<PAGE> 1
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[x] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
Somanetics Corporation
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing
fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
- --------------------------------------------------------------------------------
<PAGE> 2
[SOMANETICS LOGO]
1653 EAST MAPLE ROAD
TROY, MICHIGAN 48083-4208
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 25, 1997
To the Shareholders of Somanetics Corporation:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
Somanetics Corporation will be held at the Sterling Inn Banquet & Conference
Center, 34911 Van Dyke, Sterling Heights, Michigan 48312, at 10:00 a.m. Eastern
Standard Time on Tuesday, March 25, 1997 for the following purposes:
1. To select one director to serve until the 2000 Annual Meeting of
Shareholders and until his successor is elected and qualified.
2. To consider and act upon a proposal to amend and restate 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.
3. To consider and act upon a proposal to approve the Somanetics
Corporation 1997 Stock Option Plan, pursuant to which 295,000 Common Shares
(after giving effect to the one-for-ten reverse stock split described above)
are reserved for issuance pursuant to options to be granted to key
employees, directors, consultants and advisors of the Company, all subject
to approval of the reverse stock split described above.
4. To transact such other business as may properly come before the
meeting and any adjournment thereof.
Only shareholders of record on January 27, 1997 will be entitled to
notice of, and to vote at, the meeting or any adjournment thereof.
All shareholders are cordially invited to attend the meeting. An
admission ticket for the meeting is enclosed with this Proxy Statement due to
limited space. If you desire to attend the meeting in person, you must present
the ticket or proof of beneficial ownership of the Company's Common Shares as
of January 27, 1997. Whether or not you expect to attend the meeting, please
complete, date and sign the enclosed proxy and return it as promptly as
possible to ensure your representation at the meeting. A return
postage-prepaid envelope is enclosed for that purpose. If you return the
proxy, you may withdraw your proxy and vote your shares in person if you attend
the meeting.
Your attention is called to the attached Proxy Statement and the
accompanying proxy. A copy of the Annual Report of the Company for the fiscal
year ended November 30, 1996 accompanies this notice.
By order of the Board of Directors
Bruce J. Barrett
President and Chief Executive Officer
Troy, Michigan
February 7, 1997
<PAGE> 3
SOMANETICS CORPORATION
1653 EAST MAPLE ROAD
TROY, MICHIGAN 48083-4208
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
MARCH 25, 1997
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Somanetics Corporation (the "Company")
for use at the 1997 Annual Meeting of Shareholders to be held at the Sterling
Inn Banquet & Conference Center, 34911 Van Dyke, Sterling Heights, Michigan
48312, at 10:00 a.m. Eastern Standard Time on Tuesday, March 25, 1997, and at
any adjournment thereof, for the purposes set forth in the accompanying Notice
of Annual Meeting of Shareholders. The mailing of this Proxy Statement and
accompanying proxy will take place on or about February 7, 1997.
Solicitation
The Company will bear the entire cost of solicitation of proxies in the
enclosed form, including the preparation, assembly, printing and mailing of
this Proxy Statement, the accompanying proxy and any additional information
furnished to shareholders. The solicitation of proxies by mail may be
supplemented by telephone, telegraph or personal solicitation by directors,
officers or other regular employees of the Company; no additional compensation
will be paid to directors, officers or other regular employees for such
services. The Company has also engaged Shareholder Communications Corporation,
to solicit proxies by mail or telephone or in person, at a cost to the Company
expected to be approximately $6,500, plus an additional fee for each completed
call to a shareholder, plus reasonable out-of-pocket expenses. Brokers,
nominees and other similar record holders will be requested to forward
soliciting material and will be reimbursed by the Company upon request for
their out-of-pocket expenses.
VOTING SECURITIES AND PRINCIPAL HOLDERS
Voting Rights and Outstanding Shares
Only shareholders of record at the close of business on January 27,
1997 will be entitled to notice of, and to vote at, the Annual Meeting or any
adjournment of the meeting. As of the close of business on January 27, 1997,
the Company had 22,853,514 outstanding Common Shares, $0.01 par value ("Common
Shares"), the only class of stock outstanding and entitled to vote.
Each Common Share is entitled to one vote on each matter submitted for
a vote at the meeting. The presence, in person or by proxy, of the holders of
record of a majority of the
1
<PAGE> 4
outstanding Common Shares entitled to vote, or 11,426,758 shares, is necessary
to constitute a quorum for the transaction of business at the meeting or any
adjournment thereof.
Revocability of Proxies
A shareholder giving a proxy may revoke it at any time before it is
voted by giving written notice of such revocation to the Secretary of the
Company or by executing and delivering to the Secretary a later dated proxy.
Attendance at the meeting by a shareholder who has given a proxy will not have
the effect of revoking it unless such shareholder gives such written notice of
revocation to the Secretary before the proxy is voted. Any written notice
revoking a proxy, and any later dated proxy, should be sent to Somanetics
Corporation, 1653 East Maple Road, Troy, Michigan 48083-4208, Attention:
Investor Relations Department.
Valid proxies in the enclosed form which are returned in time for the
meeting and executed and dated in accordance with the instructions on the proxy
will be voted as specified in the Proxy. If no specification is made, the
proxies will be voted FOR the election as a director of the nominee listed
below, FOR the proposed one-for-ten reverse stock split and related amendments
and FOR the proposed 1997 Stock Option Plan.
Principal Holders of the Company's Voting Securities
As of January 27, 1997, no person was known by the Company to
beneficially own more than 5% of the Company's Common Shares, its only
outstanding class of voting shares.
I. ELECTION OF DIRECTOR
The Board of Directors proposes that the one person named below as
nominee for election as director for a three-year term be elected as a director
of the Company to hold office until the Annual Meeting of Shareholders to be
held in 2000, and until his successor is elected and qualified. Mr. Wallace
was elected as a director by the Board of Directors effective as of June 22,
1994 to fill a vacancy in the Board of Directors. If a quorum is present, the
nominee receiving the greatest number of votes cast at the meeting or its
adjournment shall be elected. Withheld votes and broker non-votes will not be
deemed votes cast in determining which nominee receives the greatest number of
votes cast, but will be counted for purposes of determining whether a quorum is
present. The persons named in the accompanying proxy intend to vote all valid
proxies received by them FOR the election of the nominee listed below unless
the giver of the proxy withholds authority to vote for such nominee. The
nominee listed below has consented to serve if elected. If the nominee is
unable or declines to serve, which is not expected, it is intended that the
proxies be voted in accordance with the best judgment of the proxy holders for
another qualified person.
The following information is furnished as of January 27, 1997 with
respect to the nominee for election as a director, with respect to each person
whose term of office as a director will continue after the meeting, with
respect to each executive officer of the Company and each
2
<PAGE> 5
executive officer named in the Summary Compensation Table below, and with
respect to all directors and executive officers as a group:
<TABLE>
<CAPTION>
AMOUNT AND PERCENTAGE
NATURE OF OF
POSITION AND OFFICES WITH COMMON SHARES COMMON TERM
DIRECTOR THE COMPANY AND OTHER BENEFICIALLY SHARES TO
NAME SINCE AGE PRINCIPAL OCCUPATION OWNED OWNED(1) EXPIRE
---- ----- --- -------------------- ----- -------- ------
NOMINEE FOR ELECTION AS DIRECTOR FOR A THREE-YEAR TERM
<S> <C> <C> <C> <C> <C> <C>
H. Raymond Wallace . 6/94 61 Chairman of the Board and 53,614 (2) * 2000
a Director of the Company
<CAPTION>
DIRECTORS CONTINUING IN OFFICE
<S> <C> <C> <C> <C> <C> <C>
Bruce J. Barrett . . 6/94 37 President, Chief Executive 650,929 (3) 2.8% 1998
Officer and a Director
of the Company
Daniel S. Follis . . 4/89 59 Director of the 273,981 (4) 1.2% 1999
Company and President
of Verschuren & Follis, Inc.
Dr. James I. Ausman . 6/94 59 Director of the Company, 170,359 (5) * 1999
Professor and Head of the
Department of Neurosurgery
at the University of Illinois
at Chicago
<CAPTION>
OTHER CURRENT EXECUTIVE OFFICERS
<S> <C> <C>
Raymond W. Gunn . . . . . . . . . . . . . . . . . . . . . . . . . 326,500 (6) 1.4%
All directors and executive officers as a group (5 persons) . . . 1,475,383 (7) 6.2%
</TABLE>
_______________________________
* Less than 1%
(1) Based on 22,853,514 Common Shares outstanding as of January 27, 1997.
(2) Includes 37,614 Common Shares that Mr. Wallace has the right to
acquire within 60 days of January 27, 1997 and 10,000 shares held in a
living trust; Mr. Wallace has sole voting and dispositive power over
the shares held in the trust.
(3) Includes 616,000 Common Shares that Mr. Barrett has the right to
acquire within 60 days of January 27, 1997 and 5,000 Common Shares
owned by his wife.
(4) Includes 57,500 Common Shares that Mr. Follis has the right to acquire
within 60 days of January 27, 1997, and 2,161 Common Shares that
Verschuren & Follis, Inc. has the right to acquire within 60 days of
January 27, 1997. The 273,981 Common Shares shown above as
beneficially owned by Mr. Follis include 88,203 Common Shares owned by
The Infinity Fund, a limited partnership in which Mr. Follis is a
6.068%
3
<PAGE> 6
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.
(5) Includes 42,614 Common Shares that Dr. Ausman has the right to acquire
within 60 days of January 27, 1997, 97,445 Common Shares owned jointly
with his wife, and 30,300 shares held in an individual retirement
account over which Dr. Ausman exercises sole voting and investment
control.
(6) Includes 320,500 Common Shares that Mr. Gunn has the right to acquire
within 60 days of January 27, 1997.
(7) Includes 1,076,389 Common Shares which all executive officers and
directors as a group have the right to acquire within 60 days of
January 27, 1997.
BIOGRAPHICAL INFORMATION
The following is a brief account of the business experience during the
past five years of the nominee for the Board of Directors of the Company and of
each director whose term of office will continue after the meeting:
H. Raymond 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, he served as Vice President and General Manager of Abbott
Critical Care Systems, a division of Abbott Laboratories, Inc., a health care
equipment manufacturer and distributor.
Bruce J. Barrett has served as the Company's President and Chief
Executive Officer and as a director of the Company since June 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. From September 1981 until June 1987, he served as the group
product manager of hemodynamic monitoring products of Baxter-Edwards Critical
Care, an affiliate of Baxter International, Inc., another health care equipment
manufacturer and distributor.
Daniel S. Follis is President of Verschuren & Follis, Inc., a Michigan
corporation formed in 1981 to advise and administer The Infinity Fund, a
limited partnership investing in emerging growth companies. He has served as a
director of the Company since April 1989.
James I. Ausman, M.D., Ph.D. 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 in Detroit. From December
1987 until July 1991 he served as Director of the Henry Ford
4
<PAGE> 7
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 has authored more than
two hundred book chapters and peer-reviewed publications and has been a
visiting professor or invited lecturer at conferences and medical schools
worldwide. He serves as editor of Surgical Neurology, a neurosurgical journal
with global circulation, as editor of the International Journal of Surgical
Neurology, and as a member of the editorial boards of several medical
publications, including Archives of Neurology. Dr. Ausman also has served on
several national and international medical association committees, including
committees of the World Federation of Neurological Societies. He has served as
a director of the Company since June 1994 and as Chairman of the Company's
Scientific Advisory Board since January 1994.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During the fiscal year ended November 30, 1996, the Board of Directors
held eight meetings and took action by written consent on three occasions.
Audit Committee
The Board of Directors has an Audit Committee which consists of two
directors. H. Raymond Wallace and Daniel S. Follis are the current members of
this committee. The Audit Committee (i) recommends to the Board the
conditions, compensation and term of appointment of independent certified
public accountants for the audit of the Company's financial statements, (ii)
reviews examination reports of the Company prepared by regulatory authorities,
and (iii) provides the Board with such assistance as is necessary with respect
to the Company's corporate and reporting practices. The Audit Committee may
also from time to time confer with the auditors to exchange views relating to
the scope and results of the audit. During the fiscal year ended November 30,
1996, the Audit Committee held two meetings.
Compensation Committee
The Board of Directors has a Compensation Committee which consists of
two directors. H. Raymond Wallace and Daniel S. Follis are the current members
of this committee. The Compensation Committee makes recommendations to the
Board of Directors with respect to compensation arrangements and plans for
senior management, officers and directors of the Company and administers the
Company's 1983 Stock Option Plan, 1991 Incentive Stock Option Plan and 1993
Director Stock Option Plan. Either this committee or the Board of Directors
would administer the proposed 1997 Stock Option Plan (see Part III of this
Proxy Statement). During the fiscal year ended November 30, 1996, the
Compensation Committee held four meetings.
The Company does not have a nominating committee.
5
<PAGE> 8
EXECUTIVE 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 $100,000 in fiscal
1996:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
------------
AWARDS
------
ANNUAL COMPENSATION SECURITIES ALL OTHER
NAME AND ------------------- UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)
------------------ ---- --------- -------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Bruce J. Barrett, President
and Chief Executive Officer
(since 6/1/94) . . . . . 1996 195,000 -0- 432,000 (1) -0-
1995 195,000 -0- 330,000 (1) -0-
1994 98,250 (2) 24,375 (3) 400,000 18,091
Raymond W. Gunn, Executive
Vice President and Chief
Financial Officer . . . 1996 105,000 -0- 191,000 (1) -0-
1995 95,625 -0- 100,000 (1) -0-
1994 91,667 -0- 225,000 (4) -0-
</TABLE>
_______________________________
(1) The fiscal 1995 numbers include options to purchase 165,000 and 50,000
Common Shares granted to Messrs. Barrett and Gunn, respectively,
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 165,000 and 50,000 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 options to purchase 165,000 and 50,000 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. See "Employment Contracts and Termination of Employment
and Change-in-Control Arrangements -- Bruce J. Barrett".
6
<PAGE> 9
(4) Includes 100,000 options granted to Mr. Gunn that replaced options
with higher exercise prices previously granted to him.
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>
Individual Grants
- -----------------------------------------------------------------------------------
Potential
% 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 ($/Sh) Date 5% ($) 10% ($)
---- ----------- ---------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bruce J. Barrett . . . 165,000 (1) 11.7 $1.3125 3/13/05 123,100 305,132
267,000 (2) 18.9 $0.5625 1/05/06 94,452 239,360
Raymond W. Gunn . . . . 50,000 (1) 3.5 $1.3125 3/13/05 37,303 92,464
141,000 (2) 3.4 $0.5625 3/13/05 49,879 126,404
</TABLE>
__________________________
(1) In light of the lack of 1995 bonuses, increases in 1996 salaries and a
1996 bonus plan, and to facilitate the retention of the Company's
employees and to align their interests with the interests of the
Company's shareholders, in December 1995, in exchange for the
cancellation of certain outstanding stock options, which were granted
subject to shareholder approval, the Company granted stock options to
purchase an aggregate of 689,000 Common Shares (most of which were
granted independent of the Company's stock option plans and none of
which was granted subject to shareholder approval) to each then
current employee of the Company and two advisors to the Company,
including options to purchase 165,000 and 50,000 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 ($0.50 a share), (ii) the new options
become exercisable in one-fourth cumulative annual increments
beginning December 22, 1996 and expire December 22, 2005, and (iii)
the new options are not subject to shareholder approval. The new
options granted to officers are the same as those granted to other
persons, except that (i) the exercise price of the new options granted
to officers is the same as the exercise price of their cancelled
options ($1.3125 a share), and (ii) the new options granted to the
officers become exercisable at the same times as the cancelled
options: one-fourth cumulative annual increments beginning March 13,
1996, expiring March 13, 2005. Each option also becomes 100%
exercisable immediately 10 days before or upon specified changes in
control of the Company.
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<PAGE> 10
(2) Options to purchase 267,000 and 141,000 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. Each option became 100% exercisable immediately
10 days before or upon specified changes in control of the Company.
(3) 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.
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 FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES FY-END (#) FY-END ($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Bruce J. Barrett . . . -0- -0- 574,750/257,250 207,938/100,125
Raymond W. Gunn . . . . -0- -0- 308,000/108,000 67,719/52,875
</TABLE>
Compensation of Directors and Advisory Board Members
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 Board meeting. The Company also reimburses Outside Directors for
their reasonable expenses of attending Board and Board committee meetings.
8
<PAGE> 11
On January 14, 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 15,000 shares
every three years beginning June 30, 1993 and ending June 30, 2002 (including
June 30, 1996) 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 15,000 Common Shares vesting over the period remaining
until the next regular grant of options under the Directors Plan.
Options to purchase 15,000 Common Shares exercisable at $2.63 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 10,000 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 15,000 Common Shares exercisable at $1.91
a 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 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 20,000 Common Shares exercisable at
$0.50 a share. The option is exercisable in one-fourth cumulative annual
installments beginning December 22, 1996. The option becomes 100% exercisable
immediately 10 days before or upon specified changes in control of the Company.
Advisory Board members are not presently compensated by the Company
for their services as Advisory Board members. The Company pays Advisory Board
members their reasonable expenses for attending Advisory Board meetings. No
such expenses were incurred for the fiscal year ended November 30, 1996.
For a description of the Company's distribution agreement with Mr.
Follis, see "Compensation Committee Interlocks and Insider Participation". For
a description of the Company's consulting agreement with Mr. Lewis, see
"Certain Transactions".
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 he is employed as
President and Chief Executive Officer (or in such other position as the Board
of Directors determines) for three years ending May 31, 1997. Mr. Barrett's
annual salary is $195,000, until 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
9
<PAGE> 12
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. Effective as of December 1, 1992, the Company and
Mr. Gunn amended and restated Mr. Gunn's employment agreement, and as of
December 22, 1995 and November 18, 1996, the Company and Mr. Gunn extended the
agreement for an additional year and updated Mr. Gunn's title. Pursuant to the
revised agreement, Mr. Gunn is to be 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 five years ending
November 30, 1997. Mr. Gunn's annual salary under the agreement is $90,000,
until increased by the Board of Directors. The Board of Directors increased
such salary to $105,000 effective July 16, 1995 and to $110,250 effective
December 1, 1996. 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 severance 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 January 27, 1997, that are not already 100% exercisable
immediately, including options granted to Messrs. Barrett and Gunn, become 100%
exercisable immediately ten 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 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 45,000 Common
Shares at $2.00 a share, including Exchange Warrants to purchase 2,161 Common
Shares issued to a corporation affiliated with Daniel S. Follis, a director and
shareholder of the Company. In September through December 1990, the Company
also issued Class M Warrants, warrants to purchase 628,346 Common Shares
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<PAGE> 13
(after adjustment as a result of the Company's initial public offering) at
$1.00 a share, including Class M Warrants to purchase 7,150 Common Shares at
$0.95 a share (after adjustment as a result of the Company's initial public
offering and as a result of the Regulation S offering in fiscal 1994) issued to
Daniel S. Follis, a director and a shareholder of the Company. 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 statement, but Mr. Follis has
not yet sold his Common Shares.
Distributorship Agreement. The Company has entered into a
distributorship agreement with Somatek, Inc., an entity 50% owned by Daniel S.
Follis, a director and shareholder of the Company. The distributorship covers
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 are on substantially the same terms, including
the purchase price of the Company's products covered by such agreement, as
those prevailing at the time for comparable agreements and transactions with
other distributors. The disinterested directors determined at the time they
approved the original agreement, that it involves normal risks to the Company,
that it does not have other unfavorable features, that it is on terms at least
as favorable to the Company as could be obtained from independent third-party
distributors, and that having a distributor on the Board of Directors could
provide valuable first-hand insights into the operation and effectiveness of
the Company's marketing and distribution programs.
During fiscal 1996, the Company has entered into new distribution
agreements with its United States distributors on different terms and
conditions, including different prices. 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.
In addition, the Company intends to sell (rather than exchange) INVOS 3100A
Cerebral Oximeters to United States distributors and customers who had not paid
for the INVOS 3100 Cerebral Oximeters they returned to the Company (including
Somatek, Inc.). During the fiscal year ended November 30, 1996, the Company
had no sales to Somatek, Inc. pursuant to its distributor agreement. As of
November 30, 1996 and January 27, 1997, Somatek, Inc. had no outstanding
indebtedness to the Company.
SCIENTIFIC ADVISORS
In September 1985, the Company established an Advisory Board for the
purpose of providing the President of the Company with information and advice
on the application of its technology. The members of the Advisory Board may
also be asked to review and evaluate the Company's research programs, to advise
the Company with respect to technical matters in fields in which the Company is
involved, and to recommend personnel to the Company. The Advisory Board meets
at such times as is determined necessary by the President of the Company. It
has met infrequently over the years with the most recent meetings occurring in
December 1990 and August 1992. The Company has used its Advisory Board members
primarily for individual consultation in their areas of expertise. The Company
intends to use its Advisory Board in the
11
<PAGE> 14
future to assist it in identifying and evaluating potential additional
applications of the Company's INVOS technology. Members of the Advisory Board
are appointed by, and serve at the discretion of, the Company's President. The
Advisory Board currently has seven members, James I. Ausman, M.D., Ph.D.
(Chairman), Gregory Crosby, M.D., Robert R. Di Loreto, M.D., Manuel Dujovny,
M.D., George A. Kling, M.D., Donald S. Prough, M.D., and Hugh F. Stoddart.
For a description of the principal occupation and employment of James
I. Ausman, M.D., Ph.D., see "Election of Director -- Biographical Information."
Gregory Crosby, M.D. is presently the Evan & Marion Helfaer Professor
and Chairman of the Department of Anesthesiology at the University of Wisconsin
Medical School, Madison, Wisconsin. He moved to Wisconsin in 1996 after a
15-year affiliation with Harvard Medical School and Massachusetts General
Hospital, Boston, Massachusetts. Dr. Crosby 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. Dr. Crosby also lectures widely
and is an active investigator whose work has been consistently funded by the
National Institute of Health.
Robert R. Di Loreto, M.D. 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 in Detroit since 1980. Dr. Di
Loreto also has sat as a panel member, Center for Device Evaluation, Division
of Gastroenterology and Urology, U.S. Food and Drug Administration in
Washington, D.C. since 1990.
Manuel Dujovny, M.D. has been 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 (formerly the Department of
Neurological Surgery) in Detroit 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 in Detroit. 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. has been 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 important capacities since 1962, including American Roentgen Ray
Society
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<PAGE> 15
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. has been Professor and Chairman of the
Department of Anesthesiology at The University of Texas Medical Branch in
Galveston since February 1992. Before that he was 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 is 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 (with Massachusetts General Hospital), the Harvard
scanner for high resolution imaging of brain function and systems for
non-invasive infrared spectroscopy of the human body. He is presently
Principle 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.
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'
research into the feasibility and development of prototypes of four new
products. In exchange, NeuroPhysics has granted the Company certain rights in
the new products, subject to the rights of the United States Federal
government, which is also funding the research, in the new products and a
royalty in favor of NeuroPhysics. The potential new products are noninvasive,
in vivo, near-infrared spectroscopy devices that monitor liver oxygenation for
assessing and controlling hemorrhagic shock, locate and assess subdural
hematomas in head trauma patients, monitor certain blood gases and monitor
fetal cerebral blood oxygenation during labor and delivery. There can be no
assurance that the Company will be able to successfully apply the INVOS
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<PAGE> 16
technology or related technologies in the development of commercially viable
products or that competitors will not develop and market similar products
before the Company does.
During fiscal 1996, the Company paid approximately $81,050 in fees and
expenses to Mr. Stoddart and Neurophysics under this agreement. In addition,
effective December 22, 1995, the Company granted Mr. Stoddart ten-year options
to purchase 20,000 Common Shares at $.50 a 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 15,000 Common Shares at
$1.4375 a share.
The Advisory Board members 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 are not
expected to actively participate in the Company's activities or in the
development of the Company's technology. Certain of the institutions with
which the Advisory Board members 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 Advisory Board members to consult with the Company. The loss of the
services of certain of the Advisory Board members could adversely affect the
Company, in the event that the Company is pursuing research or development in
areas relating to such member's expertise and the Company is unsuccessful in
finding a substitute Advisory Board member who has expertise in a similar area,
and is able to advise the Company with respect to Company programs, to a
similar degree.
In addition, the institutions with which the Advisory Board members
are affiliated may make available the research services of their scientific and
other skilled personnel, including the Advisory Board members, to entities
other than the Company pursuant to sponsored research agreements with others.
Under such sponsored research agreements, such institutions may be obligated to
assign or license patents and other proprietary information which may result
from research sponsored by an entity other than the Company, including research
performed by an Advisory Board member for a competitor of the Company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of
a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than ten-percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) reports they file.
Based solely on review of the copies of such reports furnished to the
Company during or with respect to fiscal 1996, or written representations that
no Forms 5 were required, the
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<PAGE> 17
Company believes that during the fiscal year ended November 30, 1996 all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten-percent beneficial owners were complied with, except that (i)
one report covering one transaction was filed late by Bruce J. Barrett, the
Company's President and Chief Executive Officer and a director, (ii) one report
covering one transaction was filed late by Raymond W. Gunn, the Company's
Executive Vice President, Chief Financial Officer, Secretary and Treasurer,
(iii) one report covering one transaction was filed late by Larry Layman II,
the Company's former Vice President, Sales and Marketing, (iv) one report
covering one transaction was filed late by Daniel S. Follis, a director of the
Company, (v) one report covering one transaction was filed late by H. Raymond
Wallace, a director of the Company, and (vi) two reports covering an aggregate
of two transactions were filed late by James I. Ausman, M.D., Ph.D., a director
of the Company.
CERTAIN TRANSACTIONS
Transactions with Directors
See "Executive Compensation -- Compensation Committee Interlocks and
Insider Participation" for a description of (i) Exchange Warrants and Class M
Warrants issued to Mr. Follis, and (ii) a distributorship agreement between the
Company and Mr. Follis.
Agreement and Release. 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), 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) for Mr. Lewis' consulting services, confidentiality,
non-compete and non-solicitation agreements and release of the Company, 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 his legal fees; the
Company will also reimburse Mr. Lewis' business-related expenses, (iv) the
Company and Mr. Lewis amended and restated the Company's note receivable from
Mr. Lewis (see "Mortgage Loan"), (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.
Mortgage Loan. 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 (five years
after the date of the loan). 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
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<PAGE> 18
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 (see "Agreement and Release"), 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 of his loan
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 continued to be secured by
a second mortgage on Mr. Lewis' home and was also secured by 175,000 of Mr.
Lewis' options to purchase the Company's stock and the underlying securities.
Effective November 4, 1996, Gary D. Lewis resigned as a director of
the Company. The size of the Board was reduced to four members, and Bruce J.
Barrett was changed from a Class II director to a Class III director to make
the number of directors in each class as nearly equal as possible. Mr. Barrett
will now serve until the 1998 Annual Meeting of Shareholders and until his
successor is duly elected and qualified, or until his earlier death,
resignation or removal. On November 6, 1996, Gary D. Lewis paid the Company
$175,000 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. 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.
II. APPROVAL OF ONE-FOR-TEN REVERSE STOCK SPLIT
GENERAL
The Board of Directors has determined that it would be advisable to
amend and restate the Company's Restated Articles of Incorporation to (i)
effect a one-for-ten reverse split of the Company's issued and outstanding
Common Shares while keeping 6,000,000 authorized Common Shares, at a par value
of $0.01, and 1,000,000 authorized Preferred Shares, at a par value of $0.01
(the "Reverse Split"), (ii) provide for the payment of cash in lieu of
fractional shares otherwise issuable, and (iii) eliminate provisions in the
Restated Articles of Incorporation relating to the Convertible Preferred Shares
redeemed February 28, 1996.
Subject to shareholder approval, the Board of Directors has approved
an amendment and restatement of the Company's Restated Articles of
Incorporation which would (i) add a new paragraph to Article III of the
Restated Articles of Incorporation that would result in one post-split Common
Share ("Post-Split Common Share") being issued in exchange for every ten Common
Shares issued and outstanding on the effective date of the Reverse Split
("Pre-Split Common Shares"), and (ii) delete the provisions in Article III of
the Restated Articles of Incorporation relating to the Convertible Preferred
Shares, all substantially as set forth in the form of Restated Articles of
Incorporation attached as Exhibit A (collectively, the "Amendment"). The
Reverse Split will not affect the par value of the authorized Common Shares,
and the number of authorized Common Shares will be 6,000,000 Common Shares,
$0.01 par value per share. The
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<PAGE> 19
Reverse Split will not affect the number or par value of the authorized
Preferred Shares, which will remain at 1,000,000 Preferred Shares, $0.01 par
value per share.
The Reverse Split will become effective upon the filing with the
Michigan Department of Consumer and Industry Services, Corporation, Securities
and Land Development Bureau of Restated Articles of Incorporation, which state
that, at the close of business on the date of filing of the Restated Articles
of Incorporation, each Common Share then issued and outstanding would
automatically, without any action on the part of the holders of such Common
Shares, become and be converted into one-tenth of a Common Share, subject to
adjustment to eliminate fractional shares. If the Amendment is approved and
management determines to proceed with the Reverse Split (see "Reservation of
Rights"), management will use its discretion to determine when to file the
Amendment. Management currently expects such amendment to be filed sometime
before the Company raises significant additional capital, so that the Company
will have sufficient authorized, but unissued, common shares to raise such
additional capital. See "Purposes of the Reverse Split."
PRINCIPAL EFFECTS OF REVERSE SPLIT
Based upon the 22,853,514 Common Shares outstanding as of January 27,
1997, the Reverse Split would decrease the outstanding Common Shares by
approximately 90%, and, once effective, the Reverse Split would result in
approximately 2,285,351 Post-Split Common Shares outstanding, subject to
adjustment as a result of the elimination of fractional shares. Similarly, the
aggregate number of Common Shares reserved for issuance upon exercise of
warrants and options would decrease from approximately 5,270,582 Common Shares
to approximately 527,058 Common Shares (822,058 if the 1997 Stock Option Plan
described in Part III of this Proxy Statement is approved), subject to
adjustment as a result of the elimination of fractional shares.
Each outstanding option or warrant will automatically become an option
or warrant, as the case may be, to purchase 10% of the number of shares subject
to the option or warrant immediately prior to the Reverse Split at an exercise
price which is ten times the exercise price of the option or warrant
immediately prior to the Reverse Split, subject to adjustment as a result of
the elimination of fractional shares. In addition, the shares available for
issuance under the Company's 1991 Incentive Stock Option Plan and 1993 Director
Stock Option Plan will be reduced by approximately 90% to reflect the Reverse
Split, subject to adjustments required to eliminate fractional shares, and the
other relevant terms and provisions of the Company's stock option plans will be
appropriately adjusted to reflect the Reverse Split. The Company will obtain a
new CUSIP number for the Common Shares effective at the time of the Reverse
Split. Following the effectiveness of the Reverse Split, the Company will
provide each record holder of Common Shares information to enable such holder
to obtain new shares and certificates.
The Reverse Split will not affect the par value of the authorized
Common Shares, and the number of authorized Common Shares will be 6,000,000
Common Shares, $0.01 par value per share. The Reverse Split will not affect
the number or par value of the authorized Preferred Shares, which will remain
at 1,000,000 Preferred Shares, $0.01 par value per share. As a result,
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<PAGE> 20
if the Amendment is approved, the decrease in the number of shares outstanding
and reserved for issuance pursuant to the exercise of options and warrants will
result in an increase in the number of shares available for issuance. The
terms of the Post-Split Common Shares will be the same as the terms of the
Pre-Split Common Shares, and subject to the provisions for the elimination of
fractional shares, as described below, consummation of the Reverse Split will
not result in a change in the relative equity interest in the Company or the
voting power or other rights, preferences or privileges of the holders of
Common Shares.
The following table illustrates the principal effects of the proposed
reverse stock split discussed in the preceding paragraphs:
<TABLE>
<CAPTION>
Number of Before Reverse Split After Reverse Split
Common Shares And The Amendment And The Amendment
-------------- ----------------- -----------------
<S> <C> <C>
Authorized 30,000,000 6,000,000
Outstanding 22,853,514 2,285,351
Subject to Outstanding
Options and Warrants 5,132,243 513,224
Reserved for Issuance in
Connection with Future
Grants Under Option Plans 138,339 13,834
(Total if the 1997 Stock
Option Plan is approved) N/A 308,834
Available for Future Issuance
by Action of the Board (after
giving effect to the above
reservations) 1,875,904 3,187,591*
</TABLE>
__________________________________
*2,892,591 if the 1997 Stock Option Plan (described in Part III of this Proxy
Statement) is approved.
Assuming the Reverse Split is approved and management determines to
proceed with the Reverse Split (see "Reservation of Rights"), the Company will
file Restated Articles of Incorporation, in the form set forth in Exhibit A,
with the Michigan Department of Consumer and Industry Services, Corporation,
Securities and Land Development Bureau effecting the Reverse Split on a date
determined by management in its discretion. Management currently expects such
amendment to be filed sometime before the Company raises significant additional
capital, so that the Company will have sufficient authorized, but unissued,
common shares to raise such additional capital. See "Purposes of the Reverse
Split." The Reverse Split would become effective as of the close of business
on the date of such filing (the "Effective Date").
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<PAGE> 21
PURPOSES OF THE REVERSE SPLIT
The Reverse Split would decrease the number of Common Shares
outstanding and presumably increase the per share market price for the
Post-Split Common Shares. The Company's Board of Directors believes that the
relatively low market price per share of the Company's Common Shares may impair
the marketability of the Common Shares to institutional investors and members
of the investing public. In theory, the number of shares outstanding should
not, alone, affect the marketability of the Common Shares, the type of investor
who acquires them, or the Company's reputation in the financial community. In
practice, however, this is often not the case, because many investors look upon
low-priced shares as speculative in nature, and as a matter of policy, avoid
investment in such stocks. These factors may not only affect the liquidity of
the Common Shares, but may also impair the Company's ability to raise
additional capital through the sale of equity securities.
The Board also recognizes that many leading brokerage firms are
reluctant to recommend lower-priced securities to their clients. In addition,
a variety of brokerage house policies and practices currently tends to
discourage individual brokers within firms from dealing in lower-priced stocks.
Some of those policies and practices relate to the payment of brokers'
commissions and time-consuming procedures that make the handling of lower
priced stocks economically unattractive to brokers. The structure of brokerage
commissions tends to adversely impact holders of lower-priced stocks because
brokerage commissions on a sale of a lower-priced stock generally represent a
higher percentage of the sales price than the commissions on higher-priced
stocks. In addition, stocks that trade for less than $5.00 are subject to
restrictions relating to the stock's marginability and to additional
requirements for brokers who recommend such stocks to their clients, and such
restrictions tend to adversely impact the stock's marketability and,
consequently the stock's price.
The Company is currently listed on The Nasdaq SmallCap Market
("SmallCap Market"); however, there is no assurance that the Company will
continue to meet the maintenance standards for continued listing on The Nasdaq
SmallCap Market, particularly if proposed Nasdaq rule changes take effect.
Under The Nasdaq SmallCap Market's listing criteria, listed companies which
have low stock prices for a sustained period risk de-listing by The Nasdaq
SmallCap Market. If the Company is unable to satisfy the SmallCap Market's
requirements for continued listing, including, among other things, an
adequately high trading price, trading of the Common Shares would thereafter be
conducted in the over-the-counter market in the so-called "pink sheets" or
Nasdaq's OTC Bulletin Board. Consequently, the liquidity of the Company's
Common Shares could be impaired, through delays in the timing of transactions,
reduction in the news media's coverage of the Company, lack of investment
analyst interest in covering the Company, and lower prices for the Company's
Common Shares than might otherwise be obtained.
The Board of Directors hopes that the decrease in the number of Common
Shares outstanding resulting from the Reverse Split and the anticipated
corresponding increased price per share will stimulate interest in the
Company's Common Shares, promote greater liquidity for the Company's
shareholders and result in a price level for the Post-Split Common Shares that
will
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<PAGE> 22
maintain its Nasdaq SmallCap Market listing. The Board also hopes that the
Reverse Split will result in a price level for the Post-Split Common Shares
that will mitigate the present reluctance, policies and practices of brokerage
firms, and diminish the adverse impact of trading commissions, recommendation
restrictions and margin requirements on the potential market for the Company's
Common Shares. However, there is no assurance that the Reverse Split will
achieve the desired results, that the price per Post-Split Common Share will
increase proportionately with the decrease in the number of shares, that the
Post-Split Common Shares will trade at a level at which they will be
marginable, or that any price increase can be sustained for a prolonged period
of time. In addition, it is possible that the liquidity of the Post-Split
Common Shares may be adversely affected by the reduced number of shares
outstanding if the proposed Reverse Split is effected. In addition, the
Reverse Split might leave some shareholders with one or more "odd-lots" of the
Company's Common Shares (stock in amounts of less than 100 shares). These
shares may be more difficult to sell, or require a greater commission per share
to sell, than shares in even multiples of 100.
The Reverse Split is also being proposed to increase the number of the
Company's authorized but unissued Common Shares. As of January 27, 1996, the
Company had 30,000,000 Common Shares authorized, 22,853,514 Common Shares
issued and outstanding and 5,270,582 Common Shares reserved for issuance
pursuant to the exercise of options and warrants outstanding or reserved for
grant under Company stock option plans. After the Reverse Split, the Company
would have 6,000,000 Common Shares authorized, but would only have
approximately 2,285,351 Common Shares issued and outstanding and 527,058 Common
Shares reserved for issuance (827,058 if the 1997 Stock Option Plan described
in Part III of this Proxy Statement is approved), subject to adjustment as a
result of the elimination of fractional shares.
If the Reverse Split is approved by the shareholders of the Company,
the additional 3,187,591 Post-Split Common Shares so authorized (2,892,591
Post-Split Common Shares if the 1997 Stock Option Plan described in Part III of
this Proxy Statement is approved) will be available for issuance by the Board
of Directors of the Company for raising additional capital, stock options,
acquisitions, stock splits, stock dividends or other corporate purposes. There
are no arrangements, understandings or plans for the issuance of any such
additional shares, other than (i) shares reserved for issuance upon the
exercise of stock options and warrants outstanding or authorized for issuance
under existing plans or the proposed 1997 Stock Option Plan (see Part III of
this Proxy Statement), although there are no current plans for any specific
grants, and (ii) the Company's plans to raise additional capital in fiscal 1997
to support its business, as described below. The Company does not expect that
it would seek authorization from shareholders for issuance of such additional
shares unless required by applicable law or regulation or the rules of the
market in which the Company's Common Shares are traded. There are no
preemptive rights available to shareholders in connection with the issuance of
such shares.
As of the date of this Proxy Statement, the Company has no commitments
to raise additional capital in 1997, but the Company is currently actively
seeking to engage an investment banking firm to lead an offering of Company
securities. As of the date of this Proxy Statement, the Company has not yet
engaged an investment banking firm for that purpose, but it expects to
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do so before the Annual Meeting. The type and amount of security that might be
issued in any such placement have not yet been determined and will be dependent
on negotiations with the investment banking firm engaged by the Company, market
conditions and management's then current estimate of the proceeds necessary or
desired to sustain the Company's operations. There can be no assurance that
the Company will be able to engage an investment banking firm on acceptable
terms and conditions or that, even if such a firm is engaged, 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 Board of Directors believes that the Reverse Split is in the best
interest of the Company and its shareholders.
EXCHANGE OF CERTIFICATES AND ELIMINATION OF FRACTIONAL SHARE INTERESTS
On the Effective Date, each ten Pre-Split Common Shares will
automatically be combined and changed into one Post-Split Common Share. No
additional action on the part of the Company or any shareholder will be
required in order to effect the Reverse Split and beginning on the Effective
Date, each certificate representing Pre-Split Common Shares will represent for
all purposes one-tenth of that number of Post-Split Common Shares.
Shareholders will be requested to exchange their certificates representing
Common Shares held prior to the Reverse Split for new certificates representing
Common Shares issued as a result of the Reverse Split. The Company's transfer
agent will act as the Company's exchange agent to act for holders of Common
Shares in implementing the exchange of their certificates. Shareholders will
be furnished the necessary materials and instructions to effect such exchange
promptly following the Effective Date. Certificates representing Pre-Split
Common Shares subsequently presented for transfer will not be transferred on
the books and records of the Company but will be returned to the tendering
person for exchange. Shareholders should not submit any certificates until
requested to do so.
No scrip or fractional Post-Split Common Shares will be issued to any
shareholder in connection with the Reverse Split. Accordingly, all
shareholders of record who would otherwise be entitled to receive fractional
Post-Split Common Shares, will, upon surrender of their certificates
representing Pre-Split Common Shares, receive a cash payment in lieu thereof
equal to the fair value of such fractional share. Holders of less than ten
Pre-Split Common Shares as a result of the Reverse Split will on the Effective
Date no longer be shareholders of the Company. The fair value of the Common
Shares will be based on the closing price of the Common Shares on The Nasdaq
SmallCap Market on the Effective Date, or, if there are no reported sales on
such date, the average of the last reported high bid and low asked prices on
such day shall be used.
The Company will either deposit sufficient cash with the Exchange
Agent or set aside sufficient cash for the purchase of fractional interests.
Shareholders are encouraged to surrender their certificates for certificates
evidencing whole Post-Split Common Shares and to claim the sums, if any, due
them for fractional interests, as promptly as possible after the Effective
Date.
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Shareholders should be aware that, under the escheat laws of the various
jurisdictions where shareholders reside, where the Company is domiciled, and
where the funds may be deposited, sums due for fractional interests that are
not timely claimed after the Effective Date may be required to be paid to the
designated agent for each such jurisdiction, unless correspondence has been
received by the Company or its transfer agent concerning ownership of such
funds within the time permitted in such jurisdictions. Thereafter,
shareholders otherwise entitled to receive such funds will have to seek to
obtain them directly from the state to which they were paid. The ownership of
a fractional interest will not give the holder any voting, dividend, or other
rights except to receive payment therefor as described above.
FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE SPLIT
The following general description of the federal income tax
consequences is based on the Internal Revenue Code of 1986, as amended, the
applicable treasury regulations promulgated thereunder, judicial authority and
current administrative rulings and practices as in effect on the date of this
Proxy Statement, all of which are subject to change and any such change could
apply retroactively. This discussion is for general information only and does
not purport to deal with all aspects of federal income taxation that may be
relevant to holders of Common Shares and does not discuss consequences which
may apply to special classes of taxpayers (e.g., non-resident aliens,
broker-dealers, tax-exempt organizations, banks or insurance companies).
Shareholders are urged to consult their own tax advisors to determine the
particular federal, state, local and foreign tax consequences to them.
The combination and change of each ten Pre-Split Common Shares into
one Post-Split Common Share should be a tax-free transaction, and no gain or
loss will be recognized to the Company or its shareholders who do not receive
any cash as a result of the Reverse Split. The holding period of the Pre-Split
Common Shares will be transferred to the Post-Split Common Shares received in
exchange therefor, provided that the shareholder held the Pre-Split Common
Shares as a capital asset at the time of the exchange. Shareholders who
receive both Post-Split Common Shares and cash will, to the extent of the cash
received, recognize gain measured by the excess, if any, of (i) the value of
the Post-Split Common Shares plus the amount of cash, over (ii) the tax basis
of the Pre-Split Common Shares exchanged therefor; such shareholders will not
be entitled to recognize any loss. Depending on the circumstances relating to
such a shareholder, any such recognized gain may constitute capital gain or may
be treated as ordinary dividend income. The tax basis in the Post-Split Common
Shares will equal the tax basis in the Pre- Split Common Shares exchanged
therefor, plus the amount of any gain or income recognized by the shareholder,
less the amount of any cash received by the shareholder.
In the case of any shareholder who received only cash in the Reverse
Split, the shareholder will recognize gain or loss measured by the difference
between (i) the amount of cash received, and (ii) the shareholder's tax basis
in his or her Pre-Split Common Shares; such gain or loss will be capital gain
or loss (if such shareholder's Pre-Split Common Shares were held as a capital
asset). Any capital gain or loss recognized by any shareholder as a result of
the Reverse
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<PAGE> 25
Split will generally be long-term capital gain or loss to the extent such
shareholder's holding period for his or her Pre-Split Common Shares exceeds one
year.
This discussion should not be considered as tax or investment advice,
and the tax consequences of the Reverse Split may not be the same for all
shareholders. Shareholders should consult their own tax advisors to ascertain
their individual federal, state, local and foreign tax consequences.
FINANCIAL STATEMENTS
The Company's Annual Report for the year ended November 30, 1996
includes the Company's audited financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
which are incorporated by reference in this Proxy Statement. A copy of the
Annual Report accompanies this Proxy Statement.
VOTE REQUIRED
Approval of the Amendment requires the affirmative vote of the holders
of a majority of the outstanding Common Shares. Abstentions and broker
non-votes will not be deemed affirmative votes, and will have the same effect
as a negative vote on the proposal. Such votes, however, will be counted in
determining the number of Common Shares present or represented by proxy in
determining whether a quorum is present Proxies received in response to this
solicitation will, in the absence of any contrary specification, be voted in
favor of the proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THIS PROPOSAL.
RESERVATION OF RIGHTS
The Board of Directors reserves the right to abandon the proposed
Amendment and Reverse Split without further action by the shareholders at any
time before the filing of the Amendment with the Michigan Department of
Consumer and Industry Services, Corporation, Securities and Land Development
Bureau notwithstanding authorization of the proposed Amendment and Reverse
Split by the shareholders.
III. PROPOSAL TO APPROVE THE SOMANETICS CORPORATION 1997 STOCK OPTION PLAN
GENERAL
At the meeting, shareholders will be asked to consider and act upon a
proposal to approve the Somanetics Corporation 1997 Stock Option Plan (the
"1997 Option Plan"), but adoption of the plan is contingent on approval of the
Reverse Split described in Part II of this Proxy Statement, because the Company
will not otherwise have sufficient authorized but unissued and unreserved
Common Shares to reserve for the 1997 Option Plan. Pursuant to the 1997 Option
Plan, 295,000 Post-Split Common Shares, par value $0.01 a share ("Common
Shares"), are
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reserved for issuance pursuant to options to be granted to key employees
(including officers), directors, consultants or advisors (the "Participants")
of or to the Company or of or to any corporation or other entity in which the
Company has a direct or indirect ownership interest of 50% or more of the total
combined voting power of all classes of outstanding voting equity interests
("Subsidiary") as the Company's Board of Directors or a committee appointed by
the Board of Directors shall determine.
Options granted under the 1997 Option Plan may be "Incentive Stock
Options" (options meeting the requirements set forth in the 1997 Option Plan
and which are also intended to be and qualify as incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended,
and the applicable rules and regulations thereunder (the "Code")), nonqualified
options (options which meet the requirements set forth in the 1997 Option Plan
but are not intended to be, or do not qualify as, an incentive stock option
within the meaning of Section 422) or both. The 1997 Option Plan contains
various provisions to ensure that Incentive Stock Options comply with Section
422. The Board of Directors adopted the 1997 Option Plan on January 15, 1997,
subject to shareholder approval.
The Company's 1983 Stock Option Plan (the "1983 Plan") terminated in
1993, except as to options granted before that date. As of January 27, 1997,
options to purchase 93,158 Pre-Split Common Shares (9,315 Post-Split Common
Shares) remained outstanding under the 1983 Plan. The Company's 1991 Incentive
Stock Option Plan ("1991 Plan") authorizes the issuance of up to 1,150,000
Pre-Split Common Shares (115,000 Post-Split Common Shares), of which options
to purchase 47,113 Pre-Split Common Shares (4,711 Post-Split Common Shares)
have been exercised, options to purchase 1,099,320 Pre-Split Common Shares
(109,932 Post-Split Common Shares) are outstanding, and options to purchase
3,567 Pre-Split Common Shares (357 Post-Split Common Shares) are available for
future grants as of January 27, 1997. In addition, as of January 27, 1997, the
Company had granted options independent of any of its stock option plans to
purchase 1,840,417 Pre-Split Common Shares (184,041 Post-Split Common Shares).
The Company's 1993 Director Stock Option Plan (the "Directors Plan") authorizes
the issuance of up to 240,000 Pre-Split Common Shares (24,000 Post-Split Common
Shares), of which options to purchase 20 Pre-Split Common Shares (2 Post-Split
Common Shares) had been exercised, options to purchase 105,208 Pre-Split Common
Shares (10,520 Post-Split Common Shares) are outstanding, and options to
purchase 134,772 Pre-Split Common Shares (13,478 Post-Split Common Shares) are
available for future grants as of January 27, 1997.
The Company also has the following warrants outstanding: (i) Exchange
Warrants to purchase 45,000 Pre-Split Common Shares (4,500 Post-Split Common
Shares), (ii) warrants granted to the placement agent in connection with three
Regulation S offerings of Common Shares in 1994, 1995 and 1996 to purchase an
aggregate of 793,940 Pre-Split Common Shares (79,394 Post-Split Common Shares),
and (iii) warrants issued to purchasers in connection with two Regulation S
offerings of Common Shares in 1995 and 1996 to purchase an aggregate of
1,155,200 Pre-Split Common Shares (115,520 Post-Split Common Shares) as of
January 27, 1996.
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<PAGE> 27
The Board of Directors believes that it is in the best interests of the
Company and its shareholders to approve the 1997 Option Plan to allow the
Company to continue to grant options to Participants in accordance with the
terms of the 1997 Option Plan.
The purposes of the 1997 Option Plan are to provide key employees
(including officers), directors, consultants and advisors of the Company and
its Subsidiaries with an increased incentive to make significant and
extraordinary contributions to the long-term performance and growth of the
Company, to join the interests of key employees, directors, consultants and
advisors with the interests of shareholders of the Company and to facilitate
attracting and retaining key employees, directors, consultants and advisors of
the Company. The 1997 Option Plan, however, could have an "anti-takeover"
effect, particularly with regard to the Committee's ability to accelerate the
exercisability of stock options in connection with a change in control.
Persons deemed to be affiliates of the Company, i.e., persons who
directly or indirectly through one or more intermediaries, control, are
controlled by, or are under common control with, the Company, must resell
securities acquired under the 1997 Option Plan pursuant to a registration
statement under the Securities Act of 1933, as amended, and the rules and
regulations thereunder (the "Securities Act"), Rule 144 under the Securities
Act or an applicable exemption under the Securities Act.
The Company is the issuer of the securities offered pursuant to the
1997 Option Plan. The Common Shares of the Company issuable upon exercise of
stock options under the 1997 Option Plan may be either authorized and unissued
or reacquired Common Shares of the Company. The 1997 Option Plan is not
subject to any provisions of the Employee Retirement Income Security Act of
1974 and is not qualified under Section 401(a) of the Code.
APPROVAL OF THE 1997 OPTION PLAN
The approval by a majority of the votes cast by the holders of Common
Shares at the meeting and entitled to vote on the action is necessary for
shareholder approval of the 1997 Option Plan. Abstentions, withheld votes and
broker non-votes will not be deemed votes cast in determining approval of this
proposal, but will be counted in determining the number of Common Shares
present or represented by proxy in determining whether a quorum is present.
The Board does not intend to place the 1997 Option Plan into effect unless such
approval is obtained by January 15, 1998, and such approval is sought in order
to exempt the granting of options under the 1997 Option Plan from the
provisions of Section 162(m) of the Code and in order to comply with
shareholder approval requirements proposed for securities traded on The Nasdaq
SmallCap Market.
A FULL COPY OF THE 1997 OPTION PLAN IS ATTACHED AS EXHIBIT B TO THIS
PROXY STATEMENT. THE MAJOR FEATURES OF THE 1997 OPTION PLAN ARE SUMMARIZED
BELOW, BUT THIS IS ONLY A SUMMARY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE ACTUAL TEXT. CAPITALIZED TERMS NOT OTHERWISE DEFINED IN THIS PROXY
STATEMENT HAVE THE MEANINGS GIVEN THEM IN THE 1997
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OPTION PLAN. AS OF THE RECORD DATE, THE CLOSING SALES PRICE OF THE COMPANY'S
COMMON SHARES WAS $_.___.
ADMINISTRATION
The 1997 Option Plan is administered by a committee or entity
appointed by the Board of Directors to perform any of the functions and duties
of the Committee under the 1997 Option Plan and, with respect to administration
of the 1997 Option Plan regarding Participants who are subject to Section 16(a)
and (b) of the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder (the "Exchange Act"), that is a committee meeting the
standards of Rule 16b-3 under the Exchange Act, or any similar successor rule,
or the Board of Directors as a whole (the "Committee"). Members of the
Committee serve at the pleasure of the Board of Directors and may be removed or
replaced by the Board of Directors at any time. The Committee currently
consists of Daniel S. Follis and H. Raymond Wallace.
Subject to the provisions of the 1997 Option Plan, the Committee is
authorized to interpret the 1997 Option Plan, to promulgate, amend and rescind
rules and regulations relating to the 1997 Option Plan, and to make all other
determinations necessary or advisable for the 1997 Option Plan's
administration. Interpretation and construction of any provision of the 1997
Option Plan by the Committee is, unless otherwise determined by the Board of
Directors of the Company, final and conclusive. Subject to the provisions of
the 1997 Option Plan, the Committee determines, from those eligible to be
Participants under the Plan, the persons to be granted stock options, the
amount of stock to be optioned to each such person, the time such options shall
be granted, the time or times such option shall be exercisable and the terms
and conditions of any stock options. Such terms and conditions may, in the
Committee's sole discretion, with no requirement whatsoever that the Committee
follow past practices, act in a manner consistent with past practices, or treat
any key employee, director, consultant or advisor in a manner consistent with
the treatment afforded other key employees, directors, consultants or advisors
with respect to the Plan or otherwise ("Discretion"), include, without
limitation, provisions providing for termination of the option, forfeiture of
the gain on any option exercises or both if the Participant competes with the
Company or otherwise acts contrary to the Company's interests, and provisions
imposing restrictions, potential forfeiture or both on shares acquired upon
exercise of options granted pursuant to this Plan. The Committee may condition
any grant on the potential Participant's agreement to such terms and
conditions.
Subject to the requirements of the Code with respect to Incentive
Options that are intended to remain Incentive Options, in connection with a
Participant ceasing to be an employee of the Company or a subsidiary for any
reason, the stock option agreement may provide for the acceleration of, or the
Committee may accelerate, in its Discretion (exercised at the date of the grant
of the stock option or after the date of grant), in whole or in part, the time
or times or installments with respect to which any stock option granted under
the 1997 Option Plan shall be exercisable in connection with termination of a
Participant's employment with the Company or a subsidiary, subject to any
restrictions, terms and conditions fixed by the Committee either at the date of
the award or at the date it exercises such Discretion.
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In addition to such other rights of indemnification as they may have,
the members of the Committee will be indemnified by the Company in connection
with any claim, action, suit or proceeding relating to any action taken or
failure to act under or in connection with the 1997 Option Plan or any option
granted under the 1997 Option Plan to the full extent provided for under the
Company's Restated Articles of Incorporation or bylaws with respect to
indemnification of directors of the Company.
1997 OPTION PLAN PARTICIPANTS
The selection of persons who are eligible to participate in the 1997
Option Plan and grants and awards to those individuals are determined by the
Committee, in its Discretion. The only established criterion to determine
eligibility under the 1997 Option Plan is that individuals must be key
employees (including officers), directors, consultants or advisors of or to the
Company or any Subsidiary, as determined by the Committee in its discretion;
provided that Incentive Options may be granted only to employees (as defined in
the Code) of the Company or a corporate Subsidiary, to the extent required by
Section 422 of the Code, or any successor provision.
Approximately 36 key employees, 3 directors, 6 consultants and 5
advisors are currently eligible to participate in the 1997 Option Plan, all of
whom have been granted options under the 1983 Plan, the 1991 Plan, the
Directors Plan or independent of any stock option plan. No options have been
granted or awarded under the 1997 Option Plan
Subject to adjustments as described under "Shares Subject to Grant or
Award", no Participant may be granted stock options to purchase more than
200,000 Post-Split Common Shares (the equivalent of 2,000,000 Pre-Split Common
Shares) in the aggregate in any fiscal year. In addition, grants and awards
are subject to the maximum number of shares remaining with respect to which
stock options may be granted at any time under the 1997 Option Plan. There are
also certain limitations on the maximum value of Incentive Options which may
become first exercisable by any person in any year. Each grant or award under
the 1997 Option Plan must be evidenced by a written agreement containing such
provisions as may be approved by the Committee.
SHARES SUBJECT TO GRANT OR AWARD
The maximum number of Common Shares with respect to which stock
options may be granted under the 1997 Option Plan is 295,000 Post-Split Common
Shares (the equivalent of 2,950,000 Pre-Split Common Shares), which may consist
in whole or in part of authorized and unissued or reacquired Common Shares.
Unless the 1997 Option Plan has terminated, shares covered by the unexercised
portion of canceled, expired or otherwise terminated options under the 1997
Option Plan are again available for option and sale.
The number and type of shares subject to each outstanding stock
option, the option price with respect to outstanding stock options, the
aggregate number and type of shares remaining
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<PAGE> 30
available under the 1997 Option Plan, and the maximum number and type of shares
that may be granted to any Participant in any fiscal year are subject to such
adjustment as the Committee, in its Discretion, deems appropriate to reflect
such events such as stock dividends, stock splits, recapitalizations, mergers,
statutory share exchanges or reorganizations of or by the Company; provided
that no fractional shares may be issued pursuant to the 1997 Option Plan, no
rights may be granted under the 1997 Option Plan with respect to fractional
shares, and any fractional shares resulting from such adjustments shall be
eliminated from any outstanding option.
AMENDMENT OR TERMINATION OF THE 1997 OPTION PLAN
The Board of Directors may terminate or amend the 1997 Option Plan, or
amend any stock option agreement under the 1997 Option Plan, at any time;
provided that, (i) to the extent required by Section 162(m) of the Code and
related regulations, or any successor rule, but only with respect to amendments
or revisions affecting Participants whose compensation is subject to Section
162(m) of the Code, and to the extent required by Section 422 of the Code, or
any successor section, but only with respect to Incentive Stock Options, no
such amendment or revision may increase the maximum number of shares in the
aggregate that are subject to the 1997 Option Plan without the approval or
ratification of the shareholders of the Company, and (ii) no such amendment or
revision may change the option price or alter or impair any stock option
previously granted under the 1997 Option Plan, in a manner adverse to a
Participant, without the consent of such Participant, all except as described
under the caption "Shares Subject to Grant".
Unless sooner terminated by the Board of Directors, the 1997 Option
Plan will terminate on January 15, 2007, which is ten years after its original
adoption by the Board of Directors, and no stock options may be granted under
the 1997 Option Plan after that date. The termination of the 1997 Option Plan
will not affect the validity of any option outstanding on the date of
termination.
STOCK OPTIONS
Grant of Stock Options
Both Incentive Options and Nonqualified Options may be granted under
the 1997 Option Plan. An Incentive Option is intended to be, and qualifies as,
an incentive stock option within the meaning of Section 422 of the Code. Any
Incentive Option granted under the 1997 Option Plan must have an exercise price
not less than 100% of the fair market value of the shares on the date on which
such option is granted. With respect to an Incentive Option granted to a
Participant who owns more than 10% of the total combined voting shares of the
Company or of any parent or Subsidiary of the Company, the exercise price of
such option must not be less than 110% of the fair market value of the shares
subject to such option on the date such option is granted. A Nonqualified
Option granted under the 1997 Option Plan must have an exercise price of not
less than the par value, if any, of the Common Shares.
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At the time of the exercise of any option granted pursuant to the 1997
Option Plan, the Participant must pay the full option price for all shares
purchased (a) in cash or, (b) with the consent of the Committee, in its
Discretion, (i) in Common Shares, (ii) by a promissory note payable to the
order of the Company which is acceptable to the Committee, (iii) by a cash down
payment and a promissory note for the unpaid balance, (iv) subject to such
conditions as may be established by the Committee, by the Company retaining
from the shares to be delivered upon exercise of the stock option that number
of shares having a fair market value on the date of exercise equal to the
option price of the number of shares with respect to which the Participant
exercises the option, (v) by delivery to the Company of written notice of the
exercise in such form as the Committee may prescribe, accompanied by
irrevocable instructions to a stock broker to promptly deliver to the Company
full payment for the shares with respect to which the option is exercised from
the proceeds of the stockbroker's sale of, or loan against, the shares, or (vi)
in such other manner as the Committee determines is appropriate, in its
Discretion. The aggregate fair market value (determined as of the date the
option is granted) of the underlying stock with respect to which Incentive
Options are first exercisable for the first time by such individual during any
calendar year (under all of such plans of the Company and its parent and
Subsidiary corporations ) cannot exceed $100,000.
Term of Stock Options
If not sooner terminated, each stock option granted under the 1997
Option Plan will expire not more than ten years from the date of grant;
provided that, with respect to an Incentive Option granted to a Participant
who, at the time of the grant, owns more than 10% of the total combined voting
stock of all classes of stock of the Company or of any parent or Subsidiary,
such option must expire not more than five years after the date of the grant.
Continuation of Employment
Options granted under the 1997 Option Plan may be exercised only while
the Participant is an employee, director, consultant or advisor of or to the
Company or a Subsidiary, except as described under "Extraordinary Transactions"
and except that the Committee may, in its Discretion, permit the exercise of
all or any portion of the options granted to such Participant (i) for a period
not to exceed three months following such termination with respect to Incentive
Options that are intended to remain Incentive Options if such termination is
not due to death or permanent disability of the Participant, (ii) for a period
not to exceed one year following termination of employment with respect to
Incentive Options that are Intended to remain Incentive Options if termination
of employment is due to the death or permanent disability of the Participant,
and (iii) for a period not to extend beyond the expiration date with respect to
Nonqualified Options or Incentive Options that are not intended to remain
Incentive Options, all subject to any restrictions, terms and conditions fixed
by the Committee either at the date of the award or at the date it exercises
such Discretion.
In no event, however, shall an option be exercisable after its
expiration date, and, unless the Committee in its Discretion determines
otherwise (pursuant to the 1997 Option Plan), an
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option may only be exercised after termination of a Participant's employment,
consultation or other service by or to the Company to the extent exercisable on
the date of such termination or to the extent exercisable as a result of the
reason for such termination. The Committee may evidence the exercise of its
Discretion in any manner it deems appropriate, including by resolution or by a
provision in, or amendment to, the option.
Subject to the requirements of the Code with respect to Incentive
Options that are intended to remain Incentive Options, in connection with a
Participant ceasing to be an employee of the Company or a subsidiary for any
reason, the stock option agreement may provide for the acceleration of, or the
Committee may accelerate, in its Discretion (exercised at the date of the grant
of the stock option or after the date of grant), in whole or in part, the time
or times or installments with respect to which any option granted under the
1997 Option Plan shall be exercisable in connection with termination of a
Participant's employment with the Company or a Subsidiary, subject to any
restrictions, terms and conditions fixed by the Committee either at the date of
the award or at the date it exercises such Discretion.
The Committee may require, in its Discretion, that any Participant
under the 1997 Option Plan to whom an option shall be granted shall agree in
writing as a condition of the granting of such option to remain in his or here
position as an employee, director, consultant or advisor of the Company or a
Subsidiary of the Company for a designated minimum period from the date of the
granting of such stock option as shall be fixed by the Committee. Nothing
contained in the 1997 Option Plan or in any option granted pursuant to the 1997
Option Plan, nor any action taken by the Committee under the 1997 Option Plan
confers upon any Participant any right with respect to continuation of
employment, consultation or other service by or to the Company or any
Subsidiary or interfere in any way with the right of the Company or a
Subsidiary to terminate such person's employment, consultation or other service
at any time.
Sequential Exercise
Successive stock options may be granted to the same Participant
whether or not the option or options previously granted to such Participant
remain unexercised. A Participant may exercise any option granted under the
1997 Option Plan, if then exercisable, notwithstanding that options granted to
such Participant before the option then being exercised remain unexercised.
Transferability of Options
Except as otherwise described below, to the extent required by Section
422 of the Code, or any successor section, but only with respect to Incentive
Options, or to the extent determined by the Committee in its Discretion (either
by resolution or by a provision in, or amendment to, the option), (i) no option
granted under the 1997 Option Plan to a Participant shall be transferable by
such Participant otherwise than by will, or by the laws of descent and
distribution or, with respect to Nonqualified Options only (unless permitted by
Section 422 of the Code or any successor section), pursuant to a qualified
domestic relations order as defined in the Code or
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Title I of the Employee Retirement Income Security Act, or the rules
thereunder, and (ii) each option is exercisable, during the lifetime of the
Participant, only by the Participant.
The Committee may, in its Discretion, authorize all or a portion of
the options to be granted to an optionee to be on terms which permit transfer
by such optionee to, and the exercise of such option by, (i) the spouse,
children or grandchildren of the optionee ("Immediate Family Members"), (ii) a
trust or trusts for the exclusive benefit of such Immediate Family Members,
(iii) a partnership in which such Immediate Family Members are the only
partners, or (iv) such other persons or entities as determined by the
Committee, in its Discretion, on such terms and conditions as the Committee, in
its Discretion, may determine; provided that (y) the stock option agreement
pursuant to which such options are granted must be approved by the Committee
and must expressly provide for transferability in a manner consistent with
these provisions of the 1997 Option Plan, and (z) subsequent transfers of
transferred options are prohibited except for transfers the original optionee
would be permitted to make (if he or she were still the owner of the option) in
accordance with the 1997 Option Plan.
Following transfer, any such options shall continue to be subject to
the same terms and conditions as were applicable immediately before transfer,
provided that for some purposes under the 1997 Option Plan (generally relating
to exercise of the option) the term "Participant" shall be deemed to refer to
the transferee. The events of termination of employment, described above under
the caption "Continuation of Employment", continue to be applied with respect
to the original optionee. Following such events of termination of employment
of the original optionee, the options are exercisable by the transferee only to
the extent, and for the periods, described above under the caption
"Continuation of Employment". The original optionee remains subject to
withholding taxes and related requirements upon exercise described below under
the caption "Federal Income Taxes -- Withholding Payments". The Company has no
obligation to provide any notice to any transferee, including, without
limitation, notice of any termination of the option as a result of termination
of the original optionee's employment with, or other service to, the Company.
Shareholder Rights
No Participant in the 1997 Option Plan has any of the rights of a
shareholder of the Company under any option granted under the 1997 Option Plan
until the actual issuance of shares to the Participant, and before such
issuance no adjustment will be made for dividends, distributions or other
rights in respect of such shares, except as described under the caption "Shares
Subject to Grant".
EXTRAORDINARY TRANSACTIONS
If the Company engages in specified consolidations, mergers, transfers
of substantially all of its properties and assets, dissolutions, liquidations,
reorganizations or reclassifications in such a way that holders of Common
Shares are entitled to receive stock, securities, cash or other assets with
respect to, or in exchange for, the Common Shares (each a "Transaction"), then
each
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<PAGE> 34
Participant holding a stock option granted under the 1997 Option Plan upon the
exercise of such option after consummation of a Transaction will be entitled to
receive (for the same aggregate exercise price) the stock and other securities,
cash and assets the Participant would have received upon consummation of the
Transaction if he or she had exercised the option in full immediately before
consummation of the Transaction.
In addition, in connection with a Transaction, the Committee, acting
in its Discretion without the consent of any Participant and regardless of any
other provision of the 1997 Option Plan, may (i) permit stock options
outstanding under the 1997 Option Plan to be exercised in full for a limited
period of time, after which all unexercised stock options and all rights of
Participants under such options would terminate, (ii) permit stock options
outstanding under the 1997 Option Plan to be exercised in full for their then
remaining terms, or (iii) require all stock options outstanding under the 1997
Option Plan to be surrendered to the Company for cancellation and payment to
each Participant in cash of the excess of the fair market value of the
underlying Common Shares as of the date such Transaction is effective over the
exercise price, less any applicable withholding taxes. The 1997 Option Plan
provides, however, that the Committee may not select an alternative for a
Participant that would result in his or her liability under Section 16(b) of
the Exchange Act, without the Participant's consent. If all of the
alternatives have such a result, the Committee will take such action to put
such Participant in as close to the same position as he or she would have been
in if one of the alternatives described above had been selected, but without
resulting in any payment by such Participant under Section 16(b) of the
Exchange Act. Notwithstanding the foregoing, with the consent of each
Participant, the Committee may make such provision with respect to any
Transaction as it deems appropriate.
FEDERAL INCOME TAX CONSEQUENCES
The rules governing the tax treatment of options and shares acquired
upon the exercise of options are quite technical. Therefore, the description
of federal income tax consequences set forth below is necessarily general in
nature and does not purport to be complete. Moreover, statutory provisions are
subject to change, as are their interpretations, and their application may vary
in individual circumstances. Finally, the tax consequences under applicable
state and local income tax laws may not be the same as under the federal income
tax laws.
Incentive Options
Incentive Options granted pursuant to the 1997 Option Plan are
intended to qualify as "Incentive Stock Options" within the meaning of Section
422 of the Code. If the Participant makes no disposition of the shares
acquired pursuant to exercise of an Incentive Option within one year after the
transfer of shares to such Participant and within two years from grant of the
option, such Participant will realize no taxable income as a result of the
grant or exercise of such option, and any gain or loss that is subsequently
realized may be treated as long-term capital gain or loss, as the case may be.
Under these circumstances, the Company will not be entitled to a
32
<PAGE> 35
deduction for federal income tax purposes with respect to either the issuance
of such Incentive Options or the transfer of shares upon their exercise.
If shares acquired upon exercise of Incentive Options are disposed of
prior to the expiration of the above time periods, the Participant will
recognize ordinary income in the year in which the disqualifying disposition
occurs, the amount of which will generally be the lesser of (i) the excess of
the market value of the shares on the date of exercise over the option price,
or (ii) the gain recognized on such disposition. Such amount will ordinarily
be deductible by the Company for federal income tax purposes in the same year,
provided that the amount constitutes reasonable compensation and that the
Company satisfies certain federal income tax withholding requirements. In
addition, the excess, if any, of the amount realized on a disqualifying
disposition over the market value of the shares on the date of exercise will be
treated as capital gain.
Nonqualified Options
A Participant who acquires shares by exercise of a Nonqualified Option
generally realizes as taxable ordinary income, at the time of exercise, the
difference between the exercise price and the fair market value of the shares
on the date of exercise. Such amount will ordinarily be deductible by the
Company in the same year, provided that the amount constitutes reasonable
compensation and that the Company satisfies certain federal income tax
withholding requirements. Subsequent appreciation or decline in the value of
the shares will generally be treated as capital gain or loss on the sale or
other disposition of the shares.
Withholding Payments
If upon the exercise of any Nonqualified Option or a disqualifying
disposition (within the meaning of Section 422 of the Code) of shares acquired
upon exercise of an Incentive Option, there shall be payable by the Company or
a Subsidiary any amount for income tax withholding, in the Committee's
Discretion, either the Participant shall pay such amount to the Company or such
Subsidiary, or the amount of Common Shares delivered by the Company to the
Participant will be appropriately reduced, to reimburse the Company or such
Subsidiary for such payment.
The Company or any of its Subsidiaries will have the right to withhold
the amount of such taxes from any other sums or property due or to become due
from the Company or any of its Subsidiaries to the Participant upon such terms
and conditions as the Committee shall prescribe. The Company may also defer
issuance of the stock upon exercise of such option until payment by the
Participant to the Company of the amount of any such tax. The Committee may,
in its Discretion, permit Participants to satisfy such withholding obligations,
in whole or in part, by electing to have the amount of Common Shares delivered
or deliverable by the Company upon exercise of a stock option appropriately
reduced, or by electing to tender Common Shares back to the Company subsequent
to exercise of a stock option to reimburse the Company for such income tax
withholding, subject to such rules and regulations, if any, as the Committee
may
33
<PAGE> 36
adopt. The Committee may make such other arrangements with respect to income
tax withholding as it shall determine.
Limitation on Compensation Deduction
Publicly-held corporations are precluded from deducting compensation
paid to certain of their executive officers in excess of $1 million. The
employees covered by the $1 million limitation on deductibility of compensation
include the chief executive officer and those employees whose annual
compensation is required to be reported to the Securities and Exchange
Commission because the employee is one of the company's four highest
compensated employees for the taxable year (other than the chief executive
officer). Compensation attributable to stock options generally are included in
an employee's compensation for purposes of the $1 million limitation on
deductibility of compensation.
However, there is an exception to the $1 million deduction limitation
for compensation (including compensation attributable to stock options) paid
pursuant to a qualified performance-based compensation plan. Compensation
attributable to a stock option is deemed to satisfy the qualified
performance-based compensation exception if (i) the grant is made by a
compensation committee comprised of outside directors, (ii) the plan under
which the options may be granted states the maximum number of shares with
respect to which options may be granted during a specified period to any
employee, (iii) under the terms of the option, the amount of compensation the
employee would receive is based solely on an increase in the value of the
shares after the date of the grant (e.g., the option is granted at fair market
value as of the date of the grant), and (iv) the individuals eligible to
receive grants, the maximum number of shares for which grants may be made to
any employee, the exercise price of the options and other disclosures required
by SEC proxy rules are disclosed to, and subsequently approved by,
shareholders.
If the amount of compensation a covered employee will receive under
the grant is not based solely on an increase in the value of the shares after
the date of the grant (e.g., an option is granted with an exercise price that
is less than the fair market value as of the date of the grant), none of the
compensation attributable to the grant is qualified performance-based
compensation unless the grant is made on account of the attainment of a
performance goal that has been previously established and approved by the
shareholders of the Company and otherwise qualifies under Section 162(m) of the
Code. The Company has not established any performance goals for grants under
the 1997 Option Plan that meet the requirements of the performance-based
compensation standard required by Section 162(m) of the Code.
In order to satisfy the shareholder approval requirement applicable to
qualified performance-based compensation plans, there must be a separate
shareholder vote in which a majority of the votes cast on the issue (including
abstentions to the extent abstentions are counted as voting under applicable
state law) are cast in favor of approval. The 1997 Option Plan is being
submitted to shareholders at the meeting, in part, to satisfy this requirement.
If the shareholder approval and the other requirements applicable to qualified
performance-based compensation plans are satisfied (including grant by a
committee of outside directors), the $1
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<PAGE> 37
million compensation deduction limitation will not apply to stock options with
an exercise price equal to or greater than the fair market value of the
underlying shares on the date of grant. However, the grant of options by the
Board of Directors or by a committee not meeting the requirements of Section
162(m) and the grant of options with an exercise price less than the fair
market value of the underlying shares on the date of grant under the 1997
Option Plan will not qualify for the performance-based compensation exception
to the $1 million compensation deduction limitation.
ACCOUNTING TREATMENT
Generally, under current accounting rules applicable to the Company,
neither the grant nor the exercise of an Incentive Option or a Nonqualified
Option under the 1997 Option Plan requires any charge against earnings, if the
exercise price of the option is equal to the fair market value of the shares on
the date of grant. Footnote disclosure of the value of such options, however,
is required. If the exercise price is below the fair market value of the
shares on the date of grant, an earnings charge equal to the difference will be
required either at the date of grant or possibly over the term of the option.
If the optionee is allowed to pay the exercise price of an option with shares
held less than six months (or possibly, if such price is paid by the Company
withholding shares issuable upon exercise of the option), the Company will
recognize an earnings charge equal to the difference between the fair market
value of the shares issuable upon exercise of the option and the exercise
price.
OPTION GRANTS UNDER THE PLANS
No options have been granted under the 1997 Option Plan as of January
27, 1997, and no options have been granted under any plan of the Company from
December 1, 1996 through January 27, 1997. Options to purchase 127,000 Common
Shares were granted on January 15, 1997 independent of the Company's stock
option plans to new employees. Options may be granted under the 1997 Option
Plan at the Committee's Discretion, subject to shareholder approval of the 1997
Option Plan, if granted before such approval. The following table sets forth,
as to Bruce J. Barrett, Raymond W. Gunn, all current executive officers as a
group, all current directors who are not executive officers as a group, all
employees (including officers) who are not executive officers, as a group, and
all other consultants and advisors, as a group, the options granted under the
1997 Option Plan, the 1983 Plan, the 1991 Plan, the Directors Plan and
independent of any option plan (collectively, the "Plans") during the fiscal
year ended November 30, 1996, in Pre-Split Common Shares (the equivalent
Post-Split Common Share amounts would be one-tenth of the following amounts):
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<PAGE> 38
NEW PLAN BENEFITS
Somanetics Corporation 1983 Stock Option Plan
Somanetics Corporation 1991 Incentive Stock Option Plan
Somanetics Corporation 1997 Stock Option Plan
Somanetics Corporation Stock Options Granted Independent of Any Plan
Somanetics Corporation 1993 Director Stock Option Plan
<TABLE>
<CAPTION>
Number of Common
Shares Subject to Options
Granted Under the Plans
In the Fiscal Year Ended
Name and Position November 30, 1996 (1)
----------------- -----------------------
<S> <C>
Bruce J. Barrett, President and Chief Executive Officer . . . . . . . . . . . . 432,000
Raymond W. Gunn, Executive Vice President and Chief Financial Officer . . . . . 191,000
All current executive officers as a group (2 persons) . . . . . . . . . . . . 623,000
All current directors who are not executive officers as a group (3 persons) . . 110,000
All employees (including officers) who are not executive officers as a
group (36 persons) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 790,350
All other consultants and advisors as a group (7 persons) . . . . . . . . . . . 130,000
</TABLE>
________________________
(1) In light of the lack of 1995 bonuses, increases in 1996 salaries and a
1996 bonus plan, and to facilitate the retention of the Company's employees and
to align their interests with the interests of the Company's shareholders, in
December 1995, in exchange for the cancellation of certain outstanding stock
options, which were granted subject to shareholder approval, the Company
granted stock options to purchase an aggregate of 689,000 Pre-Split Common
Shares (68,900 Post-Split Common Shares) (most of which were granted
independent of the Company's stock option plans and none of which was granted
subject to shareholder approval) to each then current employee of the Company
and two advisors to the Company, including options to purchase 165,000 and
50,000 Pre-Split Common Shares (16,500 and 5,000 Post-Split 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
Plan, except that (i) the exercise price of the new options is the fair market
value of the Company's Common Shares as of the date of grant ($0.50 a Pre-Split
Common Share or $5.00 a Post-Split Common Share), (ii) the new options become
exercisable in one-fourth cumulative annual increments beginning December 22,
1996 and expire December 22, 2005, and (iii) the new options are not subject to
shareholder approval. The new options granted to officers are the same as
those granted to other persons, except that (i) the exercise price of the new
options granted to officers is the same as the exercise price of their
cancelled options ($1.3125 a Pre-Split Common Share or $13.125 a Post-Split
Common Share),
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<PAGE> 39
and (ii) the new options granted to the officers become exercisable at the same
times as the cancelled options: one-fourth cumulative annual increments
beginning March 13, 1996, expiring March 13, 2005. Each option also becomes
100% exercisable immediately 10 days before or upon specified changes in
control of the Company.
In addition, in December 1995 and January 1996, the Company granted
options to purchase an additional 624,850 Pre-Split Common Shares (62,485
Post-Split Common Shares) (most of which were granted independent of the
Company's stock option plans) to officers and employees of, and advisors to,
the Company, including options to purchase 267,000 and 141,000 Pre-Split Common
Shares (26,700 and 14,100 Post-Split Common Shares) granted to Messrs. Barrett
and Gunn, respectively.
The dollar values of such options cannot be determined because they
depend on the market value of the underlying shares on the date of exercise.
No associate of any director, nominee or executive officer has been granted
options under the Plans. In addition, no person not named above has received
five percent or more of the options authorized under the Plans, in the
aggregate.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE PROPOSED
1997 OPTION PLAN, AND YOUR PROXY WILL BE SO VOTED UNLESS YOU SPECIFY OTHERWISE.
IV. OTHER MATTERS
ANNUAL REPORT
A COPY OF THE ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR ENDED
NOVEMBER 30, 1996 ACCOMPANIES THIS PROXY STATEMENT. THE COMPANY FILES AN
ANNUAL REPORT ON FORM 10-K WITH THE SECURITIES AND EXCHANGE COMMISSION. THE
COMPANY WILL PROVIDE, WITHOUT CHARGE, TO EACH PERSON BEING SOLICITED BY THIS
PROXY STATEMENT, UPON THE WRITTEN REQUEST OF ANY SUCH PERSON, A COPY OF THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED NOVEMBER 30,
1996 (AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, EXCLUDING EXHIBITS
FOR WHICH A REASONABLE CHARGE SHALL BE IMPOSED). ALL SUCH REQUESTS SHOULD BE
DIRECTED TO SOMANETICS CORPORATION, 1653 EAST MAPLE ROAD, TROY, MICHIGAN
48083-4208, ATTENTION: INVESTOR RELATIONS DEPARTMENT.
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP are the independent accountants for the Company
and have reported on the Company's financial statements in the Company's 1996
Annual Report to Shareholders which accompanies this proxy statement. The
Company's independent accountants are appointed by the Board of Directors after
receiving the recommendation of its Audit Committee. The Company will not
select its independent accountants for the fiscal year ended November 30, 1997
until later in its fiscal year.
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<PAGE> 40
A representative of Deloitte & Touche LLP is expected to be present at
the Annual Meeting of Shareholders and will have the opportunity to make a
statement at the meeting if he desires to do so. The representative will also
be available to respond to appropriate questions.
SHAREHOLDER PROPOSALS
Proposals of shareholders that are intended to be presented at the
Company's 1998 Annual Meeting of Shareholders must be received by the Company's
Secretary at the Company's offices, 1653 East Maple Road, Troy, Michigan
48083-4208, no later than October 10, 1997 to be considered for inclusion in
the Proxy Statement and Proxy relating to that meeting. Such proposals should
be sent by certified mail, return receipt requested.
OTHER BUSINESS
Neither the Company nor the members of its Board of Directors intend
to bring before the Annual Meeting any matters other than those set forth in
the Notice of Annual Meeting of Shareholders, and they have no present
knowledge that other matters will be presented for action at the Annual Meeting
by others. However, if other matters are properly presented to the meeting,
the persons named in the enclosed Proxy intend to vote the shares represented
thereby in accordance with their best judgment.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The audited financial statements and the Company's "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in the Company's Annual Report to Shareholders for the fiscal year
ended November 30, 1996 are hereby specifically incorporated by reference into
this Proxy Statement.
By order of the Board of Directors
Bruce J. Barrett
President and Chief Executive Officer
Troy, Michigan
February 7, 1997
38
<PAGE> 41
SOMANETICS CORPORATION
ADMIT ONE
1997 ANNUAL MEETING OF SHAREHOLDERS
STERLING INN BANQUET & CONFERENCE CENTER
34911 VAN DYKE
STERLING HEIGHTS, MI 48312
TUESDAY, MARCH 25, 1997
10:00 A.M. E.S.T.
NOTE: DUE TO THE LIMITED SPACE OF THE MEETING FACILITY, THIS ADMISSION TICKET
ADMITS ONE PERSON TO THE SOMANETICS CORPORATION 1997 ANNUAL MEETING OF
SHAREHOLDERS. IF YOU DESIRE TO ATTEND THE MEETING IN PERSON, YOU MUST PRESENT
THIS ADMISSION TICKET OR PROOF OF BENEFICIAL OWNERSHIP OF SOMANETICS COMMON
SHARES AS OF JANUARY 27, 1997.
39
<PAGE> 42
EXHIBIT A
C&S 510 (Rev. 8/96)
MICHIGAN DEPARTMENT OF CONSUMER AND INDUSTRY SERVICES
CORPORATION, SECURITIES AND LAND DEVELOPMENT BUREAU
Date Received (FOR BUREAU USE ONLY)
Name
Robert J. Krueger
Honigman Miller Schwartz and Cohn
Address
2290 First National Building
City State Zip Code
Detroit, Michigan 48226-3583
EFFECTIVE DATE:
Document will be returned to the name and address you enter above
RESTATED ARTICLES OF INCORPORATION
FOR USE BY DOMESTIC PROFIT CORPORATIONS
(Please read information and instructions on the last page)
Pursuant to the provisions of Act 284, Public Acts of 1972, the
undersigned corporation executes the following Articles:
<TABLE>
<S><C>
1. The present name of the corporation is: Somanetics Corporation
---------------------------------------------------------------------------------------------
2. The identification number assigned by the Bureau is: 261-155
3. All former names of the corporation are: N/A
4. The date of filing the original Articles of Incorporation was: January 15, 1982
-----------------------------
</TABLE>
The following Restated Articles of Incorporation supersede the Articles
of Incorporation as amended and shall be the Articles of Incorporation for the
corporation:
ARTICLE I
The name of the corporation is: Somanetics Corporation
ARTICLE II
The purpose or purposes for which the corporation is formed is to engage in
any activity within the purposes for which corporations may be organized under
the Business Corporation Act of Michigan.
<PAGE> 43
ARTICLE III
The total authorized shares:
1. Common Shares 6,000,000, par value $0.01 per share
Preferred Shares 1,000,000, par value $0.01 per share
2. A statement of all or any of the relative rights, preferences and
limitations of the shares of each class is as follows:
a. Preferred Shares. The Board of Directors may cause the
Corporation to issue Preferred Shares in one or more series, each series to
bear a distinctive designation and to have such relative rights and preferences
as shall be prescribed by resolution of the Board. Such resolutions, when
filed, shall constitute amendments to these Articles of Incorporation.
b. Reverse Stock Split. Effective as of the close of business on
the date of filing these Restated Articles of Incorporation (the "Effective
Time"), the filing of these Restated Articles of Incorporation shall effect a
reverse stock split on the basis of one new Common Share for each ten then
issued and outstanding Common Shares, while maintaining the number of
authorized Common Shares and Preferred Shares, and their par values, as set
forth in this Article III (the "Reverse Split").
Immediately as of the Effective Time, and without any action by the
holders of outstanding Common Shares, but subject to the redemption of
fractional shares described below, outstanding certificates representing the
Corporation's Common Shares shall represent for all purposes, and each Common
Share issued and outstanding immediately before the Effective Time shall
automatically be converted into, new Common Shares in the ratio of ten old
Common Shares for one new Common Share, all by virtue of the Reverse Split and
without any action on the part of the holder of such Common Shares.
Notwithstanding any of the foregoing to the contrary, no scrip or
fractional Common Shares shall be issued in connection with the Reverse Split.
In lieu thereof each record holder of Common Shares as of the Effective Date
who would otherwise have been entitled to receive a fractional new Common Share
shall, upon surrender of such shareholder's certificates representing pre-split
Common Shares, be entitled to receive a cash payment equal to the closing sale
price of one Common Share on The Nasdaq SmallCap Market on the Effective Date,
or, if there are no reported sales on such date, the average of the last
reported high bid and low asked prices on such day multiplied by the fractional
share which would otherwise be issuable after giving effect to the Reverse
Split, and such amount shall in no event accrue any interest. As of the
Effective Time such fractional shares shall no longer represent equity
interests in the Corporation, and shall not be entitled to any voting, dividend
or other shareholder rights; rather, they shall represent only the right to
receive the cash payment described in this paragraph.
<PAGE> 44
ARTICLE IV
1. The address of the current registered office is:
1653 East Maple Road, Troy, Michigan 48083-4208
------------------------------------ --------------------------
(Street Address) (City) (ZIP Code)
2. The mailing address of the current registered office, if different than
above:
Michigan
-------------------------------------------- -----------------
(Street Address or P.O. Box) (City) (ZIP Code)
3. The name of the current resident agent is: Bruce J. Barrett
----------------------------
ARTICLE V
When a compromise or arrangement or a plan of reorganization of this
corporation is proposed between this corporation and its creditors or any class
of them or between this corporation and its shareholders or any class of them,
a court of equity jurisdiction within the state, on application of this
corporation or of a creditor or shareholder thereof, or on application of a
receiver appointed for the corporation, may order a meeting of the creditors or
class of creditors or of the shareholder or class of shareholders to be
affected by the proposed compromise or arrangement or reorganization, to be
summoned in such manner as the court directs. If a majority in number
representing 3/4 in value of the creditors or class of creditors, or of the
shareholders or class of shareholders to be affected by the proposed compromise
or arrangement or a reorganization, agree to a compromise or arrangement or a
reorganization of this corporation as a consequence of the compromise or
arrangement, the compromise or arrangement, the compromise or arrangement and
the reorganization, if sanctioned by the court to which the application has
been made, shall be binding on all the creditors or class of creditors, or on
all the shareholders or class of shareholders and also on this corporation.
<PAGE> 45
ARTICLE VI
A director of the Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for breach of the
director's fiduciary duty. However, this Article VI shall not eliminate or
limit the liability of a director for any of the following:
(1) A breach of the director's duty of loyalty to the Corporation
or its shareholders.
(2) Acts or omissions not in good faith or that involve
intentional misconduct or knowing violation of law.
(3) A violation of Section 551(1) of the Michigan Business
Corporation Act.
(4) A transaction from which the director derived an improper
personal benefit.
(5) An act or omission occurring before the effective date of this
Article VI.
Any repeal or modification of this Article VI by the shareholders of the
Corporation shall not adversely affect any right or protection of any director
of the Corporation existing at the time of, or for or with respect to, any acts
or omissions occurring before such repeal or modification.
<PAGE> 46
ARTICLE VII
The business and affairs of the Corporation shall be managed by or under
the direction of a Board of Directors consisting of not less than three or more
than fifteen directors, the exact number of directors to be determined from time
to time solely by a resolution adopted by an affirmative vote of a majority of
the directors then in office. The directors shall be divided into three
classes, designated Class I, Class II and Class III. Each class shall consist,
as nearly as may be possible, of one-third of the total number of directors
constituting the entire Board of Directors. At the 1992 Annual Meeting of
Shareholders, Class I directors shall be elected for a one-year term, Class II
directors for a two-year term and Class III directors for a three-year term. At
each succeeding annual meeting of shareholders, commencing in 1993, successors
to the class of directors whose term expires at that annual meeting shall be
elected for a three-year term.
If the number of directors is changed, any increase or decrease shall be
apportioned among the classes of directors so as to maintain the number of
directors in each class as nearly equal as possible, but in no case will a
decrease in the number of directors shorten the term of any incumbent director.
When the number of directors is increased by the Board of Directors and any
newly-created directorships are filled by the Board, the additional directors
shall be classified as provided by the Board.
A director shall hold office until the meeting for the year in which his or
her term expires and until his or her successor shall be elected and shall
qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office. Newly created directorships resulting
from an increase in the number of directors and any vacancy on the Board of
Directors may be filled by an affirmative vote of a majority of the directors
then in office. If the number of directors then in office is less than a
quorum, such newly created directorships and vacancies may be filled by a
majority of the directors then in office, although less than a quorum, or by the
sole remaining director. A director elected by the Board of Directors to fill a
vacancy shall hold office until the next election of the class for which the
director shall have been chosen and until his or her successor shall be elected
and shall qualify. A director or the entire Board of Directors ma be removed
only for cause.
Notwithstanding the foregoing, whenever the holders of any one or more
classes of Preferred Shares or series thereof issued by the Corporation shall
have the right, voting separately by class or series, to elect directors at an
annual or special meeting of shareholders, the election, term of office, filling
of vacancies and other features of such directorship shall be governed by the
terms of these Restated Articles of Incorporation applicable thereto, and such
directors so elected shall not be divided into classes pursuant to this
Article.
This Article VII may only be amended by the affirmative vote of holders of
90% of the outstanding Common Shares of the Corporation, in addition to the vote
otherwise required by the Michigan Business Corporation Act.
<PAGE> 47
ARTICLE VII (ADDITIONAL PROVISIONS, IF ANY, MAY BE INSERTED HERE; ATTACH
ADDITIONAL PAGES IF NEEDED.)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5. COMPLETE SECTION (a) IF THE RESTATED ARTICLES WERE ADOPTED BY THE UNANIMOUS
CONSENT OF THE INCORPORATOR(S) BEFORE THE FIRST MEETING OF THE BOARD OF
DIRECTORS; OTHERWISE, COMPLETE SECTION (b). DO NOT COMPLETE BOTH.
a. [ ] These Restated Articles of Incorporation were duly adopted on the
___________ day of _____________, 19________, in accordance with the
provisions of Section 642 of the Act by the unanimous consent of the
incorporator(s) before the first meeting of the Board of Directors.
Signed this day of , 19 .
--------------- -------------- -----------
---------------------------------- -----------------------------------
---------------------------------- -----------------------------------
(Signatures of Incorporators; Type or Print Name Under Each Signature)
b. [X] These Restated Articles of Incorporation were duly adopted on the
25th day of March, 1997 in accordance with the provisions of
Section 642 of the Act and: (check one of the following)
[ ] were duly adopted by the Board of Directors without a vote of
the shareholders. These Restated Articles of Incorporation only
restate and integrate and do not further amend the provisions of
the Articles of Incorporation as heretofore amended and there is
no material discrepancy between those provisions and the
provisions of these Restated Articles.
[X] were duly adopted by the shareholders. The necessary number of
shares as required by statute were voted in favor of these
Restated Articles.
[ ] were duly adopted by the written consent of the shareholders
having not less than the minimum number of votes required by
statute in accordance with Section 407(1) of the Act. Written
notice to shareholders who have not consented in writing has
been given. (Note: Written consent by less than all of the
shareholders is permitted only if such provision appears in the
Articles of Incorporation.)
[ ] were duly adopted by the written consent of all the shareholders
entitled to vote in accordance with section 407(2) of the Act.
Signed this day of , 1997
--------- -------
By
-----------------------------------------------------
(Signature of President, Vice-President,
Chairperson, or Vice-Chairperson)
Bruce J. Barrett, President
--------------------------------------------------------
(Type or Print Name) (Type or Print Title)
<PAGE> 48
Name of person or organization Preparer's name and business
remitting fees: telephone number:
Honigman Miller Schwartz and Cohn Robert J. Krueger
----------------------------------- -----------------------------
(313) 256-7675
----------------------------------- -----------------------------
INFORMATION AND INSTRUCTIONS
1. The articles of incorporation cannot be restated until this form, or a
comparable document, is submitted.
2. Submit one original of this document. Upon filing, the document will be
added to the records of the Corporation, Securities and Land Development
Bureau. The original will be returned to the address appearing in the box
on the front as evidence of filing.
Since this document will be maintained on optical disk media, it is
important that the filing be legible. Documents with poor black and white
contrast, or otherwise illegible, will be rejected.
3. This document is to be used pursuant to sections 641 through 643 of the Act
for the purpose of restating the articles of incorporation of a domestic
profit corporation. Restated articles of incorporation are an integration
into a single instrument of the current provisions of the corporation's
articles of incorporation, along with any desired amendments to those
articles.
4. Restated articles of incorporation which do not amend the articles of
incorporation may be adopted by the board of directors without a vote of the
shareholders. Restated articles of incorporation which amend the articles of
incorporation require adoption by the shareholders. Restated articles of
incorporation submitted before the first meeting of the board of directors
require adoption by all of the incorporators.
5. Item 2 - Enter the identification number previously assigned by the
Bureau. If this number is unknown, leave it blank.
6. The duration of the corporation should be stated in the restated articles of
incorporation only if it not perpetual.
7. This document is effective on the date endorsed "filed" by the Bureau. A
later effective date, no more than 90 days after the date of delivery, may
be stated as an additional article.
8. If the restated articles are adopted before the first meeting of the board
of directors, item 5(a) must be completed and signed in ink by a majority of
the incorporators. Other restated articles must signed by the president,
vice-president, chairperson or vice-chairperson of the corporation.
9. FEES: Make remittance payable to the State of Michigan. Include
corporation name and identification number on check or money order.
<TABLE>
<S><C>
NONREFUNDABLE FEE.......................................................................................$10.00
TOTAL MINIMUM FEE.......................................................................................$10.00
ADDITIONAL FEES DUE FOR INCREASED AUTHORIZED SHARES ARE:
each additional 20,000 authorized shares or portion thereof..................................$30.00
maximum fee per filing for first 10,000,000 authorized shares.............................$5,000.00
each additional 20,000 authorized shares or portion thereof in excess of 10,000,000 shares...$30.00
maximum fee per filing for authorized shares in excess of 10,000,000 shares.............$200,000.00
10. Mail form and fee to: The office is located at:
Michigan Department of Consumer and Industry Services 6546 Mercantile Way
Corporation, Securities and Land Development Bureau Lansing, MI 48910
Corporation Division (517) 334-6302
P.O. Box 30054
Lansing, MI 48909-7554
</TABLE>
<PAGE> 49
EXHIBIT B
SOMANETICS CORPORATION
1997 STOCK OPTION PLAN
1. Definitions: As used herein, the following terms shall have
the following meanings:
(a) "Code" shall mean the Internal Revenue Code of 1986,
as amended, and the applicable rules and regulations thereunder.
(b) "Committee" shall mean, (i) with respect to
administration of the Plan regarding Participants who are subject to
Section 16(a) and (b) of the Exchange Act, a committee meeting the
standards of Rule 16b-3 of the Rules and Regulations under the
Exchange Act, or any similar successor rule, appointed by the Board of
Directors of the Company to perform any of the functions and duties of
the Committee under the Plan, or the Board of Directors as a whole,
and (ii) with respect to administration of the Plan regarding all
other Participants, such committee or the Board of Directors of the
Company, as described in clause (i), or such other committee or entity
appointed by the Board of Directors of the Company to perform any of
the functions and duties of the Committee under the Plan.
(c) "Common Shares" shall mean the Common Shares, par
value $.01 per share, of the Company.
(d) "Company" shall mean Somanetics Corporation, a
Michigan corporation, or any successor thereof.
(e) "Discretion" shall mean the sole discretion of the
Committee, with no requirement whatsoever that the Committee follow
past practices, act in a manner consistent with past practices, or
treat any key employee, director, consultant or advisor in a manner
consistent with the treatment afforded other key employees, directors,
consultants or advisors with respect to the Plan or otherwise.
(f) "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended, and the rules and regulations thereunder.
(g) "Incentive Option" shall mean an option to purchase
Common Shares which meets the requirements set forth in the Plan and
also is intended to be, and qualifies as, an incentive stock option
within the meaning of Section 422 of the Code.
(h) "Nonqualified Option" shall mean an option to
purchase Common Shares which meets the requirements set forth in the
Plan but is not intended to be, or does not qualify as, an incentive
stock option within the meaning of the Code.
<PAGE> 50
(i) "Participant" shall mean any individual designated by
the Committee under Paragraph 6 for participation in the Plan.
(j) "Plan" shall mean this Somanetics Corporation 1997
Stock Option Plan.
(k) "Securities Act" shall mean the Securities Act of
1933, as amended, and the rules and regulations thereunder.
(l) "Subsidiary" shall mean any corporation or other
entity in which the Company has a direct or indirect ownership
interest of 50% or more of the total combined voting power of all
classes of outstanding voting equity interests.
2. Purpose of Plan: The purpose of the Plan is to provide key
employees (including officers), directors, consultants and advisors of the
Company and its Subsidiaries (collectively, "key employees") with an increased
incentive to make significant and extraordinary contributions to the long-term
performance and growth of the Company and its Subsidiaries, to join the
interests of key employees, directors, consultants and advisors with the
interests of the shareholders of the Company, and to facilitate attracting and
retaining key employees, directors, consultants and advisors of exceptional
ability.
3. Administration: The Plan shall be administered by the
Committee. Subject to the provisions of the Plan, the Committee shall
determine, from those eligible to be Participants under the Plan, the persons
to be granted stock options, the amount of stock to be optioned to each such
person, the time such options shall be granted and the terms and conditions of
any stock options. Such terms and conditions may, in the Committee's
Discretion, include, without limitation, provisions providing for termination
of the option, forfeiture of the gain on any option exercises or both if the
Participant competes with the Company or otherwise acts contrary to the
Company's interests, and provisions imposing restrictions, potential forfeiture
or both on shares acquired upon exercise of options granted pursuant to this
Plan. The Committee may condition any grant on the potential Participant's
agreement to such terms and conditions.
Subject to the provisions of the Plan, the Committee is authorized to
interpret the Plan, to promulgate, amend and rescind rules and regulations
relating to the Plan and to make all other determinations necessary or
advisable for its administration. Interpretation and construction of any
provision of the Plan by the Committee shall, unless otherwise determined by
the Board of Directors of the Company, be final and conclusive. A majority of
the Committee shall constitute a quorum, and the acts of a majority of the
members present at any meeting at which a quorum is present, or acts approved
in writing by a majority of the Committee, shall be the acts of the Committee.
4. Indemnification: In addition to such other rights of
indemnification as they may have, the members of the Committee shall be
indemnified by the Company in connection with any claim, action, suit or
proceeding relating to any action taken or failure to act under or in
connection with the Plan or any option granted hereunder to the full extent
provided for under
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<PAGE> 51
the Company's articles of incorporation or bylaws with respect to
indemnification of directors of the Company.
5. Maximum Number of Shares Subject to Plan: The maximum number
of shares with respect to which stock options may be granted under the Plan
shall be an aggregate of 295,000 Common Shares, which may consist in whole or
in part of authorized and unissued or reacquired Common Shares. Unless the
Plan shall have been terminated, shares covered by the unexercised portion of
canceled, expired or otherwise terminated options under the Plan shall again be
available for option and sale.
Subject to Paragraph 16, the number and type of shares subject to each
outstanding stock option, the option price with respect to outstanding stock
options, the aggregate number and type of shares remaining available under the
Plan, and the maximum number and type of shares that may be granted to any
Participant in any fiscal year of the Company pursuant to Paragraph 6, shall be
subject to such adjustment as the Committee, in its Discretion, deems
appropriate to reflect such events as stock dividends, stock splits,
recapitalizations, mergers, statutory share exchanges or reorganizations of or
by the Company; provided that no fractional shares shall be issued pursuant to
the Plan, no rights may be granted under the Plan with respect to fractional
shares, and any fractional shares resulting from such adjustments shall be
eliminated from any outstanding option.
6. Participants: The Committee shall determine and designate
from time to time, in its Discretion, those key employees (including officers),
directors, consultants and advisors of or to the Company or any Subsidiary to
whom options are to be granted and who thereby become Participants under the
Plan; provided, however, that (a) Incentive Options shall be granted only to
employees (as defined in the Code) of the Company or a corporate Subsidiary, to
the extent required by Section 422 of the Code, or any successor provision, and
(b) no Participant may be granted stock options to purchase more than 200,000
Common Shares in the aggregate in any fiscal year of the Company, subject to
any adjustments provided in the final paragraph of Paragraph 5 and in Paragraph
16.
7. Allotment of Shares: The Committee shall determine and fix
the number of Common Shares to be offered to each Participant; provided that no
Incentive Option may be granted under the Plan to any one Participant which
would result in the aggregate fair market value, determined as of the date the
option is granted, of the underlying stock with respect to which Incentive
Options are exercisable for the first time by such individual during any
calendar year (under all of such plans of the Company and its parent and
Subsidiary corporations) exceeding $100,000.
8. Option Price: Subject to the rules set forth in this
Paragraph 8, the Committee, in its Discretion, shall establish the option price
at the time any option is granted. With respect to an Incentive Option, such
option price shall not be less than 100% of the fair market value of the stock
on the date on which such option is granted; provided that with respect to an
Incentive Option granted to an employee who at the time of the grant owns
(after applying the
-3-
<PAGE> 52
attribution rules of Section 424(d) of the Code) more than 10% of the total
combined voting stock of the Company or of any parent or Subsidiary, the option
price shall not be less than 110% of the fair market value of the stock subject
to the Incentive Option on the date such option is granted. With respect to a
Nonqualified Option, the option price shall be not less than the par value, if
any, of the Common Shares. Fair market value of a share shall be determined by
the Committee and may be determined by using the closing sale price of the
Company's stock on any exchange or other market on which the Common Shares
shall be traded on such date, or if there is no sale on such date, on the next
following date on which there is a sale, or the average of the closing bid and
asked prices in any market or quotation system in which the Common Shares shall
be listed or traded on such date. The option price will be subject to
adjustment in accordance with the provisions of Paragraphs 5 and 16 of the
Plan.
9. Granting and Exercise of Options: The granting of options
under the Plan shall be effected in accordance with determinations made by the
Committee pursuant to the provisions of the Plan, by execution of instruments
in writing in form approved by the Committee. Such instruments shall
constitute binding contracts between the Company and the Participant.
Subject to the terms of the Plan, the Committee, in its Discretion,
may grant to Participants Incentive Options, Nonqualified Options or any
combination thereof. Each option granted under the Plan shall designate the
number of shares covered thereby, if any, with respect to which the option is
an Incentive Option and the number of shares covered thereby, if any, with
respect to which the option is a Nonqualified Option.
Subject to the terms of the Plan, each option granted under the Plan
shall be exercisable at any such time or times or in any such installments as
may be determined by the Committee in its Discretion; provided that the
aggregate fair market value (determined as of the date the option is granted)
of the underlying stock with respect to which Incentive Options are exercisable
for the first time by such individual during any calendar year (under all of
such plans of the Company and its parent and Subsidiary corporations) shall not
exceed $100,000. Except as provided in Paragraph 13, options may be exercised
only while the Participant is an employee, director, consultant or advisor of
the Company or a Subsidiary.
Notwithstanding any other term or provision of this Plan, but subject
to the requirements of the Code with respect to Incentive Options that are
intended to remain Incentive Options, in connection with a Participant ceasing
to be an employee of the Company or a Subsidiary for any reason, the stock
option agreement may provide for the acceleration of, or the Committee may
accelerate, in its Discretion (exercised at the date of the grant of the stock
option or after the date of grant), in whole or in part, the time or times or
installments with respect to which any option granted under this Plan shall be
exercisable in connection with termination of a Participant's employment with
the Company or a Subsidiary, subject to any restrictions, terms and conditions
fixed by the Committee either at the date of the award or at the date it
exercises such Discretion.
Successive stock options may be granted to the same Participant,
whether or not the option or options previously granted to such Participant
remain unexercised. A Participant may exercise
-4-
<PAGE> 53
any option granted under the Plan, if then exercisable, notwithstanding that
options granted to such Participant prior to the option then being exercised
remain unexercised.
10. Payment of Option Price: At the time of the exercise in whole
or in part of any option granted under this Plan, payment in full in cash, or
with the consent of the Committee, in its Discretion, in Common Shares or by a
promissory note payable to the order of the Company which is acceptable to the
Committee, shall be made by the Participant for all shares so purchased. Such
payment may, with the consent of the Committee, in its Discretion, also consist
of a cash down payment and delivery of such a promissory note in the amount of
the unpaid exercise price. In the Discretion of, and subject to such
conditions as may be established by, the Committee, payment of the option price
may also be made by the Company retaining from the shares to be delivered upon
exercise of the stock option that number of shares having a fair market value
on the date of exercise equal to the option price of the number of shares with
respect to which the Participant exercises the option. In the Discretion of
the Committee, a Participant may exercise an option, if then exercisable, in
whole or in part, by delivery to the Company of written notice of the exercise
in such form as the Committee may prescribe, accompanied by irrevocable
instructions to a stock broker to promptly deliver to the Company full payment
for the shares with respect to which the option is exercised from the proceeds
of the stock broker's sale of or loan against some or all of the shares. Such
payment may also be made in such other manner as the Committee determines is
appropriate, in its Discretion. No Participant shall have any of the rights of
a shareholder of the Company under any option until the actual issuance of
shares to such Participant, and prior to such issuance no adjustment shall be
made for dividends, distributions or other rights in respect of such shares,
except as provided in Paragraphs 5 and 16.
11. Transferability of Option: Except as otherwise provided in
this Paragraph 11, (i) to the extent required by Section 422 of the Code, or
any successor section, but only with respect to Incentive Options, or (ii) to
the extent determined by the Committee in its Discretion (either by resolution
or by a provision in, or amendment to, the option), (a) no option granted under
the Plan to a Participant shall be transferable by such Participant otherwise
than (1) by will, or (2) by the laws of descent and distribution or, (3) with
respect to Nonqualified Options only (unless permitted by Section 422 of the
Code or any successor section), pursuant to a qualified domestic relations
order as defined in the Code or Title I of the Employee Retirement Income
Security Act, or the rules thereunder, and (b) such option shall be
exercisable, during the lifetime of the Participant, only by the Participant.
The Committee may, in its Discretion, authorize all or a portion of
the options to be granted to an optionee to be on terms which permit transfer
by such optionee to, and the exercise of such option by, (i) the spouse,
children or grandchildren of the optionee ("Immediate Family Members"), (ii) a
trust or trusts for the exclusive benefit of such Immediate Family Members,
(iii) a partnership in which such Immediate Family Members are the only
partners, or (iv) such other persons or entities as determined by the
Committee, in its Discretion, on such terms and conditions as the Committee, in
its Discretion, may determine; provided that (y) the stock option agreement
pursuant to which such options are granted must be approved by the Committee
and
-5-
<PAGE> 54
must expressly provide for transferability in a manner consistent with this
Paragraph 11, and (z) subsequent transfers of transferred options shall be
prohibited except for transfers the original optionee would be permitted to
make (if he or she were still the owner of the option) in accordance with this
Paragraph 11.
Following transfer, any such options shall continue to be subject to
the same terms and conditions as were applicable immediately before transfer,
provided that for purposes of Paragraphs 9, 10, 14, 16 and 18 the term
"Participant" shall be deemed to refer to the transferee. The events of
termination of employment of Paragraph 13 shall continue to be applied with
respect to the original optionee, following which the options shall be
exercisable by the transferee only to the extent, and for the periods,
specified in Paragraph 13. The original optionee shall remain subject to
withholding taxes and related requirements upon exercise provided in Paragraph
15. The Company shall have no obligation to provide any notice to any
transferee, including, without limitation, notice of any termination of the
option as a result of termination of the original optionee's employment with,
or other service to, the Company.
12. Continuance of Employment; No Right to Continued Employment:
The Committee may require, in its Discretion, that any Participant under the
Plan to whom an option shall be granted shall agree in writing as a condition
of the granting of such option to remain in his or her position as an employee,
director, consultant or advisor of the Company or a Subsidiary for a designated
minimum period from the date of the granting of such option as shall be fixed
by the Committee.
Nothing contained in the Plan or in any option granted pursuant to the
Plan, nor any action taken by the Committee hereunder, shall confer upon any
Participant any right with respect to continuation of employment, consultation
or other service by or to the Company or a Subsidiary nor interfere in any way
with the right of the Company or a Subsidiary to terminate such person's
employment, consultation or other service at any time.
13. Termination of Employment; Expiration of Options: Subject to
the other provisions of the Plan, including, without limitation, Paragraphs 9
and 16 and this Paragraph 13, all rights to exercise options shall terminate
when a Participant ceases to be an employee, director, consultant or advisor of
or to the Company or a Subsidiary for any cause, except that the Committee may,
in its Discretion, permit the exercise of all or any portion of the options
granted to such Participant
(i) for a period not to exceed three months following such
termination with respect to Incentive Options that are intended to
remain Incentive Options if such termination is not due to death or
permanent disability of the Participant,
(ii) for a period not to exceed one year following termination
of employment with respect to Incentive Options that are Intended to
remain Incentive Options if termination of employment is due to the
death or permanent disability of the Participant, and
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<PAGE> 55
(iii) for a period not to extend beyond the expiration date
with respect to Nonqualified Options or Incentive Options that are not
intended to remain Incentive Options,
all subject to any restrictions, terms and conditions fixed by the Committee
either at the date of the award or at the date it exercises such Discretion.
In no event, however, shall an option be exercisable after its expiration date,
and, unless the Committee in its Discretion determines otherwise (pursuant to
Paragraph 9 or Paragraph 16), an option may only be exercised after termination
of a Participant's employment, consultation or other service by or to the
Company to the extent exercisable on the date of such termination or to the
extent exercisable as a result of the reason for such termination. The
Committee may evidence the exercise of its Discretion under this Paragraph 13
in any manner it deems appropriate, including by resolution or by a provision
in, or amendment to, the option.
If not sooner terminated, each stock option granted under the Plan
shall expire not more than 10 years from the date of the granting thereof;
provided that with respect to an Incentive Option granted to a Participant who,
at the time of the grant, owns (after applying the attribution rules of Section
424(d) of the Code) more than 10% of the total combined voting stock of all
classes of stock of the Company or of any parent or Subsidiary, such option
shall expire not more than 5 years after the date of granting thereof.
14. Investment Purpose: If the Committee in its Discretion
determines that as a matter of law such procedure is or may be desirable, it
may require a Participant, upon any exercise of any option granted under the
Plan or any portion thereof and as a condition to the Company's obligation to
deliver certificates representing the shares subject to exercise, to execute
and deliver to the Company a written statement, in form satisfactory to the
Committee, representing and warranting that the Participant's purchase of
Common Shares upon exercise thereof shall be for such person's own account, for
investment and not with a view to the resale or distribution thereof and that
any subsequent sale or offer for sale of any such shares shall be made either
pursuant to (a) a Registration Statement on an appropriate form under the
Securities Act, which Registration Statement has become effective and is
current with respect to the shares being offered and sold, or (b) a specific
exemption from the registration requirements of the Securities Act, but in
claiming such exemption the Participant shall, prior to any offer for sale or
sale of such shares, obtain a favorable written opinion from counsel for or
approved by the Company as to the availability of such exemption. The Company
may endorse an appropriate legend referring to the foregoing restriction upon
the certificate or certificates representing any shares issued or transferred
to the Participant upon exercise of any option granted under the Plan.
15. Withholding Payments: If upon the exercise of any
Nonqualified Option or a disqualifying disposition (within the meaning of
Section 422 of the Code) of shares acquired upon exercise of an Incentive
Option, there shall be payable by the Company or a Subsidiary any amount for
income tax withholding, in the Committee's Discretion, either the Participant
shall pay such amount to the Company, or the amount of Common Shares delivered
by the Company to the Participant shall be appropriately reduced, to reimburse
the Company or such Subsidiary
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<PAGE> 56
for such payment. The Company or any of its Subsidiaries shall have the right
to withhold the amount of such taxes from any other sums or property due or to
become due from the Company or any of its Subsidiaries to the Participant upon
such terms and conditions as the Committee shall prescribe. The Company may
also defer issuance of the stock upon exercise of such option until payment by
the Participant to the Company of the amount of any such tax. The Committee
may, in its Discretion, permit Participants to satisfy such withholding
obligations, in whole or in part, by electing to have the amount of Common
Shares delivered or deliverable by the Company upon exercise of a stock option
appropriately reduced, or by electing to tender Common Shares back to the
Company subsequent to exercise of a stock option to reimburse the Company or
such Subsidiary for such income tax withholding, subject to such rules and
regulations, if any, as the Committee may adopt. The Committee may make such
other arrangements with respect to income tax withholding as it shall
determine.
16. Extraordinary Transactions: In case the Company (i)
consolidates with or merges into any other corporation or other entity and is
not the continuing or surviving entity of such consolidation or merger, or (ii)
permits any other corporation or other entity to consolidate with or merge into
the Company and the Company is the continuing or surviving entity but, in
connection with such consolidation or merger, the Common Shares are changed
into or exchanged for stock or other securities of any other corporation or
other entity or cash or any other assets, or (iii) transfers all or
substantially all of its properties and assets to any other corporation or
other person or entity, or (iv) dissolves or liquidates, or (v) effects a
capital reorganization or reclassification in such a way that holders of Common
Shares shall be entitled to receive stock, securities, cash or other assets
with respect to or in exchange for the Common Shares, then, and in each such
case, proper provision shall be made so that, each Participant holding a stock
option upon the exercise of such option at any time after the consummation of
such consolidation, merger, transfer, dissolution, liquidation, reorganization
or reclassification (each transaction, for purposes of this Paragraph 16, being
herein called a "Transaction"), shall be entitled to receive (at the aggregate
option price in effect for all Common Shares issuable upon such exercise
immediately prior to such consummation and as adjusted to the time of such
Transaction), in lieu of Common Shares issuable upon such exercise prior to
such consummation, the stock and other securities, cash and assets to which
such Participant would have been entitled upon such consummation if such
Participant had so exercised such stock option in full immediately prior
thereto (subject to adjustments subsequent to such Transaction provided for in
Paragraph 5).
Notwithstanding anything in the Plan to the contrary, in connection
with any Transaction and effective as of a date selected by the Committee,
which date shall, in the Committee's judgment, be far enough in advance of the
Transaction to permit Participants holding stock options to exercise their
options and participate in the Transaction as a holder of Common Shares, the
Committee, acting in its Discretion without the consent of any Participant, may
effect one or more of the following alternatives with respect to all of the
outstanding stock options (which alternatives may be made conditional on the
occurrence of the applicable Transaction and which may, if permitted by law,
vary among individual Participants): (a) accelerate the time at which stock
options then outstanding may be exercised so that such stock options may be
exercised in full for a limited period of time on or before a specified date
fixed by the Committee
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<PAGE> 57
after which specified date all unexercised stock options and all rights of
Participants thereunder shall terminate; (b) accelerate the time at which stock
options then outstanding may be exercised so that such stock options may be
exercised in full for their then remaining term; or (c) require the mandatory
surrender to the Company of outstanding stock options held by such Participants
(irrespective of whether such stock options are then exercisable) as of a date,
before or not later than sixty days after such Transaction, specified by the
Committee, and in such event the Company shall thereupon cancel such stock
options and shall pay to each Participant an amount of cash equal to the excess
of the fair market value of the aggregate Common Shares subject to such stock
option, determined as of the date such Transaction is effective, over the
aggregate option price of such shares, less any applicable withholding taxes;
provided, however, the Committee shall not select an alternative (unless
consented to by the Participant) such that, if a Participant exercised his or
her accelerated stock option pursuant to alternative (a) or (b) and
participated in the Transaction or received cash pursuant to alternative (c),
the alternative would result in the Participant's owing any money by virtue of
the operation of Section 16(b) of the Exchange Act. If all such alternatives
have such a result, the Committee shall, in its Discretion, take such action to
put such Participant in as close to the same position as such Participant would
have been in had alternative (a), (b) or (c) been selected but without
resulting in any payment by such Participant pursuant to Section 16(b) of the
Exchange Act. Notwithstanding the foregoing, with the consent of affected
Participants, each with respect to such Participant's option only, the
Committee may in lieu of the foregoing make such provision with respect to any
Transaction as it deems appropriate.
17. Effectiveness of Plan: This Plan shall be effective on the
date the Board of Directors of the Company adopts this Plan, provided that the
shareholders of the Company approve the Plan within 12 months before or after
its adoption by the Board of Directors. Options may be granted before
shareholder approval of this Plan, but each such option shall be subject to
shareholder approval of this Plan. No option granted under this Plan shall be
exercisable unless and until this Plan shall have been approved by the
Company's shareholders.
18. Termination, Duration and Amendments to the Plan: The Plan
may be abandoned or terminated at any time by the Board of Directors of the
Company. Unless sooner terminated, the Plan shall terminate on the date ten
years after the earlier of its adoption by the Board of Directors or its
approval by the shareholders of the Company, and no stock options may be
granted under the Plan thereafter. The termination of the Plan shall not
affect the validity of any option which is outstanding on the date of
termination.
For the purpose of conforming to any changes in applicable law or
governmental regulations, or for any other lawful purpose, the Board of
Directors shall have the right, with or without approval of the shareholders of
the Company, to amend or revise the terms of this Plan or any option agreement
under this Plan at any time; provided, however, that (i) to the extent required
by Section 162(m) of the Code and related regulations, or any successor rule,
but only with respect to amendments or revisions affecting Participants whose
compensation is subject to Section 162(m) of the Code, and to the extent
required by Section 422 of the Code, or any successor section, but only with
respect to Incentive Options, no such amendment or revision
-9-
<PAGE> 58
shall increase the maximum number of shares in the aggregate which are subject
to this Plan (subject, however, to the provisions of Paragraphs 5 and 16)
without the approval or ratification of the shareholders of the Company, and
(ii) no such amendment or revision shall change the option price (except as
contemplated by Paragraphs 5 and 16) or alter or impair any option which shall
have been previously granted under this Plan, in a manner adverse to a
Participant, without the consent of such Participant.
As adopted by the Board of Directors on January 15, 1997.
-10-
<PAGE> 59
PROXY
SOMANETICS CORPORATION
BOARD OF DIRECTORS PROXY FOR ANNUAL MEETING MARCH 25, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF SOMANETICS CORPORATION
The undersigned hereby appoints Bruce J. Barrett and Raymond W. Gunn, and each
of them, attorneys and proxies with full power of substitution in each of them,
in the name, place and stead of the undersigned to vote as proxy all the Common
Shares, par value $.01 per share, of the undersigned in Somanetics Corporation
(the "Company") which the undersigned is entitled to vote at the Annual Meeting
of Shareholders of the Company to be held on March 25, 1997, and at any and all
adjournments thereof.
<TABLE>
<S><C>
1. Election of Directors / / FOR THE NOMINEE LISTED / / WITHHOLD AUTHORITY
(EXCEPT AS MARKED TO THE TO VOTE FOR THE
CONTRARY BELOW) NOMINEE LISTED
Nominee: H. Raymond Wallace
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE THAT NOMINEE'S
NAME IN THE SPACE PROVIDED BELOW.)
---------------------------------------------------------------------------
2. Approval of the 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.
/ / FOR / / AGAINST / / ABSTAIN
3. Approval of 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 issurance puruant to options to be granted to key employees,
directors, consultants and advisors of the Company, all subject to approval of the reverse stock split described above.
/ / FOR / / AGAINST / / ABSTAIN
4. In their discretion with respect to any other matters that may properly come before the meeting.
(See reverse side)
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE SPECIFICATIONS MADE HEREIN. THE SHARES REPRESENTED BY
THIS PROXY WILL BE VOTED FOR THE ELECTION OF THE DIRECTOR NAMED IN PROPOSAL 1 AND FOR PROPOSALS 2 AND 3 IF NO INSTRUCTIONS TO THE
CONTRARY ARE INDICATED OR IF NO INSTRUCTION IS GIVEN.
</TABLE>
PLEASE DATE, SIGN AND RETURN THIS PROXY
PROMPTLY IN THE ENCLOSED ENVELOPE.
Date:
--------------------------, 1997
--------------------------------
Signature(s)
Date:
--------------------------, 1997
-------------------------------------
Signature(s)
(NOTE: PLEASE SIGN EXACTLY AS NAME
APPEARS HEREON. EXECUTORS, ADMINISTRATORS,
ATTORNEYS, GUARDIANS, TRUSTEES, ETC. SHOULD
SO INDICATE WHEN SIGNING, GIVING FULL TITLE
AS SUCH. IF SIGNER IS A CORPORATION,
EXECUTE IN FULL CORPORATE NAME BY
AUTHORIZED OFFICER. IF SHARES ARE HELD IN
THE NAME OF TWO OR MORE PERSONS, ALL SHOULD
SIGN.)
