<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended MAY 31, 1997
OR
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
------------ ------------
Commission file number 0-19095
SOMANETICS CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2394784
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1653 EAST MAPLE ROAD,
TROY, MICHIGAN
48083-4208
(Address of principal executive offices)
(Zip Code)
(248) 689-3050
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Number of common shares outstanding at June 27, 1997: 4,285,334
<PAGE> 2
PART I FINANCIAL INFORMATION
SOMANETICS CORPORATION
(A development stage company)
BALANCE SHEETS
<TABLE>
<CAPTION>
May 31, November 30,
1997 1996
ASSETS -------------- --------------
CURRENT ASSETS: (Unaudited) (Audited)
<S> <C> <C>
Cash and cash equivalents ........................................ $ 432,217 $ 3,291,911
Accounts receivable, net of allowance for doubtful accounts of
approximately $53,000 and $46,000 at May 31, 1997 and
November 30, 1996, respectively ............................... 503,288 191,436
Inventory, net ................................................... 844,844 931,135
Prepaid expenses ................................................. 37,200 65,435
------------ ------------
Total current assets .......................................... 1,817,549 4,479,917
------------ ------------
PROPERTY AND EQUIPMENT (at cost):
Machinery and equipment .......................................... 495,314 479,757
Furniture and fixtures ........................................... 193,683 193,343
Leasehold improvements ........................................... 166,770 166,770
------------ ------------
Total ......................................................... 855,767 839,870
Less accumulated depreciation and amortization ................... (763,861) (743,775)
------------ ------------
Net property and equipment .................................... 91,906 96,095
------------ ------------
OTHER ASSETS:
Patents and trademarks, net ...................................... 75,673 79,129
Other ............................................................ 204,816 16,600
------------ ------------
Total other assets ............................................ 280,489 95,729
------------ ------------
TOTAL ASSETS ........................................................ $ 2,189,944 $ 4,671,741
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................. $ 634,950 $ 364,032
Accrued liabilities .............................................. 242,916 254,110
------------ ------------
Total current liabilities ..................................... 877,866 618,142
------------ ------------
COMMITMENTS AND CONTINGENCIES ....................................... -- --
SHAREHOLDERS' EQUITY:
Preferred shares; authorized, 1,000,000 shares of $.01 par value;
no shares issued or outstanding ............................... -- --
Common shares; authorized, 6,000,000 shares of $.01 par value;
issued and outstanding, 2,285,334 and 2,285,351 shares at
May 31, 1997 and November 30, 1996, respectively .............. 22,853 22,854
Additional paid-in capital ....................................... 34,253,189 34,241,798
Deficit accumulated during the development stage ................. (32,963,964) (30,211,053)
------------ ------------
Total shareholders' equity .................................... 1,312,078 4,053,599
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......................... $ 2,189,944 $ 4,671,741
============ ============
</TABLE>
See notes to financial statements
2
<PAGE> 3
SOMANETICS CORPORATION
(A development stage company)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
for the Period
Three Months Six Months January 15, 1982
Ended May 31, Ended May 31, (Date of Inception)
------------------------ ------------------------- to May 31,
1997 1996 1997 1996 1997
----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Net sales ............................ $ 401,056 $ 84,387 $ 754,919 $ 599,465 $ 6,483,851
Research and development activities .. -- -- -- -- 122,500
----------- ---------- ----------- ---------- -----------
Total revenues ................... 401,056 84,387 754,919 599,465 6,606,351
COST OF SALES .......................... 213,939 48,318 394,211 259,451 3,021,462
----------- ---------- ----------- ---------- -----------
GROSS MARGIN ........................... 187,117 36,069 360,708 340,014 3,584,889
----------- ---------- ----------- ---------- -----------
OPERATING EXPENSES:
Research, development and engineering 239,973 52,732 404,185 102,668 8,409,095
Selling, general and administrative .. 1,413,807 609,386 2,772,893 1,199,716 28,962,616
----------- ---------- ----------- ---------- ------------
Total operating expenses ......... 1,653,780 662,118 3,177,078 1,302,384 37,371,711
----------- ---------- ----------- ---------- ------------
OPERATING LOSS ......................... (1,466,663) (626,049) (2,816,370) (962,370) (33,786,822)
----------- ---------- ----------- ---------- ------------
OTHER INCOME (EXPENSE):
Interest income ...................... 14,064 18,752 47,259 32,411 1,168,407
Interest expense ..................... - - - - (231,674)
Other ................................ 8,100 8,100 16,200 11,173 (94,033)
----------- ---------- ----------- ---------- ------------
Total other income ............... 22,164 26,852 63,459 43,584 842,700
----------- ---------- ----------- ---------- ------------
NET LOSS ............................... $(1,444,499) $ (599,197) $(2,752,911) $ (918,786) $(32,944,122)
----------- ---------- ----------- ---------- ------------
NET LOSS PER COMMON SHARE .............. $ (0.63) $ (0.33) $ (1.20) $ (0.51) $ (40.94)
----------- ---------- ----------- ---------- ------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING .............. 2,285,342 1,820,033 2,285,347 1,799,154 804,748
=========== ========== =========== ========== ============
</TABLE>
See notes to financial statements
3
<PAGE> 4
SOMANETICS CORPORATION
(A development stage company)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED)
(1 of 2)
<TABLE>
<CAPTION>
PRICE ADDITIONAL ACCUM-
PER SHARE PAID-IN ULATED
DATE SHARE SHARES VALUE CAPITAL DEFICIT
--------------- -------- ------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
ISSUANCE OF COMMON SHARES:
For shareholders' contributions of test equipment .. January, 1982 $ 0.32 83,037 $ 830 $ 25,670 $ -
For cash ........................................... July, 1982 13.08 7,835 79 101,921
Net loss from January 15, 1982 (date of inception)
to November 30, 1982 ............................. (107,083)
------- ------ ----------- ------------
Balance at November 30, 1982 ......................... 90,872 909 127,591 (107,083)
For cash ........................................... December, 1982 13.08 3,917 39 50,961
For services ....................................... January, 1983 13.08 1,567 16 20,484
For cash, less issuance costs of $5,863 ............ July, 1983 26.17 11,624 116 298,185
For services ....................................... November, 1983 26.17 784 8 20,492
Net loss for the year ended November 30, 1983 ...... (291,986)
------- ------ ----------- ------------
Balance at November 30, 1983 ......................... 108,764 1,088 517,713 (399,069)
For cash, less issuance costs December, 1983-
of $7,735 April, 1984 26.17 19,421 194 500,252
For patents February, 1984 26.17 4,895 49 128,020
For cash November, 1984 35.10 3,730 37 130,899
Net loss for the year ended November 30, 1984 ...... (700,380)
------- ------ ----------- ------------
Balance at November 30, 1984 ......................... 136,810 1,368 1,276,884 (1,099,449)
For cash, less issuance costs December, 1984-
of $3,726 June, 1985 35.10 13,029 130 453,485
For cash November, 1985 70.20 14,484 145 1,016,655
Net loss for the year ended November 30, 1985 ...... (559,871)
------- ------ ----------- ------------
Balance at November 30, 1985 ......................... 164,323 1,643 2,747,024 (1,659,320)
Exercise of stock options for cash ................. December, 1985 35.10 783 8 27,492
For cash ........................................... January, 1986 70.20 10,444 104 733,097
Net loss for the year ended November 30, 1986 ...... (1,222,772)
------- ------ ----------- ------------
Balance at November 30, 1986 ......................... 175,550 1,755 3,507,613 (2,882,092)
For cash, less issuance costs March, 1987-
of $9,500 September, 1987 51.06 10,359 104 519,296
Net loss for the year ended November 30, 1987 ...... (1,143,081)
------- ------ ----------- ------------
Balance at November 30, 1987 ......................... 185,909 1,859 4,026,909 (4,025,173)
For cash, less issuance costs February, 1988-
of $10,500 April, 1988 51.06 3,291 33 157,467
Net loss for the year ended November 30, 1988 ...... (352,311)
------- ------ ----------- ------------
Balance at November 30, 1988 ......................... 189,200 1,892 4,184,376 (4,377,484)
For cash and the exchange of debt January, 1989-
due a shareholder ................................ July, 1989 51.06 4,524 45 230,955
Net loss for the year ended November 30, 1989 ...... (446,642)
------- ------ ----------- ------------
Balance at November 30, 1989 ......................... 193,724 1,937 4,415,331 (4,824,126)
For services ....................................... August, 1990 51.06 4,701 47 239,953
Net loss for the year ended November 30, 1990 ...... (1,328,518)
------- ------ ----------- ------------
Balance at November 30, 1990 ......................... 198,425 1,984 4,655,284 (6,152,644)
For cash, less issuance costs of $1,630,241 ........ March, 1991 20.00 360,000 3,600 5,566,159
Unit Purchase Option ............................... March, 1991 120
Redeemable Convertible Preferred Stock dividend .... April, 1991 (19,843)
For cash, less issuance costs of $126,900 .......... April, 1991 20.00 54,000 540 952,560
Net loss for the year ended November 30, 1991 ...... (2,058,493)
------- ------ ----------- ------------
Balance at November 30, 1991 ......................... 612,425 $6,124 $11,174,123 $(8,230,980)
</TABLE>
<TABLE>
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
(DEFICIENCY)
-------------
<S> <C>
For shareholders' contributions of test equipment .. $ 26,500
For cash ........................................... 102,000
Net loss from January 15, 1982 (date of inception)
to November 30, 1982 ............................. (107,083)
-----------
Balance at November 30, 1982 ......................... 21,417
For cash ........................................... 51,000
For services ....................................... 20,500
For cash, less issuance costs of $5,863 ............ 298,301
For services ....................................... 20,500
Net loss for the year ended November 30, 1983 ...... (291,986)
-----------
Balance at November 30, 1983 ......................... 119,732
For cash, less issuance costs
of $7,735 500,446
For patents 128,069
For cash 130,936
Net loss for the year ended November 30, 1984 ...... (700,380)
-----------
Balance at November 30, 1984 ......................... 178,803
For cash, less issuance costs
of $3,726 453,615
For cash 1,016,800
Net loss for the year ended November 30, 1985 ...... (559,871)
-----------
Balance at November 30, 1985 ......................... 1,089,347
Exercise of stock options for cash ................. 27,500
For cash ........................................... 733,201
Net loss for the year ended November 30, 1986 ...... (1,222,772)
-----------
Balance at November 30, 1986 ......................... 627,276
For cash, less issuance costs
of $9,500 519,400
Net loss for the year ended November 30, 1987 ...... (1,143,081)
-----------
Balance at November 30, 1987 ......................... 3,595
For cash, less issuance costs
of $10,500 157,500
Net loss for the year ended November 30, 1988 ...... (352,311)
-----------
Balance at November 30, 1988 ......................... (191,216)
For cash and the exchange of debt
due a shareholder ................................ 231,000
Net loss for the year ended November 30, 1989 ...... (446,642)
-----------
Balance at November 30, 1989 ......................... (406,858)
For services ....................................... 240,000
Net loss for the year ended November 30, 1990 ...... (1,328,518)
-----------
Balance at November 30, 1990 ......................... (1,495,376)
For cash, less issuance costs of $1,630,241 ........ 5,569,759
Unit Purchase Option ............................... 120
Redeemable Convertible Preferred Stock dividend .... (19,843)
For cash, less issuance costs of $126,900 .......... 953,100
Net loss for the year ended November 30, 1991 ...... (2,058,493)
-----------
Balance at November 30, 1991 ......................... $ 2,949,267
</TABLE>
See notes to financial statements
4
<PAGE> 5
SOMANETICS CORPORATION
(A development stage company)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED)
(2 OF 2)
<TABLE>
<CAPTION>
PRICE ADDITIONAL ACCUM-
PER SHARE PAID-IN ULATED
DATE SHARE SHARES VALUE CAPITAL DEFICIT
--------------- ------ --------- ------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at November 30, 1991 ......................... 612,425 $6,124 $11,174,123 $(8,230,980)
Exercise of Class A Warrants for cash, December, 1991-
less issuance costs of $702,917 .................. May, 1992 30.00 413,900 4,139 11,709,944
February, 1992-
Exercise of Class B Warrants for cash .............. November, 1992 40.00 3,406 34 136,186
July, 1992- 20.00-
Exercise of stock options for cash ................. November, 1992 21.90 3,010 30 66,045
Net loss for year ended November 30, 1992 .......... (5,390,637)
--------- ------ ----------- -------------
Balance at November 30, 1992 ......................... 1,032,741 10,327 23,086,298 (13,621,617)
December, 1992-
Exercise of Class B Warrants for cash .............. October, 1993 40.00 2,976 30 119,034
March, 1993-
Exercise of Class M Warrants for cash .............. October, 1993 10.00 60,018 601 599,578
March, 1993- 20.00-
Exercise of stock options for cash ................. September, 1993 43.80 310 3 13,147
Exercise of Unit Purchase Options and May, 1993- 30.00-
underlying Class A Warrants for cash ............. October, 1993 33.00 1,000 10 31,496
Net loss for the year ended November 30, 1993 ...... (6,135,830)
--------- ------ ----------- -------------
Balance at November 30, 1993 ......................... 1,097,045 10,971 23,849,553 (19,757,447)
For cash, less issuance costs of $490,790 .......... August, 1994 8.00 529,700 5,297 3,741,513
Exercise of stock options for cash ................. November, 1994 16.25-
35.90 10 -- 202
Net loss for the year ended November 30, 1994 ...... (4,331,500)
--------- ------ ----------- -------------
Balance at November 30, 1994 ......................... 1,626,755 16,268 27,591,268 (24,088,947)
Exercise of stock options for cash ................. February, 1995 8.40 100 1 843
For cash, less issuance costs of $282,475 .......... July, 1995 12.50 150,000 1,500 1,591,125
Net loss for the year ended November 30, 1995 ..... (2,818,403)
--------- ------ ----------- -------------
Balance at November 30, 1995 ......................... 1,776,855 17,769 29,183,236 (26,907,350)
January, 1996- 8.40-
Exercise of stock options for cash ................. June, 1996 14.70 7,717 77 75,030
For cash, less issuance costs of $143,587 .......... April, 1996 12.50 114,240 1,143 1,283,270
Exercise of warrants for cash, less issuance June, 1996-
costs of $16,350 ................................. September, 1996 20.00 19,698 197 339,886
For cash, less issuance costs of $650,872 .......... November, 1996 11.50 366,841 3,668 3,564,135
Redemption of Class B Warrants ..................... November, 1996 0.50 (203,759)
Net loss for the year ended November 30, 1996 ...... (3,303,703)
--------- ------ ----------- -------------
Balance at November 30, 1996 ......................... 2,285,351 22,854 34,241,798 (30,211,053)
Reduce issuance costs for November, 1996 offering .. 11,768
Redemption of fractional shares, April 11, 1997 .... (17) (1) (377)
Net loss for the six-month period ended
May 31, 1997 ..................................... (2,752,911)
--------- ------ ----------- -------------
Balance at May 31, 1997 .............................. 2,285,334 22,853 $34,253,189 $(32,963,964)
========= ====== =========== =============
</TABLE>
<TABLE>
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
(DEFICIENCY)
-------------
<S> <C>
Balance at November 30, 1991 ......................... $ 2,949,267
Exercise of Class A Warrants for cash,
less issuance costs of $702,917 .................. 11,714,083
Exercise of Class B Warrants for cash .............. 136,220
Exercise of stock options for cash ................. 66,075
Net loss for year ended November 30, 1992 .......... (5,390,637)
-----------
Balance at November 30, 1992 ......................... 9,475,008
Exercise of Class B Warrants for cash .............. 119,064
Exercise of Class M Warrants for cash .............. 600,179
Exercise of stock options for cash ................. 13,150
Exercise of Unit Purchase Options and
underlying Class A Warrants for cash ............. 31,506
Net loss for the year ended November 30, 1993 ...... (6,135,830)
-----------
Balance at November 30, 1993 ......................... 4,103,077
For cash, less issuance costs of $490,790 .......... 3,746,810
Exercise of stock options for cash .................
202
Net loss for the year ended November 30, 1994 ...... (4,331,500)
-----------
Balance at November 30, 1994 ......................... 3,518,589
Exercise of stock options for cash ................. 844
For cash, less issuance costs of $282,475 .......... 1,592,625
Net loss for the year ended November 30, 1995 ..... (2,818,403)
-----------
Balance at November 30, 1995 ......................... 2,293,655
Exercise of stock options for cash ................. 75,107
For cash, less issuance costs of $143,587 .......... 1,284,413
Exercise of warrants for cash, less issuance
costs of $16,350 ................................. 340,083
For cash, less issuance costs of $650,872 .......... 3,567,803
Redemption of Class B Warrants ..................... (203,759)
Net loss for the year ended November 30, 1996 ...... (3,303,703)
-----------
Balance at November 30, 1996 ......................... 4,053,599
Reduce issuance costs for November, 1996 offering .. 11,768
Redemption of fractional shares, April 11, 1997 .... (378)
Net loss for the six-month period ended
May 31, 1997 ..................................... (2,752,911)
-----------
Balance at May 31, 1997 .............................. $ 1,312,078
===========
</TABLE>
See notes to financial statements
5
<PAGE> 6
SOMANETICS CORPORATION
(A development stage company)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
for the Period
Six Months January 15, 1982
Ended May 31, (Date of Inception)
------------------------- to May 31,
1997 1996 1997
------------ ----------- -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................ $(2,752,911) $ (918,786) $(32,944,122)
Adjustments to reconcile net loss to net cash used in
operations:
Depreciation and amortization ........................................ 26,522 31,164 855,731
Expenses paid through the issuance of common shares................... -- -- 408,068
Loss on disposal of property ......................................... -- -- 44,861
Changes in assets and liabilities:
Accounts receivable (increase) decrease .......................... (311,852) 134,381 (503,288)
Inventory (increase) decrease .................................... 86,291 22,945 (844,844)
Prepaid expenses (increase) decrease ............................. 28,235 27,438 (37,200)
Other assets (increase) .......................................... (188,217) (12,970) (315,549)
Accounts payable increase ........................................ 270,918 53,949 634,950
Accrued liabilities increase (decrease) .......................... (11,194) (241,576) 242,916
----------- ---------- ------------
Net cash (used in) operations ................................. (2,852,208) (903,455) (32,458,477)
----------- ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities ....................................... -- -- (12,166,540)
Proceeds from sale of marketable securities .............................. -- -- 12,166,540
Acquisition of property and equipment (net) .............................. (18,876) 2,897 (929,937)
Accrual for note receivable - related party .............................. -- (7,948) --
----------- ---------- ------------
Net cash (used in) investing activities ....................... (18,876) (5,051) (929,937)
----------- ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Shares .................................. 11,768 1,356,210 34,044,611
Redemption of Redeemable Convertible Preferred Shares .................... -- (19,843) (19,843)
Redemption of Class B Warrants and Fractional Shares ..................... (378) -- (204,137)
Proceeds from issuance of notes payable and long-term debt ............... -- -- 2,515,223
Repayments of notes payable and long-term debt ........................... -- -- (2,515,223)
----------- ---------- ------------
Net cash provided by financing activities .................... 11,390 1,336,367 33,820,631
----------- ---------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .............................................................. (2,859,694) 427,861 432,217
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD ................................................................ 3,291,911 941,426 --
----------- ---------- ------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD ................................................................ $ 432,217 $1,369,287 $ 432,217
=========== ========== ============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
See Statements of Shareholders' Equity (Deficiency) for details of shares
issued in exchange for non-cash consideration.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest for the six-month periods ended May 31, 1997 and 1996
approximated $0 and $0, respectively.
See notes to financial statements
6
<PAGE> 7
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 1997
1. ORGANIZATION AND OPERATIONS
Somanetics Corporation (the "Company"), a Michigan corporation formed in
January 1982, develops, manufactures and markets the INVOS 3100A Cerebral
Oximeter (the "Cerebral Oximeter"), the only FDA-cleared, non-invasive patient
monitoring system that continuously measures changes in the blood oxygen level
in the adult brain. The Cerebral Oximeter is based on the Company's
proprietary In Vivo Optical Spectroscopy ("INVOS(R)") technology. INVOS
analyzes various characteristics of human blood and tissue by measuring and
analyzing low-intensity visible and near infrared light transmitted into
portions of the body. The Company is in the development stage and has incurred
research, product development and other expenses involved in designing,
developing, marketing and selling its product, as well as devoting efforts to
raising capital.
2. FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited interim financial statements of Somanetics
Corporation have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, such financial statements do
not include all of the information and footnotes normally included in the
Company's annual financial statements prepared in accordance with generally
accepted accounting principles, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
The accompanying unaudited interim financial statements reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. All such
adjustments are of a normal recurring nature, except those described in Note 3
and those not material to the Company's financial condition or results of
operations. Operating results for the six-month period ended May 31, 1997, are
not necessarily indicative of the results that may be expected for the year
ending November 30, 1997, although the Company expects to continue to incur
operating losses for the foreseeable future. The unaudited interim financial
statements should be read in conjunction with the financial statements and
footnotes thereto for the year ended November 30, 1996 included in the
Company's Annual Report on Form 10-K for the fiscal year ended November 30,
1996.
The Company is in the development stage and, accordingly, has not achieved
sales necessary to support operations. The Company has incurred an accumulated
deficit of $32,963,964 through May 31, 1997. The Company had working capital
of $939,683, cash and cash equivalents of $432,217, total current liabilities
of $877,866 and shareholders' equity of $1,312,078, as of May 31, 1997.
Management believes that markets exist for the product the Company has
developed; however, there is an inherent uncertainty associated with the
success of such new product. The likelihood of success of the Company must be
considered in view of the Company's limited resources and current financial
condition, the problems and expenses frequently encountered in connection with
formation of a new business, the ability to raise new funds, the development
and application of new technology, and the competitive environment in which the
Company operates.
The net proceeds from the sale of Common Shares in the Regulation S
offering in November 1996 were sufficient to fund the Company's working capital
requirements for the six months ended May 31, 1997. Current sales are not
sufficient to fund operations. On June 4, 1997, the Company completed the
public offering of 2,000,000 newly-issued Common Shares, at a price of $4.00
per share, for gross proceeds of $8,000,000, through an offering underwritten
by Brean Murray & Co., Inc. The net proceeds to the Company, after deducting
the underwriting discount and the estimated expenses of the offering, were
approximately $6,980,000. The Company also granted the underwriter warrants to
purchase 200,000 Common Shares at $4.80 per share exercisable during the
four-year period beginning May 30, 1998.
7
<PAGE> 8
SOMANETICS CORPORATION
(A development stage company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 1997
The Company believes that the cash and cash equivalents on hand at May 31,
1997 together with the net proceeds of the June 4, 1997 public offering will be
sufficient to sustain the Company's operations at budgeted levels and its needs
for liquidity into the second half of fiscal 1998. By that time the Company
will be required to raise additional cash either through additional sales of
its product, through sales of securities, by incurring indebtedness or by some
combination of the foregoing. If the Company is unable to raise additional
cash by that time, it will be required to reduce or discontinue its operations.
The estimated length of time current cash and cash equivalents will
sustain the Company's operations is based on certain estimates and assumptions
made by the Company. Such estimates and assumptions are subject to change as a
result of actual experience. There can be no assurance that actual capital
requirements necessary to market the Cerebral Oximeter and SomaSensor, to
develop enhancements to, and product extensions of, the Cerebral Oximeter, to
conduct research and development concerning additional potential applications
of the Company's technology and for working capital will not be substantially
greater than current estimates.
Product Sales. The Company does not believe that product sales will be
sufficient to fund the Company's operations in fiscal 1997.
Securities Sales. As of May 31, 1997, there were 60,400 redeemable
warrants outstanding, exercisable at $20.00 per share until July 13, 2000, and
55,120 redeemable warrants outstanding exercisable at $17.50 per share until
April 1, 2001. These warrants were issued in the Company's 1995 and 1996
Regulation S securities offerings. The conditions permitting the Company to
redeem these warrants have not been met as of June 27, 1997. In addition, the
placement agents and their transferees hold warrants to purchase 52,970 Common
Shares exercisable at $12.50 per share, 15,000 warrants exercisable at $14.40
per share, and 11,242 warrants exercisable at $12.50 per share. Also, as
described above, the underwriter of the 1997 public offering received warrants
to purchase 200,000 Common Shares exercisable at $4.80 per share. It is
unlikely that these warrants will be exercised if the exercise price exceeds
the market price of the Common Shares. The Company has the right to reduce the
exercise price of these warrants.
Indebtedness. The Company has no loan commitments.
There can be no assurance that even if the Company receives additional
capital, it will be able to achieve the level of sales necessary to sustain its
operations. There can be no assurance that the Company will be able to obtain
any funds on terms acceptable to the Company and at times required by the
Company through sales of the Company's product, sales of securities or loans in
sufficient quantities. The report of the Company's Independent Auditors in the
Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996
contains an explanatory paragraph relating to an uncertainty concerning the
Company's ability to continue as a going concern.
These factors, among others, raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
8
<PAGE> 9
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 1997
3. COMMON SHARES AND STOCK OPTIONS
On January 15, 1997, the Company's Board of Directors approved an
amendment and restatement of the Company's Restated Articles of Incorporation
to (i) effect a one-for-ten reverse stock split of the Company's Common Shares
while keeping 6,000,000 authorized Common Shares, at a par value of $0.01, and
(ii) remove provisions relating to the Convertible Preferred Shares redeemed
February 28, 1996, all subject to shareholder approval at the 1997 Annual
Meeting of Shareholders. The Company's shareholders approved such amendment
and restatement at the 1997 Annual Meeting of Shareholders on March 25, 1997,
and the reverse stock split became effective on April 10, 1997. All
information contained in this report gives retroactive effect to the 1-for-10
reverse stock split effected April 10, 1997.
In addition, on January 15, 1997, the Company's Board of Directors
approved the Somanetics Corporation 1997 Stock Option Plan, pursuant to which
295,000 Common Shares are reserved for issuance pursuant to options to be
granted to key employees, directors, consultants and advisors of the Company,
all subject to approval of the reverse stock split described above, subject to
shareholder approval at the 1997 Annual Meeting of Shareholders. The Company's
shareholders approved the reverse stock split and the 1997 Stock Option Plan at
the 1997 Annual Meeting of Shareholders on March 25, 1997, and the reverse
stock split became effective on April 10, 1997.
Also at its January 15, 1997 meeting, the Company's Board of Directors
granted ten-year stock options independent of the Company's stock option plans
to purchase an aggregate of 12,700 Common Shares at $13.10 per share (the then
current market price). Such options were granted to eight new employees of the
Company. Effective April 24, 1997, the Company granted ten-year options under
the 1997 Stock Option Plan to purchase 251,200 Common Shares to 47 employees
and consultants of the Company at an exercise price of $4,75 a share (the
closing sale price of the Common Shares on the date of grant), including
options to purchase 135,000 and 45,000 shares granted to Mr. Barrett and Mr.
Gunn, respectively. Also effective April 24, 1997, the Company replaced
options to purchase 36,150 Common Shares granted independent of the Company's
stock option plans to persons who were not directors or officers of the Company
(including the options granted January 15, 1997, described above), with new
ten-year options granted independent of the Company's stock option plans
exercisable at $4.75 a share.
On March 27, 1997, the 4,500 Exchange Warrants expired unexercised.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventory is stated at the lower of cost or market on a first-in,
first-out (FIFO) basis and consists of:
<TABLE>
<CAPTION>
May 31, 1997 November 30, 1996
------------ -----------------
<S> <C> <C>
Finished goods .......... $ 336,878 $ 437,079
Work in process ......... 337,034 307,510
Purchased components .... 369,578 386,996
---------- -----------
Sub-total ............ 1,043,489 1,131,585
Less reserve for obsolete
and excess inventory ... (198,645) (200,450)
---------- -----------
Total ................ $ 844,844 $ 931,135
========== ===========
</TABLE>
9
<PAGE> 10
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 1997
Patents and Trademarks are recorded at cost and are being amortized on the
straight-line method over 17 years. Accumulated amortization was $36,060 and
$32,604 at May 31, 1997 and November 30, 1996, respectively.
Loss Per Common Share is computed using the weighted average number of
common shares outstanding during each period. Common Shares issuable under
stock options and warrants have not been considered in the computation of the
net loss per Common Share because such inclusion would be antidilutive.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
May 31, 1997 November 30, 1996
------------ -----------------
<S> <C> <C>
Professional Fees ......... $ 34,232 $101,697
Product Upgrades .......... 31,583 18,261
Warranty .................. 23,589 12,421
Accrued Insurance ......... 13,859 32,231
Accrued Incentive ......... 112,863 --
Other...................... 26,790 89,500
-------- --------
Total ................. $242,916 $254,110
======== ========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
On April 25, 1994, a shareholder of the Company filed suit in the United
States District Court for the Eastern District of Michigan, individually and on
behalf of all others similarly situated, against the Company and Gary D. Lewis,
the Company's former Chairman of the Board, in an action captioned Benjamin
Langford v. Somanetics Corporation and Gary D. Lewis. The plaintiff alleges
that Company documents contained material misstatements and omissions in
violation of various securities laws. He generally seeks unspecified
rescissionary damages, interest, punitive damages and attorneys' fees. While
the Company settled a class action in 1996 raising similar issues,
approximately 11 persons, including Benjamin Langford, opted out of that action
and the related settlement and, therefore, are not barred by the settlement
from pursuing their own claims against the Company. Mr. Langford's action is
still pending against the Company, although it is no longer a class action.
The Company's motion to dismiss the Langford action was denied and discovery is
proceeding. Management believes it has substantial defenses to the Langford
claim.
The ultimate outcome of the Langford litigation cannot presently be
determined. If the Company must pay any additional significant amount to
defend or settle the Langford lawsuit or if it must pay a significant judgment
in connection with this lawsuit, its financial condition and liquidity could be
materially adversely affected, and capital intended for use in the marketing of
the Cerebral Oximeter or to develop enhancements to, or product extensions of,
the Cerebral Oximeter or other products may have to be reallocated to satisfy
any such requirements. In addition, any such expenses will, when incurred,
have the effect of increasing the Company's net loss (or decreasing its net
income) during the periods in which they are incurred.
The Company may become subject to product liability claims by patients or
doctors, and may become a defendant in product liability or malpractice
litigation. The Company has obtained product liability insurance and an
umbrella policy. There can be no assurance that the Company will be able to
maintain such insurance or that such insurance would be sufficient to protect
the Company against such product liability.
10
<PAGE> 11
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 1997
Effective April 24, 1997, the Company extended its employment agreements
with its President and Chief Executive Officer and with its Executive Vice
President and Chief Financial Officer through April 30, 2000 and increased Mr.
Barrett's annual salary to $204,750.
7. SUBSEQUENT EVENTS
The Company entered into a Second Addendum to the Lease of its facilities
dated September 10, 1991 with its landlord. The Second Addendum extends the
term of the Lease by two years commencing January 1, 1998 and terminating
December 31, 1999, and provides for an option to extend for a third additional
year under the same terms and conditions. The minimum monthly lease payment
for the extended two-year term is approximately, $14,700, excluding other
occupancy costs.
As discussed in Note 2, on June 4, 1997, the Company completed the
public offering of 2,000,000 newly-issued Common Shares, at a price of $4.00
per share, for gross proceeds of $8,000,000, through an offering underwritten
by Brean Murray & Co., Inc.
11
<PAGE> 12
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 1997
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations includes forward-looking statements with respect to
the Company's future financial performance. These forward-looking statements
are subject to various risks and uncertainties, including the factors described
under "Risk Factors" and elsewhere in the Company's Registration Statement on
Form S-1 (file no. 333-25275), that could cause actual results to differ
materially from historical results or those currently anticipated.
RESULTS OF OPERATIONS
OVERVIEW
Somanetics Corporation develops, manufactures and markets the INVOS 3100A
Cerebral Oximeter, the only FDA-cleared, non-invasive patient monitoring system
that continuously measures changes in the blood oxygen level in the adult
brain. In 1988, the Company began clinical studies of the Cerebral Oximeter on
human patients. In June 1992, the Company received 510(k) clearance from the
FDA to market the Cerebral Oximeter in the United States for use on adults.
The Company began commercial shipments of Cerebral Oximeters and SomaSensors
in May 1993. In November 1993, the FDA rescinded the Company's clearance to
market the Cerebral Oximeter and the related disposable SomaSensor in the
United States, and the Company suspended all commercial sales. In February
1994, the Company resumed marketing its product in several foreign countries,
and in June 1996 the Company received clearance from the FDA to market the
Cerebral Oximeter and the related disposable SomaSensor in the United States.
The Company is in the development stage and has accumulated losses of
$32,944,122 through May 31, 1997. From its inception in January 1982 through
May 31, 1997, its primary activities have consisted of research and development
of the INVOS technology, a discontinued product, the Cerebral Oximeter and the
related disposable SomaSensor. The Company believes that its accumulated
deficit will continue to increase for the foreseeable future.
The Company derives its revenues from sales of Cerebral Oximeters and
SomaSensors to its distributors and, since the June 1996 FDA clearance, to
hospitals through its direct sales employees. The Company recognizes revenues
when it ships its product to its distributors or to hospitals. Payment terms
are generally net 30 days for United States sales and net 60 days or longer for
international sales. The Company's primary expenses, excluding the cost of its
product, are selling, general and administrative expenses and research,
development and engineering expenses, which are generally expensed as incurred.
The Company capitalizes its patent costs and amortizes them over 17 years.
Since May 1994, the Company has exchanged the new model 3100A Cerebral
Oximeters for its model 3100 Cerebral Oximeters. The Company refurbishes the
model 3100 Cerebral Oximeters it receives and sells them approximately at cost
in countries that do not require compliance with the standards met by the model
3100A. Such sales reduce the Company's overall gross margin percentage.
THREE MONTHS ENDED MAY 31, 1997 COMPARED TO THREE MONTHS ENDED MAY 31, 1996
Net sales increased by approximately $317,000, or 375%, from $84,387 in
the three-month period ended May 31, 1996 to $401,056 in the three-month period
ended May 31, 1997. The increase in sales was primarily attributable to
approximately $131,000 of sales in the United States and approximately $150,000
of sales to Baxter Limited, the Company's Japanese distributor, in the second
quarter of fiscal 1997, compared to none in the second quarter of fiscal 1996.
Sales of refurbished model 3100 Cerebral Oximeters, model 3100A Cerebral
Oximeters, and SomaSensors comprised approximately 12%, 64% and 24%,
respectively, of the Company's sales in the second quarter of fiscal 1997 and
25%, 24% and 51%, respectively, of the Company's sales in the second quarter of
fiscal 1996. Approximately 67% of the Company's net sales in the second
quarter of fiscal 1997 were export sales, compared to 100% of the Company's net
sales in the second quarter of fiscal 1996. Three international distributors
accounted for approximately 37%, 15% and 11%, respectively, of total net sales
for the
12
<PAGE> 13
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 1997
three months ended May 31, 1997, and three international distributors
accounted for approximately 24%, 17% and 17%, respectively, of total net sales
for the three months ended May 31, 1996. Third quarter fiscal 1997 sales are
expected to be lower than second quarter fiscal 1997 sales as a result of the
summer vacation season in Europe and no expected orders from Baxter Limited in
Japan for the third quarter.
Gross margin as a percentage of net sales for the quarters ended May 31,
1997 and May 31, 1996 was approximately 47% and 43%, respectively. Gross
margin as a percentage of net sales increased in the second quarter ended May
31, 1997 from the second quarter of fiscal 1996 primarily because a smaller
percentage of net sales consisted of refurbished model 3100 Cerebral Oximeters.
This increase was partially offset by higher cost of the SomaSensor in the
second quarter of fiscal 1997, compared to the second quarter of fiscal 1996.
The Company's research, development and engineering expenses increased
approximately $187,000, or 355%, from $52,732 for the three months ended May
31, 1996 to $239,973 for the three months ended May 31, 1997. The increase is
primarily attributable to increased consulting fees and costs of development
materials in fiscal 1997 in connection with new product development, an
increase in research, development, and engineering personnel from two employees
at May 31, 1996 to five employees at May 31, 1997, increased clinical testing
in the second quarter of fiscal 1997, and increased obsolescence costs in the
second quarter of fiscal 1997.
Selling, general and administrative expenses increased approximately
$804,000, or 132%, from $609,386 for the three months ended May 31, 1996 to
$1,413,807 for the three months ended May 31, 1997. The increase in selling,
general and administrative expense is primarily attributable to a $479,000
increase in salaries, wages and related expenses as a result of the additional
employees hired since May 31, 1996 (from an average of 18 employees in the
second quarter of fiscal 1996 to 40 employees in the second quarter of fiscal
1997), a $206,000 increase in selling-related expenses as a result of the costs
associated with training and equipping direct sales personnel with
demonstration equipment, the added cost of promotional equipment and materials
in the United States, an increase in travel and related expenses, due to
distributor training and support and additional employees in sales and
marketing, an increase in advertising expenses, and an increase in trade show
participation expenses, a $75,000 increase in incentive compensation accrual,
and a $65,000 increase in professional fees
For the three-month period ended May 31, 1997, the Company realized a 141%
increase in its net loss over the same period in fiscal 1996. The increase is
primarily attributable to a 150% increase in operating expenses, partially
offset by a 375% increase in sales.
SIX MONTHS ENDED MAY 31, 1997 COMPARED TO SIX MONTHS ENDED MAY 31, 1996
Net sales increased by approximately $155,000, or 26%, from $599,465 in
the six-month period ended May 31, 1996 to $754,919 in the six-month period
ended May 31, 1997. This increase in sales was primarily attributable to
approximately $266,000 of sales in the United States in the first two quarters
of fiscal 1997, compared to none in the first two quarters of fiscal 1996,
partially offset by a decrease in the average selling price of Cerebral
Oximeters in the first two quarters of fiscal 1997, compared to the first two
quarters of fiscal 1996 and reduced shipments to Baxter Limited in Japan, which
purchased its requirements for all of 1996 in the first quarter of fiscal 1996.
Sales of refurbished model 3100 Cerebral Oximeters, model 3100A Cerebral
Oximeters, and SomaSensors comprised approximately 9%, 68% and 23%,
respectively, of the Company's sales in the six-month period ended May 31, 1997
and 7%, 76% and 17%, respectively, of the Company's sales for the same period
of fiscal 1996. Approximately 65% of the Company's net sales for the six-month
period ended May 31, 1997 were export sales, compared to 100% of the Company's
net sales for the same period of fiscal 1996. Three international distributors
and one United States distributor accounted for approximately 39%, 12%, 10% and
11%, respectively, of total net sales for the six-month period ended May 31,
1997, and two international distributors accounted for approximately 76% and 9%
of total net sales for the same period ended May 31, 1996.
13
<PAGE> 14
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 1997
Gross margin as a percentage of net sales for six-month periods ended May
31, 1997 and May 31, 1996 was approximately 48% and 57%, respectively. Gross
margin as a percentage of net sales decreased in the six-month period ended May
31, 1997 from the same period of fiscal 1996 primarily because the Company
realized lower average selling prices for model 3100A Cerebral Oximeters in
fiscal 1997, a larger percentage of net sales consisted of refurbished model
3100 Cerebral Oximeters, the cost to the Company of the SomaSensor was higher
in fiscal 1997, and SomaSensors were a larger portion of overall sales.
The Company's research, development and engineering expenses increased
approximately $302,000, or 294%, from $102,668 for the six-month period ended
May 31, 1996 to $404,185 for the six-month period ended May 31, 1997. The
increase is primarily attributable to increased consulting fees and costs of
development materials in fiscal 1997 in connection with new product
development, an increase in research, development, and engineering personnel
from two employees at May 31, 1996 to five employees at May 31, 1997, increased
clinical testing, and increased obsolescence costs in the first six months of
fiscal 1997.
Selling, general and administrative expenses increased approximately
$1,573,000, or 131%, from $1,199,716 for the six-month period ended May 31,
1996 to $2,772,893 for the six-month period ended May 31, 1997. The increase
in selling, general and administrative expense is primarily attributable to a
$962,000 increase in salaries, wages and related expenses as a result of the
additional employees hired since May 31, 1996 (from an average of 19 employees
in the six-month period ended May 31, 1996 to 38 employees in the same period
of fiscal 1997), a $384,000 increase in selling-related expenses as a result of
the costs associated with training and equipping direct sales personnel with
demonstration equipment, the added cost of promotional equipment and materials
in the United States, an increase in travel and related expenses, due to
distributor training and support and additional employees in sales and
marketing, an increase in advertising expenses, and an increase in trade show
participation expenses, a $150,000 increase in incentive compensation accrual,
and a $56,000 increase in professional fees.
For the six-month period ended May 31, 1997, the Company realized a 200%
increase in its net loss over the same period in fiscal 1996. The increase is
primarily attributable to a 144% increase in operating expenses, partially
offset by a 26% increase in net sales.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the six-month period ended May 31, 1997
was approximately $2,852,000. Cash was used primarily to (i) fund the
Company's net loss, including selling, general and administrative expenses and
research, development and engineering expenses (approximately $2,726,000, net
of depreciation and amortization expense), (ii) increase accounts receivable
(approximately $312,000) primarily due to higher sales in the first and second
quarters of fiscal 1997 than in the prior two quarters, and (iii) increase in
other assets as a result of increased deferred offering costs associated with
the recent public offering (approximately $188,000). These uses of cash were
partially offset by (i) an increase in accounts payable (approximately
$271,000) primarily due to delays in payments to suppliers, and (ii) a decrease
in inventory (approximately $86,000). Management expects working capital
requirements to increase if sales increase.
As of May 31, 1997 the Company had working capital of $939,683, cash and
cash equivalents of $432,217, total current liabilities of $877,866 and
shareholders' equity of $1,312,078. The Company has no loan commitments.
On June 4, 1997, the Company completed the public offering of 2,000,000
newly-issued Common Shares, at a price of $4.00 per share, for gross proceeds
of $8,000,000, through an offering underwritten by Brean Murray & Co., Inc.
The net proceeds to the Company, after deducting the underwriting discount and
the estimated expenses of the offering, were approximately $6,980,000. The
Company also granted the underwriter
14
<PAGE> 15
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MAY 31, 1997
warrants to purchase 200,000 Common Shares at $4.80 per share exercisable during
the four-year period beginning May 30, 1998.
The Company believes that the cash and cash equivalents on hand at May 31,
1997 together with the net proceeds of the June 4, 1997 public offering will be
sufficient to sustain the Company's operations at budgeted levels and its needs
for liquidity into the second half of fiscal 1998. By that time the Company
will be required to raise additional cash either through additional sales of
its product, through sales of securities, by incurring indebtedness or by some
combination of the foregoing. If the Company is unable to raise additional
cash by that time, it will be required to reduce or discontinue its operations.
The estimated length of time current cash and cash equivalents will
sustain the Company's operations is based on certain estimates and assumptions
made by the Company. Such estimates and assumptions are subject to change as a
result of actual experience and there can be no assurance that actual capital
requirements necessary to market the Cerebral Oximeter and SomaSensor, to
develop enhancements to, and product extensions of, the Cerebral Oximeter, to
conduct research and development concerning additional potential applications
of the Company's technology and for working capital will not be substantially
greater than current estimates.
Product Sales. The Company does not believe that product sales will be
sufficient to fund the Company's operations in fiscal 1997.
Securities Sales. As of May 31, 1997, there were 60,400 redeemable
warrants outstanding, exercisable at $20.00 per share until July 13, 2000, and
55,120 redeemable warrants outstanding exercisable at $17.50 per share until
April 1, 2001. These warrants were issued in the Company's 1995 and 1996
Regulation S securities offerings. The conditions permitting the Company to
redeem these warrants have not been met as of June 27, 1997. In addition, the
placement agents and their transferees hold warrants to purchase 52,970 Common
Shares exercisable at $12.50 per share, 15,000 warrants exercisable at $14.40
per share, and 11,242 warrants exercisable at $12.50 per share. Also, as
described above, the underwriter of the 1997 public offering received warrants
to purchase 200,000 Common Shares exercisable at $4.80 per share. It is
unlikely that these warrants will be exercised if the exercise price exceeds
the market price of the Common Shares. The Company has the right to reduce the
exercise price of these warrants.
Indebtedness. The Company has no loan commitments.
There can be no assurance that even if the Company receives additional
capital, it will be able to achieve the level of sales necessary to sustain its
operations. There can be no assurance that the Company will be able to obtain
any funds on terms acceptable to the Company and at times required by the
Company through sales of the Company's product, sales of securities or loans in
sufficient quantities. The report of the Company's Independent Auditors in the
Company's Annual Report on Form 10-K for the fiscal year ended November 30,
1996 contains an explanatory paragraph relating to an uncertainty concerning
the Company's ability to continue as a going concern.
For a description of a lawsuit alleging various securities law violations
filed by a shareholder of the Company on April 25, 1994, see Note 6 of Notes to
Financial Statements in Item 1 of this report.
15
<PAGE> 16
PART II OTHER INFORMATION
Item 2. Changes in Securities
In connection with the Company's public offering of Common Shares, on
June 4, 1997, the Company sold 200,000 warrants to Brean Murray & Co., Inc., the
underwriter of the public offering, for $100. Each warrant is exercisable to
purchase one Common Share for $4.80 at any time during the four year period
beginning May 30, 1998. The Company also granted Brean Murray & Co., Inc.
registration rights in connection with the warrants. The warrants were not
registered, but were sold in reliance on the exemptions from registration
requirements contained in Section 4(2) and Section 4(6) of the Securities Act
of 1933.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held on March 25,
1997. At the Annual Meeting, H. Raymond Wallace was elected as a Director of
the Company, and the terms of office of Bruce J. Barrett, Daniel S. Follis and
Dr. James I. Ausman as Directors of the Company continued after the meeting.
18,520,194 votes were cast for Mr. Wallace's election and 694,245 votes were
withheld from Mr. Wallace's election. There were no abstentions or broker
non-votes in connection with the election of the Director at the Annual
Meeting.
Also at the Annual Meeting of Shareholders, the shareholders approved
the proposed 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. 15,572,129 votes were cast in favor of this
proposal, 1,361,685 votes were cast against this proposal, 125,179 votes
abstained on this proposal, and there were 2,155,446 broker non-votes in
connection with this proposal.
In addition, at the Annual Meeting of Shareholders, the shareholders
approved the proposed Somanetics Corporation 1997 Stock Option Plan, pursuant
to which 295,000 Common Shares (after giving effect to the one-for-ten reverse
stock split effected April 10, 1997) are reserved for issuance pursuant to
options to be granted to key employees, directors, consultants and advisors of
the Company. 7,139,057 votes were cast in favor of this proposal, 1,879,077
votes were cast against this proposal, 335,193 votes abstained on this
proposal, and there were 9,861,112 broker non-votes in connection with this
proposal.
The number of votes described above represent Common Shares before the
one-for-ten reverse stock split effected April 10, 1997.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Second Addendum, between Somanetics Corporation
and First Industrial Mortgage Partnership, L.P., dated
April 14, 1997.
10.2 Form of Underwriting Agreement, dated May 30, 1997,
between Somanetics Corporation and Brean Murray & Co.,
Inc., incorporated by reference to Exhibit 1.1 to Amendment
No. 1 to the Registration Statement on Form S-1 (file no.
333-25275), filed with the Securities and Exchange
Commission on May 30, 1997.
10.3 Form of Warrant Agreement and Warrant, dated June 4, 1997,
between Somanetics Corporation and Brean Murray & Co.,
Inc., incorporated by reference to Exhibit 10.60 to
Amendment No. 1 to the Registration Statement on Form S-1
(file no. 333-25275), filed with the Securities and
Exchange Commission on May 30, 1997.
<PAGE> 17
10.4 Amendment to Employment Agreement, dated as of
April 24, 1997 between Somanetics Corporation and Bruce J.
Barrett, incorporated by reference to Exhibit 10.21 to
Amendment No. 1 to the Registration Statement on Form S-1
(file no. 333-25275), filed with the Securities and
Exchange Commission on May 30, 1997.
10.5 Amendment to Employment Agreement, dated as of
April 24, 1997 between Somanetics Corporation and Raymond
W. Gunn, incorporated by reference to Exhibit 10.22 to
Amendment No. 1 to the Registration Statement on Form S-1
(file no. 333-25275), filed with the Securities and
Exchange Commission on May 30, 1997.
10.6 Form of Stock Option Agreement, dated as of April 24,
1997, between Somanetics Corporation and twenty-three
employees, incorporated by reference to Exhibit 10.32 to
Amendment No.1 to the Registration Statement on Form S-1
(file no. 333-25275), filed with the Securities and
Exchange Commission on May 30, 1997.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter for which this report is filed.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Somanetics Corporation
-------------------------
(Registrant)
Date: June 27, 1997 By: /s/ Raymond W. Gunn
------------------ -------------------------------
Raymond W. Gunn
Executive Vice President and Chief
Financial Officer (Duly Authorized
and Principal Financial Officer)
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
<S> <C> <C>
10.1 Second Addendum, between Somanetics Corporation and First
Industrial Mortgage Partnership, L.P., dated April 14, 1997. 20 - 24
-------
10.2 Form of Underwriting Agreement, dated May 30, 1997, between
Somanetics Corporation and Brean Murray & Co., Inc., incorporated
by reference to Exhibit 1.1 to Amendment No. 1 to the Registration
Statement on Form S-1 (file no. 333-25275), filed with the
Securities and Exchange Commission on May 30, 1997. N/A
10.3 Form of Warrant Agreement and Warrant, dated June 4, 1997, between
Somanetics Corporation and Brean Murray & Co., Inc., incorporated by
reference to Exhibit 10.60 to Amendment No. 1 to the Registration
Statement on Form S-1 (file no. 333-25275), filed with the
Securities and Exchange Commission on May 30, 1997. N/A
10.4 Amendment to Employment Agreement, dated as of April 24, 1997 between
Somanetics Corporation and Bruce J. Barrett, incorporated by
reference to Exhibit 10.21 to Amendment No. 1 to the Registration
Statement on Form S-1 (file no. 333-25275), filed with the
Securities and Exchange Commission on May 30, 1997. N/A
10.5 Amendment to Employment Agreement, dated as of April 24, 1997 between
Somanetics Corporation and Raymond W. Gunn, incorporated by reference
to Exhibit 10.22 to Amendment No. 1 to the Registration Statement on
Form S-1 (file no. 333-25275), filed with the Securities and Exchange
Commission on May 30, 1997. N/A
10.6 Form of Stock Option Agreement, dated as of April 24, 1997, between
Somanetics Corporation and twenty-three employees, incorporated by
reference to Exhibit 10.32 to Amendment No.1 to the Registration
Statement on Form S-1 (file no. 333-25275), filed with the Securities
and Exchange Commission on May 30, 1997.
27.1 Financial Data Schedule. 25
--
</TABLE>
19
<PAGE> 1
EXHIBIT 10.1
SECOND ADDENDUM attached to and made a part of that certain Lease dated
September 10, 1991, between FIRST INDUSTRIAL MORTGAGE PARTNERSHIP, L.P.,
successor in interest to WS Development Company, as Landlord, and SOMANETICS
CORPORATION, as Tenant, covering premises at 1653 E. Maple Road, Troy, Michigan.
NOTWITHSTANDING anything to the contrary contained in the Lease, Agreement,
Addendum to Lease, Termination of Agreement, and Extension of Lease to which
this Second Addendum is attached to and made a part thereof, the Landlord and
Tenant agree as follows:
1. The Term of the Lease shall be extended two (2) years commencing January 1,
1998 and terminating December 31, 1999.
2. The minimum net rental for the extended two (2) year Term shall be Three
Hundred Fifty-Two Thousand Eight Hundred Ninety-Seven and 78/100 Dollars
($352,897.78) payable monthly in advance at the rate of Fourteen Thousand
Seven Hundred Four and 07/100 Dollars ($14,704.07).
3. Option to Extend Term:
a) Grant of Option: Tenant shall have the right and option to extend the
Term of this Lease for one (1) period of (1) year (hereinafter from
time to time referred to as the "Extension Period"), at the rental
rate and upon the other terms and conditions set forth herein. Tenant
shall not be entitled to so extend the Term of the Lease if then in
default or if during the year immediately preceding the date for
exercise of the option in questions, Tenant shall have been in default
under this Lease for any prior consecutive period of two (2) months, or
any non-consecutive period totaling four (4) months.
b) Exercise of Option: The option to extend the Term granted herein shall
be exercised by written notice to Landlord given not less than one
hundred eighty (180) days prior to December 31, 1999.
c) Minimum Net Rental: Tenant's possession of the Premises during the
Extension Period shall be under and subject to all the terms, covenants
and conditions set forth in the Lease, including the payment of the
minimum net rent at the rate of One Hundred Seventy-Six Thousand Five
Hundred Forty-Eight and 89/100 Dollars ($176,448.89) per year payable in
monthly installments in advance of Fourteen Thousand Seven Hundred Four
and 07/100 Dollars ($14,704.07).
d) Option Personal to Tenant: The option to extend Term of this Lease
granted in this Second Addendum is personal to Tenant and may not be
assigned in whole or in part in any manner whatsoever and can only be
exercised if Tenant is occupying and utilizing the Premises for the uses
set forth in Section 7 of this Lease.
4. Subordination; Notices to Superior Lessors and Mortgagees; Attornment:
4.1 Subordination of Lease. This Lease, and all rights of Tenant
hereunder, are subject and subordinate to all ground leases of the Premises now
or hereafter existing and to all mortgages or trust deeds (all of which are
hereafter referred to collectively as "Mortgages"), that may now or hereafter
affect or encumber all or any portion of the Premises. This subordination
shall apply to each and every advance made, or to be made, under such
Mortgages; to all renewals, modifications, replacements and extensions of such
Mortgages; and to "spreaders" and consolidations of such Mortgages. This
Section 4.1 shall be self-operative and no further instrument of subordination
shall be required; however, in confirmation of such subordination, Tenant shall
from time to time promptly execute, acknowledge and deliver any instrument that
Landlord may from time to time reasonably require in order to evidence or
confirm such subordination.
<PAGE> 2
Tenant acknowledges that this Lease has been (and, in the future, may be)
assigned by Landlord to a Superior Mortgagee, (defined below) as additional
collateral security for the loans secured by the Superior Mortgagee
(defined below) held by such Superior Mortgagee. Any ground lease to
which this Lease is subject and subordinate is hereinafter referred to as
a "Superior Lease," and the lessor of a Superior Lease is hereinafter
referred to as a "Superior Lessor; and the Lessee thereunder, a "Superior
Lessee"; and any Mortgage to which this Lease is subject and subordinate
is hereinafter referred to as a "Superior Mortgage," and the holder of a
Superior Mortgage is hereinafter referred to as a "Superior Mortgagee."
Notwithstanding the foregoing, at Landlord's election, this Lease may be
made senior to the lien of any Superior Mortgage, if and only if the
Superior Mortgagee, thereunder so requests.
4.2 Notice in the Event of Default. If any act or omission of Landlord or
Agent would give Tenant the right to cancel or terminate this Lease, or to
claim a partial or total eviction, Tenant shall not exercise such right (a)
until it has given, by registered or certified mail, return receipt
requested, written notice of such act or omission to Landlord and to each
Superior Mortgagee and Superior Lessor whose name and address shall
previously have been furnished to Tenant, and (b) until a thirty (30)-day
period for remedying such act or omission shall have elapsed following the
giving of such notice; provided, however, that said thirty (30)-day cure
period shall be automatically extended in the event that the act or
omission cannot, by its nature, be cured within thirty (30) days and one or
more of Landlord, the Superior Mortgagee or the Superior Lessor is
diligently proceeding to cure said default. See Exhibit A as integral
part of this "Second Addendum."
4.3 Successor Landlord. If any Superior Lessor or Superior Mortgagee
shall succeed to the rights of Landlord hereunder, then, at the request of
such party (hereinafter referred to as "Successor Landlord"), Tenant shall
attorn to and recognize each Successor Landlord as Tenant's landlord under
this Lease and shall promptly execute and deliver any instrument such
Successor Landlord may reasonably request to further evidence such
attornment. Tenant hereby acknowledges that in the event of such
succession, then from and after the date on which the Successor Landlord
acquires Landlord's rights and interest under this Lease (the "Succession
Date"), the rights and remedies available to Tenant under this Lease
against Successor Landlord shall be limited to the equity interest of the
Successor Landlord in the Premises; and the Successor Landlord shall not
(a) be liable for any act, omission or default of Landlord or other prior
lessor under this Lease; (b) be required to make or complete any tenant
improvements or capital improvements, or to repair, restore, rebuild or
replace the Premises or any part thereof in the event of damage, casualty
or condemnation; or (c) be required to pay any amounts to Tenant that are
due and payable, under the express terms of this Lease, prior to the
Succession Date. Additionally, from and after the Succession Date, Tenant's
obligation to pay Rent shall not be subject to any abatement, deduction,
set-off or counterclaim against the Successor Landlord that arises as a
result of, or due to, a default of Landlord or any other lessor that occurs
prior to the Succession Date in (a) (b) and (c) above. Moreover, no
Successor Landlord shall be bound by any advance payments of Rent made
prior to the calendar month in which the Succession Date occurs, nor by any
security deposit that is not actually delivered to, and received by, the
Successor Landlord.
5. Notices.
Any notice required to be given by either party pursuant to this Lease,
shall be in writing and shall be deemed to have been properly given,
rendered or made only if personally delivered, if sent by Federal Express
or other comparable overnight delivery service, or if sent by registered or
certified mail, return receipt requested, postage prepaid, addressed to the
other party at the addresses set forth below (or to such other address as
Landlord or Tenant may designate to each other from time to time by written
notice), and shall be deemed to have been given, rendered or made on the
day so delivered or three (3) business days after having been mailed:
<PAGE> 3
If to Landlord: First Industrial, L.P.
150 North Wacker Drive, Suite 150
Chicago, Illinois 60606
Attn: Michael W. Brennan
With a copy to: Barack, Ferrazzano, Kirschbaum & Perlman
333 West Wacker Drive
Suite 2700
Chicago, Illinois 60606
Attn: Howard Nagelberg and Suzanne Bessette-Smith
If to Tenant: ____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
6. Landlord, at its sole cost and expense, will undertake the following work
in the Premises upon execution of this Second Addendum by the Landlord and
Tenant:
a) Construct offices as shown on the attached Exhibit 1 (Smith & Schurman
Associates, Inc. drawing dated April 8, 1997) using building standard
materials. Consistent with tenant finish.
b) Remove and replace carpet and base in high traffic areas and enclosed
offices with building standard carpet and base in colors selected by
Tenant.
c) Repair roof leaks.
All other terms and conditions of said Lease, Agreement, Addendum to Lease,
Termination of Agreement and Extension of Lease to remain in full force and
effect unless in conflict with the terms and conditions of this Second Addendum
in which event the terms and conditions of this Second Addendum shall prevail
and control.
6(a), (b) and (c) to be completed by May 31, 1997.
LANDLORD:
FIRST INDUSTRIAL MORTGAGE
PARTNERSHIP, L.P., a Delaware Limited
Partnership, successor in interest to WS
Development Company
By: First Industrial Mortgage Corporation, a
Maryland Corporation
Its: General Partner
By: /s/ David P. Draft
--------------------------
David P. Draft
Its: Signing Officer
TENANT:
SOMANETICS CORPORATION, a Michigan
Corporation
By: /s/ Raymond W. Gunn
--------------------------
Its: EVP & CFO
--------------------------
Dated: April 14, 1997
<PAGE> 4
EXHIBIT 1
SOMANETICS CORPORATION
SCHEMATIC FLOOR PLAN
<PAGE> 5
EXHIBIT A
In the event of foreclosure of the Mortgage or conveyance in lieu of
foreclosure, which foreclosure or conveyance occurs prior to the expiration date
of the lease now provided thereunder, and so long as Tenant is not in default
under any terms, covenants and conditions of the Lease beyond any applicable
grace period, Mortgagee agrees on behalf of itself, its successors and assigns,
and on behalf of any purchaser at such foreclosure ("Purchaser") that Tenant
shall not be disturbed in the quiet, peaceful possession of the premises
demised under the Lease.
Somanetics Corporation
By: /s/ Raymond W. Gunn
-------------------------
Raymond W. Gunn
Its: EVP & CFO
------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SOMANETICS CORPORATION AS OF, AND FOR THE SIX MONTHS
ENDED, MAY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> MAY-31-1997
<CASH> 432,217
<SECURITIES> 0
<RECEIVABLES> 556,288
<ALLOWANCES> 53,000
<INVENTORY> 844,844
<CURRENT-ASSETS> 1,817,549
<PP&E> 855,767
<DEPRECIATION> 763,861
<TOTAL-ASSETS> 2,189,944
<CURRENT-LIABILITIES> 877,866
<BONDS> 0
0
0
<COMMON> 22,853
<OTHER-SE> 1,289,225
<TOTAL-LIABILITY-AND-EQUITY> 2,189,944
<SALES> 754,919
<TOTAL-REVENUES> 754,919
<CGS> 394,211
<TOTAL-COSTS> 394,211
<OTHER-EXPENSES> 3,177,078
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,752,911)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,752,911)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,752,911)
<EPS-PRIMARY> (1.20)
<EPS-DILUTED> (1.20)
</TABLE>
