<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 16, 1997.
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SOMANETICS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
MICHIGAN 3845 38-2394784
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
1653 EAST MAPLE ROAD
TROY, MICHIGAN 48083-4208
(810) 689-3050
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
BRUCE J. BARRETT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SOMANETICS CORPORATION
1653 EAST MAPLE ROAD
TROY, MICHIGAN 48083-4208
(810) 689-3050
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C>
ROBERT J. KRUEGER MICHAEL HIRSCHBERG
HONIGMAN MILLER SCHWARTZ AND COHN PIPER & MARBURY L.L.P.
2290 FIRST NATIONAL BUILDING 1251 AVENUE OF THE AMERICAS
DETROIT, MICHIGAN 48226 NEW YORK, NEW YORK 10020-1104
(313) 256-7675 (212) 835-6270
FAX NO.: (313) 962-0176 FAX NO.: (212) 835-6001
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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============================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares, par value $.01 per 2,070,000 $5.50 $11,385,000 $3,450
share.................................
============================================================================================================================
</TABLE>
(1) Includes 270,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee, based on
a bona fide estimate of the maximum public offering price pursuant to Rule
457(a), based on the closing sale price of the Common Shares on April 15,
1997.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
SUBJECT TO COMPLETION, DATED APRIL 16, 1997
PROSPECTUS
1,800,000
[SOMANETICS LOGO]
COMMON SHARES
------------------------
All of the 1,800,000 Common Shares, par value $.01 per share ("Common
Shares"), offered hereby are being sold by Somanetics Corporation ("Somanetics"
or the "Company").
Since December 27, 1994, the Company's Common Shares have been included in
The Nasdaq SmallCap Market under the symbol "SMTS." From November 30, 1994 until
December 27, 1994, the Common Shares traded in the over-the-counter market, and
from August 18, 1992 until November 30, 1994, the Common Shares were included in
The Nasdaq National Market. Before that, and since the Company's initial public
offering on March 20, 1991, the Common Shares were included in The Nasdaq Stock
Market. On April 15, 1997, the last reported sales price of the Company's Common
Shares was $5.50.
------------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7 HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS(1) TO COMPANY(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share....................... $ $ $
- -------------------------------------------------------------------------------------------------------------
Total(3)........................ $ $ $
</TABLE>
================================================================================
(1) Excludes the value of warrants to be issued to the representative of the
Underwriters (the "Representative") to purchase up to 180,000 Common Shares
(the "Representative's Warrants"). The Company has agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company estimated
to be $600,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 270,000 additional Common Shares on the same terms and
conditions as the Common Shares offered hereby solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ , respectively.
See "Underwriting."
The Common Shares offered hereby are offered by the Underwriters, subject
to prior sale when, as and if delivered to and accepted by the Underwriters and
subject to certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
It is expected that delivery of the certificates representing Common Shares will
be made at the offices of Brean Murray & Co., Inc. in New York, New York on or
about , 1997.
------------------------
BREAN MURRAY & CO., INC.
------------------------
The date of this Prospectus is , 1997.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
<PAGE> 3
WINDOW TO THE BRAIN
[Picture of SomaSensor
being placed on patient]
The Cerebral Oximeter is the
only FDA-cleared,
non-invasive patient
monitoring system that
provides continuous
information about changes in
the blood oxygen level in
the adult brain. The brain
is the organ least tolerant
of oxygen deprivation.
Without sufficient oxygen,
brain damage may occur
within a few minutes, which
can result in paralysis,
severe and complex
disabilities or death.
The SomaSensor is a single-use, disposable
sensor that avoids cross-contamination and
requires purchasers of the Cerebral Oximeter
to purchase SomaSensors on a regular basis.
[Picture of Cerebral Oximeter]
BENEFITS OF THE
CEREBRAL OXIMETER
- - Non-invasive
- - Continuous information
- - Organ specific
- - Relatively inexpensive
- - Easy-to-use
- - Effective in difficult
circumstances
- - Portable
Surgeons, anesthesiologists and other critical care
medical professionals use the information provided
by the Cerebral Oximeter to identify brain oxygen
imbalances and take corrective action.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF COMMON SHARES,
INCLUDING STABILIZING, SYNDICATE SHORT COVERING AND PENALTY BID TRANSACTIONS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON SHARES ON NASDAQ IN ACCORDANCE
WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 4
Risk Factors................................................ 7
Use of Proceeds............................................. 15
Price Range of Common Shares and Dividend Policy............ 16
Capitalization.............................................. 17
Dilution.................................................... 18
Selected Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business.................................................... 27
Management.................................................. 40
Certain Transactions........................................ 48
Principal Shareholders...................................... 49
Description of Capital Stock................................ 50
Underwriting................................................ 52
Legal Matters............................................... 53
Experts..................................................... 53
Available Information....................................... 53
Glossary.................................................... 55
Index to Financial Statements............................... F-1
</TABLE>
------------------------
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any security
other than in connection with the offer made by this Prospectus, nor does it
constitute an offer to sell or a solicitation of any offer to buy the Common
Shares offered hereby in any jurisdiction in which such an offer or solicitation
is not authorized, or in which the person making such offer or solicitation is
not qualified to do so, or to any person to whom it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any time subsequent to its date.
3
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes to Financial Statements appearing
elsewhere in this Prospectus, including information under "Risk Factors." The
Common Shares offered hereby involve a high degree of risk and investors should
carefully consider information set forth in "Risk Factors." Unless otherwise
indicated, all information contained in this Prospectus (i) gives effect to a
1-for-10 reverse split effected April 10, 1997 and (ii) assumes that the
Underwriters' over-allotment option as described in "Underwriting" is not
exercised.
THE COMPANY
Somanetics develops, manufactures and markets the INVOS(R) 3100A Cerebral
Oximeter (the "Cerebral Oximeter"), the only FDA-cleared, non-invasive patient
monitoring system that continuously measures changes in the blood oxygen level
in the adult brain. The Cerebral Oximeter was developed to meet the need for
information about oxygen in the brain, the organ least tolerant of oxygen
deprivation. Without sufficient oxygen, brain damage may occur within a few
minutes, which can result in paralysis, severe and complex disabilities or
death. Brain oxygen information, therefore, is important, especially in surgical
procedures requiring general anesthesia and in other critical care situations
with a high risk of brain oxygen imbalances.
The Company is initially targeting cardiovascular and vascular surgeries
and surgeries on elderly patients involving abnormal blood pressure, because
these surgeries involve a high risk of brain oxygen imbalances, both during and
after surgery. Surgeons, anesthesiologists and other medical professionals use
the Cerebral Oximeter to identify brain oxygen imbalances and take corrective
action, potentially improving patient outcome and reducing the cost of care.
Industry sources estimate that in the United States, based on a 1995 survey,
more than 24 million surgeries were performed and, according to another report,
in 1993, there were more than 4.4 million surgeries involving the heart or blood
vessels around the heart.
The Cerebral Oximeter is a relatively inexpensive, portable and easy-to-use
monitoring system placed at a patient's bedside in hospital critical care areas,
especially operating rooms, recovery rooms, intensive care units ("ICUs") and
emergency rooms. It is comprised of (i) a portable unit including a computer and
a display monitor, (ii) a single-use, disposable sensor, the SomaSensor(R),
(iii) proprietary software and (iv) a preamplifier cable. The SomaSensor is
adhered to a patient's forehead and connected to the computer through the
preamplifier cable. The computer uses the Company's proprietary software to
analyze information received from the SomaSensor and provides a continuous
digital and trend display on the monitor of an index of the oxygen saturation in
the area of the brain under the SomaSensor. Users of the Cerebral Oximeter will
be required to purchase disposable SomaSensors on a regular basis because of
their single-use nature.
The Cerebral Oximeter is based on the Company's proprietary In Vivo Optical
Spectroscopy ("INVOS") technology. INVOS analyzes 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 use of optical
spectroscopy in the body has not generally been useful when the substances to be
measured are surrounded by, are behind or are near bone, 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. 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 optical spectroscopy.
Under the direction of the Company's President and Chief Executive Officer,
Bruce Barrett, formerly with Abbott Laboratories, the Company obtained FDA
clearance in June 1996 to sell the Cerebral Oximeter in the United States and
implemented a new business strategy. The Company's objective is to establish the
Cerebral Oximeter as a "standard of care" in surgical procedures requiring
general anesthesia and in other critical care situations. Key elements of the
Company's strategy are (i) target surgical procedures with a high risk of brain
oxygen imbalances, (ii) demonstrate the clinical benefits, and promote
acceptance, of the Cerebral Oximeter, (iii) expand marketing and sales
activities, (iv) develop additional applications of the Cerebral Oximeter and
(v) license technology to medical device manufacturers. In addition, the Company
is analyzing the feasibility of other applications of its technology.
4
<PAGE> 6
The Company sells the Cerebral Oximeter in the United States through its
direct sales force and five independent distributors. Internationally, the
Company sells its product through 27 independent distributors covering 78
countries, including Baxter Limited in Japan. Since FDA clearance in June 1996
through April 11, 1997, the Company sold 61 Cerebral Oximeters to distributors
and customers. United States hospitals that have purchased Cerebral Oximeters
include the Mayo Clinic Scottsdale, the University of Kentucky Hospital,
LAC-University of Southern California, UCLA Medical Center and Orlando Regional
Medical Center. In addition, Cerebral Oximeters are in use at more than 100
United States hospitals for clinical research and product evaluation, including
the Duke Heart Center, Emory University School of Medicine, Brigham & Women's
Hospital, University of Louisville Hospital and the University of Pittsburgh.
The Company, a development stage company, was incorporated in the State of
Michigan on January 15, 1982. The Company's headquarters are located at 1653
East Maple Road, Troy, Michigan 48083-4208. Its telephone number is (810)
689-3050.
THE OFFERING
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Common Shares Offered by the Company................. 1,800,000 shares
Common Shares Outstanding After the Offering(1)...... 4,085,351 shares
Use of Proceeds...................................... To finance the Company's operations, including
marketing and sales activities, research and
development programs and for other general
corporate purposes, including working capital.
See "Use of Proceeds."
Nasdaq Symbol........................................ "SMTS"
</TABLE>
- ---------------
(1) Excludes (i) an aggregate of up to 622,646 Common Shares reserved for
issuance under the Company's 1983 Stock Option Plan, 1991 Incentive Stock
Option Plan, 1993 Director Stock Option Plan, 1997 Stock Option Plan and
nonplan options, of which options to purchase an aggregate of 313,792 Common
Shares were outstanding as of April 11, 1997, (ii) 79,394 Common Shares
issuable upon the exercise of warrants (the "Placement Agent Warrants")
issued in connection with Regulation S financings completed in August 1994,
July 1995 and April 1996 (the "Regulation S Offerings"), (iii) 115,520
Common Shares issuable upon the exercise of warrants (the "Regulation S
Warrants") issued in connection with the Regulation S Offerings completed in
July 1995 and April 1996 and (iv) 180,000 Common Shares issuable upon
exercise of the Representative's Warrants. See Notes 3, 8 and 11 of Notes to
Financial Statements.
5
<PAGE> 7
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------- FISCAL YEAR ENDED NOVEMBER 30,
FEBRUARY 28, FEBRUARY 29, -----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------------ ------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................... $ 354 $ 515 $ 778 $ 1,336 $ 938 $ 1,547 $ 50
Cost of sales................. 180 211 385 658 464 763 48
Gross margin.................. 174 304 393 678 474 784 2
Research, development and
engineering expenses........ 164 50 235 286 550 1,150 1,190
Selling, general and
administrative expenses..... 1,359 590 3,550 3,303 4,347 6,063 4,313
Net loss...................... (1,308) (320) (3,304) (2,818) (4,332) (6,136) (5,391)
Net loss per Common
Share(1).................... (.57) (.18) (1.77) (1.67) (3.41) (5.75) (5.96)
Weighted average number of
Common Shares
outstanding(1).............. 2,285 1,778 1,867 1,684 1,270 1,068 905
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28, 1997
-------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 1,845 $ 10,353
Working capital............................................. 2,577 11,085
Total assets................................................ 3,367 11,875
Long-term debt.............................................. -- --
Deficit accumulated during the development stage............ (31,519) (31,519)
Shareholders' equity(3)..................................... 2,757 11,265
</TABLE>
- ---------------
(1) See Note 4 of Notes to Financial Statements included in this Prospectus for
information with respect to the calculation of per share data. The net loss
per Common Share data and weighted average number of Common Shares
outstanding data have been adjusted to give effect to the 1-for-10 reverse
stock split effected April 10, 1997.
(2) Adjusted to reflect the sale of 1,800,000 Common Shares offered by the
Company hereby at the offering price set forth on the cover page of this
Prospectus (after deducting underwriting discounts and commissions and
estimated offering expenses) and the application of the estimated net
proceeds from such sale. See "Use of Proceeds" and "Capitalization."
(3) See Statements of Shareholders' Equity (Deficiency) of the Financial
Statements included in this Prospectus for an analysis of Common Share
transactions for the period from January 15, 1982 (date of inception)
through February 28, 1997.
6
<PAGE> 8
RISK FACTORS
This Prospectus contains certain forward-looking statements within the
meaning of the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended. Actual results could differ materially from those
projected in the forward-looking statements as a result of certain risks and
uncertainties set forth below and elsewhere in this Prospectus. An investment in
the Common Shares offered hereby involves a high degree of risk. Prospective
investors should carefully consider the following risk factors, in addition to
the other information set forth in this Prospectus, in connection with an
investment in the Common Shares offered hereby.
HISTORY OF LOSSES AND GOING CONCERN UNCERTAINTY
The Company has been in the development stage since its inception in 1982
and has incurred net losses in every year of its existence. From its inception
on January 15, 1982 through February 28, 1997, the Company incurred a cumulative
net loss of $31,499,623, including a net loss of $3,303,703 for the fiscal year
ended November 30, 1996 and $1,308,412 for the three months ended February 28,
1997. The Company should be evaluated in light of the delays, expenses, problems
and uncertainties frequently encountered by development stage companies. Due to
a number of factors, including the need for customer education about the
clinical benefits of the Cerebral Oximeter, the lengthy sales cycle, the need to
attract and service a customer base, the ability to manufacture its product on a
commercial scale in a cost-effective manner, the development of new products and
increased expenses in fiscal 1997 primarily due to the increase in the number of
employees, the Company does not believe that product sales will be sufficient to
support its operations in fiscal 1997. Therefore, in the foreseeable future, the
Company believes that such expenses will increase the Company's net losses, and
there can be no assurance that the Company will ever be profitable. Due to the
Company's history of losses and its current financial condition, the Company's
independent auditors' report expresses an uncertainty concerning the Company's
ability to continue as a going concern. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," Note 2 of Notes to
Financial Statements and "Independent Auditors' Report."
DEPENDENCE ON THE CEREBRAL OXIMETER AND SOMASENSOR
The Cerebral Oximeter and the related SomaSensor are currently the
Company's only commercial product and will account for substantially all of the
Company's revenues for the foreseeable future. The Company received clearance
from the FDA in June 1996 and commercially reintroduced the Cerebral Oximeter in
the United States shortly thereafter. The Company has limited experience in
manufacturing, marketing and selling the Cerebral Oximeter. The Cerebral
Oximeter has not had extensive use in a commercial environment and has not been
evaluated for every medical procedure in which it might be used. Further
research or use of the Cerebral Oximeter might reveal unexpected problems with
its operation or performance, especially in connection with medical procedures
for which the system has not yet been evaluated. Although the Company's testing
of the Cerebral Oximeter to date indicates clinical benefits, subsequent
performance problems could prevent acceptance of the product by the medical
community, result in unanticipated expense and adversely affect future sales of
its product. Since the Cerebral Oximeter and the related SomaSensor represent
the Company's primary near-term focus, if the market for the Cerebral Oximeter
fails to develop, or fails to develop as rapidly as expected, the Company's
business, financial condition and results of operations could be adversely
affected. Although the Company is developing other products, there can be no
assurance that any commercial products will result from its efforts.
UNCERTAINTY OF ACCEPTANCE BY THE MEDICAL COMMUNITY
To date, the medical community has had little exposure to the Company or
its technology. Because the medical community is often skeptical of new
companies and new technologies, no assurance can be given that members of the
medical community will perceive a need for the Cerebral Oximeter or be convinced
of its clinical benefits. In addition, hospital capital equipment purchasing
decisions are often made by hospital purchasing committees that might not
include the user of the monitoring system. In such a case, such committees will
have to be convinced to purchase the Company's product. Even if the Company is
successful
7
<PAGE> 9
in convincing physicians, other medical professionals and their hospital
purchasing committees of the 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. In
many cases, these constraints are due to hospital cost controls, increased
managed care and fixed reimbursements for the medical procedures in which the
Cerebral Oximeter is used. If the Company's product fails to achieve market
acceptance, the Company's business, financial condition and results of
operations could be adversely affected.
Part of the Company's marketing strategy is to support clinical research
programs and encourage peer-to-peer selling. While the Company believes
favorable peer review is a key element to a product's acceptance by the medical
community, there can be no assurance that additional papers will be submitted or
that any such papers will help the Company sell Cerebral Oximeters. In addition,
researchers might publish adverse results. For example, in fiscal 1993
researchers in the United Kingdom published adverse results from research
regarding an earlier prototype of the Cerebral Oximeter. While publications in
fiscal 1996 were generally favorable, some researchers published adverse results
after using the Cerebral Oximeter beyond its indicated use. Negative reaction to
these publications, the Company's financial condition and the rescission of the
Company's previous FDA clearance for the Cerebral Oximeter could adversely
affect the Company's reputation in the medical community and, as a result, its
ability to market and sell its product. See "Business -- Marketing, Sales and
Distribution."
LENGTHY SALES CYCLE
The decision-making process for the Company's customers is often complex
and time-consuming. Based on its limited experience, the Company believes the
period between initial discussions concerning the Cerebral Oximeter and a
purchase of even one unit is a minimum of six to nine months. The process can be
delayed even further as a result of hospital capital budgeting procedures.
Moreover, even if one or two units are sold to a hospital, the Company believes
that it will take additional time and experience with the Cerebral Oximeter
before additional medical professionals in the hospital might be interested in
using the Cerebral Oximeter in other procedures or other areas of the hospital.
These delays could have an adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Marketing, Sales and
Distribution."
COMPETITION
The Company believes that the market for cerebral oximetry products, if it
develops, may become highly competitive. The Company is aware of foreign
companies that have sold products relating to cerebral metabolism monitoring for
research or evaluation. In addition, the medical equipment industry is
characterized by intense competition and extensive research and development.
Other companies and individuals are engaged in research and development of
non-invasive cerebral oximeters, and the Company believes there are many other
potential entrants into the market, including the Critikon division of Johnson &
Johnson. Some of these potential competitors have well established reputations,
customer relationships and marketing, distribution and service networks, and
have substantially longer histories in the medical equipment industry, larger
product lines, and greater financial, technical, manufacturing, research and
development and management resources than those of the Company. Many of these
potential competitors have long-term product supply relationships with the
Company's potential customers. These potential competitors may succeed in
developing products that are at least as reliable and effective as the Company's
product, that make additional measurements, or that are less costly than the
product developed by the Company. These potential competitors may be more
successful than the Company in manufacturing and marketing their products, and
may be able to take advantage of the significant time and effort invested by the
Company to gain medical acceptance of cerebral oximetry. In addition, two
patents issued to an unaffiliated third party and relating to cerebral oximetry
will expire in the next year, making that technology generally available and
potentially helping the development of competing products. Successful commercial
development of competing products could lead to loss of market share and lower
margins and have an adverse effect on the Company's business, financial
condition and results of operations.
The Company also competes indirectly with numerous companies that sell
various types of medical equipment to hospitals for the limited amount of
funding allocated to capital equipment in hospital budgets.
8
<PAGE> 10
The market for medical equipment is subject to rapid change due to an
increasingly competitive, cost-conscious environment and to government programs
intended to reduce the cost of medical care. Many of these manufacturers of
medical equipment are large, well-established companies whose resources,
reputations and ability to leverage existing customer relationships may give
them a competitive advantage over the Company. The Company's product and
technology also compete indirectly with many other methods currently used to
measure blood oxygen levels or the effects of low blood oxygen levels. See
"Business -- Market Overview," and "-- Competition."
NEED FOR ADDITIONAL FINANCING
The Company expects that the net proceeds of this offering will be adequate
to satisfy its operating and capital requirements at least into the second half
of fiscal 1998. However, changes in the Company's business or business plan or
unexpected expenses could affect the Company's capital requirements. The
Company's future capital requirements will depend on many factors, including,
but not limited to, the cost of marketing and assembly activities, whether it
can successfully market its product, the rate of market acceptance, if any, the
scope of research and development programs, the length of time required to
collect accounts receivable, and competing technological and market
developments. If additional financing is needed, it might not be available on
terms acceptable to the Company or at the times required by the Company, if at
all, and such financing might dilute the interests of existing shareholders. See
"Use of Proceeds," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced, and expects to continue to experience,
significant fluctuations in its quarterly operating results. The Company's
future operating results are dependent upon a number of factors, including, but
not limited to, the demand for its product, the timing of its sales, the length
of its sales cycle, the timing and development of any competing products, the
publication of clinical research results regarding the product, the use of the
Company's product as a "standard of care" by any hospitals, the timing of new
employee hiring and economic conditions, both generally and in the medical
equipment industry. In particular, the Company does not expect to have a
material backlog of unfilled orders, so any shortfall in demand for the
Company's product in relation to the Company's expectations, or any material
delay in orders from distributors or customers, could have an almost immediate
impact on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE UPON MANAGEMENT AND KEY PERSONNEL
The Company's future performance depends in significant part upon the
continued service of its senior management, including Bruce J. Barrett,
President and Chief Executive Officer, Raymond W. Gunn, Executive Vice President
and Chief Financial Officer, and certain scientific, technical and manufacturing
personnel. The loss of any of such key personnel by the Company could have an
adverse effect on the Company. The Company also plans to hire additional key
employees in fiscal 1997. Competition for qualified employees is intense, and an
inability to attract, retain and motivate additional, highly-skilled employees
required for the expansion of the Company's operations could adversely affect
the Company's business, financial condition and results of operations. The
Company's ability to retain existing employees and attract new employees may be
adversely affected by its current financial situation. There can be no assurance
that the Company will be able to retain its existing personnel or attract
additional, qualified persons when required and on acceptable terms. See
"Business -- Employees," and "Management."
DEPENDENCE ON DISTRIBUTORS
The Company is substantially dependent on its distributors to generate
sales of Cerebral Oximeters, especially internationally. Although the Company
believes its current distributors to be knowledgeable and 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
9
<PAGE> 11
technology or the Cerebral Oximeter to demonstrate adequately its operation and
clinical benefits. Failure of distributors to market, promote and sell the
Company's product adequately would have an adverse effect on the Company's
business, financial condition and results of operations.
There can be no assurance that the Company will be able to engage
additional distributors on a timely basis or enter into other third-party
marketing arrangements, and retain or replace its existing distributors. The
Company's inability to engage, replace or retain distributors could have an
adverse effect on its ability to market and sell its product. Distributor
terminations might increase the Company's costs. Even if such distributors are
engaged and retained, they might incur conflicting obligations to sell other
companies' products or might distribute other products that provide greater
revenues than are provided by the Company.
Two international distributors accounted for approximately 62% and 15%,
respectively, of total revenues for fiscal 1996 and one international
distributor and two United States distributors accounted for approximately 42%,
14% and 11%, respectively, of total revenues for the three months ended February
28, 1997. The loss of any of these distributors would have an adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Marketing, Sales and Distribution."
PROPRIETARY RIGHTS; RISK OF INFRINGEMENT
Although twelve United States patents have been issued to the Company with
respect to its technology, only seven of such patents expressly refer to
examination of the brain or developments involving the Cerebral Oximeter. Many
patents have already been issued to third parties involving optical spectroscopy
and the interaction of light with tissue, some of which relate to the use of
optical spectroscopy in the area of brain metabolism monitoring, the primary use
of the Cerebral Oximeter. No patent infringement claims have been asserted
against the Company, although the development of a significant market for
cerebral oximeters would give potential competitors more incentive to assert
infringement claims or challenge the Company's patents. The costs of defense of
patent litigation can be substantial and, if such defense were unsuccessful, the
Company could be liable for substantial damages. In addition, if it were
determined that the Company's product infringed any claims of an issued patent,
the Company could be enjoined from manufacturing or selling such product 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. If the Company were required to obtain a
license, it might not be available, or available on terms acceptable to the
Company. Any inability to obtain required licenses on favorable terms, or at
all, would adversely affect the Company's business, financial condition and
results of operations.
There can be no assurance that any additional patent applications will be
allowed, any issued patents would be upheld, any issued patents will provide the
Company with significant competitive advantages, or 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. If
patents are not issued from future patent applications, the Company may be
subject to greater competition. 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 financial capability even if the Company could otherwise prevail.
Also, the laws of certain foreign countries do not protect the Company's
proprietary rights to the same extent as the laws of the United States.
Furthermore, individuals and companies might independently develop similar
technologies, duplicate the Company's technology or design around the patented
aspects of the Company's technology, or the Company might infringe patents or
other rights owned by other individuals and companies. 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. Two patents issued to an unaffiliated third party and
relating to cerebral oximetry will expire in the next year, making that
technology generally available. The development or emergence of competing
products or technologies could have an adverse effect on the Company and,
accordingly, its business, financial condition and results of operations. The
Company also relies on trade secret, copyright and other laws and on
confidentiality agreements to protect its technology, but believes that neither
its patents nor other legal rights will necessarily prevent other individuals
and companies from developing or from using similar or related technology to
compete against the Company's product. There can be no assurance that
confidentiality agreements will not be breached, that the Company
10
<PAGE> 12
would have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known to, or independently developed by, competitors.
See "Business -- Proprietary Information."
MANAGEMENT OF GROWTH
The Company anticipates entering a period of rapid growth and expansion,
which is expected to place a significant strain on the Company's management,
customer service, operations, sales and administrative personnel and other
resources. In order to serve the needs of its existing and future customers, the
Company has increased and will continue to increase its workforce, which
requires the Company to attract, train, motivate and manage qualified employees.
The Company has incurred and continues to incur significant costs to retain
qualified management, sales and marketing, engineering, production,
manufacturing and administrative personnel and scientists, as well as for
marketing and promotional activities. The Company's ability to manage its
planned growth depends upon the Company's success in continuing to expand its
operating, management, information and financial systems, which may
significantly increase its operating expense. There can be no assurance that the
Company will be able to manage effectively any future growth, and any failure to
do so would have an adverse effect on the Company's business, financial
condition and results of operations. See "Dependence Upon Management and Key
Personnel," "Business -- Employees," and "Management -- Directors and Executive
Officers."
RISKS ASSOCIATED WITH NEW PRODUCT DEVELOPMENT
The Company has invested, and expects to continue to invest, substantial
resources to further develop the Cerebral Oximeter, the related disposable
SomaSensor, product extensions of the Cerebral Oximeter for use on children and
newborns, and other applications of its technology. 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 resistance to major capital equipment
expenditures by hospital purchasing committees and because hospitals might be
concerned that the cost of a new device will lower their profits because medical
insurers generally fix reimbursement amounts 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 its technology in the development of
commercially viable products. See "Use of Proceeds" and "Business -- Research
and Development."
GOVERNMENT REGULATION
The testing, manufacture and sale of the Company's product are subject to
regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign agencies. Pursuant to the Federal Food, Drug,
and Cosmetic Act, and the regulations promulgated thereunder, the FDA regulates
the preclinical and clinical testing, manufacture, labeling, distribution and
promotion of medical devices. Noncompliance with applicable requirements can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing clearances or approvals and criminal prosecution, any of
which actions could have an adverse effect on the Company's business, financial
condition and results of operations.
The Company has made modifications to the Cerebral Oximeter, which the
Company believes do not require the submission of new 510(k) notices. There can
be no assurance, however, that the FDA would agree with any of the Company's
determinations not to submit a new 510(k) notice for any of these changes or
would not require the Company to submit a new 510(k) notice for any of the
changes made to the device. If the FDA requires the Company to submit a new
510(k) notice for any device modification, the Company may be prohibited from
marketing the modified device until the 510(k) notice is cleared by the FDA. See
"Business -- Government Regulation."
There can be no assurance that the Company's current FDA clearance to
market the Cerebral Oximeter in the United States will not be rescinded or that,
if and when any additional products are developed by the Company, they will
receive FDA clearance. If any current or future clearances or approvals are
rescinded or
11
<PAGE> 13
denied, sales of the Company's product in the United States would be prohibited
during the period the Company does not have such clearances. There can be no
assurance that the Company will be able to obtain necessary regulatory approvals
or clearances on a timely basis or at all, and delays in receipt of or failure
to receive such approvals or clearances, the loss of previously received
approvals or clearances, limitations on intended use imposed as a condition of
such approvals or clearances, any limitations on the Company's market required
by any clearances, any resulting delays in market introduction or failure to
comply with existing or future regulatory requirements would have an adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Government Regulation."
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with Good Manufacturing Practice ("GMP") and other
applicable regulations. Changes in existing requirements or adoption of new
requirements could have an adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will not incur significant costs to comply with laws and regulations in the
future or that laws and regulations will not have an adverse effect upon the
Company's business, financial condition and results of operations.
The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations in the future or that such laws or regulations will not have an
adverse effect upon the Company's ability to do business.
PRODUCT LIABILITY
The testing, marketing and sale of patient monitoring devices entail an
inherent risk that product liability claims will be asserted against the
Company. The Cerebral Oximeter is intended to be used in operating rooms and
other critical care hospital units with patients who may be seriously ill or may
be undergoing dangerous procedures. On occasion, patients on whom the Cerebral
Oximeter is being used may sustain injury or die as a result of their medical
treatment or condition. If litigation is initiated because of such injury or
death, the Company may be sued, and regardless of whether it is ultimately
determined to be liable, the Company may incur significant legal expenses not
covered by insurance. 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 product liability
insurance with a liability limit of $1,000,000. Such insurance is costly and
even though it has been obtained, there can be no assurance that the Company
will be able to retain such insurance or that such insurance would be sufficient
to protect the Company in the event of a major defect in the Cerebral Oximeter.
In the event of an uninsured or inadequately insured product liability claim
based on the performance of the Cerebral Oximeter, the Company's business,
financial condition and results of operations could be adversely affected. See
"Business -- Insurance."
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING AND SUPPLY
The Company is dependent on various suppliers for manufacturing the
components for its Cerebral Oximeter and the related disposable SomaSensor. The
Company believes each component is generally available from several potential
suppliers. However, engaging additional or replacing existing suppliers of
custom-designed components is costly and time consuming. The Company does not
intend to maintain significant inventories of components, Cerebral Oximeters, or
SomaSensors. Therefore, the Company might incur delays in meeting delivery
deadlines in the event a particular supplier is unable or unwilling to meet the
Company's requirements. The Company would require approximately three to four
months to change SomaSensor suppliers. In addition, the Company does not have
direct control over the activities of its suppliers and is dependent on them for
quality control, capacity, processing technologies and, in required cases,
compliance with FDA GMP regulations. If the Company cannot replace certain
suppliers on a timely basis when necessary, its business, financial condition
and results of operations may be adversely affected. In addition, because the
Company does not have long-term agreements with its suppliers, it may be subject
to unexpected price increases which may adversely affect its profit margins. See
"Business -- Manufacturing."
12
<PAGE> 14
SUBSTANTIAL DILUTION
At February 28, 1997, the Company had a net tangible shareholders' equity
of $1.17 per share. A purchaser of Common Shares in this offering will
experience immediate and substantial dilution of $2.76 per share in that the
offering price exceeds the net tangible book value of the Company after giving
effect to the offering. To the extent outstanding options and warrants to
purchase Common Shares are exercised, there will be further dilution to new
investors. See "Dilution."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Shares may be highly volatile. Quarterly
operating results of the Company, changes in general conditions in the economy,
the financial markets, or the medical equipment industry, changes in financial
estimates by securities analysts or failure by the Company to meet such
estimates, litigation involving the Company, actions by governmental agencies or
other developments affecting the Company or its competitors, could cause the
market price of the Common Shares to fluctuate substantially. In particular, the
stock market may experience significant price and volume fluctuations which may
affect the market price of the Common Shares for reasons that are unrelated to
the Company's operating performance and that are beyond the Company's control.
BROAD DISCRETION OF MANAGEMENT TO ALLOCATE NET PROCEEDS
The Company intends to use the net proceeds of this offering primarily to
finance its operations, including increased marketing and sales activities,
expanding research and development programs and for other general corporate
purposes, including working capital. The amounts identified for the foregoing
under "Use of Proceeds" in this Prospectus are estimates and the amounts
actually expended for each such purpose and the timing of such expenditures may
vary depending upon numerous factors. Management will retain broad discretion to
determine the allocation of the net proceeds of this offering and the timing of
expenditures.
FUTURE SALES OF COMMON SHARES; REGISTRATION RIGHTS; EXERCISE OF OPTIONS AND
WARRANTS
The number of the Company's outstanding Common Shares held by
non-affiliates is large relative to the trading volume of the Common Shares. The
Company is unable to predict the effect that sales of Common Shares may have on
the then prevailing market price of the Common Shares. Any substantial sale of
Common Shares or even the possibility of such sales occurring may have an
adverse effect on the market price of the Common Shares.
As of April 11, 1997, the Company had outstanding options and warrants to
purchase an aggregate of 508,706 Common Shares. The Company has also reserved up
to an additional 308,854 Common Shares for issuance upon exercise of options
which have not yet been granted under the Company's stock option plans. Holders
of such warrants and options are likely to exercise them when, in all
likelihood, the Company could obtain additional capital on terms more favorable
than those provided by the options and warrants. In addition, holders of the
Placement Agent Warrants have piggy-back registration rights with respect to the
underlying securities, and holders of the Representative's Warrants to be
granted in connection with this offering will have demand and piggy-back
registration rights with respect to the underlying securities. Exercise of these
registration rights may adversely affect the terms upon which the Company may
obtain additional financing. Further, while its warrants and options are
outstanding, the Company's ability to obtain additional financing on favorable
terms may be adversely affected. See "Underwriting" and "Description of Capital
Stock."
POTENTIAL ANTI-TAKEOVER EFFECT
The Board of Directors has the authority, without further approval of the
Company's shareholders, to issue preferred shares (the "Preferred Shares")
having such rights, preferences and privileges as the Board of Directors may
determine. Any such issuance of Preferred Shares could, under certain
circumstances, have the effect of delaying or preventing a change in control of
the Company and may adversely affect the rights of holders of Common Shares. In
addition, the Company is subject to Michigan statutes regulating business
combinations, takeovers and control share acquisitions which might also hinder
or delay a change in control of
13
<PAGE> 15
the Company. Anti-takeover provisions that could be included in the Preferred
Shares when issued and the Michigan statutes regulating business combinations,
takeovers and control share acquisitions can have a depressive effect on the
market price of the Company's securities and can limit shareholders' ability to
receive a premium on their shares by discouraging takeover and tender offer
bids.
The directors of the Company serve staggered three-year terms, and
directors may not be removed without cause. The Company's Restated Articles of
Incorporation also set the minimum and maximum number of directors constituting
the entire Board at three and fifteen, respectively, and require approval of
holders of 90% of the Company's voting shares to amend these provisions. These
provisions could have an anti-takeover effect by making it more difficult to
acquire the Company by means of a tender offer, a proxy contest or otherwise or
the removal of incumbent officers and directors. These provisions could delay,
deter or prevent a tender offer or takeover attempt that a shareholder might
consider in his or her best interests, including those attempts that might
result in a premium over the market price for the Common Shares held by the
Company's shareholders. See "Description of Capital Stock."
14
<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,800,000 Common
Shares offered hereby after deducting the underwriting discounts and commissions
and estimated offering expenses payable by the Company, are estimated to be
approximately $8,508,000 ($9,874,200 if the Underwriters' over-allotment option
is exercised in full), assuming a public offering price of $5.50 per share.
The Company currently intends to use the net proceeds from the sale of the
Common Shares offered hereby to finance the Company's operations, including
approximately $2,800,000 to finance increased marketing and sales activities,
including the cost of the Company's direct sales force, attendance at trade
shows and other promotional activities, $900,000 to expand research and
development programs, including the development of a Cerebral Oximeter for use
on children and newborns, enhancements to the Cerebral Oximeter and the
development of new products through its consulting arrangement with NeuroPhysics
Corporation, and $4,808,000 for other general corporate purposes, including
working capital.
The foregoing represents the Company's best estimate of its allocation of
the estimated net proceeds from the sale of Common Shares offered hereby and is
subject to a reapportionment of proceeds among the categories discussed above or
to new categories in response to, among other things, changes in the Company's
business plans, future revenues and expenses and industry, regulatory or
competitive conditions. The amount and timing of expenditures will vary
depending on a number of factors, including changes in the Company's
contemplated operations or business plan and changes in economic and industry
conditions. Any such shifts will be at the discretion of the Board of Directors
and the officers of the Company.
Pending the application of such proceeds, the Company intends to invest the
net proceeds of this offering in short-term, investment-grade, interest-bearing
investments.
15
<PAGE> 17
PRICE RANGE OF COMMON SHARES AND DIVIDEND POLICY
The Common Shares trade on The Nasdaq SmallCap Market 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 currently quoted
in, The Nasdaq SmallCap Market. The following table sets forth, for the periods
indicated, the range of high and low closing bid quotations as reported by
Nasdaq. The prices set forth below have been adjusted to give effect to the
1-for-10 reverse stock split of the Common Shares effected on April 10, 1997.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal Year Ended November 30, 1995
First Quarter............................................. $13.10 $ 7.50
Second Quarter............................................ 18.10 11.30
Third Quarter............................................. 18.10 8.80
Fourth Quarter............................................ 9.40 5.00
Fiscal Year Ended November 30, 1996
First Quarter............................................. $17.50 $ 4.10
Second Quarter............................................ 25.00 10.00
Third Quarter............................................. 40.00 14.40
Fourth Quarter............................................ 23.10 12.50
Fiscal Year Ending November 30, 1997
First Quarter............................................. $15.00 $ 5.63
Second Quarter (through April 15, 1997)................... 11.25 4.75
</TABLE>
On April 15, 1997, the last reported sales price for the Common Shares on
The Nasdaq SmallCap Market was $5.50 per share. At April 11, 1997, the Company
had 602 shareholders of record.
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 Company has never paid cash dividends on its Common Shares and does not
expect to pay such dividends in the foreseeable future. The Company currently
intends to retain any future earnings for use in the Company's business. The
payment of any future dividends will be determined by the Board in light of the
conditions then existing, including the Company's financial condition and
requirements, future prospects, restrictions in future financing agreements,
business conditions and other factors deemed relevant by the Board.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of February 28, 1997 and as adjusted to give effect to the sale of the 1,800,000
Common Shares offered by the Company hereby at an assumed public offering price
of $5.50 (after deducting underwriting discounts and commissions and estimated
offering expenses) and the application of the estimated net proceeds of
$8,508,000 therefrom as described in "Use of Proceeds." This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and Notes to
Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT FEBRUARY 28, 1997
----------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Shareholders' equity:
Preferred shares, authorized, 1,000,000 shares of $.01 par
value; no shares issued or outstanding................. $ -- $ --
Common Shares; authorized, 6,000,000 shares of $.01 par
value; issued and outstanding, 2,285,351 shares at
February 28, 1997 (4,085,351 shares, as adjusted)(1)... 23 41
Additional paid-in capital................................ 34,253 42,743
Deficit accumulated during the development stage(2)....... (31,519) (31,519)
-------- --------
Total shareholders' equity and total capitalization.... $ 2,757 $ 11,265
======== ========
</TABLE>
- ---------------
(1) Excludes (i) an aggregate of up to 622,646 Common Shares reserved for
issuance under the Company's 1983 Stock Option Plan, 1991 Incentive Stock
Option Plan, 1993 Director Stock Option Plan, 1997 Stock Option Plan and
non-plan options, of which options to purchase an aggregate of 313,792
Common Shares were outstanding as of April 11, 1997, (ii) 79,394 Common
Shares issuable upon the exercise of the Placement Agent Warrants issued in
connection with the Regulation S Offerings, (iii) 115,520 Common Shares
issuable upon the exercise of the Regulation S Warrants issued in connection
with the Regulation S Offerings completed in July 1995 and April 1996 and
(iv) 180,000 Common Shares issuable upon exercise of the Representative's
Warrants. See Notes 3, 8 and 11 of Notes to Financial Statements.
(2) Management believes the deficit accumulated during the development stage has
continued to increase during the second quarter ending May 31, 1997 and
there has been a corresponding decrease in total capitalization.
17
<PAGE> 19
DILUTION
The net tangible book value of the Company as of February 28, 1997 was
$2,679,554, or $1.17 per Common Share. Net tangible book value per share
represents the amount of net tangible assets, less total liabilities, divided by
the number of Common Shares outstanding. After giving effect to the sale by the
Company of 1,800,000 Common Shares offered hereby at an assumed public offering
price of $5.50 per share, the net tangible book value of the Company as of
February 28, 1997 would have been $11,187,554, or $2.74 per share. This
represents an immediate increase in such net tangible book value of $1.57 per
share to existing shareholders and an immediate dilution of $2.76 per share to
new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $ 5.50
Net tangible book value per share at February 28, 1997.... $1.17
Increase in net tangible book value per share attributable
to new investors....................................... 1.57
-----
Net tangible book value per share after giving effect to
this offering............................................. 2.74
------
Dilution per share to new investors......................... $ 2.76
======
</TABLE>
The foregoing assumes no exercise of options and warrants after February
28, 1997. As of February 28, 1997, there were outstanding options and warrants
to purchase an aggregate of 508,706 Common Shares, and the Company had also
reserved up to an additional 308,854 Common Shares for issuance upon the
exercise of options which had not yet been granted under the Company's stock
option plans. To the extent outstanding options or warrants are exercised, there
will be further dilution to new investors. See "Capitalization."
18
<PAGE> 20
SELECTED FINANCIAL DATA
The following selected financial data as of November 30, 1996, 1995, 1994,
1993 and 1992, and for each of the years in the five-year period ended November
30, 1996 have been derived from the audited financial statements of the Company,
certain of which appear elsewhere in this Prospectus 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 following selected financial data as
of February 28, 1997, and for the three-month periods ended February 28, 1997
and February 29, 1996, have been derived from the unaudited financial statements
of the Company, appearing elsewhere in this Prospectus, but in the opinion of
management, reflect all adjustments, consisting of normal recurring adjustments
necessary for a fair presentation of the financial position and results of
operations for such periods and as of such date. The results of operations for
the three months ended February 28, 1997 are not necessarily indicative of the
results to be expected for the year ending November 30, 1997. The selected
financial data should be read in conjunction with the financial statements and
notes thereto and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS ENDED INCEPTION
--------------------------- FISCAL YEAR ENDED NOVEMBER 30, (JANUARY 15, 1982)
FEBRUARY 28, FEBRUARY 29, ---------------------------------------------------- TO FEBRUARY 28,
1997 1996 1996 1995 1994 1993 1992 1997
------------ ------------ -------- -------- -------- -------- -------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales(1)........ $ 354 $ 515 $ 778 $ 1,336 $ 938 $ 1,547 $ 50 $ 6,083
Cost of sales....... 180 211 385 658 464 763 48 2,808
Gross margin........ 174 304 393 678 474 784 2 3,398
Research,
development and
engineering
expenses.......... 164 50 235 286 550 1,150 1,190 8,169
Selling, general and
administrative
expenses.......... 1,359 590 3,550 3,303 4,347 6,063 4,313 27,549
Net loss............ (1,308) (320) (3,304) (2,818) (4,332) (6,136) (5,391) (31,500)
Net loss per Common
Share(2).......... (.57) (.18) (1.77) (1.67) (3.41) (5.75) (5.96) (41.03)
Weighted average
number of Common
Shares
outstanding(2).... 2,285 1,778 1,867 1,684 1,270 1,068 905 768
</TABLE>
<TABLE>
<CAPTION>
AT AT NOVEMBER 30,
FEBRUARY 28, ----------------------------------------------------
1997 1996 1995 1994 1993 1992
------------ -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities... $ 1,845 $ 3,292 $ 941 $ 2,405 $ 2,929 $ 8,594
Working capital.................. 2,577 3,862 1,846 2,982 3,326 8,776
Total assets..................... 3,367 4,672 2,861 4,327 5,142 10,310
Total liabilities................ 610 618 568 808 1,039 835
Long-term debt and redeemable
Convertible Preferred Shares... -- -- 20 20 60 80
Deficit accumulated during the
development stage(4)........... (31,519) (30,211) (26,907) (24,089) (19,757) (13,622)
Shareholders' equity(3)(4)....... 2,757 4,054 2,294 3,519 4,103 9,475
</TABLE>
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(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 years ended November 30, 1992 and 1991 relates to the sale of
Cerebral Oximeters primarily to specialty dealers for demonstration purposes
only. Revenue recorded in the three months ended February 28, 1997 and
February 29, 1996 and 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 "Business -- Government Regulation," and "Management's
Discussion and Analysis of Financial Condition and 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 this Prospectus for
information with respect to the calculation of per share data. The net loss
per Common Share data and weighted average number of Common Shares
outstanding data have been adjusted to give effect to the 1-for-10 reverse
stock split effective April 10, 1997.
(3) See Statements of Shareholders' Equity (Deficiency) of the Financial
Statements included in this Prospectus for an analysis of Common Share
transactions for the period from January 15, 1982 (date of inception)
through February 28, 1997.
(4) The Company believes its deficit accumulated during the development stage
has increased and shareholders' equity has decreased since February 28,
1997.
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<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations includes forward-looking statements with respect to
the Company's future financial performance. These forward-looking statements are
subject to various risks and uncertainties, including the factors described
under "Risk Factors" and elsewhere in this Prospectus, that could cause actual
results to differ materially from historical results or those currently
anticipated.
RESULTS OF OPERATIONS
OVERVIEW
In 1988, the Company began clinical studies of the Cerebral Oximeter on
human patients. In June 1992, the Company received 510(k) clearance from the FDA
to market the Cerebral Oximeter in the United States for use on adults. The
Company began commercial shipments of Cerebral Oximeters and SomaSensors in May
1993. In November 1993, the FDA rescinded the Company's clearance to market the
Cerebral Oximeter and the related disposable SomaSensor in the United States,
and the Company suspended all commercial sales. In February 1994, the Company
resumed marketing its product in several foreign countries, and in June 1996 the
Company received clearance from the FDA to market the Cerebral Oximeter and the
related disposable SomaSensor in the United States.
The Company is in the development stage and has accumulated losses of
$31,499,623 through February 28, 1997. From its inception in January 1982
through February 28, 1997, its primary activities have consisted of research and
development of the INVOS technology, a discontinued product, the Cerebral
Oximeter and the related disposable SomaSensor. The Company believes that its
accumulated deficit will continue to increase for the foreseeable future.
The Company derives its revenues from sales of Cerebral Oximeters and
SomaSensors to its distributors and, since the June 1996 FDA clearance, to
hospitals through its direct sales employees. The Company recognizes revenues
when it ships its product to its distributors or to hospitals. Payment terms are
generally net 30 days for United States sales and net 60 days or longer for
international sales. The Company's primary expenses, excluding the cost of its
product, are selling, general and administrative and research, development and
engineering, which are generally expensed as incurred. The Company capitalizes
its patent costs and amortizes them over 17 years. Since May 1994, the Company
has exchanged the new model 3100A Cerebral Oximeters for its model 3100 Cerebral
Oximeters. The Company refurbishes the model 3100 Cerebral Oximeters it receives
and sells them approximately at cost in countries that do not require compliance
with the standards met by the model 3100A. Such sales reduce the Company's
overall gross margin.
THREE MONTHS ENDED FEBRUARY 28, 1997 COMPARED TO THREE MONTHS ENDED FEBRUARY 29,
1996
Net sales decreased by approximately $161,000, or 31%, from $515,079 in the
three-month period ended February 29, 1996 to $353,863 in the three-month period
ended February 28, 1997. The decrease in sales was primarily attributable to a
26% decrease in the average selling price of Cerebral Oximeters to Baxter
Limited to make their price similar to that of other distributors and reduced
shipments to Baxter Limited in Japan, which purchased its requirements for all
of 1996 in the first quarter of fiscal 1996. Sales of refurbished model 3100
Cerebral Oximeters, model 3100A Cerebral Oximeters and SomaSensors comprised
approximately 5%, 73% and 22%, respectively, of the Company's sales in the first
quarter of fiscal 1997 and 5%, 84% and 11%, respectively, of the Company's sales
in the first quarter of fiscal 1996. Approximately 63% of the Company's net
sales in the first quarter of fiscal 1997 were export sales, compared to 100% of
the Company's net sales in the first quarter of fiscal 1996. One international
distributor and two United States distributors accounted for approximately 42%,
14% and 11%, respectively, of total net sales for the three months ended
February 28, 1997, and two international distributors accounted for
approximately 86% and 6% of total net sales for the three months ended February
29, 1996.
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<PAGE> 22
Gross margin as a percentage of net sales for the quarters ended February
28, 1997 and February 29, 1996 was approximately 49% and 59%, respectively.
Gross margin as a percentage of net sales decreased in the first quarter ended
February 28, 1997 from the first quarter of fiscal 1996, primarily because the
Company realized lower average selling prices for model 3100A Cerebral
Oximeters, and the cost to the Company of the SomaSensor was higher in the first
quarter of fiscal 1997. This decrease was partially offset by an approximately
4% decrease in materials cost for the Cerebral Oximeter in the first quarter of
fiscal 1997.
The Company's research, development and engineering expenses increased
approximately $114,000, or 229%, from $49,936 for the three months ended
February 29, 1996 to $164,211 for the three months ended February 28, 1997. The
increase is primarily attributable to increased consulting fees in fiscal 1997
in connection with new product development, increased research, development, and
engineering personnel from two employees at February 29, 1996 to five employees
at February 28, 1997, increased clinical testing in the first quarter of fiscal
1997, and increased obsolescence costs in the first quarter of fiscal 1997.
Selling, general and administrative expenses increased approximately
$768,000, or 130%, from $590,331 for the three months ended February 29, 1996 to
$1,359,088 for the three months ended February 28, 1997. The increase in
selling, general and administrative expense is primarily attributable to a
$496,000 increase in salaries, wages and related expenses as a result of the
additional employees hired since May 31, 1996 (from an average of 19 employees
in the first quarter of fiscal 1996 to 36 employees in the first quarter of
fiscal 1997) and an increase in incentive compensation accrual, and a $181,000
increase in selling-related expenses as a result of the costs associated with
training and equipping direct sales personnel with demonstration equipment, the
added cost of promotional equipment and materials in the United States, an
increase in travel and related expenses due to distributor training and support
and additional employees in sales and marketing, and an increase in trade show
participation expenses.
For the three-month period ended February 28, 1997, the Company realized a
309% increase in its net loss over the same period in fiscal 1996. The increase
is primarily attributable to a 31% reduction in sales and a 137% increase in
operating expenses.
FISCAL YEAR ENDED NOVEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED NOVEMBER 30,
1995
Net sales decreased approximately $558,000, or 42%, from $1,335,970 in the
fiscal year ended November 30, 1995 to $778,200 in the fiscal year ended
November 30, 1996. The decrease in sales was primarily attributable to a more
than 20% decrease in the average selling price of model 3100A Cerebral Oximeters
to distributors and reduced shipments to Europe and to Baxter Limited in Japan.
Approximately 96% and 100% of the Company's net sales in fiscal 1996 and 1995,
respectively, were export sales. Sales of refurbished model 3100 Cerebral
Oximeters, model 3100A Cerebral Oximeters and SomaSensors comprised
approximately 14%, 63% and 23%, respectively, of the Company's fiscal year 1996
net sales, and 10%, 74% and 16%, respectively, of the Company's fiscal year 1995
net sales.
Two international distributors accounted for approximately 62% and 15%,
respectively, of net sales for fiscal year 1996, and approximately 53% and 13%,
respectively, of net sales for fiscal year 1995. The Company terminated its
Japanese distributor effective January 28, 1995. In March 1995, the Company
announced the engagement of Baxter Limited as its exclusive distributor in
Japan. In April 1995, the Company received its license from the Japanese
Ministry of Health and Welfare to market its product in Japan.
Gross margin as a percentage of net sales for the fiscal years ended
November 30, 1996 and 1995 were approximately 50% and 51%, respectively. Gross
margin as a percentage of net sales decreased in fiscal 1996 from fiscal 1995
primarily because 14% of net sales in fiscal 1996 consisted of sales of
refurbished model 3100 Cerebral Oximeters, and because of lower average selling
prices for model 3100A 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 model
3100 Cerebral Oximeters, 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 model 3100A Cerebral Oximeters and the
increased cost of the SomaSensor.
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<PAGE> 23
The Company's research, development and engineering expenses decreased
approximately $51,000, or 18%, from $285,893 for the fiscal year ended November
30, 1995 to $235,354 for the fiscal year ended November 30, 1996. 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 model 3100A Cerebral Oximeter,
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.
Selling, general and administrative expenses increased approximately
$247,000, or 7%, from $3,302,751 for the fiscal year ended November 30, 1995 to
$3,549,939 for the fiscal year ended November 30, 1996. The increase for fiscal
1996 is primarily attributable to (i) a $217,000 increase in selling-related
expenses, primarily due to the costs of providing Cerebral Oximeters for
clinical research and to United States sales personnel and the added cost of
promotional equipment and materials in the United States, partially offset by a
decrease in travel and related expenses and two fewer employees in sales and
marketing for approximately seven months of the fiscal year, (ii) one-time
charges of $175,000 for write-downs of excess refurbished model 3100 Cerebral
Oximeters and obsolete inventory, (iii) an increase in nonproductive, indirect
labor and overhead of $197,000 and (iv) a $71,000 increase in warranty expenses,
partially offset by (a) a decrease of $237,000 in salaries and wages, primarily
due to a reduction in payroll and related benefits, partially offset by an
increase in temporary and contract labor and an increase in consulting services,
(b) a $134,000 decrease in occupancy costs principally due to the reduction in
personnel and the expiration of operating leases and (c) 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 United States distributors whose receivables had been
written off), $57,200 reversal of the reserve for the extra cost of exchanging
new INVOS 3100A Cerebral Oximeters for INVOS 3100 Cerebral Oximeters held by
United States distributors who had not yet paid for their Cerebral Oximeters,
and the cost of upgrading model 3100 Cerebral Oximeters, 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.
FISCAL YEAR ENDED NOVEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED NOVEMBER 30,
1994
Net sales increased approximately $397,000, or 42%, from $938,531 in the
fiscal year ended November 30, 1994 to $1,335,970 in the fiscal year ended
November 30, 1995. The increase in sales can be attributed to sales to Baxter
Limited 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 model 3100 Cerebral Oximeters at
substantially lower prices than model 3100A Cerebral Oximeters. In fiscal 1995
and 1994, 100% of the Company's net sales were export sales. Sales of
refurbished model 3100 Cerebral Oximeters, model 3100A Cerebral Oximeters and
SomaSensors comprised approximately 10%, 74% and 16%, respectively, of the
Company's fiscal year 1995 net sales and 0%, 84% and 16%, respectively, of the
Company's fiscal year 1994 net sales.
Two international distributors accounted for approximately 53% and 13%,
respectively, of net sales for fiscal year 1995 and approximately 43% and 10% of
net sales for fiscal year 1994. The Company terminated its former Japanese
distributor effective in January 1995. In March 1995, the Company announced the
engagement of Baxter Limited as its exclusive distributor in Japan. In April
1995, the Company received its license from the Japanese Ministry of Health and
Welfare to market its product in Japan.
Gross margin as a percentage of net sales for the fiscal years ended
November 30, 1995 and 1994 was approximately 51%. 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
22
<PAGE> 24
the sale of refurbished model 3100 Cerebral Oximeters in fiscal 1995
approximately at cost, thereby reducing overall gross margins.
The Company's research, development and engineering expenses decreased
approximately $264,000, or 48%, from $549,737 for the fiscal year ended November
30, 1994 to $285,893 for the fiscal year ended November 30, 1995. The decrease
in fiscal 1995 is attributable to reductions in research, development, and
engineering personnel from three employees at November 30, 1994 to two employees
at November 30, 1995, decreased engineering consulting services and clinical
testing in fiscal 1995 (incurred in fiscal 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.
Selling, general and administrative expenses decreased approximately
$1,044,000, or 24%, from $4,346,858 for the fiscal year ended November 30, 1994
to $3,302,751 for the fiscal year ended November 30, 1995. The decrease is
primarily due to (i) a $542,000 reduction in legal and accounting fees, (ii) a
$254,000 reduction in salaries, wages and related expenses, primarily due to a
reduction in payroll and related benefits as a result of a reduction in
workforce from 26 employees at November 30, 1994, to 20 employees at November
30, 1995 and a reduction in consulting expenses, (iii) a $76,000 reduction in
depreciation expense, (iv) a $58,000 reduction in facility expenses, primarily
due to the reduction in personnel and the expiration of operating lease
commitments and (v) a $51,000 reduction in selling expenses, primarily due to
the $115,400 accrual in fiscal 1994 in connection with the plan to replace INVOS
3100 Cerebral Oximeters with INVOS 3100A Cerebral Oximeters, clinical trial
expenses in fiscal 1994 associated with the 510(k) filed in February 1995 and a
reduction in advertising expenses in fiscal 1995, partially offset by an
increase in trade show participation and travel expenses. This decrease was
partially offset by the $72,000 settlement with a former distributor in Japan.
Interest income increased approximately $26,000, or 39%, from $68,290 for
the fiscal year ended November 30, 1994 to $94,769 for the fiscal year ended
November 30, 1995. The increase in interest income for the fiscal year ended
November 30, 1995 over the fiscal year ended November 30, 1994 is primarily due
to interest income from the investment of the cash received from the Regulation
S Offerings in July 1995 and August 1994.
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.
LIQUIDITY AND CAPITAL RESOURCES
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,
including 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 United States 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 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.
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<PAGE> 25
Net cash used in operations during the three-month period ended February
28, 1997 was approximately $1,457,000. Cash was used primarily to (i) fund the
Company's net loss, including selling, general and administrative expenses and
research, development and engineering expenses (approximately $1,295,000, net of
depreciation and amortization expense), (ii) increase accounts receivable
(approximately $132,000) primarily due to higher sales in the first quarter of
fiscal 1997 than in the prior two quarters, (iii) decrease accrued liabilities
primarily as a result of the payment of professional fees (approximately
$50,000) and (iv) increase inventories as a result of increased manufacturing
activity in preparation for United States sales (approximately $21,000). These
uses of cash were partially offset by an increase in accounts payable
(approximately $42,000) primarily due to increased legal and professional
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.
The Company's principal sources of operating funds have been the proceeds
of equity investments from sales of the Company's Common Shares. See Statements
of Shareholders' Equity (Deficiency) of the Company's Financial Statements
included elsewhere in this Prospectus.
Several transactions in fiscal 1996 had a significant impact on the
Company's capitalization. Effective February 28, 1996, the Company redeemed all
of its 198,425 outstanding Convertible Preferred Shares for $0.10 per share. On
March 19, 1996, all 14,433.966 outstanding unit purchase options expired.
Effective November 14, 1996, the Company redeemed all of its 407,518 outstanding
redeemable Class B Warrants for $0.50 per warrant. On September 26, 1996, the
remaining 3,098 outstanding Class M Warrants (warrants issued in a bridge
financing before the Company's 1991 initial public offering) were exercised for
$9.50 a Common Share, and on November 14, 1996, the remaining 500 outstanding
nonredeemable Class B Warrants expired.
On April 2, 1996, the Company completed the placement of 57,120 units, at a
price of $25.00 per unit, through an offering complying with Regulation S under
the Securities Act of 1933, as amended. The net proceeds to the Company were
approximately $1,284,000. Each unit consisted of two Common Shares and one
warrant to purchase one Common Share. The warrants are exercisable at an initial
exercise price of $17.50 per share, subject to adjustment, at any time through
April 1, 2001, unless earlier redeemed. The warrants are redeemable for $0.10 by
the Company at any time if certain conditions are met; these conditions have not
been met as of April 11, 1997. The Company also granted the placement agent
warrants to purchase 11,424 Common Shares at $12.50 per share exercisable during
the four-year period beginning April 2, 1997.
During fiscal 1996, 14,600 warrants issued in the Company's 1995 Regulation
S Offering and exercisable at $20.00 per share, and 2,000 warrants issued in the
Company's April 1996 Regulation S Offering and exercisable at $17.50 per share,
were exercised, resulting in net proceeds to the Company of approximately
$311,000. Also during fiscal 1996, the Company received approximately $75,000
from the exercise of employee stock options.
On November 21, 1996, the Company completed the placement of 366,841 Common
Shares at a price of $11.50 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 agent's fee, the expenses of the
offering and $129,318 of other deferred offering costs, were approximately
$3,568,000.
During fiscal 1996, the Company settled a class action lawsuit. For a
description of the settlement, including the cost to the Company, see Note 7 of
Notes to Financial Statements included elsewhere in this Prospectus.
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 a loan made by the Company to him on February 1,
1993, and the Company wrote off approximately $29,750 of accrued interest with
respect to that loan.
As of February 28, 1997 the Company had working capital of $2,577,418 and
cash and cash equivalents of $1,844,674, total current liabilities of $610,096
and shareholder's equity of $2,756,955. The Company has no loan commitments.
24
<PAGE> 26
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 and medical affairs 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 sales orders. In addition, management has budgeted
approximately $120,000 for capital expenditures during fiscal 1997.
The Company believes that the cash and cash equivalents on hand at February
28, 1997 together with the net proceeds of this offering will be sufficient to
sustain the Company's operations at budgeted levels and its needs for liquidity
at least into the second half of fiscal 1998. By that time the Company will be
required to raise additional cash either (i) through additional sales of its
product, (ii) through sales of securities, (iii) by incurring indebtedness or
(iv) by a 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.
Also as of February 28, 1997, there were 60,400 redeemable warrants
outstanding, exercisable at $20.00 per share until July 13, 2000 and 55,120
redeemable warrants outstanding exercisable at $17.50 per share until April 1,
2001. These warrants were issued in the Company's 1995 and April 1996 Regulation
S Offerings. The conditions permitting the Company to redeem these warrants have
not been met as of April 11, 1997. In addition, the placement agents and their
transferees hold warrants to purchase 52,970 Common Shares exercisable at $12.50
per share, 15,000 warrants exercisable at $14.40 per share and 11,424 warrants
exercisable at $12.50 per share. It is unlikely that these warrants 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.
For a description of a lawsuit alleging various securities law violations
filed by a shareholder of the Company on April 25, 1994, see Note 7 of Notes to
Financial Statements included elsewhere in this Prospectus.
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 of its securities in March 1991. See
Note 6 of Notes to Financial Statements included elsewhere in this Prospectus.
NEW 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 has evaluated the impact of the new standard on its financial position,
results of operations and cash flows and has determined 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 has decided 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.
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share." This
Statement establishes standards for computing and presenting earnings per share
("EPS") and applies to all entities with
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<PAGE> 27
publicly-held common shares or potential common shares. This Statement replaces
the presentation of primary EPS and fully-diluted EPS with a presentation of
basic EPS and diluted EPS, respectively. Basic EPS excludes dilution and is
computed by dividing earnings available to common shareholders by the
weighted-average number of common shares outstanding for the period. Similar to
fully diluted EPS, diluted EPS reflects the potential dilution of securities
that could share in the earnings. This Statement is not expected to have a
material effect on the Company's reported EPS amounts. The Statement is
effective for the Company's financial statements for the year ending November
30, 1998.
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<PAGE> 28
BUSINESS
THE COMPANY
Somanetics develops, manufactures and markets the Cerebral Oximeter, the
only FDA-cleared, non-invasive patient monitoring system that continuously
measures changes in the blood oxygen level in the adult brain. The Cerebral
Oximeter was developed to meet the need for information about oxygen in the
brain, the organ least tolerant of oxygen deprivation. Brain oxygen information,
therefore, is important, especially in surgical procedures requiring general
anesthesia and in other critical care situations with a high risk of brain
oxygen imbalances. The Company is initially targeting cardiovascular and
vascular surgeries and surgeries on elderly patients involving abnormal blood
pressure, because these surgeries involve a high risk of brain oxygen
imbalances, both during and after surgery. Surgeons, anesthesiologists and other
medical professionals use the Cerebral Oximeter to identify brain oxygen
imbalances and take corrective action, potentially improving patient outcome and
reducing the cost of care.
The Cerebral Oximeter is a relatively inexpensive, portable and easy-to-use
monitoring system placed at a patient's bedside in hospital critical care areas,
especially operating rooms, recovery rooms, ICUs and emergency rooms. It is
comprised of (i) a portable unit including a computer and a display monitor,
(ii) a single-use, disposable sensor, the SomaSensor, (iii) proprietary software
and (iv) a preamplifier cable. The SomaSensor is adhered to a patient's forehead
and connected to the computer through the preamplifier cable. The computer uses
the Company's proprietary software to analyze information received from the
SomaSensor and provides a continuous digital and trend display on the monitor of
an index of the oxygen saturation in the area of the brain under the SomaSensor.
Users of the Cerebral Oximeter will be required to purchase disposable
SomaSensors on a regular basis because of their single-use nature.
Under the direction of the Company's President and Chief Executive Officer,
Bruce Barrett, formerly with Abbott Laboratories, the Company obtained FDA
clearance in June 1996 to sell the Cerebral Oximeter in the United States and
implemented a new business strategy. The Company's objective is to establish the
Cerebral Oximeter as a "standard of care" in surgical procedures requiring
general anesthesia and in other critical care situations.
MARKET OVERVIEW
INDUSTRY BACKGROUND
The brain is the human organ least tolerant of oxygen deprivation. Without
sufficient oxygen, brain damage may occur within a few minutes, which can result
in paralysis, severe and complex disabilities or death. Undetected brain hypoxia
(insufficiency of oxygen delivery) and ischemia (tissue oxygen starvation due to
the obstruction of the inflow of arterial blood) are common causes of brain
damage and death during and after many surgical procedures and in other critical
care situations. A December 1996 article in The New England Journal of Medicine
reported on a 24-institution study and concluded that adverse cerebral outcomes
after coronary artery bypass graft surgery are relatively common and serious and
are associated with substantial increases in death, length of hospitalization
and use of intermediate- or long-term care facilities. Adverse cerebral outcomes
occurred in 6.1% of the patients included in the study. Additional studies have
estimated that a higher percentage of patients experience some neurological
decline after heart surgery and that insufficiency of oxygen delivery to the
brain is a frequent cause of this problem. The New England Journal article
concluded that new diagnostic and therapeutic strategies must be developed to
lessen such injury.
Oxygen is carried to the brain by hemoglobin in the blood. Hemoglobin
passes 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. Brain oxygen imbalances can be caused by several factors, including
changes in oxygen saturation (the percentage of hemoglobin contained in a given
amount of blood which carries oxygen) in the arteries, blood flow to the brain,
hemoglobin concentration and oxygen consumption by the brain.
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Brain oxygen information is important in surgical procedures requiring
general anesthesia, in other critical care situations with a high risk of brain
oxygen imbalances, as well as in the treatment of patients with head injuries or
strokes. These procedures include cardiovascular and vascular surgeries,
surgeries on elderly patients involving abnormal blood pressure, any
neurosurgery, major surgeries involving the neck, transplant surgeries and
treatments of patients with diseases resulting from high blood pressure, lung
problems, or head, organ or heart injuries and treatments of patients suffering
from strokes. These patients are most commonly found in operating rooms as well
as in the other critical care areas of hospitals, especially recovery rooms,
ICUs and emergency rooms. The Company believes that medical professionals need
immediate and continuous information about changes in the oxygen levels in the
blood in the brain to identify brain oxygen imbalances. After they are alerted
to such imbalances, medical professionals have the information to take
corrective action through the introduction of medications, anesthetic agents or
mechanical intervention, potentially improving patient outcome and reducing the
costs of care. Immediate and continuous information about changes in brain
oxygen levels would also provide immediate feedback regarding the adequacy of
the selected therapy. Equally important, without information about brain oxygen
levels, therapy that may not be necessary might be initiated to assure adequate
brain oxygen levels. Unnecessary therapy can have an adverse impact on patient
safety and increase hospital costs.
Based on a 1995 survey, industry sources estimate that more than 24 million
surgeries were performed in the United States. Industry sources also estimate
that, in 1993, there were more than 4.4 million surgeries involving the heart or
the blood vessels around the heart. Such surgeries include more than 600,000
open heart surgeries and 89,000 endarterectomies (the removal of blockage in the
artery). Industry sources estimate, based on a 1985 survey, that there were more
than 26,800 operating rooms in the United States and, based on a 1993 survey,
that there were more than 6,100 ICUs in the United States with more than 90,000
beds.
Currently, several different methods are used to detect one or more of the
factors affecting brain oxygen levels or the effects of brain oxygen imbalances.
These methods include invasive jugular bulb catheter monitoring, transcranial
Doppler, electroencephalograms ("EEG"), intracranial pressure monitoring and the
neurological examination. These methods have not been widely adopted to monitor
brain oxygen levels for a variety of reasons. The use of any of these methods is
limited because it is either expensive, difficult or impractical to use as a
brain monitor, invasive, not available under certain circumstances (such as when
the patient is unconscious or has suppressed neural activity), not able to
measure all of the factors that may affect brain oxygen imbalances, not organ
specific or not able to provide continuous information or able to measure only
the effects of brain oxygen imbalances.
Arterial oxygen saturation is only one of the factors that can affect
oxygen imbalances in the brain. Pulse oximetry measures oxygen saturation in the
arteries. It is non-invasive, uses optical spectroscopy and has become a
standard of care for measuring arterial oxygen saturation in critical care
situations. However, pulse oximeters require a strong pulse, making them
unavailable during bypass surgeries, surgeries involving induced hypothermia or
any other time the patient does not have a strong peripheral pulse. Pulse
oximeters provide information about the oxygen saturation of the arteries in a
finger or earlobe, not oxygen imbalances in the brain. Changes in the oxygen
balance in the brain may not have any affect on the oxygen levels in a finger or
earlobe. For example, a blocked artery to the brain would affect oxygen in the
brain, but would not affect the amount of oxygen in the arteries in the finger.
The Cerebral Oximeter is the only FDA-cleared non-invasive monitoring
system that provides continuous information about changes in the blood oxygen
level in the adult brain. It is easy to use and relatively inexpensive and
provides medical professionals with new information to help them identify brain
oxygen imbalances. This information may facilitate timely intervention, provide
feedback regarding the adequacy of the selected therapy and provide medical
professionals with additional assurance when they make decisions regarding the
need for therapy, thereby potentially improving patient outcome and reducing the
cost of care.
MARKET TRENDS
The Company believes the market for its product is driven by the following
market trends:
Demand to Reduce Health Care Costs. Hospitals in the United States are
increasingly faced with direct economic incentives to control health care costs
and improve the efficiency of health care through improved
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labor productivity, shortened hospital stays and more selective performance of
medical procedures and use of facilities and equipment. Hospitals often receive
a fixed fee from Medicare, managed care organizations and private insurers based
on the disease diagnosed, rather than based on the services actually performed.
Therefore, hospitals are increasingly focused on avoiding unexpected costs, such
as those associated with increased hospital stays resulting from patients with
brain damage or other adverse outcomes following surgery. This focus on avoiding
unexpected costs is especially pronounced in the operating room and other
hospital critical care areas due to their high operating costs. The economic and
human costs of brain damage can be tremendous. Even short extensions of hospital
stays resulting from brain damage can be expensive. In addition, overtreating a
patient as a result of lack of knowledge about brain oxygen levels can result in
unnecessary costs.
Organ-Specific Monitoring; Current Emphasis on the Brain. The Company
believes that physicians and hospitals are increasingly interested in monitoring
the status of specific organs in the body, especially the brain. It also
believes there is an increased interest in understanding how the brain functions
and in finding ways to prevent injury to, and cures to diseases affecting, the
brain. The Company believes that this interest has led to a greater focus on
monitoring the brain, both to determine how it functions and to monitor the
effects of various actions on the brain. In July 1989, Congress passed a
resolution, and President Bush signed a proclamation, designating the 1990s as
the "Decade of the Brain."
Less Invasive Medical Procedures. The Company believes there is a trend
toward less invasive medical procedures. Notable examples include laparoscopic
procedures in general surgery and arthroscopic procedures in orthopedic surgery.
Such procedures are designed to reduce trauma, thereby decreasing complications,
reducing pain and suffering, speeding recovery and decreasing costs associated
with patient care. The Company also believes that there is a trend to minimize
invasive procedures relating to the brain to increase the safety of patients and
medical professionals, reduce recovery time and minimize costs.
Aging Population. According to the Administration on Aging, United States
Department of Health and Human Services, approximately 33.5 million persons in
the United States were age 65 or older in 1995, representing 13% of the
population. The number of Americans age 65 or older increased by approximately
2.3 million, or 7%, between 1990 and 1995, compared to an increase of 5% for the
under-65 population. The Administration on Aging predicts that the number of
Americans age 65 or older will increase to approximately 34.7 million by the
year 2000 and to approximately 53.2 million by the year 2020. The Company
believes that older patients require a higher level of medical care using more
procedures in which the patient or the procedure involves a risk of brain oxygen
imbalances. Medical and surgical procedure growth rate has remained steady
recently, and industry analysts expect this trend to continue.
BUSINESS STRATEGY
The Company's objective is to establish the Cerebral Oximeter as a
"standard of care" in surgical procedures requiring general anesthesia and in
other critical care situations. Key elements of the Company's strategy are as
follows:
Target Surgical Procedures With a High Risk of Brain Oxygen Imbalances. The
Company is targeting its initial marketing efforts primarily on the use of the
Cerebral Oximeter in surgical procedures with a high risk of brain oxygen
imbalances, such as cardiovascular and vascular surgeries and surgeries on
elderly patients involving abnormal blood pressure. The Company believes that
the medical professionals involved in these surgeries are the most aware of the
risks of brain damage resulting from brain oxygen imbalances. Therefore, the
Company believes that it will be easier to demonstrate the clinical benefits of
the Cerebral Oximeter and potentially gain market acceptance for its product in
connection with these surgeries.
Demonstrate Clinical Benefits and Promote Acceptance of the Cerebral
Oximeter. The Company sponsors clinical studies using the Cerebral Oximeter to
provide additional evidence of its benefits. The resulting publication of any
favorable peer-reviewed papers is used to help convince the medical community of
the clinical benefits of the Cerebral Oximeter. The Company also promotes
acceptance of the Cerebral Oximeter in the medical community by encouraging
surgeons, anesthesiologists and nurses in leading
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hospitals, whose opinions and practices the Company believes are valued by other
hospitals and physicians, to use the Cerebral Oximeter on a trial basis. The
Company believes that successful evaluations of the Cerebral Oximeter by these
medical professionals will accelerate the acceptance of the Cerebral Oximeter by
other medical professionals. The Company sponsors discussions among physicians
who have used the Cerebral Oximeter about its clinical benefits.
Expand Marketing and Sales Activities. The Company has recently established
a distribution network consisting of its direct sales employees and
distributors. The Company is expanding its marketing and sales efforts to
increase the medical community's exposure to its INVOS technology and the
Cerebral Oximeter, including increased participation in trade shows and medical
conferences and increased product evaluations. The Company is aggressively
marketing its product through its existing sales force and leverages its sales
resources through the use of its distributors, including Baxter Limited in
Japan.
Develop Additional Applications of the Cerebral Oximeter. The Company is in
the process of developing product-line extensions of the Cerebral Oximeter for
use on children and newborns. The Company believes that these natural extensions
of its existing product will increase the market for the Cerebral Oximeter
without the more significant development efforts required for entirely new
products. The Company believes that non-invasive monitoring is important for
newborns, as they have higher risks of oxygen imbalances and less blood volume
from which medical professionals can make invasive blood gas measurements.
License Technology to Medical Device Manufacturers. The Company plans to
license its Cerebral Oximeter technology to other medical device manufacturers
to expand the installed base of Cerebral Oximeters and increase the demand for
SomaSensors. Such a license might be made to a company interested in
incorporating the Cerebral Oximeter into a multi-function monitor. The Company
believes that such an arrangement could provide another distribution channel for
the Company's Cerebral Oximeter. The Company, however, has no current
commitments for any such licenses.
In addition, the Company is analyzing the feasibility of other applications
of its technology. The Company has entered into a consulting arrangement with
NeuroPhysics Corporation in connection with research into the feasibility of
four new products.
PRODUCT AND TECHNOLOGY
THE CEREBRAL OXIMETER
The Company's Cerebral Oximeter is the only FDA-cleared, non-invasive
patient monitoring system that provides continuous information about changes in
the blood oxygen level in the adult brain. It is a portable and easy-to-use
monitoring system that is placed at a patient's bedside in hospital critical
care areas, especially operating rooms, recovery rooms, ICUs and emergency
rooms. Surgeons, anesthesiologists and other medical professionals use the
information provided by the Cerebral Oximeter to identify brain oxygen
imbalances and take corrective action, potentially improving patient outcome and
reducing the cost of care. Once the cause of a cerebral oxygen imbalance is
identified and therapy is initiated, the Cerebral Oximeter provides immediate
feedback regarding the adequacy of the selected therapy. It can also provide
medical professionals with an additional level of assurance when they make
decisions regarding the need for therapy.
Unlike certain existing monitoring methods, the Cerebral Oximeter functions
even when the patient is unconscious, lacks a strong peripheral pulse or has
suppressed neural activity. The measurement made by the Cerebral Oximeter is
dominated by the blood in the veins. Therefore, it responds to the changes in
factors that affect the balance between cerebral oxygen supply and demand,
including changes in arterial oxygen saturation, cerebral blood flow, hemoglobin
concentration and cerebral oxygen consumption. The Cerebral Oximeter responds to
global changes in brain oxygen levels and to events that affect the brain oxygen
levels in the region beneath the SomaSensor.
The Cerebral Oximeter monitoring system is comprised of (i) a portable unit
including a computer and a display monitor, (ii) a single-use, disposable
sensor, the SomaSensor, (iii) proprietary software and (iv) a
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preamplifier cable. The SomaSensor is adhered to a patient's forehead and
connected to the computer through the preamplifier cable. The SomaSensor
continuously transmits and receives predetermined wavelengths of light sent
through the scalp, muscle and skull into the brain tissue. The computer receives
the information about the intensity of the light scattered by the blood and
tissue in the area being monitored. The computer uses the Company's proprietary
software to analyze this information and provide a continuous digital and trend
display on the monitor of an index of the oxygen saturation in the area of the
brain under the SomaSensor.
The portable unit includes a menu driven user interface which provides easy
access for setting high and low audible alarms and permits a customized display
format and data retrieval. Single-function keys offer a convenient means of
powering the Cerebral Oximeter, silencing alarms, marking important events and
printing results that can be stored for up to 24 hours and retrieved by a
variety of standard, commercially available printers. The portable unit measures
12 inches wide, 6 inches high and 13 inches deep and weighs approximately 15
pounds.
The suggested list prices for the Cerebral Oximeter and the SomaSensor in
the United States are $8,995 and $59, respectively. Users of the Cerebral
Oximeter will be required to purchase disposable SomaSensors on a regular basis.
The SomaSensor may only be used once because after one use it may become
contaminated and its effectiveness is not warranted by the Company. The Company
provides a one-year warranty on the Cerebral Oximeter, which the Company will
satisfy by repairing or exchanging those units 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 following table summarizes the principal features and related benefits
of the Cerebral Oximeter:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
FEATURES BENEFITS
------------------------------------------------------------------------------------------------------
<S> <C>
FDA-cleared - Access to United States and certain foreign
markets
------------------------------------------------------------------------------------------------------
Non-invasive - Consistent with market trend toward less invasive
medical procedures
- No risk to patients and medical professionals
- No added patient recovery costs
------------------------------------------------------------------------------------------------------
Continuous Information - Immediate information regarding brain oxygen
imbalances
- Real-time guide to therapeutic interventions
------------------------------------------------------------------------------------------------------
New Organ-Specific Information - Provides information about oxygen imbalances in
the brain
------------------------------------------------------------------------------------------------------
Relatively Inexpensive - Low cost relative to other brain monitors and
medical devices
- Small portion of the cost of the procedures in
which it is used
- New information can potentially improve patient
outcome and reduce the cost of care
------------------------------------------------------------------------------------------------------
Easy-to-Use - Does not require a trained technician to operate
or interpret
- Automatic SomaSensor calibration
- Simple user interface and controls
- Audible alarm limits
------------------------------------------------------------------------------------------------------
Effective in Difficult Circumstances - Provides information when the patient is
unconscious, lacks a strong peripheral pulse or
has suppressed neural activity, specifically
during cardiac arrest, hypothermia, hypertension,
hypotension and hypovolemia
- Indicates oxygen imbalances in the brain, not just
blood flow, oxygenation of the arteries or the
effects of imbalances
------------------------------------------------------------------------------------------------------
Portable - Placed at patient's bedside
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
</TABLE>
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OPTICAL SPECTROSCOPY TECHNOLOGY
The Company's proprietary In Vivo Optical Spectroscopy ("INVOS") technology
is based primarily on the physics of optical spectroscopy. Optical spectroscopy
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. Physicians and scientists can use spectrophotometers to
examine human blood and tissue. 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, physicians can obtain
information about the matter under analysis. Optical spectroscopy generates no
ionizing radiation and produces no known hazardous effects.
Optical spectroscopy was first used clinically in the 1940s at the
Sloan-Kettering Institute for cancer research. The pulse oximeter 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 and the oxygenated hemoglobin and measuring the relative amounts of
each, oxygen saturation of hemoglobin can be measured. However, the use of
optical spectroscopy in the body has not generally been useful when the
substances to be measured are surrounded by, are behind, or are near bone,
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.
INVOS TECHNOLOGY
The Cerebral Oximeter is based on INVOS technology. In 1982, the Company
commenced research and development efforts in connection with a spectroscopic
instrument for the measurement of breast tissue abnormalities. The Company's
first product, the Somanetics INVOS 2100 System (the "INVOS 2100"), used the
same INVOS technology as the Cerebral Oximeter. Subsequently, the Company
commenced analysis of the application of INVOS technology to the measurement of
changes in cellular metabolism in the brain. Early studies conducted in
conjunction with the Henry Ford Neurosurgical Institute, 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 ICUs at Henry Ford Hospital and
later at Bowman Gray School of Medicine and Mount Sinai Medical Center.
Like other applications of optical spectroscopy, INVOS technology also
analyzes various characteristics of human blood and tissue by measuring and
analyzing low-intensity visible and near-infrared light transmitted into
portions of the body. It measures the composition of substances by detecting the
effect they have on light. The INVOS technology measurement is made by
transmitting low-intensity visible and near-infrared light through a portion of
the body and detecting the manner in which the molecules of the exposed
substance interact with light at specific wavelengths. INVOS technology detects
this interaction by measuring the intensity of the various wavelengths of light
received by light sensors. 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 such region of the brain.
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[PATENTED DUAL DETECTOR SOMASENSOR PICTURE]
The Company has developed a method of reducing extraneous spectroscopic
data caused by surrounding bone, muscle and other tissue. This method allows
data to be gathered from areas of the body which previously could not be
analyzed using optical spectroscopy. The dual detector design of the SomaSensor
enables the measurement of scattered light intensities from the intermediate
tissues of skin, muscle and skull in a separate process. As illustrated above,
the depth of penetration of the light signal is related to the distance between
the light source and the shallow and deep detectors. While both detectors
receive similar information about the tissue outside the brain, the detector
further from the light source receives more information specific to the brain
than does the detector closer to the light source. By subtracting the two
measurements, INVOS technology is able to suppress the influence of the tissues
outside the brain to provide a measurement of changes in brain oxygen
saturation.
RESEARCH AND DEVELOPMENT
The Company is currently focusing its research and development efforts on
product-line extensions of the Cerebral Oximeter for use on children and
newborns and enhancements to the Cerebral Oximeter. The Company is currently
sponsoring clinical studies of the Cerebral Oximeter for use on children and
newborns, but expects to redesign the SomaSensor for use on smaller heads. The
Company believes that non-invasive monitoring is especially important in
newborns, who have higher risks of oxygen imbalances and less blood volume from
which medical professionals can make invasive blood gas measurements.
In addition to the Company's internal research and development activities,
the Company has entered into a consulting arrangement with NeuroPhysics
Corporation pursuant to which the Company is funding a portion of NeuroPhysics'
research into the feasibility and development of prototypes of four new
products. The United States government is also funding a portion of the research
pursuant to two research grants. NeuroPhysics has granted the Company certain
ownership and commercialization rights in the new products, subject to the
rights of the United States government and royalties payable to NeuroPhysics.
The new products are intended to be non-invasive, in vivo, near-infrared
spectroscopy devices that (i) monitor liver oxygenation for assessing and
controlling hemorrhagic shock (shock resulting from loss of blood), (ii) locate
and assess subdural hematomas (bleeding between the brain and the skull) in head
trauma patients, (iii) monitor certain blood gasses and (iv) monitor fetal
cerebral blood oxygenation during labor and delivery.
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During the three months ended February 28, 1997, the Company spent $164,211
on research, development and engineering. During fiscal years 1996, 1995 and
1994 the Company spent $235,354, $285,893 and $549,737, respectively, on
research, development and engineering.
MARKETING, SALES AND DISTRIBUTION
MARKETING
The Cerebral Oximeter is for use on patients at risk of brain oxygen
imbalances. These patients are most commonly found in operating rooms amongst
those undergoing general anesthesia for various surgical procedures as well as
in the other critical care areas of hospitals, especially recovery rooms, ICUs
and emergency rooms. After the Cerebral Oximeter is accepted in hospitals,
future markets might include free-standing operating rooms, clinics, ambulances
and nursing homes.
The Company markets the Cerebral Oximeter primarily to cardiovascular and
vascular surgeons, neurosurgeons and anesthesiologists. The Company believes
that these specialists are the medical professionals most aware of the risks of
brain damage resulting from brain oxygen imbalances. 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, especially those
the Company considers opinion leaders. Product evaluations have already begun at
over 100 university and other hospitals. In addition, the Company is sponsoring
discussions among physicians who have used the Cerebral Oximeter about its
clinical benefits.
The Company believes that favorable peer review is a key element to a
product's success in the medical equipment industry. Accordingly, the Company
supports clinical research programs with third-party clinicians and researchers
intended to demonstrate the need for, and clinical benefits of, the Cerebral
Oximeter with the specific objective of publishing the results in peer-reviewed
journals. 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 or reports of the results of the use of the Cerebral Oximeter in
various procedures. The Company attends trade shows and medical conferences in
order to introduce and promote the Cerebral Oximeter and to meet medical
professionals with an interest in submitting peer-reviewed papers to appropriate
medical journals and to major national meetings. In fiscal year 1996, a total of
30 presentations concerning the Cerebral Oximeter were presented to 20 meetings,
and 13 peer-reviewed articles mentioning the Cerebral Oximeter were published.
SALES AND DISTRIBUTION
The Company sells the Cerebral Oximeter through its direct sales force and
independent distributors. The Company has engaged distributors to provide it
with increased geographic coverage and local sales contacts. In the United
States, the Company sells the Cerebral Oximeter through its 19 direct
salespersons covering 21 states exclusively and 29 states in which they support
five distributors. Sales compensation and incentive plans are designed to
motivate the Company's direct sales force by making half of their targeted
compensation dependent on meeting targeted sales levels. The Company believes
that the minimum selling cycle for new medical devices is approximately six to
nine months.
In March 1997, the Company entered into a marketing arrangement with Health
Services Corporation of America, the representative of a buying group for many
small hospitals and extended care facilities. Health Services Corporation of
America will inform its member hospital administrators that the Company is its
sole supplier of cerebral oximetry equipment and will forward the Company's
marketing materials to such administrators. In exchange, for its marketing
assistance, the Company's product will be available to the members of the buying
group at a discount.
Since FDA clearance in June 1996 through April 11, 1997, the Company sold
61 Cerebral Oximeters to distributors and customers. United States hospitals
that have purchased Cerebral Oximeters include the Mayo Clinic Scottsdale, the
University of Kentucky Hospital, LAC-University of Southern California, UCLA
Medical Center and Orlando Regional Medical Center. In addition, Cerebral
Oximeters are in use at more
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<PAGE> 36
than 100 United States hospitals for clinical research and product evaluation,
including the Duke Heart Center, Emory University School of Medicine, Brigham &
Women's Hospital, the University of Louisville Hospital and the University of
Pittsburgh. The Company did not have any backlog of firm orders as of April 11,
1997 and does not believe that this is indicative of trends in its business,
especially because the Company is in the development stage and received its FDA
510(k) clearance in June 1996.
Internationally, the Company has distribution agreements with 27
distributors covering 78 countries. In March 1995, the Company engaged Baxter
Limited as its exclusive distributor in Japan. In April 1995, the Company was
licensed by 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 assists United
States-based companies in executing 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 February
1997, the Company engaged Mitani & Co., LLC to assist the Company in finding new
and replacement distributors in specified far-eastern markets.
For a description of sales to major customers, see Note 10 of Notes to
Financial Statements included elsewhere in this Prospectus. The Company's
distributor in Japan has been the Company's largest customer in the first three
months of fiscal 1997 and 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 an adverse effect on the Company's business, financial
condition and results of operations.
The Company's export sales for the three months ended February 28, 1997
were approximately $218,000. 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. For a description of the breakdown of sales between
refurbished model 3100 Cerebral Oximeters, model 3100A Cerebral Oximeters and
SomaSensors, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations."
MANUFACTURING
The Company assembles the Cerebral Oximeter in its facilities in Troy,
Michigan, from components purchased from outside suppliers. The Company
assembles the Cerebral Oximeter to control its quality and costs and to permit
it to make changes to the Cerebral Oximeter faster than it could with
third-party assembly. The Company believes that each component is generally
available from several potential suppliers. The SomaSensor, the printed circuit
boards, other mechanical components and the unit enclosure 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 assemble the components of the Cerebral Oximeter. 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 SomaSensor or the components of the Cerebral Oximeter.
COMPETITION
The Company does not believe there is currently any direct commercial
competition for the Cerebral Oximeter. The Company believes, however, that the
market for cerebral oximetry products is in the early stages of its development
and, if it develops, may become highly competitive. The Company is aware of
foreign companies that have sold products relating to cerebral metabolism
monitoring for research or evaluation. The medical equipment industry is
characterized by intense competition and extensive research and development.
Other companies and individuals are engaged in research and development of
non-invasive cerebral oximeters, and the Company believes there are many other
potential entrants into the market, including the Critikon division of Johnson &
Johnson. Some of these potential competitors have well established reputations,
customer relationships and marketing, distribution and service networks, and
have substantially longer histories in the medical equipment industry, larger
product lines and greater financial,
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technical, manufacturing, research and development and management resources than
those of the Company. Many of these potential competitors have long-term product
supply relationships with the Company's potential customers. These potential
competitors may succeed in developing products that are at least as reliable and
effective as the Company's product, that make additional measurements, or that
are less costly than the product developed by the Company. These potential
competitors may be more successful than the Company in manufacturing and
marketing their products and may be able to take advantage of the significant
time and effort invested by the Company to gain medical acceptance of cerebral
oximetry. In addition, two patents issued to an unaffiliated third party and
relating to cerebral oximetry will expire in the next year, making that
technology generally available and potentially helping the development of
competing products. See "Market Overview."
The Company also competes indirectly with the numerous companies that sell
various types of medical equipment to hospitals for the limited amount of
funding allocated to capital equipment in hospital budgets. The market for
medical equipment is subject to rapid change due to an increasingly competitive,
cost-conscious environment and to government programs intended to reduce the
cost of medical care. Many of these manufacturers of medical equipment are
large, well-established companies whose resources, reputations and ability to
leverage existing customer relationships may give them a competitive advantage
over the Company. The Company's product and technology also compete indirectly
with many other methods currently used to measure blood oxygen levels or the
effects of low blood oxygen levels.
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.
PROPRIETARY INFORMATION
The Company has twelve United States patents and three foreign patents. The
Company's patents basically cover methods and apparatus for introducing light
into a body part and receiving, measuring and analyzing the resulting light and
its interaction with tissue. Such methods also involve receiving, measuring 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. Although the Company believes that one
or more of its issued patents cover some of the underlying technology used in
the Cerebral Oximeter, only seven of the issued patents expressly refer to
examination of the brain or developments involving the Cerebral Oximeter.
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, the
corresponding European Community patent was issued in 1990, and the
corresponding Japanese patent was issued in 1991. The Company's eleven
additional United States patents expire on various dates from February 2005 to
December 2013. The Company has filed three additional patent applications in the
United States with respect to other aspects of its technology relating to the
interaction of light with tissue.
Many patents have previously been issued to third parties involving optical
spectroscopy and the interaction of light with tissue, some of which relate to
the use of optical spectroscopy in the area of brain metabolism monitoring, the
primary use of the Cerebral Oximeter. No patent infringement claims have been
asserted against the Company.
In addition to its patent rights, the Company has obtained United States
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 and on
confidentiality agreements to protect its technology, but believes that neither
its patents nor other legal rights will necessarily prevent third
36
<PAGE> 38
parties from developing or from using similar or related technology to compete
against the Company's product. Moreover, 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.
GOVERNMENT REGULATION
The testing, manufacture and sale of the Company's products are subject to
regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign agencies. Pursuant to the Federal Food, Drug,
and Cosmetic Act, and the regulations promulgated thereunder, the FDA regulates
the preclinical and clinical testing, manufacture, labeling, distribution and
promotion of medical devices. Noncompliance with applicable requirements can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing clearances or approvals and criminal prosecution.
A medical device may be marketed in the United States only with prior
authorization from the FDA unless it is subject to a specific exemption. Devices
classified by the FDA as posing less risk than class III devices are categorized
as class I or II and are eligible to seek "510(k) clearance." Such clearance
generally is granted when submitted information establishes that a proposed
device is "substantially equivalent" in intended use to a class I or II device
already legally on the market or to a "preamendment" class III device (i.e., one
that has been in commercial distribution since before May 28, 1976) for which
the FDA has not called for PMA applications (as defined below). The FDA in
recent years has been requiring a more rigorous demonstration of substantial
equivalence than in the past, including requiring clinical trial data in some
cases. For any devices that are cleared through the 510(k) process,
modifications or enhancements that could significantly affect safety or
effectiveness, or constitute a major change in the intended use of the device,
will require new 510(k) submissions. The Company believes that it now usually
takes from one to four months from the date of submission to obtain 510(k)
clearance, but it can take substantially longer. The Cerebral Oximeter has been
categorized as class II.
A device requiring prior marketing authorization that does not qualify for
510(k) clearance is categorized as class III, which is reserved for devices
classified by FDA as posing the greatest risk (e.g., life-sustaining,
life-supporting or implantable devices), or devices that are not substantially
equivalent to a legally marketed class I or class II device. A class III device
generally must receive approval of a premarket approval ("PMA") application,
which requires proving the safety and effectiveness of the device to the FDA.
The process of obtaining PMA approval is expensive and uncertain. The Company
believes that is usually takes from one to three years after filing, but it can
take longer.
If human clinical trials of a device are required, whether for a 510(k) or
a PMA application, and the device presents a "significant risk," the sponsor of
the trial (usually the manufacturer or the distributor of the device) will have
to file an investigational device exemption ("IDE") application prior to
commencing human clinical trials. The IDE application must be supported by data,
typically including the results of animal and laboratory testing. If the IDE
application is approved by the FDA and one or more appropriate Institutional
Review Boards ("IRBs"), human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. If the device presents a "nonsignificant risk" to the patient, a sponsor
may begin the clinical trial after obtaining approval for the study by one or
more appropriate IRBs without the need for FDA approval.
In June 1992, the Company received 510(k) clearance from the FDA to market
the Cerebral Oximeter in the United States for use on adults. The Company began
commercial shipments of Cerebral Oximeters and SomaSensors in May 1993. In
November 1993, the Company received notification that the FDA had rescinded the
Company's 510(k) clearance to market the Cerebral Oximeter. As a result, all
commercial sales of the Company's product were suspended. In February 1994, the
Company resumed marketing its product in several foreign countries. In June
1996, the Company received 510(k) clearance from the FDA to market the Cerebral
Oximeter, including the SomaSensor, in the United States.
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<PAGE> 39
The Company has made modifications to the Cerebral Oximeter, which the
Company believes do not require the submission of new 510(k) notices. There can
be no assurance, however, that the FDA would agree with any of the Company's
determinations not to submit a new 510(k) notice for any of these changes or
would not require the Company to submit a new 510(k) notice for any of the
changes made to the device. If the FDA requires the Company to submit a new
510(k) notice for any device modification, the Company may be prohibited from
marketing the modified device until the 510(k) notice is cleared by the FDA.
Any devices manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA and certain state agencies. Manufacturers of medical devices for
marketing in the United States are required to adhere to applicable regulations
setting forth detailed GMP requirements, which including testing, control and
documentation requirements. Manufacturers must also comply with Medical Device
Reporting requirements that a firm report to the FDA any incident in which its
product may have caused or contributed to a death or serious injury, or in which
its product malfunctioned and, if the malfunction were to recur, it would be
likely to cause or contribute to a death or serious injury. Labeling and
promotional activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. Current FDA enforcement policy
prohibits the marketing of approved medical devices for unapproved uses.
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with GMP requirements and other applicable regulations.
The FDA has recently finalized changes to the GMP regulations that will likely
increase the cost of compliance with GMP requirements. The Company also is
subject to numerous federal, state and local laws relating to such matters as
safe working conditions, manufacturing practices, environmental protection, fire
hazard control and disposal of hazardous or potentially hazardous substances.
If any of the Company's FDA clearances are denied or rescinded, sales of
the Company's product 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 product 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 that is not in
commercial distribution in the United States, but which needs 510(k) clearance
to be commercially distributed in the United States, 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 labeled and intended for export only,
(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 hospital critical
care 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. The Company has obtained products liability insurance with a liability
limit of $1,000,000. The Company also maintains coverage for property damage or
loss, general liability, business interruption, travel-accident, directors' and
officers' liability and workers' compensation.
EMPLOYEES
As of April 11, 1997, the Company employed 40 full-time individuals,
including 23 in sales and marketing, five in research and development, seven in
general and administration and five in manufacturing, quality and service. The
Company also uses three contract employees and four consultants. The Company
believes that its future success is dependent, in large part, on its ability to
attract and retain highly qualified managerial, marketing and technical
personnel. 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.
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PROPERTIES
The Company leases 23,392 square feet of office, manufacturing and
warehouse space in Troy, Michigan, of which approximately 12,000 square feet is
office space for sales and marketing, engineering, accounting and other
administrative activities. The lease expires December 31, 1997. The Company is
currently negotiating an extension of its lease. 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 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.
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 elsewhere in this
Prospectus.
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 elsewhere in this Prospectus.
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<PAGE> 41
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company as of February 28, 1997
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Bruce J. Barrett.......................... 38 President, Chief Executive Officer and a Director
Raymond W. Gunn........................... 39 Executive Vice President, Chief Financial
Officer, Treasurer and Secretary
H. Raymond Wallace (1).................... 61 Chairman of the Board
Daniel S. Follis (1)...................... 59 Director
Dr. James I. Ausman....................... 59 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee and Member of the Audit Committee.
Bruce J. Barrett. Mr. Barrett has served as the Company's President and
Chief Executive Officer and a director since June 1, 1994. 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.
While at Abbott Critical Care Systems, Mr. Barrett managed Abbott's invasive
oximetry products for approximately four years. Mr. Barrett received a B.S.
degree in marketing from Indiana State University and an M.B.A. degree from
Arizona State University.
Raymond W. Gunn, CPA. Mr. Gunn 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. His prior experience includes serving as a financial manager
with Pulte Home Corporation and a senior accountant with Deloitte Haskins &
Sells. Mr. Gunn received a B.S. degree in management from Oakland University.
H. Raymond Wallace. Mr. Wallace has served as the Company's Chairman of the
Board since January 1995 (as a non-officer Chairman of the Board since April
1995) and as a director of the Company since June 1994. He also served as a
consultant to the Company from April 1994 until January 1995. He has also served
as Chairman of the Board of Cardiometrics, Inc., a cardiovascular medical device
company, since December 1993, and as a self-employed consultant to medical
device and other companies since January 1994. From September 1986 until May
1993 (when he retired), he served as Vice President and General Manager of
Abbott Critical Care Systems. Mr. Wallace received a B.A. degree from Ohio State
University and an M.B.A. degree from the University of California, Berkeley.
Daniel S. Follis. Mr. Follis has served as a director of the Company since
April 1989. Since 1981, he has served as President of Verschuren & Follis, Inc.,
which advises and administers The Infinity Fund, a limited partnership investing
in emerging growth companies. Mr. Follis received a B.A. degree in business from
Michigan State University.
James I. Ausman, M.D., Ph.D. Dr. Ausman has served as a director of the
Company since June 1994. He has been Professor and Head of the Department of
Neurosurgery at the University of Illinois at Chicago since August 1991. From
September 1978 until July 1991 he was Chairman of the Department of Neurosurgery
at Henry Ford Hospital. From December 1987 until July 1991 he served as Director
of the Henry Ford Neurosurgical Institute, also at Henry Ford Hospital. In
addition, he was Clinical Professor of Surgery, Section of Neurosurgery at the
University of Michigan in Ann Arbor from 1980 until 1991. Dr. Ausman received a
B.S. degree in chemistry and biology from Tufts University, a Doctorate of
Medicine from Johns
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<PAGE> 42
Hopkins University School of Medicine, a Masters of Arts in Physiology, from the
State University of New York at Buffalo, and a Ph.D. in Pharmacology from George
Washington University. He has also received graduate training in neurosurgery at
the University of Minnesota and has obtained board certification from the
American Board of Neurological Surgery.
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 of the
Company they currently hold. Officers of the Company serve at the discretion of
the Board of Directors.
Effective November 4, 1996, Gary D. Lewis, a former director, 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. The directors of the Company will hold office until the
Annual Meeting of Shareholders to be held in 1998 for Bruce J. Barrett, the
Annual Meeting of Shareholders to be held in 1999 for Daniel S. Follis and Dr.
James I. Ausman, and the Annual Meeting of Shareholders to be held in 2000 for
H. Raymond Wallace, and until their successors are elected and qualified.
Directors may not be removed without cause.
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.
OTHER KEY PERSONNEL
The following persons, although not executive officers of the Company, are
regarded by management as key employees of the Company:
Richard Scheuing. Mr. Scheuing has served as the Company's Director of
Research and Development since March 1993. He joined the Company in 1991 as its
Director of Mechanical Engineering. He is an inventor on two of the Company's
issued patents, and one patent that is pending. Before joining the Company, he
was Director of Mechanical Engineering for Irwin Magnetic Systems, Inc. from
1987 until 1991 and was a Development Engineer with the Sarns division of
Minnesota Mining and Manufacturing Company ("3M") from 1982 to 1987. He received
a B.S. degree in mechanical engineering from the University of Michigan.
Ronald Widman. Mr. Widman has served as the Company's Director of Medical
Affairs since August 1994. Before joining the Company as Marketing Manager in
1991, he was employed by Mennen Medical, Inc., a manufacturer and marketer of
medical monitoring and diagnostic devices, for 12 years, where he held various
positions in domestic and international medical product marketing, including
Senior Product Manager from 1982 until 1991. He is the author of several papers
and articles related to medical care and monitoring devices.
SCIENTIFIC ADVISORS TO THE COMPANY
The Company uses scientific advisors primarily for individual consultation
in their areas of expertise, including assisting it with technical issues
regarding its technology and assisting it in identifying and evaluating
potential additional applications of the Company's INVOS technology.
The following are scientific advisors to the Company:
James I. Ausman, M.D., Ph.D. For a description of the principal occupation
and employment of Dr. Ausman, see "Directors and Executive Officers."
Gregory Crosby, M.D. Dr. Crosby has served as the Evan & Marion Helfaer
Professor and Chairman of the Department of Anesthesiology at the University of
Wisconsin Medical School since 1996. For 15 years prior to 1996, he was
affiliated with Harvard Medical School and Massachusetts General Hospital. Dr.
Crosby
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<PAGE> 43
is a neuroanesthesiologist who serves as an examiner on the American Board of
Anesthesiology, on the American Society of Anesthesiologists subcommittee on
Clinical Neurosciences, as Associate Editor of Anesthesiology, as Section Editor
for Neuroanesthesia of the Journal of Clinical Anesthesia and as a member of the
editorial board for the Journal of Neurosurgical Anesthesiology.
Robert R. Di Loreto, M.D. Dr. Di Loreto has held senior staff appointments
in the Department of Surgery, Urology Section and the Department of Pediatrics,
Pediatric Urology Section, at St. John Hospital and Medical Center in Detroit
since 1980. In addition, he has been the Medical Director of Michigan Mobile
Lithotripsy Inc. since 1988 and has served on the adjunct teaching staff,
Department of Urology, at Henry Ford Hospital since 1980. Dr. Di Loreto also has
sat as a panel member, Center for Device Evaluation, Division of
Gastroenterology and Urology, at the FDA, since 1990.
Manuel Dujovny, M.D. Dr. Dujovny has served as the Professor and Associate
Head of the Department of Neurosurgery, College of Medicine and Neuropsychiatric
Institute, University of Illinois Hospital at Chicago, since August 1991. He
also is the Director of Imaging Guided Stereotactic Surgery and Radiosurgery at
the University Hospital. Previously, he served as Director of Neurosurgical
Research at the Henry Ford Neurological Institute from 1981 until August 1991.
From 1984 until 1991 he also served as the Director of the Brain and Spinal Cord
Tumor Center at Henry Ford Hospital. He serves on numerous FDA working groups
examining materials and products and on the American Society of Testing
Materials (ASTM) committee for neurological surgery. Dr. Dujovny has also
written numerous articles on cerebral ischemia-related difficulties.
George A. Kling, M.D. Dr. Kling has served as Chairman and Professor of the
Department of Radiology at Wayne State University School of Medicine in Detroit
since July 1984 and Chief of the Department of Radiology, Harper-Grace Hospitals
in Detroit since July 1976. Dr. Kling has served Wayne State University and
Harper-Grace Hospitals, and the radiological community, in a number of
capacities since 1962, including American Roentgen Ray Society Councilor to the
American College of Radiology and committee appointments to the Michigan State
Medical Society and the Wayne County Medical Society.
Donald S. Prough, M.D. Dr. Prough has served as Professor and Chairman of
the Department of Anesthesiology at The University of Texas Medical Branch in
Galveston since February 1992. Before that he served as Professor of Anesthesia
and Neurology; Head, Section on Critical Care; and Medical Director, Cerebral
Blood Flow Laboratory, at The Bowman Gray School of Medicine, of Wake Forest
University, Winston-Salem, North Carolina, since 1980. He also is editor of the
Neurosurgical Anesthesia Section of Anesthesia and Analgesia and a member of the
editorial board of Critical Care Medicine. Dr. Prough has spoken frequently
about brain monitoring at national meetings of anesthesiologists and physicians
specializing in intensive care.
Hugh F. Stoddart. Mr. Stoddart has served as a consultant to business in
the fields of science and technology. For forty years he has invented and
developed products for medicine and industry using diverse technologies such as
imaging, image processing, radiation detection, optics, x-rays, spectroscopy,
lasers, computers and electronics. Examples include the first commercial brain
scanner based on positron emission, the Harvard scanner for high resolution
imaging of brain function and systems for non-invasive infrared spectroscopy of
the human body. He is presently Principal Investigator on two R&D projects,
funded by the National Institute of Health and the United States Army, involving
medical applications of in vivo near-infrared spectroscopy. He has participated
as president, vice-president, director, or product manager in a number of
medical device and high-technology companies, including the Atomic Instrument
Company, Baird, Atomium, Perkin-Elmer, Bedford Engineering, Cleon, Union Carbide
Imaging Systems, Strichman Medical and NeuroPhysics, where he is currently
Chairman and Senior Scientist. He served as President and Chief Executive
Officer of Strichman Medical Equipment Inc. from 1988 to 1993, and Vice
President and Director of Union Carbide Imaging Systems from 1976 to 1980.
Strichman Medical is a manufacturer of computer workstations for nuclear
medicine and scanners for producing images of the functioning of the human
brain. Union Carbide Imaging Systems is a developer and manufacturer of nuclear
medical imaging equipment.
The scientific advisors are employed by and/or have consulting agreements
with entities other than the Company, and they are expected to devote only a
small portion of their time to the Company. They do not
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<PAGE> 44
actively participate in the Company's activities or in the development of the
Company's technology. Certain of the institutions with which the scientific
advisors are affiliated may have regulations or policies which limit the ability
of such personnel to act as part-time consultants or in other capacities for a
commercial enterprise. Regulations or policies currently in effect or adopted in
the future might limit the ability of the scientific advisors to consult with
the Company.
COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information for each of the fiscal years
ended November 30, 1996, 1995 and 1994 concerning compensation of (i) all
individuals serving as the Company's Chief Executive Officer during the fiscal
year ended November 30, 1996 and (ii) each other executive officer of the
Company whose total annual salary and bonus exceeded $100,000 in fiscal 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------------
--------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION
--------------------------- ---- -------- ------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Bruce J. Barrett..................... 1996 $195,000 $ -- 43,200(1) $ --
President and Chief Executive
Officer 1995 195,000 -- 33,000(1) --
(since 6/1/94) 1994 98,250(2) 24,375(3) 40,000 18,091
Raymond W. Gunn...................... 1996 105,000 -- 19,100(1) --
Executive Vice President and Chief 1995 95,625 -- 10,000(1) --
Financial Officer 1994 91,667 -- 22,500(4) --
</TABLE>
- ---------------
(1) The fiscal 1995 numbers include options to purchase 16,500 and 5,000 Common
Shares which were granted to Messrs. Barrett and Gunn, respectively, and
which were subject to shareholder approval of an amendment to the Company's
1991 Incentive Stock Option Plan at the 1995 Annual Meeting of Shareholders.
Although more than 85% of those voting approved the proposed amendment to
the 1991 Incentive Stock Option Plan, as a result of a significant number of
broker non-votes, there were insufficient votes in favor of the amendment,
it was not approved and the options were cancelled. The fiscal 1995 numbers
also include options to purchase 16,500 and 5,000 Common Shares granted to
Messrs. Barrett and Gunn, respectively, after the 1995 Annual Meeting of
Shareholders and subject to shareholder approval of an amendment to the
Company's 1991 Incentive Stock Option Plan at the next meeting of the
Company's shareholders. These options were cancelled in December 1995 (and
the proposed amendment was cancelled) in exchange for options covering the
same number of shares and exercisable at the same exercise price, but
granted independent of the Company's stock option plans and not subject to
shareholder approval. The fiscal 1996 numbers include these new options to
purchase 16,500 and 5,000 Common Shares granted to Messrs. Barrett and Gunn,
respectively.
(2) Mr. Barrett became an employee of the Company on June 1, 1994.
(3) Mr. Barrett received a signing bonus pursuant to his employment agreement.
(4) Includes 10,000 options granted to Mr. Gunn that replaced options with
higher exercise prices previously granted to him.
COMPENSATION OF DIRECTORS AND SCIENTIFIC ADVISORS
The Company's directors who are not officers or employees of the Company
(collectively, the "Outside Directors") receive $1,000 for each Board meeting
attended in person, $250 for each telephonic Board meeting attended and $250 for
each Board committee meeting attended on a date other than the date of a
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<PAGE> 45
Board meeting. The Company also reimburses Outside Directors for their
reasonable expenses of attending Board and Board committee meetings.
In January 1993, the Board of Directors adopted the Somanetics Corporation
1993 Director Stock Option Plan (the "Directors Plan"). The Directors Plan
provides for the grant of options to purchase 1,500 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. The exercise price of the options is the
fair market value of the Common Shares on the date of grant. Options vest in
one-third annual increments beginning on the date of grant and expire ten years
after the date of grant. 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 1,500 Common Shares vesting over the period
remaining until the next regular grant of options under the Directors Plan.
Options to purchase 1,500 Common Shares exercisable at $26.30 per share
were granted pursuant to the Directors Plan to each of Messrs. Wallace and
Follis, Dr. Ausman and Gary D. Lewis, a former director of the Company, as of
June 30, 1996. Options to purchase 1,000 Common Shares expired upon Mr. Lewis's
resignation as a director effective November 4, 1996. In addition, effective May
21, 1996, each of Messrs. Wallace and Follis and Dr. Ausman was granted a
ten-year option to purchase 1,500 Common Shares exercisable at $19.10 per share.
Each of the options is exercisable 50% on June 5, 1996 (the date the Company
received FDA 510(k) clearance) and 25% on June 5, 1997 and 1998, respectively.
Each option becomes 100% exercisable immediately 10 business days before or upon
specified changes in control of the Company. In addition, effective December 22,
1995, Dr. Ausman was granted a ten-year option independent of the Company's
stock option plans to purchase 2,000 Common Shares exercisable at $5.00 per
share. The option is exercisable in one-fourth cumulative annual installments
beginning December 22, 1996. The option becomes 100% exercisable immediately 10
business days before or upon specified changes in control of the Company.
Scientific advisors are not presently compensated by the Company for their
services as scientific advisors. The Company pays scientific advisors their
reasonable expenses for advising the Company. No such expenses were incurred for
the fiscal year ended November 30, 1996, although some advisors received
consulting fees.
Under a consulting agreement dated February 28, 1983, Mr. Stoddart has
agreed to provide consulting services to the Company for a term ending February
28, 1998, which term is automatically renewed each year unless terminated by
either party by at least 30 days notice prior to the renewal of the agreement.
Pursuant to this agreement, the Company has entered into a Consulting Order with
NeuroPhysics Corporation, a research and development company owned by Mr.
Stoddart and his son, pursuant to which the Company is supporting NeuroPhysics
Corporation's research into the feasibility and development of prototypes of
four new products. See "Business--Research and Development." During fiscal 1996,
the Company paid approximately $81,050 in fees and expenses to Mr. Stoddart and
Neurophysics Corporation under this agreement. In addition, effective December
22, 1995, the Company granted Mr. Stoddart ten-year options to purchase 2,000
Common Shares at $5.00 per share, replacing options previously granted to him
for the same number of shares at higher exercise prices. Also, effective
November 18, 1996, the Company granted Mr. Stoddart's son, also a consultant to
the Company, ten-year options to purchase 1,500 Common Shares at $14.375 per
share.
For a description of the Company's former distribution agreement with Mr.
Follis, see "Compensation Committee Interlocks and Insider Participation." For a
description of the Company's consulting agreement with Gary D. Lewis, a former
director and a former officer of the Company, see "Certain Transactions."
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OPTION GRANTS TABLE
The following table sets forth information concerning individual grants of
stock options made during the fiscal year ended November 30, 1996 to each of the
executive officers of the Company named in the Summary Compensation Table above:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
PERCENT OF REALIZABLE VALUE AT
TOTAL ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION --------------------
NAME GRANTED YEAR PER SHARE DATE 5% 10%
---- ---------- ---------- --------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Bruce J. Barrett.......... 16,500(1) 11.7% $13.125 3/13/05 $123,100 $305,132
26,700(2) 18.9 5.625 1/05/06 94,452 239,360
Raymond W. Gunn........... 5,000(1) 3.5 13.125 3/13/05 37,303 92,464
14,100(2) 3.4 5.625 1/05/06 49,879 126,404
</TABLE>
- ---------------
(1) In December 1995, in exchange for the cancellation of certain outstanding
stock options, which were granted subject to shareholder approval, the
Company granted options to purchase an aggregate of 68,900 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 16,500 and 5,000 Common Shares granted to Messrs.
Barrett and Gunn, 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 ($5.00
per 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 Messrs. Barrett and Gunn are the same as those granted to
other persons, except that the exercise price of the new options is the same
as the exercise price of their cancelled options ($13.125 per share) and the
new options become exercisable at the same times as their cancelled options:
one-fourth cumulative annual increments beginning March 13, 1996, expiring
March 13, 2005.
(2) Options to purchase 26,700 and 14,100 Common Shares were granted to Messrs.
Barrett and Gunn, respectively, in fiscal 1996 independent of the Company's
stock option plans, exercisable at the then current fair market value of the
underlying common shares. Each of the options set forth in the table is
exercisable 50% on June 5, 1996 (the date the Company received FDA 510(k)
clearance) and 25% on June 5, 1997 and 1998, respectively, and expire on
January 5, 2006.
With respect to each of the options described above, the portion of such
option which is exercisable at the date of termination of employment remains
exercisable until the expiration date of the option, unless termination is for
cause. If upon exercise of these options the Company must pay any amount for
income tax withholding, in the Compensation Committee's or the Board of
Directors' sole discretion, either the optionee will pay such amount to the
Company or the number of Common Shares delivered by the Company to the optionee
will be appropriately reduced to reimburse the Company for such payment. The
Compensation Committee or the Board may also permit the optionee to choose to
have such shares withheld or to tender Common Shares the optionee already owns.
The Compensation Committee or the Board may also make such other arrangements
with respect to income tax withholding as it shall determine. All options
granted under the Company's stock option plans through April 11, 1997, that are
not already 100% exercisable immediately, including options granted to Messrs.
Barrett and Gunn, become 100% exercisable immediately 10 business days before or
upon specified changes in control of the Company.
45
<PAGE> 47
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth information concerning each exercise of
stock options during the fiscal year ended November 30, 1996 by each of the
executive officers named in the Summary Compensation Table above and the value
of unexercised options held by such persons as of November 30, 1996:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT 11/30/96 AT 11/30/96
ACQUIRED ON VALUE --------------------------- ---------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bruce J. Barrett............ - $ - 57,475 25,725 $207,938 $100,125
Raymond W. Gunn............. - - 30,800 10,800 67,719 52,875
</TABLE>
- ---------------
"Value Realized" represents the fair value of the underlying securities on the
exercise date minus the aggregate exercise price of such options.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Bruce J. Barrett. As of May 13, 1994, the Company entered into an
employment agreement with Bruce J. Barrett, pursuant to which, as amended, he is
employed as President and Chief Executive Officer (or in such other position as
the Board of Directors determines) for a period ending April 30, 2000. Mr.
Barrett's annual base salary is $195,000, which may be increased by the Board of
Directors, and he received a one-time signing bonus equal to $24,375 upon
execution of the agreement. Mr. Barrett is also entitled to participate in any
bonus plan established by the Compensation Committee of the Board of Directors.
There was no bonus plan in fiscal 1996, but one has been adopted for fiscal
1997. Mr. Barrett is entitled to various fringe benefits under the agreement,
including 12 months of compensation and six months of benefits if his employment
under the agreement is terminated without cause or if the agreement expires
without being renewed. Mr. Barrett has agreed not to compete with the Company
during specified periods following the termination of his employment.
Raymond W. Gunn. Pursuant to the employment agreement between the Company
and Mr. Gunn, dated December 1, 1992, as amended, Mr. Gunn is employed as
Executive Vice President and Chief Financial Officer, Treasurer and Secretary of
the Company (or in such other position as the Board of Directors determines) for
a period ending April 30, 2000. Mr. Gunn's annual base salary under the
agreement is currently $110,250, which may be increased by the Board of
Directors. Mr. Gunn is entitled to a bonus determined at the discretion of the
Company's Board of Directors. Mr. Gunn is entitled to various fringe benefits
under the agreement, including disability insurance, a leased automobile and
twelve months of compensation and benefits if his employment under the agreement
is terminated without cause or if the agreement expires without being renewed.
The agreement also provides that Mr. Gunn will not compete against the Company
during specified periods following the termination of his employment.
Stock Option Terms. All options granted under the Company's stock option
plans through April 11, 1997, that are not already 100% exercisable immediately,
including options granted to Messrs. Barrett and Gunn, become 100% exercisable
immediately 10 business days before or upon specified changes in control of the
Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended November 30, 1996, Daniel S. Follis and H.
Raymond Wallace served as the members of the Company's Compensation Committee.
None of the members of the Company's Compensation Committee was, during the
fiscal year ended November 30, 1996, an officer or employee of the Company, or a
former officer of the Company, except that Mr. Wallace became the Company's
non-salaried Chairman
46
<PAGE> 48
of the Board on January 27, 1995 and became a non-officer Chairman of the Board
effective April 6, 1995. Mr. Follis has the relationships with the Company
described below:
Exchange Warrants and Class M Warrants. On September 1, 1990, in connection
with the renewal of notes payable to shareholders of the Company, the Company
issued Exchange Warrants to purchase an aggregate of 4,500 Common Shares at
$20.00 per share, including Exchange Warrants to purchase 216 Common Shares
issued to a corporation affiliated with Mr. Follis, a director and shareholder
of the Company. During September through December 1990, the Company also issued
Class M Warrants, warrants to purchase 62,835 Common Shares at $10.00 per share,
including Class M Warrants to purchase 715 Common Shares at $9.50 per share
issued to Mr. Follis. Mr. Follis exercised his Class M Warrants on September 26,
1996. The Company has registered for resale the Common Shares issuable upon
exercise of the Class M Warrants and intends to update the registration when Mr.
Follis desires to sell his Common Shares. The Exchange Warrants expired
unexercised on March 27, 1997.
Distributorship Agreement. The Company entered into a distributorship
agreement with Somatek, Inc., an entity 50% owned by Mr. Follis. The
distributorship covered the territory of Michigan. The agreement was approved by
the Company's disinterested directors and was made in the ordinary course of
business on the Company's standard form of distributorship agreement.
Transactions pursuant to the distributorship agreement were on substantially the
same terms, including the purchase price of the Company's product covered by
such agreement, as those prevailing at the time for comparable agreements and
transactions with other distributors.
During fiscal 1996, the Company entered into new distribution agreements
with its United States distributors, including Somatek, Inc. The Company wrote
off $67,690 of its receivables from Somatek, Inc. in exchange for the return of
15 INVOS 3100 Cerebral Oximeters and 108 SomaSensors from Somatek, Inc. and its
customers. During the fiscal years ended November 30, 1996, 1995 and 1994, the
Company had no sales to Somatek, Inc. pursuant to its distributor agreement. As
of November 30, 1996 and April 11, 1997, Somatek, Inc. had no outstanding
indebtedness to the Company. As of November 30, 1995 and 1994, Somatek, Inc.
owed the Company $67,690. Effective February 28, 1997, the Company terminated
its distribution agreement with Somatek, Inc.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Michigan Business Corporation Act, as amended, authorizes a corporation
under specified circumstances to indemnify its directors and officers (including
reimbursement for expenses incurred). The provisions of the Company's Bylaws
relating to indemnification of directors and executive officers generally
provide that directors and executive officers will be indemnified to the fullest
extent permissible under Michigan law. The provision also provides for the
advancement of litigation expenses at the request of a director or executive
officer. These obligations are broad enough to permit indemnification with
respect to liabilities arising under the Securities Act of 1933, as amended, or
the Michigan Uniform Securities Act, as amended. The Company's Bylaws and Mr.
Barrett's and Mr. Gunn's employment agreements also provide for indemnification.
The Company believes that such indemnification will assist the Company in
continuing to attract and retain talented directors and officers in light of the
risk of litigation directed against directors and officers of publicly-held
corporations.
The Michigan Business Corporation Act, as amended, also permits Michigan
corporations to limit the personal liability of directors for a breach of their
fiduciary duty. The provisions of the Restated Articles of Incorporation limit
director liability to the maximum extent currently permitted by Michigan law.
Michigan law allows a corporation to provide in its articles of incorporation
that a director of the corporation will not be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except for liability for specified acts. As a result of the
inclusion of such a provision, shareholders of the Company may be unable to
recover monetary damages against directors for actions taken by them which
constitute negligence or gross negligence or which are in violation of their
fiduciary duties, although it may be possible to obtain injunctive or other
equitable relief with respect to such actions. If equitable remedies are found
not to be available to shareholders in any particular case, shareholders may not
have any effective
47
<PAGE> 49
remedy against the challenged conduct. These provisions, however, do not affect
liability under the Securities Act of 1933, as amended.
In addition, the Company has obtained Directors' and Officers' liability
insurance. The policy provides for $1,000,000 in coverage including prior acts
dating to the Company's inception and liabilities under the Securities Act of
1933, as amended, in connection with the Company's initial public offering, the
exercise of Class A Warrants and this offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933, as amended, and is therefore unenforceable.
CERTAIN TRANSACTIONS
See "Compensation -- Compensation Committee Interlocks and Insider
Participation" for a description of Exchange Warrants and Class M Warrants
issued to Mr. Follis, and a distributorship agreement between the Company and
Somatek, Inc., an entity 50% owned by Mr. Follis.
Pursuant to an Agreement and Release, dated and effective as of February 1,
1995, between the Company and Gary D. Lewis, a director of the Company until
November 4, 1996 and the Company's former Chairman of the Board (until January
27, 1995) and President and Chief Executive Officer (until May 31, 1994), (i)
Mr. Lewis voluntarily resigned from all of his positions with the Company,
except as a director of the Company, and his employment agreement terminated
without any obligations of either party, (ii) Mr. Lewis agreed to provide
consulting services to the Company through January 31, 1997, (iii) the Company
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, (c) a facsimile machine, computer
equipment and office furniture and (d) $2,500 for legal fees and reimbursement
of Mr. Lewis' business-related expenses, (iv) the Company and Mr. Lewis amended
and restated the Company's note receivable from Mr. Lewis, (v) Mr. Lewis agreed
to confidentiality, non-compete and non-solicitation provisions for periods
specified in the agreement and (vi) each party released the other from all
claims through the date of the agreement.
On February 1, 1993, the Company made a $200,000 loan to Gary D. Lewis, the
Company's former Chairman of the Board, President and Chief Executive Officer
and a former director of the Company, secured by a second mortgage on the home
Mr. Lewis purchased at that time. The principal and all accrued interest were
originally due on January 31, 1998. The loan bore interest at 8% a year. In July
1994, Mr. Lewis agreed to make regular periodic reductions in the outstanding
principal balance of the note, with the entire amount to be paid back to the
Company within one year. Mr. Lewis paid the Company $25,000 toward the
outstanding principal balance on November 30, 1994.
Pursuant to the Agreement and Release between Mr. Lewis and the Company,
the Company and Mr. Lewis amended and restated the promissory note evidencing
the loan. As amended, Mr. Lewis' promissory note provided for the repayment of
the $175,000 balance from the Company on January 31, 1998, with interest at an
annual rate equal to the Company's bank's prime rate plus .75%. The note was
further secured by 17,500 of Mr. Lewis' options to purchase the Company's stock
and the underlying securities.
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, and the Company wrote off approximately
$29,750 of accrued interest with respect to that loan. The largest principal
amount of the loan outstanding during fiscal 1996 was $175,000 (not including
approximately $29,750 of accrued interest), and as of January 27, 1997 the loan
was fully repaid.
48
<PAGE> 50
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Company's Common Shares as of April 11, 1997, and as adjusted
to reflect the sale of the Common Shares offered hereby, by (i) each director of
the Company, (ii) each executive officer of the Company and each executive
officer of the Company named in the Summary Compensation Table above, (iii) all
directors and executive officers of the Company as a group and (iv) each person
known by the Company to own more than 5% of the Company's Common Shares.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED
NUMBER OF ----------------------------
COMMON SHARES BEFORE THE AFTER THE
NAMED OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING (1) OFFERING (2)
------------------------- ------------------ ------------ ------------
<S> <C> <C> <C>
BRUCE J. BARRETT...................................... 65,092(3) 2.8% 1.6%
RAYMOND W. GUNN....................................... 32,650(4) 1.4% *
H. RAYMOND WALLACE.................................... 5,361(5) * *
DANIEL S. FOLLIS...................................... 27,181(6) 1.2% *
DR. JAMES I. AUSMAN................................... 17,035(7) * *
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (5
PERSONS).............................................. 147,319(8) 6.2% 3.5%
</TABLE>
- ---------------
* Represents less than 1% of outstanding Common Shares.
(1) Based on 2,285,351 Common Shares outstanding as of April 11, 1997.
(2) Based on 4,085,351 Common Shares outstanding, assuming all 1,800,000 Common
Shares offered hereby are sold to third parties.
(3) Includes 61,600 Common Shares that Mr. Barrett has the right to acquire
within 60 days and 500 shares owned by his wife.
(4) Includes 32,050 Common Shares that Mr. Gunn has the right to acquire within
60 days.
(5) Includes 3,761 Common Shares that Mr. Wallace has the right to acquire
within 60 days and 1,000 shares held in a living trust; Mr. Wallace has sole
voting and dispositive power over the shares held in the trust.
(6) Includes 5,750 Common Shares that Mr. Follis has the right to acquire within
60 days. The 27,181 Common Shares shown above as beneficially owned by Mr.
Follis include 8,820 Common Shares owned by The Infinity Fund, a limited
partnership in which Mr. Follis is a 6.068% limited partner and a 50%
general partner and which is administered by Verschuren & Follis, Inc., a
corporation in which Mr. Follis is a 50% shareholder, a director and the
President.
(7) Includes 4,261 Common Shares that Dr. Ausman has the right to acquire within
60 days, 9,744 Common Shares owned jointly with his wife and 3,030 shares
held in an individual retirement account over which Dr. Ausman exercises
sole voting and investment control.
(8) Includes 107,422 Common Shares which all executive officers and directors as
a group have the right to acquire within 60 days.
49
<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital shares of the Company consist of an aggregate of
6,000,000 Common Shares, par value $0.01 per share, and 1,000,000 Preferred
Shares, par value $0.01 per share. As of April 11, 1997, 2,285,351 Common Shares
and no Preferred Shares were outstanding. All of the shares being offered in
this offering are Common Shares.
COMMON SHARES
Holders of Common Shares have one vote per share on each matter submitted
to a vote of the shareholders and a ratable right to the net assets of the
Company upon liquidation. Holders of Common Shares participate ratably in
dividends and distributions as may be declared by the Board of Directors from
funds legally available for that purpose have no conversion rights, are not
redeemable and are not entitled to any preemptive or subscription rights. See
"Price Range of Common Shares and Dividend Policy." The Common Shares currently
outstanding are, and the shares to be issued in connection with this offering
will be, duly authorized, validly issued, fully paid and non-assessable. Holders
of Common Shares have no cumulative voting rights, and accordingly, holders of a
majority of the outstanding Common Shares are able to elect all of the Company's
directors.
The directors of the Company serve staggered three-year terms. The
directors of the Company will hold office until the Annual Meeting of
Shareholders to be held in 1998 for Bruce J. Barrett, the Annual Meeting of
Shareholders to be held in 1999 for Daniel S. Follis and Dr. James I. Ausman,
and the Annual Meeting of Shareholders to be held in 2000 for H. Raymond
Wallace, and until their successors are elected and qualified. Directors may not
be removed without cause. The Restated Articles of Incorporation also set the
minimum and maximum number of directors constituting the entire Board at three
and fifteen, respectively, and require approval of holders of 90% of the
Company's voting shares to amend this provision.
BUSINESS COMBINATION PROVISIONS
Chapters 7A and 7B of the Michigan Business Corporation Act, as amended,
may affect attempts to acquire control of the Company. In general, under Chapter
7A, "business combinations" (defined to include, among other transactions,
certain mergers, dispositions of assets or shares and recapitalizations) between
covered Michigan business corporations or their subsidiaries and an "interested
shareholder" (defined as the direct or indirect beneficial owner of at least 10%
of the voting power of a covered corporation's outstanding shares) can only be
consummated if approved by at least 90% of the votes of each class of the
corporation's shares entitled to vote and by at least two-thirds of such voting
shares not held by the "interested shareholder" or affiliates, unless five years
have elapsed after the person involved became an "interested shareholder" and
unless certain price and other conditions are satisfied. The Board of Directors
has the power to elect to be subject to Chapter 7A as to specifically identified
or unidentified interested shareholders.
In general, under Chapter 7B, an entity that acquires "Control Shares" of
the Company may vote the Control Shares on any matter only if a majority of all
shares, and of all non-"Interested Shares", of each class of shares entitled to
vote as a class, approve such voting rights. Interested Shares are shares owned
by officers of the Company, employee-directors of the Company and the entity
making the "Control Share Acquisition" (as defined). Control Shares are shares
that when added to shares already owned by an entity, would give the entity
voting power in the election of directors over any of the three thresholds:
one-fifth, one-third and a majority. The effect of the statute is to condition
the acquisition of voting control of a corporation on the approval of a majority
of the pre-existing disinterested shareholders. The Board of Directors may amend
the bylaws before a "Control Share Acquisition" occurs to provide that Chapter
7B does not apply to the Company.
50
<PAGE> 52
PREFERRED SHARES
The Company has also authorized the issuance of up to 1,000,000 Preferred
Shares, $0.01 par value per share, none of which is outstanding as of the date
of this Prospectus. The Preferred Shares may be issued from time to time in one
or more series. The Board of Directors is authorized to determine the rights,
preferences, privileges and restrictions granted to, and imposed upon, each
series of Preferred Shares and to fix the number of shares of any series of
Preferred Shares and the designation of any such series. The issuance of
Preferred Shares could be used, under certain circumstances, as a method of
preventing a takeover of the Company and could permit the Board of Directors,
without any action of the holders of the Common Shares, to issue Preferred
Shares which could have a detrimental effect on the rights of holders of the
Common Shares, including loss of voting control. Anti-takeover provisions that
could be included in the Preferred Shares when issued may have a depressive
effect on the market price of the Company's securities and may limit
shareholders' ability to receive a premium on their shares by discouraging
takeover and tender offer bids. The Company has no present plans to issue any
Preferred Shares.
TRANSFER AGENT
American Stock Transfer & Trust Company serves as transfer agent for the
Common Shares. As of April 11, 1997 there were 602 holders of record of the
Company's Common Shares.
REGISTRATION RIGHTS
The placement agents for three of the Company's Regulation S Offerings in
1994, 1995 and 1996 and their transferees have piggy-back registration rights
with respect to the Common Shares underlying the 793,940 Placement Agent
Warrants. In addition, the Representative will be granted demand and piggy-back
registration rights with respect to the Representative's Warrants issued to it
in connection with this offering. See "Underwriting." These rights allow the
holders to include their Common Shares in any registration of the Company's
securities in a registration statement under the Securities Act of 1933, as
amended, subject to specified limitations.
51
<PAGE> 53
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
underwriters named below (the "Underwriters"), for which Brean Murray & Co.,
Inc. is acting as representative (the "Representative"), and each of the
Underwriters severally has agreed to purchase from the Company the aggregate
number of Common Shares set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Brean Murray & Co., Inc. ...................................
---------
Total.................................................. 1,800,000
=========
</TABLE>
Upon the terms and subject to the conditions of the Underwriting Agreement,
the Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the Common Shares set forth in the above table if any of the
Common Shares are purchased.
The Underwriters propose to offer the Common Shares to the public initially
at the public offering price set forth on the cover page of this Prospectus, and
to selected dealers at such public offering price less a concession not to
exceed $ per share. The Underwriters or such dealers may reallow a
commission to certain other dealers not to exceed $ per share. After the
offering to the public, the offering price, the concession to selected dealers
and the reallowance to other dealers may be changed by the Representative.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 270,000 additional
Common Shares to cover over-allotments, if any, at the public offering price,
less underwriting discounts and commissions, as set forth on the cover page of
this Prospectus. If the Underwriters exercise this option, then each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase a number of option shares proportionate to such Underwriters' initial
commitment as indicated in the table above. The Underwriters may exercise such
option only to cover over-allotments made in connection with the sale of the
Common Shares offered hereby.
The Company and its officers and directors (who beneficially hold in the
aggregate 147,319 Common shares, including Common Shares issuable upon exercise
of outstanding options beneficially owned by them) have agreed not to sell,
offer to sell, issue, distribute or otherwise dispose of any Common Shares of
the Company for a period of 180 days from the date of this Prospectus (subject
to certain limited exceptions) without the prior written consent of the
Representative.
In connection with the offering made hereby, the Company has agreed to sell
to the Representative, for nominal consideration, the Representative's Warrants
to purchase 180,000 Common Shares from the Company (10% of the number of shares
issued in this offering). The Representative's Warrants are exercisable, in
whole or in part, at an exercise price equal to 120% of the public offering
price set forth on the cover page of this Prospectus at any time during the
four-year period commencing one year after the effective date of the
Registration Statement of which this Prospectus is a part. The warrant agreement
pursuant to which the Representative's Warrants will be issued will contain
provisions providing for adjustment of the exercise price and the number and
type of securities issuable upon exercise of the Representative's Warrants
should any one or more of certain specified events occur. The Representative's
Warrants grant to the holders thereof demand and piggy-back registration rights
for the securities issuable upon exercise of the Representative's Warrants.
The Company has agreed to reimburse the Underwriters for up to $250,000 of
the Underwriters' out-of-pocket expenses (including fees of their counsel) in
connection with the sale of the Common Shares offered hereby. The Company has
also agreed to indemnify the Underwriters or contribute to losses arising out
52
<PAGE> 54
of certain liabilities that may be incurred in connection with this offering,
including liabilities under the Securities Act of 1933, as amended.
In connection with this offering, certain Underwriters may engage in
passive market making transactions in the Common Shares on The Nasdaq SmallCap
Market immediately prior to the commencement of sales in this offering, in
accordance with Rule 103 of Regulation M. Passive market making consists of
displaying bids on The Nasdaq SmallCap Market limited by the bid prices of
independent market makers and purchases limited by such prices and effected in
response to order flow. Net purchases by a passive market maker on each day are
limited to a specified percentage of the passive market maker's average daily
trading volume in the Common Shares during a specified period and must be
discontinued when such limit is reached. Passive market making may stabilize the
market price of the Common Shares at a level above that which might otherwise
prevail and, if commenced, may be discontinued at any time.
In connection with this offering, the Underwriters and selling group
members, if any, may engage in stabilizing, syndicate short covering
transactions, penalty bids or other transactions during the offering that may
stabilize, maintain or otherwise affect the market price of the Common Shares at
a level above that which might otherwise prevail in the open market. Stabilizing
transactions are bids for and purchases of the Common Shares for the purpose of
preventing or retarding a decline in the market price of the Common Shares to
facilitate the offering. Syndicate short covering transactions are bids to
purchase and actual purchases of Common Shares on behalf of the Underwriters to
provide them with enough Common Shares to deliver to those purchasing Common
Shares in the offering. A penalty bid is an arrangement that permits the
Representative to reclaim a selling concession when the Common Shares originally
sold by the syndicate member are purchased in a syndicate covering transaction.
Such stabilizing, syndicate short covering transactions, penalty bids and other
transactions, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the Common Shares offered hereby will be passed upon for
the Company by Honigman Miller Schwartz and Cohn, Detroit, Michigan. Certain
legal matters will be passed upon for the Underwriters by Piper & Marbury
L.L.P., New York, New York.
EXPERTS
The financial statements included in this Prospectus, the related financial
statement schedule included elsewhere in the registration statement and the
financial statements from which the selected financial data included in this
Prospectus have been derived, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and elsewhere
in the registration statement (which report on the financial statements
expresses an unqualified opinion and includes an explanatory paragraph referring
to an uncertainty concerning the Company's ability to continue as a going
concern), and have been so included herein and elsewhere in the registration
statement in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files reports
and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy and information statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission in Washington, D.C. at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's
regional offices in New York (7 World Trade Center, Suite 1300, New York New
York 10048) and Chicago (Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60611). Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission can be contacted at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. The Company's
53
<PAGE> 55
Securities Exchange Act of 1934, as amended, filings are also available to the
public on the Commission's Internet site (http://www.sec.gov).
This Prospectus, which constitutes part of a Registration Statement on Form
S-1 filed with the Commission under the Securities Act of 1933, as amended, by
the Company (the "Registration Statement"), omits certain of the information
contained in the Registration Statement. Reference is hereby made to the
Registration Statement and to the exhibits to the Registration Statement for
further information about the Company and the Common Shares. Statements in this
Prospectus concerning provisions of documents are summaries of such documents,
and each statement is qualified by reference to the copy of the applicable
document filed with the Commission. Copies of such material, including the
complete Registration Statement and the exhibits, can be inspected, without
charge at the offices of the Commission, or obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.
54
<PAGE> 56
GLOSSARY
As used in this Prospectus, the following terms have the meanings set forth
below.
ARTERY: One of the vessels carrying blood from the heart to the tissues. The
arteries carry oxygenated blood from the right and left ventricles of the heart
to all parts of the body.
BRAIN OXYGEN IMBALANCE: The difference between brain oxygen supply and demand.
Brain oxygen imbalances can be caused by several factors, including changes in
oxygen saturation in the arteries, blood flow to the brain, hemoglobin
concentration and oxygen consumption by the brain.
CAPILLARIES: The smallest vessels in the blood-vascular system, connecting the
arteries with the veins.
CAROTID ENDARTERECTOMY: The removal of atherosclerotic placque from the carotid
artery.
CORONARY ARTERY BYPASS GRAFT: A bypass, established surgically, which permits
blood to travel from the aorta to a branch of the coronary artery at a point
past an obstruction. It is used in treating coronary artery disease.
ELECTROENCEPHALOGRAM ("EEG"): A device that measures electrical activity in the
brain, which can be affected by decreased oxygen supply.
FDA-CLEARED: A medical device may be marketed in the United States only with
prior authorization from the FDA unless it is subject to a specific exemption.
Devices classified by the FDA as posing less risk are placed either in class I
or II and are eligible to seek "510(k) clearance." Such clearance generally is
granted when submitted information establishes that a proposed device is
"substantially equivalent" in intended use to a class I or II device already
legally on the market or to a "preamendment" class III device (i.e., one that
has been in commercial distribution since before May 28, 1976) for which FDA has
not called for PMA applications. The FDA in recent years has been requiring a
more rigorous demonstration of substantial equivalence than in the past,
including requiring clinical trial data in some cases. For any devices that are
cleared through the 510(k) process, modifications or enhancements that could
significantly affect safety or effectiveness, or constitute a major change in
the intended use of the device, will require new 510(k) submissions. The Company
believes that it now usually takes from one to four months from the date of
submission to obtain 510(k) clearance, but it can take substantially longer.
After such clearance the Company may market its product in the United States.
GENERAL ANESTHESIA: Complete anesthesia, affecting the entire body with loss of
consciousness when the anesthetic agent acts upon the brain. This type of
anesthesia is usually accomplished following the administration of inhalational
or intravenous anesthetics. Commonly used for surgical procedures.
HEMOGLOBIN: Virtually all the oxygen carried by the blood is bound to
hemoglobin, the red protein in the red blood cells. Hemoglobin passes through
the lungs, bonds with oxygen and is pumped by the heart through arteries and
capillaries to various parts of the body. Those parts of the body extract the
oxygen and the blood carries away carbon dioxide through the capillaries and
veins back to the lungs.
HEMORRHAGIC SHOCK: Shock due to massive loss of blood.
HYPERTENSION: High blood pressure.
HYPOTENSION: Decreased blood pressure; occurs in shock, hemorrhages, infections,
fevers or cancer or under other conditions.
HYPOTHERMIA: Having a body temperature below normal.
HYPOVOLEMIA: Diminished blood volume.
HYPOXEMIA: Insufficient oxygenation of the blood.
HYPOXIA: Insufficiency of oxygen delivery to tissue; decreased concentration of
oxygen in the inspired air.
IN VIVO: In the living body.
55
<PAGE> 57
INTRACRANIAL PRESSURE MONITORING: A sensor is placed in the intracranial space
through a drilled hole to monitor the pressure on the brain inside the patient's
skull, which may increase as a secondary effect of certain brain damage or head
injuries.
INVASIVE JUGULAR BULB CATHETER MONITORING: Blood is drawn from a patient's
jugular vein (a vein in the neck near the base of the brain), and the oxygen
content, acidity and other blood gases are analyzed directly from the removed
blood.
INVOS: In Vivo Optical Spectroscopy is the name of the patented technology that
the Company uses in the operation of the INVOS Cerebral Oximeter.
ISCHEMIA: Tissue oxygen starvation due to the obstruction of the inflow of
arterial blood.
NEUROLOGICAL EXAM: Uses physical responses to test for signs of brain damage.
NEUROSURGERY: Surgery of the nervous system, including the brain.
OPEN HEART SURGERY: Any cardiac surgical procedure where the heart is exposed,
such as a valve replacement or repair, heart transplant or congenital repair. It
includes bypass surgery.
OPTICAL SPECTROSCOPY: Study of the spectra (series of colors). Relates to the
theories behind INVOS and the interaction between matter and light.
OXIMETRY: Use of photoelectric apparatus for determining the amount of oxygen in
the blood. Usually done by measuring the amount of light transmitted through a
translucent part of the tissue.
OXYGEN SATURATION: The percentage of total hemoglobin contained in a given
amount of blood which is combined (saturated) with oxygen.
OXYGENATED HEMOGLOBIN: Hemoglobin that is bound to oxygen.
PULMONARY ARTERY: The artery that carries the venous blood from the right
ventricle to the lungs.
PULSE OXIMETRY: A device that measures hemoglobin oxygen saturation in the
arteries in peripheral tissue.
SPECTROPHOTOMETER: A device for measuring the amount of color in a solution by
comparison with the spectrum.
SPECTROPHOTOMETRY: The estimation of coloring of matter in a solution by use of
a spectrophotometer or spectroscope.
STROKE: The sudden loss of consciousness caused by hemorrhage into the brain,
the formation of an embolus or thrombus that blocks an artery, or the rupture of
an extracerebral artery causing ischemia in parts of the brain.
SUBDURAL HEMATOMA: Internal bleeding between the skull and brain.
TRANSCRANIAL DOPPLER: A device using ultrasound for measuring velocity of blood
in a vessel.
VENOUS BLOOD: The dark blood carried back to the heart by the veins, after
oxygen has been extracted by the tissues.
56
<PAGE> 58
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets -- February 28, 1997 (Unaudited) and November
30, 1996 and 1995......................................... F-3
Statements of Operations -- For the Three-Month Periods
Ended February 28, 1997 and February 29, 1996 (Unaudited)
and for the Years Ended November 30, 1996, 1995 and 1994
and Cumulative For the Period January 15, 1982 (Date of
Inception) Through February 28, 1997 (Unaudited).......... F-4
Statements of Shareholders' Equity (Deficiency) -- For the
Period January 15, 1982 (Date of Inception) through
February 28, 1997 (Unaudited)............................. F-5
Statements of Cash Flows -- For the Three-Month Periods
Ended February 28, 1997 and February 29, 1996 (Unaudited)
and for the Years Ended November 30, 1996, 1995 and 1994
and Cumulative for the Period January 15, 1982 (Date of
Inception) through February 28, 1997 (Unaudited).......... F-7
Notes to Financial Statements............................... F-8
</TABLE>
F-1
<PAGE> 59
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 operations, 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 (not presented
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements 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.
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.
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.
DELOITTE & TOUCHE LLP
Detroit, Michigan
January 24, 1997
(April 10, 1997 as to paragraph 1 of Note 11)
F-2
<PAGE> 60
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30,
FEBRUARY 28, ----------------------------
1997 1996 1995
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (Note 4)............... $ 1,844,674 $ 3,291,911 $ 941,426
Accounts receivable, net of allowance for
doubtful accounts of approximately $46,000,
$46,000 and $194,000 at February 28, 1997,
November 30, 1996 and November 30, 1995,
respectively (Notes 7 and 9).................. 323,775 191,436 443,859
Inventory (Note 4)............................... 951,932 931,135 936,421
Prepaid expenses................................. 67,133 65,435 72,161
------------ ------------ ------------
Total current assets.......................... 3,187,514 4,479,917 2,393,867
------------ ------------ ------------
Property and Equipment: (Note 4)
Machinery and equipment.......................... 478,012 479,757 412,217
Furniture and fixtures........................... 193,683 193,343 193,339
Leasehold improvements........................... 166,770 166,770 166,770
------------ ------------ ------------
Total......................................... 838,465 839,870 772,326
Less accumulated depreciation and amortization... (752,929) (743,775) (685,835)
------------ ------------ ------------
Net property and equipment.................... 85,536 96,095 86,491
------------ ------------ ------------
Other Assets:
Note receivable -- related party (Note 9)........ -- -- 190,240
Patents and trademarks, net (Note 4)............. 77,401 79,129 86,041
Other............................................ 16,600 16,600 104,616
------------ ------------ ------------
Total other assets............................ 94,001 95,729 380,897
------------ ------------ ------------
Total Assets....................................... $ 3,367,051 $ 4,671,741 $ 2,861,255
============ ============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
Current Liabilities:
Accounts payable................................. $ 406,143 $ 364,032 $ 131,401
Accrued liabilities (Notes 5 and 7).............. 203,953 254,110 416,356
------------ ------------ ------------
Total current liabilities..................... 610,096 618,142 547,757
------------ ------------ ------------
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, 6,000,000 shares of
$.01 par value; issued and outstanding,
2,285,351, 2,285,351 and 1,776,855 shares at
February 28, 1997, November 30, 1996 and
November 30, 1995, respectively............... 22,854 22,854 17,769
Additional paid-in capital....................... 34,253,566 34,241,798 29,183,236
Deficit accumulated during the development stage
.............................................. (31,519,465) (30,211,053) (26,907,350)
------------ ------------ ------------
Total shareholders' equity.................... 2,756,955 4,053,599 2,293,655
------------ ------------ ------------
Total Liabilities and Shareholders' Equity......... $ 3,367,051 $ 4,671,741 $ 2,861,255
============ ============ ============
</TABLE>
See notes to financial statements
F-3
<PAGE> 61
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE
FOR THE THREE-MONTH FOR THE PERIOD
PERIODS ENDED JANUARY 15, 1982
--------------------------- FOR THE YEARS ENDED NOVEMBER 30, (DATE OF INCEPTION)
FEBRUARY 28, FEBRUARY 29, --------------------------------------- TO FEBRUARY 28,
1997 1996 1996 1995 1994 1997
------------ ------------ ----------- ----------- ----------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Net sales (Notes 4, 9 and
10)...................... $ 353,863 $ 515,079 $ 778,200 $ 1,335,970 $ 938,531 $ 6,082,795
Research and development
activities............... -- -- -- -- -- 122,500
----------- ---------- ----------- ----------- ----------- ------------
Total revenues........... 353,863 515,079 778,200 1,335,970 938,531 6,205,295
Cost of sales................ 180,271 211,134 385,136 657,614 464,322 2,807,522
----------- ---------- ----------- ----------- ----------- ------------
Gross margin................. 173,592 303,945 393,064 678,356 474,209 3,397,773
----------- ---------- ----------- ----------- ----------- ------------
Operating Expenses:
Research, development and
engineering (Note 4)..... 164,211 49,936 235,354 285,893 549,737 8,169,122
Selling, general and
administrative (Note
9)....................... 1,359,088 590,331 3,549,939 3,302,751 4,346,858 27,548,810
----------- ---------- ----------- ----------- ----------- ------------
Total operating
expenses............... 1,523,299 640,267 3,785,293 3,588,644 4,896,595 35,717,932
----------- ---------- ----------- ----------- ----------- ------------
Operating loss............... (1,349,707) (336,322) (3,392,229) (2,910,288) (4,422,386) (32,320,159)
----------- ---------- ----------- ----------- ----------- ------------
Other income (expense):
Interest income............ 33,195 13,660 61,603 94,769 68,290 1,154,343
Interest expense........... -- -- (449) (772) (3,892) (231,674)
Other...................... 8,100 3,073 27,372 (2,112) 26,488 (102,133)
----------- ---------- ----------- ----------- ----------- ------------
Total other
income................. 41,295 16,733 88,586 91,885 90,886 820,536
----------- ---------- ----------- ----------- ----------- ------------
Net loss..................... $(1,308,412) $ (319,589) $(3,303,703) $(2,818,403) $(4,331,500) $(31,499,623)
=========== ========== =========== =========== =========== ============
Net loss per Common Share
(Notes 4 and 11)........... $ (.57) $ (.18) $ (1.77) $ (1.67) $ (3.41) $ (41.03)
=========== ========== =========== =========== =========== ============
Weighted average number of
Common Shares outstanding
(Notes 4 and 11)........... 2,285,351 1,778,046 1,866,751 1,684,368 1,269,743 767,745
=========== ========== =========== =========== =========== ============
</TABLE>
See notes to financial statements
F-4
<PAGE> 62
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY) (NOTE 11)
<TABLE>
<CAPTION>
TOTAL
PRICE ADDITIONAL ACCUM- SHAREHOLDERS'
PER SHARE PAID-IN ULATED EQUITY
DATE SHARE SHARES VALUE CAPITAL DEFICIT (DEFICIENCY)
--------------- ------ ------- ------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ISSUANCE OF COMMON SHARES:
For shareholders' contributions of
test equipment.................... January, 1982 $ 0.32 83,037 $ 830 $ 25,670 $ -- $ 26,500
For cash............................ July, 1982 13.08 7,835 79 101,921 102,000
Net loss from January 15, 1982 (date
of inception) to November 30,
1982.............................. (107,083) (107,083)
------- ------ ----------- ----------- -----------
Balance at November 30, 1982.......... 90,872 909 127,591 (107,083) 21,417
For cash............................ December, 1982 13.08 3,917 39 50,961 51,000
For services........................ January, 1983 13.08 1,567 16 20,484 20,500
For cash, less issuance costs of
$5,863............................ July, 1983 26.17 11,624 116 298,185 298,301
For services........................ November, 1983 26.17 784 8 20,492 20,500
Net loss for the year ended November
30, 1983.......................... (291,986) (291,986)
------- ------ ----------- ----------- -----------
Balance at November 30, 1983.......... 108,764 1,088 517,713 (399,069) 119,732
For cash, less issuance costs of
$7,735............................ December, 1983-
April, 1984 26.17 19,421 194 500,252 500,446
For patents......................... February, 1984 26.17 4,895 49 128,020 128,069
For cash............................ November, 1984 35.10 3,730 37 130,899 130,936
Net loss for the year ended November
30, 1984.......................... (700,380) (700,380)
------- ------ ----------- ----------- -----------
Balance at November 30, 1984.......... 136,810 1,368 1,276,884 (1,099,449) 178,803
For cash, less issuance costs of
$3,726............................ December, 1984-
June, 1985 35.10 13,029 130 453,485 453,615
For cash............................ November, 1985 70.20 14,484 145 1,016,655 1,016,800
Net loss for the year ended November
30, 1985.......................... (559,871) (559,871)
------- ------ ----------- ----------- -----------
Balance at November 30, 1985.......... 164,323 1,643 2,747,024 (1,659,320) 1,089,347
Exercise of stock options for
cash.............................. December, 1985 35.10 783 8 27,492 27,500
For cash............................ January, 1986 70.20 10,444 104 733,097 733,201
Net loss for the year ended November
30, 1986.......................... (1,222,772) (1,222,772)
------- ------ ----------- ----------- -----------
Balance at November 30, 1986.......... 175,550 1,755 3,507,613 (2,882,092) 627,276
For cash, less issuance costs of
$9,500............................ March, 1987-
September, 1987 51.06 10,359 104 519,296 519,400
Net loss for the year ended November
30, 1987.......................... (1,143,081) (1,143,081)
------- ------ ----------- ----------- -----------
Balance at November 30, 1987.......... 185,909 1,859 4,026,909 (4,025,173) 3,595
For cash, less issuance costs of
$10,500........................... February, 1988-
April, 1988 51.06 3,291 33 157,467 157,500
Net loss for the year ended November
30, 1988.......................... (352,311) (352,311)
------- ------ ----------- ----------- -----------
Balance at November 30, 1988.......... 189,200 1,892 4,184,376 (4,377,484) (191,216)
For cash and the exchange of debt
due a shareholder................. January, 1989-
July, 1989 51.06 4,524 45 230,955 231,000
Net loss for the year ended November
30, 1989.......................... (446,642) (446,642)
------- ------ ----------- ----------- -----------
Balance at November 30, 1989.......... 193,724 1,937 4,415,331 (4,824,126) (406,858)
For services........................ August, 1990 51.06 4,701 47 239,953 240,000
Net loss for the year ended November
30, 1990.......................... (1,328,518) (1,328,518)
------- ------ ----------- ----------- -----------
Balance at November 30, 1990.......... 198,425 1,984 4,655,284 (6,152,644) (1,495,376)
For cash, less issuance costs of
$1,630,241........................ March, 1991 20.00 360,000 3,600 5,566,159 5,569,759
Unit Purchase Option................ March, 1991 120 120
Redeemable Convertible Preferred
Stock dividend.................... April, 1991 (19,843) (19,843)
For cash, less issuance costs of
$126,900.......................... April, 1991 20.00 54,000 540 952,560 953,100
Net loss for the year ended November
30, 1991.......................... (2,058,493) (2,058,493)
------- ------ ----------- ----------- -----------
Balance at November 30, 1991.......... 612,425 $6,124 $11,174,123 $(8,230,980) $ 2,949,267
</TABLE>
See notes to financial statements
F-5
<PAGE> 63
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY) (NOTE 11) -- (CONTINUED)
<TABLE>
<CAPTION>
TOTAL
PRICE ADDITIONAL ACCUM- SHAREHOLDERS'
PER SHARE PAID-IN ULATED EQUITY
DATE SHARE SHARES VALUE CAPITAL DEFICIT (DEFICIENCY)
--------------- ----- --------- ------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at November 30, 1991....... 612,425 $ 6,124 $11,174,123 $ (8,230,980) $ 2,949,267
Exercise of Class A Warrants for
cash, less issuance costs of
$702,917....................... December, 1991-
May, 1992 30.00 413,900 4,139 11,709,944 11,714,083
Exercise of Class B Warrants for
cash........................... February, 1992-
November, 1992 40.00 3,406 34 136,186 136,220
Exercise of stock options for
cash........................... July, 1992- 20.00-
November, 1992 21.90 3,010 30 66,045 66,075
Net loss for year ended November
30, 1992....................... (5,390,637) (5,390,637)
--------- ------- ----------- ------------ -----------
Balance at November 30, 1992....... 1,032,741 10,327 23,086,298 (13,621,617) 9,475,008
Exercise of Class B Warrants for
cash........................... December, 1992-
October, 1993 40.00 2,976 30 119,034 119,064
Exercise of Class M Warrants for
cash........................... March, 1993-
October, 1993 10.00 60,018 601 599,578 600,179
Exercise of stock options for
cash........................... March, 1993- 20.00-
September, 1993 43.80 310 3 13,147 13,150
Exercise of Unit Purchase Options
and underlying Class A Warrants
for cash....................... May, 1993- 30.00-
October, 1993 33.00 1,000 10 31,496 31,506
Net loss for the year ended
November 30, 1993.............. (6,135,830) (6,135,830)
--------- ------- ----------- ------------ -----------
Balance at November 30, 1993....... 1,097,045 10,971 23,849,553 (19,757,447) 4,103,077
For cash, less issuance costs of
$490,790....................... August, 1994 8.00 529,700 5,297 3,741,513 3,746,810
Exercise of stock options for
cash........................... November, 1994 16.25-
35.90 10 -- 202 202
Net loss for the year ended
November 30, 1994.............. (4,331,500) (4,331,500)
--------- ------- ----------- ------------ -----------
Balance at November 30, 1994....... 1,626,755 16,268 27,591,268 (24,088,947) 3,518,589
Exercise of stock options for
cash........................... February, 1995 8.40 100 1 843 844
For cash, less issuance costs of
$282,475....................... July, 1995 12.50 150,000 1,500 1,591,125 1,592,625
Net loss for the year ended
November 30, 1995.............. (2,818,403) (2,818,403)
--------- ------- ----------- ------------ -----------
Balance at November 30, 1995....... 1,776,855 17,769 29,183,236 (26,907,350) 2,293,655
Exercise of stock options for
cash........................... January, 1996- 8.40-
June, 1996 14.70 7,717 77 75,030 75,107
For cash, less issuance costs of
$143,587....................... April, 1996 12.50 114,240 1,143 1,283,270 1,284,413
Exercise of warrants for cash,
less issuance costs of
$16,350........................ June, 1996-
September, 1996 20.00 19,698 197 339,886 340,083
For cash, less issuance costs of
$650,872....................... November, 1996 11.50 366,841 3,668 3,564,135 3,567,803
Redemption of Class B Warrants... November, 1996 0.50 (203,759) (203,759)
Net loss for the year ended
November 30, 1996.............. (3,303,703) (3,303,703)
--------- ------- ----------- ------------ -----------
Balance at November 30, 1996....... 2,285,351 22,854 34,241,798 (30,211,053) 4,053,599
(UNAUDITED)
Reduce issuance costs for
November, 1996 offering........ 11,768 11,768
Net loss for the three-month
period ended February 28,
1997........................... (1,308,412) (1,308,412)
--------- ------- ----------- ------------ -----------
Balance at February 28, 1997
(unaudited)...................... 2,285,351 $22,854 $34,253,566 $(31,519,465) $ 2,756,955
========= ======= =========== ============ ===========
</TABLE>
See notes to financial statements
F-6
<PAGE> 64
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE
FOR THE THREE-MONTH FOR THE PERIOD
PERIOD ENDED JANUARY 15, 1982
--------------------------- FOR THE YEARS ENDED NOVEMBER 30, (DATE OF INCEPTION)
FEBRUARY 28, FEBRUARY 29, --------------------------------------- TO FEBRUARY 28,
1997 1996 1996 1995 1994 1997
------------ ------------ ----------- ----------- ----------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.......................... $(1,308,412) $(319,589) $(3,303,703) $(2,818,403) $(4,331,500) $(31,499,623)
Adjustments to reconcile net loss
to net cash used in operations:
Depreciation and amortization... 13,863 15,883 66,222 133,128 209,030 843,072
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......... (132,340) (144,084) 252,423 (17,913) (11,631) (323,776)
Inventory (increase)
decrease.................... (20,797) 135,070 5,286 (61,452) (24,379) (951,932)
Prepaid expenses (increase)
decrease.................... (1,697) (6,250) 6,726 (8,083) 45,942 (67,132)
Other assets (increase)
decrease.................... -- 1,280 88,016 (9,545) 59,219 (127,332)
Accounts payable increase
(decrease).................. 42,111 (11,392) 232,631 (98,807) (138,409) 406,143
Accrued liabilities increase
(decrease).................. (50,157) (59,688) (162,246) (111,532) (62,254) 203,953
----------- --------- ----------- ----------- ----------- ------------
Net cash (used in) operations... (1,457,429) (388,770) (2,814,645) (2,992,607) (4,253,984) (31,063,698)
----------- --------- ----------- ----------- ----------- ------------
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 (net)................. (1,576) 3,255 (68,914) (19,267) (12,334) (912,637)
Proceeds (investment) under note
receivable-related party........ -- (4,010) 190,240 (15,240) 25,000 --
----------- --------- ----------- ----------- ----------- ------------
Net cash provided by (used in)
investing activities.......... (1,576) (755) 121,326 1,530,319 638,601 (912,637)
----------- --------- ----------- ----------- ----------- ------------
Cash flows from financing
activities:
Proceeds from issuance of Common
Shares.......................... 11,768 61,458 5,267,406 1,593,469 3,747,012 34,044,611
Redemption of Redeemable
Convertible Preferred Shares.... -- (19,843) (19,843) -- -- (19,843)
Redemption of Class B Warrants.... -- -- (203,759) -- -- (203,759)
Proceeds from issuance of 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.................... 11,768 41,615 5,043,804 1,563,469 3,717,012 33,821,009
----------- --------- ----------- ----------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents.................. (1,447,237) (347,910) 2,350,485 101,181 101,629 1,844,674
Cash and cash equivalents, beginning
of period......................... 3,291,911 941,426 941,426 840,245 738,616 --
----------- --------- ----------- ----------- ----------- ------------
Cash and cash equivalents, end of
period............................ $ 1,844,674 $ 593,516 $ 3,291,911 $ 941,426 $ 840,245 $ 1,844,674
=========== ========= =========== =========== =========== ============
</TABLE>
Supplemental disclosure of noncash financing activities:
See Statements of Shareholders' Equity (Deficiency) for details of shares
issued in exchange for noncash consideration.
Supplemental disclosure of cash flow information:
Cash paid for interest for the three-month periods ended February 28, 1997
and February 29, 1996 (unaudited) and for the years ended November 30, 1996,
1995 and 1994 approximated $0, $0, $450, $1,000 and $4,000, respectively.
See notes to financial statements
F-7
<PAGE> 65
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Somanetics Corporation (the "Company"), a Michigan corporation formed in
January 1982, develops, manufactures and markets the INVOS 3100A Cerebral
Oximeter (the "Cerebral Oximeter"), the only FDA-cleared, non-invasive patient
monitoring system that continuously measures changes in the blood oxygen level
in the adult brain. The Cerebral Oximeter is based on the Company's proprietary
In Vivo Optical Spectroscopy ("INVOS(R)") technology. INVOS analyzes 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 is in the development stage and has incurred research, product
development and other expenses involved in designing, developing, marketing and
selling its product, as well as devoting efforts to raising capital.
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 product 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
Cerebral Oximeter. In February 1994, the Company resumed marketing its product
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
United States distributors, 16 direct sales personnel and 1 international sales
consultant. During fiscal 1996, the Company sold its product 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.
Management believes that markets exist for the product the Company has
developed; however, there is an inherent uncertainty associated with the success
of such new product. 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).
F-8
<PAGE> 66
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 its product, 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 estimated length of time current cash and cash equivalents will sustain
the Company's operations is 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.
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 17,
1997, pursuant to which the Company has exclusively retained a managing
underwriter to underwrite a proposed public offering by the Company of 1,800,000
newly-issued Common Shares (after giving effect to, the one-for-ten reverse
stock split effected April 10, 1997) (Note 11). There can be no assurance 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 product, 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.
1997 Interim Information (Unaudited)
The accompanying unaudited interim financial statements reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal recurring nature. Operating results for the three-month period
ended February 28, 1997, are not necessarily indicative of the results that may
be expected for the year ending November 30, 1997, although the Company expects
to continue to incur operating losses for the foreseeable future.
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 $31,519,465 through February 28, 1997. The Company had working
capital of $2,577,418, cash and cash equivalents of $1,844,674, total current
liabilities of $610,096 and shareholders' equity of $2,756,955, as of February
28, 1997.
F-9
<PAGE> 67
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. STOCK OFFERINGS AND COMMON SHARES
The Company has authorized 6,000,000 Common Shares (par value $.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 138,000 units, consisting
of 414,000 Common Shares (par value $.01 per share) and 414,000 redeemable Class
A Warrants. 413,900 Class A Warrants were exercised, each entitling the holder
to one Common Share and one Class B Warrant, and 100 Class A Warrants were
redeemed in 1992. 6,382 Class B Warrants were exercised in 1992 and 1993. The
Company redeemed all 407,518 then outstanding redeemable Class B Warrants on
November 14, 1996, at $.50 per Class B Warrant, or approximately $203,759.
On March 27, 1991, the Company sold, for $120 to the underwriter an option
to purchase up to 12,000 units at $99.00 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. 167 Unit Purchase Options and the 500 underlying
Class A Warrants were exercised in fiscal 1993. The Company issued 1,000 Common
Shares and 500 non-redeemable Class B Warrants as a result of such exercises. As
a result of various anti-dilution adjustments, there were approximately 14,434
Unit Purchase Options outstanding on March 19, 1996, all of which expired
unexercised on that date. The 500 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 $.10 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 4,500 common shares
at $20.00 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 529,700
newly-issued Common Shares, par value $.01 per share, at a price of $8.00 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
52,970 Common Shares at $12.50 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 75,000 Units, at a
price of $25.00 per Unit, for gross proceeds of $1,875,000, through an offering
complying with Regulation S under the Act. 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 $.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 $20.00 per share, subject to adjustment, at any
time through July 13, 2000, unless earlier redeemed. The Warrants are redeemable
for $.10 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.
F-10
<PAGE> 68
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company also granted the placement agent warrants to purchase 15,000
Common Shares at $14.375 per share exercisable during the four-year period
beginning July 14, 1996.
On April 2, 1996, the Company completed the placement of 57,120 Units, at a
price of $25.00 per Unit, for gross proceeds of $1,428,000, through an offering
complying with Regulation S under the Act. 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 $.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 $17.50 per share, subject to adjustment, at any
time through April 1, 2001, unless earlier redeemed. The Warrants are redeemable
for $.10 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 11,424
Common Shares at $12.50 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 366,841
newly-issued Common Shares at a price of $11.50 per share through an offering
complying with Regulation S under the Act. The net proceeds to the Company were
approximately $3,568,000.
During fiscal 1996, 14,600 warrants issued in the Company's 1995 Regulation
S Offering and exercisable at $20.00 per share, and 2,000 warrants issued in the
Company's April 1996 Regulation S Offering and exercisable at $17.50 per 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 60,400 redeemable warrants outstanding exercisable at $20.00 per share
until July 13, 2000 and 55,120 redeemable warrants outstanding exercisable at
$17.50 per share until April 1, 2001. These warrants were issued in the
Company's 1995 and April 1996 Regulation S Offerings. The conditions permitting
the Company to redeem these warrants have not been met as of January 24, 1997.
In addition, the Placement Agent and their transferees hold warrants to purchase
52,970 Common Shares exercisable at $12.50 per share, 15,000 Common Shares
exercisable at $14.40 per share and 11,424 Common Shares exercisable at $12.50
per 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.
F-11
<PAGE> 69
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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)............................. 9,317
1991 Incentive Stock Option Plan (Note 8)................... 110,288
1993 Director Stock Option Plan (Note 8).................... 23,998
Options Granted Independent of Option Plans (Note 8)........ 171,343
Exchange Warrants........................................... 4,500
Placement Agent Warrants.................................... 79,394
Regulation S Warrants....................................... 115,520
-------
Total reserved for future issuance................ 514,360
=======
</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:
<TABLE>
<CAPTION>
NOVEMBER 30,
FEBRUARY 28, ------------------------
1997 1996 1995
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Finished goods............................. $ 419,465 $ 437,079 $ 516,420
Work in process............................ 347,929 307,510 219,076
Purchased components....................... 383,358 386,996 296,003
---------- ---------- ----------
Sub-total................................ 1,150,752 1,131,585 1,031,499
Less reserve for obsolete and excess
inventory................................ (198,820) (200,450) (95,078)
---------- ---------- ----------
Total............................... $ 951,932 $ 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 $34,332
(Unaudited), $32,604 and $25,692 at February 28, 1997 and 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. On April 10,
1997, the Company effected a 1-for-10 reverse stock split (Note 11).
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
F-12
<PAGE> 70
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
fiscal year. The Company has evaluated the impact of the new standard on its
financial position, results of operations and cash flows and has determined 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 has determined 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.
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share." This
Statement establishes standards for computing and presenting earnings per share
("EPS") and applies to all entities with publicly-held common shares or
potential common shares. This Statement replaces the presentation of primary EPS
and fully-diluted EPS with a presentation of basic EPS and diluted EPS,
respectively. Basic EPS excludes dilution and is computed by dividing earnings
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Similar to fully diluted EPS, diluted EPS reflects
the potential dilution of securities that could share in the earnings. This
Statement is not expected to have a material effect on the Company's reported
EPS amounts. The Statement is effective for the Company's financial statements
for the year ending November 30, 1998.
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,
FEBRUARY 28, -------------------
1997 1996 1995
------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Professional Fees.............................. $ 33,739 $101,697 $ 75,702
Shareholder Lawsuits (Note 7).................. -- -- 144,717
Product Upgrades............................... 16,341 18,261 149,954
Warranty....................................... 17,467 12,421 15,000
Accrued Insurance.............................. 34,613 32,231 --
Accrued Incentive.............................. 37,863 -- --
Other.......................................... 63,930 89,500 30,983
-------- -------- --------
Total..................................... $203,953 $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.
F-13
<PAGE> 71
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
NOVEMBER 30,
-----------------
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
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, respectively, 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 three months ended February
28, 1997 (unaudited) and for the years ended November 30, 1996, 1995 and 1994
was approximately $42,800, $173,500, $278,000 and $294,000, respectively.
Approximate future minimum lease commitments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
- -----------------------
<S> <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
F-14
<PAGE> 72
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company to eligible employees. No Company matching or discretionary
contributions were made to the plan for the three months ended February 28, 1997
(unaudited) or 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 an
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 Act, 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 Act,
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act of 1934"), Rule 10b-5 under the Securities Exchange Act
of 1934 and under common law for (i) rescission of their investment and
compensation for the lost use of the money invested, (ii) other compensatory
damages, (iii) punitive damages in the amount of $10,000,000, (iv) consequential
damages, (v) reasonable attorneys' fees, (vi) costs and disbursements and (vii)
such other relief as the court may deem just and proper.
On April 25, 1994, another shareholder of the Company filed suit in the
United States District Court for the Eastern District of Michigan, individually
and on behalf of all others similarly situated, against the Company and Gary D.
Lewis, the Company's former Chairman of the Board, in an action captioned
Benjamin Langford v. Somanetics Corporation and Gary D. Lewis. The allegations,
relief requested and consequences of the action are similar to those in the
Jacobson case described above.
The Company entered into a Stipulation And Agreement Of Compromise And
Understanding (the "Agreement") with counsel for plaintiff Earl J. Jacobson. On
July 3, 1996 the court 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.
F-15
<PAGE> 73
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, 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
physicians, 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 15,668
Common Shares under the 1983 Plan and 115,000 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 three months ended February 28, 1997 (unaudited) and 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 February 28, 1997 (unaudited) and at
November 30, 1996, no additional options may be granted under the 1983 Plan and
376 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 24,000 Common Shares for the grant of options to purchase 1,500 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
F-16
<PAGE> 74
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 1,500 Common Shares.
<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... 15,426(1) $13.10-$36.25 84,250 $20.00-$56.90 4,500 $35.90
Options granted..... 123,016 $8.40-$16.25 55,000 $10.00-$12.50 2,022 $15.00
Options exercised... (8) $16.25 (2) $35.90
Options canceled.... (92,723) $14.70-$56.90 (1,000) $35.90
------ ------ ------- ------
Options outstanding
November 30, 1994... 15,426 $13.10-$36.25 114,535 $8.40-$42.50 55,000 $10.00-$12.50 5,520 15.00-$35.90
Options granted..... 76,950 $11.90-$13.10 4,666 $14.70-$20.00
Options exercised... (100) $8.40
Options canceled.... (6,109) $20.00-$36.25 (25,593) $8.40-$42.50
------ ------ ------- ------
Options outstanding
November 30, 1995... 9,317 $13.10-$36.25 165,792 $8.40-$42.50 59,666 $10.00-$20.00 5,520 $15.00-$35.90
Options granted..... 23,785 $5.00 135,540 $5.00-$23.10 6,000 $26.25
Options exercised... (3,508) $8.40-$14.70 (3,432) $10.00-$13.10
Options canceled.... (76,157) $5.00-$14.70 (20,431) $5.00-$13.10 (1,000) $26.25
------ ------ ------- ------
Options outstanding
November 30, 1996... 9,317 $13.10-$36.25 109,912 $5.00-$42.50 171,343 $5.00-$23.10 10,520 $15.00-$35.90
(UNAUDITED)
Options granted..... 12,700 $13.10
Options exercised...
Options canceled....
------ ------ ------- ------
Options outstanding
February 28,
1997(2)(3).......... 9,317 $13.10-$36.25 109,912 $5.00-$42.50 184,043 $5.00-$23.10 10,520 $15.00-$35.90
====== ======= ======= ======
</TABLE>
- ---------------
(1) Plus 13,239 redeemable Convertible Preferred Shares.
(2) Exercise dates range from February 21, 1991 to January 15, 2007.
(3) Options to purchase 177,508 Common Shares were exercisable at November 30,
1996.
Also, see Note 11 herein for approval of a new employee stock option plan
(unaudited).
9. RELATED PARTY TRANSACTIONS
The Company received legal services from certain shareholders. Services
from such parties amounted to approximately $74,600 (unaudited), $348,570,
$236,000 and $439,000 during the three months ended February 28, 1997 and 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.
F-17
<PAGE> 75
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company recognized no revenue in the three months ended February 28,
1997 (unaudited) or in fiscal 1996, 1995 and 1994, respectively, from Somatek,
Inc., one of the Company's United States 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 one international distributor and two United States
distributors which accounted for approximately 42% (Japan), 14% (United States)
and 11% (United States), respectively, of total sales for the three months ended
February 28, 1997 (unaudited), two distributors which accounted for
approximately 86% (Japan) and 6% (Latin America), respectively, of total sales
for the three months ended February 29, 1996 (unaudited), two distributors which
accounted for approximately 62% (Japan) and 15% (Latin America), respectively,
of total sales for fiscal year 1996, two distributors which accounted for
approximately 53% (Japan) and 13% (Latin America), respectively, of total sales
for fiscal year 1995, and two distributors which accounted for approximately 43%
(Japan) and 10% (Latin America), respectively, of total sales for fiscal year
1994.
Additionally, total sales to foreign customers for the three months ended
February 28, 1997 and February 29, 1996 (unaudited) and for the years ended
November 30, 1996, 1995 and 1994 include approximately $218,000, $515,000,
$745,000, $1,336,000 and $939,000, respectively.
11. SUBSEQUENT EVENTS
Reverse Stock Split
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. The Company's shareholders approved such amendment and restatement
at the 1997 Annual Meeting of Shareholders on March 25, 1997, and the reverse
stock split was effected April 10, 1997. All share and per share information
included in these financial statements have been restated to reflect the reverse
stock split.
Other Events (Unaudited)
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, subject to
shareholder approval at the 1997 Annual Meeting of Shareholders. The Company's
shareholders approved the 1997 Stock Option Plan at the 1997 Annual Meeting of
Shareholders on March 25, 1997.
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 12,700 Common Shares at $13.10 per 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 17,
1997, pursuant to which the Company has exclusively retained a managing
underwriter to underwrite a proposed public offering by the Company of 1,800,000
newly-issued Common Shares. The Company has also agreed to grant the underwriter
an option to purchase an additional 270,000 Common Shares to cover
over-allotments and a five-year warrant
F-18
<PAGE> 76
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. There can be no assurance 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.
On March 27, 1997, the 4,500 Exchange Warrants expired unexercised.
F-19
<PAGE> 77
[Picture of doctor placing
SomaSensor on patient]
Harvey Edmonds, Jr., Ph.D.,
professor and director of
research at the University of
Louisville School of Medicine,
places a SomaSensor on a patient
with the Cerebral Oximeter at
his side.
[Picture of the Company's
manufacturing facility]
Somanetics' manufacturing
facility at its
headquarters in Troy,
Michigan.
[Picture of SomaSensor
on newborn]
FUTURE APPLICATIONS
Somanetics has invested
substantial resources in the
development of its INVOS
technology, the Cerebral Oximeter
and the related disposable
SomaSensor. Research being
conducted on children and
newborns is expected to result in
a SomaSensor that can fit smaller
heads. Non-invasive monitoring is
especially important in this
population, as newborns have
higher risks of oxygen imbalances
and less blood volume from which
to make invasive blood gas
measurements.
Somanetics, INVOS and SomaSensor are
registered trademarks of Somanetics
Corporation. "Window to the Brain" is
a trademark of Somanetics Corporation. SOMANETICS LOGO
<PAGE> 78
[SOMANETICS LOGO]
[WINDOW TO THE BRAIN TRADEMARK]
<PAGE> 79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated amounts of expenses to be
borne by the Company in connection with the issuance and distribution expenses
of the securities being registered (other than underwriting discounts and
commissions):
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 3,450
NASD Filing Fee............................................. 1,638
Nasdaq Listing Fee.......................................... 7,500
Printing and Engraving Expenses............................. 75,000
Accounting Fees and Expenses................................ 75,000
Legal Fees and Expenses..................................... 125,000
Blue Sky Fees and Expenses.................................. 50,000
Transfer Agent's and Registrar's Fees and Expenses.......... 7,000
Underwriters' Accountable Expenses.......................... 250,000
Miscellaneous Expenses...................................... 5,412
--------
Total.................................................. $600,000
========
</TABLE>
All of these expenses, except the Securities and Exchange Commission
registration fee and the NASD filing fee, represent estimates only.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Sections 561-571 of the Michigan Business Corporation Act, as
amended, directors and officers of a Michigan corporation may be entitled to
indemnification by the corporation against judgments, expenses, fines and
amounts paid by the director or officer in settlement of claims brought against
them by third persons or by or in the right of the corporation if those
directors and officers acted in good faith and in a manner reasonably believed
to be in, or not opposed to, the best interests of the corporation or its
shareholders.
The Registrant is obligated under its bylaws and employment agreements with
two of its executive officers to indemnify a present or former director or
executive officer of the registrant, and may indemnify any other person, to the
fullest extent now or hereafter permitted by law in connection with any actual
or threatened civil, criminal, administrative or investigative action, suit or
proceeding arising out of their past or future service to the registrant or a
subsidiary, or to another organization at the request of the registrant or a
subsidiary. In addition, the Restated Articles of Incorporation of the Company
limit certain personal liabilities of directors of the Company.
Reference is also made to Section 8 of the Underwriting Agreement (a form
of which is attached to this Registration Statement as Exhibit 1.1) with respect
to undertakings to indemnify the registrant, its directors and officers and each
person who controls the registrant within the meaning of the Securities Act of
1933, as amended (the "Act"), against certain civil liabilities, including
certain liabilities under the Act.
The Company has obtained Directors' and Officers' liability insurance. The
policy provides for $1,000,000 in coverage including prior acts dating to the
Company's inception and liabilities under the Act in connection with the
Company's initial public offering, the exercise and redemption of Class A
Warrants and this offering.
II-1
<PAGE> 80
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following securities of the registrant were sold by the registrant
during the past three years without being registered under the Act:
1. In June through September 1996, the Company sold to seven foreign
investors 16,600 Common Shares upon the exercise of warrants issued in offerings
complying with Regulation S under the Securities Act of 1933 (14,600 at $20.00
per share and 2,000 at $17.50 per share). The gross proceeds to the Company from
such sales were $327,000, and the Company paid Rauscher Pierce & Clark, Inc. and
Rauscher Pierce & Clark Limited (the "Placement Agent") a commission of $16,350
in connection with such exercises. Such Common Shares were not registered, but
were issued in reliance upon the exemption from registration contained in
Regulation S under the Act.
2. In September 1996, the Company sold to two accredited investors 3,098
Common Shares upon the exercise of 3,098 Class M Warrants issued before the
Company's initial public offering (exercisable at $9.50 per Class M Warrant).
The gross proceeds to the Company from such sales were $29,433.85. Such Common
Shares were not registered, but were issued in reliance upon the exemptions from
registration contained in Sections 4(2) and 4(6) of the Act.
3. On November 21, 1996 the Company completed the placement of 366,841
Common Shares to 34 foreign investors, at a price of $11.50 per share. The
Placement Agent acted as placement agent in connection with the sale of such
Common Shares. The gross proceeds to the Company from such sales were
$4,218,675, and the Company paid the Placement Agent a fee of $421,868 in
connection with such offering. The Company also reimbursed the Placement Agent
for its expenses of the offering, including its counsel's fees. Such securities
were not registered, but were issued in reliance upon the exemption from
registration contained in Regulation S under the Act.
4. On April 2, 1996 the Company completed the placement of 57,120 Units to
20 foreign investors, at a price of $25.00 per Unit. Each Unit consists of two
newly-issued Common Shares and one warrant to purchase one Common Share. The
Placement Agent acted as placement agent in connection with the sale of such
Units. The gross proceeds to the Company from such sales were $1,428,000, and
the Company paid the Placement Agent a fee of $114,240 in connection with such
offering. The Company also reimbursed the Placement Agent for its expenses of
the offering, including its counsel's fees. The Company also granted the
Placement Agent warrants to purchase 11,240 Common Shares at $12.50 per share
exercisable during the four-year period beginning April 2, 1997.
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 $17.50 per share, subject to adjustment, at any
time through April 1, 2001, unless earlier redeemed. The Warrants are redeemable
for $.10 by the Company at any time if certain conditions are met. Such
securities were not registered, but were issued in reliance upon the exemption
from registration contained in Regulation S under the Act.
5. On July 14, 1995, the Company completed the placement of 75,000 Units to
27 foreign investors, at a price of $25.00 per Unit. Each Unit consists of two
newly-issued Common Shares and one warrant to purchase one Common Share. The
Placement Agent acted as placement agent in connection with the sale of such
Units. The gross proceeds to the Company from such sales were $1,875,000, and
the Company paid the Placement Agent a fee of $150,000 in connection with such
offering. The Company also reimbursed the Placement Agent for its expenses of
the offering, including its counsel's fees. The Company also granted the
Placement Agent warrants to purchase 15,000 Common Shares at $14.375 per share
exercisable during the four-year period beginning July 14, 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 $20.00 per share, subject to adjustment, at any
time through July 13, 2000, unless earlier redeemed. The Warrants are redeemable
for $.10 by the Company at any time after January 13, 1996, if certain
conditions are met. Such
II-2
<PAGE> 81
securities were not registered, but were issued in reliance upon the exemption
from registration contained in Regulation S under the Act.
6. On August 2, 1994, the Company completed a placement of 529,700
newly-issued Common Shares to 26 foreign investors at a price of $8.00 per
share. Rauscher Pierce & Clark Limited acted as placement agent in connection
with the sale of such Common Shares. The gross proceeds to the Company from such
sales were $4,237,600, and the Company paid the Placement Agent a fee of
$317,820 in connection with such offering. The Company also reimbursed Rauscher
Pierce & Clark Limited for its expenses of the offering, including its counsel's
fees. The Company also granted the placement agent warrants to purchase 52,970
Common Shares at $12.50 per share exercisable during the four-year period
beginning August 2, 1995. Such securities were not registered, but were issued
in reliance upon the exemption from registration contained in Regulation S under
the Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
See Exhibit Index immediately preceding the exhibits.
(b) Financial Statement Schedules
<TABLE>
<CAPTION>
SCHEDULE PAGE
-------- ----
<S> <C>
Schedule II -- Valuation and Qualifying Accounts and
Reserves for the years ended November 30, 1996, 1995 and
1994...................................................... S-1
</TABLE>
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 82
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Troy, State of Michigan,
on April 15, 1997.
SOMANETICS CORPORATION
(Registrant)
By: /s/ BRUCE J. BARRETT
------------------------------------
Bruce J. Barrett
Its: President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned officers
and directors of Somanetics Corporation, a Michigan corporation (the "Company"),
hereby constitutes and appoints Bruce J. Barrett and Raymond W. Gunn, and each
of them (with full power of substitution and re-substitution), his or her true
and lawful attorneys-in-fact and agents for each of the undersigned and on his
or her behalf and in his or her name, place and stead, in any and all
capacities, with full power and authority in such attorneys-in-fact and agents
and in any one or more of them, to sign, execute and affix his seal thereto and
file with the Securities and Exchange Commission and any state securities
regulatory board or commission the registration statement on Form S-1 to be
filed by the Company under the Securities Act of 1933, as amended, which
registration statement relates to the registration and sale of Common Shares,
par value $0.01 per share, by the Company, any and all amendments or supplements
to such registration statement, including any amendment or supplement thereto
changing the amount of securities for which registration is being sought, any
post-effective amendment, and any registration statement or amendment to such
registration statement for the same offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, with all exhibits and
any and all documents required to be filed with respect thereto with any
regulatory authority, including, without limitation, The Nasdaq Stock Market,
the National Association of Securities Dealers, Inc. and any federal or state
regulatory authority pertaining to such registration statement; granting unto
such attorneys-in-fact, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same as fully to all intents and
purposes as he or she might or could do if personally present, hereby ratifying
and confirming all that such attorneys-in-fact and agents, and each of them and
any of their substitutes, may lawfully do or cause to be done by virtue of this
Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ BRUCE J. BARRETT President, Chief Executive Officer and April 15, 1997
- --------------------------------------------- a Director (Principal Executive
Bruce J. Barrett Officer)
/s/ RAYMOND W. GUNN Executive Vice President and Chief April 15, 1997
- --------------------------------------------- Financial Officer (Principal Financial
Raymond W. Gunn Officer and Principal Accounting
Officer)
/s/ H. RAYMOND WALLACE Chairman of the Board of Directors April 15, 1997
- ---------------------------------------------
H. Raymond Wallace
/s/ DANIEL S. FOLLIS Director April 15, 1997
- ---------------------------------------------
Daniel S. Follis
/s/ JAMES I. AUSMAN Director April 15, 1997
- ---------------------------------------------
James I. Ausman, M.D., Ph.D.
</TABLE>
II-4
<PAGE> 83
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
<CAPTION>
Note: (1) Write-off uncollectible accounts, net of recoveries
Note: (2) Reserve of additional uncollectible accounts, net of recoveries
<S> <C> <C> <C> <C> <C>
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
</TABLE>
Note: (3) Write-off obsolete, excess inventory, net of recoveries
S-1
<PAGE> 84
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C>
1.1 Proposed form of Underwriting Agreement. ---
3(i) Restated Articles of Incorporation of Somanetics N/A
Corporation, incorporated by reference to Exhibit 3(i) to
the Company's Quarterly Report on Form 10-Q for the quarter
ended February 28, 1997.
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.
5.1* Opinion of Honigman Miller Schwartz and Cohn concerning the ---
legality of the securities being offered.
10.1 Lease Agreement, dated September 10, 1991, between N/A
Somanetics 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 N/A
Road, 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 N/A
Option 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 N/A
Stock 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 N/A
Stock 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 N/A
Corporation 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.
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, incorporated N/A
by reference to Exhibit 10.9 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1996.
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 N/A
Program, incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the fiscal year
ended November 30, 1996.
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.
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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, N/A
1994, 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.
10.18 Amendment to Employment Agreement, dated as of July 21, N/A
1994, 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, N/A
1995, 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, N/A
1996, 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, 1996.
10.21 Stock Option Agreement, dated May 16, 1994, between N/A
Somanetics 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 N/A
Somanetics 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 N/A
Somanetics 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 N/A
Somanetics 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 N/A
Somanetics 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, N/A
between 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.
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10.27 Form of Stock Option Agreement, dated December 22, 1995, N/A
between 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.
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, N/A
between 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, N/A
between Somanetics Corporation and three employees,
incorporated by reference to Exhibit 10.30 to the Company's
Annual Report on Form 10-K for the fiscal year ended
November 30, 1996.
10.31 Form of Stock Option Agreement, dated as of September 10, N/A
1996, between Somanetics Corporation and six 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, 1996.
10.32 Form of Stock Option Agreement, dated as of November 18, N/A
1996, between Somanetics Corporation and six employees,
incorporated by reference to Exhibit 10.32 to the Company's
Annual Report on Form 10-K for the fiscal year ended
November 30, 1996.
10.33 Form of Stock Option Agreement, dated as of January 15, N/A
1997, between Somanetics Corporation and eight employees,
incorporated by reference to Exhibit 10.33 to the Company's
Annual Report on Form 10-K for the fiscal year ended
November 30, 1996.
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 N/A
Somanetics 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 N/A
Agreement 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. Current Form of Somanetics Corporation
Confidentiality Agreement 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, N/A
February 11, 1986 and February 11, 1986, from Gary D. Lewis
to Somanetics Corporation in connection with the Company's
INVOS technology, incorporated by reference to Exhibit 10.17
to the Company's Registration Statement on Form S-1 (file
no. 33-38438).
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10.41 Assignments, dated October 5, 1983, August 28, 1985, N/A
February 11, 1986, February 12, 1986, and September 24,
1986, from Hugh F. Stoddart to Somanetics Corporation in
connection with the Company's INVOS technology, incorporated
by reference to Exhibit 10.18 to the Company's Registration
Statement on Form S-1 (file no. 33-38438).
10.42 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.
10.43 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.
10.44 Engagement Letter, dated as of June 6, 1995, among N/A
Somanetics 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.
10.45 Form of Purchase Agreement, between Somanetics Corporation N/A
and 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.
10.46 Form of Warrant, between Somanetics Corporation and N/A
purchasers 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.
10.47 Warrant Agreement, dated as of July 14, 1995, between N/A
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 August
31, 1995.
10.48 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.
10.49 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.
10.50 Engagement Letter, dated as of March 25, 1996, among N/A
Somanetics 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).
10.51 Form of Purchase Agreement, between Somanetics Corporation N/A
and 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.
10.52 Form of Warrant between Somanetics Corporation and N/A
purchasers 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.
10.53 Warrant Agreement, dated as of April 2, 1996, between N/A
Somanetics 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.
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10.54 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.
10.55 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.
10.56 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.
10.57 Engagement Letter, dated as of October 23, 1996, among N/A
Somanetics Corporation, Rauscher Pierce & Clark Limited and
Rauscher Pierce & Clark, Inc., incorporated by reference to
Exhibit 10.58 to the Company's Annual Report on Form 10-K
for the fiscal year ended November 30, 1996.
10.58 Amendment to Engagement Letter, dated as of November 1, N/A
1996, among Somanetics Corporation, Rauscher Pierce & Clark
Limited and Rauscher Pierce & Clark, Inc., incorporated by
reference to Exhibit 10.59 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1996.
10.59 Form of Purchase Agreement, between Somanetics Corporation N/A
and purchasers of Units in the November 1996 Regulation S
Offering, incorporated by reference to Exhibit 10.60 to the
Company's Annual Report on Form 10-K for the fiscal year
ended November 30, 1996.
10.60 Placement Agent Agreement, dated as of November 21, 1996, N/A
among Somanetics Corporation, Rauscher Pierce & Clark
Limited and Rauscher Pierce & Clark, Inc., incorporated by
reference to Exhibit 10.61 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1996.
10.61 Letter Agreement, dated as of January 17, 1997, between N/A
Somanetics Corporation and Brean Murray & Co., Inc.,
incorporated by reference to Exhibit 10.62 to the Company's
Annual Report on Form 10-K for the fiscal year ended
November 30, 1996.
10.62 Letter Agreement, dated as of February 20, 1997, between N/A
Somanetics Corporation and Mitani & Co., LLC, incorporated
by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended February 28, 1997.
23.1 Consent and Report on Schedule of Deloitte & Touche LLP. ---
23.2* Consent of Honigman Miller Schwartz and Cohn (included in ---
the opinion filed as Exhibit 5.1 to this registration
statement).
24.1 Powers of Attorney (included after the signature of the II-4
registrant contained on page II-4 of this registration
statement).
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* To be filed by amendment.
<PAGE> 1
EXHIBIT 1
SOMANETICS CORPORATION
1,800,000 Common Shares
UNDERWRITING AGREEMENT
June [__], 1997
BREAN MURRAY & CO., INC.
As Representative of the several
Underwriters
570 Lexington Avenue
New York, New York 10022-6822
Ladies and Gentlemen:
SOMANETICS CORPORATION, a Michigan corporation (the "Company"), proposes
to sell an aggregate of 1,800,000 shares (the "Firm Shares") of the Common
Shares, par value $.01 per share (the "Common Shares"), of the Company, to you
and the other underwriters named in Schedule I hereto (collectively, the
"Underwriters"), for whom you are acting as representative (the
"Representative"). The Company also has agreed to grant to you and the other
Underwriters an option (the "Option") to purchase up to an additional 270,000
Common Shares (the "Option Shares") on the terms and for the purposes set forth
in Section l(b) hereto. The Firm Shares and the Option Shares are hereinafter
collectively referred to as the "Shares." The words "you" and "your" refer to
the Representative.
The Company hereby confirms as follows its agreement with the
Representative and the several other Underwriters.
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1. Agreement to Sell and Purchase.
(a) On the basis of the representations, warranties and agreements of the
Company herein contained and subject to all the terms and conditions of this
Agreement, the Company agrees to sell to each Underwriter and each Underwriter,
severally and not jointly, agrees to purchase from the Company at a purchase
price of $[____] per share, the number of Firm Shares set forth opposite the
name of such Underwriter on Schedule I hereto, plus such additional number of
Shares which such Underwriter may become obligated to purchase pursuant to
Sections 1(b) or 10 hereof.
(b) Subject to all the terms and conditions of this Agreement, the Company
grants the Option to the several Underwriters to purchase, severally and not
jointly, the Option Shares at the same price per share as the Underwriters
shall pay for the Firm Shares. The Option may be exercised only to cover
over-allotments in the sale of the Firm Shares by the Underwriters and may be
exercised in whole or in part at any time and from time to time on or before
the 30th day after the date of this Agreement (or on the next business day if
the 30th day is not a business day), upon notice (the "Option Shares Notice")
in writing or by telephone (confirmed in writing) by the Representative to the
Company no later than 5:00 p.m., New York City time, at least two and no more
than five business days before the date specified for closing in the Option
Shares Notice (the "Option Closing Date") setting forth the aggregate number of
Option Shares to be purchased on the Option Closing Date. (As used herein,
"business day" means a day on which the New York Stock Exchange is open for
trading and on which banks in New York are open for business and not permitted
by law or executive order to be closed.) On the Option Closing Date, the
Company will sell to the Underwriters the number of Option Shares set forth in
the Option Shares Notice, and each Underwriter will purchase such percentage of
the Option Shares as is equal to the percentage of Firm Shares that such
Underwriter is purchasing, as adjusted by the Representative in such manner as
it deems advisable to avoid fractional shares.
2. Delivery and Payment.
(a) Delivery of the Firm Shares shall be made to the Representative for
the accounts of the Underwriters at the office of Brean Murray & Co., Inc., 570
Lexington Avenue, New York, New York 10022-6822, and in exchange therefor
payment of the purchase price shall be made to the Company by wire transfer of
immediately available funds to the Company's account at [________] (the
"Closing"). Such delivery and payment shall be made at 10:00 a.m., New York
time, on the third business day following the date of this Agreement, or at
such other time on such other date as may be agreed upon by the Company and the
Representative (such date is hereinafter referred to as the "Closing Date").
Time shall be of the essence, and delivery at the time and place specified
pursuant to this Agreement is a further condition of the obligations of each
Underwriter hereunder.
(b) To the extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner specified above) will take
place at the
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offices specified above for the Closing at the time and date (which may be the
Closing Date) specified in the Option Shares Notice.
(c) Certificates evidencing the Shares shall be in definitive form and
shall be registered in such names and in such denominations as the
Representative shall request at least two business days prior to the Closing
Date or the Option Closing Date, as the case may be, by written notice to the
Company. For the purpose of expediting the checking and packaging of
certificates for the Shares, the Company agrees to make such certificates
available for inspection at least 24 hours prior to the Closing Date or the
Option Closing Date, as the case may be.
(d) The cost of original issue tax stamps, if any, in connection with the
issuance, sale and delivery of the Shares by the Company to the respective
Underwriters shall be borne by the Company. The Company will pay and save each
Underwriter and any subsequent holder of the Shares harmless from any and all
liabilities with respect to or resulting from any failure or delay in paying
Federal or state stamp and other transfer taxes, if any, which may be payable
or determined to be payable in connection with the issuance, sale or delivery
to such Underwriter of the Shares.
3. Representations and Warranties of the Company. The Company represents,
warrants and covenants to each Underwriter that:
(a) A registration statement on Form S-1 (Registration No. 333-____)
relating to the Shares, including a preliminary prospectus relating to the
Shares and such amendments to such registration statement as may have been
required to the date of this Agreement, has been prepared by the Company under
the provisions of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (collectively referred to as the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") promulgated
thereunder and has been filed with the Commission. The Commission has not
issued any order preventing or suspending the use of the Prospectus (as defined
below) or any Preliminary Prospectus (as defined below) or instituted or, to
the knowledge of the Company, threatened any proceeding for that purpose. The
term "Preliminary Prospectus" as used herein means a preliminary prospectus
relating to the Shares included at any time as part of the foregoing
registration statement or any amendment thereto before it became effective
under the Act and any prospectus filed with the Commission by the Company
pursuant to Rule 424(a) of the Rules and Regulations. Copies of such
registration statement and amendments and of each related Preliminary
Prospectus have been delivered to the Representative. If such registration
statement has not become effective, a further amendment to such registration
statement, including a form of final Preliminary Prospectus, necessary to
permit such registration statement to become effective will be filed promptly
by the Company with the Commission. If such registration statement has become
effective, a final prospectus relating to the Shares containing information
permitted to be omitted at the time of effectiveness by Rule 430A of the Rules
and Regulations will be filed by the Company with the Commission in accordance
with Rule 424(b) of the Rules and Regulations promptly after execution and
delivery of this Agreement. The term "Registration Statement" means the
registration statement at the time such registration statement becomes or
became
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<PAGE> 4
effective (the "Effective Date"), together with any registration statement filed
by the Company pursuant to Rule 462(b) of the Rules and Regulations, including
all financial statements and schedules and all exhibits, documents incorporated
therein by reference and all information contained in any final prospectus filed
with the Commission pursuant to Rule 424(b) of the Rules and Regulations or in a
term sheet described in Rule 434 of the Rules and Regulations in accordance with
Section 5 hereof and deemed to be included therein as of the Effective Date by
Rule 430A of the Rules and Regulations. The term "Prospectus" means the
prospectus relating to the Shares as first filed with the Commission pursuant to
Rule 424(b) of the Rules and Regulations or, if no such filing is required, the
form of final prospectus relating to the Shares included in the Registration
Statement at the Effective Date. References herein to any document or other
information incorporated by reference in the Registration Statement shall
include documents or other information incorporated by reference in the
Prospectus (or if the Prospectus is not in existence, in the most recent
Preliminary Prospectus). References herein to any Preliminary Prospectus or the
Prospectus shall be deemed to include all documents and information incorporated
by reference therein and shall be deemed to refer to and include any documents
and information filed after the date of such Preliminary Prospectus or
Prospectus, as the case may be, and so incorporated by reference, under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
(b) On the date that any Preliminary Prospectus was filed with the
Commission, the date the Prospectus is first filed with the Commission pursuant
to Rule 424(b) of the Rules and Regulations (if required), at all times
subsequent thereto up to and including the Closing Date and, if later, the
Option Closing Date and when any post-effective amendment to the Registration
Statement becomes effective or any amendment or supplement to the Prospectus is
filed with the Commission, the Registration Statement, each Preliminary
Prospectus and the Prospectus (as amended or as supplemented if the Company
shall have filed with the Commission any amendment or supplement thereto),
including the financial statements included in the Prospectus, did or will
comply in all material respects with all applicable provisions of the Act and
the Rules and Regulations and did or will contain all material statements
required to be stated therein in accordance with the Act and the Rules and
Regulations. On the Effective Date and when any post-effective amendment to
the Registration Statement becomes effective, no part of the Registration
Statement or any such amendment did or will contain any 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 not misleading. At the
Effective Date, the date the Prospectus or any amendment or supplement to the
Prospectus is filed with the Commission and at the Closing Date and, if later,
the Option Closing Date, the Prospectus did not or will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading. The foregoing representations and warranties in this
Section 3(b) do not apply to any statements or omissions made in reliance on
and in conformity with information furnished in writing to the Company by the
Representative specifically for inclusion in the Registration Statement or
Prospectus or any amendment or supplement thereto. There are no contracts or
other documents required to be filed as exhibits to the Registration Statement
by the Act or the Rules and Regula-
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<PAGE> 5
tions that have not been so filed. The documents which are incorporated by
reference in any Preliminary Prospectus or the Prospectus or from which
information is so incorporated by reference, when they became effective or were
filed with the Commission, as the case may be, complied in all material respects
with the requirements of the Act and the Rules and Regulations or the Exchange
Act and the rules and regulations thereunder, as applicable, and did not, when
such documents were so filed, contain any 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, and any documents so filed and incorporated by
reference subsequent to the Effective Date shall, when they are filed with the
Commission, conform in all material respects with the requirements of the Act
and the Rules and Regulations and the Exchange Act and the rules and regulations
thereunder, as applicable.
(c) The Company has no subsidiaries. The Company does not own and, at the
Closing Date and the Option Closing Date, if any, will not own, an interest in
any corporation, joint venture, trust, partnership or other business entity.
The Company has been and, at the Closing Date and Option Closing Date, if any,
will be, duly incorporated and validly existing as a corporation under the laws
of the State of Michigan and is, and at the Closing Date and the Option Closing
Date, if any, will be, in good standing under the laws of the State of
Michigan. The Company has all corporate power and authority necessary to own
its properties and conduct its business as currently being carried on and as
described in the Registration Statement and Prospectus. The Company is, and at
the Closing Date and the Option Closing Date, if any, will be, duly licensed or
qualified and in good standing as a foreign corporation in each jurisdiction in
which the character or location of its properties (owned, leased or licensed)
or the nature or conduct of its business or use of its property and assets
makes such licensing or qualification necessary. Complete and correct copies
of the Company's Restated Articles of Incorporation and Bylaws, in each case as
amended, have been delivered to the Representative or its counsel, and no
changes therein will be made subsequent to the date hereof and prior to the
Closing Date or, if later, the Option Closing Date.
(d) The outstanding shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable and are not
subject to any preemptive or similar rights, and the holders thereof, are not
subject to personal liability by reason of being such holders. The Firm Shares
to be sold hereunder to the Underwriters, and the Option Shares to be sold
hereunder to the Underwriters in the event the Option is exercised, will be
duly authorized and, when issued and delivered to the Underwriters against
payment therefor as provided by this Agreement, will be validly issued, fully
paid and nonassessable and will not be subject to any preemptive or similar
rights, and the holders thereof will not be subject to personal liability by
reason of being such holders. The Company has, and, upon completion of the
sale of the Shares, will have, an authorized, issued and outstanding
capitalization as set forth in the Registration Statement and the Prospectus
under the captions "Description of Capital Stock" and "Capitalization" (or,
if the Prospectus is not in existence, in the most recent Preliminary
Prospectus). The description of the securities of the Company in the
Registration Statement and the Prospectus
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<PAGE> 6
under the caption "Description of Capital Stock" (or, if the Prospectus is not
in existence, in the most recent Preliminary Prospectus) is, and at the
Closing Date and, if later, the Option Closing Date, will be, complete and
accurate in all material respects. Except as set forth or contemplated in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, in the most recent Preliminary Prospectus), the Company does not
have outstanding and, at the Closing Date and, if later, the Option Closing
Date, will not have outstanding, any options to purchase, or any rights or
warrants to subscribe for, or any securities or obligations exchangeable or
convertible into, or any contracts or commitments to issue or sell, any shares
of its capital stock or any such options, rights, warrants, obligations,
contracts or commitments. Neither the filing of the Registration Statement nor
the offering or sale of the Shares as contemplated by this Agreement gives rise
to any rights for or relating to the registration of any Common Shares or other
securities of the Company, except such rights as have been disclosed in the
Registration Statement or as have been satisfied, waived or terminated.
(e) The financial statements and the related notes of the Company included
in the Registration Statement and in the Prospectus (or, if the Prospectus is
not in existence, in the most recent Preliminary Prospectus) or incorporated
therein by reference comply in all material respects with the requirements of
the Act and the Rules and Regulations, present fairly the financial condition,
results of operations, shareholders' equity and cash flows of the Company at
the dates and for the periods covered thereby and have been prepared in
accordance with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the entire periods involved (except as otherwise
stated therein), subject to year-end adjustments with respect to interim
information consistent with past practice. Deloitte & Touche LLP (the
"Accountants"), who have reported on those of such financial statements and
related notes which are audited, are independent accountants with respect to
the Company as required by the Act and the Rules and Regulations. The selected
financial information and statistical data set forth under the captions
"Prospectus Summary -- Summary Financial Data" and "Selected Financial Data"
in the Prospectus (or, if the Prospectus is not in existence, in the most
recent Preliminary Prospectus) have been prepared on a basis consistent with
the financial statements of the Company.
(f) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed
in accordance with management's general or specific authorization, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain accountability for assets,
(iii) access to assets is permitted only in accordance with management's
general or specific authorization and (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(g) Except as set forth or contemplated in the Registration Statement and
Prospectus (or, if the Prospectus is not in existence, in the most recent
Preliminary Prospectus), subsequent to the respective dates as of which
information is given in the Registration Statement
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<PAGE> 7
and the Prospectus and prior to the Closing Date and, if later, the Option
Closing Date, (i) there has not been, and will not have been, any material
adverse change in the business, properties, prospects, key personnel, condition
(financial or otherwise), net worth or results of operations of the Company,
(ii) the Company has not, and will not have, incurred any material liabilities
or obligations, direct or contingent, or, entered into any material transactions
not in the ordinary course of business other than pursuant to this Agreement,
(iii) the Company has not, and will not have, paid or declared any dividends or
other distributions of any kind on any class of its capital stock, and (iv)
there has not been, and will not have been, any change in the capital stock, or
a material change in the short-term or long-term debt, or any issuance of
options, warrants, convertible securities or other rights to purchase capital
stock of the Company, other than changes in capital stock and issuances of
rights, options and shares pursuant to the Company's 1983 Stock Option Plan,
1991 Incentive Stock Option Plan, 1993 Director Stock Option Plan and the 1997
Stock Option Plan (collectively, the "Option Plans") or this Agreement.
(h) The Company has good and marketable title to all properties and assets
described in the Registration Statement and Prospectus (or, if the Prospectus
is not in existence, in the most recent Preliminary Prospectus), as owned by
it, free and clear of all liens, security interests, restrictions, pledges,
encumbrances, charges, equities, claims, easements, leases and tenancies
(collectively, "Encumbrances") other than those described or referred to in the
Registration Statement and Prospectus (or, if the Prospectus is not in
existence, in the most recent Preliminary Prospectus). The Company has valid,
subsisting and enforceable leases for the properties and assets described in
the Registration Statement and Prospectus (or, if the Prospectus is not in
existence, in the most recent Preliminary Prospectus) as leased by it, free and
clear of all Encumbrances, other than those described or referred to in the
Registration Statement and Prospectus (or, if the Prospectus is not in
existence, in the most recent Preliminary Prospectus). The Company has no
notice of any claim which has been asserted by anyone adverse to the Company's
rights as lessee or sublessee under the respective lease or sublease, or
affecting or questioning the Company's right to the continued possession of the
leased or subleased premises.
(i) Except as described or referred to in the Registration Statement or
Prospectus (or, if the Prospectus is not in existence, in the most recent
Preliminary Prospectus), the Company owns or possesses all patents, patent
applications, trademarks, service marks, tradenames, trademark registrations,
service mark registrations, copyrights, licenses, inventions, trade secrets and
other intellectual property rights necessary for the conduct of the business of
the Company as currently carried on and as described in the Registration
Statement and Prospectus (or, if the Prospectus is not in existence, in the
most recent Preliminary Prospectus), and except as stated or referred to in the
Registration Statement or Prospectus (or, if the Prospectus is not in
existence, in the most recent Preliminary Prospectus), no name which the
Company uses and no other aspect of the business of the Company will involve or
give rise to any infringement of or license or similar fees for, any patents,
patent applications, trademarks, service marks, tradenames, trademark
registrations, service mark registrations, copyrights, licenses, inventions,
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<PAGE> 8
trade secrets or other similar rights of others material to the business or
prospects of the Company, and the Company has not received any notice alleging
any such infringement or fee.
(j) Except as set forth or referred to in the Registration Statement and
Prospectus (or, if the Prospectus is not in existence, in the most recent
Preliminary Prospectus), there are no actions, suits, arbitrations, claims,
governmental or other proceedings (formal or informal), or investigations
pending or, to the knowledge of the Company, threatened against or, to the
knowledge of the Company, affecting the Company, any of the Company's officers,
directors or shareholders, in its capacity as such, or any of the properties or
assets owned or leased by the Company, before or by any Federal, state,
municipal or foreign court, commission, regulatory body, administrative agency
or other governmental body, including, without limitation, the United States
Food and Drug Administration (the "FDA"), domestic or foreign (collectively, a
"Governmental Body"), which might result in any material adverse change in the
business, properties, prospects, condition (financial or otherwise), net worth
or results of operations of the Company. There are no actions, proceedings or
investigations pending or, to the knowledge of the Company, threatened by the
FDA or any other Governmental Body relating to the safety, efficacy or recall of
any product developed or sold by the Company. The Company is not in violation
of, or in default with respect to, any law, rule or regulation, or any order,
judgment or decree, except as described or referred to in the Prospectus (or if
the Prospectus is not in existence, in the most recent Preliminary Prospectus)
or such as in the aggregate do not now have and can reasonably be expected in
the future not to have a material adverse effect upon the business, properties,
prospects, condition (financial or otherwise), net worth or results of
operations of the Company; nor is the Company presently required to take any
action under any such order, judgment or decree in order to avoid any such
violation or default.
(k) The Company has, and at the Closing Date and, if later, the Option
Closing Date will have, all governmental licenses, permits, consents, orders,
approvals, franchises, certificates and other authorizations (collectively,
"Licenses") and has made all requisite declarations, notifications and filings
with all Government Bodies, in each case as are necessary to carry on its
business as then currently conducted and own or lease its properties as
contemplated in the Registration Statement and Prospectus (or, if the
Prospectus is not in existence, in the most recent Preliminary Prospectus), and
all such Licenses are, and at the Closing Date and, if later, the Option
Closing Date will be, in full force and effect. The Company has, and at the
Closing Date and, if later, the Option Closing Date will have, complied in all
material respects with all laws, regulations and orders applicable to it or its
business, assets and properties. The Company is not, nor at the Closing Date
and, if later, the Option Closing Date will it be, in violation of its Restated
Articles of Incorporation or Bylaws, in each case as amended, or in default
(nor has any event occurred which, with notice or lapse of time or both, would
constitute a default) in the due performance and observation of any term,
covenant or condition of any indenture, mortgage, deed of trust, voting trust
agreement, loan agreement, bond, debenture, note agreement or other evidence of
indebtedness, lease, contract or other agreement or instrument (collectively, a
"contract or other agreement") to which it is a party or by which its
properties are bound, the violation of which would individually or in the
aggregate
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<PAGE> 9
have a material adverse effect on the business, properties,
prospects, condition (financial or otherwise), net worth or results of
operations of the Company. There are no governmental proceedings or actions
pending or, to the Company's knowledge, threatened for the purpose of
suspending, modifying or revoking any License held by the Company and, to the
knowledge of the Company, no event has occurred that allows, or with notice or
lapse of time or both would allow, any such suspension, modification or
revocation or any material impairment of the Company's rights thereunder.
(l) No consent, approval, authorization or order of, or any filing or
declaration with, any Governmental Body is required for the execution, delivery
or performance of this Agreement or for the consummation of the transactions
contemplated by this Agreement or in connection with the sale of the Shares by
the Company, except such as have been obtained and are in full force and effect
and such as may be required under the Act, the Rules and Regulations, any state
securities or Blue Sky laws or the bylaws and rules of the National Association
of Securities Dealers, Inc. (the "NASD") in connection with the purchase and
distribution by the Underwriters of the Shares to be sold hereby.
(m) The Company has full power (corporate and other) and authority to
enter into this Agreement and to carry out all the terms and provisions hereof
to be carried out by it. This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding agreement of the
Company, and is enforceable against the Company in accordance with the terms
hereof, except as rights to indemnity and contribution may be limited by
Federal or state securities laws or the public policy underlying such laws.
Except as disclosed in the Registration Statement and the Prospectus (or, if
the Prospectus is not in existence, in the most recent Preliminary Prospectus),
the execution, delivery and the performance of this Agreement and the
consummation of the transactions contemplated hereby will not result in the
creation or imposition of any Encumbrance upon any of the properties or assets
of the Company pursuant to the terms or provisions of, or result in a breach or
violation of or conflict with any of the terms or provisions of, or constitute
a default under, or give any other party a right to terminate any of its
obligations under, or result in the acceleration of any obligation under, (i)
the Restated Articles of Incorporation or Bylaws of the Company, in each case
as amended, or (ii) any contract or other agreement to which the Company is a
party or by which it or any of its assets or properties are bound, or (iii) any
judgment, ruling, decree, order, law, statute, rule or regulation of any
Governmental Body applicable to the Company or its business or properties,
assuming compliance with applicable state securities and Blue Sky laws.
(n) No statement, representation, warranty or covenant made by the Company
in this Agreement or made in any certificate or document required by this
Agreement to be delivered to the Representative was or will be, when made,
inaccurate, untrue or incorrect in any material respect. Each certificate
signed by an officer of the Company and delivered to the Representative or
counsel for the Underwriters shall be deemed to be a representation and
warranty by the Company to each Underwriter as to the matters covered thereby.
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<PAGE> 10
(o) Neither the Company nor any of its directors, officers or affiliates
(within the meaning of the Rules and Regulations) has taken, nor will he, she
or it take, directly or indirectly, any action designed, or which might
reasonably be expected in the future, to cause or result in, under the Act or
otherwise, or which has constituted, stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of the Shares
or otherwise.
(p) The Company is not involved in any material labor dispute with its
employees nor is any such dispute threatened or imminent.
(q) Neither the Company nor, to the Company's knowledge, any employee or
agent of the Company has made any payment of funds of the Company or received or
retained any funds of the Company in violation of any law, rule or regulation or
of a character required to be disclosed in the Registration Statement and
Prospectus (or, if the Prospectus is not in existence, in the most recent
Preliminary Prospectus).
(r) The business, operations and facilities of the Company have been and
are being conducted in compliance in all material respects with all applicable
laws, ordinances, rules, regulations, licenses, permits, approvals, plans,
authorizations or requirements relating to occupational safety and health, or
pollution, or protection of health or the environment (including, without
limitation, those relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants or hazardous or toxic substances,
materials or wastes into ambient air, surface water, groundwater or land, or
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of chemical substances, pollutants,
contaminants or hazardous or toxic substances, materials or wastes, whether
solid, gaseous or liquid in nature) of any governmental department, commission,
board, bureau, agency or instrumentality of the United States or any state or
political subdivision thereof, or any foreign jurisdiction, and all applicable
judicial or administrative agency or regulatory decrees, awards, judgments and
orders relating thereto; and the Company has not received any notice from any
Governmental Body or any third party alleging any violation thereof or material
liability thereunder (including, without limitation, liability for costs of
investigating or remediating sites containing hazardous substances and/or
damages to natural resources). The intended use and occupancy of each of the
facilities owned or operated by the Company complies in all material respects
with all applicable codes and zoning laws and regulations, and there is no
pending or, to the Company's knowledge, threatened condemnation, zoning change,
environmental or other proceeding or action that will in any material respect
adversely affect the size of, use of, improvements on, construction on or
access to such facilities.
(s) The Company has filed all foreign, Federal, state and local tax
returns that are required to be filed or has requested extensions thereof and
is not in default in any taxes which were payable pursuant to said returns.
(t) Neither the Company nor any of its directors, officers or employees in
such capacity is subject to any order or directive of, or party to any
agreement with, any regulatory agency having jurisdiction with respect to its
business or operations except as
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<PAGE> 11
disclosed in the Prospectus (or if the Prospectus is not in existence, in the
most recent Preliminary Prospectus).
(u) The Company and each officer and director of the Company have
delivered to the Representative agreements (the "Lockup Agreements") to the
effect that he, she or it will not, for a period of 180 days after the date
hereof, without the prior written consent of the Representative, directly or
indirectly, offer, sell or otherwise dispose (or announce any offer, sale,
grant of any option to purchase or other disposition) of any Common Shares or
securities convertible into, or exercisable or exchangeable for, Common Shares,
except pursuant to this Agreement and except for (i) exercises of options and
warrants to acquire Common Shares, (ii) transfers to the holder's spouse or
lineal descendants or ancestors, natural or adopted (collectively,
"Relatives"), or to an inter vivos trust for the benefit of such holder's
Relatives, (iii) transfers upon the death of such holder pursuant to the laws
of descent and distribution of pursuant to wills, or (iv) gifts,
provided that, in the case of the foregoing clauses (i) through (iv), the
transferor agrees in writing to be bound by the terms of these restrictions.
(v) The Company has not distributed and will not distribute any prospectus
or other offering material in connection with the offering and sale of the
Shares other than any Preliminary Prospectus or the Prospectus or other
materials permitted by the Act or the Rules and Regulations to be distributed
by the Company.
(w) The Common Shares of the Company are quoted on The Nasdaq SmallCap
Market.
(x) The Company is not required to be registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act").
(y) The Company has furnished the Representative with true and complete
copies of its report on Form 10-K for the fiscal year ended November 30, 1996,
its report on Form 10-Q for the fiscal quarter ended February 28, 1997, its
Proxy Statement for use in connection with its 1997 Annual Meeting of
Shareholders and its 1996 Annual Report to Shareholders (the "Current
Reports"), which Current Reports constitute the only documents that the Company
was required to file with the Commission since November 30, 1996. The Company
has also filed all other reports required to be filed with the Commission prior
to November 30, 1996 (such reports, together with the Current Reports are
collectively referred to as the "Commission Reports"). As of their respective
filing dates, the Commission Reports and all other filings made by the Company
under the Act or Exchange Act complied in all material respects with the
requirements of the Act or the Exchange Act, as the case may be, and none of
such filings contained any untrue statement of a material fact or omitted 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.
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<PAGE> 12
(z) Since its inception, the Company has not incurred any material
liability resulting from a violation of the provisions of the Act or any state
securities or Blue Sky laws.
(aa) The Company has made available to the Representative a copy of all
premarket notification ("510(k)") and premarket approval ("PMA") concurrence or
clearance letters received from the FDA and all related documents and
information, including device master files and market studies.
(bb) The Company carries, or is covered by, insurance in such amounts and
covering such risks as is adequate for the conduct of its business and the
value of its properties.
(cc) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any material liability; the Company has not incurred and does not
expect to incur liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or
4971 of the Internal Revenue Code of 1986, as amended, including the regulations
and published interpretations thereunder (the "Code"); and each "pension plan"
for which the Company would have any liability that is intended to be qualified
under Section 401(a) of the Code is so qualified in all material respects and
nothing has occurred, whether by action or by failure to act, which would cause
the loss of such qualification.
4. Representations and Warranties of the Underwriters. Upon your
authorization of the release of the Firm Shares, the several Underwriters
propose to offer the Firm Shares for sale to the public upon the terms set
forth in the Prospectus. The Representative represents and warrants to the
Company that, assuming compliance by the Company with all relevant provisions
of the Act in connection with the Registration Statement, the Representative
will conduct all offers and sales of the Shares in compliance with the relevant
provisions of the Act and the Rules and Regulations, all applicable state
securities laws and regulations and the bylaws and rules of the NASD. The
Representative represents and warrants to the Company that the Representative
has been authorized by the several Underwriters to enter into this Agreement on
their behalf and to act for them in the manner provided in this Agreement.
5. Agreements of the Company. The Company covenants and agrees with each
of the several Underwriters as follows:
(a) The Company will not, either prior to the Effective Date or thereafter
during such period as the Prospectus is required by law to be delivered in
connection with sales of the Shares by an Underwriter or dealer, file any
amendment or supplement to the Registration Statement or the Prospectus, unless
a copy thereof shall first have been submitted to the Representative and the
Representative shall have consented thereto.
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<PAGE> 13
(b) If the Registration Statement is not yet effective, the Company will
use its best efforts to cause the Registration Statement to become effective
not later than the time indicated in Section 7(a) hereof. The Company will
notify the Representative promptly, and will confirm such advice in writing,
(i) when the Registration Statement has become effective (if later than the
date hereof) and when any post-effective amendment thereto becomes effective,
(ii) of any request by the Commission for amendments or supplements to the
Registration Statement or the Prospectus or for additional information, (iii)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereto or any order suspending the use of any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto or the initiation of any
proceedings for any such purpose or the threat thereof, (iv) of the happening
of any event during the period mentioned in the first sentence of Section 5(f)
that in the reasonable judgment of the Company makes any statement of a
material fact made in the Registration Statement or the Prospectus untrue or
that requires the making of any changes in the Registration Statement or the
Prospectus in order to make the statements of material fact therein, in light
of the circumstances in which they are made, not misleading and (v)
of receipt by the Company or any representative or attorney of the Company
during the period mentioned in the first sentence of Section 5(f) of any other
communication from the Commission relating to the Company, the Registration
Statement, any Preliminary Prospectus or the Prospectus. The Company will use
its best efforts to prevent the issuance of any order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereto or any order suspending the use of any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, and, if any such order is
issued, the Company will use its best efforts to obtain the withdrawal of such
order at the earliest possible moment. The Company will prepare the Prospectus
in a form approved by the Representative and will file such Prospectus pursuant
to Rule 424(b) of the Rules and Regulations not later than the Commission's
close of business on the second business day following the execution and
delivery of this Agreement or, if applicable, such earlier time as may be
required by Rule 430A(a)(3) of the Rules and Regulations. If the Company has
omitted any information from the Registration Statement pursuant to Rule 430A
of the Rules and Regulations, the Company will use its best efforts to comply
with the provisions of and make all requisite filings with the Commission
pursuant to Rule 430A of the Rules and Regulations and to notify the
Representative promptly of all such filings.
(c) If, at any time when a Prospectus relating to the Shares is required
to be delivered under the Act, any event has occurred as a result of which the
Prospectus, as then amended or supplemented, would include any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, or the Registration Statement, as then amended or
supplemented, would include any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein not misleading,
or if for any other reason it is necessary at any such time to amend or
supplement the Prospectus or the Registration Statement to comply with the Act
or the Rules and Regulations, the Company will promptly notify the
Representative thereof and, in accordance with Section 5(a) hereof, will
prepare and file with the
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<PAGE> 14
Commission, at the Company's expense, an amendment to the Registration Statement
or an amendment or supplement to the Prospectus that corrects such statement or
omission or effects such compliance.
(d) The Company will furnish to the Representative, without charge, two
signed copies of the Registration Statement and of any post-effective amendment
thereto, including financial statements and schedules, and all exhibits
thereto, other than exhibits incorporated by reference, and will furnish to the
Representative, without charge, for transmittal to each of the other
Underwriters, copies of the Registration Statement and any post-effective
amendment thereto, including financial statements and schedules but without
exhibits.
(e) The Company will comply with all the provisions of all undertakings
contained in the Registration Statement.
(f) On the Effective Date, and thereafter from time to time for such
period as the Prospectus is required by the Act to be delivered, the
Company will deliver to each of the Underwriters, without charge, as many
copies of the Prospectus or any amendment or supplement thereto as the
Representative may reasonably request. The Company consents to the use of the
Prospectus or any amendment or supplement thereto by the several Underwriters
and by all dealers to whom the Shares may be sold, both in connection with the
offering or sale of the Shares and for any period of time thereafter during
which the Prospectus is required by law to be delivered in connection
therewith. If during such period of time any event shall occur which in the
judgment of the Company or counsel to the Underwriters should be set forth in
the Prospectus in order to make any statement of material fact therein, in the
light of the circumstances under which it was made, not misleading, or in the
Registration Statement in order to make any statement of material fact therein
not misleading, or if it is necessary to supplement or amend the Prospectus or
the Registration Statement to comply with law, the Company will, in accordance
with Section 5(a) hereof, forthwith prepare and duly file with the Commission
an appropriate supplement or amendment thereto and will deliver to each of the
Underwriters, without charge, such number of copies thereof as the
Representative may reasonably request.
(g) The Company will (i) take or cause to be taken all such actions and
furnish all such information as the Representative may reasonably request in
order to qualify the Shares for offer and sale under the state securities or
Blue Sky laws of such jurisdictions as the Representative may designate, (ii)
continue such qualifications in effect for as long as may be necessary to
complete the distribution of the Shares but not to exceed one year from the
date of this Agreement and (iii) make such applications, file such documents
and furnish such information as may be required for the purposes set forth in
the foregoing clauses (i) and (ii); provided, that in no event shall the
Company be obligated to qualify to do business in any jurisdiction where it is
not now so qualified or to take any action which would subject it to general
service of process or to taxation in any jurisdiction where it is not now so
subject.
(h) During the period of five years commencing on the Effective Date, the
Company will furnish to the Representative and each other Underwriter who may
so request
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<PAGE> 15
copies of such financial statements and other periodic and special
reports as the Company may from time to time distribute generally to the
holders of any class of its capital stock and will furnish to the
Representative and each other Underwriter who may so request a copy of each
annual or other report it shall be required to file with the Commission.
(i) The Company will make generally available to holders of its
securities, as soon as may be practicable, but in no event later than the last
day of the fifteenth full calendar month following the calendar quarter in
which the Effective Date falls, an earnings statement (which need not be
audited but shall be in reasonable detail) for a period of 12 months commencing
after the Effective Date, and satisfying the provisions of Section 11(a) of the
Act (including Rule 158 of the Rules and Regulations).
(j) The Company will not for a period of 180 days after the date hereof,
without the prior written consent of Representative, directly or indirectly,
offer, sell or otherwise dispose (or announce any offer, sale, grant of any
option to purchase or other disposition) of any Common Shares or any securities
convertible into, or exercisable or exchangeable for, Common Shares, except
pursuant to Section 1 hereof and except that the Company may grant options, and
issue shares pursuant to the options granted, under the Company's Option Plans
and the Company may issue shares pursuant to warrants outstanding as of the
date of this Agreement and warrants issued to the Representative.
(k) The Company will not at any time, directly or indirectly, take any
action intended, or which might reasonably be expected, to cause or result in,
or which will constitute, stabilization of the price of the Common Shares to
facilitate the sale or resale of any of the Shares.
(l) The Company shall apply the net proceeds of the sale of the Shares as
set forth in the Prospectus.
(m) The Company shall not invest, or otherwise use, the proceeds received
by the Company from the sale of the Shares to the Underwriters in such a manner
as would require the Company to register as an investment company under the
Investment Company Act.
(n) The Company will maintain a transfer agent and, if necessary under the
jurisdiction of incorporation of the Company or if required by The Nasdaq Stock
Market, a registrar for its Common Shares.
(o) The Company will timely file all such reports, forms or other
documents as may be required from time to time under the Act, the Rules and
Regulations, the Exchange Act, and the rules and regulations promulgated
thereunder, and all such reports, forms and documents filed will comply in all
material respects as to form and substance with the applicable requirements of
the Act, the Rules and Regulations, the Exchange Act, and the rules and
regulations promulgated thereunder.
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<PAGE> 16
6. Expenses. Whether or not the transactions contemplated by this
Agreement are consummated or this Agreement is terminated, the Company will pay,
or reimburse if paid by the Representative, all costs and expenses incident to
the performance of its obligations under this Agreement and the transactions
contemplated by this Agreement, including, but not limited to, costs and
expenses of or relating to (i) the preparation, printing and filing of the
Registration Statement and exhibits thereto, each Preliminary Prospectus, the
Prospectus, any amendment or supplement to the Registration Statement or the
Prospectus, (ii) the preparation and delivery of certificates representing the
Shares, (iii) the printing of this Agreement, the Agreement among Underwriters,
any Dealer Agreements and any Underwriters' Questionnaire, (iv) furnishing
(including costs of shipping and mailing) such copies of the Registration
Statement, the Prospectus and any Preliminary Prospectus, and all amendments and
supplements thereto, as may be requested for use in connection with the offering
and sale of the Shares by the Underwriters or by dealers to whom Shares may be
sold, (v) the quotation of the Shares on The Nasdaq Stock Market, (vi) any
filings required to be made by the Underwriters with the NASD, (vii) the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions designated pursuant to Section
5(g) hereof, including the reasonable fees, disbursements and other charges of
counsel to the Underwriters in connection therewith, and the preparation and
printing of preliminary, supplemental and final Blue Sky memoranda, (viii)
counsel and accountants to the Company and (ix) the transfer agent, and any
registrar, for the Shares. Whether or not the transactions contemplated by this
Agreement are consummated or if this Agreement shall be terminated by the
Company pursuant to any provisions hereof, the Company will reimburse the
Representative for all of its accountable out-of-pocket fees and expenses
including, among other things, its travel and travel-related expenses and its
counsel fees and expenses, incurred by it in connection herewith, up to an
aggregate amount of $250,000.
7. Conditions to the Obligations of the Underwriters. The obligations of
each Underwriter hereunder are subject to the following conditions:
(a) Notification that the Registration Statement has become effective
shall be received by the Representative not later than 4:00 p.m., New York
time, on the date of this Agreement or at such later date and time as shall be
consented to in writing by the Representative and all filings required prior to
such effectiveness by Rule 424 and Rule 430A of the Rules and Regulations shall
have been made.
(b) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall be
ending or threatened by the Commission, (ii) no order suspending the
effectiveness of the Registration Statement or the qualification or
registration of the Shares under the securities or Blue Sky laws of any
jurisdiction shall be in effect, and no proceeding for such purpose shall be
pending before or threatened or contemplated by the authorities of any such
jurisdiction, (iii) any request for additional information on the part of the
staff of the Commission or any such authorities shall have been complied with
to the satisfaction of the staff of the Commission or such authorities and (iv)
after the date hereof no amendment or supplement to the Registration Statement
or the
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<PAGE> 17
Prospectus shall have been filed unless a copy thereof was first
submitted to the Representative and the Representative consented thereto, and
the Representative shall have received certificates, dated the Closing
Date and the Option Closing Date, if any, and signed on behalf of the Company
by the Chief Executive Officer of the Company and the Chief Financial Officer
of the Company (who may, as to proceedings threatened, rely upon the best of
their information and belief), to the effect of the foregoing clauses (i), (ii)
and (iii).
(c) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) there shall not have been a
material adverse change in the general affairs, business, business prospects,
properties, management, condition (financial or otherwise) or results of
operations of the Company, whether or not arising from transactions in the
ordinary course of business, and (ii) the Company shall not have sustained any
material loss or interference with its business, assets or properties from
fire, explosion, flood or other casualty, whether or not covered by insurance,
or from any labor dispute or any court or legislative or other governmental
action, order or decree, which is not set forth in the Registration Statement
and the Prospectus, if in the judgment of the Representative any such
development makes it impracticable or inadvisable to consummate the sale and
delivery of the Shares by the Underwriters at the public offering price.
(d) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall have been no litigation
or other proceeding instituted against the Company or any of its officers,
directors or shareholders in their capacities as such, or any of its assets or
properties, before or by any Governmental Body in which litigation or
proceeding an unfavorable ruling, decision or finding would materially and
adversely affect the general affairs, business, properties, prospects,
condition (financial or otherwise), net worth or results of operations of the
Company.
(e) Each of the representations and warranties of the Company contained
herein shall be true and correct in all material respects at the date hereof,
at the Closing Date and, with respect to the Option Shares, if any, at the
Option Closing Date, as if made on such date, and all covenants and agreements
herein contained to be performed on the part of the Company and all conditions
herein contained to be fulfilled or complied with by the Company at or prior to
the Closing Date and, with respect to the Option Shares, if any, at or prior to
the Option Closing Date, shall have been fully performed, fulfilled or complied
with in all material respects.
(f) The Representative shall have received an opinion, dated the Closing
Date and the Option Closing Date, as applicable, from Honigman Miller Schwartz
and Cohn, Detroit, Michigan, counsel for the Company, to the following effect:
(i) The Company has been duly incorporated and is validly existing
and in good standing under the laws of the State of Michigan;
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<PAGE> 18
(ii) The description of the Common Shares under the caption
"Description of Capital Stock" in the Prospectus, to the extent that it
constitutes statements of law or legal conclusions, conforms in all material
respects to the terms thereof contained in the Company's Restated Articles of
Incorporation, as amended (the "Articles"). The authorized capital stock of the
Company is as set forth in the Prospectus under the caption "Capitalization".
All of the issued and outstanding Common Shares have been, and the Shares, when
issued, delivered and paid for by the Underwriters in accordance with the terms
of this Agreement, will be, duly authorized, validly issued, fully paid and
nonassessable and will not be subject to any preemptive or similar right arising
under the Michigan Business Corporation Act, as amended, the Company's Articles
or Bylaws, or any agreement listed as an Exhibit to the Registration
Statement. To such counsel's actual knowledge, neither the filing of the
Registration Statement nor the offering or sale of the Shares pursuant to this
Agreement gives rise to any rights for the registration of any Common Shares or
other securities of the Company pursuant to any of the agreements listed as
Exhibits to the Registration Statement, except as disclosed in the
Registration Statement, or such rights as have been satisfied, waived or
terminated;
(iii) Based solely on such counsel's review of the minutes of the
meetings of the Company shareholders and board of directors and committees of
the board of directors and the Certificate (as defined below), except as
described in the Registration Statement and Prospectus, there are no options,
warrants, agreements, contracts or other rights in existence to purchase or
acquire from the Company any shares of capital stock of the Company;
(iv) The Registration Statement has become effective under the Act;
assuming that the Prospectus was first used on [____], 1997 and was filed with
the Commission on [____], 1997, any required filing of the Prospectus pursuant
to Rule 424(b) of the Rules and Regulations has been made in the manner and
within the time period required by Rule 424(b) of the Rules and Regulations;
and, to such counsel's actual knowledge, (i) no stop order suspending the
effectiveness of the Registration Statement or any amendment thereto has been
issued under the Act, and (ii) no proceedings for that purpose have been
instituted, are pending or, are threatened by the Commission under the Act;
(v) The Registration Statement and, if any, each amendment thereto
and the Prospectus and, if any, each amendment and supplement thereto (except
the financial statements, schedules and other financial data contained therein,
as to which such counsel need not express any opinion), complied as to form in
all material respects with the requirements of the Act and Rules and
Regulations;
(vi) The descriptions contained and summarized in the Registration
Statement, or incorporated therein by reference, and the Prospectus of statutes,
legal and governmental proceedings, contracts and other documents, insofar as
such descriptions relate to matters of law, fairly present in all material
respects the information required by the Act and the Rules and Regulations and
provide a materially accurate summary of such statutes, legal and governmental
proceedings, contracts and other documents;
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<PAGE> 19
(vii) To such counsel's actual knowledge, there are no contracts or
documents which are required by the Act to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement which are not so described or filed;
(viii) Based solely on a certificate of officers of the Company (the
"Certificate") and the results of an inquiry circulated to the partners of such
counsel's firm (the "Inquiry"), such counsel confirms to you that, to such
counsel's actual knowledge, there is not pending or threatened against the
Company any action, suit, arbitration, claim, governmental or other proceeding
(informal or formal) or investigation before or by any Governmental Body which
is required to be disclosed in the Registration Statement or the Prospectus
which is not so disclosed therein;
(ix) The Company has the corporate power and authority to execute,
deliver and comply with its obligations under this Agreement and to consummate
the transactions provided for herein; and execution, delivery and performance by
the Company of this Agreement have been duly authorized by all requisite
corporate action on behalf of the Company, and such counsel shall confirm to you
that this Agreement has been executed and delivered on behalf of the Company by
a duly authorized officer of the Company.
(x) Under Michigan conflict of laws principles, the stated choice of
New York law to govern this Agreement will be honored by the courts of the State
of Michigan and this Agreement will be construed in accordance with, and will be
treated as being governed by, the law of the State of New York. However, if
this Agreement were stated to be governed by and construed in accordance with
the law of the State of Michigan, or if a Michigan court were to apply the law
of the State of Michigan to this Agreement, this Agreement would constitute a
valid and binding obligation of the Company and, except for the contribution and
indemnification provisions hereof, as to which such counsel need not express any
opinion, is enforceable against the Company in accordance with the terms hereof,
except as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws now or hereafter in effect relating to or affecting
creditors rights generally or by general principles of equity relating to the
availability of remedies;
(xi) The execution and delivery of this Agreement by the Company, the
Company's compliance with the terms of the Agreement and its consummation of the
transactions contemplated herein (i) do not result in the creation or imposition
of any Encumbrance upon any property or assets of the Company pursuant to the
terms or provisions of, or constitute a breach or, or default under, any
material contract or other material agreement included as an Exhibit to the
Registration Statement, and (ii) do not violate (A) the Articles or Bylaws of
the Company, (B) any laws which are known to such counsel to be applicable to
the Company where such violation would reasonably be expected to have a material
adverse effect on the validity, performance or enforceability of any of the
terms of this Agreement applicable to the Company or relating to the rights and
remedies of the Underwriters and the Representatives, of (C) based solely on the
Certificate and the Inquiry, any of the Company's existing obligations
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<PAGE> 20
under any judgment, decree or order of any arbitrator or Governmental Body
naming the Company; no consent, approval, authorization or order of, or filing
with, any Governmental Body is legally required for the execution, delivery and
performance of this Agreement by the Company or for the consummation of the
transactions contemplated hereby, except such as may be required under the Act
and the Rules and Regulations, such as may be required by the bylaws
and rules of the NASD in connection with the purchase and distribution by the
Underwriters of the Shares and such as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution by the
Underwriters of the Shares;
(xii) The Company is not in any breach or violation of any of the
terms or provisions of, or in default under (nor has an event occurred which
with notice or lapse of time or both would constitute a default or acceleration
under), the terms of its Restated Articles of Incorporation or Bylaws, in
each case as amended;
(xiii) To such counsel's actual knowledge, the Company is not an
"investment company" as such term is defined in the Investment Company Act.
In addition, such counsel shall state that, such counsel participated in
the preparation of the Registration Statement and the Prospectus and nothing
has come to such counsel's attention that causes such counsel to believe that
the Registration Statement as of the Effective Date and as of the date of
such opinion contained or contains any untrue statement of a material fact or
omitted or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that the Prospectus
as of the date thereof and as of the date of such opinion, contained or
contains any untrue statement of a material fact or omitted or omits to state a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need not make any statement
with respect to the financial statements, schedules and other financial data
included in the Registration Statement or the Prospectus).
In rendering any such opinion, such counsel may (i) state that such counsel
expresses no opinion as to the laws of any jurisdiction other than the laws of
the State of Michigan and the Federal laws of the United States and expresses no
opinion concerning the FD&C Act or related rules and regulations or any
intellectual property law and (ii) may rely, as to matters of fact on
certificates of responsible officers of the Company and public officials.
References to the Registration Statement and the Prospectus in this
paragraph (f) shall include any amendment or supplement thereto at the date of
such opinion.
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<PAGE> 21
(g) The Representative shall have received an opinion, dated the Closing
Date and the Option Closing Date, as applicable, from Hogan & Hartson,
Washington, D.C., special FDA counsel for the Company, to the following effect:
(i) The statements set forth in the Prospectus under the captions
"Risk Factors -- Government Regulation" and "Business -- Government Regulation"
(the "FDA Portion"), insofar as such statements purport to summarize applicable
provisions of the Federal Food, Drug and Cosmetics Act (the "FD&C Act") and the
regulations promulgated thereunder, are accurate summaries in all material
respects of the provisions purported to be summarized under such captions, of
any legal matters, documents and proceedings referred to therein and relating to
the FD&C Act, the regulation by the FDA of the business, products and operations
of the Company, and the Company's compliance therewith;
(ii) The Company has filed with the FDA for, and received approval or
clearance of, all applications, licenses, consents, registrations and permits
(collectively, "Regulatory Authorizations") necessary to conduct its business
and operations as described in the Registration Statement and the Prospectus,
and the Company is in compliance with all such Regulatory Authorizations and all
applicable FDA rules, regulations, guidelines and policies, including, without
limitation, applicable FDA rules, regulations, guidelines and policies relating
to the development, testing, manufacture, labeling, storage, record keeping,
reporting or marketing of the Company's products; and
(iii) There are no FDA enforcement actions or proceedings pending or,
to such counsel's knowledge, threatened, against the Company.
In addition such counsel shall state that, such counsel participated
in the preparation of the Registration Statement and the Prospectus and
nothing has come to such counsel's attention that causes such counsel
to believe that the FDA Portion as of the Effective Date and as of the date of
such opinion contained or contains any untrue statement of material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus as of the
date thereof and as of the date of such opinion, contained or contains any
untrue statement of material fact or omits 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.
In rendering any such opinion, such counsel may (i) state that such counsel
expresses no opinion as to the laws of any jurisdiction other than the Federal
laws of the United States and (ii) may rely, as to matters of fact, to the
extent such counsel deems proper, on certificates of responsible officers of the
Company and public officials and, as to matters involving the application of
laws of any other jurisdiction than the United States.
References to the Registration Statement and the Prospectus in this
paragraph (g) shall include any amendment or supplement thereto at the date of
such opinion.
(h) The Representative shall have received an opinion, dated the Closing
Date and the Option Closing Date, as applicable, from Price, Heneveld, Cooper,
DeWitt & Litton, Grand Rapids, Michigan, special counsel for the Company, to the
following effect:
(i) The statements set forth in the Registration Statement and the
Prospectus under the captions "Risk Factors -- Proprietary Rights; Risk of
Infringement" and "Business -- Proprietary Information" (the "Intellectual
Property Portion") are accurate summaries in all material respects of the
provisions purported to be summarized under such captions, of any legal matters,
documents and proceedings referred to therein;
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<PAGE> 22
(ii) The Company is recorded in the records of the United States
Patent and Trademark Office and in each appropriate foreign patent office as the
sole owner or assignee of record of each of the issued patents noted on an
appendix to such opinion (the "Patents") and each of the patent applications
noted on such appendix (the "Patent Applications"). To the knowledge of such
counsel, there are no asserted or unasserted claims of any person relating to
the scope or ownership of the Patents or Patent Applications, and there is no
material defects of form in the preparation or filing of the Patent Applications
and the applications which led to the Patents and, unless otherwise noted on
such appendix, none of the Patent Applications are finally rejected;
(iii) There is no fact or circumstance known to such counsel that
would form a basis for the belief that any of the Patents are either invalid or
unenforceable;
(iv) There is no charge of infringement, or other fact or
circumstance known to such counsel, that would form the basis for the belief
that any of the Company's products infringe any patent, copyright, trademark,
trade secret or other intellectual property rights of any third party; and
(v) There are no actions or proceedings pending or, to such counsel's
knowledge, threatened, against the Company relating to the Patents, the Patent
Applications, or the Company's copyrights, trademarks, trade secrets or other
intellectual property rights.
In rendering any such opinion, such counsel may (i) state that such
counsel expresses no opinion as to the laws of any jurisdiction other than the
Federal laws of the United States and (ii) may rely, as to matters of fact, to
the extent such counsel deems proper, on certificates of responsible officers
of the Company and public officials and, as to matters involving the
application of laws of any other jurisdiction than the United States.
References to the Registration Statement and the Prospectus in this
paragraph (h) shall include any amendment or supplement thereto at the date of
such opinion.
(i) The Representative shall have received an opinion, dated the Closing
Date and the Option Closing Date, as applicable, from Piper & Marbury L.L.P.,
counsel to the Underwriters, which opinion shall be satisfactory in all
respects to the Representative.
(j) Concurrently with the execution and delivery of this Agreement, or, if
the Company elects to rely on Rule 430A of the Rules and Regulations, on the
date of the Prospectus, the Accountants shall have furnished to the
Representative a letter, dated the date of its delivery (the "Original
Letter"), addressed to the Representative and in form and substance
satisfactory to the Representative, to the effect that:
(i) They are independent certified public accountants with respect to
the Company within the meaning of the Act, the Rules and Regulations, the
Exchange Act and the rules and regulations thereunder;
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<PAGE> 23
(ii) In their opinion, the audited financial statements and schedules
examined by them and included in the Registration Statement, or incorporated
therein by reference, and in the Prospectus comply as to form in all material
respects with the applicable accounting requirements of the Act, the Rules and
Regulations, the Exchange Act and the rules and regulations promulgated
thereunder;
(iii) On the basis of a reading of the latest available interim
unaudited financial statements of the Company, carrying out certain specified
procedures (which do not constitute an audit made in accordance with generally
accepted auditing standards) that would not necessarily reveal matters of
significance with respect to the comments set forth in this paragraph (iii), a
reading of the minute books of the shareholders, the board of directors and any
committees thereof of the Company and inquiries of certain officials of the
Company who have responsibility for financial and accounting matters, nothing
came to their attention that caused them to believe that at a specific date not
more than five business days prior to the date of such letter, there were any
changes in the shares of capital stock or long-term indebtedness of the Company,
in each case compared with amounts shown on the February 28, 1997 balance sheet
included in the Registration Statement and the Prospectus, or for the period
from March 1, 1997 to such specified date there were any decreases, as compared
with the corresponding period of the preceding fiscal year, in net revenues,
except in all instances for changes, decreases or increases set forth in such
letter or as set forth in or contemplated in the Prospectus; and
(iv) They have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting records of
the Company and are included in its Annual Report on Form 10-K for the fiscal
year ended November 30, 1996 and have compared such amounts, percentages and
financial information with such records of the Company and with information
derived from such records and have found them to be in agreement, excluding any
questions of legal interpretation.
In the event that the letter referred to above set forth any such changes,
decreases or increases, it shall be a further condition to the obligations of
the Underwriters that (A) such letters shall be accompanied by a written
explanation of the Company as to the significance thereof, unless the
Representative deems such explanation unnecessary, and (B) such changes,
decreases or increases do not, in the sole judgment of the Representative, make
it impractical or inadvisable to proceed with the purchase and delivery of the
Shares as contemplated by the Registration Statement, as amended as of the date
hereof.
At the Closing Date and, as to the Option Shares, if any, the Option
Closing Date, the Accountants shall have furnished to the Representative a
letter, dated the date of its delivery, which shall confirm, on the basis of a
review in accordance with the procedures set forth in the Original Letter, that
nothing has come to their attention during the period from the date of the
Original Letter referred to in the prior sentence to a date (specified in such
letter) not more than five days prior to the Closing Date or the Option Closing
Date, as the case may be, which would
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<PAGE> 24
require any change in the Original Letter if it were required to be dated and
delivered at the Closing Date or the Option Closing Date, as the case may be.
(k) At the Closing Date and, as to the Option Shares, if any, the Option
Closing Date, there shall be furnished to the Representative an
accurate certificate, dated the date of its delivery, signed on behalf of the
Company by each of the Chief Executive Officer and the Chief Financial Officer
of the Company, in form and substance satisfactory to the Representative, to
the effect that:
(i) Each signer of such certificate has carefully examined the
Registration Statement and the Prospectus and (A) as of the date of such
certificate, (x) neither the Registration Statement, nor any amendment or
supplement thereto, if any, contains any untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading and (y) neither the
Prospectus, nor any amendment or supplement thereto, if any, contains any untrue
statement of a material fact or omits 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, and (B) since the
Effective Date, no event has occurred as a result of which it is necessary to
amend or supplement the Prospectus in order to make the statements therein not
untrue or misleading in any material respect;
(ii) Each of the representations and warranties of the Company
contained in this Agreement were, when originally made, and are, at the time
such certificate is delivered, true and correct in all material respects; each
of the covenants required herein to be performed by the Company on or
prior to the date of such certificate has been duly, timely and fully performed
in all material respects and each condition herein required to be complied with
by the Company on or prior to the delivery of such certificate has been duly,
timely and fully complied with in all material respects.
(iii) The Registration Statement has become effective and no stop
order suspending the effectiveness of the Registration Statement or any
post-effective amendment thereto and no order directed at any document
incorporated by reference in the Registration Statement or any amendment thereto
or the Prospectus has been issued, and no proceedings for that purpose have been
instituted or, to the Company's knowledge, are threatened or contemplated by the
Commission.
(l) The Shares shall have been qualified for sale in such states as the
Representative may reasonably designate and each such qualification shall be in
full force and effect and not subject to any stop order or other proceeding on
the Closing Date and the Option Closing Date, if any.
(m) The Representative shall have received at or prior to the Closing Date
from Piper & Marbury L.L.P. a memorandum or summary, in form and substance
satisfactory to the Representative, with respect to the qualification for
offering and sale by the Underwriters of the Shares under the state securities
or Blue Sky laws of such jurisdictions as the Representative may reasonably
have designated to the Company.
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<PAGE> 25
(n) The Company shall have filed a Nasdaq SmallCap Market Notification
Form for the listing of the Firm Shares and Option Shares and shall not have
received any notice of delisting of any Common Shares.
(o) The Lockup Agreements shall be in full force and effect.
(p) The Company shall have furnished to the Representative such
certificates, letters and other documents, in addition to those specifically
mentioned herein, as the Representative may have reasonably requested as to the
accuracy and completeness at the Closing Date and the Option Closing Date, if
any, of any statement in the Registration Statement or the Prospectus, as to
the accuracy at the Closing Date and the Option Closing Date, if any, of the
representations and warranties of the Company, as to the performance by the
Company of its obligations hereunder or as to the fulfillment of the conditions
concurrent and precedent to the obligations hereunder of the Underwriters.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to you. The Company will furnish you with such conformed copies of
such opinions, certificates, letters and other documents as you shall
reasonably request.
If any of the conditions hereinabove provided for in this Section 7 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representative by notifying the Company of such termination in writing at or
prior to the Closing Date or the Option Closing Date, as the case may be.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each Underwriter, the
directors, officers, employees and agents of each Underwriter and each person,
if any, who controls such Underwriter within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act, from and against any and all losses,
claims, damages or liabilities, joint or several (and actions in respect
thereof), to which they, or any of them, may become subject under the Act or
other Federal or state law or regulation, at common law or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon (i) any breach of representation or warranty made
by the Company in Section 3 of this Agreement, (ii) any untrue statement or
alleged untrue statement of any material fact contained in (A) any Preliminary
Prospectus, the Registration Statement or the Prospectus or any amendment or
supplement to the Registration Statement or the Prospectus or (B) any
application or other document, or any amendment or supplement thereto, executed
by the Company or based upon written information furnished by or on behalf of
the Company filed in any jurisdiction in order to qualify the Shares under the
securities or Blue Sky laws thereof or filed with the Commission, the NASD or
any securities association or securities exchange (each, an "Application"), or
(iii) the omission or alleged omission to state in any Preliminary Prospectus,
the Registration
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<PAGE> 26
Statement or the Prospectus or any amendment or supplement to the Registration
Statement or the Prospectus or any Application a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse, as incurred, each Underwriter and each such other person for any
legal or other expenses reasonably incurred by such Underwriter or such other
person in connection with investigating, defending or appearing as a third-party
witness in connection with any such loss, claim, damage, liability or action;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of an untrue
statement or omission or alleged untrue statement or omission in any of such
documents made or omitted to be made in reliance upon and in conformity with
information furnished by such Underwriter in writing to the Company by the
Representative on behalf of any Underwriter expressly for inclusion therein;
provided, further, that such indemnity with respect to any Preliminary
Prospectus shall not inure to the benefit of any Underwriter (or any such other
person) from whom the person asserting any such loss, claim, damage, liability
or action purchased Shares which are the subject thereof to the extent that any
such loss, claim, damage or liability (i) results from the fact that such
Underwriter failed to send or give a copy of the Prospectus (as amended or
supplemented) to such person at or prior to the confirmation of the sale of such
Shares to such person in any case where such delivery is required by the Act and
(ii) arises out of or is based upon an untrue statement or omission of a
material fact contained in such Preliminary Prospectus that was corrected in the
Prospectus (or any amendment or supplement thereto), unless such failure to
deliver the Prospectus (as amended or supplemented) was the result of
noncompliance by the Company with Section 5(f) hereof. This indemnity agreement
will be in addition to any liability that the Company might otherwise have. The
Company will not, without the prior written consent of each Underwriter, settle
or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which indemnification
may be sought hereunder (whether or not such Underwriter or any person who
controls such Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act is a party to each claim, action, suit or proceeding),
unless such settlement, compromise or consent includes an unconditional release
of each Underwriter and each such other person from all liability arising out of
such claim, action, suit or proceeding.
(b) Each Underwriter, severally and not jointly, will indemnify and hold
harmless the Company, the directors, officers, employees and agents of the
Company and each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, against any and all
losses, claims, damages or liabilities, joint or several (and actions in respect
thereof), to which they, or any of them, may become subject under the Act or
other Federal or state law or regulation, at common law or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any amendment or supplement to the
Registration Statement or the Prospectus or any Application, or (ii) the
omission or the alleged omission to state in the Registration Statement, any
Preliminary Prospectus or the Prospectus or any amendment or supplement to the
- 26 -
<PAGE> 27
Registration Statement or the Prospectus, or any Application, a material fact
required to be stated therein or necessary to make the statements therein 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 or omitted to be made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through the
Representative expressly for use therein; and, subject to the limitation set
forth immediately preceding this clause, will reimburse, as incurred, any legal
or other expenses reasonably incurred by the Company and each such other
person in connection with investigating, defending or appearing as a
third-party witness in connection with any such loss, claim, damage, liability
or any action in respect thereof. The Company acknowledges that, for all
purposes under this Agreement, the statements set forth under the heading
"Underwriting" and the information set forth in the last paragraph on the front
cover page and the last two paragraphs on the inside front cover of any
Preliminary Prospectus and the Prospectus constitute the only information
furnished in writing to the Company by the Representative on behalf of the
Underwriters expressly for inclusion in the Registration Statement, any
Preliminary Prospectus or the Prospectus. This indemnity agreement will be in
addition to any liability that each Underwriter might otherwise have. No
Underwriter will, without the prior written consent of the Company, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action, suit or proceeding in respect of which indemnification may be
sought hereunder (whether or not the Company or any person who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act is a party to each claim, action, suit or proceeding), unless such
settlement, compromise or consent includes an unconditional release of the
Company and each such other person from all liability arising out of such
claim, action, suit or proceeding.
(c) Promptly after receipt by an indemnified party under this Section 8 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party or parties
under this Section 8, notify such indemnifying party or parties of the
commencement thereof; but the omission so to notify the indemnifying party or
parties will not relieve it or them from any liability which it or they may
have to any indemnified party under the foregoing provisions of this Section 8
or otherwise unless, and only to the extent that, such omission results in the
forfeiture of substantive rights or defenses by the indemnifying party. If any
such action is brought against an indemnified party, the indemnifying party or
parties against which a claim is made will be entitled to participate therein
and, to the extent that it or they may wish, to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party; provided, however,
that if the defendants in any such action include both the indemnified party
and the indemnifying party or parties and the indemnified party shall have
reasonably concluded that there may be one or more legal defenses available to
it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party or parties, the indemnifying party or
parties shall not have the right to direct the defense of such action on behalf
of such indemnified party or parties and such indemnified party or parties
shall have the right to select separate counsel to defend such action on behalf
of such indemnified party or parties. After notice from the indemnifying party
or parties to such indemnified party of
- 27 -
<PAGE> 28
its or their election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party or parties will not be liable to such indemnified party under this Section
8 for any legal or other expenses other than reasonable costs of investigation
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying party
or parties shall not be liable for the expenses of more than one separate
counsel (in addition to local counsel) in any one action or separate but
substantially similar actions in the same jurisdiction arising out of the same
general allegations or circumstances, designated by the Representative in the
case of paragraph (a) of this Section 8, representing the indemnified parties
under such paragraph (a) who are parties to such action or actions), or (ii) the
indemnifying party has authorized in writing the employment of counsel for the
indemnified party at the expense of the indemnifying party or parties. After
such notice from the indemnifying party or parties to such indemnified party,
the indemnifying party or parties will not be liable for the costs and expenses
of any settlement of such action effected by such indemnified party without the
consent of the indemnifying party or parties, unless such indemnified party
waived its rights under this Section 8 in which case the indemnified party may
effect such a settlement without such consent.
(d) If the indemnification provided for in the foregoing paragraphs of this
Section 8 is unavailable or insufficient to hold harmless an indemnified party
under paragraph (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) (i) in such proportion as is appropriate to reflect
the relative benefits received by the indemnifying party or parties, on the one
hand, and the indemnified party, on the other, from the offering of the Shares
or (ii) if, but only if, the allocation provided by the foregoing clause (i) is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the indemnifying party or parties on the one hand, and the
indemnified party, on the other, in connection with the statements or omissions
or alleged statements or omissions that resulted in such losses, claims, damages
or liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company, on the
one hand, and the Underwriters, on the other, shall be deemed to be in the same
proportion as the total proceeds from the offering of the Shares (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. Relative fault shall be
determined by reference to whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Representative on behalf
of the Underwriters, the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this Section 8(d) were to be determined by pro rata
allocation (even if the Underwriters were treated
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<PAGE> 29
as one entity for such purpose) or by any other method of allocation which does
not take into account the equitable considerations referred to herein. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities (or actions in respect thereof) referred to above
in this Section 8(d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 8(d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the underwriting discounts and commissions
applicable to the Shares purchased by such Underwriter exceeds the amount of any
damages that such Underwriter has otherwise been required to pay in respect of
the same or any substantially similar claim. Notwithstanding the provisions of
this Section 8(d), the Company shall not be required to contribute any amount in
excess of the amount by which the total proceeds received by it from the sale of
the Shares under this Agreement, before deducting expenses, exceeds the
aggregate amount of any damages that the Company has otherwise been required to
pay in respect of the same or any substantially similar claim. No person found
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) will be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations to contribute
as provided in this Section 8(d) are several in proportion to their respective
underwriting obligations and not joint. For purposes of this Section 8(d), each
person, if any, who controls an Underwriter within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act will have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement and each person, if any,
who controls the Company within the meaning of Section 15 of the Act or Section
20 of the Exchange Act, will have the same rights to contribution as the
Company, subject in each case to the provisions of this Section 8(d). Any party
entitled to contribution will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of which a claim
for contribution may be made under this Section 8(d), notify any such party or
parties from whom contribution may be sought, but the omission so to notify will
not relieve the party or parties from whom contribution may be sought from any
other obligation(s) it or they may have hereunder or otherwise than under this
Section 8(d), or to the extent that such party or parties were not adversely
affected by such omission. The contribution agreement set forth above shall be
in addition to any liabilities which any indemnifying party may otherwise have.
No party will be liable for contribution with respect to any action or claim
settled without its written consent (which consent will not be unreasonably
withheld).
9. Termination. The obligations of the several Underwriters under this
Agreement may be terminated at any time prior to the Closing Date (or, with
respect to the Option Shares, if any, on or prior to the Option Closing Date),
by notice to the Company from the Representative, without liability on the part
of any Underwriter to the Company, if, prior to delivery and payment for the
Firm Shares (or the Option Shares, if any, as the case may be), (i) the Company
shall have failed, refused or been unable, at or prior to such Closing Date, to
perform all obligations on its part to be performed hereunder, (ii) any of the
representations or warranties of the Company are not accurate in any respect,
(iii) since the respective dates as of which information is given in the
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<PAGE> 30
Registration Statement and the Prospectus, there shall have occurred any
material adverse change in the general affairs, business, business prospects,
properties, management, condition (financial or otherwise) or results of
operation, whether or not arising in the ordinary course of business; (iv)
trading in the Common Shares or securities generally shall have been suspended
by the Commission or by The Nasdaq Stock Market, (v) minimum or maximum prices
shall have been established for the Common Shares or securities generally on
either The Nasdaq Stock Market or the New York Stock Exchange, or additional
material governmental restrictions, not in force on the date of this Agreement,
shall have been imposed upon trading in securities generally by any such market
or exchange or by order of the Commission or any court or other governmental
authority, (vi) a general banking moratorium shall have been declared by the
United States or New York State authorities, (vii) there shall have been
enacted, published, decreed or otherwise promulgated any statute, regulation,
rule or order of any court or other Governmental Body which in the opinion of
the Representative materially and adversely affects or may materially and
adversely affect the business or operations of the Company or (viii) any
material adverse change in the financial or securities markets in the United
States or any outbreak or material escalation of hostilities or declaration by
the United States of a national emergency or war or other calamity or crisis
shall have occurred, the effect of any of which is such as to make it, in the
sole judgment of the Representative, impracticable or inadvisable to market the
Shares on the terms and in the manner contemplated by the Prospectus. This
Agreement may also be terminated as provided in Sections 7 and 10 of this
Agreement. Any termination pursuant to this Section 9 shall be without
liability of any party to any other party except as provided in Sections 6 and
8 hereof.
10. Default of Underwriters. If one or more Underwriters default in their
obligations to purchase Firm Shares or Option Shares hereunder and the aggregate
number of such Shares that such defaulting Underwriter or Underwriters agreed
but failed to purchase is ten percent (10%) or less of the aggregate number of
Firm Shares or Option Shares, as the case may be, to be purchased by all of the
Underwriters at such time hereunder, the other Underwriters may make
arrangements satisfactory to the Representative for the purchase of such Shares
by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representative), but if no such arrangements are
made by the Closing Date or the related Option Closing Date, as the case may be,
the other Underwriters shall be obligated severally in proportion to their
respective commitments hereunder to purchase the Firm Shares or Option Shares
that such defaulting Underwriter or Underwriters agreed but failed to purchase.
If one or more Underwriters so default with respect to an aggregate number of
Shares that is more than ten percent (10%) of the aggregate number of Firm
Shares or Option Shares, as the case may be, to be purchased by all of the
Underwriters at such time hereunder, and if arrangements satisfactory to the
Representative are not made within 48 hours after such default for the purchase
by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representative) of the Shares with respect to which
such default occurs, this Agreement will terminate without liability on the part
of any non-defaulting Underwriter or the Company other than as provided in
Section 11 hereof. In the event of any default by one or more Underwriters as
described in this Section 10, the Representative shall have the right to
postpone the Closing Date or the Option Closing Date, as the case may be,
established as provided in Section 2 hereof
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<PAGE> 31
for not more than seven (7) business days in order that any necessary changes
may be made in the arrangements or documents for the purchase and delivery of
the Firm Shares or Option Shares, as the case may be. As used in this
Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section 10. Nothing herein shall relieve any defaulting
Underwriter from liability for its default.
11. Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company and the
several Underwriters set forth in this Agreement or made by or on behalf of
them, respectively, pursuant to this Agreement shall remain in full force and
effect, regardless of (i) any investigation made by or on behalf of the
Company, any of its officers or directors, any Underwriter or any controlling
person referred to in Section 8 hereof and (ii) delivery of and payment for the
Shares. The respective agreements, covenants, indemnities and other statements
set forth in Sections 6 and 8 hereof shall remain in full force and effect,
regardless of any termination or cancellation of this Agreement.
12. Notices. Notice given pursuant to any of the provisions of this
Agreement shall be in writing and, unless otherwise specified, shall be mailed
or delivered (a) if to the Company, at the office of the Company, 1653 East
Maple Road, Troy, Michigan 48083-4208, Attention: Chief Executive Officer,
Telephone: (810) 689-3050 and Facsimile: (810) 689-4294, with a copy to Honigman
Miller Schwartz and Cohn, 2290 First National Building, Detroit, Michigan 48226,
Attention: Robert J. Krueger, Esq., Telephone: (313) 256-7675 and Facsimile:
(313) 962-0176 or (b) if to the Underwriters, to the Representative at the
offices of Brean Murray & Co., Inc., 570 Lexington Avenue, New York, New York
10022-6822 Attention: Mr. A. Brean Murray, Telephone: (212) 702-6500 and
Facsimile: (212) 702-6649, with a copy to Piper & Marbury L.L.P., 1251 Avenue of
the Americas, New York, New York 10020-1104, Attention: Michael Hirschberg,
Esq., Telephone: (212) 835-6270 and Facsimile: (212) 835-6001. Any such notice
shall be effective only upon receipt. Any notice under Section 8 or 9 hereof
may be made by telephone or facsimile but if so made shall be subsequently
confirmed in writing.
13. Successors. This Agreement shall inure to the benefit of and shall be
binding upon the several Underwriters, the Company and their respective
successors and legal representatives, and nothing expressed or mentioned in
this Agreement is intended or shall be construed to give any other person any
legal or equitable right, remedy or claim under or in respect of this
Agreement, or any provisions herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole
and exclusive benefit of such persons and for the benefit of no other person
except that (i) the indemnities of the Company contained in Section 8 of this
Agreement shall also be for the benefit of any person or persons who control
any Underwriter within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act and (ii) the indemnities of the Underwriters contained in
Section 8 of this Agreement shall also be for the benefit of the directors of
the Company, the officers of the Company who have signed the Registration
Statement and any person or persons who control the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act. No purchaser of
Shares from any Underwriter shall be deemed a successor because of such
purchase.
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<PAGE> 32
This Agreement shall not be assignable by any party hereto without the prior
written consent of the other parties.
14. APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT,
AND THE TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS.
15. Submission to Jurisdiction. The Company hereby submits to the
nonexclusive jurisdiction of the United States District Court for the Southern
District of New York and of the Supreme Court of the State of New York sitting
in New York County (including its Appellate Division), and of any other
appellate court in the State of New York, for the purposes of all legal
proceedings arising out of or relating to this Agreement or the transactions
contemplated hereby. The Company irrevocably waives, to the fullest extent
permitted by applicable law, any objection that it may now or hereafter have to
the laying of venue of any such proceeding brought in such a court and any
claim that any such proceeding brought in such a court has been brought in an
inconvenient forum.
16. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Please confirm that the foregoing correctly sets forth the agreement among
the Company and the several Underwriters.
Very truly yours,
SOMANETICS CORPORATION
By:_______________________________
Name: Bruce J. Barrett
Title: President and Chief
Executive Officer
Confirmed as of the date first
above mentioned:
BREAN MURRAY & CO., INC.
By:_________________________________
Name: A. Brean Murray
Title: Chairman
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<PAGE> 33
Acting on its behalf and
as the Representative of
the other several Underwriters
named in Schedule I hereof.
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<PAGE> 34
SCHEDULE I
UNDERWRITERS
Aggregate
Number of
Shares to
be
Purchased
---------
[To Be Supplied]
Total . . . . . . . . 1,800,000
=========
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<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
We consent to the use in this Registration Statement relating to 2,070,000
Common Shares of Somanetics Corporation on Form S-1 of our report dated January
24, 1997 (April 10, 1997 as to paragraph 1 of Note 11) (which includes an
explanatory paragraph relating to an uncertainty concerning the Company's
ability to continue as a going concern), appearing in the Prospectus, which is a
part of this Registration Statement, and to the references to us under the
headings "Selected Financial Data" and "Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of Somanetics Corporation
listed in Item 16(b). This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. 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.
DELOITTE & TOUCHE LLP
Detroit, Michigan
April 15, 1997
