
action which alleges or is based upon any alleged untrue statement of a
material fact, or omission of a material fact, or any other violation of
applicable securities' or other laws, rules or regulations by the Company
or its officers, agents, employees or controlling persons, irrespective of
the role or concurrent negligence of any such Indemnified Party and to
reimburse any such Indemnified Party for any legal or other expenses
reasonably incurred by them in connection with investigating, settling, or
defending any action or claim in connection therewith (including, without
limitation, court costs and reasonable attorneys' fees)- provided,
however, that the Company shall not be liable in any such case to the
extent that any such loss, claim, damage, or liability is found in a final
judgement of a court of competent jurisdiction to have resulted from any
such Indemnified Party's gross negligence or bad faith in performing their
services hereunder. If for any reason the foregoing indemnification is
unavailable to an Indemnified Party or insufficient to hold an Indemnified
Party harmless, then the Company shall contribute to the amount paid or
payable by that Indemnified Party as a result of such loss, claim, damage,
or liability in such proportion as is appropriate to reflect not only the
relative benefits received by the Company on the one hand and the
Indemnified Party on the other hand but also the relative fault of the
Company and that Indemnified Party, as well as any relevant equitable
considerations. The Company agrees to reimburse an Indemnified Party
within ten days after presentation of any statement by that Indemnified
Party of all reasonable expenses (including without limitation of the
generality of the foregoing, fees and expenses of attorneys selected by
each Indemnified Party) incurred in connection with any testimony the
Indemnified Party or its employees are required to give (in court, before
a regulatory agency, by deposition, or otherwise) in any regulatory or
court proceeding (including depositions), whether or not the Indemnified
Party is a party, and which related directly or indirectly to the proposed
Placement.
2. With respect to the foregoing Paragraph I of the indemnification, the
Company agrees that no Indemnified Party shall be deemed to have been
grossly negligent for reasonably relying upon any written untrue statement
or alleged omission of a material fact necessary to make the statements,
in light of the circumstances in which made, not misleading, contained in
or omitted from any information provided to any Indemnified Party by or on
behalf of the Company (including, without limitation of the generality of
the foregoing, any accountant or attorney employed or retained by the
Company). The indemnification provided in the foregoing Paragraph I
hereof shall extend upon the same terms and conditions to each person, if
any, who may be deemed to control any Indemnified Party.
Rauscher Pierce & Clark
<PAGE> 7
7
3. In the event any action (with respect to which indemnity or reimbursement
from the Company may be sought by any Indemnified Party on account of
agreements contained herein) shall be brought or threatened against an
Indemnified Party, prompt notice will be given to the Company in writing
of such action, together with a copy of all papers served on, or received
by, such Indemnified Party in connection with such action provided that
failure to give such notice shall not affect such Indemnified Party's
right under these indemnification provisions, unless, and only to the
extent that, such failure results in the Company's forfeiture of
substantive rights or defenses. If such an event occurs, the Company
shall assume the defense of such action, including the employment of
counsel and the payment of all expenses. Each Indemnified Party shall
have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of each such Indemnified Party unless (a)
the employment thereof has been specifically authorised by the Company in
writing (b) the Company has failed to assume the defense and employ
counsel or (c) the named parties, or parties threatened to be named, to
any such action (including any impleaded parties or parties threatened to
be impleaded) include both such Indemnified Party and the Company, and the
Company has been advised by such counsel that there may be one or more
legal defenses available to them which are different from or additional to
those available to the Company (in which cases each Indemnified Party with
a different legal defense from those of other Indemnified Parties with
their own counsel shall have the right to employ its own counsel and in
such cases any reasonable fees and expenses of such counsel shall be paid
by the Company). The Company shall not be liable for any such action or
proceeding effected without its written consent.
Rauscher Pierce & Clark
<PAGE> 1
EXHIBIT 10.59
[RAUSCHER PIERCE & CLARK LETTERHEAD]
November 1, 1996
PRIVATE & CONFIDENTIAL
Bruce J. Barrett
President and Chief Executive Officer
Somanetics Corporation
1653 East Maple Road
Troy, Michigan, 48083-4208
U.S.A
Dear Bruce,
Pursuant to that certain Engagement Letter dated October 23, 1996 (the
"Agreement"), between Rauscher Pierce & Clark, Inc. and Rauscher Pierce & Clark
Limited, (the "Placement Agents") and Somanetics Corporation (the "Company"),
the Company has agreed to make a placement of newly issued shares of the
Company or such other security that may be subsequently agreed between the
Company and the Placement Agent.
In connection with the proposed Placement, the Company and the Placement Agent
hereby agree to amend the terms of the Agreement as follows:
(1) The security to be placed in the placement will consist of up to 5,500,000
shares of newly issued common stock of the Company.
(2) In connection with the redemption by the Company of its Class B Warrants,
the Placement Agent shall provide a loan (the "Loan") to the Company in the
principal amount of $205,000, to be evidenced by a promissory note made by the
Company in favour of Rauscher Pierce & Clark, Inc.. Without limiting the right
to demand payment of the Loan at any time, it is anticipated that the Loan
shall be repaid from the net proceeds of the Placement on the Closing Date.
The Company shall pay the Placement Agent an arrangement fee equal to 1% of the
principal amount of the Loan.
<PAGE> 2
November 1, 1996
Page 2
Accept as otherwise expressly amended hereby, the terms of the Agreement shall
remain in full force and effect. All defined terms used and not otherwise
defined herein shall have their same meaning except for in the Agreement.
If the foregoing currently sets forth our mutual understanding of these
arrangements, please so indicate by signing and returning the enclosed copy of
this Agreement.
Yours sincerely,
RAUSCHER PIERCE & CLARK, INC. and
RAUSCHER PIERCE & CLARK LIMITED
DAVID P. QUINT
- ------------------------------
By:
Name: David P. Quint
Title: Chief Executive Officer
Agreed to and accepted this
5 day of November
1996
SOMANETICS CORPORATION
BRUCE J. BARRETT
- ------------------------------
By:
Name: Bruce J. Barrett
Title: PRESIDENT & CEO
<PAGE> 1
EXHIBIT 10.60
PURCHASE AGREEMENT
Purchase of Common Shares
THIS PURCHASE AGREEMENT is made as of November ___, 1996, by and
between the purchaser whose name and address are shown on the signature page of
this Purchase Agreement (the "Purchaser") and Somanetics Corporation, a
Michigan corporation, with its principal offices at 1653 East Maple Road, Troy,
Michigan 48083-4208, United States of America (the "Company").
WHEREAS, the Company has duly authorized the issuance, sale and
delivery of up to 5,500,000 shares (the "Shares") of its common shares, par
value $0.01 per share (the "Common Shares") (the "Offering");
WHEREAS, the Shares are being offered and sold by the Company to the
Purchaser in reliance upon, and in conformity with, the requirements of
Regulation S ("Regulation S") under the United States Securities Act of 1933,
as amended (the "Securities Act");
WHEREAS, the placement of the Shares (the "Placement") has been
arranged by Rauscher Pierce & Clark, Inc. and its wholly-owned subsidiary
Rauscher Pierce & Clark Limited (together, the "Placement Agent"), as placement
agent, pursuant to a letter agreement dated October 23, 1996 and an amendment
to such letter agreement dated November 1, 1996 (the "Engagement Letter")
between the Company and the Placement Agent;
WHEREAS, the Company has prepared and the Purchaser has received a
Confidential Offering Memorandum dated November 6, 1996, Amendment No. 1
thereto, dated November 14, 1996, and any supplements and amendments thereto
(the "Offering Memorandum"); and
WHEREAS, the Company wishes to offer and sell to the Purchaser, and
the Purchaser wishes to buy from the Company, the aggregate number of Shares
set forth opposite the Purchaser's address on the signature page to this
Purchase Agreement for delivery in accordance with this Purchase Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained in this Purchase Agreement, and intending to be legally
bound, the Purchaser and the Company agree as follows:
1. Agreement to Sell and Purchase the Shares.
1.1. Agreement to Issue and Buy; Closing Date; Amount; Purchase
Price. On the basis of the representations, warranties and agreements
contained in this Purchase Agreement, but subject to the terms and conditions
set forth in this Purchase Agreement, the Company agrees to issue and sell to
Purchaser, and Purchaser agrees to buy from the Company, on November 21,
1
<PAGE> 2
1996, or on such other date as shall be mutually agreed upon by the Company and
Purchaser (the "Closing Date"), the aggregate number of Shares set forth
opposite Purchaser's address on the signature page of this Purchase Agreement
(the "Designated Shares"). The price for the Designated Shares shall be One
United States dollar and Fifteen cents ($1.15) per Designated Share, and the
Purchaser shall pay to the Company the aggregate price for the Designated
Shares (the "Purchase Price"), set forth in the signature page to this Purchase
Agreement, on the Closing Date.
1.2. Payment. Payment of the Purchase Price for the Designated
Shares shall be made before the Closing Date by wire transfer of immediately
available funds in United States dollars to the following bank account (the
"Account"):
Nationsbank of Texas - Dallas
901 Main Street
Dallas, Texas
Swift Code: NABKUS44DAL
ABA No.: 111000025
For Credit to Account: Bracewell & Patterson L.L.P.
IOLTA Account No. 3313102571
Reference: Somanetics
PURCHASERS SHOULD INSTRUCT THEIR RESPECTIVE PAYING BANKS TO WIRE FUNDS FOR SAME
DAY VALUE ON OR BEFORE WEDNESDAY, NOVEMBER 20, 1996, IN ORDER TO HAVE THEIR
FUNDS TRANSFERRED TO THE ABOVE ACCOUNT PRIOR TO THE CLOSING DATE.
1.3. Transfer of Funds to the Company.
(a) Transfer. On the Closing Date, Bracewell &
Patterson, L.L.P. ("B&P"), on behalf of the Purchaser, shall make payment of
the Purchase Price for the Designated Shares by wire transfer of immediately
available funds in United States dollars to the account of the Company. Before
the Closing Date, the Company shall notify B&P of the bank account into which
it desires such funds to be transferred.
(b) B&P's Duties. B&P's duties under this Section 1.3
shall be determined solely by the terms of this Section 1.3, and B&P shall not
be responsible in any manner whatsoever for (i) any failure or inability of any
of the parties to perform any of their obligations, (ii) any actions taken by
it or not taken by it in reliance upon any writing or document which it in good
faith believes to be signed or presented by the proper party or parties, or
(iii) for any error of judgment, or for any act done or step taken or omitted
by it in good faith or for any
2
<PAGE> 3
mistake of fact or law or for anything which it may do or refrain from doing in
connection with this Purchase Agreement, except for its own gross negligence,
willful misconduct or an act of bad faith. If any controversy arises as to
whether or to whom any monies in the Account shall be distributed or any other
matter related to the funds in the Account, B&P shall not be required to
determine the controversy and the B&P need not transfer any of such funds, but
may withhold such funds until the rights of the parties to the dispute shall
have finally determined by agreement or by final order of a court of competent
jurisdiction. B&P may also, in its sole discretion, but shall not be obligated
to, cause to be commenced interpleader or similar actions or proceedings for
determination of the controversy in a circuit court of, or federal district
court in, the State of Michigan.
1.4. Other Purchasers. The Company intends to offer and sell other
Common Shares to other investors (together with Purchaser, the "Purchasers")
pursuant to separate substantially identical purchase agreements (together with
this Purchase Agreement, the "Purchase Agreements").
1.5. The Closing. The completion of the sale and purchase of the
Shares (the "Closing") shall take place at the offices of the Placement Agent,
56 Green Street, London W1Y 3RH at 4:00 p.m. local time on the Closing Date.
At the Closing, the Company shall deliver to the Placement Agent, for the
account of the Purchaser, one or more stock certificates representing the
Designated Shares registered in the name of the Purchaser or its nominee,
against payment of the Purchase Price for such Designated Shares in immediately
available funds to the account of the Company designated pursuant to Section
1.3 of this Purchase Agreement.
1.6. Changes in Common Shares. In the event of any change in the
issued and outstanding Common Shares of the Company by reason of stock
dividends, split-up or combination of the Common Shares, reclassification of
the capital stock of the Company or recapitalization of the Company which
occurs within the period on or after the latest date of the Offering Memorandum
(which includes amendments and supplements thereto) and before the Closing, the
number of Common Shares to be delivered to the Purchaser at the Closing and the
Purchase Price therefor shall be appropriately adjusted. In addition, in the
event that any cash dividends on the Common Shares of the Company shall be
payable to shareholders of record as of a record date that falls on any date
within the period on or after the latest date of the Offering Memorandum (which
includes amendments and supplements thereto) and before the Closing Date, the
Purchase Price per Designated Share payable by the Purchaser shall be reduced
by the amount of such cash dividend per Common Share.
1.7. Conditions to Purchaser's Obligations. The obligation of the
Purchaser to purchase the Designated Shares at the Closing shall be conditional
upon the delivery by the Company to the Placement Agent, on behalf of all the
Purchasers, of the following:
(a) a certificate of the Company as to the accuracy, in
all material respects, of the representations and warranties of the Company
contained in Section 2 of this Purchase
3
<PAGE> 4
Agreement as of the Closing Date, in the form attached as Schedule 1.7.(a)
dated the Closing Date.
(b) a written opinion of Honigman Miller Schwartz and
Cohn, counsel to the Company, substantially in the form attached as Schedule
1.7.(b) dated the Closing Date.
1.8. Condition to the Company's Obligations. The obligation of the
Company to deliver the Designated Shares at the Closing shall be conditional
upon the delivery by the Purchaser to the Company of a certificate of the
Purchaser as to the accuracy, in all material respects, of the representations
and warranties of the Purchaser contained in Section 4 of this Purchase
Agreement as of the Closing Date, in the form attached as Schedule 1.8 dated
the Closing Date.
2. Representations and Warranties of the Company. The Company hereby
represents and warrants to Purchaser as follows:
2.1. Organization and Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Michigan and has all requisite corporate power and authority to own
and lease its properties and to conduct its business as presently conducted and
as described in, or by incorporation by reference in, the Offering Memorandum.
The Company is duly qualified to do business as a foreign corporation and is in
good standing in every jurisdiction where such qualification is required by
controlling law and where the failure to so qualify would have a material
adverse effect on the Company.
2.2. Authorized Capital Stock. The authorized and outstanding
capital stock of the Company are as described in, or by incorporation by
reference in, the Offering Memorandum, and all of the issued shares of capital
stock of the Company have been duly authorized and validly issued and are fully
paid and non-assessable. Except as disclosed in, by incorporation by reference
in, or contemplated by, the Offering Memorandum, the Company does not own,
directly or indirectly, any equity or debt securities of any other company,
corporation, partnership, joint venture or other entity which are material to
the business or operations of the Company.
2.3. Due Execution, Delivery and Performance of the Purchase
Agreement. The execution, delivery and performance of this Purchase Agreement
by the Company (i) have been duly authorized by all requisite corporate action
of the Company, and (ii) will not (a) violate the Restated Articles of
Incorporation or the Amended and Restated Bylaws of the Company or (b) violate
any law applicable to the Company or any rule, regulation or order of any court
or governmental agency or body having jurisdiction over the Company or (c)
cause a breach of any provision of any indenture, mortgage, agreement, contract
or other instrument to which the Company is a party or by which the Company is
bound or to which any of the properties or assets of the Company are subject,
or constitute (upon notice or lapse of time or both) a default under any such
indenture, mortgage, agreement, contract or other instrument or result in the
creation or imposition of any lien, security interest, pledge, charge or other
encumbrance of any nature whatsoever (each a "Lien" and, collectively, "Liens")
upon any of the properties or assets
4
<PAGE> 5
of the Company (except for such violations, breaches, defaults or Liens which
would not have a material adverse effect on the Company's performance of its
obligations under this Purchase Agreement). Upon execution and delivery by the
Company and the Purchaser, this Purchase Agreement will constitute the legal,
valid and binding obligation of the Company, enforceable against the Company in
accordance with its terms, except as the enforceability thereof may be limited
by (i) any applicable bankruptcy, insolvency, fraudulent conveyance,
moratorium, reorganization or other similar laws now or hereafter in effect
relating to or affecting the enforcement of creditors' rights generally, and
(ii) general equitable principles, now or hereafter in effect, regardless of
whether such enforceability is considered in an action at law or a proceeding
in equity, and except as rights to indemnity or contribution may be limited
under applicable law.
2.4. Issuance and Delivery of the Shares. The offer, issuance,
sale and delivery of the Designated Shares in accordance with this Purchase
Agreement, have been duly authorized by all requisite corporate action of the
Company. The Shares conform to the description of the Common Shares contained
in, or by incorporation by reference in, the Offering Memorandum and conform to
the terms of the Common Shares contained in the Company's Restated Articles of
Incorporation. The Designated Shares, as and when issued and sold to the
Purchaser pursuant to this Purchase Agreement, and upon receipt by the Company
of the Purchase Price therefor, will be duly and validly issued and
outstanding, fully paid and non-assessable, will not be subject to any
preemptive or similar right except for certain anti-dilution adjustments, and
the Purchaser or the Purchaser's nominee will receive good and valid record
title to the Shares, free and clear of any adverse claim (as defined in the
Uniform Commercial Code), except such as may have been created by the
Purchaser. No consent or approval by the shareholders of the Company or of any
other person is required to be obtained by the Company for the consummation of
the issuance, sale and delivery of the Designated Shares to the Purchaser
pursuant to this Purchase Agreement, subject to applicable securities and blue
sky laws. As and from the expiration of the Restricted Period (as defined in
Section 4.3.(a) of this Purchase Agreement), (i) each stock certificate
representing any of the Shares shall be free of any type of restrictive legend,
including, but not limited to, the legend set forth in Section 4.4 of this
Purchase Agreement, and (ii) subject to the provisions of Section 4 of this
Purchase Agreement, the Shares represented by each such stock certificate shall
not be subject to any "stop transfer" or similar order at American Stock
Transfer and Trust Company, the transfer agent for the Common Shares, or any
successor transfer agent thereto (the "Transfer Agent").
2.5. Offering Memorandum.
(a) The Offering Memorandum, as of its date and at the
Closing Date, did not and will not as of such dates contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that this representation and warranty shall not apply to any statement or
omission relating to matters of foreign law, any statement included in the
Offering Memorandum describing the Placement Agent, the statements in paragraph
3 on page 2 of the Offering Memorandum, the statements in
5
<PAGE> 6
the last paragraph on page 45 and the fifth paragraph on page 46 under the
heading "Plan of Distribution and Restrictions on Resale" in the Offering
Memorandum or any other statement or omission made in reliance upon and in
conformity with information furnished in writing to the Company by the
Placement Agent expressly for use in the Offering Memorandum; and provided,
however, that this representation and warranty shall not apply to any statement
contained in the Offering Memorandum to the extent that a statement contained
in any document filed by the Company under the United States Securities
Exchange Act of 1934, as amended (the "Exchange Act"), with the United States
Securities and Exchange Commission (the "Commission") after the date of the
Offering Memorandum which also is incorporated by reference in the Offering
Memorandum modifies, amends or supersedes such statement.
(b) The documents incorporated by reference in the
Offering Memorandum, at the time they were filed (or, if any amendment with
respect thereto was filed, when such amendment was filed) with the Commission,
complied in all material respects with the applicable requirements of the
Exchange Act, and the rules and regulations of the Commission thereunder, and,
when filed with the Commission (or in the case of an amendment thereto, when
such amendment was filed), did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(c) Except as otherwise disclosed in or by incorporation
by reference in or contemplated by the Offering Memorandum, including the
Independent Auditors' Report for the fiscal year ended November 30, 1995,
attached as part of Exhibit A thereto, the financial statements of the Company
for full fiscal years included or incorporated by reference in the Offering
Memorandum present fairly the financial condition of the Company as of the
respective dates thereof and the results of operations of the Company for the
respective periods covered thereby, all in conformity with accounting
principles generally accepted in the United States applied on a consistent
basis throughout the entire periods involved.
2.6. No Other Offers or Sales. Neither the Company nor any
affiliate of the Company nor anyone acting on the behalf of the Company or any
such affiliate, other than the Placement Agent and its agents and affiliates,
has, directly or indirectly, offered or sold, or attempted to offer, sell or
dispose of, any of the Shares, or solicited any offer to buy any Shares from,
or otherwise approached or negotiated with respect thereto with, any person,
except for any of the foregoing arranged by, or conducted with, the Placement
Agent, including, without limitation, the Company's preparation and
distribution of the Offering Memorandum, negotiation of, and entry into, the
Purchase Agreements, the Engagement Letter and the agreements and documents
referred to in those agreements, and the Company's discussions with prospective
investors arranged by the Placement Agent.
2.7. Legal Proceedings. Except as otherwise described in or by
incorporation by reference in or contemplated by the Offering Memorandum, there
are no actions, suits, investigations or proceedings pending to which the
Company is a party before or by any court or governmental agency or body, which
in the opinion of the Company's officers would result,
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<PAGE> 7
individually or in the aggregate, in any material adverse change in the
financial condition or results of operations of the Company or which would
materially and adversely affect the properties or assets thereof; and, except
as otherwise described in or by incorporation by reference in or contemplated
by the Offering Memorandum, to the actual knowledge of the Company's officers,
no such actions, suits, investigations or proceedings are threatened by any
person, corporation or governmental agency or body.
2.8. No Material Change. Except as disclosed in or by
incorporation by reference in or contemplated by the Offering Memorandum, there
has been no material adverse change or, to the actual knowledge of the
Company's officers, any development which will result in a material adverse
change, in or affecting the business, operations, management, financial
condition, shareholders' equity or results of operations of the Company since
August 31, 1996.
2.9. Properties and Assets. The Company has good title to all
properties and assets described in the Offering Memorandum as owned by it, free
and clear of all Liens except as disclosed in or by incorporation by reference
in or contemplated by the Offering Memorandum or which are not material to the
business of the Company. The Company has a valid and enforceable lease for the
real property described in or by incorporation by reference in the Offering
Memorandum as leased by it, with such exceptions as are not material and do not
materially interfere with the use made and proposed to be made of such property
by the Company. Except as otherwise disclosed in or by incorporation by
reference in or contemplated by the Offering Memorandum, the Company owns or
possesses or is the valid licensee of all patents, trademarks, service marks
and trade names necessary to carry on its business as described in the Offering
Memorandum, and the Company has not received any notice of infringement of, or
conflict with, asserted rights of others with respect to any of the foregoing
which, if the subject of an unfavorable decision, ruling or finding, would
result, individually or in the aggregate, in any material adverse change in the
business, operations or financial condition of the Company.
2.10. Compliance with Applicable Regulations. Except as disclosed
in or by incorporation by reference in or contemplated by the Offering
Memorandum, the Company (a) has all material governmental licenses, permits,
consents, orders, approvals and other authorizations necessary to carry on its
business as described in the Offering Memorandum (collectively, "Licenses"),
except that the Company does not have all of the necessary Licenses to sell its
products in certain foreign countries or in places where it does not have
distributors or where it is "marketing", but not selling in violation of any
law, (b) complies in all material respects with, and conducts its business in
substantial conformity with (except for failures to conform which would not
have a material adverse effect on the Company), all laws, regulations and
orders applicable to it or its business, and (c) complies in all material
respects with, and conducts its business in substantial conformity with (except
for failures to conform which would not have a material adverse effect on the
Company), all Licenses issued to the Company by, and all agreements of the
Company with, any governmental agency or body having jurisdiction over the
Company.
7
<PAGE> 8
2.11. Investment Company Act of 1940. The Company is not an
"investment company" or an "affiliated person" of an "investment company," as
such terms are defined in the Investment Company Act of 1940, as amended.
2.12. Compliance with Regulation S. The Company is a "reporting
issuer" (as defined in Regulation S). The Company, its affiliates and any
person acting on behalf of, or as agent of, any of the foregoing (other than
the Placement Agent, as to which no representation, warranty or covenant is
made), (a) have offered and sold the Shares to the Purchasers only in "offshore
transactions" (as defined in Regulation S), (b) have not made with respect to
the Shares any "directed selling efforts" (as defined in Regulation S) in the
United States of America, its territories and possessions, any State of the
United States or the District of Columbia (the "United States"), (c) have
implemented all "offering restrictions" (as defined in Regulation S) in respect
of the Shares, (d) have not delivered the Offering Memorandum or any revision
or amendment thereof or supplement thereto to any "U.S. person" (as defined in
Regulation S) (other than directors, officers, employees and agents of the
Company, the Placement Agent, affiliates of the Placement Agent and its
directors, officers employees and agents, and professional advisers), (e) have
not made any offers or sales of any of the Shares or any interest therein in
the United States or to, or for the account or benefit of, any "U.S. person"
(as defined in Regulation S), and (f) have not made any sales of any of the
Shares or any interest therein in connection with the Offering to any person
other than the Purchasers; provided, however, that insofar as this
representation and warranty involves any "distributor" (as defined in
Regulation S), any broker-dealer participating in the offering, any affiliate
of such broker-dealer or any officer, director, employee or agent of such
distributor or broker-dealer, to the extent such broker-dealer or distributor
is acting as placement agent for the offering of the Shares, such
representation and warranty is made by the Company solely on the basis of, and
in reliance upon, the representations and warranties of such broker-dealer or
distributor and such broker-dealer or distributor complying with Regulation S
with respect to offers and sales of Shares.
2.13. Representations and Warranties at the Closing. Each of the
representations and warranties contained in this Section 2 is true and correct
in all material respects as of the date of this Purchase Agreement and will be
true and correct in all material respects as of the Closing Date, except to the
extent that such representations and warranties expressly relate to an earlier
date.
3. Certain Agreements of the Company. The Company hereby covenants and
agrees with the Purchaser as follows:
3.1. Offering Memorandum. Not later than two (2) days before the
Closing Date, the Company will prepare and furnish to the Purchaser the
Offering Memorandum.
3.2. Questions. The Company will make available to the Purchaser
prior to the Closing Date the opportunity to ask questions and receive answers
concerning the terms and conditions of the offering of the Shares and to obtain
any additional information that the Company possesses
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<PAGE> 9
or can acquire without unreasonable effort or expense that is necessary to
verify the accuracy of the information furnished in accordance with this
Purchase Agreement.
3.3. Legend Removal. Within seven business days after the end of
the Restricted Period (as defined in Section 4.3.(a) or at any time thereafter,
the Company will deliver to the Purchaser or its nominee who is acting as
custodian therefor or any subsequent holder who has received a stock
certificate representing the Shares which bears the legend described in Section
4.4 of this Purchase Agreement (the "Legended Stock Certificate"), without cost
to such Purchaser or subsequent holder, a substitute stock certificate without
the restrictive legend described in Section 4.4 of this Purchase Agreement.
The Company shall be required to deliver such substitute stock certificate only
upon surrender of the Legended Stock Certificate which, in the case of any
holder subsequent to the Purchaser, must be duly endorsed for transfer or
surrender.
4. Representations, Warranties and Covenants of the Purchaser. The
Purchaser hereby represents, warrants and covenants to the Company as follows:
4.1. Compliance with United States Securities Laws. The Purchaser
understands, acknowledges and agrees that (a) the Shares have not been, and
will not be, registered under the Securities Act or under any state or foreign
securities or blue sky laws, and may not be offered, sold, transferred, pledged
or otherwise disposed of in the United States or to, or for the account or
benefit of, any "U.S. person" (as defined in Regulation S, which definition is
set forth in Schedule 4.1, a "U.S. person"), unless such securities are
registered under the Securities Act and any applicable state or foreign
securities or blue sky laws, or such offer or sale is made pursuant to an
exemption from the registration requirements of the Securities Act and any
applicable state or foreign securities or blue sky laws, and (b) the Shares are
being offered and sold pursuant to the terms of Regulation S under the
Securities Act, which permits securities to be sold to persons who are not U.S.
persons in "offshore transactions" (as defined in Regulation S), subject to
certain terms and conditions.
4.2 Status of Purchaser.
(a) The Purchaser is purchasing the Designated Shares (i)
for its own account or for persons or accounts as to which it exercises
investment discretion; and (ii) for investment purposes only, not for any
trading or arbitrage purposes and not with a view to, or for sale in connection
with, any distribution of the Designated Shares. Neither the Purchaser nor
such person or account (i) is a U.S. person as defined in Regulation S (a copy
of such definition is set forth in the attached Schedule 4.1), or (ii) is
acquiring the Designated Shares for the account or benefit of any "U.S.
person", or (iii) if an entity, is organized under the laws of the "United
States" (as defined in Regulation S; a copy of which definition is set forth in
the attached Schedule 4.1), or (iv) if an entity, was organized for the purpose
of acquiring the Designated Shares or principally for the purpose of investing
in securities not registered under the Securities Act, or (v) is registered
under the Exchange Act, or (vi) is part of an identifiable group of U.S.
citizens abroad, such as a member of the U.S. armed forces serving overseas, or
(vii) is
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<PAGE> 10
purchasing the Designated Shares in any transaction or series of transactions
that, although in technical compliance with Regulation S, is part of a plan or
scheme to evade the registration provisions of the Securities Act. Purchaser's
purchase of the Designated Shares was not pre- arranged with the Purchaser in
the United States. The Purchaser has executed this Purchase Agreement outside
the United States, and at the time the buy order for the Designated Shares was
originated, the Purchaser was outside the United States. All offers to the
Purchaser regarding the Designated Shares and the sale of the Designated Shares
have occurred outside the United States.
(b) The Purchaser (and any person or account on behalf of
which the Purchaser is purchasing) is knowledgeable, sophisticated and
experienced in financial and business matters and is making, and is qualified
to make, decisions with respect to investments in restricted securities (such
as the Designated Shares) and has requested, received, reviewed and considered
all information the Purchaser deems relevant, and the Purchaser has relied
solely upon its review of the Offering Memorandum, this Purchase Agreement and
its own independent investigations in making a decision to execute this
Purchase Agreement and to purchase the Designated Shares. The Purchaser
acknowledges receipt of the Offering Memorandum, including all of the Exhibits
to the Offering Memorandum, at least 48 hours before the expected Closing Date.
The Purchaser has read and understands the Offering Memorandum, including all
of the Exhibits to the Offering Memorandum, this Purchase Agreement and any
other information and documents about the Company or the offering of the Shares
requested by the Purchaser. The Purchaser represents, warrants and
acknowledges that it is capable of evaluating the merits and risks of its
investment in the Designated Shares. To the extent that any certificate
representing the Designated Shares is registered in the name of the Purchaser's
nominee, the Purchaser confirms that such nominee is acting solely as its
custodian.
(c) The Purchaser acknowledges that, at all times
following its initial contact with the Company or its agents pertaining to this
offering of Shares, the Company has made available to the Purchaser the
opportunity to ask questions and receive answers concerning the Company and the
terms and conditions of the offering of the Shares and to obtain any additional
information that the Company possesses or can acquire without unreasonable
effort or expense that is necessary to verify the accuracy of the information
furnished to the Purchaser and that the Company has responded to all such
questions and requests for information to the full satisfaction of the
Purchaser. The Purchaser acknowledges that the Offering Memorandum has been
delivered to the Purchaser, and that the Purchaser has not and will not
distribute the Offering Memorandum to anyone other than such Purchaser's
professional advisors for the purpose of evaluating the proposed purchase of
the Designated Shares.
4.3. Restrictions on Re-Sale.
(a) For a period of forty (40) days following the Closing
Date or, if the Shares shall be issued on more than one day, the latest Closing
Date (the "Restricted Period"), the Purchaser shall not (i) engage in any
activity for the purpose of, or which may reasonably be expected to have the
effect of, conditioning the market in the United States for the Shares, or (ii)
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<PAGE> 11
offer, sell, pledge, or otherwise dispose of or transfer the Designated Shares,
any interest therein in the United States or to, or for the account or benefit
of, a U.S. person.
(b) The Purchaser understands that the Shares or any
interest therein are only transferable on the books and records of the Transfer
Agent. The Purchaser further understands that the Transfer Agent will not
register any transfer of the Shares or any interest therein which the Company
in good faith believes violates the restrictions set forth in this Purchase
Agreement or in Regulation S or other applicable law.
(c) Unless registered under the Securities Act, any
proposed offer, sale or transfer during the Restricted Period of any of the
Designated Shares or any interest therein shall be subject to the condition
that the Purchaser must deliver to the Company (i) a written certification that
neither record nor beneficial ownership of the Designated Shares or any
interest therein, as the case may be, has been offered or sold in the United
States or to, or for the account or benefit of, any "U.S. person" (as defined
in Regulation S), (ii) a written certification of the proposed transferee that
such transferee (or any account for which such transferee is acquiring such
Shares or any interest therein, as the case may be) is not a "U.S. person" (as
defined in Regulation S) and that such transferee is not purchasing the Shares
or any interest therein, as the case may be, for the account or benefit of a
U.S. person, that such transferee is acquiring such securities or such interest
therein, as the case may be, for such transferee's own account (or an account
over which it has investment discretion) for investment purposes only, not for
any trading or arbitrage purposes and not with a view to, or for sale in
connection with, any distribution of any of the securities, that such
transferee did not receive any other offer relating to the Shares or any
interest therein, as the case may be, in the United States, that at the time
the buy order was originated, such transferee was outside the United States,
that such transferee is not a U.S. citizen part of an identifiable group of
U.S. citizens abroad, that such transferee is knowledgeable of, and agrees to
be bound by, the restrictions set forth in this Purchase Agreement and
Regulation S during the Restricted Period, and that such transferee agrees that
until the expiration of the Restricted Period, it will not, directly or
indirectly, execute or effect or cause to be executed or effected any short
sale, option or equity swap transactions in or relating to the Common Shares or
any other derivative security transactions the purpose or effect of which is to
hedge or transfer to a third party all or any part of the risk of loss
associated with the ownership of the Shares to be acquired from the proposed
transferor, and (iii) a written opinion of United States legal counsel, in form
and substance satisfactory to the Company, to the effect that the offer, sale
and transfer of such Shares or any interest therein, as the case may be, are
exempt from registration under the Securities Act and any applicable state and
foreign securities or blue sky laws.
(d) The Purchaser will not, directly or indirectly,
offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to
buy, purchase or otherwise acquire or take a pledge of) its rights under this
Purchase Agreement, the Designated Shares, or any interest therein otherwise
than in compliance with the Securities Act, any applicable state and foreign
securities or blue sky laws and any applicable securities laws of jurisdictions
outside the United States, and the rules and regulations promulgated
thereunder.
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<PAGE> 12
4.4. Legend. The Purchaser agrees that for the duration of the
Restricted Period and until removed pursuant to Section 3.3, the stock
certificates representing the Designated Shares shall bear the legend set forth
below:
"The Common Shares represented by this certificate have not been and
will not be registered under the United States Securities Act of 1933,
as amended (the "Act"), or any other securities laws, and have been
issued in reliance upon the exemption from such registration
requirements contained in Regulation S under the Act. Neither the
Common Shares represented by this stock certificate nor any interest
therein may be offered, sold, transferred, pledged or otherwise
disposed of, in the United States or to, or for the account or benefit
of, any "U.S. person" (as defined in Regulation S under the Act)
before January 1, 1997 or 40 days following the date of the Closing of
the last sale of Common Shares sold pursuant to the Offering
Memorandum dated November 6, 1996, as amended or supplemented, unless
registered under the Act and any applicable state and foreign
securities or blue sky laws or Somanetics Corporation receives a
written opinion of United States legal counsel in form and substance
satisfactory to it to the effect that the offer, sale, transfer,
pledge or other disposal of such shares or any interest therein is
exempt from the registration requirements of such laws."
4.5. Prohibition of Certain Trading Transactions. During the
period from the date of the initial Offering Memorandum to the date of this
Purchase Agreement, the Purchaser did not, and from the date of the initial
Offering Memorandum through the expiration of the Restricted Period (as defined
in Section 4.3.(a)) the Purchaser will not, execute or effect or cause to be
executed or effected, directly or indirectly, any short sale, option, or equity
swap transaction in or with respect to the Common Shares of the Company or any
other derivative security transaction for its own account, if it is purchasing
for its own account, or, if it is purchasing the Designated Shares for the
account of another person or entity, for such account, the purpose or effect of
which is to hedge or transfer to a third party all or any part of the risk of
loss associated with the ownership of the Designated Shares by the Purchaser.
4.6. Sales by the Purchaser in the United States. If the Purchaser
sells all or any part of the Designated Shares or any interest therein in the
United States, the Purchaser (and/or certain persons who participate in any
such sale) may be deemed, under certain circumstances, to be an "underwriter"
as defined in Section 2(11) of the Securities Act. Before offering or selling
all or any part of the Designated Shares in the United States, whether during
or after the Restricted Period, the Purchaser shall (a) consult with United
States legal counsel to determine its liabilities and obligations under this
Purchase Agreement, the Securities Act and any applicable state and foreign
securities or blue sky laws, and (b) comply with the provisions of this
Purchase Agreement and all applicable federal, state and foreign securities or
blue sky laws, including the Securities Act. The Purchaser acknowledges that
the Company has no present intention of registering the Shares under the
Securities Act or any other securities laws, and agrees that the Shares may not
be resold unless they are subsequently registered under United States federal
and state statutes or unless exemptions from all such applicable registration
requirements are available.
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<PAGE> 13
4.7. Due Execution, Delivery and Performance of the Purchase
Agreement and Other Obligations. The Purchaser has full right, power,
authority and capacity to enter into this Purchase Agreement and to consummate
the transactions contemplated by this Purchase Agreement. If the Purchaser is
a company, corporation or other entity, the execution, delivery and performance
of this Purchase Agreement by the Purchaser have been duly authorized by all
requisite corporate or other required action of the Purchaser. This Purchase
Agreement has been validly executed and delivered by or on behalf of the
Purchaser. Upon the execution and delivery of this Purchase Agreement by the
Company, this Purchase Agreement shall constitute the legal, valid and binding
obligation of the Purchaser, enforceable in accordance with its terms, except
as the enforceability thereof may be limited by (i) any applicable bankruptcy,
insolvency, fraudulent conveyance, moratorium, reorganization or other similar
laws now or hereafter in effect relating to or affecting the enforcement of
creditors' rights generally, and (ii) general equitable principles, now or
hereafter in effect, regardless of whether such enforceability is considered in
an action at law or a proceeding in equity.
4.8. Organization: Lack of Conflict. If the Purchaser is an
entity, the Purchaser is duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or organization. The
execution, delivery and performance of this Purchase Agreement by the Purchaser
will not violate (i) the organizational documents of the Purchaser, if the
Purchaser is an entity, (ii) any law applicable to the Purchaser or any rule,
regulation or order of any court or governmental agency or body having
jurisdiction over the Purchaser, or (iii) any provision of any indenture,
mortgage, agreement, contract or other instrument to which the Purchaser is a
party or by which the Purchaser is bound or to which any of the properties or
assets of the Purchaser are subject, or result in a breach of, or constitute
(upon notice or lapse of time or both) a default under, any such indenture,
mortgage, agreement, contract or other instrument or result in the creation or
imposition of any Lien upon any of the properties or assets of the Purchaser
(except for any violation, breach or default described in this sentence which
would not have a material adverse effect on the Purchaser's performance of its
obligations under this Purchase Agreement).
4.9. Governmental Consents. The Purchaser is not aware of any
authorization, approval or consent of any governmental body which is legally
required for its purchase of the Designated Shares as contemplated by this
Purchase Agreement which has not been obtained.
4.10. Acknowledgement. The Purchaser acknowledges that the
Designated Shares are being offered and sold to it in reliance on specific
exemptions from the registration requirements of the Securities Act and that
the Company is relying upon the truth and accuracy of the representations,
warranties, agreements, acknowledgements and understanding of the Purchaser set
forth in this Purchase Agreement to determine the applicability of such
exemptions and the suitability of the Purchaser to acquire the Designated
Shares. Purchaser also acknowledges that no federal or state agency has passed
on or made any recommendation or endorsement of the Shares.
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<PAGE> 14
4.11. Authorization of the Placement Agent to Accept Delivery of the
Designated Shares. The Purchaser hereby authorizes the Placement Agent, or its
designated agent, on behalf of the Purchaser (i) to receive payment of the
Purchase Price by the Purchaser for the Designated Shares, (ii) to pay the
Purchase Price to the Company against delivery of the Designated Shares at the
Closing, and (iii) to accept delivery at the Closing of the Designated Shares.
The Purchaser may, in its sole discretion, authorize the Placement Agent, or
its designated agent, on behalf of the Purchaser (i) to hold the certificates
representing the Designated Shares on behalf of the Purchaser during the
Restricted Period, (ii) to surrender such certificates to the Transfer Agent
for the Common Shares upon expiration of the Restricted Period, and (iii) to
obtain from the Company within seven business days after the Restricted Period
a substitute stock certificate or certificates representing the Designated
Shares without the restrictive legend described in Section 4.4.
4.12. Representations and Warranties at the Closing. Each of the
representations and warranties contained in this Section 4 is true and correct
as of the date of this Purchase Agreement and will be true and correct as of
the Closing Date.
5. Survival of Representations, Warranties and Agreements.
Notwithstanding any investigation made by or on behalf of either party to this
Purchase Agreement or any controlling person, director, officer or agent of
either party to this Purchase Agreement, all covenants, agreements,
representations and warranties made by the Company or the Purchaser in this
Purchase Agreement and in the Designated Shares delivered pursuant to this
Purchase Agreement shall survive the execution of this Purchase Agreement, the
delivery to the Purchaser of the Designated Shares and the receipt by the
Company of payment for the Designated Shares.
6. Notices. All notices, demands, consents or other communications under
this Purchase Agreement shall be given or made in writing and shall be
delivered personally, or sent by certified or registered airmail, postage
prepaid, or sent by overnight courier or sent by facsimile transmission with a
confirmation copy sent by mail, and shall be deemed given when so personally
delivered, or if mailed, ten (10) days after the same shall have been posted or
if sent by overnight courier, one business day after the date such courier
confirms in writing that delivery has been made or if sent by facsimile
transmission, at the earlier of (i) as soon as written or telephonic
confirmation is received from the party to whom it was sent that the message
has been received or (ii) ten (10) days after the confirmation is posted: (a)
if to the Company, at its address set forth in the introductory paragraph of
this Purchase Agreement, or at such address or addresses as may have been
furnished to the Purchaser in writing by the Company, (b) if to the Purchaser,
at its address set forth following the Purchaser's signature on the signature
page of this Purchase Agreement, or at such other address or addresses as may
have been furnished to the Company in writing by the Purchaser or (c) if to any
transferee or transferees of the Purchaser, at such address or addresses as
shall have been furnished to the Company or the Transfer Agent at the time of
the transfer or transfers, or at such other address or addresses as may have
been furnished by such transferee or transferees to the Company or the Transfer
Agent in writing.
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<PAGE> 15
7. Amendments. No termination, amendment, interpretation or waiver of
any of the provisions of this Purchase Agreement shall be effective unless made
in writing and signed by the parties to this Purchase Agreement.
8. Headings. The headings of the sections and subsections of this
Purchase Agreement are used for convenience only and shall not affect the
meaning or interpretation of the contents of this Purchase Agreement.
9. Enforcement. The failure to enforce or to require the performance at
any time of any of the provisions of this Purchase Agreement shall in no way be
construed to be a waiver of such provisions, and shall not affect either the
validity of this Purchase Agreement or any part of this Purchase Agreement or
the right of any party thereafter to enforce each and every provision in
accordance with the terms of this Purchase Agreement.
10. Governing Law. The laws of the State of Michigan, in the United
States of America, applicable to agreements made and to be performed entirely
therein, without regard to the conflict of law provisions thereof, shall govern
this Purchase Agreement, its construction, the relationships of the parties in
connection with the subject matter of this Purchase Agreement and the
determination of any rights, duties or remedies of the parties arising out of,
or relating to, this Purchase Agreement.
11. Severability. If any provision of this Purchase Agreement is held to
be invalid or unenforceable by any judgment of a tribunal of competent
jurisdiction, the remainder of this Purchase Agreement shall not be affected by
such judgment, and this Purchase Agreement shall be carried out as nearly as
possible according to its original terms and intent.
12. Counterparts. This Purchase Agreement may be executed in
counterparts, all of which shall constitute one agreement, and each such
counterpart shall be deemed to have been made, executed and delivered on the
date set forth in the introductory paragraph of this Purchase Agreement without
regard to the dates or times when such counterparts may actually have been
made, executed or delivered.
13. Parties. This Purchase Agreement shall inure to the benefit of and be
binding upon the Company, Purchaser and their respective permitted successors
and assigns. This Purchase Agreement may not be assigned by either party
without the written consent of the other party. This Purchase Agreement and
all conditions and provisions of this Purchase Agreement are intended to be for
the sole and exclusive benefit of the parties to this Purchase Agreement and
their respective permitted successors and assigns and for the benefit of no
other person.
14. Entire Agreement. This Purchase Agreement constitutes the entire
agreement and understanding of the parties with respect to the matters and
transactions contemplated by this Purchase Agreement and supersedes all prior
agreements and understandings whatsoever relating to such matters and
transactions.
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<PAGE> 16
IN WITNESS WHEREOF, the parties have caused this Purchase Agreement to
be executed and delivered by their duly authorized representatives as of the
day and year set forth in the introductory paragraph of this Purchase
Agreement.
SOMANETICS CORPORATION PURCHASER'S NAME:
By: _______________________ _____________________________________
Its: __________________ _____________________________________
Duly executed by: __________________
Its: _________________________
Aggregate number of Designated Shares: PURCHASER'S ADDRESS:
_____________________ _____________________________________
Total Purchase Price: _____________________________________
_____________________ _____________________________________
Stock certificate registration instructions:
Name of Holder: ________________________________________
Address of Holder: _____________________________________
_________________________________________________________
_________________________________________________________
Stock certificate delivery instructions:
_________________________________________________________
_________________________________________________________
_________________________________________________________
16
<PAGE> 17
SCHEDULE 1.7.(a)
TO THE
PURCHASE AGREEMENT
CERTIFICATE OF THE COMPANY
The undersigned, [name], [title] of Somanetics Corporation
(the "Company"), does hereby certify on behalf of the Company that the
representations and warranties of the Company as set out in Section 2 of the
Purchase Agreements each dated on or about November 21, 1996 by and between the
Company and the Purchasers named therein, are true and correct in all material
respects on and as of the date of this Certificate with the same effect as
though such representations and warranties had been made on and as of the date
of this Certificate, except to the extent that such representations and
warranties expressly relate to an earlier date.
DATED this ___ day of November, 1996 SOMANETICS CORPORATION
By: _________________________
Its: __________________
1
<PAGE> 18
SCHEDULE 1.7.(b)
TO THE
PURCHASE AGREEMENT
FORM OF LEGAL OPINION
OF COUNSEL TO THE COMPANY
LANSING, MICHIGAN
WEST PALM BEACH, FLORIDA
TAMPA, FLORIDA
ORLANDO, FLORIDA
November 21, 1996
To each of the Purchasers
Listed on Schedule A (the "Purchasers")
Gentlemen:
We have acted as counsel to Somanetics Corporation, a Michigan
corporation (the "Company"), in connection with the offering by the Company of
up to 5,500,000 shares (the "Shares") of the Company's Common Shares, par value
$.01 a share ("Common Shares"), pursuant to the Purchase Agreements, each dated
on or about November 21, 1996, between the Company and the Purchasers (the
"Purchase Agreements"). This Opinion Letter is provided to you at the request
of the Company pursuant to Section 1.7.(b) of the Purchase Agreements. Except
as otherwise indicated, capitalized terms used in this Opinion Letter are
defined as set forth in the Purchase Agreements, the Accord or Part II (see
below).
In so acting, we have considered such matters of law and of fact, and
relied upon such certificates and other information furnished to us, as we have
deemed appropriate as a basis for our opinions set forth below. As to matters
involving the facts specified therein, we have relied solely upon (i)
representations made in the Purchase Agreements, and (ii) certificates of
officers of the Company and of government officials.
This Opinion Letter is governed by, and shall be interpreted in
accordance with, the Legal Opinion Accord (the "Accord") of the ABA Section of
Business Law (1991) and Section A of Part II of the Report of the Ad Hoc
Committee of the Business Law Section of the State Bar of Michigan on
Standardized Legal Opinions in Business Transactions (1991) ("Part II"). As a
consequence, it is subject to a number of qualifications, exceptions,
definitions, limitations on coverage and other limitations, all as more
particularly described in the Accord and Part II, and this Opinion Letter
should be read in conjunction with the Accord and Part II. The law covered
<PAGE> 19
Purchasers Listed on Schedule A
November 21, 1996
Page 2
by the opinions expressed herein is limited to the Federal Law of the United
States and the Law of the State of Michigan.
Based upon the foregoing, we are of the opinion that:
1. The Company is duly incorporated, validly existing and in good
standing under the laws of the State of Michigan and has all requisite
corporate power and authority to own or lease all of the properties owned or
leased by it and to conduct its business as described in the Offering
Memorandum.
2. Based solely on a certified copy of the Company's Restated
Articles of Incorporation, certified by the Michigan Department of Commerce,
Corporation and Securities Bureau as of November 12, 1996, the authorized
capital stock of the Company consists of 30,000,000 Common Shares, par value
$.01 a share, 1,000,000 Preferred Shares, par value $.01 a share, and 2,116,648
Convertible Preferred Shares, par value $.01 a share.
3. The Company has the requisite corporate power and authority to
issue, sell and deliver the Shares in compliance with its obligations under the
Purchase Agreements.
4. The terms of the Shares conform, in all material respects, to
the description thereof contained under the caption "Description of Securities"
on pages 64-67 of the Prospectus attached as Exhibit C to the Offering
Memorandum, to the extent such description constitutes statements of law or
legal conclusions.
5. Assuming that the Company's Class B Warrants have been
redeemed or have expired pursuant to the Warrant Agreement, dated as of March
21, 1991, among the Company, American Stock Transfer & Trust Company, and D.H.
Blair & Co., Inc., the Shares, when issued and delivered to the Purchasers and
paid for by the Purchasers, all pursuant to the Purchase Agreements, will be
validly issued, fully paid and non-assessable and will not be subject to any
preemptive right arising under the Michigan Business Corporation Act or the
Company's Restated Articles of Incorporation or Bylaws.
6. Execution, delivery and performance of the Purchase Agreements
by the Company have been duly authorized by all necessary corporate action on
the part of the Company. The Purchase Agreements have been duly executed and
delivered by the Company and constitute valid and binding obligations of the
Company and, except for the indemnification and contribution provisions
thereof, as to which we express no opinion, are enforceable against the Company
in accordance with their respective terms.
7. The execution and delivery of the Purchase Agreements by the
Company and the compliance by the Company with the terms of the Purchase
Agreements do not violate (i) the
<PAGE> 20
Purchasers Listed on Schedule A
November 21, 1996
Page 3
Restated Articles of Incorporation or Bylaws of the Company, or (ii) any laws
which are known to us to be applicable to the Company where such violation
would reasonably be expected to have a material adverse effect upon the
validity, performance or enforceability of any of the terms of the Purchase
Agreements, except that we express no opinion as to federal, state or foreign
securities laws, other than as set forth in Paragraph 8.
8. For purposes of this Paragraph 8, we have assumed, with your
permission and without any investigation or verification, and we render no
opinion concerning, the following: (i) all of the closing conditions in, and
the other terms and conditions of, the Offering Memorandum and the Purchase
Agreements have been met and complied with, (ii) the Company, the Placement
Agent, the Purchasers, and all other parties have complied in all respects with
all requirements of Regulation S and other applicable laws and will comply with
the restrictive legends on the Shares, (iii) the representations and warranties
of the Company and the Purchasers in the Purchase Agreements are true and
accurate in all respects and each party to the Purchase Agreements will comply
with all of the covenants applicable to it in the Purchase Agreements, (iv) any
Company communications, in person or otherwise, with securities analysts,
institutional investors or investment bankers in the months before the closing
of the Offering did not constitute "directed selling efforts" within the
meaning of Regulation S, (v) the representations and warranties of the Company
and the Placement Agent in the Placement Agent Agreement, among the Company and
the Placement Agent, dated as of November 21, 1996, and in the Engagement
Letter are true and accurate in all respects and each party will comply with
all of the covenants applicable to such party in such agreements, and (vi)
Gruntal & Co., Incorporated and all other parties have complied in all respects
with all requirements of Regulation S and other applicable laws; and the
offering of securities by the Company to be made through Gruntal & Co.,
Incorporated pursuant to the engagement letter, dated September 9, 1996, was
terminated by the Company before any offers to sell securities were made and
before any securities were sold. Based solely on the foregoing assumptions,
the offer, sale and delivery of the Shares to the Purchasers pursuant to the
Purchase Agreements and the Offering Memorandum do not require registration
under the Securities Act. No opinion is expressed as to any offer or resale of
the Shares by the Purchasers (including the ability of any person or entity to
resell in the United States or elsewhere any of the Shares without prior
registration or qualification of such Shares with the relevant authorities,
including the Securities and Exchange Commission and any applicable state
securities commission or "blue sky" authority), and no opinion is expressed as
to the legality of the transfer and sale of the Shares under the laws of any
jurisdiction outside the United States.
9. No consent, approval, authorization or order of, or
registration or qualification with, any United States or State of Michigan
court or governmental agency or body, and which has not been made or obtained
by the Company, is required to be obtained by the Company for the issuance,
sale or delivery of the Shares to the Purchasers pursuant to the Purchase
Agreements, except such as may be required under the Securities Act and the
rules and
<PAGE> 21
Purchasers Listed on Schedule A
November 21, 1996
Page 4
regulations thereunder and such as may be required under state or foreign
securities or blue sky laws.
10. To our Actual Knowledge, the Company is not an "investment
company" or an "affiliated person" of an "investment company," as such terms
are defined in the Investment Company Act of 1940, as amended.
The General Qualifications apply to the opinions set forth in
paragraph 7 above as well as to the opinions set forth in paragraph 6.
The phrase "Primary Lawyer Group", as used in the Accord, is hereby
modified, and for purposes of this Opinion Letter the Primary Lawyer Group
shall be deemed to refer to the lawyers in this firm who have given substantive
legal attention to representation of the Company in connection with the
Purchase Agreements.
This opinion is rendered solely for the benefit of the Purchasers with
respect to the Shares issued, sold and delivered under the Purchase Agreements
and is not to be used, circulated, quoted or referred to, or otherwise relied
upon by any person, without our prior written consent.
Very truly yours,
DRAFT
HONIGMAN MILLER SCHWARTZ AND COHN
<PAGE> 22
SCHEDULE 1.8
TO THE
PURCHASE AGREEMENT
CERTIFICATE OF THE PURCHASER
The undersigned, on behalf of the purchaser named below (the
"Purchaser"), does hereby certify that the representations and warranties of
the Purchaser as set out in Section 4 of the Purchase Agreement dated November
21, 1996 by and between the Company and the Purchaser, are true and correct in
all material respects on and as of the date of this Certificate with the same
effect as though such representations and warranties had been made on and as of
the date of this Certificate, except to the extent that such representations
and warranties expressly relate to an earlier date.
DATED this __ day of November, 1996 PURCHASER'S NAME:
_____________________________
_____________________________
_____________________________
Duly executed by:
_____________________________
Its: _________________
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<PAGE> 23
SCHEDULE 4.1
TO THE
PURCHASE AGREEMENT
DEFINITION OF U.S. PERSON UNDER REGULATION S
1. U.S. PERSON
(a) "U.S. person" means:
(i) Any natural person resident in the United States;
(ii) Any partnership or corporation organized or
incorporated under the laws of the United States;
(iii) Any estate of which any executor or administrator is
a U.S. person;
(iv) Any trust of which any trustee is a U.S. person;
(v) Any agency or branch of a foreign entity located in
the United States;
(vi) Any non-discretionary account or similar account
(other than an estate or trust) held by a dealer or
other fiduciary for the benefit or account of a U.S.
person;
(vii) Any discretionary account or similar account (other
than an estate or trust) held by a dealer or other
fiduciary organized, incorporated, or (if an
individual) resident in the United States; and
(viii) Any partnership or corporation if: (A) organized or
incorporated under the laws of any foreign
jurisdiction; and (B) formed by a U.S. person
principally for the purpose of investing in
securities not registered under the Securities Act,
unless it is organized or incorporated, and owned, by
accredited investors (as defined in Rule 501(a) of
the Securities Act) who are not natural persons,
estates or trusts.
(b) Notwithstanding paragraph (1)(a) of this rule, any discretionary
account or similar account (other than an estate or trust) held for
the benefit or account of a non-U.S. person by a dealer or other
professional fiduciary organized, incorporated, or (if an individual)
resident in the United States shall not be deemed a "U.S. person."
(c) Notwithstanding paragraph (1)(a) of this rule, any estate of which any
professional fiduciary acting as executor or administrator is a U.S.
person shall not be deemed a U.S. person if:
(i) An executor or administrator of the estate who is not
a U.S. person has sole or shared investment
discretion with respect to the assets of the estate;
and
(ii) The estate is governed by foreign law.
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<PAGE> 24
(d) Notwithstanding paragraph (1)(a) of this rule, any trust of which any
professional fiduciary acting as a trustee is a U.S. person shall not
be deemed a U.S. person if a trustee who is not a U.S. person has sole
or shared investment discretion with respect to the trust assets, and
no beneficiary of the trust (and no settlor if the trust is revocable)
is a U.S. person.
(e) Notwithstanding paragraph (1)(a) of this rule, an employee benefit
plan established and administered in accordance with the law of a
country other than the United States and customary practices and
documentation of such country shall not be deemed a U.S. person.
(f) Notwithstanding paragraph (1)(a) of this rule, any agency or branch of
a U.S. person located outside the United States shall not be deemed a
"U.S. person" if:
(i) The agency or branch operates for valid business
reasons; and
(ii) The agency or branch is engaged in the business of
insurance or banking and is subject to substantive
insurance or banking regulation, respectively, in the
jurisdiction where located.
(g) The International Monetary Fund, the International Bank for
Reconstruction and Development, the Inter-American Development Bank,
the Asian Development Bank, the African Development Bank, the United
Nations, and their agencies, affiliates and pension plans and any
other similar international organizations, their agencies, affiliates
and pension plans shall not be deemed "U.S. persons."
2. UNITED STATES. "United States" means the United States of America,
its territories and possessions, any State of the United States, and the
District of Columbia.
2
<PAGE> 1
EXHIBIT 10.61
PLACEMENT AGENT AGREEMENT
THIS PLACEMENT AGENT AGREEMENT ("Agreement") is made as of November
21, 1996 by and among Somanetics Corporation, a Michigan corporation (the
"Company"), Rauscher Pierce & Clark, Inc., an Ohio corporation ("Rauscher"),
and Rauscher Pierce & Clark Limited, a limited liability company organized and
existing under the laws of England ("RPC", and together with Rauscher, the
"Placement Agent").
WHEREAS, the Company has duly authorized the issuance, sale and
delivery of up to 5,500,000 shares (the "Shares") of its common shares, par
value $.01 per share (the "Common Shares") (the "Offering");
WHEREAS, the Company has prepared and delivered a Confidential
Offering Memorandum dated November 6, 1996, as amended by Amendment No. 1,
dated November 14, 1996 (the "Offering Memorandum"), describing, among other
things, the Common Shares and providing material information about the Company
and the terms of the Offering;
WHEREAS, the Shares are being offered and sold in the Offering to
investors who are not "U.S. persons" as defined in Regulation S ("Regulation
S"), which definition is set forth in Schedule 1 (a "U.S. person"), under the
United States Securities Act of 1933, as amended (the "Securities Act"),
pursuant to Purchase Agreements (the "Purchase Agreements") entered into by the
Company and each such investor (a "Purchaser"), in reliance upon, and in
conformity with, an exemption from the registration requirements of the
Securities Act pursuant to Regulation S; and
WHEREAS, the Placement Agent has agreed to use its best efforts to
assist the Company in the placement of the Shares, subject to the conditions
set forth in that certain letter dated October 23, 1996 from the Placement
Agent to the Company and an amendment thereto dated November 1, 1996, and
amendments thereto and restatements thereof (the "Engagement Letter").
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained in this Agreement, and intending to be legally bound, the
undersigned agree as follows:
1. Agreement to Assist in the Placement of the Shares. On the basis of
the representations, warranties and agreements contained in this Agreement and
subject to the terms and conditions set forth in this Agreement and the
Engagement Letter, the Company engages the Placement Agent to, and the
Placement Agent agrees to, (i) act as placement agent for the Company in
connection with the Offering as described in the Offering Memorandum, subject
to the terms and conditions of the Engagement Letter, and (ii) perform the
duties of the Placement Agent described in the Purchase Agreements. The
Placement Agent shall not, in fulfilling its obligations, act as underwriter
for the Shares, and is in no way obligated, directly or indirectly,
1
<PAGE> 2
to advance its own funds to purchase any Shares. In exchange for such
services, the Placement Agent shall receive the compensation described in the
Engagement Letter.
2. Representations and Warranties of the Company. The Company represents
and warrants to the Placement Agent as follows:
2.1. Organization and Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Michigan and has all requisite corporate power and authority to own
and lease its properties and to conduct its business as presently conducted and
as described in, or by incorporation by reference in, the Offering Memorandum.
The Company is duly qualified to do business as a foreign corporation and is in
good standing in every jurisdiction where such qualification is required by
controlling law and where the failure to so qualify would have a material
adverse effect on the Company.
2.2. Authorized Capital Stock. The authorized and outstanding
capital stock of the Company are as described in, or by incorporation by
reference in, the Offering Memorandum, and all of the issued shares of capital
stock of the Company have been duly authorized and validly issued and are fully
paid and non-assessable.
2.3. Offering Memoranda.
(a) The Offering Memorandum, as of its date and at the
Closing Date, did not and will not as of such dates contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that this representation and warranty shall not apply to any statement or
omission relating to matters of foreign law, any statement included in the
Offering Memorandum describing the Placement Agent, the statements in paragraph
3 on page 2 of the Offering Memorandum, the statements in the last paragraph on
page 45 and the fifth paragraph on page 46 under the heading "Plan of
Distribution and Restrictions on Resale" in the Offering Memorandum or any
other statement or omission made in reliance upon, and in conformity with,
information furnished in writing to the Company by the Placement Agent
expressly for use in the Offering Memorandum; and provided, however, that this
representation and warranty shall not apply to any statement contained in the
Offering Memorandum to the extent that a statement contained in any document
filed by the Company under the United States Securities Exchange Act of 1934,
as amended (the "Exchange Act"), with the United States Securities and Exchange
Commission (the "Commission") after the date of the Offering Memorandum which
also is incorporated by reference in the Offering Memorandum modifies, amends
or supersedes such statement.
(b) The documents incorporated by reference in the
Offering Memorandum, at the time they were filed (or, if any amendment with
respect thereto was filed, when such amendment was filed) with the Commission,
complied in all material respects with the applicable requirements of the
Exchange Act, and the rules and regulations of the Commission thereunder, and,
when filed with the Commission (or in the case of an amendment thereto, when
such
2
<PAGE> 3
amendment was filed), did not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
(c) Except as otherwise disclosed in or by incorporation
by reference in or contemplated by the Offering Memorandum, including the
Independent Auditors' Report for the fiscal year ended November 30, 1995,
attached as part of Exhibit A thereto, the financial statements of the Company
for full fiscal years included or incorporated by reference in the Offering
Memorandum present fairly the financial condition of the Company as of the
respective dates thereof and the results of operations of the Company for the
respective periods covered thereby, all in conformity with accounting
principles generally accepted in the United States applied on a consistent
basis throughout the entire periods involved.
2.4. No Other Offers or Sales. Neither the Company nor any
affiliate of the Company nor anyone acting on the behalf of the Company or any
such affiliate, other than the Placement Agent and its agents and affiliates,
has, directly or indirectly, offered or sold, or attempted to offer, sell or
dispose of, any of the Shares, or solicited any offer to buy any Shares from,
or otherwise approached or negotiated with respect thereto with, any person,
except for any of the foregoing arranged by, or conducted with, the Placement
Agent, including, without limitation, the Company's preparation and
distribution of the Offering Memorandum, negotiation of, and entry into, this
Agreement, the Purchase Agreements, the Engagement Letter and the agreements
and documents referred to in those agreements, and the Company's discussions
with prospective investors arranged by the Placement Agent.
2.5. Due Execution, Delivery and Performance of this Agreement.
The execution, delivery and performance of this Agreement and the Engagement
Letter by the Company (i) have been duly authorized by all requisite corporate
action of the Company, and (ii) will not (a) violate the Restated Articles of
Incorporation or the Amended and Restated Bylaws of the Company or (b) violate
any law applicable to the Company or any rule, regulation or order of any court
or governmental agency or body having jurisdiction over the Company or (c)
cause a breach of any provision of any indenture, mortgage, agreement, contract
or other instrument to which the Company is a party or by which the Company is
bound or to which any of the properties or assets of the Company are subject,
or constitute (upon notice or lapse of time or both) a default under any such
indenture, mortgage, agreement, contract or other instrument or result in the
creation or imposition of any lien, security interest, pledge, charge or other
encumbrance of any nature whatsoever (each a "Lien" and, collectively, "Liens")
upon any of the properties or assets of the Company (except for such
violations, breaches, defaults or Liens which would not have a material adverse
effect on the Company's performance of its obligations under this Agreement).
Upon execution and delivery by the Company and the Placement Agent, the
Engagement Letter constituted and this Agreement will constitute legal, valid
and binding obligations of the Company, enforceable against the Company in
accordance with their respective terms, except as the enforceability thereof
may be limited by (i) any applicable bankruptcy, insolvency, fraudulent
conveyance, moratorium, reorganization or other similar laws now or hereafter
in effect relating to or affecting the enforcement of creditors' rights
generally, and (ii) general equitable principles,
3
<PAGE> 4
now or hereafter in effect, regardless of whether such enforceability is
considered in an action at law or a proceeding in equity, and except as rights
to indemnity or contribution may be limited under applicable law.
2.6. Legal Proceedings. Except as otherwise described in or by
incorporation by reference in or contemplated by the Offering Memorandum, there
are no actions, suits, investigations or proceedings pending to which the
Company is a party before or by any court or governmental agency or body, which
in the opinion of the Company's officers would result, individually or in the
aggregate, in any material adverse change in the financial condition or results
of operations of the Company, or which would materially and adversely affect
the properties or assets thereof; and, except as otherwise described in or by
incorporation by reference in or contemplated by the Offering Memorandum to the
actual knowledge of the Company's officers, no such actions, suits,
investigations or proceedings are threatened by any person, corporation or
governmental agency or body.
2.7. No Material Change. Except as disclosed in or by
incorporation by reference in or contemplated by the Offering Memorandum, there
has been no material adverse change or, to the actual knowledge of the
Company's officers, any development which will result in a material adverse
change, in or affecting the business, operations, management, financial
condition, shareholders' equity or results of operations of the Company since
August 31, 1996.
2.8. Properties and Assets. The Company has good title to all
properties and assets described in the Offering Memorandum as owned by it, free
and clear of all Liens except as disclosed in or by incorporation by reference
in or contemplated by the Offering Memorandum or which are not material to the
business of the Company. The Company has a valid and enforceable lease for the
real property described in or by incorporation by reference in the Offering
Memorandum as leased by it, with such exceptions as are not material and do not
materially interfere with the use made and proposed to be made of such property
by the Company. Except as otherwise disclosed in or by incorporation by
reference in or contemplated by the Offering Memorandum, the Company owns or
possesses or is the valid licensee of all patents, trademarks, service marks
and trade names necessary to carry on its business as described in the Offering
Memorandum, and the Company has not received any notice of infringement of, or
conflict with, asserted rights of others with respect to any of the foregoing
which, if the subject of an unfavorable decision, ruling or finding, would
result, individually or in the aggregate, in any material adverse change in the
business, operations or financial condition of the Company.
2.9. Compliance with Applicable Regulations. Except as disclosed
in or by incorporation by reference in or contemplated by the Offering
Memorandum, the Company (a) has all material governmental licenses, permits,
consents, orders, approvals and other authorizations necessary to carry on its
business as described in the Offering Memorandum (collectively, "Licenses"),
except that the Company does not have all of the necessary Licenses to sell its
products in certain foreign countries or in places where it does not have
distributors or where it is "marketing", but not selling in violation of any
law, (b) complies in all material
4
<PAGE> 5
respects with, and conducts its business in substantial conformity with (except
for failures to conform which would not have a material adverse effect on the
Company), all laws, regulations and orders applicable to it or its business,
and (c) complies in all material respects with, and conducts its business in
substantial conformity with (except for failures to conform which would not
have a material adverse effect on the Company), all Licenses issued to the
Company by, and all agreements of the Company with, any governmental agency or
body having jurisdiction over the Company.
2.10. Investment Company Act of 1940. The Company is not an
"investment company" or an "affiliated person" of an "investment company," as
such terms are defined in the Investment Company Act of 1940, as amended.
2.11. Compliance with Regulation S. The Company is a "reporting
issuer" (as defined in Regulation S). The Company, its affiliates and any
person acting on behalf of, or as agent of, any of the foregoing (other than
the Placement Agent, as to which no representation, warranty or covenant is
made), (a) have offered and sold the Shares to the Purchasers only in "offshore
transactions" (as defined in Regulation S), (b) have not made with respect to
the Shares any "directed selling efforts" (as defined in Regulation S) in the
United States of America, its territories and possessions, any State of the
United States or the District of Columbia (the "United States"), (c) have
implemented all "offering restrictions" (as defined in Regulation S) in respect
of the Shares, (d) have not delivered the Offering Memorandum or any revision
or amendment thereof or supplement thereto to any "U.S. person" (as defined in
Regulation S) (other than directors, officers, employees and agents of the
Company, the Placement Agent, affiliates of the Placement Agent and its
directors, officers, employees and agents, and professional advisers), (e) have
not made any offers or sales of any of the Shares or any interest therein in
the United States or to, or for the account or benefit of, any "U.S. person"
(as defined in Regulation S), and (f) have not made any sales of any of the
Shares or any interest therein in connection with the Offering to any person
other than the Purchasers; provided, however, that insofar as this
representation and warranty involves any "distributor" (as defined in
Regulation S), any broker-dealer participating in the offering, any affiliate
of such broker-dealer or any officer, director, employee or agent of such
distributor or broker-dealer, to the extent such broker-dealer or distributor
is acting as placement agent for the offering of the Shares, such
representation and warranty is made by the Company solely on the basis of, and
in reliance upon, the representations and warranties of such broker-dealer or
distributor and such broker-dealer or distributor complying with Regulation S
with respect to offers and sales of Shares.
2.12. Representations and Warranties at the Closing. Each of the
representations and warranties contained in this Section 2 is true and correct
in all material respects as of the date of this Agreement and will be true and
correct in all material respects as of the Closing Date (as defined in the
Purchase Agreements), except to the extent such representations and warranties
expressly relate to an earlier date.
3. Representations, Warranties and Covenants of the Placement Agent. The
Placement Agent hereby represents and warrants to, and covenants with, the
Company as follows:
5
<PAGE> 6
3.1. Due Execution, Delivery and Performance of this Agreement and
Other Obligations. The Placement Agent has full right, power, authority and
capacity to enter into this Agreement and the Engagement Letter and to
consummate the transactions contemplated by this Agreement and the Engagement
Letter. The execution, delivery and performance of this Agreement and the
Engagement Letter by the Placement Agent have been duly authorized by all
requisite corporate action of the Placement Agent. This Agreement and the
Engagement Letter have been validly executed and delivered by or on behalf of
the Placement Agent. Upon the execution and delivery of this Agreement and the
Engagement Letter by the Company, each of this Agreement and the Engagement
Letter shall constitute the legal, valid and binding obligation of the
Placement Agent, enforceable in accordance with its terms, except as the
enforceability thereof may be limited by (i) any applicable bankruptcy,
insolvency, fraudulent conveyance, moratorium, reorganization or other similar
laws now or hereafter in effect relating to or affecting the enforcement of
creditors' rights generally, and (ii) general equitable principles, now or
hereafter in effect, regardless of whether such enforceability is considered in
an action at law or a proceeding in equity, and except as rights to
indemnification and contribution may be limited by applicable law.
3.2. Organization; Lack of Conflict. The Placement Agent is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation. The execution, delivery and performance of
this Agreement and the Engagement Letter by the Placement Agent will not
violate (i) the organizational documents of the Placement Agent, (ii) any law
applicable to the Placement Agent or any rule, regulation or order of any court
or governmental agency or body having jurisdiction over the Placement Agent or
(iii) any provision of any indenture, mortgage, agreement, contract or other
instrument to which the Placement Agent is a party, or by which the Placement
Agent is bound or to which any of the properties or assets of the Placement
Agent are subject, or result in a breach of, or constitute (upon notice or
lapse of time or both) a default under, any such indenture, mortgage,
agreement, contract or other instrument or result in the creation or imposition
of any Lien upon any of the properties or assets of the Placement Agent (except
for any violation, breach or default described in this sentence which would not
have a material adverse effect on the Placement Agent's performance of its
obligations under this Agreement and the Engagement Letter).
3.3. Governmental Consents. The Placement Agent is not aware of
any authorization, approval or consent of any governmental body which is
legally required for the issuance and sale of the Shares as contemplated by the
Purchase Agreements and which has not been obtained.
3.4. Acknowledgement. The Placement Agent acknowledges that the
Shares are being offered and sold in reliance on specific exemptions from the
registration requirements of the Securities Act and that the Company is relying
upon the truth and accuracy of the representations, warranties, agreements,
acknowledgements and understandings of the Placement Agent set forth in this
Agreement to determine the applicability of such exemptions and the suitability
of the Purchasers to acquire the Shares. The Placement Agent also acknowledges
that no federal or state agency has passed on or made any recommendation or
endorsement of the Shares.
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<PAGE> 7
3.5. Compliance with Regulation S.
(a) In connection with the offer and sale of Shares or
any interest therein, the Placement Agent will (i) not make an offer or sale to
a person in the United States or to an identifiable group of U.S. citizens
abroad, such as members of the U.S. armed forces serving overseas, and (ii)
take all appropriate action so that at the time the buy order is originated, it
reasonably believes that the buyer is outside the United States.
(b) For a period beginning on the date of the Engagement
Letter and ending forty days following the Closing Date (as defined in the
Purchase Agreements) or, if there is more than one Closing Date, the latest
Closing Date (the "Restricted Period"), the Placement Agent, its affiliates and
any person acting on its behalf shall not make any directed selling efforts (as
defined in Regulation S) in the United States in connection with any offer or
sale of the Shares and shall not engage in any activity undertaken for the
purpose of, or that could reasonably be expected to have the effect of,
conditioning the market in the United States for the Shares.
(c) The Placement Agent agrees that all offers and sales
of Shares made by the Placement Agent prior to the expiration of the Restricted
Period shall be made only in accordance with the provisions of Section 903 or
904 of Regulation S, pursuant to registration of the Shares under the
Securities Act, or pursuant to an available exemption from the registration
requirements of the Securities Act.
(d) The Placement Agent understands, acknowledges and
agrees that (a) the Shares have not been, and will not be, registered under the
Securities Act or under any state or foreign securities or blue sky laws, and
may not be offered, sold, transferred, pledged or otherwise disposed of in the
United States or to, or for the account or benefit of, any "U.S. person",
unless such securities are registered under the Securities Act and any
applicable state and foreign securities or blue sky laws or exemptions from the
registration requirements of the Securities Act and any applicable state and
foreign securities or blue sky laws are available, and (b) the Shares are being
offered and sold pursuant to the terms of Regulation S under the Securities
Act, which permits securities to be sold to persons who are not "U.S. persons"
in "offshore transactions" (as defined in Regulation S), subject to certain
terms and conditions.
(e) All offering materials and documents used by the
Placement Agent, its affiliates and any person acting on its behalf in
connection with offers and sales of the Shares prior to the expiration of the
Restricted Period shall include statements to the effect that the securities
have not been registered under the Securities Act and may not be offered or
sold in the United States or to "U.S. persons" (other than distributors) unless
the securities are registered under the Securities Act, or an exemption from
the registration requirements of the Securities Act is available. Such
statements shall appear in any advertisement made or issued by the Placement
Agent, any of its affiliates or any person acting on its behalf.
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<PAGE> 8
(f) No offer, sale, transfer, pledge or other disposition
of the Shares or any interest therein made prior to the expiration of the
Restricted Period shall be made by the Placement Agent, its affiliates and any
person acting on its behalf to a "U.S. person" or for the account or benefit of
a "U.S. person" (other than a distributor).
(g) If the Placement Agent sells Shares to a distributor,
a dealer (as defined in Section 2(12) of the Securities Act), or a person
receiving a selling concession, fee or other remuneration in respect of the
securities sold, prior to the expiration of the Restricted Period, the
Placement Agent shall send a confirmation or other notice to the purchaser
stating that the purchaser is subject to the same restrictions on offers and
sales that apply to a distributor.
(h) The Placement Agent shall advise the Company of any
legends or restrictions required by foreign countries, if any, pertaining to
the Shares, and the Placement Agent shall otherwise take all steps necessary to
ensure that any offers and sales made pursuant to the Purchase Agreements or
this Agreement comply with the laws and regulations of all foreign regulatory
and/or self-regulatory authorities, including, without limitation, the
Financial Services Act 1986 and the Public Offers of Securities Regulations
1995.
3.6. Representations and Warranties at the Closing. Each of the
representations and warranties contained in this Section 3 is true and correct
as of the date of this Agreement and will be true and correct as of the Closing
Date, except to the extent such representations and warranties expressly relate
to an earlier date.
4. Representations, Warranties and Agreements to Survive Delivery.
Notwithstanding any investigation made by or on behalf of the Placement Agent
or any controlling person, director, officer or agent of the Placement Agent or
by or on behalf of the Company or any controlling person, director, officer or
agent of the Company, all representations, warranties, covenants and agreements
made by either party in this Agreement shall survive the execution of this
Agreement, the delivery of the Shares to the Purchasers and the receipt by the
Company of payment for the Shares.
5. Covenants of the Company.
5.1. No Other Offers of Sales. Until the end of the Restricted
Period, neither the Company or any affiliate of the Company nor anyone acting
on behalf of the Company or any such affiliate, other than the Placement Agent
and its agents and affiliates, shall directly or indirectly, offer or sell, or
attempt to offer, sell or dispose of, any of the Shares, or solicit any offer
to buy any Shares from, or otherwise approach or negotiate with respect thereto
with, any person, except for any of the foregoing arranged by, or conducted
with, the Placement Agent, or about which the Placement Agent otherwise has
knowledge, including, without limitation, the Company's preparation and
distribution of the Offering Memorandum, negotiation of, and entry into, this
Agreement, the Purchase Agreements and the agreements and documents referred to
in those agreements, and the Company's discussions with prospective investors
arranged by the Placement Agent.
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<PAGE> 9
5.2. Updating Disclosures. The Company shall promptly notify the
Placement Agent if, because of the occurrence of any event or condition, the
passing of time or otherwise, the Offering Memorandum as of its date or as of
the Closing Date contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements in Offering Memorandum,
in light of the circumstances under which they were made, not misleading. In
such an event, the Offering Memorandum shall be amended or supplemented in form
and substance satisfactory to the Placement Agent and the Company so that after
giving effect to such amendment or supplement, the Offering Memorandum will not
contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements, in light of the circumstances under
which they were made, not misleading.
5.3. Foreign Securities Qualification. The Company shall furnish
such information, execute such instruments and take such action, if any, as may
be reasonably requested by the Placement Agent to effect the placement of the
Shares under the securities laws of each jurisdiction in which the Company
agrees that the Shares may be offered or sold; provided, however, that the
Company shall not be required to qualify to do business in any jurisdiction
where it is not now so qualified or to take any action that would subject it to
general or unlimited service of process or taxation in any jurisdiction where
it is not now so subject.
5.4. Press Release; Form 8-K. The Company will not at any time
issue a press release to announce the Offering of the Shares (i) without the
prior consent of the Placement Agent, (ii) prior to having furnished the
Placement Agent with a copy of the proposed form of the press release and
giving the Placement Agent a reasonable opportunity to review and comment upon
the same, or (iii) in a manner to which the Placement Agent or its counsel
shall reasonably object, unless the Company is required to do so by applicable
law. The Company will not file a Form 8-K reporting the Offering of the Shares
with the Securities and Exchange Commission prior to having furnished the
Placement Agent with a copy of the proposed form of the Form 8-K and giving the
Placement Agent a reasonable opportunity to review and comment upon the same.
The Placement Agent acknowledges receipt of the proposed form of press release
and the proposed form of Form 8-K attached as Exhibit A, acknowledges that it
had a reasonable opportunity to review and comment on the same and consents to,
and does not (nor does its counsel) object to, their issuance and filing.
5.5. Company Lock Up. During the period beginning on the Closing
Date and ending 60 days after the Closing Date, the Company will not, without
the prior written consent of the Placement Agent, offer, issue, sell or deliver
(whether through the issuance or granting of options, warrants, commitments,
subscriptions, rights to purchase or otherwise) any of its Common Shares or any
other securities or obligations convertible into or exchangeable for, or giving
any person any right to acquire from it, any Common Shares (hereinafter, with
the exceptions described below, collectively referred to as "Stock Issuances"),
except for (i) the issuance and sale of the Shares, (ii) the issuance of
options or warrants pursuant to any employee, executive, officer, director,
agent, advisor or consultant benefit, incentive, stock option, or profit
sharing plan of the Company, (iii) the issuance or sale by the Company of any
Common Shares pursuant to the exercise of any such options or warrants, (iv)
the issuance or sale by the Company of any options
9
<PAGE> 10
or warrants to any employee, executive, officer, director, agent, advisor or
consultant of the Company or the issuance or sale of any Common Shares upon
exercise of any such options or warrants, (v) the issuance or sale by the
Company of any Common Shares pursuant to (A) the exercise of any options or
warrants previously issued and outstanding or authorized on the Closing Date,
or (B) the conversion of any convertible preferred shares previously issued and
outstanding or authorized on the Closing Date, or (vi) the issuance or sale by
the Company of options, warrants, convertible preferred shares, or Common
Shares pursuant to anti-dilution provisions applicable to the Company or its
securities (collectively, the "Permitted Transactions"). During the period
from the Closing Date until 60 days thereafter, the Company will not, without
the prior written consent of the Placement Agent, file a registration statement
containing a preliminary or final prospectus for a Stock Issuance in a
transaction involving a public offering under the Securities Act pursuant to
such registration statement, except for (i) any filing of a registration
statement containing a preliminary or final prospectus which is required to be
filed by the Company pursuant to the provisions of any agreement between the
Company and any holder of its securities which is in effect on the date of this
Agreement, or (ii) any filing of a post-effective amendment or a supplement to
a registration statement which has become effective on or before the date of
this Agreement.
5.6. Director and Officer Lock-Up. Unless the Placement Agent
shall consent in writing, which consent shall not be unreasonably withheld,
during the period beginning on the Closing Date and ending 60 days thereafter,
the Company will use its best efforts to ensure that none of the directors or
officers of the Company offer, sell or deliver (whether through the exercise of
warrants, options or otherwise) any Common Shares or any other securities or
obligations convertible into or exchangeable for any Common Shares.
5.7. Legal Opinions Regarding Subsequent Transactions. The Company
shall not offer or sell any securities of the same class as the Shares until a
period of three (3) months has elapsed from the Closing Date of the Offering,
unless the Company shall have provided the Placement Agent with a satisfactory
opinion from the Company's legal counsel to the effect that the proposed offer
or sale will not result in any violation of the Securities Act, any state
securities or blue sky laws or any rules or regulations promulgated thereunder.
5.8. Expenses. Subject to the provisions of the Engagement Letter,
regardless of whether the transactions described in this Agreement are
consummated, the Company shall pay all costs and expenses in connection with
(i) the preparation and reproduction of the Offering Memorandum and the
certificates representing the Shares, (ii) the reproduction of the Purchase
Agreements, (iii) the Company's performance of and compliance with all
agreements and conditions contained in this Agreement, the Engagement Letter
and the Purchase Agreements on its part to be performed or complied with, (iv)
all of the Company's expenses incident to the issuance and delivery of the
Shares, and (v) the fees, disbursements and expenses of the Company's legal
counsel and accountants.
10
<PAGE> 11
6. Indemnification and Contribution.
6.1. Indemnification by the Company The Company agrees to defend,
indemnify, and hold the Placement Agent and its respective officers, directors,
agents, employees, and controlling persons (each in the context of this Section
6.1 an "Indemnified Party") harmless from and against any losses, claims,
damages, or liabilities (including, without limitation, court costs and
reasonable attorneys' fees and expenses) to which any Indemnified Party may
become subject insofar as the same arises from an action which alleges or is
based upon any alleged untrue statement of a material fact, or omission of a
material fact, or any other violation of applicable securities or other laws,
rules or regulations by the Company or its officers, agents, employees or
controlling persons irrespective of the role or concurrent negligence of any
such Indemnified Party and to reimburse each Indemnified Party for any legal or
other expenses reasonably incurred by them in connection with investigating,
settling, or defending any action or claim in connection therewith (including,
without limitation, court costs and reasonable attorneys' fees); provided,
however, that the Company shall not be liable to so indemnify, defend or hold
harmless any Indemnified Party in any such case to the extent that any such
loss, claim, damage, or liability is found in a final judgment of a court of
competent jurisdiction to have resulted from an Indemnified Party's gross
negligence or bad faith in performing their services hereunder.
If for any reason the foregoing indemnification is unavailable to any
Indemnified Party or insufficient to hold such Indemnified Party harmless, then
the Company shall contribute to the amount paid or payable by such Indemnified
Party as a result of such loss, claim, damage, or liability in such proportion
as is appropriate to reflect not only the relative benefits received by the
Company on the one hand and the Indemnified Party on the other hand but also
the relative fault of the Company and the Indemnified Party, as well as any
other relevant equitable considerations. The Company agrees to reimburse the
Indemnified Party within ten days after presentation of any statement by the
Indemnified Party of all reasonable expenses (including, without limitation of
the generality of the foregoing, reasonable fees and expenses of attorneys
selected by each Indemnified Party) incurred in connection with any testimony
the Indemnified Party or its employees are required to give (in court, before a
regulatory agency, by deposition, or otherwise) in any regulatory or court
proceeding (including depositions), whether or not the Indemnified Party is a
party, and which related directly or indirectly to the Offering.
6.2. Reasonable Reliance. With respect to Section 6.1, the Company
agrees that no Indemnified Party shall be deemed to have been grossly negligent
for reasonably relying upon any written untrue statement or alleged omission of
a material fact necessary to make the statements, in light of the circumstances
in which made, not misleading, contained in or omitted from any information
provided to any Indemnified Party by or on behalf of the Company (including,
without limitation of the generality of the foregoing, any accountant or
attorney employed or retained by the Company). The indemnification provided in
Section 6.1 shall extend upon the same terms and conditions to each person, if
any, who may be deemed to control any Indemnified Party.
11
<PAGE> 12
6.3. Indemnification Procedures. In the event any action (with
respect to which indemnity or reimbursement from the Company may be sought by
any Indemnified Party pursuant to the provisions of Section 6.1) shall be
brought or threatened against an Indemnified Party, prompt notice of such
action shall be given by such Indemnified Party to the Company in writing,
together with a copy of all papers served on, or received by, such Indemnified
Party in connection with such action; provided, however, that failure to give
such notice shall not affect the Indemnified Party's rights under these
indemnification provisions, unless, and only to the extent that, such failure
results in the Company's forfeiture of substantive rights or defenses. If such
an event occurs, the Company shall assume the defense of such action, including
the employment of counsel and the payment of all expenses. Each Indemnified
Party shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of the Indemnified Party unless (a) the employment
thereof has been specifically authorized by the Company in writing, (b) the
Company has failed to assume the defense and employ counsel, or (c) the named
parties, or parties threatened to be named, to any such action (including any
impleaded parties or parties threatened to be impleaded) include both such
Indemnified Party and the Company, and the Indemnified Party has been advised
by such counsel that there may be one or more legal defenses available to such
Indemnified Party which are different from or additional to those available to
the Company (in which cases each Indemnified Party with a different legal
defense from those of other Indemnified Parties with their own counsel shall
have the right to employ its own counsel and in such cases any reasonable fees
and expenses of such counsel shall be paid by the Company). The Company shall
not be liable for any such action or proceeding effected without its written
consent.
6.4. Indemnification by the Placement Agent. The Placement Agent
shall indemnify, defend and save and hold the Company, any controlling person
of the Company, and its officers, directors, employees, agents and advisors
(each, a "Company Party") harmless from and against any losses, claims, damages
or liabilities (including, without limitation, court costs and reasonable
attorneys' fees and expenses) to which any Company Party may become subject
insofar as the same arises from an action which alleges or is based upon, (i)
any breach by the Placement Agent of any term, provision, condition,
representation, warranty or covenant contained in this Agreement, or (ii) any
actions of the Placement Agent, its agents or representatives inconsistent with
such terms, provisions, conditions, representations, warranties or covenants,
or (iii) any untrue or alleged untrue statement of a material fact contained in
the offering materials relating to the Shares, including, without limitation,
the Offering Memorandum, as amended or supplemented, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in such offering materials or in any other
offering documentation in reliance upon and in conformity with written
information furnished to the Company by the Placement Agent specifically for
use therein, or (iv) any other violation of applicable securities or other
laws, rules or regulations by the Placement Agent or its officers, agents,
employees or controlling persons, and to reimburse any such Company Party for
any legal or other expenses reasonably incurred by them in
12
<PAGE> 13
connection with investigating, settling, or defending any action or claim in
connection therewith (including, without limitation, court costs and reasonable
attorneys' fees).
If for any reason the foregoing indemnification is unavailable to any
Company Party or insufficient to hold such Company Party harmless, then the
Placement Agent shall contribute to the amount paid or payable by such Company
Party as a result of such loss, claim, damage, or liability in such proportion
as is appropriate to reflect not only the relative benefits received by the
Company Party on the one hand and the Placement Agent on the other hand but
also the relative fault of the Company Party and the Placement Agent, as well
as any other relevant equitable considerations. The Placement Agent agrees to
reimburse the Company Party within ten days after presentation of any statement
by the Company Party of all reasonable expenses (including, without limitation
of the generality of the foregoing, reasonable fees and expenses of attorneys
selected by each Company Party) incurred in connection with any testimony the
Company Party or its employees are required to give (in court, before a
regulatory agency, by deposition, or otherwise) in any regulatory or court
proceeding (including depositions), whether or not the Company Party is a
party, and which related directly or indirectly to the Offering.
7. Notices. All notices, demands, consents or other communications under
this Agreement shall be given or made in writing and shall be given or made in
writing and shall be delivered personally, or sent by certified or registered
airmail, postage prepaid, or sent by overnight courier or sent by facsimile
transmission with a confirmation copy sent by mail, and shall be deemed given
when so personally delivered, or if mailed, ten days after the same shall have
been posted or if sent by overnight courier, one business day after the date
such courier confirms in writing that delivery has been made or if sent by
facsimile transmission, at the earlier of (i) as soon as written or telephonic
confirmation is received from the party to whom it was sent that the message
has been received, or (ii) ten days after the confirmation is posted: (a) if
to the Placement Agent, addressed to the Placement Agent at 56 Green Street,
London W1Y 3RH, England, Attention: Alan A. Nash, or to such other address as
the Placement Agent may designate in writing to the Company, or (b) if to the
Company, addressed to the Company at 1653 East Maple Road, Troy, Michigan
48083-4208, United States of America, Attention: Bruce J. Barrett, President
and Chief Executive Officer, or to such other address as the Company may
designate in writing to RPC.
8. Parties. This Agreement shall inure to the benefit of and be binding
upon the Placement Agent, the Company and their respective permitted successors
and assigns. This Agreement may not be assigned by any party without the
consent of the other parties. This Agreement and all conditions and provisions
of this Agreement are intended to be for the sole and exclusive benefit of the
parties to this Agreement and their respective permitted successors and assigns
and for the benefit of no other person.
9. Entire Agreement and Incorporation by Reference. This Agreement
constitutes the entire agreement and understanding of the parties with respect
to the matters and transactions contemplated by this Agreement and supersedes
all prior agreements and understandings whatsoever relating to such matters and
transactions, except for the Engagement Letter. All of
13
<PAGE> 14
the terms and conditions of the Engagement Letter, including all amendments
thereto and restatements thereof, are specifically incorporated by reference
into this Agreement.
10. Amendments. No termination, amendment, interpretation or waiver of
any of the provisions of this Agreement shall be effective unless made in
writing and signed by the parties to this Agreement.
11. Headings. The headings of the sections and subsections of this
Agreement are used for convenience only and shall not affect the meaning or
interpretation of the contents of this Agreement.
12. Enforcement. The failure to enforce or to require the performance at
any time of any of the provisions of this Agreement or the Engagement Letter
shall in no way be construed to be a waiver of such provisions, and shall not
affect either the validity of this Agreement or the Engagement Letter or any
part of this Agreement or the Engagement Letter or the right of any party
thereafter to enforce each and every provision in accordance with the terms of
this Agreement or the Engagement Letter.
13. Governing Law. The laws of the State of Michigan, in the United
States of America, applicable to agreements made and to be performed entirely
therein, without regard to the conflict of law provisions thereof, shall govern
this Agreement and the Engagement Letter, its construction, the relationships
of the parties in connection with the subject matter of this Agreement and the
Engagement Letter and the determination of any rights, duties or remedies of
the parties arising out of, or relating to, this Agreement and the Engagement
Letter.
14. Severability. If any provision of this Agreement or the Engagement
Letter is held to be invalid or unenforceable by any judgment of a tribunal of
competent jurisdiction, the remainder of this Agreement and the Engagement
Letter shall not be affected by such judgment, and this Agreement and the
Engagement Letter shall be carried out as nearly as possible according to its
original terms and intent.
15. Counterparts. This Agreement may be executed in counterparts, all of
which shall constitute one agreement, and each such counterpart shall be deemed
to have been made, executed and delivered on the date set forth in the
introductory paragraph of this Agreement without regard to the dates or times
when such counterparts may actually have been made, executed or delivered.
14
<PAGE> 15
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed and delivered by their duly authorized representatives as of the
day and year set forth in the introductory paragraph of this Agreement.
RAUSCHER PIERCE & CLARK, INC. SOMANETICS CORPORATION
By: /s/ ALAN NASH By: /s/ RAYMOND GUNN
-------------------------- ----------------------------
Its: Vice President Its: EVP and CFO
----------------- --------------------
Attest: Attest:
/s/ BRUCE J BARRETT
- ------------------------------- ---------------------------------
RAUSCHER PIERCE & CLARK LIMITED
By: /s/ ALAN NASH
--------------------------
Its: Director
----------------
Attest:
- -------------------------------
15
<PAGE> 16
SCHEDULE 1
TO THE
PLACEMENT AGENT AGREEMENT
DEFINITION OF U.S. PERSON UNDER REGULATION S
1. U.S. PERSON
(a) "U.S. person" means:
(i) Any natural person resident in the United States;
(ii) Any partnership or corporation organized or
incorporated under the laws of the United States;
(iii) Any estate of which any executor or administrator is
a U.S. person;
(iv) Any trust of which any trustee is a U.S. person;
(v) Any agency or branch of a foreign entity located in
the United States;
(vi) Any non-discretionary account or similar account
(other than an estate or trust) held by a dealer or
other fiduciary for the benefit or account of a U.S.
person;
(vii) Any discretionary account or similar account (other
than an estate or trust) held by a dealer or other
fiduciary organized, incorporated, or (if an
individual) resident in the United States; and
(viii) Any partnership or corporation if: (A) organized or
incorporated under the laws of any foreign
jurisdiction; and (B) formed by a U.S. person
principally for the purpose of investing in
securities not registered under the Securities Act,
unless it is organized or incorporated, and owned, by
accredited investors (as defined in Rule 501(a) of
the Securities Act) who are not natural persons,
estates or trusts.
(b) Notwithstanding paragraph (1)(a) of this rule, any discretionary
account or similar account (other than an estate or trust) held for
the benefit or account of a non-U.S. person by a dealer or other
professional fiduciary organized, incorporated, or (if an individual)
resident in the United States shall not be deemed a "U.S. person."
(c) Notwithstanding paragraph (1)(a) of this rule, any estate of which any
professional fiduciary acting as executor or administrator is a U.S.
person shall not be deemed a U.S. person if:
(i) An executor or administrator of the estate who is not
a U.S. person has sole or shared investment
discretion with respect to the assets of the estate;
and
(ii) The estate is governed by foreign law.
16
<PAGE> 17
(d) Notwithstanding paragraph (1)(a) of this rule, any trust of which any
professional fiduciary acting as a trustee is a U.S. person shall not
be deemed a U.S. person if a trustee who is not a U.S. person has sole
or shared investment discretion with respect to the trust assets, and
no beneficiary of the trust (and no settlor if the trust is revocable)
is a U.S. person.
(e) Notwithstanding paragraph (1)(a) of this rule, an employee benefit
plan established and administered in accordance with the law of a
country other than the United States and customary practices and
documentation of such country shall not be deemed a U.S. person.
(f) Notwithstanding paragraph (1)(a) of this rule, any agency or branch of
a U.S. person located outside the United States shall not be deemed a
"U.S. person" if:
(i) The agency or branch operates for valid business
reasons; and
(ii) The agency or branch is engaged in the business of
insurance or banking and is subject to substantive
insurance or banking regulation, respectively, in the
jurisdiction where located.
(g) The International Monetary Fund, the International Bank for
Reconstruction and development, the Inter-American Development Bank,
the Asian Development Bank, the African Development Bank, the United
Nations, and their agencies, affiliates and pension plans and any
other similar international organizations, their agencies, affiliates
and pension plans shall not be deemed "U.S. persons."
2. UNITED STATES. "United States" means the United States of America,
its territories and possessions, any State of the United States, and the
District of Columbia.
17
<PAGE> 1
EXHIBIT 10.62
January 17, 1997
Brean Murray & Co., Inc.
570 Lexington Avenue, 11th Floor
New York, NY 10022
Attn: Mr. A. Brean Murray
Re: Public Offering of Common Stock
Dear Mr. Murray:
This letter agreement (the "Letter Agreement") confirms the agreement of
Somanetics Corporation (the "Company") to exclusively retain Brean Murray &
Co., Inc. as the managing underwriter (the "Underwriter") to underwrite the
sale by the Company of 1,200,000 primary shares of the Company's common stock,
$0.01 par value (the "Common Stock"), after giving effect to a 1 for 10 reverse
split. Prior to the filing of the registration statement with the Securities
and Exchange Commission, the Company shall (i) effect a 1 for 10 reverse split
of its Common Stock and (ii) authorize and place into effect a proper stock
option plan. The Letter Agreement also confirms the agreement of the Company
to grant to the Underwriter an option to purchase an additional 180,000 shares
of Common Stock to cover over-allotments for a period of 30 days following the
aforementioned sale of the shares of Common Stock. The term of this engagement
commences as of the date of this letter and expires on December 31, 1997,
unless extended by the parties hereto.
1. The Company and the Underwriter shall enter into an underwriting
agreement in such customary form as shall be acceptable to all parties,
setting forth, without limitation, indemnification provisions and the
conditions of the parties' respective obligations and 180-day lock-up for
officers, directors and principal shareholders. In addition, the
obligation of the Underwriter to enter into an underwriting agreement
pursuant to the proceeding sentence is subject to the satisfactory
completion of a due diligence investigation of the Company by the
Underwriter and its agents.
2. The Underwriter's aggregate fee for underwriting the sale of Common Stock
referred to in the first paragraph of this Letter Agreement shall be 8% of
the aggregate proceeds resulting from the sale of such shares of Common
Stock. The Company will
<PAGE> 2
Mr. A. Brean Murray
January 17, 1997
page two
also sell to the Underwriter for $100 a five year warrant, with cashless
exercise provisions (the "Warrant"), not to be exercised the first year,
to purchase an amount of shares equal to 10% of the shares of Common Stock
sold in the Offering (without giving effect to the over-allotment option)
at a purchase price equal to 120% of the purchase price set forth on the
cover page of the prospectus. The Company shall also reimburse the
Underwriter for all its accountable out-of-pocket fees and expenses,
including legal fees, whether or not the transactions contemplated hereby
are consummated, up to an aggregate amount of $250,000. Furthermore, the
Company shall pay: (i) National Association for Securities Dealers, Inc.
expenses, including counsel and filing fees, and (ii) "blue sky" expenses,
including counsel and filing fees.
3. THIS LETTER AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW
YORK GOVERNING CONTRACTS MADE AND TO BE PERFORMED IN SUCH STATE WITHOUT
GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS.
4. This Letter Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original and all of which together shall
be deemed to be the same agreement.
5. If the foregoing is in accord with your understanding of our agreement,
please sign in the space provided on the duplicate original hereof and
return a signed duplicate original to the Company.
Sincerely,
Somanetics Corporation
By:_________________________
Bruce J. Barrett
President and CEO
Accepted this _____day of January 1997
Brean Murray & Co., Inc.
By:___________________________
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-93538, 33-41453, 33-48646, 33-77080 and 333-4620 on Forms S-8 and 33-60260
on Form S-3 of Somanetics Corporation of our report dated January 24, 1997
(which expresses an unqualified opinion and includes an explanatory paragraph
relating to an uncertainty concerning the Company's ability to continue as a
going concern), appearing in the Annual Report on Form 10-K of Somanetics
Corporation for the year ended November 30, 1996.
/S/DELOITTE & TOUCHE LLP
- ------------------------
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 3, 1997
<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 FISCAL
YEAR ENDED, NOVEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AND ACCOMPANYING NOTES TO FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<CASH> 3,291,911
<SECURITIES> 0
<RECEIVABLES> 237,436
<ALLOWANCES> 46,000
<INVENTORY> 931,135
<CURRENT-ASSETS> 4,479,917
<PP&E> 839,870
<DEPRECIATION> 743,775
<TOTAL-ASSETS> 4,671,741
<CURRENT-LIABILITIES> 618,142
<BONDS> 0
0
0
<COMMON> 228,537
<OTHER-SE> 3,825,062
<TOTAL-LIABILITY-AND-EQUITY> 4,671,741
<SALES> 778,200
<TOTAL-REVENUES> 778,200
<CGS> 385,136
<TOTAL-COSTS> 385,136
<OTHER-EXPENSES> 3,785,293
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 449
<INCOME-PRETAX> (3,303,703)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,303,703)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,303,703)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
