<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 30, 1997.
REGISTRATION NO. 333-25275
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SOMANETICS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
MICHIGAN 3845 38-2394784
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
1653 EAST MAPLE ROAD
TROY, MICHIGAN 48083-4208
(810) 689-3050
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
BRUCE J. BARRETT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SOMANETICS CORPORATION
1653 EAST MAPLE ROAD
TROY, MICHIGAN 48083-4208
(810) 689-3050
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C>
ROBERT J. KRUEGER MICHAEL HIRSCHBERG
HONIGMAN MILLER SCHWARTZ AND COHN PIPER & MARBURY L.L.P.
2290 FIRST NATIONAL BUILDING 1251 AVENUE OF THE AMERICAS
DETROIT, MICHIGAN 48226 NEW YORK, NEW YORK 10020-1104
(313) 256-7675 (212) 835-6270
FAX NO.: (313) 962-0176 FAX NO.: (212) 835-6001
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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============================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares, par value $.01 per 2,300,000 $4.00 $9,200,000 $3,450(3)
share.................................
============================================================================================================================
</TABLE>
(1) Includes 300,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee, based on
a bona fide estimate of the maximum public offering price pursuant to Rule
457(a).
(3) Paid with the initial filing.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
PROSPECTUS
2,000,000
SOMANETICS LOGO
COMMON SHARES
------------------------
All of the 2,000,000 Common Shares, par value $.01 per share ("Common
Shares"), offered hereby are being sold by Somanetics Corporation ("Somanetics"
or the "Company").
Since December 27, 1994, the Company's Common Shares have been included in
The Nasdaq SmallCap Market under the symbol "SMTS." From November 30, 1994 until
December 27, 1994, the Common Shares traded in the over-the-counter market, and
from August 18, 1992 until November 30, 1994, the Common Shares were included in
The Nasdaq National Market. Before that, and since the Company's initial public
offering on March 20, 1991, the Common Shares were included in The Nasdaq Stock
Market. On May 29, 1997, the last reported sales price of the Company's Common
Shares was $5.50.
------------------------
THESE ARE SPECULATIVE SECURITIES. THE SHARES OFFERED HEREBY INVOLVE A HIGH
DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7 HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS(1) TO COMPANY(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share....................... $4.00 $0.26 $3.74
- -------------------------------------------------------------------------------------------------------------
Total(3)........................ $8,000,000 $520,000 $7,480,000
</TABLE>
================================================================================
(1) Excludes the value of warrants to be issued to the representative of the
Underwriters (the "Representative") to purchase up to 200,000 Common Shares
(the "Representative's Warrants"). The Company has agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company estimated
to be $500,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 300,000 additional Common Shares on the same terms and
conditions as the Common Shares offered hereby solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $9,200,000, $598,000 and $8,602,000,
respectively. See "Underwriting."
The Common Shares offered hereby are offered by the Underwriters, subject
to prior sale when, as and if delivered to and accepted by the Underwriters and
subject to certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
It is expected that delivery of the certificates representing Common Shares will
be made at the offices of Brean Murray & Co., Inc. in New York, New York on or
about June 4, 1997.
------------------------
BREAN MURRAY & CO., INC.
------------------------
The date of this Prospectus is May 30, 1997.
<PAGE> 3
WINDOW TO THE BRAIN
[Picture of SomaSensor
being placed on patient]
The Cerebral Oximeter is the
only FDA-cleared,
non-invasive patient
monitoring system that
provides continuous
information about changes in
the blood oxygen level in
the adult brain. The brain
is the organ least tolerant
of oxygen deprivation.
Without sufficient oxygen,
brain damage may occur
within a few minutes, which
can result in paralysis,
severe and complex
disabilities or death.
The SomaSensor is a single-use, disposable
sensor that avoids cross-contamination and
requires purchasers of the Cerebral Oximeter
to purchase SomaSensors on a regular basis.
[Picture of Cerebral Oximeter]
BENEFITS OF THE
CEREBRAL OXIMETER
- - Non-invasive
- - Continuous information
- - Organ specific
- - Relatively inexpensive
- - Easy-to-use
- - Effective in difficult
circumstances
- - Portable
Surgeons, anesthesiologists and other critical care
medical professionals use the information provided
by the Cerebral Oximeter to identify brain oxygen
imbalances and take corrective action.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF COMMON SHARES,
INCLUDING STABILIZING, SYNDICATE SHORT COVERING AND PENALTY BID TRANSACTIONS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON SHARES ON NASDAQ IN ACCORDANCE
WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 4
Risk Factors................................................ 7
Use of Proceeds............................................. 15
Price Range of Common Shares and Dividend Policy............ 16
Capitalization.............................................. 17
Dilution.................................................... 18
Selected Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business.................................................... 27
Management.................................................. 40
Certain Transactions........................................ 48
Principal Shareholders...................................... 50
Description of Capital Stock................................ 51
Underwriting................................................ 53
Legal Matters............................................... 54
Experts..................................................... 54
Available Information....................................... 54
Glossary.................................................... 56
Index to Financial Statements............................... F-1
</TABLE>
------------------------
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any security
other than in connection with the offer made by this Prospectus, nor does it
constitute an offer to sell or a solicitation of any offer to buy the Common
Shares offered hereby in any jurisdiction in which such an offer or solicitation
is not authorized, or in which the person making such offer or solicitation is
not qualified to do so, or to any person to whom it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any time subsequent to its date.
3
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes to Financial Statements appearing
elsewhere in this Prospectus, including information under "Risk Factors." The
Common Shares offered hereby involve a high degree of risk and investors should
carefully consider information set forth in "Risk Factors." Unless otherwise
indicated, all information contained in this Prospectus (i) gives effect to a
1-for-10 reverse split effected April 10, 1997 and (ii) assumes that the
Underwriters' over-allotment option as described in "Underwriting" is not
exercised.
THE COMPANY
Somanetics develops, manufactures and markets the INVOS(R) 3100A Cerebral
Oximeter (the "Cerebral Oximeter"), the only FDA-cleared, non-invasive patient
monitoring system that continuously measures changes in the blood oxygen level
in the adult brain. The Cerebral Oximeter was developed to meet the need for
information about oxygen in the brain, the organ least tolerant of oxygen
deprivation. Without sufficient oxygen, brain damage may occur within a few
minutes, which can result in paralysis, severe and complex disabilities or
death. Brain oxygen information, therefore, is important, especially in surgical
procedures requiring general anesthesia and in other critical care situations
with a high risk of brain oxygen imbalances.
The Company is initially targeting cardiovascular and vascular surgeries
and surgeries on elderly patients involving abnormal blood pressure, because
these surgeries involve a high risk of brain oxygen imbalances, both during and
after surgery. Surgeons, anesthesiologists and other medical professionals use
the Cerebral Oximeter to identify brain oxygen imbalances and take corrective
action, potentially improving patient outcome and reducing the cost of care.
Industry sources estimate that in the United States, based on a 1995 survey,
more than 24 million surgeries were performed and, according to another report,
in 1993, there were more than 4.4 million surgeries involving the heart or blood
vessels around the heart.
The Cerebral Oximeter is a relatively inexpensive, portable and easy-to-use
monitoring system placed at a patient's bedside in hospital critical care areas,
especially operating rooms, recovery rooms, intensive care units ("ICUs") and
emergency rooms. It is comprised of (i) a portable unit including a computer and
a display monitor, (ii) a single-use, disposable sensor, the SomaSensor(R),
(iii) proprietary software and (iv) a preamplifier cable. The SomaSensor is
adhered to a patient's forehead and connected to the computer through the
preamplifier cable. The computer uses the Company's proprietary software to
analyze information received from the SomaSensor and provides a continuous
digital and trend display on the monitor of an index of the oxygen saturation in
the area of the brain under the SomaSensor. Users of the Cerebral Oximeter will
be required to purchase disposable SomaSensors on a regular basis because of
their single-use nature.
The Cerebral Oximeter is based on the Company's proprietary In Vivo Optical
Spectroscopy ("INVOS") technology. INVOS analyzes various characteristics of
human blood and tissue by measuring and analyzing low-intensity visible and
near-infrared light transmitted into portions of the body. The use of optical
spectroscopy in the body has not generally been useful when the substances to be
measured are surrounded by, are behind or are near bone, muscle or other tissue,
because the transmission, scattering and absorption of the transmitted light
produces extraneous data that interferes with analysis of the data from the area
being examined. The Company has developed a method of reducing extraneous
spectroscopic data caused by surrounding bone, muscle and other tissue, thereby
allowing it to gather information about portions of the body which previously
could not be analyzed using traditional optical spectroscopy.
Under the direction of the Company's President and Chief Executive Officer,
Bruce Barrett, formerly with Abbott Laboratories, the Company obtained FDA
clearance in June 1996 to sell the Cerebral Oximeter in the United States and
implemented a new business strategy. The Company's objective is to establish the
Cerebral Oximeter as a "standard of care" in surgical procedures requiring
general anesthesia and in other critical care situations. Key elements of the
Company's strategy are (i) target surgical procedures with a high risk of brain
oxygen imbalances, (ii) demonstrate the clinical benefits, and promote
acceptance, of the Cerebral Oximeter, (iii) expand marketing and sales
activities, (iv) develop additional applications of the Cerebral Oximeter and
(v) license technology to medical device manufacturers. In addition, the Company
is analyzing the feasibility of other applications of its technology.
4
<PAGE> 6
The Company sells the Cerebral Oximeter in the United States through its
direct sales force and five independent distributors. Internationally, the
Company sells its product through 27 independent distributors covering 78
countries, including Baxter Limited in Japan. Since FDA clearance in June 1996
through April 11, 1997, the Company sold 61 Cerebral Oximeters to distributors
and customers. United States hospitals that have purchased Cerebral Oximeters
include the Mayo Clinic Scottsdale, the University of Kentucky Hospital,
LAC-University of Southern California, UCLA Medical Center and Orlando Regional
Medical Center. In addition, Cerebral Oximeters are in use at more than 100
United States hospitals for clinical research and product evaluation, including
the Duke Heart Center, Emory University School of Medicine, Brigham & Women's
Hospital, University of Louisville Hospital and the University of Pittsburgh.
The Company, a development stage company, was incorporated in the State of
Michigan on January 15, 1982. The Company's headquarters are located at 1653
East Maple Road, Troy, Michigan 48083-4208. Its telephone number is (810)
689-3050.
THE OFFERING
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<S> <C>
Common Shares Offered by the Company................. 2,000,000 shares
Common Shares Outstanding After the Offering(1)...... 4,285,351 shares
Use of Proceeds...................................... To finance the Company's operations, including
marketing and sales activities, research and
development programs and for other general
corporate purposes, including working capital
and sustaining ongoing operations. See "Use of
Proceeds."
Nasdaq Symbol........................................ "SMTS"
</TABLE>
- ---------------
(1) Excludes (i) an aggregate of up to 622,646 Common Shares reserved for
issuance under the Company's 1983 Stock Option Plan, 1991 Incentive Stock
Option Plan, 1993 Director Stock Option Plan, 1997 Stock Option Plan and
nonplan options, of which options to purchase an aggregate of 564,992 Common
Shares were outstanding as of May 23, 1997, (ii) 79,394 Common Shares
issuable upon the exercise of warrants (the "Placement Agent Warrants")
issued in connection with Regulation S financings completed in August 1994,
July 1995 and April 1996 (the "Regulation S Offerings"), (iii) 115,520
Common Shares issuable upon the exercise of warrants (the "Regulation S
Warrants") issued in connection with the Regulation S Offerings completed in
July 1995 and April 1996 and (iv) 200,000 Common Shares issuable upon
exercise of the Representative's Warrants. See Notes 3, 8 and 11 of Notes to
Financial Statements.
5
<PAGE> 7
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------- FISCAL YEAR ENDED NOVEMBER 30,
FEBRUARY 28, FEBRUARY 29, -----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------------ ------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................... $ 354 $ 515 $ 778 $ 1,336 $ 938 $ 1,547 $ 50
Cost of sales................. 180 211 385 658 464 763 48
Gross margin.................. 174 304 393 678 474 784 2
Research, development and
engineering expenses........ 164 50 235 286 550 1,150 1,190
Selling, general and
administrative expenses..... 1,359 590 3,550 3,303 4,347 6,063 4,313
Net loss...................... (1,308) (320) (3,304) (2,818) (4,332) (6,136) (5,391)
Net loss per Common
Share(1).................... (.57) (.18) (1.77) (1.67) (3.41) (5.75) (5.96)
Weighted average number of
Common Shares
outstanding(1).............. 2,285 1,778 1,867 1,684 1,270 1,068 905
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28, 1997
-------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 1,845 $ 8,825
Working capital............................................. 2,577 9,557
Total assets................................................ 3,367 10,347
Long-term debt.............................................. -- --
Deficit accumulated during the development stage............ (31,519) (31,519)
Shareholders' equity(3)..................................... 2,757 9,737
</TABLE>
- ---------------
(1) See Note 4 of Notes to Financial Statements included in this Prospectus for
information with respect to the calculation of per share data. The net loss
per Common Share data and weighted average number of Common Shares
outstanding data have been adjusted to give effect to the 1-for-10 reverse
stock split effected April 10, 1997.
(2) Adjusted to reflect the sale of 2,000,000 Common Shares offered by the
Company hereby at the offering price set forth on the cover page of this
Prospectus (after deducting underwriting discounts and commissions and
estimated offering expenses) and the application of the estimated net
proceeds from such sale. See "Use of Proceeds" and "Capitalization."
(3) See Statements of Shareholders' Equity (Deficiency) of the Financial
Statements included in this Prospectus for an analysis of Common Share
transactions for the period from January 15, 1982 (date of inception)
through February 28, 1997.
6
<PAGE> 8
RISK FACTORS
This Prospectus contains certain forward-looking statements within the
meaning of the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended. Actual results could differ materially from those
projected in the forward-looking statements as a result of certain risks and
uncertainties set forth below and elsewhere in this Prospectus. An investment in
the Common Shares offered hereby involves a high degree of risk. Prospective
investors should carefully consider the following risk factors, in addition to
the other information set forth in this Prospectus, in connection with an
investment in the Common Shares offered hereby.
HISTORY OF LOSSES AND COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN
The Company has been in the development stage since its inception in 1982
and has incurred net losses in every year of its existence. From its inception
on January 15, 1982 through February 28, 1997, the Company incurred a cumulative
net loss of $31,499,623, including a net loss of $3,303,703 for the fiscal year
ended November 30, 1996 and $1,308,412 for the three months ended February 28,
1997. The Company should be evaluated in light of the delays, expenses, problems
and uncertainties frequently encountered by development stage companies. Due to
a number of factors, including the need for customer education about the
clinical benefits of the Cerebral Oximeter, the lengthy sales cycle, the need to
attract and service a customer base, the ability to manufacture its product on a
commercial scale in a cost-effective manner, the development of new products and
increased expenses in fiscal 1997 primarily due to the increase in the number of
employees, the Company does not believe that product sales will be sufficient to
support its operations in fiscal 1997. Therefore, in the foreseeable future, the
Company believes that such expenses will increase the Company's net losses, and
there can be no assurance that the Company will ever be profitable. Due to the
Company's history of losses and its current financial condition, the Company's
independent auditors' report expresses an uncertainty concerning the Company's
ability to continue as a going concern. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," Note 2 of "Notes to
Financial Statements" and "Independent Auditors' Report."
DEPENDENCE ON THE CEREBRAL OXIMETER AND SOMASENSOR
The Cerebral Oximeter and the related SomaSensor are currently the
Company's only commercial product and will account for substantially all of the
Company's revenues for the foreseeable future. The Company received clearance
from the FDA in June 1996 and commercially reintroduced the Cerebral Oximeter in
the United States shortly thereafter. The Company has limited experience in
manufacturing, marketing and selling the Cerebral Oximeter. The Cerebral
Oximeter has not had extensive use in a commercial environment and has not been
evaluated for every medical procedure in which it might be used. Further
research or use of the Cerebral Oximeter might reveal unexpected problems with
its operation or performance, especially in connection with medical procedures
for which the Cerebral Oximeter has not yet been evaluated. Although the
Company's testing of the Cerebral Oximeter to date indicates clinical benefits,
subsequent performance problems could prevent acceptance of the product by the
medical community, result in unanticipated expense and adversely affect future
sales of its product. Since the Cerebral Oximeter and the related SomaSensor
represent the Company's primary near-term focus, if the market for the Cerebral
Oximeter fails to develop, or fails to develop as rapidly as expected, the
Company's business, financial condition and results of operations could be
adversely affected. Although the Company is developing other products, there can
be no assurance that any commercial products will result from its efforts.
UNCERTAINTY OF ACCEPTANCE BY THE MEDICAL COMMUNITY
To date, the medical community has had little exposure to the Company or
its technology. Because the medical community is often skeptical of new
companies and new technologies, no assurance can be given that members of the
medical community will perceive a need for the Cerebral Oximeter or be convinced
of its clinical benefits. In addition, hospital capital equipment purchasing
decisions are often made by hospital purchasing committees that might not
include the user of the monitoring system. In such a case, such committees will
have to be convinced to purchase the Company's product. Even if the Company is
successful
7
<PAGE> 9
in convincing physicians, other medical professionals and their hospital
purchasing committees of the need for the Cerebral Oximeter, they might be
unwilling or unable to commit funds to the purchase of the Cerebral Oximeter due
to institutional budgetary constraints or decreases in capital expenditures. In
many cases, these constraints are due to hospital cost controls, increased
managed care and fixed reimbursements for the medical procedures in which the
Cerebral Oximeter is used. If the Company's product fails to achieve market
acceptance, the Company's business, financial condition and results of
operations could be adversely affected.
Part of the Company's marketing strategy is to support clinical research
programs and encourage peer-to-peer selling. While the Company believes
favorable peer review is a key element to a product's acceptance by the medical
community, there can be no assurance that additional papers will be submitted or
that any such papers will help the Company sell Cerebral Oximeters. In addition,
researchers might publish adverse results. For example, in fiscal 1993
researchers in the United Kingdom published adverse results from research
regarding an earlier prototype of the Cerebral Oximeter. While publications in
fiscal 1996 were generally favorable, some researchers published adverse results
after using the Cerebral Oximeter beyond its indicated use. Negative reaction to
these publications, the Company's financial condition and the rescission of the
Company's previous FDA clearance for the Cerebral Oximeter could adversely
affect the Company's reputation in the medical community and, as a result, its
ability to market and sell its product. See "Business -- Marketing, Sales and
Distribution."
LENGTHY SALES CYCLE
The decision-making process for the Company's customers is often complex
and time-consuming. Based on its limited experience, the Company believes the
period between initial discussions concerning the Cerebral Oximeter and a
purchase of even one unit is a minimum of six to nine months. The process can be
delayed even further as a result of hospital capital budgeting procedures.
Moreover, even if one or two units are sold to a hospital, the Company believes
that it will take additional time and experience with the Cerebral Oximeter
before additional medical professionals in the hospital might be interested in
using the Cerebral Oximeter in other procedures or other areas of the hospital.
These delays could have an adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Marketing, Sales and
Distribution."
COMPETITION
The Company believes that the market for cerebral oximetry products, if it
develops, may become highly competitive. The Company is aware of foreign
companies that have sold products relating to cerebral metabolism monitoring for
research or evaluation. In addition, the medical equipment industry is
characterized by intense competition and extensive research and development.
Other companies and individuals are engaged in research and development of
non-invasive cerebral oximeters, and the Company believes there are many other
potential entrants into the market, including the Critikon division of Johnson &
Johnson. Some of these potential competitors have well established reputations,
customer relationships and marketing, distribution and service networks, and
have substantially longer histories in the medical equipment industry, larger
product lines, and greater financial, technical, manufacturing, research and
development and management resources than those of the Company. Many of these
potential competitors have long-term product supply relationships with the
Company's potential customers. These potential competitors may succeed in
developing products that are at least as reliable and effective as the Company's
product, that make additional measurements, or that are less costly than the
product developed by the Company. These potential competitors may be more
successful than the Company in manufacturing and marketing their products, and
may be able to take advantage of the significant time and effort invested by the
Company to gain medical acceptance of cerebral oximetry. In addition, two
patents issued to an unaffiliated third party and relating to cerebral oximetry
will expire in the next year, making that technology generally available and
potentially helping the development of competing products. Successful commercial
development of competing products could lead to loss of market share and lower
margins and have an adverse effect on the Company's business, financial
condition and results of operations.
The Company also competes indirectly with numerous companies that sell
various types of medical equipment to hospitals for the limited amount of
funding allocated to capital equipment in hospital budgets.
8
<PAGE> 10
The market for medical equipment is subject to rapid change due to an
increasingly competitive, cost-conscious environment and to government programs
intended to reduce the cost of medical care. Many of these manufacturers of
medical equipment are large, well-established companies whose resources,
reputations and ability to leverage existing customer relationships may give
them a competitive advantage over the Company. The Company's product and
technology also compete indirectly with many other methods currently used to
measure blood oxygen levels or the effects of low blood oxygen levels. See
"Business -- Market Overview" and "-- Competition."
NEED FOR ADDITIONAL FINANCING
The Company expects that the net proceeds of this offering will be adequate
to satisfy its operating and capital requirements at least into the second half
of fiscal 1998. However, changes in the Company's business or business plan or
unexpected expenses could affect the Company's capital requirements. The
Company's future capital requirements will depend on many factors, including,
but not limited to, the cost of marketing and assembly activities, whether it
can successfully market its product, the rate of market acceptance, the scope of
research and development programs, the length of time required to collect
accounts receivable, and competing technological and market developments. If
additional financing is needed, it might not be available on terms acceptable to
the Company or at the times required by the Company, if at all, and such
financing might dilute the interests of existing shareholders. See "Use of
Proceeds," and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced, and expects to continue to experience,
significant fluctuations in its quarterly operating results. The Company's
future operating results are dependent upon a number of factors, including, but
not limited to, the demand for its product, the timing of its sales, the length
of its sales cycle, the timing and development of any competing products, the
publication of clinical research results regarding the product, the use of the
Company's product as a "standard of care" by any hospitals, the timing of new
employee hiring and economic conditions, both generally and in the medical
equipment industry. In particular, the Company does not expect to have a
material backlog of unfilled orders, so any shortfall in demand for the
Company's product in relation to the Company's expectations, or any material
delay in orders from distributors or customers, could have an almost immediate
adverse impact on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DEPENDENCE UPON MANAGEMENT AND KEY PERSONNEL
The Company's future performance depends in significant part upon the
continued service of its senior management, including Bruce J. Barrett,
President and Chief Executive Officer, Raymond W. Gunn, Executive Vice President
and Chief Financial Officer, and certain scientific, technical and manufacturing
personnel. The loss of any of such key personnel by the Company could have an
adverse effect on the Company. The Company does not maintain key-man life
insurance on any such key personnel. The Company also plans to hire additional
key employees in fiscal 1997. Competition for qualified employees is intense,
and an inability to attract and retain additional, highly-skilled employees
required for the expansion of the Company's operations could adversely affect
the Company's business, financial condition and results of operations. The
Company's ability to retain existing employees and attract new employees may be
adversely affected by its current financial situation. There can be no assurance
that the Company will be able to retain its existing personnel or attract
additional, qualified persons when required and on acceptable terms. See
"Business -- Employees," and "-- Management."
DEPENDENCE ON DISTRIBUTORS
The Company is substantially dependent on its distributors to generate
sales of Cerebral Oximeters, especially internationally. Although the Company
believes its current distributors to be knowledgeable and has a training program
for new distributors concerning the Company's technology and its product,
independent
9
<PAGE> 11
distributors might not have sufficient knowledge about, or familiarity with, the
Company's technology or its product to demonstrate adequately its operation and
clinical benefits. Failure of distributors to market, promote and sell the
Company's product adequately would have an adverse effect on the Company's
business, financial condition and results of operations.
There can be no assurance that the Company will be able to engage
additional distributors on a timely basis or enter into other third-party
marketing arrangements, and retain or replace its existing distributors. The
Company's inability to engage, replace or retain distributors could have an
adverse effect on its ability to market and sell its product. Distributor
terminations might increase the Company's costs. Even if such distributors are
engaged and retained, they might incur conflicting obligations to sell other
companies' products or might distribute other products that provide greater
revenues than are provided by the Company's product.
Two international distributors accounted for approximately 62% and 15%,
respectively, of total revenues for fiscal 1996 and one international
distributor and two United States distributors accounted for approximately 42%,
14% and 11%, respectively, of total revenues for the three months ended February
28, 1997. The loss of any of these distributors would have an adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Marketing, Sales and Distribution."
PROPRIETARY RIGHTS; RISK OF INFRINGEMENT
Although twelve United States patents have been issued to the Company with
respect to its technology, only seven of such patents expressly refer to
examination of the brain or developments involving the Cerebral Oximeter. Many
patents have already been issued to third parties involving optical spectroscopy
and the interaction of light with tissue, some of which relate to the use of
optical spectroscopy in the area of brain metabolism monitoring, which is the
primary use of the Cerebral Oximeter. No patent infringement claims have been
asserted against the Company, although the development of a significant market
for cerebral oximeters would give potential competitors more incentive to assert
infringement claims or challenge the Company's patents. The costs of defense of
patent litigation can be substantial and, if such defense were unsuccessful, the
Company could be liable for substantial damages. In addition, if it were
determined that the Company's product infringed any claims of an issued patent,
the Company could be enjoined from manufacturing or selling its product or
forced to obtain a license in order to continue the manufacture or sale of its
product, requiring payment of a licensing fee or royalties of unknown magnitude
on sales of its product. If the Company were required to obtain a license, it
might not be available, or available on terms acceptable to the Company. Any
inability to obtain required licenses on favorable terms, or at all, would
adversely affect the Company's business, financial condition and results of
operations.
There can be no assurance that any additional patent applications will be
allowed, any issued patents would be upheld, if challenged, any issued patents
will provide the Company with significant competitive advantages, or challenges
will not be instituted against the validity or enforceability of any patents
owned by the Company or, if instituted, that such challenges will not be
successful. If patents are not issued from future patent applications, the
Company may be subject to greater competition. The cost of litigation to uphold
the validity of a patent and prevent infringement can be very substantial and
could be beyond the Company's financial capability even if the Company could
otherwise prevail. Also, the laws of certain foreign countries do not protect
the Company's proprietary rights to the same extent as the laws of the United
States. Furthermore, individuals and companies might independently develop
similar technologies, duplicate the Company's technology or design around the
patented aspects of the Company's technology, or the Company might infringe
patents or other rights owned by other individuals and companies. The Company's
technology primarily represents improvements or adaptations of known optical
spectroscopy technology, which might be duplicated or discovered through its
patents, reverse engineering or both. Two patents issued to an unaffiliated
third party and relating to cerebral oximetry will expire in the next year,
making that technology generally available. The development or emergence of
competing products or technologies could have an adverse effect on the Company's
business, financial condition and results of operations. The Company also relies
on trade secret, copyright and other laws and on confidentiality agreements to
protect its technology, but believes that neither its patents nor other legal
rights will necessarily prevent other individuals and companies from
10
<PAGE> 12
developing or from using similar or related technology to compete against the
Company's product. There can be no assurance that confidentiality agreements
will not be breached, that the Company would have adequate remedies for any
breach, or that the Company's trade secrets will not otherwise become known to,
or independently developed by, competitors. See "Business -- Proprietary
Information."
MANAGEMENT OF GROWTH
The Company anticipates entering a period of rapid growth and expansion,
which is expected to place a significant strain on the Company's management,
customer service, operations, sales and administrative personnel and other
resources. In order to serve the needs of its existing and future customers, the
Company has increased and will continue to increase its workforce, which
requires the Company to attract, train, motivate and manage qualified employees.
The Company has incurred and continues to incur significant costs to retain
qualified management, sales and marketing, engineering, production,
manufacturing and administrative personnel and scientists, as well as for
marketing and promotional activities. The Company's ability to manage its
planned growth depends upon the Company's success in continuing to expand its
operating, management, information and financial systems, which may
significantly increase its operating expense. There can be no assurance that the
Company will be able to manage effectively any future growth, and any failure to
do so would have an adverse effect on the Company's business, financial
condition and results of operations. See "Dependence Upon Management and Key
Personnel," "Business -- Employees," and "Management -- Directors and Executive
Officers."
RISKS ASSOCIATED WITH NEW PRODUCT DEVELOPMENT
The Company has invested, and expects to continue to invest, substantial
resources to further develop the Cerebral Oximeter, the related disposable
SomaSensor, product extensions of the Cerebral Oximeter for use on children and
newborns, and other applications of its technology. New products require
extensive testing and regulatory clearance before they can be marketed, and
substantial customer education concerning product use, advantages and
effectiveness. In addition, the Company's products might meet market resistance
in their primary markets because of resistance to major capital equipment
expenditures by hospital purchasing committees and because hospitals might be
concerned that the cost of a new device will lower their profits because medical
insurers generally fix reimbursement amounts for the procedures in which the
Company's products might be used. There can be no assurance that the Company
will be able to successfully apply its technology in the development of
commercially viable products. See "Use of Proceeds" and "Business -- Research
and Development."
GOVERNMENT REGULATION
The testing, manufacture and sale of the Company's product are subject to
regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign agencies. Pursuant to the Federal Food, Drug,
and Cosmetic Act, and the regulations promulgated thereunder, the FDA regulates
the preclinical and clinical testing, manufacture, labeling, distribution and
promotion of medical devices. Noncompliance with applicable requirements can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing clearances or approvals and criminal prosecution, any of
which actions could have an adverse effect on the Company's business, financial
condition and results of operations.
The Company has made modifications to the Cerebral Oximeter, which the
Company believes do not require the submission of new 510(k) notices. There can
be no assurance, however, that the FDA would agree with any of the Company's
determinations not to submit a new 510(k) notice for any of these changes or
would not require the Company to submit a new 510(k) notice for any of the
changes made to the device. If the FDA requires the Company to submit a new
510(k) notice for any device modification, the Company may be prohibited from
marketing the modified device until the 510(k) notice is cleared by the FDA. See
"Business -- Government Regulation."
11
<PAGE> 13
There can be no assurance that the Company's current FDA clearance to
market the Cerebral Oximeter in the United States will not be rescinded or that,
if and when any additional products are developed by the Company, they will
receive FDA clearance. If any current or future clearances or approvals are
rescinded or denied, sales of the Company's product in the United States would
be prohibited during the period the Company does not have such clearances. There
can be no assurance that the Company will be able to obtain necessary regulatory
approvals or clearances on a timely basis or at all, and delays in receipt of or
failure to receive such approvals or clearances, the loss of previously received
approvals or clearances, limitations on intended use imposed as a condition of
such approvals or clearances, any limitations on the Company's market required
by any clearances, any resulting delays in market introduction or failure to
comply with existing or future regulatory requirements would have an adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Government Regulation."
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with Good Manufacturing Practice ("GMP") and other
applicable regulations. Changes in existing requirements or adoption of new
requirements could have an adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will not incur significant costs to comply with laws and regulations in the
future or that laws and regulations will not have an adverse effect upon the
Company's business, financial condition and results of operations.
The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations in the future or that such laws or regulations will not have an
adverse effect upon the Company's ability to do business.
PRODUCT LIABILITY
The testing, marketing and sale of patient monitoring devices entail an
inherent risk that product liability claims will be asserted against the
Company. The Cerebral Oximeter is intended to be used in operating rooms and
other critical care hospital units with patients who may be seriously ill or may
be undergoing dangerous procedures. On occasion, patients on whom the Cerebral
Oximeter is being used may sustain injury or die as a result of their medical
treatment or condition. If litigation is initiated because of such injury or
death, the Company may be sued, and regardless of whether it is ultimately
determined to be liable, the Company may incur significant legal expenses not
covered by insurance. In addition, product liability litigation could damage the
Company's reputation and therefore impair its marketing ability. Such litigation
could also impair the Company's ability to retain products liability insurance
or make such insurance more expensive. The Company has product liability
insurance with a liability limit of $1,000,000. Such insurance is costly and
even though it has been obtained, there can be no assurance that the Company
will be able to retain such insurance or that such insurance would be sufficient
to protect the Company in the event of a major defect in the Cerebral Oximeter.
In the event of an uninsured or inadequately insured product liability claim
based on the performance of the Cerebral Oximeter, the Company's business,
financial condition and results of operations could be adversely affected. See
"Business -- Insurance."
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING AND SUPPLY
The Company depends on various suppliers to manufacture the components for
its Cerebral Oximeter and the related disposable SomaSensor. The Company
believes each component is generally available from several potential suppliers.
However, engaging additional or replacing existing suppliers of custom-designed
components is costly and time consuming. The Company does not intend to maintain
significant inventories of components, Cerebral Oximeters, or SomaSensors.
Therefore, the Company might incur delays in meeting delivery deadlines in the
event a particular supplier is unable or unwilling to meet the Company's
requirements. The Company would require approximately three to four months to
change SomaSensor suppliers. In addition, the Company does not have direct
control over the activities of its suppliers and depends on them for quality
control, capacity, processing technologies and, in required cases, compliance
with FDA GMP regulations. If the Company cannot replace certain suppliers on a
timely basis when necessary, its
12
<PAGE> 14
business, financial condition and results of operations may be adversely
affected. In addition, because the Company does not have long-term agreements
with its suppliers, it may be subject to unexpected price increases which may
adversely affect its profit margins. See "Business -- Manufacturing."
SUBSTANTIAL DILUTION
At February 28, 1997, the Company had a net tangible shareholders' equity
of $1.17 per share. A purchaser of Common Shares in this offering will
experience immediate and substantial dilution of $1.75 per share in that the
offering price exceeds the net tangible book value of the Company after giving
effect to the offering. To the extent outstanding options and warrants to
purchase Common Shares are exercised, there will be further dilution to new
investors. See "Dilution."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Shares may be highly volatile. Quarterly
operating results of the Company, changes in general conditions in the economy,
the financial markets, or the medical equipment industry, changes in financial
estimates by securities analysts or failure by the Company to meet such
estimates, litigation involving the Company, actions by governmental agencies or
other developments affecting the Company or its competitors, could cause the
market price of the Common Shares to fluctuate substantially. In particular, the
stock market may experience significant price and volume fluctuations which may
affect the market price of the Common Shares for reasons that are unrelated to
the Company's operating performance and that are beyond the Company's control.
BROAD DISCRETION OF MANAGEMENT TO ALLOCATE NET PROCEEDS
The Company intends to use the net proceeds of this offering primarily to
finance its operations, including increased marketing and sales activities,
expanding research and development programs and for other general corporate
purposes, including working capital and sustaining ongoing operations. The
amounts identified for the foregoing under "Use of Proceeds" in this Prospectus
are estimates and the amounts actually expended for each such purpose and the
timing of such expenditures may vary depending upon numerous factors. Management
will retain broad discretion to determine the allocation of the net proceeds of
this offering and the timing of expenditures.
FUTURE SALES OF COMMON SHARES; REGISTRATION RIGHTS; EXERCISE OF OPTIONS AND
WARRANTS
The number of the Company's outstanding Common Shares held by
non-affiliates is large relative to the trading volume of the Common Shares. The
Company is unable to predict the effect that sales of Common Shares may have on
the then prevailing market price of the Common Shares. Any substantial sale of
Common Shares or even the possibility of such sales occurring may have an
adverse effect on the market price of the Common Shares.
As of May 23, 1997, the Company had outstanding options and warrants to
purchase an aggregate of 759,906 Common Shares. The Company has also reserved up
to an additional 57,654 Common Shares for issuance upon exercise of options
which have not yet been granted under the Company's stock option plans. Holders
of such warrants and options are likely to exercise them when, in all
likelihood, the Company could obtain additional capital on terms more favorable
than those provided by the options and warrants. In addition, holders of the
Placement Agent Warrants have piggy-back registration rights with respect to the
underlying securities, and holders of the Representative's Warrants to be
granted in connection with this offering will have demand and piggy-back
registration rights with respect to the underlying securities. Exercise of these
registration rights may adversely affect the terms upon which the Company may
obtain additional financing. Further, while its warrants and options are
outstanding, the Company's ability to obtain additional financing on favorable
terms may be adversely affected. See "Underwriting" and "Description of Capital
Stock."
13
<PAGE> 15
POTENTIAL ANTI-TAKEOVER EFFECT
The Board of Directors has the authority, without further approval of the
Company's shareholders, to issue preferred shares (the "Preferred Shares")
having such rights, preferences and privileges as the Board of Directors may
determine. Any such issuance of Preferred Shares could, under certain
circumstances, have the effect of delaying or preventing a change in control of
the Company and may adversely affect the rights of holders of Common Shares. In
addition, the Company is subject to Michigan statutes regulating business
combinations, takeovers and control share acquisitions which might also hinder
or delay a change in control of the Company. Anti-takeover provisions that could
be included in the Preferred Shares when issued and the Michigan statutes
regulating business combinations, takeovers and control share acquisitions can
have a depressive effect on the market price of the Company's securities and can
limit shareholders' ability to receive a premium on their shares by discouraging
takeover and tender offer bids.
The directors of the Company serve staggered three-year terms, and
directors may not be removed without cause. The Company's Restated Articles of
Incorporation also set the minimum and maximum number of directors constituting
the entire Board at three and fifteen, respectively, and require approval of
holders of 90% of the Company's voting shares to amend these provisions. These
provisions could have an anti-takeover effect by making it more difficult to
acquire the Company by means of a tender offer, a proxy contest or otherwise or
the removal of incumbent officers and directors. These provisions could delay,
deter or prevent a tender offer or takeover attempt that a shareholder might
consider in his or her best interests, including those attempts that might
result in a premium over the market price for the Common Shares held by the
Company's shareholders. See "Description of Capital Stock."
LANGFORD LAWSUIT MAY INVOLVE SIGNIFICANT AMOUNT TO DEFEND OR SETTLE
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
various registration statements filed under the Securities Act of 1933, as
amended, various reports filed under the Securities Exchange Act of 1934, as
amended, and various reports and press releases contained material misstatements
and omissions and that the Company and the named officer of the Company made
material misstatements and omissions. The plaintiff generally seeks unspecified
rescissionary damages, interest, punitive damages and attorneys' fees. Its
claims arise under Sections 11 and 12(2) of the Securities Act of 1933, as
amended, Section 10(b) of the Securities Exchange Act of 1934, as amended, Rule
10b-5 under the Securities Exchange Act of 1934, as amended, and under common
law. Because of the settlement of a prior class action, Mr. Langford's action is
no longer a class action, but approximately 11 persons who opted out of the
settlement (including Mr. Langford) are not barred by the settlement from
pursuing their own claims against the Company. 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.
14
<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 Common
Shares offered hereby after deducting the underwriting discounts and commissions
and estimated offering expenses payable by the Company, are estimated to be
approximately $6,980,000 ($8,102,000 if the Underwriters' over-allotment option
is exercised in full), at the public offering price of $4.00 per share.
The Company currently intends to use the net proceeds from the sale of the
Common Shares offered hereby to finance the Company's operations, including the
following:
<TABLE>
<S> <C>
Increased Marketing and Sales Activities(1)................. $2,800,000
Expand Research and Development Programs(2)................. 900,000
General Corporate Purposes, Including Sustaining the
Company's Operations(3)................................... 3,280,000
----------
Total.................................................. $6,980,000
==========
</TABLE>
- ---------------
(1) Includes the cost of the Company's direct sales force, attendance at trade
shows and other promotional activities.
(2) Includes the development of a Cerebral Oximeter for use on children and
newborns, enhancements to the Cerebral Oximeter and the development of new
products through its consulting arrangements with NeuroPhysics Corporation.
(3) Includes working capital and other ongoing Selling, General and
Administrative expenses. See the Financial Statements as of, and for the
quarter ended, February 28, 1997, included elsewhere in this Prospectus, for
information about the Company's current working capital needs and ongoing
Selling, General and Administrative expenses.
The foregoing represents the Company's best estimate of its allocation of
the estimated net proceeds from the sale of Common Shares offered hereby and is
subject to a reapportionment of proceeds among the categories discussed above or
to new categories in response to, among other things, changes in the Company's
business plans, future revenues and expenses and industry, regulatory or
competitive conditions. The amount and timing of expenditures will vary
depending on a number of factors, including changes in the Company's
contemplated operations or business plan and changes in economic and industry
conditions. Any such shifts will be at the discretion of the Board of Directors
and the officers of the Company.
Pending the application of such proceeds, the Company intends to invest the
net proceeds of this offering in short-term, investment-grade, interest-bearing
investments.
15
<PAGE> 17
PRICE RANGE OF COMMON SHARES AND DIVIDEND POLICY
The Common Shares trade on The Nasdaq SmallCap Market under the trading
symbol "SMTS." On November 30, 1994, the Company's securities were delisted from
The Nasdaq Stock Market and were traded in the over-the-counter market. As of
December 27, 1994, the Common Shares were re-listed on, and are currently quoted
in, The Nasdaq SmallCap Market. The following table sets forth, for the periods
indicated, the range of high and low closing bid quotations as reported by
Nasdaq. The prices set forth below have been adjusted to give effect to the
1-for-10 reverse stock split of the Common Shares effected on April 10, 1997.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal Year Ended November 30, 1995
First Quarter............................................. $13.10 $ 7.50
Second Quarter............................................ 18.10 11.30
Third Quarter............................................. 18.10 8.80
Fourth Quarter............................................ 9.40 5.00
Fiscal Year Ended November 30, 1996
First Quarter............................................. $17.50 $ 4.10
Second Quarter............................................ 25.00 10.00
Third Quarter............................................. 40.00 14.40
Fourth Quarter............................................ 23.10 12.50
Fiscal Year Ending November 30, 1997
First Quarter............................................. $15.00 $ 5.63
Second Quarter (through May 29, 1997)..................... 11.25 3.38
</TABLE>
On May 29, 1997, the last reported sales price for the Common Shares on The
Nasdaq SmallCap Market was $5.50 per share. At April 11, 1997, the Company had
602 shareholders of record.
The bid quotations set forth above reflect inter-dealer prices, without
retail markup, mark-down or commission and may not necessarily represent actual
transactions.
The Company has never paid cash dividends on its Common Shares and does not
expect to pay such dividends in the foreseeable future. The Company currently
intends to retain any future earnings for use in the Company's business. The
payment of any future dividends will be determined by the Board in light of the
conditions then existing, including the Company's financial condition and
requirements, future prospects, restrictions in future financing agreements,
business conditions and other factors deemed relevant by the Board.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of February 28, 1997 and as adjusted to give effect to the sale of the 2,000,000
Common Shares offered by the Company hereby at the public offering price of
$4.00 and the application of the estimated net proceeds of $6,980,000 therefrom
(after deducting underwriting discounts and commissions and estimated offering
expenses) as described in "Use of Proceeds." This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and Notes to Financial
Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT FEBRUARY 28, 1997
----------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Shareholders' equity:
Preferred shares, authorized, 1,000,000 shares of $.01 par
value; no shares issued or outstanding................. $ -- $ --
Common Shares; authorized, 6,000,000 shares of $.01 par
value; issued and outstanding, 2,285,351 shares at
February 28, 1997 (4,285,351 shares, as adjusted)(1)... 23 43
Additional paid-in capital................................ 34,253 41,213
Deficit accumulated during the development stage(2)....... (31,519) (31,519)
-------- --------
Total shareholders' equity and total capitalization.... $ 2,757 $ 9,737
======== ========
</TABLE>
- ---------------
(1) Excludes (i) an aggregate of up to 622,646 Common Shares reserved for
issuance under the Company's 1983 Stock Option Plan, 1991 Incentive Stock
Option Plan, 1993 Director Stock Option Plan, 1997 Stock Option Plan and
non-plan options, of which options to purchase an aggregate of 564,992
Common Shares were outstanding as of May 23, 1997, (ii) 79,394 Common Shares
issuable upon the exercise of the Placement Agent Warrants issued in
connection with the Regulation S Offerings, (iii) 115,520 Common Shares
issuable upon the exercise of the Regulation S Warrants issued in connection
with the Regulation S Offerings completed in July 1995 and April 1996 and
(iv) 200,000 Common Shares issuable upon exercise of the Representative's
Warrants. See Notes 3, 8 and 11 of Notes to Financial Statements.
(2) Management believes the deficit accumulated during the development stage has
continued to increase during the second quarter ending May 31, 1997 and
there has been a corresponding decrease in total capitalization.
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<PAGE> 19
DILUTION
The net tangible book value of the Company as of February 28, 1997 was
$2,679,554, or $1.17 per Common Share. Net tangible book value per share
represents the amount of net tangible assets, less total liabilities, divided by
the number of Common Shares outstanding. After giving effect to the sale by the
Company of 2,000,000 Common Shares offered hereby at the public offering price
of $4.00 per share, the net tangible book value of the Company as of February
28, 1997 would have been $9,659,554, or $2.25 per share. This represents an
immediate increase in such net tangible book value of $1.08 per share to
existing shareholders and an immediate dilution of $1.75 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share............................. $4.00
Net tangible book value per share at February 28, 1997.... $1.17
Increase in net tangible book value per share attributable
to new investors....................................... 1.08
-----
Net tangible book value per share after giving effect to
this offering............................................. 2.25
-----
Dilution per share to new investors......................... $1.75
=====
</TABLE>
The foregoing assumes no exercise of options and warrants after February
28, 1997. As of May 23, 1997, there were outstanding options and warrants to
purchase an aggregate of 759,906 Common Shares, and the Company had also
reserved up to an additional 57,654 Common Shares for issuance upon the exercise
of options which had not yet been granted under the Company's stock option
plans. To the extent outstanding options or warrants are exercised, there will
be further dilution to new investors. See "Capitalization."
18
<PAGE> 20
SELECTED FINANCIAL DATA
The following selected financial data as of November 30, 1996, 1995, 1994,
1993 and 1992, and for each of the years in the five-year period ended November
30, 1996 have been derived from the audited financial statements of the Company,
certain of which appear elsewhere in this Prospectus, together with the report
of Deloitte & Touche LLP, independent auditors, whose report includes an
explanatory paragraph relating to an uncertainty concerning the Company's
ability to continue as a going concern. The following selected financial data as
of February 28, 1997, and for the three-month periods ended February 28, 1997
and February 29, 1996, have been derived from the unaudited financial statements
of the Company appearing elsewhere in this Prospectus, but in the opinion of
management, reflect all adjustments, consisting of normal recurring adjustments
necessary for a fair presentation of the financial position and results of
operations for such periods and as of such date. The results of operations for
the three months ended February 28, 1997 are not necessarily indicative of the
results to be expected for the year ending November 30, 1997. The selected
financial data should be read in conjunction with the financial statements and
notes thereto and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS ENDED INCEPTION
--------------------------- FISCAL YEAR ENDED NOVEMBER 30, (JANUARY 15, 1982)
FEBRUARY 28, FEBRUARY 29, ---------------------------------------------------- TO FEBRUARY 28,
1997 1996 1996 1995 1994 1993 1992 1997
------------ ------------ -------- -------- -------- -------- -------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales(1)........ $ 354 $ 515 $ 778 $ 1,336 $ 938 $ 1,547 $ 50 $ 6,083
Cost of sales....... 180 211 385 658 464 763 48 2,808
Gross margin........ 174 304 393 678 474 784 2 3,398
Research,
development and
engineering
expenses.......... 164 50 235 286 550 1,150 1,190 8,169
Selling, general and
administrative
expenses.......... 1,359 590 3,550 3,303 4,347 6,063 4,313 27,549
Net loss............ (1,308) (320) (3,304) (2,818) (4,332) (6,136) (5,391) (31,500)
Net loss per Common
Share(2).......... (.57) (.18) (1.77) (1.67) (3.41) (5.75) (5.96) (41.03)
Weighted average
number of Common
Shares
outstanding(2).... 2,285 1,778 1,867 1,684 1,270 1,068 905 768
</TABLE>
<TABLE>
<CAPTION>
AT AT NOVEMBER 30,
FEBRUARY 28, ----------------------------------------------------
1997 1996 1995 1994 1993 1992
------------ -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities... $ 1,845 $ 3,292 $ 941 $ 2,405 $ 2,929 $ 8,594
Working capital.................. 2,577 3,862 1,846 2,982 3,326 8,776
Total assets..................... 3,367 4,672 2,861 4,327 5,142 10,310
Total liabilities................ 610 618 568 808 1,039 835
Long-term debt and redeemable
Convertible Preferred Shares... -- -- 20 20 60 80
Deficit accumulated during the
development stage(4)........... (31,519) (30,211) (26,907) (24,089) (19,757) (13,622)
Shareholders' equity(3)(4)....... 2,757 4,054 2,294 3,519 4,103 9,475
</TABLE>
- ---------------
(1) The revenue recorded prior to the fiscal year ended November 30, 1991
consists primarily of product sales revenue from sales of the INVOS 2100.
Marketing of the INVOS 2100 has been discontinued. Revenue recorded in the
fiscal years ended November 30, 1992 and 1991 relates to the sale of
Cerebral Oximeters primarily to specialty dealers for demonstration purposes
only. Revenue recorded in the three months ended February 28, 1997 and
February 29, 1996 and in fiscal years 1996, 1995, 1994 and 1993 relate
primarily to the sale of Cerebral Oximeters and SomaSensors for commercial
use. For a description of the current status of the Company's marketing
efforts, the loss of, and regaining, FDA clearance to market the Cerebral
Oximeter in the United States and the resulting changes in the Company's
operations, see "Business -- Government Regulation," and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." Thus, the selected financial data
presented above may not be indicative of the results to be expected for
fiscal 1997.
(2) See Note 4 of Notes to Financial Statements included in this Prospectus for
information with respect to the calculation of per share data. The net loss
per Common Share data and weighted average number of Common Shares
outstanding data have been adjusted to give effect to the 1-for-10 reverse
stock split effective April 10, 1997.
(3) See Statements of Shareholders' Equity (Deficiency) of the Financial
Statements included in this Prospectus for an analysis of Common Share
transactions for the period from January 15, 1982 (date of inception)
through February 28, 1997.
(4) The Company believes its deficit accumulated during the development stage
has increased and shareholders' equity has decreased since February 28,
1997.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations includes forward-looking statements with respect to
the Company's future financial performance. These forward-looking statements are
subject to various risks and uncertainties, including the factors described
under "Risk Factors" and elsewhere in this Prospectus, that could cause actual
results to differ materially from historical results or those currently
anticipated.
RESULTS OF OPERATIONS
OVERVIEW
In 1988, the Company began clinical studies of the Cerebral Oximeter on
human patients. In June 1992, the Company received 510(k) clearance from the FDA
to market the Cerebral Oximeter in the United States for use on adults. The
Company began commercial shipments of Cerebral Oximeters and SomaSensors in May
1993. In November 1993, the FDA rescinded the Company's clearance to market the
Cerebral Oximeter and the related disposable SomaSensor in the United States,
and the Company suspended all commercial sales. In February 1994, the Company
resumed marketing its product in several foreign countries, and in June 1996 the
Company received clearance from the FDA to market the Cerebral Oximeter and the
related disposable SomaSensor in the United States.
The Company is in the development stage and has accumulated losses of
$31,499,623 through February 28, 1997. From its inception in January 1982
through February 28, 1997, its primary activities have consisted of research and
development of the INVOS technology, a discontinued product, the Cerebral
Oximeter and the related disposable SomaSensor. The Company believes that its
accumulated deficit will continue to increase for the foreseeable future.
The Company derives its revenues from sales of Cerebral Oximeters and
SomaSensors to its distributors and, since the June 1996 FDA clearance, to
hospitals through its direct sales employees. The Company recognizes revenues
when it ships its product to its distributors or to hospitals. Payment terms are
generally net 30 days for United States sales and net 60 days or longer for
international sales. The Company's primary expenses, excluding the cost of its
product, are selling, general and administrative and research, development and
engineering, which are generally expensed as incurred. The Company capitalizes
its patent costs and amortizes them over 17 years. Since May 1994, the Company
has exchanged the new model 3100A Cerebral Oximeters for its model 3100 Cerebral
Oximeters. The Company refurbishes the model 3100 Cerebral Oximeters it receives
and sells them approximately at cost in countries that do not require compliance
with the standards met by the model 3100A. Such sales reduce the Company's
overall gross margin.
THREE MONTHS ENDED FEBRUARY 28, 1997 COMPARED TO THREE MONTHS ENDED FEBRUARY 29,
1996
Net sales decreased by approximately $161,000, or 31%, from $515,079 in the
three-month period ended February 29, 1996 to $353,863 in the three-month period
ended February 28, 1997. The decrease in sales was primarily attributable to a
26% decrease in the average selling price of Cerebral Oximeters to Baxter
Limited to make their price similar to that of other distributors and reduced
shipments to Baxter Limited in Japan, which purchased its requirements for all
of 1996 in the first quarter of fiscal 1996. Sales of refurbished model 3100
Cerebral Oximeters, model 3100A Cerebral Oximeters and SomaSensors comprised
approximately 5%, 73% and 22%, respectively, of the Company's sales in the first
quarter of fiscal 1997 and 5%, 84% and 11%, respectively, of the Company's sales
in the first quarter of fiscal 1996. Approximately 63% of the Company's net
sales in the first quarter of fiscal 1997 were export sales, compared to 100% of
the Company's net sales in the first quarter of fiscal 1996. One international
distributor and two United States distributors accounted for approximately 42%,
14% and 11%, respectively, of total net sales for the three months ended
February 28, 1997, and two international distributors accounted for
approximately 86% and 6% of total net sales for the three months ended February
29, 1996.
20
<PAGE> 22
Gross margin as a percentage of net sales for the quarters ended February
28, 1997 and February 29, 1996 was approximately 49% and 59%, respectively.
Gross margin as a percentage of net sales decreased in the first quarter ended
February 28, 1997 from the first quarter of fiscal 1996, primarily because the
Company realized lower average selling prices for model 3100A Cerebral
Oximeters, and the cost to the Company of the SomaSensor was higher in the first
quarter of fiscal 1997. This decrease was partially offset by an approximately
4% decrease in materials cost for the Cerebral Oximeter in the first quarter of
fiscal 1997.
The Company's research, development and engineering expenses increased
approximately $114,000, or 229%, from $49,936 for the three months ended
February 29, 1996 to $164,211 for the three months ended February 28, 1997. The
increase is primarily attributable to increased consulting fees in fiscal 1997
in connection with new product development, increased research, development and
engineering personnel from two employees at February 29, 1996 to five employees
at February 28, 1997, increased clinical testing in the first quarter of fiscal
1997, and increased obsolescence costs in the first quarter of fiscal 1997.
Selling, general and administrative expenses increased approximately
$768,000, or 130%, from $590,331 for the three months ended February 29, 1996 to
$1,359,088 for the three months ended February 28, 1997. The increase in
selling, general and administrative expense is primarily attributable to a
$496,000 increase in salaries, wages and related expenses as a result of the
additional employees hired since May 31, 1996 (from an average of 19 employees
in the first quarter of fiscal 1996 to 36 employees in the first quarter of
fiscal 1997) and an increase in incentive compensation accrual, and a $181,000
increase in selling-related expenses as a result of the costs associated with
training and equipping direct sales personnel with demonstration equipment, the
added cost of promotional equipment and materials in the United States, an
increase in travel and related expenses due to distributor training and support
and additional employees in sales and marketing, and an increase in trade show
participation expenses.
For the three-month period ended February 28, 1997, the Company realized a
309% increase in its net loss over the same period in fiscal 1996. The increase
is primarily attributable to a 31% reduction in sales and a 137% increase in
operating expenses.
FISCAL YEAR ENDED NOVEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED NOVEMBER 30,
1995
Net sales decreased approximately $558,000, or 42%, from $1,335,970 in the
fiscal year ended November 30, 1995 to $778,200 in the fiscal year ended
November 30, 1996. The decrease in sales was primarily attributable to a more
than 20% decrease in the average selling price of model 3100A Cerebral Oximeters
to distributors and reduced shipments to Europe and to Baxter Limited in Japan.
Approximately 96% and 100% of the Company's net sales in fiscal 1996 and 1995,
respectively, were export sales. Sales of refurbished model 3100 Cerebral
Oximeters, model 3100A Cerebral Oximeters and SomaSensors comprised
approximately 14%, 63% and 23%, respectively, of the Company's fiscal year 1996
net sales, and 10%, 74% and 16%, respectively, of the Company's fiscal year 1995
net sales.
Two international distributors accounted for approximately 62% and 15%,
respectively, of net sales for fiscal year 1996, and approximately 53% and 13%,
respectively, of net sales for fiscal year 1995. The Company terminated its
Japanese distributor effective January 28, 1995. In March 1995, the Company
announced the engagement of Baxter Limited as its exclusive distributor in
Japan. In April 1995, the Company received its license from the Japanese
Ministry of Health and Welfare to market its product in Japan.
Gross margin as a percentage of net sales for the fiscal years ended
November 30, 1996 and 1995 were approximately 50% and 51%, respectively. Gross
margin as a percentage of net sales decreased in fiscal 1996 from fiscal 1995
primarily because 14% of net sales in fiscal 1996 consisted of sales of
refurbished model 3100 Cerebral Oximeters, and because of lower average selling
prices for model 3100A Cerebral Oximeters and an increase in the cost of the
SomaSensor, partially offset by an approximately 10% decrease in materials cost
for the Cerebral Oximeter in fiscal 1996. Excluding sales of refurbished model
3100 Cerebral Oximeters, gross margins were relatively unchanged from fiscal
1995 to fiscal 1996; lower material costs for the Cerebral Oximeter were offset
by the lower average selling prices for model 3100A Cerebral Oximeters and the
increased cost of the SomaSensor.
21
<PAGE> 23
The Company's research, development and engineering expenses decreased
approximately $51,000, or 18%, from $285,893 for the fiscal year ended November
30, 1995 to $235,354 for the fiscal year ended November 30, 1996. The decrease
in fiscal 1996 is primarily attributable to an approximately $70,000 charge in
fiscal 1995 to engineering expenses for obsolete purchased parts inventory
relating to engineering design changes to the model 3100A Cerebral Oximeter,
partially offset by increased consulting fees in fiscal 1996 in connection with
new product development since the Company received 510(k) clearance for the
Cerebral Oximeter.
Selling, general and administrative expenses increased approximately
$247,000, or 7%, from $3,302,751 for the fiscal year ended November 30, 1995 to
$3,549,939 for the fiscal year ended November 30, 1996. The increase for fiscal
1996 is primarily attributable to (i) a $217,000 increase in selling-related
expenses, primarily due to the costs of providing Cerebral Oximeters for
clinical research and to United States sales personnel and the added cost of
promotional equipment and materials in the United States, partially offset by a
decrease in travel and related expenses and two fewer sales and marketing
employees for approximately seven months of the fiscal year, (ii) one-time
charges of $175,000 for write-downs of excess refurbished model 3100 Cerebral
Oximeters and obsolete inventory, (iii) an increase in nonproductive, indirect
labor and overhead of $197,000 and (iv) a $71,000 increase in warranty expenses,
partially offset by (a) a decrease of $237,000 in salaries and wages, primarily
due to a reduction in payroll and related benefits, partially offset by an
increase in temporary and contract labor and an increase in consulting services,
(b) a $134,000 decrease in occupancy costs principally due to the reduction in
personnel and the expiration of operating leases and (c) a decrease in
depreciation and amortization expenses of $67,000.
The $121,500 bad debt recovery (resulting from the returns of INVOS 3100
Cerebral Oximeters by United States distributors whose receivables had been
written off), $57,200 reversal of the reserve for the extra cost of exchanging
new INVOS 3100A Cerebral Oximeters for INVOS 3100 Cerebral Oximeters held by
United States distributors who had not yet paid for their Cerebral Oximeters,
and the cost of upgrading model 3100 Cerebral Oximeters, and $27,600 reversal of
the reserve for replacing SomaSensors recalled in 1993, were partially offset by
a $150,000 reserve accrued for excess INVOS 3100 Cerebral Oximeters in inventory
and obsolete inventory and a $46,000 reserve for doubtful accounts taken in
connection with receivables from some foreign distributors. These amounts are
included in selling, general and administrative expenses for fiscal 1996.
FISCAL YEAR ENDED NOVEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED NOVEMBER 30,
1994
Net sales increased approximately $397,000, or 42%, from $938,531 in the
fiscal year ended November 30, 1994 to $1,335,970 in the fiscal year ended
November 30, 1995. The increase in sales can be attributed to sales to Baxter
Limited in Japan and increased sales to distributors in South America, partially
offset by lower sales to the Company's former Japanese distributor in the first
quarter and the sale of refurbished model 3100 Cerebral Oximeters at
substantially lower prices than model 3100A Cerebral Oximeters. In fiscal 1995
and 1994, 100% of the Company's net sales were export sales. Sales of
refurbished model 3100 Cerebral Oximeters, model 3100A Cerebral Oximeters and
SomaSensors comprised approximately 10%, 74% and 16%, respectively, of the
Company's fiscal year 1995 net sales and 0%, 84% and 16%, respectively, of the
Company's fiscal year 1994 net sales.
Two international distributors accounted for approximately 53% and 13%,
respectively, of net sales for fiscal year 1995 and approximately 43% and 10%,
respectively, of net sales for fiscal year 1994. The Company terminated its
former Japanese distributor effective in January 1995. In March 1995, the
Company announced the engagement of Baxter Limited as its exclusive distributor
in Japan. In April 1995, the Company received its license from the Japanese
Ministry of Health and Welfare to market its product in Japan.
Gross margin as a percentage of net sales for the fiscal years ended
November 30, 1995 and 1994 was approximately 51%. Lower initial manufacturing,
tooling and engineering costs in fiscal 1995, the reduced level of personnel in
fiscal 1995 and the higher level of sales over which fixed costs of sales were
spread in fiscal 1995, were offset by an increased allocation of overhead costs
in fiscal 1995 as a result of the reallocation of space and indirect labor
required for manufacturing, increased costs of the SomaSensor in fiscal 1995 and
22
<PAGE> 24
the sale of refurbished model 3100 Cerebral Oximeters in fiscal 1995
approximately at cost, thereby reducing overall gross margins.
The Company's research, development and engineering expenses decreased
approximately $264,000, or 48%, from $549,737 for the fiscal year ended November
30, 1994 to $285,893 for the fiscal year ended November 30, 1995. The decrease
in fiscal 1995 is attributable to reductions in research, development, and
engineering personnel from three employees at November 30, 1994 to two employees
at November 30, 1995, decreased engineering consulting services and clinical
testing in fiscal 1995 (incurred in fiscal 1994 in connection with preparing the
Cerebral Oximeter Model 3100A for commercial sale and in connection with the
Company's 510(k) application) and discontinued development of extensions of and
enhancements to the Cerebral Oximeter and other INVOS technology (except for the
INVOS 3100A Cerebral Oximeter), partially offset by an approximately $70,000
charge in the second quarter to engineering expenses for obsolete purchased
parts inventory relating to engineering design changes to the INVOS 3100A
Cerebral Oximeter and costs associated with the issuance of two patents relating
to the Company's INVOS technology and Cerebral Oximeter.
Selling, general and administrative expenses decreased approximately
$1,044,000, or 24%, from $4,346,858 for the fiscal year ended November 30, 1994
to $3,302,751 for the fiscal year ended November 30, 1995. The decrease is
primarily due to (i) a $542,000 reduction in legal and accounting fees, (ii) a
$254,000 reduction in salaries, wages and related expenses, primarily due to a
reduction in payroll and related benefits as a result of a reduction in
workforce from 26 employees at November 30, 1994 to 20 employees at November 30,
1995 and a reduction in consulting expenses, (iii) a $76,000 reduction in
depreciation expense, (iv) a $58,000 reduction in facility expenses, primarily
due to the reduction in personnel and the expiration of operating lease
commitments and (v) a $51,000 reduction in selling expenses, primarily due to
the $115,400 accrual in fiscal 1994 in connection with the plan to replace INVOS
3100 Cerebral Oximeters with INVOS 3100A Cerebral Oximeters, clinical trial
expenses in fiscal 1994 associated with the 510(k) filed in February 1995 and a
reduction in advertising expenses in fiscal 1995, partially offset by an
increase in trade show participation and travel expenses. This decrease was
partially offset by the $72,000 settlement with a former distributor in Japan.
Interest income increased approximately $26,000, or 39%, from $68,290 for
the fiscal year ended November 30, 1994 to $94,769 for the fiscal year ended
November 30, 1995. The increase in interest income for the fiscal year ended
November 30, 1995 over the fiscal year ended November 30, 1994 is primarily due
to interest income from the investment of the cash received from the Regulation
S Offerings in July 1995 and August 1994.
EFFECTS OF INFLATION
The Company does not believe that inflation has had a significant impact on
its financial position or results of operations in the past three years.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during fiscal 1996 was approximately
$2,815,000. Cash was used primarily to (i) fund the Company's net loss,
including selling, general and administrative expenses and research, development
and engineering expenses (approximately $3,237,000, net of depreciation and
amortization expense) and (ii) decrease accrued liabilities primarily due to (a)
the reversal of the reserves to replace unpaid United States Cerebral Oximeters
and SomaSensors and upgrade the Cerebral Oximeters received, (b) use of the
reserves to replace international Cerebral Oximeters and (c) payment of expenses
and settlement costs associated with class action lawsuits (approximately
$162,000). These uses of cash were partially offset by (i) a decrease in
accounts receivable (approximately $252,000) primarily due to lower sales in
fiscal 1996 and higher bad-debt expenses, (ii) a decrease in other assets
(approximately $88,000) primarily due to the elimination of deferred offering
costs and (iii) an increase in accounts payable (approximately $233,000)
primarily due to increased expenses and inventory purchases in preparation for
selling and marketing efforts in the United States combined with slower payment.
23
<PAGE> 25
Net cash used in operations during the three-month period ended February
28, 1997 was approximately $1,457,000. Cash was used primarily to (i) fund the
Company's net loss, including selling, general and administrative expenses and
research, development and engineering expenses (approximately $1,295,000, net of
depreciation and amortization expense), (ii) increase accounts receivable
(approximately $132,000) primarily due to higher sales in the first quarter of
fiscal 1997 than in the prior two quarters, (iii) decrease accrued liabilities
primarily as a result of the payment of professional fees (approximately
$50,000) and (iv) increase inventories as a result of increased manufacturing
activity in preparation for United States sales (approximately $21,000). These
uses of cash were partially offset by an increase in accounts payable
(approximately $42,000) primarily due to increased legal and professional
expenses and inventory purchases in preparation for selling and marketing
efforts in the United States combined with slower payment. Management expects
working capital requirements to increase if sales increase.
The Company's principal sources of operating funds have been the proceeds
of equity investments from sales of the Company's Common Shares. See Statements
of Shareholders' Equity (Deficiency) of the Company's Financial Statements
included elsewhere in this Prospectus.
Several transactions in fiscal 1996 had a significant impact on the
Company's capitalization. Effective February 28, 1996, the Company redeemed all
of its 198,425 outstanding Convertible Preferred Shares for $0.10 per share. On
March 19, 1996, all 14,433.966 outstanding unit purchase options expired.
Effective November 14, 1996, the Company redeemed all of its 407,518 outstanding
redeemable Class B Warrants for $0.50 per warrant. On September 26, 1996, the
remaining 3,098 outstanding Class M Warrants (warrants issued in a bridge
financing before the Company's 1991 initial public offering) were exercised for
$9.50 a Common Share, and on November 14, 1996, the remaining 500 outstanding
nonredeemable Class B Warrants expired.
On April 2, 1996, the Company completed the placement of 57,120 units, at a
price of $25.00 per unit, through an offering complying with Regulation S under
the Securities Act of 1933, as amended. The net proceeds to the Company were
approximately $1,284,000. Each unit consisted of two Common Shares and one
warrant to purchase one Common Share. The warrants are exercisable at an initial
exercise price of $17.50 per share, subject to adjustment, at any time through
April 1, 2001, unless earlier redeemed. The warrants are redeemable for $0.10 by
the Company at any time if certain conditions are met; these conditions have not
been met as of May 29, 1997. The Company also granted the placement agent
warrants to purchase 11,424 Common Shares at $12.50 per share exercisable during
the four-year period beginning April 2, 1997.
During fiscal 1996, 14,600 warrants issued in the Company's 1995 Regulation
S Offering and exercisable at $20.00 per share, and 2,000 warrants issued in the
Company's April 1996 Regulation S Offering and exercisable at $17.50 per share,
were exercised, resulting in net proceeds to the Company of approximately
$311,000. Also during fiscal 1996, the Company received approximately $75,000
from the exercise of employee stock options.
On November 21, 1996, the Company completed the placement of 366,841 Common
Shares at a price of $11.50 per share through an offering complying with
Regulation S under the Securities Act of 1933, as amended. The net proceeds to
the Company, after deducting the placement agent's fee, the expenses of the
offering and $129,318 of other deferred offering costs, were approximately
$3,568,000.
During fiscal 1996, the Company settled a class action lawsuit. For a
description of the settlement, including the cost to the Company, see Note 7 of
Notes to Financial Statements included elsewhere in this Prospectus.
On November 6, 1996, Gary D. Lewis paid the Company $175,000 (the
outstanding principal amount of the loan at the time) in full satisfaction of
all of his obligations under a loan made by the Company to him on February 1,
1993, and the Company wrote off approximately $29,750 of accrued interest with
respect to that loan.
As of February 28, 1997 the Company had working capital of $2,577,418 and
cash and cash equivalents of $1,844,674, total current liabilities of $610,096
and shareholder's equity of $2,756,955. The Company has no loan commitments.
24
<PAGE> 26
The Company expects that its primary needs for liquidity in fiscal 1997
will be (i) to fund its losses and sustain its operations, including funding (a)
marketing costs for the Cerebral Oximeter; (b) additional sales and marketing,
manufacturing, service, quality control and medical affairs personnel expected
to be hired in fiscal 1997; (c) further development and testing of enhancements
to, and product extensions of, the Cerebral Oximeter; and (d) additional
research and development projects and (ii) for working capital, including
increased accounts receivable and inventories of components and sales units to
satisfy expected sales orders. In addition, management has budgeted
approximately $120,000 for capital expenditures during fiscal 1997.
The Company believes that the cash and cash equivalents on hand at February
28, 1997 together with the net proceeds of this offering will be sufficient to
sustain the Company's operations at budgeted levels and its needs for liquidity
at least into the second half of fiscal 1998. By that time the Company will be
required to raise additional cash either (i) through additional sales of its
product, (ii) through sales of securities, (iii) by incurring indebtedness or
(iv) by a combination of the foregoing. If the Company is unable to raise
additional cash by that time, it will be required to reduce or discontinue its
operations.
Also as of February 28, 1997, there were 60,400 redeemable warrants
outstanding, exercisable at $20.00 per share until July 13, 2000 and 55,120
redeemable warrants outstanding exercisable at $17.50 per share until April 1,
2001. These warrants were issued in the Company's 1995 and April 1996 Regulation
S Offerings. The conditions permitting the Company to redeem these warrants have
not been met as of May 23, 1997. In addition, the placement agents and their
transferees hold warrants to purchase 52,970 Common Shares exercisable at $12.50
per share, 15,000 warrants exercisable at $14.40 per share and 11,424 warrants
exercisable at $12.50 per share. It is unlikely that these warrants will be
exercised if the exercise price exceeds the market price of the Common Shares.
The Company has the right to reduce the exercise price of these warrants.
For a description of a lawsuit alleging various securities law violations
filed by a shareholder of the Company on April 25, 1994, see Note 7 of Notes to
Financial Statements included elsewhere in this Prospectus.
The Company's ability to use its accumulated net operating loss
carryforwards to offset future income, if any, for income tax purposes, is
limited due to the initial public offering of its securities in March 1991. See
Note 6 of Notes to Financial Statements included elsewhere in this Prospectus.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed
Of," which requires the Company to review for impairment long-lived assets,
certain identifiable intangibles and goodwill related to those assets whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In certain situations, an impairment loss would be
recognized. SFAS 121 is effective for the Company's 1997 fiscal year. The
Company has evaluated the impact of the new standard on its financial position,
results of operations and cash flows and has determined the effect to be
immaterial.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock Based
Compensation" which also will be effective for the Company's 1997 fiscal year.
The Company does not expect SFAS 123 to have a material impact on its financial
position, results of operations, or cash flows. SFAS 123 allows companies which
have stock-based compensation arrangements with employees to adopt a new
fair-value basis of accounting for stock options and other equity instruments,
or it allows companies to continue to apply the existing accounting rules under
APB Opinion 25 "Accounting for Stock Issued to Employees," but requires
additional financial footnote disclosure. The Company has decided to continue to
account for stock-based compensation arrangements under APB Opinion 25 and will
include additional footnote disclosure in its fiscal 1997 annual report.
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share." This
Statement establishes standards for computing and presenting earnings per share
("EPS") and applies to all entities with
25
<PAGE> 27
publicly-held common shares or potential common shares. This Statement replaces
the presentation of primary EPS and fully-diluted EPS with a presentation of
basic EPS and diluted EPS, respectively. Basic EPS excludes dilution and is
computed by dividing earnings available to common shareholders by the
weighted-average number of common shares outstanding for the period. Similar to
fully diluted EPS, diluted EPS reflects the potential dilution of securities
that could share in the earnings. This Statement is not expected to have a
material effect on the Company's reported EPS amounts. The Statement is
effective for the Company's financial statements for the year ending November
30, 1998.
26
<PAGE> 28
BUSINESS
THE COMPANY
Somanetics develops, manufactures and markets the Cerebral Oximeter, the
only FDA-cleared, non-invasive patient monitoring system that continuously
measures changes in the blood oxygen level in the adult brain. The Cerebral
Oximeter was developed to meet the need for information about oxygen in the
brain, the organ least tolerant of oxygen deprivation. Brain oxygen information,
therefore, is important, especially in surgical procedures requiring general
anesthesia and in other critical care situations with a high risk of brain
oxygen imbalances. The Company is initially targeting cardiovascular and
vascular surgeries and surgeries on elderly patients involving abnormal blood
pressure, because these surgeries involve a high risk of brain oxygen
imbalances, both during and after surgery. Surgeons, anesthesiologists and other
medical professionals use the Cerebral Oximeter to identify brain oxygen
imbalances and take corrective action, potentially improving patient outcome and
reducing the cost of care.
The Cerebral Oximeter is a relatively inexpensive, portable and easy-to-use
monitoring system placed at a patient's bedside in hospital critical care areas,
especially operating rooms, recovery rooms, ICUs and emergency rooms. It is
comprised of (i) a portable unit including a computer and a display monitor,
(ii) a single-use, disposable sensor, the SomaSensor, (iii) proprietary software
and (iv) a preamplifier cable. The SomaSensor is adhered to a patient's forehead
and connected to the computer through the preamplifier cable. The computer uses
the Company's proprietary software to analyze information received from the
SomaSensor and provides a continuous digital and trend display on the monitor of
an index of the oxygen saturation in the area of the brain under the SomaSensor.
Users of the Cerebral Oximeter will be required to purchase disposable
SomaSensors on a regular basis because of their single-use nature.
Under the direction of the Company's President and Chief Executive Officer,
Bruce Barrett, formerly with Abbott Laboratories, the Company obtained FDA
clearance in June 1996 to sell the Cerebral Oximeter in the United States and
implemented a new business strategy. The Company's objective is to establish the
Cerebral Oximeter as a "standard of care" in surgical procedures requiring
general anesthesia and in other critical care situations.
MARKET OVERVIEW
INDUSTRY BACKGROUND
The brain is the human organ least tolerant of oxygen deprivation. Without
sufficient oxygen, brain damage may occur within a few minutes, which can result
in paralysis, severe and complex disabilities or death. Undetected brain hypoxia
(insufficiency of oxygen delivery) and ischemia (tissue oxygen starvation due to
the obstruction of the inflow of arterial blood) are common causes of brain
damage and death during and after many surgical procedures and in other critical
care situations. A December 1996 article in The New England Journal of Medicine
reported on a 24-institution study and concluded that adverse cerebral outcomes
after coronary artery bypass graft surgery are relatively common and serious and
are associated with substantial increases in death, length of hospitalization
and use of intermediate- or long-term care facilities. Adverse cerebral outcomes
occurred in 6.1% of the patients included in the study. Additional studies have
estimated that a higher percentage of patients experience some neurological
decline after heart surgery and that insufficiency of oxygen delivery to the
brain is a frequent cause of this problem. The New England Journal article
concluded that new diagnostic and therapeutic strategies must be developed to
lessen such injury.
Oxygen is carried to the brain by hemoglobin in the blood. Hemoglobin
passes through the lungs, bonds with oxygen and is pumped by the heart through
arteries and capillaries to the brain. Brain cells extract the oxygen and the
blood carries away carbon dioxide through the capillaries and veins back to the
lungs. Brain oxygen imbalances can be caused by several factors, including
changes in oxygen saturation (the percentage of hemoglobin contained in a given
amount of blood which carries oxygen) in the arteries, blood flow to the brain,
hemoglobin concentration and oxygen consumption by the brain.
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Brain oxygen information is important in surgical procedures requiring
general anesthesia, in other critical care situations with a high risk of brain
oxygen imbalances, as well as in the treatment of patients with head injuries or
strokes. These procedures include cardiovascular and vascular surgeries,
surgeries on elderly patients involving abnormal blood pressure, any
neurosurgery, major surgeries involving the neck, transplant surgeries and
treatment of patients with diseases resulting from high blood pressure, lung
problems, or head, organ or heart injuries and treatment of patients suffering
from strokes. These patients are most commonly found in operating rooms as well
as in the other critical care areas of hospitals, especially recovery rooms,
ICUs and emergency rooms. The Company believes that medical professionals need
immediate and continuous information about changes in the oxygen levels in the
blood in the brain to identify brain oxygen imbalances. After they are alerted
to such imbalances, medical professionals have the information to take
corrective action through the introduction of medications, anesthetic agents or
mechanical intervention, potentially improving patient outcome and reducing the
costs of care. Immediate and continuous information about changes in brain
oxygen levels also provides immediate feedback regarding the adequacy of the
selected therapy. Equally important, without information about brain oxygen
levels, therapy that may not be necessary might be initiated to assure adequate
brain oxygen levels. Unnecessary therapy can have an adverse impact on patient
safety and increase hospital costs.
Based on a 1995 survey, industry sources estimate that more than 24 million
surgeries were performed in the United States. Industry sources also estimate
that, in 1993, there were more than 4.4 million surgeries involving the heart or
the blood vessels around the heart. Such surgeries include more than 600,000
open heart surgeries and 89,000 endarterectomies (the removal of blockage in the
artery). Industry sources estimate, based on a 1985 survey, that there were more
than 26,800 operating rooms in the United States and, based on a 1993 survey,
that there were more than 6,100 ICUs in the United States with more than 90,000
beds.
Currently, several different methods are used to detect one or more of the
factors affecting brain oxygen levels or the effects of brain oxygen imbalances.
These methods include invasive jugular bulb catheter monitoring, transcranial
Doppler, electroencephalograms ("EEG"), intracranial pressure monitoring and
neurological examination. These methods have not been widely adopted to monitor
brain oxygen levels in critical care situations for a variety of reasons. The
use of any of these methods is limited because it is either expensive, difficult
or impractical to use as a brain monitor, invasive, not available under certain
circumstances (such as when the patient is unconscious or has suppressed neural
activity), not able to measure all of the factors that may affect brain oxygen
imbalances, not organ specific or not able to provide continuous information or
able to measure only the effects of brain oxygen imbalances.
Arterial oxygen saturation is only one of the factors that can affect
oxygen imbalances in the brain. Pulse oximetry measures oxygen saturation in the
arteries. It is non-invasive, uses optical spectroscopy and has become a
standard of care for measuring arterial oxygen saturation in critical care
situations. However, pulse oximeters require a strong pulse, making them
unavailable during bypass surgeries, surgeries involving induced hypothermia or
any other time the patient does not have a strong peripheral pulse. Pulse
oximeters provide information about the oxygen saturation of the arteries in a
finger or earlobe, not oxygen imbalances in the brain. Changes in the oxygen
balance in the brain may not have any affect on the oxygen levels in a finger or
earlobe. For example, a blocked artery to the brain would affect oxygen in the
brain, but would not affect the amount of oxygen in the arteries in the finger.
The Cerebral Oximeter is the only FDA-cleared non-invasive monitoring
system that provides continuous information about changes in the blood oxygen
level in the adult brain. It is easy to use and relatively inexpensive and
provides medical professionals with new information to help them identify brain
oxygen imbalances. This information may facilitate timely intervention, provide
feedback regarding the adequacy of the selected therapy and provide medical
professionals with additional assurance when they make decisions regarding the
need for therapy, thereby potentially improving patient outcome and reducing the
cost of care.
MARKET TRENDS
The Company believes the market for its product is driven by the following
market trends:
Demand to Reduce Health Care Costs. Hospitals in the United States are
increasingly faced with direct economic incentives to control health care costs
and improve the efficiency of health care through improved
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labor productivity, shortened hospital stays and more selective performance of
medical procedures and use of facilities and equipment. Hospitals often receive
a fixed fee from Medicare, managed care organizations and private insurers based
on the disease diagnosed, rather than based on the services actually performed.
Therefore, hospitals are increasingly focused on avoiding unexpected costs, such
as those associated with increased hospital stays resulting from patients with
brain damage or other adverse outcomes following surgery. This focus on avoiding
unexpected costs is especially pronounced in the operating room and other
hospital critical care areas due to their high operating costs. The economic and
human costs of brain damage can be tremendous. Even short extensions of hospital
stays resulting from brain damage can be expensive. In addition, overtreating a
patient as a result of lack of knowledge about brain oxygen levels can result in
unnecessary costs.
Organ-Specific Monitoring; Current Emphasis on the Brain. The Company
believes that physicians and hospitals are increasingly interested in monitoring
the status of specific organs in the body, especially the brain. It also
believes there is an increased interest in understanding how the brain functions
and in finding ways to prevent injury to, and cures to diseases affecting, the
brain. The Company believes that this interest has led to a greater focus on
monitoring the brain, both to determine how it functions and to monitor the
effects of various actions on the brain. In July 1989, Congress passed a
resolution, and President Bush signed a proclamation, designating the 1990s as
the "Decade of the Brain."
Less Invasive Medical Procedures. The Company believes there is a trend
toward less invasive medical procedures. Notable examples include laparoscopic
procedures in general surgery and arthroscopic procedures in orthopedic surgery.
Such procedures are designed to reduce trauma, thereby decreasing complications,
reducing pain and suffering, speeding recovery and decreasing costs associated
with patient care. The Company also believes that there is a trend to minimize
invasive procedures relating to the brain to increase the safety of patients and
medical professionals, reduce recovery time and minimize costs.
Aging Population. According to the Administration on Aging, United States
Department of Health and Human Services, approximately 33.5 million persons in
the United States were age 65 or older in 1995, representing 13% of the
population. The number of Americans age 65 or older increased by approximately
2.3 million, or 7%, between 1990 and 1995, compared to an increase of 5% for the
under-65 population. The Administration on Aging predicts that the number of
Americans age 65 or older will increase to approximately 34.7 million by the
year 2000 and to approximately 53.2 million by the year 2020. The Company
believes that older patients require a higher level of medical care using more
procedures in which the patient or the procedure involves a risk of brain oxygen
imbalances. Medical and surgical procedure growth rate has remained steady
recently, and industry analysts expect this trend to continue.
BUSINESS STRATEGY
The Company's objective is to establish the Cerebral Oximeter as a
"standard of care" in surgical procedures requiring general anesthesia and in
other critical care situations. Key elements of the Company's strategy are as
follows:
Target Surgical Procedures With a High Risk of Brain Oxygen Imbalances. The
Company is targeting its initial marketing efforts primarily on the use of the
Cerebral Oximeter in surgical procedures with a high risk of brain oxygen
imbalances, such as cardiovascular and vascular surgeries and surgeries on
elderly patients involving abnormal blood pressure. The Company believes that
the medical professionals involved in these surgeries are the most aware of the
risks of brain damage resulting from brain oxygen imbalances. Therefore, the
Company believes that it will be easier to demonstrate the clinical benefits of
the Cerebral Oximeter and potentially gain market acceptance for its product in
connection with these surgeries.
Demonstrate Clinical Benefits and Promote Acceptance of the Cerebral
Oximeter. The Company sponsors clinical studies using the Cerebral Oximeter to
provide additional evidence of its benefits. The resulting publication of any
favorable peer-reviewed papers is used to help convince the medical community of
the clinical benefits of the Cerebral Oximeter. The Company also promotes
acceptance of the Cerebral Oximeter in the medical community by encouraging
surgeons, anesthesiologists and nurses in leading
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hospitals, whose opinions and practices the Company believes are valued by other
hospitals and physicians, to use the Cerebral Oximeter on a trial basis. The
Company believes that successful evaluations of the Cerebral Oximeter by these
medical professionals will accelerate the acceptance of the Cerebral Oximeter by
other medical professionals. The Company sponsors discussions among physicians
who have used the Cerebral Oximeter about its clinical benefits.
Expand Marketing and Sales Activities. The Company has recently established
a distribution network consisting of its direct sales employees and
distributors. The Company is expanding its marketing and sales efforts to
increase the medical community's exposure to its INVOS technology and the
Cerebral Oximeter, including increased participation in trade shows and medical
conferences and increased product evaluations. The Company is aggressively
marketing its product through its existing sales force and leverages its sales
resources through the use of its distributors, including Baxter Limited in
Japan.
Develop Additional Applications of the Cerebral Oximeter. The Company is in
the process of developing product-line extensions of the Cerebral Oximeter for
use on children and newborns. The Company believes that these natural extensions
of its existing product will increase the market for the Cerebral Oximeter
without the more significant development efforts required for entirely new
products. The Company believes that non-invasive monitoring is important for
newborns, as they have higher risks of oxygen imbalances and less blood volume
from which medical professionals can make invasive blood gas measurements.
License Technology to Medical Device Manufacturers. The Company plans to
license its Cerebral Oximeter technology to other medical device manufacturers
to expand the installed base of Cerebral Oximeters and increase the demand for
SomaSensors. Such a license might be made to a company interested in
incorporating the Cerebral Oximeter into a multi-function monitor. The Company
believes that such an arrangement could provide another distribution channel for
the Company's Cerebral Oximeter. The Company, however, has no current
commitments for any such licenses.
In addition, the Company is analyzing the feasibility of other applications
of its technology. The Company has entered into a consulting arrangement with
NeuroPhysics Corporation in connection with research into the feasibility of
four new products.
PRODUCT AND TECHNOLOGY
THE CEREBRAL OXIMETER
The Company's Cerebral Oximeter is the only FDA-cleared, non-invasive
patient monitoring system that provides continuous information about changes in
the blood oxygen level in the adult brain. It is a portable and easy-to-use
monitoring system that is placed at a patient's bedside in hospital critical
care areas, especially operating rooms, recovery rooms, ICUs and emergency
rooms. Surgeons, anesthesiologists and other medical professionals use the
information provided by the Cerebral Oximeter to identify brain oxygen
imbalances and take corrective action, potentially improving patient outcome and
reducing the cost of care. Once the cause of a cerebral oxygen imbalance is
identified and therapy is initiated, the Cerebral Oximeter provides immediate
feedback regarding the adequacy of the selected therapy. It can also provide
medical professionals with an additional level of assurance when they make
decisions regarding the need for therapy.
Unlike certain existing monitoring methods, the Cerebral Oximeter functions
even when the patient is unconscious, lacks a strong peripheral pulse or has
suppressed neural activity. The measurement made by the Cerebral Oximeter is
dominated by the blood in the veins. Therefore, it responds to the changes in
factors that affect the balance between cerebral oxygen supply and demand,
including changes in arterial oxygen saturation, cerebral blood flow, hemoglobin
concentration and cerebral oxygen consumption. The Cerebral Oximeter responds to
global changes in brain oxygen levels and to events that affect the brain oxygen
levels in the region beneath the SomaSensor.
The Cerebral Oximeter monitoring system is comprised of (i) a portable unit
including a computer and a display monitor, (ii) a single-use, disposable
sensor, the SomaSensor, (iii) proprietary software and (iv) a
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preamplifier cable. The SomaSensor is adhered to a patient's forehead and
connected to the computer through the preamplifier cable. The SomaSensor
continuously transmits and receives predetermined wavelengths of light sent
through the scalp, muscle and skull into the brain tissue. The computer receives
the information about the intensity of the light scattered by the blood and
tissue in the area being monitored. The computer uses the Company's proprietary
software to analyze this information and provide a continuous digital and trend
display on the monitor of an index of the oxygen saturation in the area of the
brain under the SomaSensor.
The portable unit includes a menu-driven user interface which provides easy
access for setting high and low audible alarms and permits a customized display
format and data retrieval. Single-function keys offer a convenient means of
powering the Cerebral Oximeter, silencing alarms, marking important events and
printing results that can be stored for up to 24 hours and retrieved by a
variety of standard, commercially available printers. The portable unit measures
12 inches wide, 6 inches high and 13 inches deep and weighs approximately 15
pounds.
The suggested list prices for the Cerebral Oximeter and the SomaSensor in
the United States are $8,995 and $59, respectively. Users of the Cerebral
Oximeter will be required to purchase disposable SomaSensors on a regular basis.
The SomaSensor may only be used once because after one use it may become
contaminated and its effectiveness is not warranted by the Company. The Company
provides a one-year warranty on the Cerebral Oximeter, which the Company will
satisfy by repairing or exchanging those units in need of repair. The Company
also expects to offer maintenance agreements and service for the Cerebral
Oximeter for a fee after the warranty expires.
The following table summarizes the principal features and related benefits
of the Cerebral Oximeter:
<TABLE>
<CAPTION>
FEATURES BENEFITS
------------------------------------------------------------------------------------------------------
<S> <C> <C>
FDA-cleared - Access to United States and certain foreign
markets
------------------------------------------------------------------------------------------------------
Non-invasive - Consistent with market trend toward less invasive
medical procedures
- No risk to patients and medical professionals
- No added patient recovery costs
------------------------------------------------------------------------------------------------------
Continuous Information - Immediate information regarding brain oxygen
imbalances
- Real-time guide to therapeutic interventions
------------------------------------------------------------------------------------------------------
New Organ-Specific Information - Provides information about oxygen imbalances in
the brain
------------------------------------------------------------------------------------------------------
Relatively Inexpensive - Low cost relative to other brain monitors and
medical devices
- Small portion of the cost of the procedures in
which it is used
- New information can potentially improve patient
outcome and reduce the cost of care
------------------------------------------------------------------------------------------------------
Easy-to-Use - Does not require a trained technician to operate
or interpret
- Automatic SomaSensor calibration
- Simple user interface and controls
- Audible alarm limits
------------------------------------------------------------------------------------------------------
Effective in Difficult Circumstances - Provides information when the patient is
unconscious, lacks a strong peripheral pulse or
has suppressed neural activity, specifically
during cardiac arrest, hypothermia, hypertension,
hypotension and hypovolemia
- Indicates oxygen imbalances in the brain, not just
blood flow, oxygenation of the arteries or the
effects of imbalances
------------------------------------------------------------------------------------------------------
Portable - Placed at patient's bedside
------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
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OPTICAL SPECTROSCOPY TECHNOLOGY
The Company's proprietary In Vivo Optical Spectroscopy ("INVOS") technology
is based primarily on the physics of optical spectroscopy. Optical spectroscopy
is the interpretation of the interaction between matter and light. Spectrometers
and spectrophotometers function primarily by shining light through matter and
measuring the extent to which such light is transmitted through, or scattered or
absorbed by, matter. Physicians and scientists can use spectrophotometers to
examine human blood and tissue. Although most human tissue is opaque to ordinary
light, certain wavelengths penetrate tissue more easily than others. Therefore,
by shining light of appropriate wavelengths into the body and measuring its
transmission, scattering and absorption, or a combination, physicians can obtain
information about the matter under analysis. Optical spectroscopy generates no
ionizing radiation and produces no known hazardous effects.
Optical spectroscopy was first used clinically in the 1940s at the
Sloan-Kettering Institute for cancer research. The pulse oximeter uses optical
spectroscopy to determine the oxygen saturation of the blood in the arteries in
peripheral tissue, such as in a finger or an earlobe. By identifying the
hemoglobin and the oxygenated hemoglobin and measuring the relative amounts of
each, oxygen saturation of hemoglobin can be measured. However, the use of
optical spectroscopy in the body has not generally been useful when the
substances to be measured are surrounded by, are behind, or are near bone,
muscle or other tissue, because the transmission, scattering and absorption of
the transmitted light produces extraneous data that interferes with analysis of
the data from the area being examined.
INVOS TECHNOLOGY
The Cerebral Oximeter is based on INVOS technology. In 1982, the Company
commenced research and development efforts in connection with a spectroscopic
instrument for the measurement of breast tissue abnormalities. The Company's
first product, the Somanetics INVOS 2100 System (the "INVOS 2100"), used the
same INVOS technology as the Cerebral Oximeter. Subsequently, the Company
commenced analysis of the application of INVOS technology to the measurement of
changes in cellular metabolism in the brain. Early studies conducted in
conjunction with the Henry Ford Neurosurgical Institute demonstrated the ability
of the Company's INVOS technology to make certain measurements which were highly
correlated to controlled changes in animal brain cell metabolism. In 1988, the
Company began clinical studies of the Cerebral Oximeter on human patients in
operating rooms, emergency rooms and ICUs at Henry Ford Hospital and later at
Bowman Gray School of Medicine and Mount Sinai Medical Center.
Like other applications of optical spectroscopy, INVOS technology also
analyzes various characteristics of human blood and tissue by measuring and
analyzing low-intensity visible and near-infrared light transmitted into
portions of the body. It measures the composition of substances by detecting the
effect they have on light. The INVOS technology measurement is made by
transmitting low-intensity visible and near-infrared light through a portion of
the body and detecting the manner in which the molecules of the exposed
substance interact with light at specific wavelengths. INVOS technology detects
this interaction by measuring the intensity of the various wavelengths of light
received by light sensors. By measuring the effect on specific wavelengths of
light caused by oxygenated hemoglobin contained in blood in the region of the
brain being monitored, the Cerebral Oximeter can monitor changes in the
approximate oxygen saturation of the hemoglobin in such region of the brain.
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[DIAGRAM]
The Company has developed a method of reducing extraneous spectroscopic
data caused by surrounding bone, muscle and other tissue. This method allows
data to be gathered from areas of the body which previously could not be
analyzed using optical spectroscopy. The dual detector design of the SomaSensor
enables the measurement of scattered light intensities from the intermediate
tissues of skin, muscle and skull in a separate process. As illustrated above,
the depth of penetration of the light signal is related to the distance between
the light source and the shallow and deep detectors. While both detectors
receive similar information about the tissue outside the brain, the detector
further from the light source receives more information specific to the brain
than does the detector closer to the light source. By subtracting the two
measurements, INVOS technology is able to suppress the influence of the tissues
outside the brain to provide a measurement of changes in brain oxygen
saturation.
RESEARCH AND DEVELOPMENT
The Company is currently focusing its research and development efforts on
product-line extensions of the Cerebral Oximeter for use on children and
newborns and enhancements to the Cerebral Oximeter. The Company is currently
sponsoring clinical studies of the Cerebral Oximeter for use on children and
newborns, but expects to redesign the SomaSensor for use on smaller heads. The
Company believes that non-invasive monitoring is especially important in
newborns, who have higher risks of oxygen imbalances and less blood volume from
which medical professionals can make invasive blood gas measurements.
In addition to the Company's internal research and development activities,
the Company has entered into a consulting arrangement with NeuroPhysics
Corporation pursuant to which the Company is funding a portion of NeuroPhysics'
research into the feasibility and development of prototypes of four new
products. The United States government is also funding a portion of the research
pursuant to two research grants. NeuroPhysics has granted the Company certain
ownership and commercialization rights in the new products, subject to the
rights of the United States government and royalties payable to NeuroPhysics.
The new products are intended to be non-invasive, in vivo, near-infrared
spectroscopy devices that (i) monitor liver oxygenation for assessing and
controlling hemorrhagic shock (shock resulting from loss of blood), (ii) locate
and assess subdural hematomas (bleeding between the brain and the skull) in head
trauma patients, (iii) monitor certain blood gasses and (iv) monitor fetal
cerebral blood oxygenation during labor and delivery.
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During the three months ended February 28, 1997, the Company spent $164,211
on research, development and engineering. During fiscal years 1996, 1995 and
1994 the Company spent $235,354, $285,893 and $549,737, respectively, on
research, development and engineering.
MARKETING, SALES AND DISTRIBUTION
MARKETING
The Cerebral Oximeter is for use on patients at risk of brain oxygen
imbalances. These patients are most commonly found in operating rooms amongst
those undergoing general anesthesia for various surgical procedures as well as
in the other critical care areas of hospitals, especially recovery rooms, ICUs
and emergency rooms. After the Cerebral Oximeter is accepted in hospitals,
future markets might include free-standing operating rooms, clinics, ambulances
and nursing homes.
The Company markets the Cerebral Oximeter primarily to cardiovascular and
vascular surgeons, neurosurgeons and anesthesiologists. The Company believes
that these specialists are the medical professionals most aware of the risks of
brain damage resulting from brain oxygen imbalances. The Company and its
distributors have initially concentrated on sales to the major teaching
hospitals in selected foreign markets in which the Company has commenced
commercial sales and the 2,000 largest United States hospitals, especially those
the Company considers opinion leaders. Product evaluations have already begun at
over 100 university and other hospitals. In addition, the Company is sponsoring
discussions among physicians who have used the Cerebral Oximeter about its
clinical benefits.
The Company believes that favorable peer review is a key element to a
product's success in the medical equipment industry. Accordingly, the Company
supports clinical research programs with third-party clinicians and researchers
intended to demonstrate the need for, and clinical benefits of, the Cerebral
Oximeter with the specific objective of publishing the results in peer-reviewed
journals. The research consists primarily of comparing the measurements obtained
from the Cerebral Oximeter to the data obtained from existing diagnostic
methods, including EEG, transcranial Doppler and invasive jugular bulb catheter
monitoring or reports of the results of the use of the Cerebral Oximeter in
various procedures. The Company attends trade shows and medical conferences in
order to introduce and promote the Cerebral Oximeter and to meet medical
professionals with an interest in submitting peer-reviewed papers to appropriate
medical journals and to major national meetings. In fiscal year 1996, a total of
30 presentations concerning the Cerebral Oximeter were presented to 20 meetings,
and 13 peer-reviewed articles mentioning the Cerebral Oximeter were published.
SALES AND DISTRIBUTION
The Company sells the Cerebral Oximeter through its direct sales force and
independent distributors. The Company has engaged distributors to provide it
with increased geographic coverage and local sales contacts. In the United
States, the Company sells the Cerebral Oximeter through its 19 direct
salespersons covering 21 states exclusively and 29 states in which they support
five distributors. Sales compensation and incentive plans are designed to
motivate the Company's direct sales force by making half of their targeted
compensation dependent on meeting targeted sales levels. The Company believes
that the minimum selling cycle for new medical devices is approximately six to
nine months.
In March 1997, the Company entered into a marketing arrangement with Health
Services Corporation of America, the representative of a buying group for many
small hospitals and extended care facilities. Health Services Corporation of
America will inform its member hospital administrators that the Company is its
sole supplier of cerebral oximetry equipment and will forward the Company's
marketing materials to such administrators. In exchange, for its marketing
assistance, the Company's product will be available to the members of the buying
group at a discount.
Since FDA clearance in June 1996 through April 11, 1997, the Company sold
61 Cerebral Oximeters to distributors and customers. United States hospitals
that have purchased Cerebral Oximeters include the Mayo Clinic Scottsdale, the
University of Kentucky Hospital, LAC-University of Southern California, UCLA
Medical Center and Orlando Regional Medical Center. In addition, Cerebral
Oximeters are in use at more
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than 100 United States hospitals for clinical research and product evaluation,
including the Duke Heart Center, Emory University School of Medicine, Brigham &
Women's Hospital, the University of Louisville Hospital and the University of
Pittsburgh. The Company did not have any backlog of firm orders as of April 11,
1997 and does not believe that this is indicative of trends in its business,
especially because the Company is in the development stage and received its FDA
510(k) clearance in June 1996.
Internationally, the Company has distribution agreements with 27
distributors covering 78 countries. In March 1995, the Company engaged Baxter
Limited as its exclusive distributor in Japan. In April 1995, the Company was
licensed by the Japanese Ministry of Health and Welfare to market its product in
Japan. In September 1996, the Company entered into a Master Distributor
Agreement with MedLink Europe, an operational services company located in The
Netherlands, with offices in other parts of Europe. MedLink assists United
States-based companies in executing their marketing activities throughout Europe
and is expected to provide the Company with sales and marketing support as well
as distribution, customer service and technical product advice. In February
1997, the Company engaged Mitani & Co., LLC to assist the Company in finding new
and replacement distributors in specified far-eastern markets.
For a description of sales to major customers, see Note 10 of Notes to
Financial Statements included elsewhere in this Prospectus. The Company's
distributor in Japan has been the Company's largest customer in the first three
months of fiscal 1997 and in each of fiscal 1996, 1995 and 1994. The Company is
dependent on its sales to Baxter Limited, and the loss of Baxter Limited as a
customer would have an adverse effect on the Company's business, financial
condition and results of operations.
The Company's export sales for the three months ended February 28, 1997
were approximately $218,000. The Company's export sales for the fiscal years
ended November 30, 1996, 1995 and 1994 were approximately $745,000, $1,336,000
and $938,500, respectively. For a description of the breakdown of sales between
refurbished model 3100 Cerebral Oximeters, model 3100A Cerebral Oximeters and
SomaSensors, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations."
MANUFACTURING
The Company assembles the Cerebral Oximeter in its facilities in Troy,
Michigan, from components purchased from outside suppliers. The Company
assembles the Cerebral Oximeter to control its quality and costs and to permit
it to make changes to the Cerebral Oximeter faster than it could with
third-party assembly. The Company believes that each component is generally
available from several potential suppliers. The SomaSensor, the printed circuit
boards, other mechanical components and the unit enclosure are the primary
components that must be manufactured according to specifications provided by the
Company. Although the Company is currently dependent on one manufacturer of the
SomaSensor, the Company believes that several potential suppliers are available
to assemble the components of the Cerebral Oximeter. The Company would, however,
require approximately three to four months to change SomaSensor suppliers. The
Company does not currently intend to manufacture on a commercial scale the
disposable SomaSensor or the components of the Cerebral Oximeter.
COMPETITION
The Company does not believe there is currently any direct commercial
competition for the Cerebral Oximeter. The Company believes, however, that the
market for cerebral oximetry products is in the early stages of its development
and, if it develops, may become highly competitive. The Company is aware of
foreign companies that have sold products relating to cerebral metabolism
monitoring for research or evaluation.
The medical equipment industry is characterized by intense competition and
extensive research and development. Other companies and individuals are engaged
in research and development of non-invasive cerebral oximeters, and the Company
believes there are many other potential entrants into the market, including the
Critikon division of Johnson & Johnson. Some of these potential competitors have
well established reputations, customer relationships and marketing, distribution
and service networks, and have
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substantially longer histories in the medical equipment industry, larger product
lines and greater financial, technical, manufacturing, research and development
and management resources than those of the Company. Many of these potential
competitors have long-term product supply relationships with the Company's
potential customers. These potential competitors may succeed in developing
products that are at least as reliable and effective as the Company's product,
that make additional measurements, or that are less costly than the product
developed by the Company. These potential competitors may be more successful
than the Company in manufacturing and marketing their products and may be able
to take advantage of the significant time and effort invested by the Company to
gain medical acceptance of cerebral oximetry. In addition, two patents issued to
an unaffiliated third party and relating to cerebral oximetry will expire in the
next year, making that technology generally available and potentially helping
the development of competing products. See "Market Overview."
The Company also competes indirectly with the numerous companies that sell
various types of medical equipment to hospitals for the limited amount of
funding allocated to capital equipment in hospital budgets. The market for
medical equipment is subject to rapid change due to an increasingly competitive,
cost-conscious environment and to government programs intended to reduce the
cost of medical care. Many of these manufacturers of medical equipment are
large, well-established companies whose resources, reputations and ability to
leverage existing customer relationships may give them a competitive advantage
over the Company. The Company's product and technology also compete indirectly
with many other methods currently used to measure blood oxygen levels or the
effects of low blood oxygen levels.
The Company believes that a manufacturer's reputation for producing
accurate, reliable and technically advanced products, references from users,
features (speed, safety, ease of use, patient convenience and range of
applicability), product effectiveness and price are the principal competitive
factors in the medical equipment industry.
PROPRIETARY INFORMATION
The Company has twelve United States patents and three foreign patents. The
Company's patents basically cover methods and apparatus for introducing light
into a body part and receiving, measuring and analyzing the resulting light and
its interaction with tissue. Such methods also involve receiving, measuring and
analyzing the light transmissivity of various body parts of a single subject, as
well as of body parts of different subjects which provides a standard against
which a single subject can be compared. Although the Company believes that one
or more of its issued patents cover some of the underlying technology used in
the Cerebral Oximeter, only seven of the issued patents expressly refer to
examination of the brain or developments involving the Cerebral Oximeter.
The Company's initial United States patent, covering the in vivo tissue
examination technology developed in conjunction with the INVOS 2100 and its
predecessor, the SOMA 100, was allowed and issued in 1986 and will expire on
October 14, 2003. The corresponding Canadian patent was issued in 1987, the
corresponding European Community patent was issued in 1990, and the
corresponding Japanese patent was issued in 1991. The Company's eleven
additional United States patents expire on various dates from February 2005 to
December 2013. The Company has filed three additional patent applications in the
United States with respect to other aspects of its technology relating to the
interaction of light with tissue.
Many patents have previously been issued to third parties involving optical
spectroscopy and the interaction of light with tissue, some of which relate to
the use of optical spectroscopy in the area of brain metabolism monitoring, the
primary use of the Cerebral Oximeter. No patent infringement claims have been
asserted against the Company.
In addition to its patent rights, the Company has obtained United States
Trademark registrations for its trademarks "SOMANETICS," "SOMAGRAM," "INVOS,"
"SOMASENSOR" and "WINDOW TO THE BRAIN," and has also obtained registrations of
its basic mark, "SOMANETICS," in thirteen foreign countries.
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The Company also relies on trade secret, copyright and other laws and on
confidentiality agreements to protect its technology, but believes that neither
its patents nor other legal rights will necessarily prevent third parties from
developing or from using similar or related technology to compete against the
Company's product. Moreover, the Company's technology primarily represents
improvements or adaptations of known optical spectroscopy technology, which
might be duplicated or discovered through its patents, reverse engineering or
both.
GOVERNMENT REGULATION
The testing, manufacture and sale of the Company's products are subject to
regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign agencies. Pursuant to the Federal Food, Drug,
and Cosmetic Act, and the regulations promulgated thereunder, the FDA regulates
the preclinical and clinical testing, manufacture, labeling, distribution and
promotion of medical devices. Noncompliance with applicable requirements can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing clearances or approvals and criminal prosecution.
A medical device may be marketed in the United States only with prior
authorization from the FDA unless it is subject to a specific exemption. Devices
classified by the FDA as posing less risk than class III devices are categorized
as class I or II and are eligible to seek "510(k) clearance." Such clearance
generally is granted when submitted information establishes that a proposed
device is "substantially equivalent" in intended use to a class I or II device
already legally on the market or to a "preamendment" class III device (i.e., one
that has been in commercial distribution since before May 28, 1976) for which
the FDA has not called for PMA applications (as defined below). The FDA in
recent years has been requiring a more rigorous demonstration of substantial
equivalence than in the past, including requiring clinical trial data in some
cases. For any devices that are cleared through the 510(k) process,
modifications or enhancements that could significantly affect safety or
effectiveness, or constitute a major change in the intended use of the device,
will require new 510(k) submissions. The Company believes that it now usually
takes from one to four months from the date of submission to obtain 510(k)
clearance, but it can take substantially longer. The Cerebral Oximeter has been
categorized as a class II device.
A device requiring prior marketing authorization that does not qualify for
510(k) clearance is categorized as class III, which is reserved for devices
classified by FDA as posing the greatest risk (e.g., life-sustaining,
life-supporting or implantable devices), or devices that are not substantially
equivalent to a legally marketed class I or class II device. A class III device
generally must receive approval of a premarket approval ("PMA") application,
which requires proving the safety and effectiveness of the device to the FDA.
The process of obtaining PMA approval is expensive and uncertain. The Company
believes that is usually takes from one to three years after filing, but it can
take longer.
If human clinical trials of a device are required, whether for a 510(k) or
a PMA application, and the device presents a "significant risk," the sponsor of
the trial (usually the manufacturer or the distributor of the device) will have
to file an investigational device exemption ("IDE") application prior to
commencing human clinical trials. The IDE application must be supported by data,
typically including the results of animal and laboratory testing. If the IDE
application is approved by the FDA and one or more appropriate Institutional
Review Boards ("IRBs"), human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. If the device presents a "nonsignificant risk" to the patient, a sponsor
may begin the clinical trial after obtaining approval for the study by one or
more appropriate IRBs without the need for FDA approval.
In June 1992, the Company received 510(k) clearance from the FDA to market
the Cerebral Oximeter in the United States for use on adults. The Company began
commercial shipments of Cerebral Oximeters and SomaSensors in May 1993. In
November 1993, the Company received notification that the FDA had rescinded the
Company's 510(k) clearance to market the Cerebral Oximeter. As a result, all
commercial sales of the Company's product were suspended. In February 1994, the
Company resumed marketing its product in
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several foreign countries. In June 1996, the Company received 510(k) clearance
from the FDA to market the Cerebral Oximeter, including the SomaSensor, in the
United States.
The Company has made modifications to the Cerebral Oximeter, which the
Company believes do not require the submission of new 510(k) notices. There can
be no assurance, however, that the FDA would agree with any of the Company's
determinations not to submit a new 510(k) notice for any of these changes or
would not require the Company to submit a new 510(k) notice for any of the
changes made to the device. If the FDA requires the Company to submit a new
510(k) notice for any device modification, the Company may be prohibited from
marketing the modified device until the 510(k) notice is cleared by the FDA.
Any devices manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA and certain state agencies. Manufacturers of medical devices for
marketing in the United States are required to adhere to applicable regulations
setting forth detailed GMP requirements, which including testing, control and
documentation requirements. Manufacturers must also comply with Medical Device
Reporting requirements that a firm report to the FDA any incident in which its
product may have caused or contributed to a death or serious injury, or in which
its product malfunctioned and, if the malfunction were to recur, it would be
likely to cause or contribute to a death or serious injury. Labeling and
promotional activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. Current FDA enforcement policy
prohibits the marketing of approved medical devices for unapproved uses.
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with GMP requirements and other applicable regulations.
The FDA has recently finalized changes to the GMP regulations that will likely
increase the cost of compliance with GMP requirements. The Company also is
subject to numerous federal, state and local laws relating to such matters as
safe working conditions, manufacturing practices, environmental protection, fire
hazard control and disposal of hazardous or potentially hazardous substances.
If any of the Company's FDA clearances are denied or rescinded, sales of
the Company's product in the United States would be prohibited during the period
the Company does not have such clearances. In such cases the Company would
consider shipping its product internationally and/or assembling them overseas if
permissible and if the Company determines its product to be ready for commercial
shipment. The FDA's current policy is that a medical device that is not in
commercial distribution in the United States, but which needs 510(k) clearance
to be commercially distributed in the United States, can be exported without the
submission of an export request and prior FDA clearance provided that (i) a
company believes the device can be found to be substantially equivalent through
a 510(k) submission, (ii) the device is labeled and intended for export only,
(iii) the device is in accord with the specifications of the foreign purchaser
and (iv) other conditions of the export provisions of the Food, Drug and
Cosmetic Act have been met.
INSURANCE
Because the Cerebral Oximeter is intended to be used in hospital critical
care units with patients who may be seriously ill or may be undergoing dangerous
procedures, the Company may be exposed to serious potential product liability
claims. The Company has obtained products liability insurance with a liability
limit of $1,000,000. The Company also maintains coverage for property damage or
loss, general liability, business interruption, travel-accident, directors' and
officers' liability and workers' compensation. The Company does not maintain
key-man life insurance.
EMPLOYEES
As of May 23, 1997, the Company employed 40 full-time individuals,
including 23 in sales and marketing, five in research and development, seven in
general and administration and five in manufacturing, quality and service. The
Company also uses three contract employees and four consultants. The Company
believes that its future success is dependent, in large part, on its ability to
attract and retain highly qualified managerial, marketing and technical
personnel. The Company's employees are not represented by a union or
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<PAGE> 40
subject to a collective bargaining agreement. The Company believes that its
relations with its current employees are good.
PROPERTIES
The Company leases 23,392 square feet of office, manufacturing and
warehouse space in Troy, Michigan, of which approximately 12,000 square feet is
office space for sales and marketing, engineering, accounting and other
administrative activities. The lease expires December 31, 1997. The Company is
currently negotiating an extension of its lease. The minimum lease payments as
of November 30, 1996 through the end of 1997 total $199,000, excluding other
occupancy costs. The Company believes that, depending on sales of the Cerebral
Oximeter, its current facility is more than suitable and adequate for its
current needs, including assembly of the Cerebral Oximeter by the Company and
conducting Company operations in compliance with prescribed FDA/GMP guidelines
and will allow for substantial expansion of the Company's business and number of
employees. The Company has subleased a portion of its warehouse space on a
month-to-month basis for $2,700 per month.
LEGAL PROCEEDINGS
For a description of a suit filed by a shareholder of the Company on March
14, 1994 in the United States District Court for the Eastern District of
Michigan, individually and on behalf of all others similarly situated, against
the Company, four current and former directors and four other officers, former
officers or employees of the Company in an action captioned Jacobson, et al v.
Somanetics Corporation, et al, and the settlement of that lawsuit in fiscal
1996, see Note 7 of Notes to Financial Statements included elsewhere in this
Prospectus.
For a description of a suit filed by another shareholder of the Company on
April 25, 1994 in the United States District Court for the Eastern District of
Michigan, individually and on behalf of all others similarly situated, against
the Company and Gary D. Lewis, former Chairman of the Board, in an action
captioned Benjamin Langford v. Somanetics Corporation and Gary D. Lewis, see
"Risk Factors -- Langford Litigation May Involve Significant Amount to Defend or
Settle;" and Note 7 of Notes to Financial Statements included elsewhere in this
Prospectus.
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<PAGE> 41
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company as of May 23, 1997 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Bruce J. Barrett.......................... 38 President, Chief Executive Officer and a Director
Raymond W. Gunn........................... 39 Executive Vice President, Chief Financial
Officer, Treasurer and Secretary
H. Raymond Wallace (1).................... 61 Chairman of the Board
Daniel S. Follis (1)...................... 59 Director
Dr. James I. Ausman....................... 59 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee and Member of the Audit Committee.
Bruce J. Barrett. Mr. Barrett has served as the Company's President and
Chief Executive Officer and a director since June 1, 1994. Mr. Barrett
previously served, from June 1993 until May 31, 1994, as the Director, Hospital
Products Division for Abbott Laboratories, Ltd., a health care equipment
manufacturer and distributor, and from September 1989 until May 1993, as the
Director, Sales and Marketing for Abbott Critical Care Systems, a division of
Abbott Laboratories, Inc., a health care equipment manufacturer and distributor.
While at Abbott Critical Care Systems, Mr. Barrett managed Abbott's invasive
oximetry products for approximately four years. Mr. Barrett received a B.S.
degree in marketing from Indiana State University and an M.B.A. degree from
Arizona State University.
Raymond W. Gunn, CPA. Mr. Gunn has served as the Company's Executive Vice
President and Secretary since May 1993 and as its Chief Financial Officer and
Treasurer since February 1991. From November 1992 to May 1993, he served as the
Company's Vice President, Finance and Administration and Assistant Secretary.
From February 1991 to November 1992, Mr. Gunn served as the Company's Vice
President, Finance. His prior experience includes serving as a financial manager
with Pulte Home Corporation and a senior accountant with Deloitte Haskins &
Sells. Mr. Gunn received a B.S. degree in management from Oakland University.
H. Raymond Wallace. Mr. Wallace has served as the Company's Chairman of the
Board since January 1995 (as a non-officer Chairman of the Board since April
1995) and as a director of the Company since June 1994. He also served as a
consultant to the Company from April 1994 until January 1995. He has also served
as Chairman of the Board of Cardiometrics, Inc., a cardiovascular medical device
company, since December 1993, and as a self-employed consultant to medical
device and other companies since January 1994. From September 1986 until May
1993 (when he retired), he served as Vice President and General Manager of
Abbott Critical Care Systems. Mr. Wallace received a B.A. degree from Ohio State
University and an M.B.A. degree from the University of California, Berkeley.
Daniel S. Follis. Mr. Follis has served as a director of the Company since
April 1989. Since 1981, he has served as President of Verschuren & Follis, Inc.,
which advises and administers The Infinity Fund, a limited partnership which
invests in emerging growth companies. Mr. Follis received a B.A. degree in
business from Michigan State University.
James I. Ausman, M.D., Ph.D. Dr. Ausman has served as a director of the
Company since June 1994. He has been Professor and Head of the Department of
Neurosurgery at the University of Illinois at Chicago since August 1991. From
September 1978 until July 1991 he was Chairman of the Department of Neurosurgery
at Henry Ford Hospital. From December 1987 until July 1991 he served as Director
of the Henry Ford Neurosurgical Institute, also at Henry Ford Hospital. In
addition, he was Clinical Professor of Surgery, Section of Neurosurgery at the
University of Michigan in Ann Arbor from 1980 until 1991. Dr. Ausman received a
B.S. degree in chemistry and biology from Tufts University, a Doctorate of
Medicine from Johns
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Hopkins University School of Medicine, a Masters of Arts in Physiology, from the
State University of New York at Buffalo, and a Ph.D. in Pharmacology from George
Washington University. He has also received graduate training in neurosurgery at
the University of Minnesota and has obtained board certification from the
American Board of Neurological Surgery.
Messrs. Gunn and Barrett are each parties to employment agreements with the
Company pursuant to which they are required to be elected to the offices of the
Company they currently hold. Officers of the Company serve at the discretion of
the Board of Directors.
Effective November 4, 1996, Gary D. Lewis, a former director, resigned as a
director of the Company. The size of the Board was reduced to four members, and
Bruce J. Barrett was changed from a Class II director to a Class III director to
make the number of directors in each class as nearly equal as possible. Mr.
Barrett will now serve until the 1998 Annual Meeting of Shareholders and until
his successor is duly elected and qualified, or until his earlier death,
resignation or removal. The directors of the Company will hold office until the
Annual Meeting of Shareholders to be held in 1998 for Bruce J. Barrett, the
Annual Meeting of Shareholders to be held in 1999 for Daniel S. Follis and Dr.
James I. Ausman, and the Annual Meeting of Shareholders to be held in 2000 for
H. Raymond Wallace, and until their successors are elected and qualified.
Directors may not be removed without cause.
Pursuant to an amended agreement with Rauscher Pierce & Clark, Inc. and
Rauscher Pierce & Clark Limited (collectively, the "Placement Agent") in
connection with the April 2, 1996 Regulation S Offering, the Company agreed to
permit a person designated by the Placement Agent to attend meetings of the
Company's Board of Directors until the 1998 Annual Meeting of Shareholders and
to participate in discussions at such meetings. The Placement Agent designated
Mr. Alan Nash as the designee.
OTHER KEY PERSONNEL
The following persons, although not executive officers of the Company, are
regarded by management as key employees of the Company:
Richard Scheuing. Mr. Scheuing has served as the Company's Director of
Research and Development since March 1993. He joined the Company in 1991 as its
Director of Mechanical Engineering. He is an inventor on two of the Company's
issued patents, and one patent that is pending. Before joining the Company, he
was Director of Mechanical Engineering for Irwin Magnetic Systems, Inc. from
1987 until 1991 and was a Development Engineer with the Sarns division of
Minnesota Mining and Manufacturing Company ("3M") from 1982 to 1987. He received
a B.S. degree in mechanical engineering from the University of Michigan.
Ronald Widman. Mr. Widman has served as the Company's Director of Medical
Affairs since August 1994. Before joining the Company as Marketing Manager in
1991, he was employed by Mennen Medical, Inc., a manufacturer and marketer of
medical monitoring and diagnostic devices, for 12 years, where he held various
positions in domestic and international medical product marketing, including
Senior Product Manager from 1982 until 1991. He is the author of several papers
and articles related to medical care and monitoring devices.
SCIENTIFIC ADVISORS TO THE COMPANY
The Company uses scientific advisors primarily for individual consultation
in their areas of expertise, including assisting it with technical issues
regarding its technology and identifying and evaluating potential additional
applications of the Company's INVOS technology.
The following are scientific advisors to the Company:
James I. Ausman, M.D., Ph.D. For a description of the principal occupation
and employment of Dr. Ausman, see "Directors and Executive Officers."
Gregory Crosby, M.D. Dr. Crosby has served as the Evan & Marion Helfaer
Professor and Chairman of the Department of Anesthesiology at the University of
Wisconsin Medical School since 1996. For 15 years prior to 1996, he was
affiliated with Harvard Medical School and Massachusetts General Hospital. Dr.
Crosby
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is a neuroanesthesiologist who serves as an examiner on the American Board of
Anesthesiology, on the American Society of Anesthesiologists subcommittee on
Clinical Neurosciences, as Associate Editor of Anesthesiology, as Section Editor
for Neuroanesthesia of the Journal of Clinical Anesthesia and as a member of the
editorial board for the Journal of Neurosurgical Anesthesiology.
Robert R. Di Loreto, M.D. Dr. Di Loreto has held senior staff appointments
in the Department of Surgery, Urology Section and the Department of Pediatrics,
Pediatric Urology Section, at St. John Hospital and Medical Center in Detroit
since 1980. In addition, he has been the Medical Director of Michigan Mobile
Lithotripsy Inc. since 1988 and has served on the adjunct teaching staff,
Department of Urology, at Henry Ford Hospital since 1980. Dr. Di Loreto also has
sat as a panel member, Center for Device Evaluation, Division of
Gastroenterology and Urology, at the FDA, since 1990.
Manuel Dujovny, M.D. Dr. Dujovny has served as the Professor and Associate
Head of the Department of Neurosurgery, College of Medicine and Neuropsychiatric
Institute, University of Illinois Hospital at Chicago, since August 1991. He
also is the Director of Imaging Guided Stereotactic Surgery and Radiosurgery at
the University Hospital. Previously, he served as Director of Neurosurgical
Research at the Henry Ford Neurological Institute from 1981 until August 1991.
From 1984 until 1991 he also served as the Director of the Brain and Spinal Cord
Tumor Center at Henry Ford Hospital. He serves on numerous FDA working groups
examining materials and products and on the American Society of Testing
Materials (ASTM) committee for neurological surgery. Dr. Dujovny has also
written numerous articles on cerebral ischemia-related difficulties.
George A. Kling, M.D. Dr. Kling has served as Chairman and Professor of the
Department of Radiology at Wayne State University School of Medicine in Detroit
since July 1984 and Chief of the Department of Radiology, Harper-Grace Hospitals
in Detroit since July 1976. Dr. Kling has served Wayne State University and
Harper-Grace Hospitals, and the radiological community, in a number of
capacities since 1962, including American Roentgen Ray Society Councilor to the
American College of Radiology and committee appointments to the Michigan State
Medical Society and the Wayne County Medical Society.
Donald S. Prough, M.D. Dr. Prough has served as Professor and Chairman of
the Department of Anesthesiology at The University of Texas Medical Branch in
Galveston since February 1992. Before that he served as Professor of Anesthesia
and Neurology; Head, Section on Critical Care; and Medical Director, Cerebral
Blood Flow Laboratory, at The Bowman Gray School of Medicine, of Wake Forest
University, Winston-Salem, North Carolina, since 1980. He also is editor of the
Neurosurgical Anesthesia Section of Anesthesia and Analgesia and a member of the
editorial board of Critical Care Medicine. Dr. Prough has spoken frequently
about brain monitoring at national meetings of anesthesiologists and physicians
specializing in intensive care.
Hugh F. Stoddart. Mr. Stoddart has served as a consultant to business in
the fields of science and technology. For forty years he has invented and
developed products for medicine and industry using diverse technologies such as
imaging, image processing, radiation detection, optics, x-rays, spectroscopy,
lasers, computers and electronics. Examples include the first commercial brain
scanner based on positron emission, the Harvard scanner for high resolution
imaging of brain function and systems for non-invasive infrared spectroscopy of
the human body. He is presently Principal Investigator on two R&D projects,
funded by the National Institute of Health and the United States Army, involving
medical applications of in vivo near-infrared spectroscopy. He has participated
as president, vice-president, director or product manager in a number of medical
device and high-technology companies, including the Atomic Instrument Company,
Baird, Atomium, Perkin-Elmer, Bedford Engineering, Cleon, Union Carbide Imaging
Systems, Strichman Medical and NeuroPhysics, where he is currently Chairman and
Senior Scientist. He served as President and Chief Executive Officer of
Strichman Medical Equipment Inc. from 1988 to 1993, and Vice President and
Director of Union Carbide Imaging Systems from 1976 to 1980. Strichman Medical
is a manufacturer of computer workstations for nuclear medicine and scanners for
producing images of the functioning of the human brain. Union Carbide Imaging
Systems is a developer and manufacturer of nuclear medical imaging equipment.
The scientific advisors are employed by and/or have consulting agreements
with entities other than the Company, and they are expected to devote only a
small portion of their time to the Company. They do not
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<PAGE> 44
actively participate in the Company's activities or in the development of the
Company's technology. Certain of the institutions with which the scientific
advisors are affiliated may have regulations or policies which limit the ability
of such personnel to act as part-time consultants or in other capacities for a
commercial enterprise. Regulations or policies currently in effect or adopted in
the future might limit the ability of the scientific advisors to consult with
the Company.
COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information for each of the fiscal years
ended November 30, 1996, 1995 and 1994 concerning compensation of (i) all
individuals serving as the Company's Chief Executive Officer during the fiscal
year ended November 30, 1996 and (ii) each other executive officer of the
Company whose total annual salary and bonus exceeded $100,000 in fiscal 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------------
--------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION
--------------------------- ---- -------- ------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Bruce J. Barrett..................... 1996 $195,000 $ -- 43,200(1) $ --
President and Chief Executive 1995 195,000 -- 33,000(1) --
Officer (since 6/1/94) 1994 98,250(2) 24,375(3) 40,000 18,091
Raymond W. Gunn...................... 1996 105,000 -- 19,100(1) --
Executive Vice President and Chief 1995 95,625 -- 10,000(1) --
Financial Officer 1994 91,667 -- 22,500(4) --
</TABLE>
- ---------------
(1) The fiscal 1995 numbers include options to purchase 16,500 and 5,000 Common
Shares which were granted to Messrs. Barrett and Gunn, respectively, and
which were subject to shareholder approval of an amendment to the Company's
1991 Incentive Stock Option Plan at the 1995 Annual Meeting of Shareholders.
Although more than 85% of those voting approved the proposed amendment to
the 1991 Incentive Stock Option Plan, as a result of a significant number of
broker non-votes, there were insufficient votes in favor of the amendment,
it was not approved and the options were cancelled. The fiscal 1995 numbers
also include options to purchase 16,500 and 5,000 Common Shares granted to
Messrs. Barrett and Gunn, respectively, after the 1995 Annual Meeting of
Shareholders and subject to shareholder approval of an amendment to the
Company's 1991 Incentive Stock Option Plan at the next meeting of the
Company's shareholders. These options were cancelled in December 1995 (and
the proposed amendment was cancelled) in exchange for options covering the
same number of shares and exercisable at the same exercise price, but
granted independent of the Company's stock option plans and not subject to
shareholder approval. The fiscal 1996 numbers include these new options to
purchase 16,500 and 5,000 Common Shares granted to Messrs. Barrett and Gunn,
respectively.
(2) Mr. Barrett became an employee of the Company on June 1, 1994.
(3) Mr. Barrett received a signing bonus pursuant to his employment agreement.
(4) Includes 10,000 options granted to Mr. Gunn that replaced options with
higher exercise prices previously granted to him.
COMPENSATION OF DIRECTORS AND SCIENTIFIC ADVISORS
The Company's directors who are not officers or employees of the Company
(collectively, the "Outside Directors") receive $1,000 for each Board meeting
attended in person, $250 for each telephonic Board meeting attended and $250 for
each Board committee meeting attended on a date other than the date of a
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<PAGE> 45
Board meeting. The Company also reimburses Outside Directors for their
reasonable expenses of attending Board and Board committee meetings.
In January 1993, the Board of Directors adopted the Somanetics Corporation
1993 Director Stock Option Plan (the "Directors Plan"). The Directors Plan
provides for the grant of options to purchase 1,500 shares every three years
beginning June 30, 1993 and ending June 30, 2002 to each director who is not an
officer or employee of the Company. The exercise price of the options is the
fair market value of the Common Shares on the date of grant. Options vest in
one-third annual increments beginning on the date of grant and expire ten years
after the date of grant. In addition, each director who is not an officer or
employee of the Company and who first becomes a director of the Company after
the date the Directors Plan was adopted is automatically granted an option to
purchase a pro-rata portion of 1,500 Common Shares vesting over the period
remaining until the next regular grant of options under the Directors Plan.
Options to purchase 1,500 Common Shares exercisable at $26.30 per share
were granted pursuant to the Directors Plan to each of Messrs. Wallace and
Follis, Dr. Ausman and Gary D. Lewis, a former director of the Company, as of
June 30, 1996. Options to purchase 1,000 Common Shares expired upon Mr. Lewis's
resignation as a director effective November 4, 1996. In addition, effective May
21, 1996, each of Messrs. Wallace and Follis and Dr. Ausman was granted a
ten-year option to purchase 1,500 Common Shares exercisable at $19.10 per share.
Each of the options is exercisable 50% on June 5, 1996 (the date the Company
received FDA 510(k) clearance) and 25% on June 5, 1997 and 1998, respectively.
Each option becomes 100% exercisable immediately 10 business days before or upon
specified changes in control of the Company. In addition, effective December 22,
1995, Dr. Ausman was granted a ten-year option independent of the Company's
stock option plans to purchase 2,000 Common Shares exercisable at $5.00 per
share. The option is exercisable in one-fourth cumulative annual installments
beginning December 22, 1996. The option becomes 100% exercisable immediately 10
business days before or upon specified changes in control of the Company.
Scientific advisors are not presently compensated by the Company for their
services as scientific advisors. The Company pays scientific advisors their
reasonable expenses for advising the Company. No such expenses were incurred for
the fiscal year ended November 30, 1996, although some advisors received
consulting fees.
Under a consulting agreement dated February 28, 1983, Mr. Stoddart has
agreed to provide consulting services to the Company for a term ending February
28, 1998, which term is automatically renewed each year unless terminated by
either party by at least 30 days notice prior to the renewal of the agreement.
Pursuant to the agreement, the Company has entered into a Consulting Order with
NeuroPhysics Corporation, a research and development company owned by Mr.
Stoddart and his son, pursuant to which the Company is supporting NeuroPhysics
Corporation's research into the feasibility and development of prototypes of
four new products. See "Business--Research and Development." During fiscal 1996,
the Company paid approximately $81,050 in fees and expenses to Mr. Stoddart and
Neurophysics Corporation under the agreement. In addition, effective December
22, 1995, the Company granted Mr. Stoddart ten-year options to purchase 2,000
Common Shares at $5.00 per share, replacing options previously granted to him
for the same number of shares at higher exercise prices. Also, effective
November 18, 1996, the Company granted Mr. Stoddart's son, also a consultant to
the Company, ten-year options to purchase 1,500 Common Shares at $14.375 per
share.
For a description of the Company's former distribution agreement with Mr.
Follis, see "Compensation Committee Interlocks and Insider Participation." For a
description of the Company's consulting agreement with Gary D. Lewis, a former
director and a former officer of the Company, see "Certain Transactions."
44
<PAGE> 46
OPTION GRANTS TABLE
The following table sets forth information concerning individual grants of
stock options made during the fiscal year ended November 30, 1996 to each of the
executive officers of the Company named in the Summary Compensation Table above:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
PERCENT OF REALIZABLE VALUE AT
TOTAL ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION --------------------
NAME GRANTED YEAR PER SHARE DATE 5% 10%
---- ---------- ---------- --------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Bruce J. Barrett.......... 16,500(1) 11.7% $13.125 3/13/05 $123,100 $305,132
26,700(2) 18.9 5.625 1/05/06 94,452 239,360
Raymond W. Gunn........... 5,000(1) 3.5 13.125 3/13/05 37,303 92,464
14,100(2) 3.4 5.625 1/05/06 49,879 126,404
</TABLE>
- ---------------
(1) In December 1995, in exchange for the cancellation of certain outstanding
stock options, which were granted subject to shareholder approval, the
Company granted options to purchase an aggregate of 68,900 Common Shares
(most of which were granted independent of the Company's stock option plans
and none of which was granted subject to shareholder approval) to each then
current employee of the Company and two advisors to the Company, including
options to purchase 16,500 and 5,000 Common Shares granted to Messrs.
Barrett and Gunn, respectively. Except for the options granted to officers,
the new options cover the same number of shares and are subject to
substantially the same terms and conditions as the options previously
granted to such persons under the 1991 Incentive Stock Option Plan (the
"Plan"), except that (i) the exercise price of the new options is the fair
market value of the Company's Common Shares as of the date of grant ($5.00
per share), (ii) the new options become exercisable in one-fourth cumulative
annual increments beginning December 22, 1996 and expire December 22, 2005
and (iii) the new options are not subject to shareholder approval. The new
options granted to Messrs. Barrett and Gunn are the same as those granted to
other persons, except that the exercise price of the new options is the same
as the exercise price of their cancelled options ($13.125 per share) and the
new options become exercisable at the same times as their cancelled options:
one-fourth cumulative annual increments beginning March 13, 1996, expiring
March 13, 2005.
(2) Options to purchase 26,700 and 14,100 Common Shares were granted to Messrs.
Barrett and Gunn, respectively, in fiscal 1996 independent of the Company's
stock option plans, exercisable at the then current fair market value of the
underlying common shares. Each of the options set forth in the table is
exercisable 50% on June 5, 1996 (the date the Company received FDA 510(k)
clearance) and 25% on June 5, 1997 and 1998, respectively, and expire on
January 5, 2006.
With respect to each of the options described above, the portion of such
option which is exercisable at the date of termination of employment remains
exercisable until the expiration date of the option, unless termination is for
cause. If, upon exercise of these options, the Company must pay any amount for
income tax withholding, in the Compensation Committee's or the Board of
Directors' sole discretion, either the optionee will pay such amount to the
Company or the number of Common Shares delivered by the Company to the optionee
will be appropriately reduced to reimburse the Company for such payment. The
Compensation Committee or the Board may also permit the optionee to choose to
have such shares withheld or to tender Common Shares the optionee already owns.
The Compensation Committee or the Board may also make such other arrangements
with respect to income tax withholding as it shall determine. All options
granted under the Company's stock option plans through May 23, 1997, that are
not already 100% exercisable immediately, including options granted to Messrs.
Barrett and Gunn, become 100% exercisable immediately 10 business days before or
upon specified changes in control of the Company.
45
<PAGE> 47
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.
The Company will not grant options or warrants to officers, directors,
employees, promoters, 5% shareholders or affiliates with an exercise price of
less than 85% of the fair market value of the Common Shares on the date of
grant.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth information concerning each exercise of
stock options during the fiscal year ended November 30, 1996 by each of the
executive officers named in the Summary Compensation Table above and the value
of unexercised options held by such persons as of November 30, 1996:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT 11/30/96 AT 11/30/96
ACQUIRED ON VALUE --------------------------- ---------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bruce J. Barrett............ - $ - 57,475 25,725 $208,562 $100,768
Raymond W. Gunn............. - - 30,800 10,800 68,020 53,145
</TABLE>
- ---------------
"Value Realized" represents the fair value of the underlying securities on the
exercise date minus the aggregate exercise price of such options.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Bruce J. Barrett. As of May 13, 1994, the Company entered into an
employment agreement with Bruce J. Barrett, pursuant to which, as amended, he is
employed as President and Chief Executive Officer (or in such other position as
the Board of Directors determines) for a period ending April 30, 2000. Mr.
Barrett's annual base salary is $195,000, which may be increased by the Board of
Directors, and he received a one-time signing bonus equal to $24,375 upon
execution of the agreement. Mr. Barrett is also entitled to participate in any
bonus plan established by the Compensation Committee of the Board of Directors.
There was no bonus plan in fiscal 1996, but one has been adopted for fiscal
1997. Mr. Barrett is entitled to various fringe benefits under the agreement,
including 12 months of compensation and six months of benefits if his employment
under the agreement is terminated without cause or if the agreement expires
without being renewed. Mr. Barrett has agreed not to compete with the Company
during specified periods following the termination of his employment.
Raymond W. Gunn. Pursuant to the employment agreement between the Company
and Mr. Gunn, dated December 1, 1992, as amended, Mr. Gunn is employed as
Executive Vice President and Chief Financial Officer, Treasurer and Secretary of
the Company (or in such other position as the Board of Directors determines) for
a period ending April 30, 2000. Mr. Gunn's annual base salary under the
agreement is currently $110,250, which may be increased by the Board of
Directors. Mr. Gunn is entitled to a bonus determined at the discretion of the
Company's Board of Directors. Mr. Gunn is entitled to various fringe benefits
under the agreement, including disability insurance, a leased automobile and
twelve months of compensation and benefits if his employment under the agreement
is terminated without cause or if the agreement expires without being renewed.
The agreement also provides that Mr. Gunn will not compete against the Company
during specified periods following the termination of his employment.
Stock Option Terms. All options granted under the Company's stock option
plans through May 23, 1997, that are not already 100% exercisable immediately,
including options granted to Messrs. Barrett and Gunn,
46
<PAGE> 48
become 100% exercisable immediately 10 business days before or upon specified
changes in control of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended November 30, 1996, Daniel S. Follis and H.
Raymond Wallace served as the members of the Company's Compensation Committee.
None of the members of the Company's Compensation Committee was, during the
fiscal year ended November 30, 1996, an officer or employee of the Company, or a
former officer of the Company, except that Mr. Wallace became the Company's
non-salaried Chairman of the Board on January 27, 1995 and became a non-officer
Chairman of the Board effective April 6, 1995. Mr. Follis has the relationships
with the Company described below:
Exchange Warrants and Class M Warrants. On September 1, 1990, in connection
with the renewal of notes payable to shareholders of the Company, the Company
issued Exchange Warrants to purchase an aggregate of 4,500 Common Shares at
$20.00 per share, including Exchange Warrants to purchase 216 Common Shares
issued to a corporation affiliated with Mr. Follis, a director and shareholder
of the Company. During September through December 1990, the Company also issued
Class M Warrants, warrants to purchase 62,835 Common Shares at $10.00 per share,
including Class M Warrants to purchase 715 Common Shares at $9.50 per share
issued to Mr. Follis. Mr. Follis exercised his Class M Warrants on September 26,
1996. The Company has registered for resale the Common Shares issuable upon
exercise of the Class M Warrants and intends to update the registration when Mr.
Follis desires to sell his Common Shares. The Exchange Warrants expired
unexercised on March 27, 1997.
Distributorship Agreement. The Company entered into a distributorship
agreement with Somatek, Inc., an entity 50% owned by Mr. Follis. The
distributorship covered the territory of Michigan. The agreement was approved by
the Company's disinterested directors and was made in the ordinary course of
business on the Company's standard form of distributorship agreement.
Transactions pursuant to the distributorship agreement were on substantially the
same terms, including the purchase price of the Company's product covered by
such agreement, as those prevailing at the time for comparable agreements and
transactions with other distributors.
During fiscal 1996, the Company entered into new distribution agreements
with its United States distributors, including Somatek, Inc. The Company wrote
off $67,690 of its receivables from Somatek, Inc. in exchange for the return of
15 INVOS 3100 Cerebral Oximeters and 108 SomaSensors from Somatek, Inc. and its
customers. During the fiscal years ended November 30, 1996, 1995 and 1994, the
Company had no sales to Somatek, Inc. pursuant to its distributor agreement. As
of November 30, 1996 and May 23, 1997, Somatek, Inc. had no outstanding
indebtedness to the Company. As of November 30, 1995 and 1994, Somatek, Inc.
owed the Company $67,690. Effective February 28, 1997, the Company terminated
its distribution agreement with Somatek, Inc.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Michigan Business Corporation Act, as amended, authorizes a corporation
under specified circumstances to indemnify its directors and officers (including
reimbursement for expenses incurred). The provisions of the Company's Bylaws
relating to indemnification of directors and executive officers generally
provide that directors and executive officers will be indemnified to the fullest
extent permissible under Michigan law. The provision also provides for the
advancement of litigation expenses at the request of a director or executive
officer. These obligations are broad enough to permit indemnification with
respect to liabilities arising under the Securities Act of 1933, as amended, or
the Michigan Uniform Securities Act, as amended. The Company's Bylaws and Mr.
Barrett's and Mr. Gunn's employment agreements also provide for indemnification.
The Company believes that such indemnification will assist the Company in
continuing to attract and retain talented directors and officers in light of the
risk of litigation directed against directors and officers of publicly-held
corporations.
The Michigan Business Corporation Act, as amended, also permits Michigan
corporations to limit the personal liability of directors for a breach of their
fiduciary duty. The provisions of the Company's Restated
47
<PAGE> 49
Articles of Incorporation limit director liability to the maximum extent
currently permitted by Michigan law. Michigan law allows a corporation to
provide in its articles of incorporation that a director of the corporation will
not be personally liable to the corporation or its shareholders for monetary
damages for breach of fiduciary duty as a director, except for liability for
specified acts. As a result of the inclusion of such a provision, shareholders
of the Company may be unable to recover monetary damages against directors for
actions taken by them which constitute negligence or gross negligence or which
are in violation of their fiduciary duties, although it may be possible to
obtain injunctive or other equitable relief with respect to such actions. If
equitable remedies are found not to be available to shareholders in any
particular case, shareholders may not have any effective remedy against the
challenged conduct. These provisions, however, do not affect liability under the
Securities Act of 1933, as amended.
In addition, the Company has obtained Directors' and Officers' liability
insurance. The policy provides for $1,000,000 in coverage including prior acts
dating to the Company's inception and liabilities under the Securities Act of
1933, as amended, in connection with the Company's initial public offering, the
exercise of Class A Warrants and this offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933, as amended, and is therefore unenforceable.
CERTAIN TRANSACTIONS
See "Compensation -- Compensation Committee Interlocks and Insider
Participation" for a description of Exchange Warrants and Class M Warrants
issued to Mr. Follis, and a distributorship agreement between the Company and
Somatek, Inc., an entity 50% owned by Mr. Follis.
Pursuant to an Agreement and Release, dated and effective as of February 1,
1995, between the Company and Gary D. Lewis, a director of the Company until
November 4, 1996 and the Company's former Chairman of the Board (until January
27, 1995) and President and Chief Executive Officer (until May 31, 1994), (i)
Mr. Lewis voluntarily resigned from all of his positions with the Company,
except as a director of the Company, and his employment agreement terminated
without any obligation to either party, (ii) Mr. Lewis agreed to provide
consulting services to the Company through January 31, 1997, (iii) the Company
agreed to provide Mr. Lewis with (a) $150,000 a year for two years, (b) the same
health, medical and dental benefits as are provided to the Company's executive
officers from time to time for two years, (c) a facsimile machine, computer
equipment and office furniture and (d) $2,500 for legal fees and reimbursement
of Mr. Lewis' business-related expenses, (iv) the Company and Mr. Lewis amended
and restated the Company's note receivable from Mr. Lewis, (v) Mr. Lewis agreed
to confidentiality, non-compete and non-solicitation provisions for periods
specified in the agreement and (vi) each party released the other from all
claims through the date of the agreement.
On February 1, 1993, the Company made a $200,000 loan to Gary D. Lewis, the
Company's former Chairman of the Board, President and Chief Executive Officer
and a former director of the Company, secured by a second mortgage on the home
Mr. Lewis purchased at that time. The principal and all accrued interest were
originally due on January 31, 1998. The loan bore interest at 8% a year. In July
1994, Mr. Lewis agreed to make regular periodic reductions in the outstanding
principal balance of the note, with the entire amount to be paid back to the
Company within one year. Mr. Lewis paid the Company $25,000 toward the
outstanding principal balance on November 30, 1994.
Pursuant to the Agreement and Release between Mr. Lewis and the Company,
the Company and Mr. Lewis amended and restated the promissory note evidencing
the loan. As amended, Mr. Lewis' promissory note provided for the repayment of
the $175,000 balance from the Company on January 31, 1998, with interest at an
annual rate equal to the Company's bank's prime rate plus .75%. The note was
further secured by 17,500 of Mr. Lewis' options to purchase the Company's stock
and the underlying securities.
48
<PAGE> 50
On November 6, 1996, Gary D. Lewis paid the Company $175,000 (the
outstanding principal amount of the loan at the time) in full satisfaction of
all of his obligations under the loan, and the Company wrote off approximately
$29,750 of accrued interest with respect to that loan. The largest principal
amount of the loan outstanding during fiscal 1996 was $175,000 (not including
approximately $29,750 of accrued interest), and as of January 27, 1997 the loan
was fully repaid.
The Company will not enter into any future transactions with directors,
officers, key employees or shareholders of the Company or their affiliates or
affiliated companies unless they are on terms no less favorable to the Company
than if entered into with unrelated third parties.
49
<PAGE> 51
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Company's Common Shares as of May 23, 1997, and as adjusted to
reflect the sale of the Common Shares offered hereby, by (i) each director of
the Company, (ii) each executive officer of the Company and each executive
officer of the Company named in the Summary Compensation Table above, (iii) all
directors and executive officers of the Company as a group and (iv) each person
known by the Company to own more than 5% of the Company's Common Shares.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED
NUMBER OF ----------------------------
COMMON SHARES BEFORE THE AFTER THE
NAMED OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING (1) OFFERING (2)
------------------------- ------------------ ------------ ------------
<S> <C> <C> <C>
BRUCE J. BARRETT...................................... 65,092(3) 2.8% 1.5%
RAYMOND W. GUNN....................................... 33,650(4) 1.5% *
H. RAYMOND WALLACE.................................... 5,361(5) * *
DANIEL S. FOLLIS...................................... 27,181(6) 1.2% *
DR. JAMES I. AUSMAN................................... 17,035(7) * *
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (5
PERSONS).............................................. 148,319(8) 6.2% 3.4%
</TABLE>
- ---------------
* Represents less than 1% of outstanding Common Shares.
(1) Based on 2,285,351 Common Shares outstanding as of May 23, 1997.
(2) Based on 4,285,351 Common Shares outstanding, assuming all 2,000,000 Common
Shares offered hereby are sold to third parties.
(3) Includes 61,600 Common Shares that Mr. Barrett has the right to acquire
within 60 days and 500 shares owned by his wife.
(4) Includes 32,050 Common Shares that Mr. Gunn has the right to acquire within
60 days.
(5) Includes 3,761 Common Shares that Mr. Wallace has the right to acquire
within 60 days and 1,000 shares held in a living trust; Mr. Wallace has sole
voting and dispositive power over the shares held in the trust.
(6) Includes 5,750 Common Shares that Mr. Follis has the right to acquire within
60 days. The 27,181 Common Shares shown above as beneficially owned by Mr.
Follis include 8,820 Common Shares owned by The Infinity Fund, a limited
partnership in which Mr. Follis is a 6.068% limited partner and a 50%
general partner and which is administered by Verschuren & Follis, Inc., a
corporation in which Mr. Follis is a 50% shareholder, a director and the
President.
(7) Includes 4,261 Common Shares that Dr. Ausman has the right to acquire within
60 days, 9,744 Common Shares owned jointly with his wife and 3,030 shares
held in an individual retirement account over which Dr. Ausman exercises
sole voting and investment control.
(8) Includes 107,422 Common Shares which all executive officers and directors as
a group have the right to acquire within 60 days.
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.
50
<PAGE> 52
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital shares of the Company consist of an aggregate of
6,000,000 Common Shares, par value $0.01 per share, and 1,000,000 Preferred
Shares, par value $0.01 per share. As of May 23, 1997, 2,285,351 Common Shares
and no Preferred Shares were outstanding. All of the shares being offered in
this offering are Common Shares.
COMMON SHARES
Holders of Common Shares have one vote per share on each matter submitted
to a vote of the shareholders and a ratable right to the net assets of the
Company upon liquidation. Holders of Common Shares participate ratably in
dividends and distributions as may be declared by the Board of Directors from
funds legally available for that purpose, have no conversion rights, are not
redeemable and are not entitled to any preemptive or subscription rights. See
"Price Range of Common Shares and Dividend Policy." The Common Shares currently
outstanding are, and the shares to be issued in connection with this offering
will be, duly authorized, validly issued, fully paid and non-assessable. Holders
of Common Shares have no cumulative voting rights, and accordingly, holders of a
majority of the outstanding Common Shares are able to elect all of the Company's
directors.
The directors of the Company serve staggered three-year terms. The
directors of the Company will hold office until the Annual Meeting of
Shareholders to be held in 1998 for Bruce J. Barrett, the Annual Meeting of
Shareholders to be held in 1999 for Daniel S. Follis and Dr. James I. Ausman,
and the Annual Meeting of Shareholders to be held in 2000 for H. Raymond
Wallace, and until their successors are elected and qualified. Directors may not
be removed without cause. The Restated Articles of Incorporation also set the
minimum and maximum number of directors constituting the entire Board at three
and fifteen, respectively, and require approval of holders of 90% of the
Company's voting shares to amend this provision.
BUSINESS COMBINATION PROVISIONS
Chapters 7A and 7B of the Michigan Business Corporation Act, as amended,
may affect attempts to acquire control of the Company. In general, under Chapter
7A, "business combinations" (defined to include, among other transactions,
certain mergers, dispositions of assets or shares and recapitalizations) between
covered Michigan business corporations or their subsidiaries and an "interested
shareholder" (defined as the direct or indirect beneficial owner of at least 10%
of the voting power of a covered corporation's outstanding shares) can only be
consummated if approved by at least 90% of the votes of each class of the
corporation's shares entitled to vote and by at least two-thirds of such voting
shares not held by the "interested shareholder" or affiliates, unless five years
have elapsed after the person involved became an "interested shareholder" and
unless certain price and other conditions are satisfied. The Board of Directors
has the power to elect to be subject to Chapter 7A as to specifically identified
or unidentified interested shareholders.
In general, under Chapter 7B, an entity that acquires "Control Shares" of
the Company may vote the Control Shares on any matter only if a majority of all
shares, and of all non-"Interested Shares", of each class of shares entitled to
vote as a class, approve such voting rights. Interested Shares are shares owned
by officers of the Company, employee-directors of the Company and the entity
making the "Control Share Acquisition" (as defined). Control Shares are shares
that when added to shares already owned by an entity, would give the entity
voting power in the election of directors over any of the three thresholds:
one-fifth, one-third and a majority. The effect of the statute is to condition
the acquisition of voting control of a corporation on the approval of a majority
of the pre-existing disinterested shareholders. The Board of Directors may amend
the bylaws before a "Control Share Acquisition" occurs to provide that Chapter
7B does not apply to the Company.
51
<PAGE> 53
PREFERRED SHARES
The Company has also authorized the issuance of up to 1,000,000 Preferred
Shares, par value $0.01 per share, none of which is outstanding as of the date
of this Prospectus. The Preferred Shares may be issued from time to time in one
or more series. The Board of Directors is authorized to determine the rights,
preferences, privileges and restrictions granted to, and imposed upon, each
series of Preferred Shares and to fix the number of shares of any series of
Preferred Shares and the designation of any such series. The issuance of
Preferred Shares could be used, under certain circumstances, as a method of
preventing a takeover of the Company and could permit the Board of Directors,
without any action of the holders of the Common Shares, to issue Preferred
Shares which could have a detrimental effect on the rights of holders of the
Common Shares, including loss of voting control. Anti-takeover provisions that
could be included in the Preferred Shares when issued may have a depressive
effect on the market price of the Company's securities and may limit
shareholders' ability to receive a premium on their shares by discouraging
takeover and tender offer bids. The Company has no present plans to issue any
Preferred Shares.
TRANSFER AGENT
American Stock Transfer & Trust Company serves as transfer agent for the
Common Shares. As of April 11, 1997 there were 602 holders of record of the
Company's Common Shares.
REGISTRATION RIGHTS
The placement agents for three of the Company's Regulation S Offerings in
1994, 1995 and 1996 and their transferees have piggy-back registration rights
with respect to the Common Shares underlying the 79,394 Placement Agent
Warrants. In addition, the Representative will be granted demand and piggy-back
registration rights with respect to the Representative's Warrants issued to it
in connection with this offering. See "Underwriting." These rights allow the
holders to include their Common Shares in any registration of the Company's
securities in a registration statement under the Securities Act of 1933, as
amended, subject to specified limitations.
52
<PAGE> 54
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to Brean Murray &
Co., Inc. (the "Underwriters"), for which Brean Murray & Co., Inc. is acting as
representative (the "Representative"), and the Underwriters have agreed to
purchase from the Company 2,000,000 Common Shares.
Upon the terms and subject to the conditions of the Underwriting Agreement,
the Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the Common Shares set forth in the above table if any of the
Common Shares are purchased.
The Underwriters propose to offer the Common Shares to the public initially
at the public offering price set forth on the cover page of this Prospectus, and
to selected dealers at such public offering price less a concession not to
exceed $0.16 per share. After the offering to the public, the offering price and
the concession to selected dealers may be changed by the Representative. The
Underwriters do not intend to sell any of the Common Shares in this offering to
accounts for which they exercise discretionary authority.
The offering price was determined by negotiation between the Company and
the Representative.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 300,000 additional
Common Shares to cover over-allotments, if any, at the public offering price,
less underwriting discounts and commissions, as set forth on the cover page of
this Prospectus. If the Underwriters exercise this option, then each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase a number of option shares proportionate to such Underwriters' initial
commitment as indicated in the table above. The Underwriters may exercise such
option only to cover over-allotments made in connection with the sale of the
Common Shares offered hereby.
The Company and its officers and directors (who beneficially hold in the
aggregate 148,319 Common shares, including Common Shares issuable upon exercise
of outstanding options beneficially owned by them) have agreed not to sell,
offer to sell, issue, distribute or otherwise dispose of any Common Shares of
the Company for a period of 180 days from the date of this Prospectus (subject
to certain limited exceptions) without the prior written consent of the
Representative.
In connection with the offering made hereby, the Company has agreed to sell
to the Representative and its designees, for nominal consideration, the
Representative's Warrants to purchase 200,000 Common Shares from the Company
(10% of the number of shares issued in this offering). The Representative's
Warrants are exercisable, in whole or in part, at an exercise price equal to
120% of the public offering price set forth on the cover page of this Prospectus
at any time during the four-year period commencing one year after the effective
date of the Registration Statement of which this Prospectus is a part. The
warrant agreement pursuant to which the Representative's Warrants will be issued
will contain provisions providing for adjustment of the exercise price and the
number and type of securities issuable upon exercise of the Representative's
Warrants should any one or more of certain specified events occur. The
Representative's Warrants grant to the holders thereof demand and piggy-back
registration rights for the securities issuable upon exercise of the
Representative's Warrants.
The Company has agreed to reimburse the Underwriters for up to $150,000 of
the Underwriters' out-of-pocket expenses (including fees of their counsel) in
connection with the sale of the Common Shares offered hereby. The Company has
also agreed to indemnify the Underwriters or contribute to losses arising out of
certain liabilities that may be incurred in connection with this offering,
including liabilities under the Securities Act of 1933, as amended.
In connection with this offering, certain Underwriters may engage in
passive market making transactions in the Common Shares on The Nasdaq SmallCap
Market immediately prior to the commencement of sales in this offering, in
accordance with Rule 103 of Regulation M. Passive market making consists of
displaying bids on The Nasdaq SmallCap Market limited by the bid prices of
independent market makers and purchases limited by such prices and effected in
response to order flow. Net purchases by a passive market maker on each day are
limited to a specified percentage of the passive market maker's average daily
trading volume in
53
<PAGE> 55
the Common Shares during a specified period and must be discontinued when such
limit is reached. Passive market making may stabilize the market price of the
Common Shares at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.
In connection with this offering, the Underwriters and selling group
members, if any, may engage in stabilizing, syndicate short covering
transactions, penalty bids or other transactions during the offering that may
stabilize, maintain or otherwise affect the market price of the Common Shares at
a level above that which might otherwise prevail in the open market. Stabilizing
transactions are bids for and purchases of the Common Shares for the purpose of
preventing or retarding a decline in the market price of the Common Shares to
facilitate the offering. Syndicate short covering transactions are bids to
purchase and actual purchases of Common Shares on behalf of the Underwriters to
provide them with enough Common Shares to deliver to those purchasing Common
Shares in the offering. A penalty bid is an arrangement that permits the
Representative to reclaim a selling concession when the Common Shares originally
sold by the syndicate member are purchased in a syndicate covering transaction.
Such stabilizing, syndicate short covering transactions, penalty bids and other
transactions, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the Common Shares offered hereby will be passed upon for
the Company by Honigman Miller Schwartz and Cohn, Detroit, Michigan. Certain
legal matters will be passed upon for the Underwriters by Piper & Marbury
L.L.P., New York, New York.
EXPERTS
The financial statements included in this Prospectus, the related financial
statement schedule included elsewhere in the registration statement and the
financial statements from which the selected financial data included in this
Prospectus have been derived, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and elsewhere
in the registration statement (which report on the financial statements
expresses an unqualified opinion and includes an explanatory paragraph referring
to an uncertainty concerning the Company's ability to continue as a going
concern), and have been so included herein and elsewhere in the registration
statement in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files reports
and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy and information statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission in Washington, D.C. at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's
regional offices in New York (7 World Trade Center, Suite 1300, New York New
York 10048) and Chicago (Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60611). Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission can be contacted at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. The Company's Securities Exchange Act of 1934, as amended, filings are
also available to the public on the Commission's Internet site
(http://www.sec.gov).
This Prospectus, which constitutes part of a Registration Statement on Form
S-1 filed with the Commission under the Securities Act of 1933, as amended, by
the Company (the "Registration Statement"), omits certain of the information
contained in the Registration Statement. Reference is hereby made to the
Registration Statement and to the exhibits to the Registration Statement for
further information about the Company and the Common Shares. Statements in this
Prospectus concerning provisions of documents are summaries of such documents,
and each statement is qualified by reference to the copy of the applicable
54
<PAGE> 56
document filed with the Commission. Copies of such material, including the
complete Registration Statement and the exhibits, can be inspected, without
charge at the offices of the Commission, or obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.
55
<PAGE> 57
GLOSSARY
As used in this Prospectus, the following terms have the meanings set forth
below.
ARTERY: One of the vessels carrying blood from the heart to the tissues. The
arteries carry oxygenated blood from the right and left ventricles of the heart
to all parts of the body.
BRAIN OXYGEN IMBALANCE: The difference between brain oxygen supply and demand.
Brain oxygen imbalances can be caused by several factors, including changes in
oxygen saturation in the arteries, blood flow to the brain, hemoglobin
concentration and oxygen consumption by the brain.
CAPILLARIES: The smallest vessels in the blood-vascular system, connecting the
arteries with the veins.
CAROTID ENDARTERECTOMY: The removal of atherosclerotic placque from the carotid
artery.
CORONARY ARTERY BYPASS GRAFT: A bypass, established surgically, which permits
blood to travel from the aorta to a branch of the coronary artery at a point
past an obstruction. It is used in treating coronary artery disease.
ELECTROENCEPHALOGRAM ("EEG"): A device that measures electrical activity in the
brain, which can be affected by decreased oxygen supply.
FDA-CLEARED: A medical device may be marketed in the United States only with
prior authorization from the FDA unless it is subject to a specific exemption.
Devices classified by the FDA as posing less risk are placed either in class I
or II and are eligible to seek "510(k) clearance." Such clearance generally is
granted when submitted information establishes that a proposed device is
"substantially equivalent" in intended use to a class I or II device already
legally on the market or to a "preamendment" class III device (i.e., one that
has been in commercial distribution since before May 28, 1976) for which FDA has
not called for PMA applications. The FDA in recent years has been requiring a
more rigorous demonstration of substantial equivalence than in the past,
including requiring clinical trial data in some cases. For any devices that are
cleared through the 510(k) process, modifications or enhancements that could
significantly affect safety or effectiveness, or constitute a major change in
the intended use of the device, will require new 510(k) submissions. The Company
believes that it now usually takes from one to four months from the date of
submission to obtain 510(k) clearance, but it can take substantially longer.
After such clearance the Company may market its product in the United States.
GENERAL ANESTHESIA: Complete anesthesia, affecting the entire body with loss of
consciousness when the anesthetic agent acts upon the brain. This type of
anesthesia is usually accomplished following the administration of inhalational
or intravenous anesthetics. Commonly used for surgical procedures.
HEMOGLOBIN: Virtually all the oxygen carried by the blood is bound to
hemoglobin, the red protein in the red blood cells. Hemoglobin passes through
the lungs, bonds with oxygen and is pumped by the heart through arteries and
capillaries to various parts of the body. Those parts of the body extract the
oxygen and the blood carries away carbon dioxide through the capillaries and
veins back to the lungs.
HEMORRHAGIC SHOCK: Shock due to massive loss of blood.
HYPERTENSION: High blood pressure.
HYPOTENSION: Decreased blood pressure; occurs in shock, hemorrhages, infections,
fevers or cancer or under other conditions.
HYPOTHERMIA: Having a body temperature below normal.
HYPOVOLEMIA: Diminished blood volume.
HYPOXEMIA: Insufficient oxygenation of the blood.
HYPOXIA: Insufficiency of oxygen delivery to tissue; decreased concentration of
oxygen in the inspired air.
IN VIVO: In the living body.
56
<PAGE> 58
INTRACRANIAL PRESSURE MONITORING: A sensor is placed in the intracranial space
through a drilled hole to monitor the pressure on the brain inside the patient's
skull, which may increase as a secondary effect of certain brain damage or head
injuries.
INVASIVE JUGULAR BULB CATHETER MONITORING: Blood is drawn from a patient's
jugular vein (a vein in the neck near the base of the brain), and the oxygen
content, acidity and other blood gases are analyzed directly from the removed
blood.
INVOS: In Vivo Optical Spectroscopy is the name of the patented technology that
the Company uses in the operation of the INVOS Cerebral Oximeter.
ISCHEMIA: Tissue oxygen starvation due to the obstruction of the inflow of
arterial blood.
NEUROLOGICAL EXAM: Uses physical responses to test for signs of brain damage.
NEUROSURGERY: Surgery of the nervous system, including the brain.
OPEN HEART SURGERY: Any cardiac surgical procedure where the heart is exposed,
such as a valve replacement or repair, heart transplant or congenital repair. It
includes bypass surgery.
OPTICAL SPECTROSCOPY: Study of the spectra (series of colors). Relates to the
theories behind INVOS and the interaction between matter and light.
OXIMETRY: Use of photoelectric apparatus for determining the amount of oxygen in
the blood. Usually done by measuring the amount of light transmitted through a
translucent part of the tissue.
OXYGEN SATURATION: The percentage of total hemoglobin contained in a given
amount of blood which is combined (saturated) with oxygen.
OXYGENATED HEMOGLOBIN: Hemoglobin that is bound to oxygen.
PULMONARY ARTERY: The artery that carries the venous blood from the right
ventricle to the lungs.
PULSE OXIMETRY: A device that measures hemoglobin oxygen saturation in the
arteries in peripheral tissue.
SPECTROPHOTOMETER: A device for measuring the amount of color in a solution by
comparison with the spectrum.
SPECTROPHOTOMETRY: The estimation of coloring of matter in a solution by use of
a spectrophotometer or spectroscope.
STROKE: The sudden loss of consciousness caused by hemorrhage into the brain,
the formation of an embolus or thrombus that blocks an artery, or the rupture of
an extracerebral artery causing ischemia in parts of the brain.
SUBDURAL HEMATOMA: Internal bleeding between the skull and brain.
TRANSCRANIAL DOPPLER: A device using ultrasound for measuring velocity of blood
in a vessel.
VENOUS BLOOD: The dark blood carried back to the heart by the veins, after
oxygen has been extracted by the tissues.
57
<PAGE> 59
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets -- February 28, 1997 (Unaudited) and November
30, 1996 and 1995......................................... F-3
Statements of Operations -- For the Three-Month Periods
Ended February 28, 1997 and February 29, 1996 (Unaudited)
and for the Years Ended November 30, 1996, 1995 and 1994
and Cumulative For the Period January 15, 1982 (Date of
Inception) Through February 28, 1997 (Unaudited).......... F-4
Statements of Shareholders' Equity (Deficiency) -- For the
Period January 15, 1982 (Date of Inception) through
February 28, 1997 (Unaudited)............................. F-5
Statements of Cash Flows -- For the Three-Month Periods
Ended February 28, 1997 and February 29, 1996 (Unaudited)
and for the Years Ended November 30, 1996, 1995 and 1994
and Cumulative for the Period January 15, 1982 (Date of
Inception) through February 28, 1997 (Unaudited).......... F-7
Notes to Financial Statements............................... F-8
</TABLE>
F-1
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Somanetics Corporation
Troy, Michigan
We have audited the accompanying balance sheets of Somanetics Corporation (the
"Company") (a development stage company) as of November 30, 1996 and 1995 and
the related statements of operations, shareholders' equity (deficiency) and cash
flows for the years ended November 30, 1996, 1995 and 1994 and for the period
from January 15, 1982 (date of inception) to November 30, 1996 (not presented
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at November 30, 1996 and 1995
and the results of its operations and its cash flows for the years ended
November 30, 1996, 1995 and 1994 and for the period from January 15, 1982 (date
of inception) to November 30, 1996 in conformity with generally accepted
accounting principles.
The Company is in the development stage as of November 30, 1996. As discussed in
Note 2 to the financial statements, the Company's attainment of profitable
operations is dependent upon future events, including obtaining adequate
financing, maintaining regulatory approval and achieving market acceptance and
demand for its product at levels adequate to support the Company's cost
structure.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is a development stage
enterprise engaged in developing, manufacturing and marketing processor-based
medical diagnostic and patient monitoring equipment. As discussed in Note 2 to
the financial statements, conditions exist which raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
DELOITTE & TOUCHE LLP
Detroit, Michigan
January 24, 1997
(April 10, 1997 as to paragraph 1 of Note 11)
F-2
<PAGE> 61
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30,
FEBRUARY 28, ----------------------------
1997 1996 1995
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (Note 4)............... $ 1,844,674 $ 3,291,911 $ 941,426
Accounts receivable, net of allowance for
doubtful accounts of approximately $46,000,
$46,000 and $194,000 at February 28, 1997,
November 30, 1996 and November 30, 1995,
respectively (Notes 7 and 9).................. 323,775 191,436 443,859
Inventory (Note 4)............................... 951,932 931,135 936,421
Prepaid expenses................................. 67,133 65,435 72,161
------------ ------------ ------------
Total current assets.......................... 3,187,514 4,479,917 2,393,867
------------ ------------ ------------
Property and Equipment: (Note 4)
Machinery and equipment.......................... 478,012 479,757 412,217
Furniture and fixtures........................... 193,683 193,343 193,339
Leasehold improvements........................... 166,770 166,770 166,770
------------ ------------ ------------
Total......................................... 838,465 839,870 772,326
Less accumulated depreciation and amortization... (752,929) (743,775) (685,835)
------------ ------------ ------------
Net property and equipment.................... 85,536 96,095 86,491
------------ ------------ ------------
Other Assets:
Note receivable -- related party (Note 9)........ -- -- 190,240
Patents and trademarks, net (Note 4)............. 77,401 79,129 86,041
Other............................................ 16,600 16,600 104,616
------------ ------------ ------------
Total other assets............................ 94,001 95,729 380,897
------------ ------------ ------------
Total Assets....................................... $ 3,367,051 $ 4,671,741 $ 2,861,255
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................. $ 406,143 $ 364,032 $ 131,401
Accrued liabilities (Notes 5 and 7).............. 203,953 254,110 416,356
------------ ------------ ------------
Total current liabilities..................... 610,096 618,142 547,757
------------ ------------ ------------
Commitments and Contingencies (Notes 7 and 11)..... -- -- --
Redeemable Convertible Preferred Shares: (Note 3)
Authorized, 2,116,648 shares of $.01 par value;
1,984,250 shares issued and outstanding at
November 30, 1995................................ -- -- 19,843
Shareholders' Equity: (Notes 3 and 11)
Preferred shares; authorized, 1,000,000 shares of
$.01 par value; no shares issued or
outstanding................................... -- -- --
Common shares; authorized, 6,000,000 shares of
$.01 par value; issued and outstanding,
2,285,351, 2,285,351 and 1,776,855 shares at
February 28, 1997, November 30, 1996 and
November 30, 1995, respectively............... 22,854 22,854 17,769
Additional paid-in capital....................... 34,253,566 34,241,798 29,183,236
Deficit accumulated during the development stage
.............................................. (31,519,465) (30,211,053) (26,907,350)
------------ ------------ ------------
Total shareholders' equity.................... 2,756,955 4,053,599 2,293,655
------------ ------------ ------------
Total Liabilities and Shareholders' Equity......... $ 3,367,051 $ 4,671,741 $ 2,861,255
============ ============ ============
</TABLE>
See notes to financial statements
F-3
<PAGE> 62
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE
FOR THE THREE-MONTH FOR THE PERIOD
PERIODS ENDED JANUARY 15, 1982
--------------------------- FOR THE YEARS ENDED NOVEMBER 30, (DATE OF INCEPTION)
FEBRUARY 28, FEBRUARY 29, --------------------------------------- TO FEBRUARY 28,
1997 1996 1996 1995 1994 1997
------------ ------------ ----------- ----------- ----------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Net sales (Notes 4, 9 and
10)...................... $ 353,863 $ 515,079 $ 778,200 $ 1,335,970 $ 938,531 $ 6,082,795
Research and development
activities............... -- -- -- -- -- 122,500
----------- ---------- ----------- ----------- ----------- ------------
Total revenues........... 353,863 515,079 778,200 1,335,970 938,531 6,205,295
Cost of sales................ 180,271 211,134 385,136 657,614 464,322 2,807,522
----------- ---------- ----------- ----------- ----------- ------------
Gross margin................. 173,592 303,945 393,064 678,356 474,209 3,397,773
----------- ---------- ----------- ----------- ----------- ------------
Operating Expenses:
Research, development and
engineering (Note 4)..... 164,211 49,936 235,354 285,893 549,737 8,169,122
Selling, general and
administrative (Note
9)....................... 1,359,088 590,331 3,549,939 3,302,751 4,346,858 27,548,810
----------- ---------- ----------- ----------- ----------- ------------
Total operating
expenses............... 1,523,299 640,267 3,785,293 3,588,644 4,896,595 35,717,932
----------- ---------- ----------- ----------- ----------- ------------
Operating loss............... (1,349,707) (336,322) (3,392,229) (2,910,288) (4,422,386) (32,320,159)
----------- ---------- ----------- ----------- ----------- ------------
Other income (expense):
Interest income............ 33,195 13,660 61,603 94,769 68,290 1,154,343
Interest expense........... -- -- (449) (772) (3,892) (231,674)
Other...................... 8,100 3,073 27,372 (2,112) 26,488 (102,133)
----------- ---------- ----------- ----------- ----------- ------------
Total other
income................. 41,295 16,733 88,586 91,885 90,886 820,536
----------- ---------- ----------- ----------- ----------- ------------
Net loss..................... $(1,308,412) $ (319,589) $(3,303,703) $(2,818,403) $(4,331,500) $(31,499,623)
=========== ========== =========== =========== =========== ============
Net loss per Common Share
(Notes 4 and 11)........... $ (.57) $ (.18) $ (1.77) $ (1.67) $ (3.41) $ (41.03)
=========== ========== =========== =========== =========== ============
Weighted average number of
Common Shares outstanding
(Notes 4 and 11)........... 2,285,351 1,778,046 1,866,751 1,684,368 1,269,743 767,745
=========== ========== =========== =========== =========== ============
</TABLE>
See notes to financial statements
F-4
<PAGE> 63
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY) (NOTE 11)
<TABLE>
<CAPTION>
TOTAL
PRICE ADDITIONAL ACCUM- SHAREHOLDERS'
PER SHARE PAID-IN ULATED EQUITY
DATE SHARE SHARES VALUE CAPITAL DEFICIT (DEFICIENCY)
--------------- ------ ------- ------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ISSUANCE OF COMMON SHARES:
For shareholders' contributions of
test equipment.................... January, 1982 $ 0.32 83,037 $ 830 $ 25,670 $ -- $ 26,500
For cash............................ July, 1982 13.08 7,835 79 101,921 102,000
Net loss from January 15, 1982 (date
of inception) to November 30,
1982.............................. (107,083) (107,083)
------- ------ ----------- ----------- -----------
Balance at November 30, 1982.......... 90,872 909 127,591 (107,083) 21,417
For cash............................ December, 1982 13.08 3,917 39 50,961 51,000
For services........................ January, 1983 13.08 1,567 16 20,484 20,500
For cash, less issuance costs of
$5,863............................ July, 1983 26.17 11,624 116 298,185 298,301
For services........................ November, 1983 26.17 784 8 20,492 20,500
Net loss for the year ended November
30, 1983.......................... (291,986) (291,986)
------- ------ ----------- ----------- -----------
Balance at November 30, 1983.......... 108,764 1,088 517,713 (399,069) 119,732
For cash, less issuance costs of
$7,735............................ December, 1983-
April, 1984 26.17 19,421 194 500,252 500,446
For patents......................... February, 1984 26.17 4,895 49 128,020 128,069
For cash............................ November, 1984 35.10 3,730 37 130,899 130,936
Net loss for the year ended November
30, 1984.......................... (700,380) (700,380)
------- ------ ----------- ----------- -----------
Balance at November 30, 1984.......... 136,810 1,368 1,276,884 (1,099,449) 178,803
For cash, less issuance costs of
$3,726............................ December, 1984-
June, 1985 35.10 13,029 130 453,485 453,615
For cash............................ November, 1985 70.20 14,484 145 1,016,655 1,016,800
Net loss for the year ended November
30, 1985.......................... (559,871) (559,871)
------- ------ ----------- ----------- -----------
Balance at November 30, 1985.......... 164,323 1,643 2,747,024 (1,659,320) 1,089,347
Exercise of stock options for
cash.............................. December, 1985 35.10 783 8 27,492 27,500
For cash............................ January, 1986 70.20 10,444 104 733,097 733,201
Net loss for the year ended November
30, 1986.......................... (1,222,772) (1,222,772)
------- ------ ----------- ----------- -----------
Balance at November 30, 1986.......... 175,550 1,755 3,507,613 (2,882,092) 627,276
For cash, less issuance costs of
$9,500............................ March, 1987-
September, 1987 51.06 10,359 104 519,296 519,400
Net loss for the year ended November
30, 1987.......................... (1,143,081) (1,143,081)
------- ------ ----------- ----------- -----------
Balance at November 30, 1987.......... 185,909 1,859 4,026,909 (4,025,173) 3,595
For cash, less issuance costs of
$10,500........................... February, 1988-
April, 1988 51.06 3,291 33 157,467 157,500
Net loss for the year ended November
30, 1988.......................... (352,311) (352,311)
------- ------ ----------- ----------- -----------
Balance at November 30, 1988.......... 189,200 1,892 4,184,376 (4,377,484) (191,216)
For cash and the exchange of debt
due a shareholder................. January, 1989-
July, 1989 51.06 4,524 45 230,955 231,000
Net loss for the year ended November
30, 1989.......................... (446,642) (446,642)
------- ------ ----------- ----------- -----------
Balance at November 30, 1989.......... 193,724 1,937 4,415,331 (4,824,126) (406,858)
For services........................ August, 1990 51.06 4,701 47 239,953 240,000
Net loss for the year ended November
30, 1990.......................... (1,328,518) (1,328,518)
------- ------ ----------- ----------- -----------
Balance at November 30, 1990.......... 198,425 1,984 4,655,284 (6,152,644) (1,495,376)
For cash, less issuance costs of
$1,630,241........................ March, 1991 20.00 360,000 3,600 5,566,159 5,569,759
Unit Purchase Option................ March, 1991 120 120
Redeemable Convertible Preferred
Stock dividend.................... April, 1991 (19,843) (19,843)
For cash, less issuance costs of
$126,900.......................... April, 1991 20.00 54,000 540 952,560 953,100
Net loss for the year ended November
30, 1991.......................... (2,058,493) (2,058,493)
------- ------ ----------- ----------- -----------
Balance at November 30, 1991.......... 612,425 $6,124 $11,174,123 $(8,230,980) $ 2,949,267
</TABLE>
See notes to financial statements
F-5
<PAGE> 64
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY) (NOTE 11) -- (CONTINUED)
<TABLE>
<CAPTION>
TOTAL
PRICE ADDITIONAL ACCUM- SHAREHOLDERS'
PER SHARE PAID-IN ULATED EQUITY
DATE SHARE SHARES VALUE CAPITAL DEFICIT (DEFICIENCY)
--------------- ----- --------- ------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at November 30, 1991....... 612,425 $ 6,124 $11,174,123 $ (8,230,980) $ 2,949,267
Exercise of Class A Warrants for
cash, less issuance costs of
$702,917....................... December, 1991-
May, 1992 30.00 413,900 4,139 11,709,944 11,714,083
Exercise of Class B Warrants for
cash........................... February, 1992-
November, 1992 40.00 3,406 34 136,186 136,220
Exercise of stock options for
cash........................... July, 1992- 20.00-
November, 1992 21.90 3,010 30 66,045 66,075
Net loss for year ended November
30, 1992....................... (5,390,637) (5,390,637)
--------- ------- ----------- ------------ -----------
Balance at November 30, 1992....... 1,032,741 10,327 23,086,298 (13,621,617) 9,475,008
Exercise of Class B Warrants for
cash........................... December, 1992-
October, 1993 40.00 2,976 30 119,034 119,064
Exercise of Class M Warrants for
cash........................... March, 1993-
October, 1993 10.00 60,018 601 599,578 600,179
Exercise of stock options for
cash........................... March, 1993- 20.00-
September, 1993 43.80 310 3 13,147 13,150
Exercise of Unit Purchase Options
and underlying Class A Warrants
for cash....................... May, 1993- 30.00-
October, 1993 33.00 1,000 10 31,496 31,506
Net loss for the year ended
November 30, 1993.............. (6,135,830) (6,135,830)
--------- ------- ----------- ------------ -----------
Balance at November 30, 1993....... 1,097,045 10,971 23,849,553 (19,757,447) 4,103,077
For cash, less issuance costs of
$490,790....................... August, 1994 8.00 529,700 5,297 3,741,513 3,746,810
Exercise of stock options for
cash........................... November, 1994 16.25-
35.90 10 -- 202 202
Net loss for the year ended
November 30, 1994.............. (4,331,500) (4,331,500)
--------- ------- ----------- ------------ -----------
Balance at November 30, 1994....... 1,626,755 16,268 27,591,268 (24,088,947) 3,518,589
Exercise of stock options for
cash........................... February, 1995 8.40 100 1 843 844
For cash, less issuance costs of
$282,475....................... July, 1995 12.50 150,000 1,500 1,591,125 1,592,625
Net loss for the year ended
November 30, 1995.............. (2,818,403) (2,818,403)
--------- ------- ----------- ------------ -----------
Balance at November 30, 1995....... 1,776,855 17,769 29,183,236 (26,907,350) 2,293,655
Exercise of stock options for
cash........................... January, 1996- 8.40-
June, 1996 14.70 7,717 77 75,030 75,107
For cash, less issuance costs of
$143,587....................... April, 1996 12.50 114,240 1,143 1,283,270 1,284,413
Exercise of warrants for cash,
less issuance costs of
$16,350........................ June, 1996-
September, 1996 20.00 19,698 197 339,886 340,083
For cash, less issuance costs of
$650,872....................... November, 1996 11.50 366,841 3,668 3,564,135 3,567,803
Redemption of Class B Warrants... November, 1996 0.50 (203,759) (203,759)
Net loss for the year ended
November 30, 1996.............. (3,303,703) (3,303,703)
--------- ------- ----------- ------------ -----------
Balance at November 30, 1996....... 2,285,351 22,854 34,241,798 (30,211,053) 4,053,599
(UNAUDITED)
Reduce issuance costs for
November, 1996 offering........ 11,768 11,768
Net loss for the three-month
period ended February 28,
1997........................... (1,308,412) (1,308,412)
--------- ------- ----------- ------------ -----------
Balance at February 28, 1997
(unaudited)...................... 2,285,351 $22,854 $34,253,566 $(31,519,465) $ 2,756,955
========= ======= =========== ============ ===========
</TABLE>
See notes to financial statements
F-6
<PAGE> 65
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE
FOR THE THREE-MONTH FOR THE PERIOD
PERIOD ENDED JANUARY 15, 1982
--------------------------- FOR THE YEARS ENDED NOVEMBER 30, (DATE OF INCEPTION)
FEBRUARY 28, FEBRUARY 29, --------------------------------------- TO FEBRUARY 28,
1997 1996 1996 1995 1994 1997
------------ ------------ ----------- ----------- ----------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.......................... $(1,308,412) $(319,589) $(3,303,703) $(2,818,403) $(4,331,500) $(31,499,623)
Adjustments to reconcile net loss
to net cash used in operations:
Depreciation and amortization... 13,863 15,883 66,222 133,128 209,030 843,072
Expenses paid through the
issuance of common shares..... -- -- -- -- -- 408,068
Loss on disposal of property.... -- -- -- -- -- 44,861
Changes in assets and
liabilities:
Accounts receivable
(increase) decrease......... (132,340) (144,084) 252,423 (17,913) (11,631) (323,776)
Inventory (increase)
decrease.................... (20,797) 135,070 5,286 (61,452) (24,379) (951,932)
Prepaid expenses (increase)
decrease.................... (1,697) (6,250) 6,726 (8,083) 45,942 (67,132)
Other assets (increase)
decrease.................... -- 1,280 88,016 (9,545) 59,219 (127,332)
Accounts payable increase
(decrease).................. 42,111 (11,392) 232,631 (98,807) (138,409) 406,143
Accrued liabilities increase
(decrease).................. (50,157) (59,688) (162,246) (111,532) (62,254) 203,953
----------- --------- ----------- ----------- ----------- ------------
Net cash (used in) operations... (1,457,429) (388,770) (2,814,645) (2,992,607) (4,253,984) (31,063,698)
----------- --------- ----------- ----------- ----------- ------------
Cash flows from investing
activities:
Purchases of marketable
securities...................... -- -- -- -- (2,075,044) (12,166,540)
Proceeds from sale of marketable
securities...................... -- -- -- 1,564,826 2,700,979 12,166,540
Acquisition of property and
equipment (net)................. (1,576) 3,255 (68,914) (19,267) (12,334) (912,637)
Proceeds (investment) under note
receivable-related party........ -- (4,010) 190,240 (15,240) 25,000 --
----------- --------- ----------- ----------- ----------- ------------
Net cash provided by (used in)
investing activities.......... (1,576) (755) 121,326 1,530,319 638,601 (912,637)
----------- --------- ----------- ----------- ----------- ------------
Cash flows from financing
activities:
Proceeds from issuance of Common
Shares.......................... 11,768 61,458 5,267,406 1,593,469 3,747,012 34,044,611
Redemption of Redeemable
Convertible Preferred Shares.... -- (19,843) (19,843) -- -- (19,843)
Redemption of Class B Warrants.... -- -- (203,759) -- -- (203,759)
Proceeds from issuance of notes
payable and long-term debt...... -- -- 205,000 -- -- 2,515,223
Repayment of notes payable and
long-term debt.................. -- -- (205,000) (30,000) (30,000) (2,515,223)
----------- --------- ----------- ----------- ----------- ------------
Net cash provided by financing
activities.................... 11,768 41,615 5,043,804 1,563,469 3,717,012 33,821,009
----------- --------- ----------- ----------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents.................. (1,447,237) (347,910) 2,350,485 101,181 101,629 1,844,674
Cash and cash equivalents, beginning
of period......................... 3,291,911 941,426 941,426 840,245 738,616 --
----------- --------- ----------- ----------- ----------- ------------
Cash and cash equivalents, end of
period............................ $ 1,844,674 $ 593,516 $ 3,291,911 $ 941,426 $ 840,245 $ 1,844,674
=========== ========= =========== =========== =========== ============
</TABLE>
Supplemental disclosure of noncash financing activities:
See Statements of Shareholders' Equity (Deficiency) for details of shares
issued in exchange for noncash consideration.
Supplemental disclosure of cash flow information:
Cash paid for interest for the three-month periods ended February 28, 1997
and February 29, 1996 (unaudited) and for the years ended November 30, 1996,
1995 and 1994 approximated $0, $0, $450, $1,000 and $4,000, respectively.
See notes to financial statements
F-7
<PAGE> 66
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Somanetics Corporation (the "Company"), a Michigan corporation formed in
January 1982, develops, manufactures and markets the INVOS 3100A Cerebral
Oximeter (the "Cerebral Oximeter"), the only FDA-cleared, non-invasive patient
monitoring system that continuously measures changes in the blood oxygen level
in the adult brain. The Cerebral Oximeter is based on the Company's proprietary
In Vivo Optical Spectroscopy ("INVOS(R)") technology. INVOS analyzes various
characteristics of human blood and tissue by measuring and analyzing
low-intensity visible and near-infrared light transmitted into portions of the
body. The Company is in the development stage and has incurred research, product
development and other expenses involved in designing, developing, marketing and
selling its product, as well as devoting efforts to raising capital.
2. FINANCIAL STATEMENT PRESENTATION
The Company is in the development stage and, accordingly, has not achieved
sales necessary to support operations. The Company has incurred an accumulated
deficit of $30,211,053 through November 30, 1996. The Company had working
capital of $3,861,775, cash and cash equivalents of $3,291,911, total current
liabilities of $618,142 and shareholders' equity of $4,053,599, as of November
30, 1996.
On November 22, 1993, the Company received notification that the FDA had
rescinded the Company's previous 510(k) clearance to market the Cerebral
Oximeter. As a result, all commercial sales of the Company's product were
suspended and the Company notified its United States distributors to stop
selling the Cerebral Oximeter and to advise their customers to stop using the
Cerebral Oximeter. In February 1994, the Company resumed marketing its product
in several foreign countries, including Japan, its largest market outside the
United States. On June 6, 1996 the Company received clearance from the FDA to
market the Cerebral Oximeter in the United States. The Company's current
financial condition and recent results of operations and the status of its
product marketing efforts and sales have been affected by the process of
obtaining such clearance.
As of January 17, 1997, the Company had 26 international distributors, 6
United States distributors, 16 direct sales personnel and 1 international sales
consultant. During fiscal 1996, the Company sold its product to 14 of its
international distributors and devoted most of its United States marketing to
entering into distribution agreements with distributors, hiring direct sales
personnel and replacing existing Cerebral Oximeters with the 3100A Cerebral
Oximeter. There can be no assurance that the Company will be successful or
profitable in marketing the Cerebral Oximeter and the related SomaSensor.
Management believes that markets exist for the product the Company has
developed; however, there is an inherent uncertainty associated with the success
of such new product. The likelihood of success of the Company must be considered
in view of the Company's limited resources and current financial condition, the
problems and expenses frequently encountered in connection with formation of a
new business, the ability to raise new funds, the development and application of
new technology and the competitive environment in which the Company intends to
operate.
The net proceeds from the sales of Common Shares and Units in the
Regulation S offerings in July 1995 and April and November 1996 (Note 3) and
exercises of warrants and options, were sufficient to fund the Company's working
capital requirements for the fiscal year ended November 30, 1996. Current sales
are not sufficient to fund operations. During fiscal 1996, the Company received
approximately $4.9 million in net proceeds from the sale of Common Shares and
Units in offerings complying with Regulation S under the Securities Act of 1933,
as amended (Note 3). In addition, during fiscal 1996, the Company received
approximately $.4 million in proceeds from the exercise of warrants issued in
Regulation S Offerings, Class M Warrants and stock options (Notes 3 and 8).
F-8
<PAGE> 67
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company believes that the cash and cash equivalents on hand at November
30, 1996 will be sufficient to sustain the Company's operations at budgeted
levels and its needs for liquidity into the third quarter of fiscal 1997. By
that time the Company will be required to raise additional cash either through
additional sales of its product, through sales of securities, by incurring
indebtedness or by some combination of the foregoing. If the Company is unable
to raise additional cash by that time, it will be required to reduce or
discontinue its operations.
The estimated length of time current cash and cash equivalents will sustain
the Company's operations is based on certain estimates and assumptions made by
the Company. Such estimates and assumptions are subject to change as a result of
actual experience. There can be no assurance that actual capital requirements
necessary to market the Cerebral Oximeter and SomaSensor, to develop
enhancements to, and product extensions of, the Cerebral Oximeter, to conduct
research and development concerning additional potential applications of INVOS
technology and related technologies and for working capital will not be
substantially greater than current estimates.
The Company does not believe that product sales will be sufficient to fund
the Company's operations in fiscal 1997.
The Company has entered into a Letter Agreement, dated as of January 17,
1997, as amended, pursuant to which the Company has exclusively retained a
managing underwriter to underwrite a proposed public offering by the Company of
2,000,000 newly-issued Common Shares (after giving effect to the one-for-ten
reverse stock split effected April 10, 1997) (Note 11). There can be no
assurance that the Company will be able to raise any capital or capital in
amounts it desires, or on terms and conditions acceptable to the Company.
The Company has no loan commitments.
There can be no assurance that even if the Company receives additional
capital, it will be able to achieve the level of sales necessary to sustain its
operations. There can be no assurance that the Company will obtain any funds on
terms acceptable to the Company and at times required by the Company through
sales of the Company's product, sales of securities or loans in sufficient
quantities.
These factors, among others, raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
1997 Interim Information (Unaudited)
The accompanying unaudited interim financial statements reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal recurring nature. Operating results for the three-month period
ended February 28, 1997, are not necessarily indicative of the results that may
be expected for the year ending November 30, 1997, although the Company expects
to continue to incur operating losses for the foreseeable future.
The Company is in the development stage and, accordingly, has not achieved
sales necessary to support operations. The Company has incurred an accumulated
deficit of $31,519,465 through February 28, 1997. The Company had working
capital of $2,577,418, cash and cash equivalents of $1,844,674, total current
liabilities of $610,096 and shareholders' equity of $2,756,955, as of February
28, 1997.
F-9
<PAGE> 68
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. STOCK OFFERINGS AND COMMON SHARES
The Company has authorized 6,000,000 Common Shares (par value $.01 per
share), which entitle the holders to one vote per share. The Company has also
authorized 1,000,000 Preferred Shares (par value $.01 per share).
Pursuant to a registration statement under the Securities Act of 1933, in
March and April 1991, the Company sold to the public 138,000 units, consisting
of 414,000 Common Shares (par value $.01 per share) and 414,000 redeemable Class
A Warrants. 413,900 Class A Warrants were exercised, each entitling the holder
to one Common Share and one Class B Warrant, and 100 Class A Warrants were
redeemed in 1992. 6,382 Class B Warrants were exercised in 1992 and 1993. The
Company redeemed all 407,518 then outstanding redeemable Class B Warrants on
November 14, 1996, at $.50 per Class B Warrant, or approximately $203,759.
On March 27, 1991, the Company sold, for $120 to the underwriter an option
to purchase up to 12,000 units at $99.00 a unit, subject to adjustment, until
March 20, 1996 (the "Unit Purchase Option"). Such units were identical to the
units sold to the public, except that Class A and Class B Warrants were not
redeemable by the Company. 167 Unit Purchase Options and the 500 underlying
Class A Warrants were exercised in fiscal 1993. The Company issued 1,000 Common
Shares and 500 non-redeemable Class B Warrants as a result of such exercises. As
a result of various anti-dilution adjustments, there were approximately 14,434
Unit Purchase Options outstanding on March 19, 1996, all of which expired
unexercised on that date. The 500 non-redeemable Class B Warrants expired
unexercised on November 14, 1996.
On February 28, 1996, the Company redeemed all of its outstanding
Convertible Preferred Shares for $.10 per share at a total redemption cost to
the Company of approximately $19,843.
In September 1990, the Company issued notes in exchange for notes
outstanding held by some of the Company's shareholders. The shareholders were
also issued warrants (the "Exchange Warrants") to purchase 4,500 Common Shares
at $20.00 per share (exercisable for five years beginning March 27, 1992). The
notes were repaid in fiscal 1991.
On August 2, 1994, the Company completed the placement of 529,700
newly-issued Common Shares, par value $.01 per share, at a price of $8.00 per
share through an offering complying with Regulation S under the Securities Act
of 1933, as amended (the "Act"). Gross proceeds from the offering were
$4,237,600. The Company also granted the placement agent warrants to purchase
52,970 Common Shares at $12.50 per share exercisable during the four-year period
beginning August 2, 1995. The net proceeds to the Company, after deducting the
placement agent's fee and expenses of the offering, were approximately $3.7
million. The Common Shares offered were not registered under the Act and may not
be offered or sold in the United States without registration or an applicable
exemption from registration requirements.
On July 14, 1995 the Company completed the placement of 75,000 Units, at a
price of $25.00 per Unit, for gross proceeds of $1,875,000, through an offering
complying with Regulation S under the Act. The net proceeds to the Company,
after deducting the placement agents' fee and the expenses of the offering, were
approximately $1,593,000. Each Unit consisted of two newly-issued Common Shares,
par value $.01 per share, and one warrant to purchase one Common Share.
The Warrants are immediately exercisable and transferable separately from
the Common Shares. Each Warrant entitles the holder to purchase one Common Share
at an initial exercise price of $20.00 per share, subject to adjustment, at any
time through July 13, 2000, unless earlier redeemed. The Warrants are redeemable
for $.10 by the Company at any time after January 13, 1996, if certain
conditions are met; these conditions had not been met as of January 24, 1997.
F-10
<PAGE> 69
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company also granted the placement agent warrants to purchase 15,000
Common Shares at $14.375 per share exercisable during the four-year period
beginning July 14, 1996.
On April 2, 1996, the Company completed the placement of 57,120 Units, at a
price of $25.00 per Unit, for gross proceeds of $1,428,000, through an offering
complying with Regulation S under the Act. The net proceeds to the Company,
after deducting the placement agents' fee and the expenses of the offering, were
approximately $1,284,000. Each Unit consists of two newly-issued Common Shares,
par value $.01 per share, and one warrant to purchase one Common Share.
The Warrants are immediately exercisable and transferable separately from
the Common Shares. Each Warrant entitles the holder to purchase one Common Share
at an initial exercise price of $17.50 per share, subject to adjustment, at any
time through April 1, 2001, unless earlier redeemed. The Warrants are redeemable
for $.10 by the Company at any time if certain conditions are met; these
conditions have not been met as of January 24, 1997.
The Company also granted the placement agent warrants to purchase 11,424
Common Shares at $12.50 per share exercisable during the four-year period
beginning April 2, 1997.
Pursuant to an amended agreement with Rauscher Pierce & Clark, Inc. and
Rauscher Pierce & Clark Limited (collectively, the "Placement Agent") in
connection with the April 2, 1996 Regulation S offering, the Company agreed to
permit a person designated by the Placement Agent to attend meetings of the
Company's Board of Directors until the 1998 Annual Meeting of Shareholders and
to participate in discussions at such meetings.
Also, on November 21, 1996, the Company completed the placement of 366,841
newly-issued Common Shares at a price of $11.50 per share through an offering
complying with Regulation S under the Act. The net proceeds to the Company were
approximately $3,568,000.
During fiscal 1996, 14,600 warrants issued in the Company's 1995 Regulation
S Offering and exercisable at $20.00 per share, and 2,000 warrants issued in the
Company's April 1996 Regulation S Offering and exercisable at $17.50 per share,
were exercised, and the Company paid the placement agent in such offerings a
$16,350 fee in connection with those exercises. As of November 30, 1996, there
were 60,400 redeemable warrants outstanding exercisable at $20.00 per share
until July 13, 2000 and 55,120 redeemable warrants outstanding exercisable at
$17.50 per share until April 1, 2001. These warrants were issued in the
Company's 1995 and April 1996 Regulation S Offerings. The conditions permitting
the Company to redeem these warrants have not been met as of January 24, 1997.
In addition, the Placement Agent and their transferees hold warrants to purchase
52,970 Common Shares exercisable at $12.50 per share, 15,000 Common Shares
exercisable at $14.40 per share and 11,424 Common Shares exercisable at $12.50
per share. There can be no assurance that additional warrants will be exercised
and it is unlikely that they will be exercised if the exercise price exceeds the
market price of the Common Shares. The Company has the right to reduce the
exercise price of these warrants.
F-11
<PAGE> 70
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Common shares reserved for future issuance upon exercise of stock options
and warrants as discussed above at November 30, 1996, are as follows:
<TABLE>
<S> <C>
1983 Stock Option Plan (Note 8)............................. 9,317
1991 Incentive Stock Option Plan (Note 8)................... 110,288
1993 Director Stock Option Plan (Note 8).................... 23,998
Options Granted Independent of Option Plans (Note 8)........ 171,343
Exchange Warrants........................................... 4,500
Placement Agent Warrants.................................... 79,394
Regulation S Warrants....................................... 115,520
-------
Total reserved for future issuance................ 514,360
=======
</TABLE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents consist of short-term, interest-bearing investments
maturing within three months of their acquisition by the Company.
Inventory is stated at the lower of cost or market on a first-in, first-out
(FIFO) basis. Inventory consists of:
<TABLE>
<CAPTION>
NOVEMBER 30,
FEBRUARY 28, ------------------------
1997 1996 1995
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Finished goods............................. $ 419,465 $ 437,079 $ 516,420
Work in process............................ 347,929 307,510 219,076
Purchased components....................... 383,358 386,996 296,003
---------- ---------- ----------
Sub-total................................ 1,150,752 1,131,585 1,031,499
Less reserve for obsolete and excess
inventory................................ (198,820) (200,450) (95,078)
---------- ---------- ----------
Total............................... $ 951,932 $ 931,135 $ 936,421
========== ========== ==========
</TABLE>
Property and Equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the assets, which range from three to five years.
Patents and Trademarks are recorded at cost and are being amortized on the
straight-line method over 17 years. Accumulated amortization was $34,332
(Unaudited), $32,604 and $25,692 at February 28, 1997 and November 30, 1996 and
1995, respectively.
Revenue Recognition occurs upon shipment to customers.
Research, Development and Engineering costs are expensed as incurred.
Loss Per Common Share is computed using the weighted average number of
common shares outstanding during each period. Common Shares issuable under stock
options and warrants have not been considered in the computation of the net loss
per Common Share because such inclusion would be antidilutive. On April 10,
1997, the Company effected a 1-for-10 reverse stock split (Note 11).
Accounting Pronouncements In March 1995, The Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To
Be Disposed Of," which requires the Company to review for impairment long-lived
assets, certain identifiable intangibles and goodwill related to those assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In certain situations, an impairment loss would
be recognized. SFAS 121 is effective for the Company's 1997
F-12
<PAGE> 71
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
fiscal year. The Company has evaluated the impact of the new standard on its
financial position, results of operations and cash flows and has determined the
effect to be immaterial.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock Based
Compensation" which also will be effective for the Company's 1997 fiscal year.
The Company does not expect SFAS 123 to have a material impact on its financial
position, results of operations, or cash flows. SFAS 123 allows companies which
have stock-based compensation arrangements with employees to adopt a new
fair-value basis of accounting for stock options and other equity instruments,
or it allows companies to continue to apply the existing accounting rules under
APB Opinion 25 "Accounting for Stock Issued to Employees," but requires
additional financial footnote disclosure. The Company has determined to continue
to account for stock-based compensation arrangements under APB Opinion 25 and
will include additional footnote disclosure in its fiscal 1997 annual report.
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share." This
Statement establishes standards for computing and presenting earnings per share
("EPS") and applies to all entities with publicly-held common shares or
potential common shares. This Statement replaces the presentation of primary EPS
and fully-diluted EPS with a presentation of basic EPS and diluted EPS,
respectively. Basic EPS excludes dilution and is computed by dividing earnings
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Similar to fully diluted EPS, diluted EPS reflects
the potential dilution of securities that could share in the earnings. This
Statement is not expected to have a material effect on the Company's reported
EPS amounts. The Statement is effective for the Company's financial statements
for the year ending November 30, 1998.
Use Of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses for each fiscal period. Actual results could differ from
those estimated.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
FEBRUARY 28, -------------------
1997 1996 1995
------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Professional Fees.............................. $ 33,739 $101,697 $ 75,702
Shareholder Lawsuits (Note 7).................. -- -- 144,717
Product Upgrades............................... 16,341 18,261 149,954
Warranty....................................... 17,467 12,421 15,000
Accrued Insurance.............................. 34,613 32,231 --
Accrued Incentive.............................. 37,863 -- --
Other.......................................... 63,930 89,500 30,983
-------- -------- --------
Total..................................... $203,953 $254,110 $416,356
======== ======== ========
</TABLE>
6. INCOME TAX
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes ("SFAS No. 109"), as of December 1, 1993. This
statement supersedes the provisions of APB No. 11 which was previously used by
the Company. Prior years' financial statements were not restated and the
adoption of SFAS No. 109 had no impact on net income for the year ended November
30, 1994.
F-13
<PAGE> 72
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes, under SFAS 109, reflect the estimated future tax
effect of (i) temporary differences between the amount of assets and liabilities
for financial reporting purposes and such amounts as measured by tax laws and
regulations and (ii) net operating loss and tax credit carryforwards. The
Company's deferred tax assets primarily represent the tax benefit of net
operating loss carryforwards and research and general business tax credit
carryforwards. The Company had deferred tax assets of approximately $9,124,000
and $8,103,000 for the years ended November 30, 1996 and 1995, respectively,
which were entirely offset by valuation allowances, due to the uncertainty of
utilizing such assets against future earnings, prior to their expiration. The
components of deferred income tax assets as of November 30, 1996 and 1995 were
as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards........................... $ 8,718 $ 7,581
Accrued liabilities........................................ 139 255
Research and general business tax credit carryforwards..... 267 267
------- -------
Subtotal.............................................. 9,124 8,103
Valuation allowance........................................ (9,124) (8,103)
------- -------
Deferred tax asset.................................... $ -- $ --
======= =======
</TABLE>
As of November 30, 1996, net operating loss carryforwards of approximately
$25.6 million, respectively, were available for Federal income tax purposes. The
Company's ability to use the net operating loss carryforwards incurred on or
before March 27, 1991 (the date the Company completed its initial public
offering) is limited to approximately $296,000 per year. Research and business
general tax credits of $267,000 are also available to offset future taxes. These
losses and credits expire, if unused, at various dates from 1997 through 2011.
Utilization of the Company's net operating loss carryforwards, tax credit
carryforwards and certain future deductions could be restricted, in the event of
future changes in the Company's equity structure, by provisions contained in the
Tax Reform Act of 1986.
7. COMMITMENTS AND CONTINGENCIES
On September 10, 1991 the Company entered into a lease agreement for a
23,392 square foot, stand-alone office, assembly and warehouse facility. The
lease expires December 31, 1997.
Operating and building lease expense for the three months ended February
28, 1997 (unaudited) and for the years ended November 30, 1996, 1995 and 1994
was approximately $42,800, $173,500, $278,000 and $294,000, respectively.
Approximate future minimum lease commitments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-----------------------
<S> <C>
1997................................................... 184,000
1998................................................... 15,000
--------
Total........................................... $199,000
========
</TABLE>
In December 1991, the Company amended and restated its profit sharing plan
to include a 401(k) plan covering substantially all employees. Under provisions
of the plan, participants may contribute, annually, between 1% and 15% of their
compensation. The Company, at the discretion of its Board of Directors, may
contribute matching contributions or make other annual discretionary
contributions to the plan, all of which, together with the participants'
contributions, cannot exceed 15% of the total compensation paid by the
F-14
<PAGE> 73
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company to eligible employees. No Company matching or discretionary
contributions were made to the plan for the three months ended February 28, 1997
(unaudited) or for the years ended November 30, 1996, 1995 or 1994.
Distributors might terminate their agreements with the Company or be
terminated by the Company. Distributor terminations may increase the Company's
costs. There can be no assurance that the Company will be able to replace
distributors desiring to terminate their distribution agreements, engage
distributors in additional territories, or retain its existing distributors. The
Company's inability to engage, replace or retain distributors could have an
adverse effect on its ability to market and sell its product.
On March 14, 1994, a shareholder of the Company filed suit in the United
States District Court for the Eastern District of Michigan, individually and on
behalf of all others similarly situated, against the Company, four of its
present and former directors and four other officers, former officers or
employees of the Company in an action captioned Jacobson, et al v. Somanetics
Corporation, et al. The plaintiff alleged that various registration statements
filed under the Act, various reports filed under the Securities Exchange Act of
1934 and various annual reports and press releases contained material
misstatements and omissions and that the Company and the named officers, former
officers and employees of the Company made material misstatements and omissions.
The plaintiffs sought recovery pursuant to Sections 11, 12(2) and 15 of the Act,
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act of 1934"), Rule 10b-5 under the Securities Exchange Act
of 1934 and under common law for (i) rescission of their investment and
compensation for the lost use of the money invested, (ii) other compensatory
damages, (iii) punitive damages in the amount of $10,000,000, (iv) consequential
damages, (v) reasonable attorneys' fees, (vi) costs and disbursements and (vii)
such other relief as the court may deem just and proper.
On April 25, 1994, another shareholder of the Company filed suit in the
United States District Court for the Eastern District of Michigan, individually
and on behalf of all others similarly situated, against the Company and Gary D.
Lewis, the Company's former Chairman of the Board, in an action captioned
Benjamin Langford v. Somanetics Corporation and Gary D. Lewis. The allegations,
relief requested and consequences of the action are similar to those in the
Jacobson case described above.
The Company entered into a Stipulation And Agreement Of Compromise And
Understanding (the "Agreement") with counsel for plaintiff Earl J. Jacobson. On
July 3, 1996 the court issued a final judgment approving the Agreement and
certifying the class. The Agreement (along with an understanding with the
Company's insurance company) required the Company to pay $250,000 in cash, less
the amount of its legal fees incurred in this action, and the Company's
insurance company was required to pay $250,000 in cash, plus the amount the
Company has incurred in attorneys' fees. Pursuant to the Agreement, the Company
and its insurance company paid an aggregate of $500,000 to an escrow agent in
the second quarter ended May 31, 1996. However, approximately 11 persons,
including Benjamin Langford, opted out of the Jacobson action and this
settlement and, therefore, are not barred by the settlement from pursuing their
own claims against the Company. Mr. Langford's action is still pending against
the Company, although it is no longer a class action. The Company's motion to
dismiss the Langford action was denied and discovery is proceeding. Management
believes it has substantial defenses to the Langford claim.
The ultimate outcome of the Langford litigation cannot presently be
determined. If the Company must pay any additional significant amount to defend
or settle the Langford lawsuit or if it must pay a significant judgment in
connection with this lawsuit, its financial condition and liquidity could be
materially adversely affected, and capital intended for use in the marketing of
the Cerebral Oximeter or to develop enhancements to, or product extensions of,
the Cerebral Oximeter or other products may have to be reallocated to satisfy
any such requirements. In addition, any such expenses will, when incurred, have
the effect of increasing the Company's net loss (or decreasing its net income)
during the periods in which they are incurred.
F-15
<PAGE> 74
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At November 30, 1996, the Company had employment agreements with Bruce J.
Barrett, its President and Chief Executive Officer ("Mr. Barrett"), and Raymond
W. Gunn, its Executive Vice President and Chief Financial Officer ("Mr. Gunn").
The employment agreements, as amended, expire May 31, 1997 for Mr. Barrett and
November 30, 1997 for Mr. Gunn, unless earlier terminated as provided in the
agreements. Messrs. Barrett and Gunn were entitled to receive annual base
salaries which at November 30, 1996 were $195,000 and $105,000, respectively,
plus potential discretionary bonuses. Both parties have agreed not to compete
with the Company during specified periods.
The Company may become subject to product liability claims by patients or
physicians, and may become a defendant in product liability or malpractice
litigation. The Company has obtained product liability insurance and an umbrella
policy. There can be no assurance that the Company will be able to maintain such
insurance or that such insurance would be sufficient to protect the Company
against such product liability.
8. STOCK OPTION PLANS
In January 1983 and in February 1991, the Company adopted stock option
plans (the "1983 Plan" and the "1991 Plan," respectively) for key management
employees, directors, consultants and advisors of the Company. The plans provide
for the issuance of options by the Company to purchase a maximum of 15,668
Common Shares under the 1983 Plan and 115,000 Common Shares under the 1991 Plan.
In addition, the Company granted options to employees independent of the plans
("Non-Plan"). Awards and expirations under the 1983 Plan, 1991 Plan and Non-Plan
during the three months ended February 28, 1997 (unaudited) and during the years
ended November 30, 1996, 1995 and 1994 are listed below.
Except for one option granted before the Company's initial public offering,
the exercise price of all options equals or exceeds the fair market value of the
underlying shares at the date of grant. At February 28, 1997 (unaudited) and at
November 30, 1996, no additional options may be granted under the 1983 Plan and
376 Common Shares were available for options to be granted under the 1991 Plan.
In January 1993, the Company adopted the Somanetics Corporation 1993
Director Stock Option Plan (the "Directors Plan"). The Directors Plan provides
up to 24,000 Common Shares for the grant of options to purchase 1,500 shares
every three years beginning June 30, 1993 and ending June 30, 2002, to each
director who is not an officer or employee of the Company. In addition, each
director who is not an officer or employee
F-16
<PAGE> 75
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of the Company and who first becomes a director of the Company after the date
the Directors Plan was adopted is automatically granted an option to purchase a
pro-rata portion of 1,500 Common Shares.
<TABLE>
<CAPTION>
1983 PLAN 1991 PLAN NON PLAN DIRECTORS PLAN
------------------------- ----------------------- ----------------------- ----------------------
COMMON PRICE RANGE COMMON PRICE RANGE COMMON PRICE RANGE COMMON PRICE RANGE
SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE
------ ------------- ------- ------------- ------- ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding
November 30, 1993... 15,426(1) $13.10-$36.25 84,250 $20.00-$56.90 4,500 $35.90
Options granted..... 123,016 $8.40-$16.25 55,000 $10.00-$12.50 2,022 $15.00
Options exercised... (8) $16.25 (2) $35.90
Options canceled.... (92,723) $14.70-$56.90 (1,000) $35.90
------ ------- ------- ------
Options outstanding
November 30, 1994... 15,426 $13.10-$36.25 114,535 $8.40-$42.50 55,000 $10.00-$12.50 5,520 $15.00-$35.90
Options granted..... 76,950 $11.90-$13.10 4,666 $14.70-$20.00
Options exercised... (100) $8.40
Options canceled.... (6,109) $20.00-$36.25 (25,593) $8.40-$42.50
------ ------- ------- ------
Options outstanding
November 30, 1995... 9,317 $13.10-$36.25 165,792 $8.40-$42.50 59,666 $10.00-$20.00 5,520 $15.00-$35.90
Options granted..... 23,785 $5.00 135,540 $5.00-$23.10 6,000 $26.25
Options exercised... (3,508) $8.40-$14.70 (3,432) $10.00-$13.10
Options canceled.... (76,157) $5.00-$14.70 (20,431) $5.00-$13.10 (1,000) $26.25
------ ------- ------- ------
Options outstanding
November 30, 1996... 9,317 $13.10-$36.25 109,912 $5.00-$42.50 171,343 $5.00-$23.10 10,520 $15.00-$35.90
(UNAUDITED)
Options granted..... 12,700 $13.10
Options exercised...
Options canceled....
------ ------- ------- ------
Options outstanding
February 28,
1997(2)(3).......... 9,317 $13.10-$36.25 109,912 $5.00-$42.50 184,043 $5.00-$23.10 10,520 $15.00-$35.90
====== ======= ======= ======
</TABLE>
- ---------------
(1) Plus 13,239 redeemable Convertible Preferred Shares.
(2) Exercise dates range from February 21, 1991 to January 15, 2007.
(3) Options to purchase 177,508 Common Shares were exercisable at November 30,
1996.
Also, see Note 11 herein for approval of a new employee stock option plan
(unaudited).
9. RELATED PARTY TRANSACTIONS
The Company received legal services from certain shareholders. Services
from such parties amounted to approximately $74,600 (unaudited), $348,570,
$236,000 and $439,000 during the three months ended February 28, 1997 and during
the years ended November 30, 1996, 1995 and 1994, respectively.
The Company and Gary D. Lewis entered into an Agreement and Release, dated
and effective as of February 1, 1995. Pursuant to the agreement the Company has
agreed to provide Mr. Lewis with (A) $150,000 a year for two years, (B) the same
health, medical and dental benefits as are provided to the Company's executive
officers from time to time for two years.
On November 6, 1996, Gary D. Lewis paid the Company $175,000 (the
outstanding principal amount of the loan at the time) in full satisfaction of
all of his obligations under the loan made by the Company to him on February 1,
1993, and the Company discharged the second mortgage and released the security
interests securing the loan and wrote off approximately $29,750 of accrued
interest with respect to that loan.
F-17
<PAGE> 76
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company recognized no revenue in the three months ended February 28,
1997 (unaudited) or in fiscal 1996, 1995 and 1994, respectively, from Somatek,
Inc., one of the Company's United States distributors whose principal owner is a
director of the Company. Approximately $68,000 of trade receivables from
Somatek, Inc. were written-off during the fiscal year ended November 30, 1996.
10. MAJOR CUSTOMERS AND FOREIGN SALES
The Company had one international distributor and two United States
distributors which accounted for approximately 42% (Japan), 14% (United States)
and 11% (United States), respectively, of total sales for the three months ended
February 28, 1997 (unaudited), two distributors which accounted for
approximately 86% (Japan) and 6% (Latin America), respectively, of total sales
for the three months ended February 29, 1996 (unaudited), two distributors which
accounted for approximately 62% (Japan) and 15% (Latin America), respectively,
of total sales for fiscal year 1996, two distributors which accounted for
approximately 53% (Japan) and 13% (Latin America), respectively, of total sales
for fiscal year 1995, and two distributors which accounted for approximately 43%
(Japan) and 10% (Latin America), respectively, of total sales for fiscal year
1994.
Additionally, total sales to foreign customers for the three months ended
February 28, 1997 and February 29, 1996 (unaudited) and for the years ended
November 30, 1996, 1995 and 1994 include approximately $218,000, $515,000,
$745,000, $1,336,000 and $939,000, respectively.
11. SUBSEQUENT EVENTS
Reverse Stock Split
On January 15, 1997, the Company's Board of Directors approved an amendment
and restatement of the Company's Restated Articles of Incorporation to (i)
effect a one-for-ten reverse stock split of the Company's Common Shares while
keeping 6,000,000 authorized Common Shares, at a par value of $0.01, and (ii)
remove provisions relating to the Convertible Preferred Shares redeemed February
28, 1996, all subject to shareholder approval at the 1997 Annual Meeting of
Shareholders. The Company's shareholders approved such amendment and restatement
at the 1997 Annual Meeting of Shareholders on March 25, 1997, and the reverse
stock split was effected April 10, 1997. All share and per share information
included in these financial statements have been restated to reflect the reverse
stock split.
Other Events (Unaudited)
In addition, on January 15, 1997, the Company's Board of Directors approved
the Somanetics Corporation 1997 Stock Option Plan, pursuant to which 295,000
Common Shares (after giving effect to the one-for-ten reverse stock split
described above) are reserved for issuance pursuant to options to be granted to
key employees, directors, consultants and advisors of the Company, subject to
shareholder approval at the 1997 Annual Meeting of Shareholders. The Company's
shareholders approved the 1997 Stock Option Plan at the 1997 Annual Meeting of
Shareholders on March 25, 1997.
Also at its January 15, 1997 meeting, the Company's Board of Directors
granted ten-year stock options independent of the Company's stock option plans
to purchase an aggregate of 12,700 Common Shares at $13.10 per share (the then
current market price). Such options were granted to eight new employees of the
Company. 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.
F-18
<PAGE> 77
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has entered into a Letter Agreement, dated as of January 17,
1997, as amended, pursuant to which the Company has exclusively retained a
managing underwriter to underwrite a proposed public offering by the Company of
2,000,000 newly-issued Common Shares. The Company has also agreed to grant the
underwriter an option to purchase an additional 300,000 Common Shares to cover
over-allotments and a five-year warrant to purchase an amount of shares equal to
10% of the Common Shares sold in the offering at an exercise price equal to 120%
of the purchase price for the Common Shares in the offering. There can be no
assurance that the Company will be able to raise any capital or capital in
amounts it desires, or on terms and conditions acceptable to the Company.
On March 27, 1997, the 4,500 Exchange Warrants expired unexercised.
F-19
<PAGE> 78
[Picture of doctor placing
SomaSensor on patient]
Harvey Edmonds, Jr., Ph.D.,
professor and director of
research at the University of
Louisville School of Medicine,
places a SomaSensor on a patient
with the Cerebral Oximeter at
his side.
[Picture of the Company's
manufacturing facility]
Somanetics' manufacturing
facility at its
headquarters in Troy,
Michigan.
[Picture of SomaSensor
on newborn]
FUTURE APPLICATIONS
Somanetics has invested
substantial resources in the
development of its INVOS
technology, the Cerebral Oximeter
and the related disposable
SomaSensor. Research being
conducted on children and
newborns is expected to result in
a SomaSensor that can fit smaller
heads. Non-invasive monitoring is
especially important in this
population, as newborns have
higher risks of oxygen imbalances
and less blood volume from which
to make invasive blood gas
measurements.
Somanetics, INVOS and SomaSensor are
registered trademarks of Somanetics
Corporation. "Window to the Brain" is
a trademark of Somanetics Corporation. SOMANETICS LOGO
<PAGE> 79
[SOMANETICS LOGO]
[WINDOW TO THE BRAIN TRADEMARK]
<PAGE> 80
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated amounts of expenses to be
borne by the Company in connection with the issuance and distribution expenses
of the securities being registered (other than underwriting discounts and
commissions):
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 3,450
NASD Filing Fee............................................. 1,638
Nasdaq Listing Fee.......................................... 7,500
Printing and Engraving Expenses............................. 75,000
Accounting Fees and Expenses................................ 75,000
Legal Fees and Expenses..................................... 125,000
Blue Sky Fees and Expenses.................................. 50,000
Transfer Agent's and Registrar's Fees and Expenses.......... 7,000
Underwriters' Accountable Expenses.......................... 150,000
Miscellaneous Expenses...................................... 5,412
--------
Total.................................................. $500,000
========
</TABLE>
All of these expenses, except the Securities and Exchange Commission
registration fee and the NASD filing fee, represent estimates only.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Sections 561-571 of the Michigan Business Corporation Act, as
amended, directors and officers of a Michigan corporation may be entitled to
indemnification by the corporation against judgments, expenses, fines and
amounts paid by the director or officer in settlement of claims brought against
them by third persons or by or in the right of the corporation if those
directors and officers acted in good faith and in a manner reasonably believed
to be in, or not opposed to, the best interests of the corporation or its
shareholders.
The Registrant is obligated under its bylaws and employment agreements with
two of its executive officers to indemnify a present or former director or
executive officer of the registrant, and may indemnify any other person, to the
fullest extent now or hereafter permitted by law in connection with any actual
or threatened civil, criminal, administrative or investigative action, suit or
proceeding arising out of their past or future service to the registrant or a
subsidiary, or to another organization at the request of the registrant or a
subsidiary. In addition, the Restated Articles of Incorporation of the Company
limit certain personal liabilities of directors of the Company.
Reference is also made to Section 8 of the Underwriting Agreement (a form
of which is attached to this Registration Statement as Exhibit 1.1) with respect
to undertakings to indemnify the registrant, its directors and officers and each
person who controls the registrant within the meaning of the Securities Act of
1933, as amended (the "Act"), against certain civil liabilities, including
certain liabilities under the Act.
The Company has obtained Directors' and Officers' liability insurance. The
policy provides for $1,000,000 in coverage including prior acts dating to the
Company's inception and liabilities under the Act in connection with the
Company's initial public offering, the exercise and redemption of Class A
Warrants and this offering.
II-1
<PAGE> 81
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following securities of the registrant were sold by the registrant
during the past three years without being registered under the Act:
1. In June through September 1996, the Company sold to seven foreign
investors 16,600 Common Shares upon the exercise of warrants issued in offerings
complying with Regulation S under the Securities Act of 1933 (14,600 at $20.00
per share and 2,000 at $17.50 per share). The gross proceeds to the Company from
such sales were $327,000, and the Company paid Rauscher Pierce & Clark, Inc. and
Rauscher Pierce & Clark Limited (the "Placement Agent") a commission of $16,350
in connection with such exercises. Such Common Shares were not registered, but
were issued in reliance upon the exemption from registration contained in
Regulation S under the Act.
2. In September 1996, the Company sold to two accredited investors 3,098
Common Shares upon the exercise of 3,098 Class M Warrants issued before the
Company's initial public offering (exercisable at $9.50 per Class M Warrant).
The gross proceeds to the Company from such sales were $29,433.85. Such Common
Shares were not registered, but were issued in reliance upon the exemptions from
registration contained in Sections 4(2) and 4(6) of the Act.
3. On November 21, 1996 the Company completed the placement of 366,841
Common Shares to 34 foreign investors, at a price of $11.50 per share. The
Placement Agent acted as placement agent in connection with the sale of such
Common Shares. The gross proceeds to the Company from such sales were
$4,218,675, and the Company paid the Placement Agent a fee of $421,868 in
connection with such offering. The Company also reimbursed the Placement Agent
for its expenses of the offering, including its counsel's fees. Such securities
were not registered, but were issued in reliance upon the exemption from
registration contained in Regulation S under the Act.
4. On April 2, 1996 the Company completed the placement of 57,120 Units to
20 foreign investors, at a price of $25.00 per Unit. Each Unit consists of two
newly-issued Common Shares and one warrant to purchase one Common Share. The
Placement Agent acted as placement agent in connection with the sale of such
Units. The gross proceeds to the Company from such sales were $1,428,000, and
the Company paid the Placement Agent a fee of $114,240 in connection with such
offering. The Company also reimbursed the Placement Agent for its expenses of
the offering, including its counsel's fees. The Company also granted the
Placement Agent warrants to purchase 11,240 Common Shares at $12.50 per share
exercisable during the four-year period beginning April 2, 1997.
The Warrants are immediately exercisable and transferable separately from
the Common Shares. Each Warrant entitles the holder to purchase one Common Share
at an initial exercise price of $17.50 per share, subject to adjustment, at any
time through April 1, 2001, unless earlier redeemed. The Warrants are redeemable
for $.10 by the Company at any time if certain conditions are met. Such
securities were not registered, but were issued in reliance upon the exemption
from registration contained in Regulation S under the Act.
5. On July 14, 1995, the Company completed the placement of 75,000 Units to
27 foreign investors, at a price of $25.00 per Unit. Each Unit consists of two
newly-issued Common Shares and one warrant to purchase one Common Share. The
Placement Agent acted as placement agent in connection with the sale of such
Units. The gross proceeds to the Company from such sales were $1,875,000, and
the Company paid the Placement Agent a fee of $150,000 in connection with such
offering. The Company also reimbursed the Placement Agent for its expenses of
the offering, including its counsel's fees. The Company also granted the
Placement Agent warrants to purchase 15,000 Common Shares at $14.375 per share
exercisable during the four-year period beginning July 14, 1996.
The Warrants are immediately exercisable and transferable separately from
the Common Shares. Each Warrant entitles the holder to purchase one Common Share
at an initial exercise price of $20.00 per share, subject to adjustment, at any
time through July 13, 2000, unless earlier redeemed. The Warrants are redeemable
for $.10 by the Company at any time after January 13, 1996, if certain
conditions are met. Such
II-2
<PAGE> 82
securities were not registered, but were issued in reliance upon the exemption
from registration contained in Regulation S under the Act.
6. On August 2, 1994, the Company completed a placement of 529,700
newly-issued Common Shares to 26 foreign investors at a price of $8.00 per
share. Rauscher Pierce & Clark Limited acted as placement agent in connection
with the sale of such Common Shares. The gross proceeds to the Company from such
sales were $4,237,600, and the Company paid the Placement Agent a fee of
$317,820 in connection with such offering. The Company also reimbursed Rauscher
Pierce & Clark Limited for its expenses of the offering, including its counsel's
fees. The Company also granted the placement agent warrants to purchase 52,970
Common Shares at $12.50 per share exercisable during the four-year period
beginning August 2, 1995. Such securities were not registered, but were issued
in reliance upon the exemption from registration contained in Regulation S under
the Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
See Exhibit Index immediately preceding the exhibits.
(b) Financial Statement Schedules
<TABLE>
<CAPTION>
SCHEDULE PAGE
-------- ----
<S> <C>
Schedule II -- Valuation and Qualifying Accounts and
Reserves for the years ended November 30, 1996, 1995 and
1994...................................................... S-1
</TABLE>
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 83
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment no. 1 to registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Troy,
State of Michigan, on May 30, 1997.
SOMANETICS CORPORATION
(Registrant)
By: /s/ BRUCE J. BARRETT
------------------------------------
Bruce J. Barrett
Its: President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
no. 1 to registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ BRUCE J. BARRETT President, Chief Executive Officer and May 30, 1997
- --------------------------------------------- a Director (Principal Executive
Bruce J. Barrett Officer)
/s/ RAYMOND W. GUNN Executive Vice President and Chief May 30, 1997
- --------------------------------------------- Financial Officer (Principal Financial
Raymond W. Gunn Officer)
/s/ WILLIAM M. IACONA Corporate Controller (Principal May 30, 1997
- --------------------------------------------- Accounting Officer)
William M. Iacona
* Chairman of the Board of Directors May 30, 1997
- ---------------------------------------------
H. Raymond Wallace
* Director May 30, 1997
- ---------------------------------------------
Daniel S. Follis
* Director May 30, 1997
- ---------------------------------------------
James I. Ausman, M.D., Ph.D.
*By: /s/ RAYMOND W. GUNN May 30, 1997
- --------------------------------------------
Raymond W. Gunn,
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 84
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED NOVEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COLUMN B COLUMN C COLUMN D COLUMN E
---------- ------------------------ ----------- ----------
ADDITIONS
------------------------
(2) CHARGED TO
BALANCE AT CHARGED TO OTHER (1)(3) BALANCE AT
BEGINNING COSTS AND ACCOUNTS, DEDUCTIONS, END OF
OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended November 30, 1996........... $193,766 $ 46,056 -- $193,775 $ 46,047
Year ended November 30, 1995........... 224,509 -- -- 30,743 193,766
Year ended November 30, 1994........... 105,000 212,257 -- 92,748 224,509
Note: (1) Write-off uncollectible accounts, net of recoveries
Note: (2) Reserve of additional uncollectible accounts, net of recoveries
Inventory reserve for obsolescence:
Year ended November 30, 1996........... $ 95,078 $170,554 -- $ 65,182 $200,450
Year ended November 30, 1995........... 25,000 70,078 -- 0 95,078
Year ended November 30, 1994........... 25,000 70,741 -- 70,741 25,000
Note: (3) Write-off obsolete, excess inventory, net of recoveries
</TABLE>
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EXHIBIT INDEX
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1.1* Proposed form of Underwriting Agreement.
---
3(i) Restated Articles of Incorporation of Somanetics N/A
Corporation, incorporated by reference to Exhibit 3(i) to
the Company's Quarterly Report on Form 10-Q for the quarter
ended February 28, 1997.
3(ii) Amended and Restated Bylaws of Somanetics Corporation, N/A
incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8 filed with the Securities
and Exchange Commission on June 16, 1995.
5.1* Opinion of Honigman Miller Schwartz and Cohn concerning the
legality of the securities being offered. ---
10.1 Lease Agreement, dated September 10, 1991, between N/A
Somanetics Corporation and WS Development Company,
incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended August
31, 1991.
10.2 Extension of Lease, between Somanetics Corporation and WS N/A
Development Company, dated July 22, 1994, incorporated by
reference to Exhibit 10.11 to the Company's Quarterly Report
on Form 10-Q for the quarter ended August 31, 1994.
10.3 Change in ownership of Lease Agreement for 1653 E. Maple N/A
Road, Troy, MI 48083, dated September 12, 1994, between
Somanetics Corporation and First Industrial, L.P.,
incorporated by reference to Exhibit 10.12 to the Company's
Quarterly Report on Form 10-Q for the quarter ended August
31, 1994.
10.4 Somanetics Corporation Amended and Restated 1983 Stock N/A
Option Plan, incorporated by reference to Exhibit 10.4 to
the Company's Annual Report on Form 10-K for the fiscal year
ended November 30, 1991.
10.5 Somanetics Corporation Amended and Restated 1991 Incentive N/A
Stock Option Plan, incorporated by reference to Exhibit 10.5
to the Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1991.
10.6 Fourth Amendment to Somanetics Corporation 1991 Incentive N/A
Stock Option Plan, incorporated by reference to Exhibit 10.7
to the Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1992.
10.7 Amended and Restated Fifth Amendment to Somanetics N/A
Corporation 1991 Incentive Stock Option Plan, incorporated
by reference to Exhibit 10.10 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1995.
10.8 Somanetics Corporation 1993 Director Stock Option Plan, N/A
incorporated by reference to Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the fiscal year ended
November 30, 1992.
10.9 Somanetics Corporation 1997 Stock Option Plan, incorporated N/A
by reference to Exhibit 10.9 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1996.
10.10 Somanetics Corporation 1995 Employee Incentive Plan, N/A
incorporated by reference to Exhibit 10.18 to the Company's
Quarterly Report on Form 10-Q for the quarter ended August
31, 1994.
10.11 Somanetics Corporation 1997 Employee Incentive Compensation N/A
Program, incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the fiscal year
ended November 30, 1996.
10.12 Amended and Restated Somanetics Corporation Plan and Trust, N/A
incorporated by reference to Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the fiscal year ended
November 30, 1991.
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10.13 Smith Barney Shearson Flexible Prototype Standardized 401(k) Plan Adoption Agreement #3, N/A
amending and restating the Somanetics Corporation Plan and Trust, incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31,
1995.
10.14 Employment Agreement, dated as of December 1, 1992, between Somanetics Corporation and Raymond N/A
W. Gunn, incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K
for the fiscal year ended November 30, 1992.
10.15 Employment Agreement, dated May 13, 1994, between Somanetics Corporation and Bruce J. Barrett, N/A
incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1994.
10.16 Amendment to Employment Agreement, dated as of February 23, 1994, between Somanetics Corporation N/A
and Raymond W. Gunn, incorporated by reference to Exhibit 10.19 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1993.
10.17 Amendment to Employment Agreement, dated as of July 21, 1994, between Somanetics Corporation and N/A
Bruce J. Barrett, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1994.
10.18 Amendment to Employment Agreement, dated as of July 21, 1994, between Somanetics Corporation and N/A
Raymond W. Gunn, incorporated by reference to Exhibit 10.3 to the Company's Quarterly report on
Form 10-Q for the quarter ended August 31, 1994.
10.19 Amendment to Employment Agreement, dated as of December 1, 1995, between Somanetics Corporation N/A
and Raymond W. Gunn, incorporated by reference to Exhibit 10.20 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1995.
10.20 Amendment to Employment Agreement, dated as of November 18, 1996, between Somanetics Corporation N/A
and Raymond W. Gunn, incorporated by reference to Exhibit 10.20 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1996.
10.21* Amendment to Employment Agreement, dated as of April 24, 1997, between Somanetics Corporation -----
and Bruce J. Barrett.
10.22* Amendment to Employment Agreement, dated as of April 24, 1997, between Somanetics Corporation -----
and Raymond W. Gunn.
10.23 Stock Option Agreement, dated May 16, 1994, between Somanetics Corporation and Bruce J. Barrett, N/A
incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 31, 1994.
10.24 Stock Option Agreement, dated July 21, 1994, between Somanetics Corporation and Bruce J. N/A
Barrett, incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form
10-Q for the quarter ended August 31, 1994.
10.25 Stock Option Agreement, dated July 21, 1994, between Somanetics Corporation and Gary D. Lewis, N/A
incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 31, 1994.
10.26 Stock Option Agreement, dated July 21, 1994, between Somanetics Corporation and Raymond W. Gunn, N/A
incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 31, 1994.
10.27 Stock Option Agreements, dated July 20, 1995, between Somanetics Corporation and Richard Farkas, N/A
incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 1995.
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10.28 Form of Stock Option Agreement, dated December 22, 1995, N/A
between Somanetics Corporation and various employees,
incorporated by reference to Exhibit 10.29 to the Company's
Annual Report on Form 10-K for the fiscal year ended
November 30, 1995.
10.29 Form of Stock Option Agreement, dated December 22, 1995, N/A
between Somanetics Corporation and various officers,
incorporated by reference to Exhibit 10.30 to the Company's
Annual Report on Form 10-K for the fiscal year ended
November 30, 1995.
10.30 Form of new Stock Option agreement, dated December 22, 1995, N/A
between Somanetics Corporation and various employees,
incorporated by reference to Exhibit 10.31 to the Company's
Annual Report on Form 10-K for the fiscal year ended
November 30, 1995.
10.31 Form of Stock Option Agreement, dated January 5, 1996, N/A
between Somanetics Corporation and two officers,
incorporated by reference to Exhibit 10.32 to the Company's
Annual Report on Form 10-K for the fiscal year ended
November 30, 1995.
10.32* Form of Stock Option Agreement, dated as of April 24, 1997, ---
between Somanetics Corporation and twenty-three employees.
10.33 Consulting Agreement, dated February 28, 1983, as amended, N/A
between Somanetics Corporation and Hugh F. Stoddart,
incorporated by reference to Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the fiscal year ended
November 30, 1991.
10.34 Consulting Order, dated as of October 1, 1996, among N/A
Somanetics Corporation and NeuroPhysics Corporation, Hugh F.
Stoddart and Hugh A. Stoddart, Ph.D., as Consultants,
incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended August
31, 1996.
10.35 Agreement and Release, dated as of February 1, 1995, between N/A
Somanetics Corporation and Gary D. Lewis, incorporated by
reference to Exhibit 10.27 to Post-Effective Amendment No. 5
to the Company's Registration Statement on Form S-1 (file
no. 33-38438) filed with the Securities and Exchange
Commission on March 30, 1995.
10.36 Amendment to Stock Option Agreement, dated as of February 1, N/A
1995, between Somanetics Corporation and Gary D. Lewis,
amending July 21, 1994 Stock Option Agreement, incorporated
by reference to Exhibit 10.31 to Post-Effective Amendment
No. 5 to the Company's Registration Statement on Form S-1
(file no. 33-38438) filed with the Securities and Exchange
Commission on March 30, 1995.
10.37 Current Form of Somanetics Corporation Confidentiality N/A
Agreement used for testing hospitals and clinics,
incorporated by reference to Exhibit 10.22 to the Company's
Annual Report on Form 10-K for the fiscal year ended
November 30, 1992. Current Form of Somanetics Corporation
Confidentiality Agreement used for the Company's employees
and agents, incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended August 31, 1992.
10.38 Assignments, dated October 6, 1983, January 23, 1986, N/A
February 11, 1986 and February 11, 1986, from Gary D. Lewis
to Somanetics Corporation in connection with the Company's
INVOS technology, incorporated by reference to Exhibit 10.17
to the Company's Registration Statement on Form S-1 (file
no. 33-38438).
10.39 Assignments, dated October 5, 1983, August 28, 1985, N/A
February 11, 1986, February 12, 1986, and September 24,
1986, from Hugh F. Stoddart to Somanetics Corporation in
connection with the Company's INVOS technology, incorporated
by reference to Exhibit 10.18 to the Company's Registration
Statement on Form S-1 (file no. 33-38438).
10.40 Warrant Agreement, dated as of August 2, 1994, between N/A
Somanetics Corporation and Rauscher Pierce & Clark Limited,
incorporated by reference to Exhibit 10.15 to the Company's
Quarterly Report on Form 10-Q for the quarter ended August
31, 1994.
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10.41 Form of Warrant to Purchase Common Stock of Somanetics N/A
Corporation, dated as of August 2, 1994, between Somanetics
Corporation and Rauscher Pierce & Clark Limited,
incorporated by reference to Exhibit 10.16 to the Company's
Quarterly Report on Form 10-Q for the quarter ended August
31, 1994.
10.42 Engagement Letter, dated as of June 6, 1995, among N/A
Somanetics Corporation, Rauscher Pierce & Clark Limited and
Rauscher Pierce & Clark, Inc., incorporated by reference to
Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q
for the quarter ended May 31, 1995.
10.43 Form of Purchase Agreement, between Somanetics Corporation N/A
and purchasers of Units in the 1995 Regulation S Offering,
incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended August
31, 1995.
10.44 Form of Warrant, between Somanetics Corporation and N/A
purchasers of Units in the 1995 Regulation S Offering,
incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended August
31, 1995.
10.45 Warrant Agreement, dated as of July 14, 1995, between N/A
Somanetics Corporation and Rauscher Pierce & Clark Limited,
incorporated by reference to Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ended August
31, 1995.
10.46 Warrant to Purchase Common Stock of Somanetics Corporation, N/A
dated as of July 14, 1995, between Somanetics Corporation
and Rauscher Pierce & Clark Limited, incorporated by
reference to Exhibit 10.6 to the Company's Quarterly Report
on Form 10-Q for the quarter ended August 31, 1995.
10.47 Side Letter, dated as of July 14, 1995, among Somanetics N/A
Corporation, Rauscher Pierce & Clark Limited and Rauscher
Pierce & Clark, Inc., incorporated by reference to Exhibit
10.7 to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 31, 1995.
10.48 Engagement Letter, dated as of March 25, 1996, among N/A
Somanetics Corporation, Rauscher Pierce & Clark Limited and
Rauscher Pierce & Clark, Inc., incorporated by reference to
Exhibit 10.57 to Post-Effective Amendment No. 6 to the
Company's Registration Statement on Form S-1 (file no.
33-38438).
10.49 Form of Purchase Agreement, between Somanetics Corporation N/A
and purchasers of Units in the April 1996 Regulation S
Offering, incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended February 29, 1996.
10.50 Form of Warrant between Somanetics Corporation and N/A
purchasers of Units in the April 1996 Regulation S Offering,
incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended February
29, 1996.
10.51 Warrant Agreement, dated as of April 2, 1996, between N/A
Somanetics Corporation and Rauscher Pierce & Clark Limited,
incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended February
29, 1996.
10.52 Warrant to Purchase Common Stock of Somanetics Corporation, N/A
dated as of April 2, 1996, between Somanetics Corporation
and Rauscher Pierce & Clark Limited, incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report
on Form 10-Q for the quarter ended February 29, 1996.
10.53 Side Letter, dated as of April 2, 1996, among Somanetics N/A
Corporation, Rauscher Pierce & Clark Limited and Rauscher
Pierce & Clark, Inc., incorporated by reference to Exhibit
10.6 to the Company's Quarterly Report on Form 10-Q for the
quarter ended February 29, 1996.
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10.54 Amendment to Side Letter, dated as of June 18, 1996, among N/A
Somanetics Corporation, Rauscher Pierce & Clark Limited and
Rauscher Pierce & Clark, Inc., incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended May 31, 1996.
10.55 Engagement Letter, dated as of October 23, 1996, among N/A
Somanetics Corporation, Rauscher Pierce & Clark Limited and
Rauscher Pierce & Clark, Inc., incorporated by reference to
Exhibit 10.58 to the Company's Annual Report on Form 10-K
for the fiscal year ended November 30, 1996.
10.56 Amendment to Engagement Letter, dated as of November 1, N/A
1996, among Somanetics Corporation, Rauscher Pierce & Clark
Limited and Rauscher Pierce & Clark, Inc., incorporated by
reference to Exhibit 10.59 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1996.
10.57 Form of Purchase Agreement, between Somanetics Corporation N/A
and purchasers of Units in the November 1996 Regulation S
Offering, incorporated by reference to Exhibit 10.60 to the
Company's Annual Report on Form 10-K for the fiscal year
ended November 30, 1996.
10.58 Placement Agent Agreement, dated as of November 21, 1996, N/A
among Somanetics Corporation, Rauscher Pierce & Clark
Limited and Rauscher Pierce & Clark, Inc., incorporated by
reference to Exhibit 10.61 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1996.
10.59 Letter Agreement, dated as of January 17, 1997, between N/A
Somanetics Corporation and Brean Murray & Co., Inc.,
incorporated by reference to Exhibit 10.62 to the Company's
Annual Report on Form 10-K for the fiscal year ended
November 30, 1996.
10.60* Proposed form of Warrant Agreement and Warrant between Brean
Murray & Co., Inc. and Somanetics Corporation. ---
10.61 Letter Agreement, dated as of February 20, 1997, between N/A
Somanetics Corporation and Mitani & Co., LLC, incorporated
by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended February 28, 1997.
23.1* Consent and Report on Schedule of Deloitte & Touche LLP.
---
23.2* Consent of Honigman Miller Schwartz and Cohn (included in
the opinion filed as Exhibit 5.1 to this registration ---
statement).
24.1 Powers of Attorney (included after the signature of the N/A
registrant contained on page II-4 of the initial
registration statement), incorporated by reference to page
II-4 to the Somanetics Corporation Registration Statement on
Form S-1 (file no. 333-25275) filed with the Securities and
Exchange Commission on April 16, 1997.
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* Filed with this amendment.
<PAGE> 1
EXHIBIT 1.1
SOMANETICS CORPORATION
2,000,000 Common Shares
FORM OF UNDERWRITING AGREEMENT
May 30, 1997
BREAN MURRAY & CO., INC.
As Representative of the several
Underwriters
570 Lexington Avenue
New York, New York 10022-6822
Ladies and Gentlemen:
SOMANETICS CORPORATION, a Michigan corporation (the "Company"), proposes
to sell an aggregate of 2,000,000 shares (the "Firm Shares") of the Common
Shares, par value $.01 per share (the "Common Shares"), of the Company, to you
and the other underwriters named in Schedule I hereto (collectively, the
"Underwriters"), for whom you are acting as representative (the
"Representative"). The Company also has agreed to grant to you and the other
Underwriters an option (the "Option") to purchase up to an additional 300,000
Common Shares (the "Option Shares") on the terms and for the purposes set forth
in Section l(b) hereto. The Firm Shares and the Option Shares are hereinafter
collectively referred to as the "Shares." The words "you" and "your" refer to
the Representative.
The Company hereby confirms as follows its agreement with the
Representative and the several other Underwriters.
- 1 -
<PAGE> 2
1. Agreement to Sell and Purchase.
(a) On the basis of the representations, warranties and agreements of
the Company herein contained and subject to all the terms and conditions of this
Agreement, the Company agrees to sell to each Underwriter and each Underwriter,
severally and not jointly, agrees to purchase from the Company at a purchase
price of $ 3.74 per share, the number of Firm Shares set forth opposite the
name of such Underwriter on Schedule I hereto, plus such additional number of
Shares which such Underwriter may become obligated to purchase pursuant to
Sections 1(b) or 10 hereof.
(b) Subject to all the terms and conditions of this Agreement, the
Company grants the Option to the several Underwriters to purchase, severally and
not jointly, the Option Shares at the same price per share as the Underwriters
shall pay for the Firm Shares. The Option may be exercised only to cover
over-allotments in the sale of the Firm Shares by the Underwriters and may be
exercised in whole or in part at any time and from time to time on or before the
30th day after the date of this Agreement (or on the next business day if the
30th day is not a business day), upon notice (the "Option Shares Notice") in
writing or by telephone (confirmed in writing) by the Representative to the
Company no later than 5:00 p.m., New York City time, at least two and no more
than five business days before the date specified for closing in the Option
Shares Notice (the "Option Closing Date") setting forth the aggregate number of
Option Shares to be purchased on the Option Closing Date. (As used herein,
"business day" means a day on which the New York Stock Exchange is open for
trading and on which banks in New York are open for business and not permitted
by law or executive order to be closed.) On the Option Closing Date, the
Company will sell to the Underwriters the number of Option Shares set forth in
the Option Shares Notice, and each Underwriter will purchase such percentage of
the Option Shares as is equal to the percentage of Firm Shares that such
Underwriter is purchasing, as adjusted by the Representative in such manner as
it deems advisable to avoid fractional shares.
2. Delivery and Payment.
(a) Delivery of the Firm Shares shall be made to the Representative
for the accounts of the Underwriters at the office of Brean Murray & Co., Inc.,
570 Lexington Avenue, New York, New York 10022-6822, and in exchange therefor
payment of the purchase price shall be made to the Company by wire transfer of
immediately available funds to the Company's account at NBD Bank, 611 Woodward
Avenue, Detroit, Michigan 48226, ABA No. 072000326, Account No. 005611024 (the
"Closing"). Such delivery and payment shall be made at 10:00 a.m., New York
time, on the third business day following the date of this Agreement, or at such
other time on such other date as may be agreed upon by the Company and the
Representative (such date is hereinafter referred to as the "Closing Date").
Time shall be of the essence, and delivery at the time and place specified
pursuant to this Agreement is a further condition of the obligations of each
Underwriter hereunder.
(b) To the extent the Option is exercised, delivery of the Option
Shares against payment by the Underwriters (in the manner specified above) will
take place at the
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<PAGE> 3
offices specified above for the Closing at the time and date (which may be the
Closing Date) specified in the Option Shares Notice.
(c) Certificates evidencing the Shares shall be in definitive form
and shall be registered in such names and in such denominations as the
Representative shall request at least two business days prior to the Closing
Date or the Option Closing Date, as the case may be, by written notice to the
Company. For the purpose of expediting the checking and packaging of
certificates for the Shares, the Company agrees to make such certificates
available for inspection at least 24 hours prior to the Closing Date or the
Option Closing Date, as the case may be.
(d) The cost of original issue tax stamps, if any, in connection with
the issuance, sale and delivery of the Shares by the Company to the respective
Underwriters shall be borne by the Company. The Company will pay and save each
Underwriter and any subsequent holder of the Shares harmless from any and all
liabilities with respect to or resulting from any failure or delay in paying
Federal or state stamp and other transfer taxes, if any, which may be payable or
determined to be payable in connection with the issuance, sale or delivery to
such Underwriter of the Shares.
3. Representations and Warranties of the Company. The Company
represents, warrants and covenants to each Underwriter that:
(a) A registration statement on Form S-1 (Registration No. 333-25275)
relating to the Shares, including a preliminary prospectus relating to the
Shares and such amendments to such registration statement as may have been
required to the date of this Agreement, has been prepared by the Company under
the provisions of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (collectively referred to as the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") promulgated
thereunder and has been filed with the Commission. The Commission has not
issued any order preventing or suspending the use of the Prospectus (as defined
below) or any Preliminary Prospectus (as defined below) or instituted or, to the
knowledge of the Company, threatened any proceeding for that purpose. The term
"Preliminary Prospectus" as used herein means a preliminary prospectus relating
to the Shares included at any time as part of the foregoing registration
statement or any amendment thereto before it became effective under the Act and
any prospectus filed with the Commission by the Company pursuant to Rule 424(a)
of the Rules and Regulations. Copies of such registration statement and
amendments and of each related Preliminary Prospectus have been delivered to the
Representative. If such registration statement has not become effective, a
further amendment to such registration statement, including a form of final
Preliminary Prospectus, necessary to permit such registration statement to
become effective will be filed promptly by the Company with the Commission. If
such registration statement has become effective, a final prospectus relating to
the Shares containing information permitted to be omitted at the time of
effectiveness by Rule 430A of the Rules and Regulations will be filed by the
Company with the Commission in accordance with Rule 424(b) of the Rules and
Regulations promptly after execution and delivery of this Agreement. The term
"Registration Statement" means the registration statement at the time such
registration statement becomes or became
- 3 -
<PAGE> 4
effective (the "Effective Date"), together with any registration statement filed
by the Company pursuant to Rule 462(b) of the Rules and Regulations, including
all financial statements and schedules and all exhibits, documents incorporated
therein by reference and all information contained in any final prospectus filed
with the Commission pursuant to Rule 424(b) of the Rules and Regulations or in a
term sheet described in Rule 434 of the Rules and Regulations in accordance with
Section 5 hereof and deemed to be included therein as of the Effective Date by
Rule 430A of the Rules and Regulations. The term "Prospectus" means the
prospectus relating to the Shares as first filed with the Commission pursuant to
Rule 424(b) of the Rules and Regulations or, if no such filing is required, the
form of final prospectus relating to the Shares included in the Registration
Statement at the Effective Date. References herein to any document or other
information incorporated by reference in the Registration Statement shall
include documents or other information incorporated by reference in the
Prospectus (or if the Prospectus is not in existence, in the most recent
Preliminary Prospectus). References herein to any Preliminary Prospectus or the
Prospectus shall be deemed to include all documents and information incorporated
by reference therein and shall be deemed to refer to and include any documents
and information filed after the date of such Preliminary Prospectus or
Prospectus, as the case may be, and so incorporated by reference, under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
(b) On the date that any Preliminary Prospectus was filed with the
Commission, the date the Prospectus is first filed with the Commission pursuant
to Rule 424(b) of the Rules and Regulations (if required), at all times
subsequent thereto up to and including the Closing Date and, if later, the
Option Closing Date and when any post-effective amendment to the Registration
Statement becomes effective or any amendment or supplement to the Prospectus is
filed with the Commission, the Registration Statement, each Preliminary
Prospectus and the Prospectus (as amended or as supplemented if the Company
shall have filed with the Commission any amendment or supplement thereto),
including the financial statements included in the Prospectus, did or will
comply in all material respects with all applicable provisions of the Act and
the Rules and Regulations and did or will contain all material statements
required to be stated therein in accordance with the Act and the Rules and
Regulations. On the Effective Date and when any post-effective amendment to the
Registration Statement becomes effective, no part of the Registration Statement
or any such amendment did or will contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein not misleading. At the Effective Date,
the date the Prospectus or any amendment or supplement to the Prospectus is
filed with the Commission and at the Closing Date and, if later, the Option
Closing Date, the Prospectus did not or will not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The foregoing representations and warranties in this
Section 3(b) do not apply to any statements or omissions made in reliance on and
in conformity with information furnished in writing to the Company by the
Representative specifically for inclusion in the Registration Statement or
Prospectus or any amendment or supplement thereto. There are no contracts or
other documents required to be filed as exhibits to the Registration Statement
by the Act or the Rules and Regula-
- 4 -
<PAGE> 5
tions that have not been so filed. The documents which are incorporated by
reference in any Preliminary Prospectus or the Prospectus or from which
information is so incorporated by reference, when they became effective or were
filed with the Commission, as the case may be, complied in all material respects
with the requirements of the Act and the Rules and Regulations or the Exchange
Act and the rules and regulations thereunder, as applicable, and did not, when
such documents were so filed, contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading, and any documents so filed and incorporated by
reference subsequent to the Effective Date shall, when they are filed with the
Commission, conform in all material respects with the requirements of the Act
and the Rules and Regulations and the Exchange Act and the rules and regulations
thereunder, as applicable.
(c) The Company has no subsidiaries. The Company does not own and,
at the Closing Date and the Option Closing Date, if any, will not own, an
interest in any corporation, joint venture, trust, partnership or other business
entity. The Company has been and, at the Closing Date and Option Closing Date,
if any, will be, duly incorporated and validly existing as a corporation under
the laws of the State of Michigan and is, and at the Closing Date and the Option
Closing Date, if any, will be, in good standing under the laws of the State of
Michigan. The Company has all corporate power and authority necessary to own
its properties and conduct its business as currently being carried on and as
described in the Registration Statement and Prospectus. The Company is, and at
the Closing Date and the Option Closing Date, if any, will be, duly licensed or
qualified and in good standing as a foreign corporation in each jurisdiction in
which the character or location of its properties (owned, leased or licensed) or
the nature or conduct of its business or use of its property and assets makes
such licensing or qualification necessary. Complete and correct copies of the
Company's Restated Articles of Incorporation and Bylaws, in each case as
amended, have been delivered to the Representative or its counsel, and no
changes therein will be made subsequent to the date hereof and prior to the
Closing Date or, if later, the Option Closing Date.
(d) The outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid and nonassessable and are
not subject to any preemptive or similar rights, and the holders thereof are not
subject to personal liability by reason of being such holders. The Firm Shares
to be sold hereunder to the Underwriters, the Option Shares to be sold hereunder
to the Underwriters in the event the Option is exercised, the warrants (the
"Warrants") issued to the Representative or certain permitted designees to
purchase up to 200,000 Common Shares on the terms and conditions set forth in a
Warrant Agreement (the "Warrant Agreement") between the Company and the
Representative, and the Common Shares issuable upon exercise of the Warrants
(the "Warrant Shares"), will be duly authorized and, when issued and delivered
to the Underwriters against payment therefor as provided by this Agreement (in
the case of the Shares) or to the Representative or such designees (in the case
of the Warrant Shares) against payment therefor as provided by the Warrants and
the Warrant Agreement, will be validly issued, fully paid and nonassessable and
will not be subject to any
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<PAGE> 6
preemptive or similar rights, and the holders thereof will not be subject to
personal liability by reason of being such holders. The Company has, and, upon
completion of the sale of the Shares, will have, an authorized, issued and
outstanding capitalization as set forth in the Registration Statement and the
Prospectus under the captions "Description of Capital Stock" and
"Capitalization" (or, if the Prospectus is not in existence, in the most recent
Preliminary Prospectus). The description of the securities of the Company in
the Registration Statement and the Prospectus under the caption "Description of
Capital Stock" (or, if the Prospectus is not in existence, in the most recent
Preliminary Prospectus) is, and at the Closing Date and, if later, the Option
Closing Date, will be, complete and accurate in all material respects. Except
as set forth or contemplated in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, in the most recent Preliminary
Prospectus), the Company does not have outstanding and, at the Closing Date and,
if later, the Option Closing Date, will not have outstanding, any options to
purchase, or any rights or warrants to subscribe for, or any securities or
obligations exchangeable or convertible into, or any contracts or commitments to
issue or sell, any shares of its capital stock or any such options, rights,
warrants, obligations, contracts or commitments. Neither the filing of the
Registration Statement nor the offering or sale of the Shares as contemplated by
this Agreement gives rise to any rights for or relating to the registration of
any Common Shares or other securities of the Company, except such rights as have
been disclosed in the Registration Statement or as have been satisfied, waived
or terminated.
(e) The financial statements and the related notes of the Company
included in the Registration Statement and in the Prospectus (or, if the
Prospectus is not in existence, in the most recent Preliminary Prospectus) or
incorporated therein by reference comply in all material respects with the
requirements of the Act and the Rules and Regulations, present fairly the
financial condition, results of operations, shareholders' equity and cash flows
of the Company at the dates and for the periods covered thereby and have been
prepared in accordance with generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the entire periods involved (except as
otherwise stated therein), subject to year-end adjustments with respect to
interim information consistent with past practice. Deloitte & Touche LLP (the
"Accountants"), who have reported on those of such financial statements and
related notes which are audited, are independent accountants with respect to the
Company as required by the Act and the Rules and Regulations. The selected
financial information and statistical data set forth under the captions
"Prospectus Summary -- Summary Financial Data" and "Selected Financial Data" in
the Prospectus (or, if the Prospectus is not in existence, in the most recent
Preliminary Prospectus) have been prepared on a basis consistent with the
financial statements of the Company.
(f) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorization, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain accountability for assets,
(iii) access to assets is permitted only in accordance with management's general
or specific authorization and (iv) the recorded accountability for assets is
compared with
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<PAGE> 7
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(g) Except as set forth or contemplated in the Registration Statement
and Prospectus (or, if the Prospectus is not in existence, in the most recent
Preliminary Prospectus), subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus and prior
to the Closing Date and, if later, the Option Closing Date, (i) there has not
been, and will not have been, any material adverse change in the business,
properties, prospects, key personnel, condition (financial or otherwise), net
worth or results of operations of the Company, (ii) the Company has not, and
will not have, incurred any material liabilities or obligations, direct or
contingent, or, entered into any material transactions not in the ordinary
course of business other than pursuant to this Agreement, (iii) the Company has
not, and will not have, paid or declared any dividends or other distributions of
any kind on any class of its capital stock, and (iv) there has not been, and
will not have been, any change in the capital stock, or a material change in the
short-term or long-term debt, or any issuance of options, warrants, convertible
securities or other rights to purchase capital stock of the Company, other than
changes in capital stock and issuances of rights, options and shares pursuant to
the Company's 1983 Stock Option Plan, 1991 Incentive Stock Option Plan, 1993
Director Stock Option Plan and the 1997 Stock Option Plan (collectively, the
"Option Plans") or this Agreement.
(h) The Company has good and marketable title to all properties and
assets described in the Registration Statement and Prospectus (or, if the
Prospectus is not in existence, in the most recent Preliminary Prospectus), as
owned by it, free and clear of all liens, security interests, restrictions,
pledges, encumbrances, charges, equities, claims, easements, leases and
tenancies (collectively, "Encumbrances") other than those described or referred
to in the Registration Statement and Prospectus (or, if the Prospectus is not in
existence, in the most recent Preliminary Prospectus). The Company has valid,
subsisting and enforceable leases for the properties and assets described in the
Registration Statement and Prospectus (or, if the Prospectus is not in
existence, in the most recent Preliminary Prospectus) as leased by it, free and
clear of all Encumbrances, other than those described or referred to in the
Registration Statement and Prospectus (or, if the Prospectus is not in
existence, in the most recent Preliminary Prospectus). The Company has no
notice of any claim which has been asserted by anyone adverse to the Company's
rights as lessee or sublessee under the respective lease or sublease, or
affecting or questioning the Company's right to the continued possession of the
leased or subleased premises.
(i) Except as described or referred to in the Registration Statement
or Prospectus (or, if the Prospectus is not in existence, in the most recent
Preliminary Prospectus), the Company owns or possesses all patents, patent
applications, trademarks, service marks, tradenames, trademark registrations,
service mark registrations, copyrights, licenses, inventions, trade secrets and
other intellectual property rights necessary for the conduct of the business of
the Company as currently carried on and as described in the Registration
Statement and Prospectus (or, if the Prospectus is not in existence, in the most
recent Preliminary Prospectus), and except as stated or referred to in the
Registration Statement or Prospectus (or, if the Prospectus is not in
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<PAGE> 8
existence, in the most recent Preliminary Prospectus), no name which the Company
uses and no other aspect of the business of the Company will involve or give
rise to any infringement of or license or similar fees for, any patents, patent
applications, trademarks, service marks, tradenames, trademark registrations,
service mark registrations, copyrights, licenses, inventions, trade secrets or
other similar rights of others material to the business or prospects of the
Company, and the Company has not received any notice alleging any such
infringement or fee.
(j) Except as set forth or referred to in the Registration Statement
and Prospectus (or, if the Prospectus is not in existence, in the most recent
Preliminary Prospectus), there are no actions, suits, arbitrations, claims,
governmental or other proceedings (formal or informal), or investigations
pending or, to the knowledge of the Company, threatened against or, to the
knowledge of the Company, affecting the Company, any of the Company's officers,
directors or shareholders, in its capacity as such, or any of the properties or
assets owned or leased by the Company, before or by any Federal, state,
municipal or foreign court, commission, regulatory body, administrative agency
or other governmental body, including, without limitation, the United States
Food and Drug Administration (the "FDA"), domestic or foreign (collectively, a
"Governmental Body"), which might result in any material adverse change in the
business, properties, prospects, condition (financial or otherwise), net worth
or results of operations of the Company. There are no actions, proceedings or
investigations pending or, to the knowledge of the Company, threatened by the
FDA or any other Governmental Body relating to the safety, efficacy or recall of
any product developed or sold by the Company. The Company is not in violation
of, or in default with respect to, any law, rule or regulation, or any order,
judgment or decree, except as described or referred to in the Prospectus (or if
the Prospectus is not in existence, in the most recent Preliminary Prospectus)
or such as in the aggregate do not now have and can reasonably be expected in
the future not to have a material adverse effect upon the business, properties,
prospects, condition (financial or otherwise), net worth or results of
operations of the Company; nor is the Company presently required to take any
action under any such order, judgment or decree in order to avoid any such
violation or default.
(k) The Company has, and at the Closing Date and, if later, the
Option Closing Date will have, all governmental licenses, permits, consents,
orders, approvals, franchises, certificates and other authorizations
(collectively, "Licenses") and has made all requisite declarations,
notifications and filings with all Government Bodies, in each case as are
necessary to carry on its business as then currently conducted and own or lease
its properties as contemplated in the Registration Statement and Prospectus (or,
if the Prospectus is not in existence, in the most recent Preliminary
Prospectus), and all such Licenses are, and at the Closing Date and, if later,
the Option Closing Date will be, in full force and effect. The Company has, and
at the Closing Date and, if later, the Option Closing Date will have, complied
in all material respects with all laws, regulations and orders applicable to it
or its business, assets and properties. The Company is not, nor at the Closing
Date and, if later, the Option Closing Date will it be, in violation of its
Restated Articles of Incorporation or Bylaws, in each case as amended, or in
default (nor has any event occurred which, with notice or lapse of time or both,
would constitute a default) in the due performance and observation of any term,
covenant or
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<PAGE> 9
condition of any indenture, mortgage, deed of trust, voting trust agreement,
loan agreement, bond, debenture, note agreement or other evidence of
indebtedness, lease, contract or other agreement or instrument (collectively, a
"contract or other agreement") to which it is a party or by which its properties
are bound, the violation of which would individually or in the aggregate have a
material adverse effect on the business, properties, prospects, condition
(financial or otherwise), net worth or results of operations of the Company.
There are no governmental proceedings or actions pending or, to the Company's
knowledge, threatened for the purpose of suspending, modifying or revoking any
License held by the Company and, to the knowledge of the Company, no event has
occurred that allows, or with notice or lapse of time or both would allow, any
such suspension, modification or revocation or any material impairment of the
Company's rights thereunder.
(l) No consent, approval, authorization or order of, or any filing or
declaration with, any Governmental Body is required for the execution, delivery
or performance of this Agreement, the Warrants or the Warrant Agreement
(collectively, the "Transaction Documents") or for the consummation of the
transactions contemplated hereby and thereby or in connection with the sale of
the Shares, the Warrants and the Warrant Shares by the Company, except such as
have been obtained and are in full force and effect and such as may be required
under the Act, the Rules and Regulations, any state securities or Blue Sky laws
or the bylaws and rules of the National Association of Securities Dealers, Inc.
(the "NASD") in connection with the purchase and distribution by the
Underwriters of the Shares to be sold hereby, the purchase of the Warrants by
the Representative or its permitted designees and the purchase by the
Representative or such permitted designees of the Warrant Shares upon exercise
of the Warrants.
(m) The Company has full power (corporate and other) and authority to
enter into each of the Transaction Documents and to carry out all the terms and
provisions hereof and thereof to be carried out by it. Each of the Transaction
Documents has been duly authorized, executed and delivered by the Company and
constitutes a valid and binding agreement of the Company, and is enforceable
against the Company in accordance with its terms, except as rights to indemnity
and contribution may be limited by Federal or state securities laws or the
public policy underlying such laws. Except as disclosed in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, in the
most recent Preliminary Prospectus), the execution, delivery and the performance
of the Transaction Documents and the consummation of the transactions
contemplated hereby and thereby will not result in the creation or imposition of
any Encumbrance upon any of the properties or assets of the Company pursuant to
the terms or provisions of, or result in a breach or violation of or conflict
with any of the terms or provisions of, or constitute a default under, or give
any other party a right to terminate any of its obligations under, or result in
the acceleration of any obligation under, (i) the Restated Articles of
Incorporation or Bylaws of the Company, in each case as amended, or (ii) any
contract or other agreement to which the Company is a party or by which it or
any of its assets or properties are bound, or (iii) any judgment, ruling,
decree, order, law, statute, rule or regulation of any Governmental Body
applicable to the Company or its business or properties, assuming compliance
with applicable state securities and Blue Sky laws.
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<PAGE> 10
(n) No statement, representation, warranty or covenant made by the
Company in any of the Transaction Documents or made in any certificate or
document required hereby or thereby to be delivered to the Representative was or
will be, when made, inaccurate, untrue or incorrect in any material respect.
Each certificate signed by an officer of the Company and delivered to the
Representative or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
covered thereby.
(o) Neither the Company nor any of its directors, officers or
affiliates (within the meaning of the Rules and Regulations) has taken, nor will
he, she or it take, directly or indirectly, any action designed, or which might
reasonably be expected in the future, to cause or result in, under the Act or
otherwise, or which has constituted, stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of the Shares or
otherwise.
(p) The Company is not involved in any material labor dispute with
its employees nor is any such dispute threatened or imminent.
(q) Neither the Company nor, to the Company's knowledge, any employee
or agent of the Company has made any payment of funds of the Company or received
or retained any funds of the Company in violation of any law, rule or regulation
or of a character required to be disclosed in the Registration Statement and
Prospectus (or, if the Prospectus is not in existence, in the most recent
Preliminary Prospectus).
(r) The business, operations and facilities of the Company have been
and are being conducted in compliance in all material respects with all
applicable laws, ordinances, rules, regulations, licenses, permits, approvals,
plans, authorizations or requirements relating to occupational safety and
health, or pollution, or protection of health or the environment (including,
without limitation, those relating to emissions, discharges, releases or
threatened releases of pollutants, contaminants or hazardous or toxic
substances, materials or wastes into ambient air, surface water, groundwater or
land, or relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of chemical substances, pollutants,
contaminants or hazardous or toxic substances, materials or wastes, whether
solid, gaseous or liquid in nature) of any governmental department, commission,
board, bureau, agency or instrumentality of the United States or any state or
political subdivision thereof, or any foreign jurisdiction, and all applicable
judicial or administrative agency or regulatory decrees, awards, judgments and
orders relating thereto; and the Company has not received any notice from any
Governmental Body or any third party alleging any violation thereof or material
liability thereunder (including, without limitation, liability for costs of
investigating or remediating sites containing hazardous substances and/or
damages to natural resources). The intended use and occupancy of each of the
facilities owned or operated by the Company complies in all material respects
with all applicable codes and zoning laws and regulations, and there is no
pending or, to the Company's knowledge, threatened condemnation, zoning change,
environmental or other proceeding or action that will in any material respect
adversely affect the size of, use of, improvements on, construction on or access
to such facilities.
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<PAGE> 11
(s) The Company has filed all foreign, Federal, state and local tax
returns that are required to be filed or has requested extensions thereof and is
not in default in any taxes which were payable pursuant to said returns.
(t) Neither the Company nor any of its directors, officers or
employees in such capacity is subject to any order or directive of, or party to
any agreement with, any regulatory agency having jurisdiction with respect to
its business or operations except as disclosed in the Prospectus (or if the
Prospectus is not in existence, in the most recent Preliminary Prospectus).
(u) The Company and each officer and director of the Company have
delivered to the Representative agreements (the "Lockup Agreements") to the
effect that he, she or it will not, for a period of 180 days after the date
hereof, without the prior written consent of the Representative, directly or
indirectly, offer, sell or otherwise dispose (or announce any offer, sale, grant
of any option to purchase or other disposition) of any Common Shares or
securities convertible into, or exercisable or exchangeable for, Common Shares,
except pursuant to this Agreement and except for (i) exercises of options and
warrants to acquire Common Shares, (ii) transfers to the holder's spouse or
lineal descendants or ancestors, natural or adopted (collectively, "Relatives"),
or to an inter vivos trust for the benefit of such holder's Relatives, (iii)
transfers upon the death of such holder pursuant to the laws of descent and
distribution or pursuant to wills, or (iv) gifts, provided that, in the case of
the foregoing clauses (i) through (iv), the transferor agrees in writing to be
bound by the terms of these restrictions.
(v) The Company has not distributed and will not distribute any
prospectus or other offering material in connection with the offering and sale
of the Shares other than any Preliminary Prospectus or the Prospectus or other
materials permitted by the Act or the Rules and Regulations to be distributed by
the Company.
(w) The Common Shares of the Company are quoted on The Nasdaq
SmallCap Market.
(x) The Company is not required to be registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act").
(y) The Company has furnished the Representative with true and
complete copies of its report on Form 10-K for the fiscal year ended November
30, 1996, its quarterly report on Form 10-Q for the fiscal quarter ended
February 28, 1997, its Proxy Statement for use in connection with its 1997
Annual Meeting of Shareholders and its 1996 Annual Report to Shareholders (the
"Current Reports"), which Current Reports constitute the only documents that the
Company was required to file with the Commission since November 30, 1996. The
Company has also filed all other reports required to be filed with the
Commission prior to November 30, 1996 (such reports, together with the Current
Reports are collectively referred to as the "Commission Reports"). As of their
respective filing dates, the Commission Reports and all other filings made by
the Company under the Act or Exchange Act complied in
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<PAGE> 12
all material respects with the requirements of the Act or the Exchange Act, as
the case may be, and none of such filings contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(z) Since its inception, the Company has not incurred any material
liability resulting from a violation of the provisions of the Act or any state
securities or Blue Sky laws.
(aa) The Company has made available to the Representative a copy of
all premarket notification ("510(k)") and premarket approval ("PMA") concurrence
or clearance letters received from the FDA and all related documents and
information, including device master files and market studies.
(bb) The Company carries, or is covered by, insurance in such amounts
and covering such risks as is adequate for the conduct of its business and the
value of its properties.
(cc) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any material liability; the Company has not incurred and does not
expect to incur liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or
4971 of the Internal Revenue Code of 1986, as amended, including the regulations
and published interpretations thereunder (the "Code"); and each "pension plan"
for which the Company would have any liability that is intended to be qualified
under Section 401(a) of the Code is so qualified in all material respects and
nothing has occurred, whether by action or by failure to act, which would cause
the loss of such qualification.
4. Representations and Warranties of the Underwriters. Upon your
authorization of the release of the Firm Shares, the several Underwriters
propose to offer the Firm Shares for sale to the public upon the terms set forth
in the Prospectus. The Representative represents and warrants to the Company
that, assuming compliance by the Company with all relevant provisions of the Act
in connection with the Registration Statement, the Representative will conduct
all offers and sales of the Shares in compliance with the relevant provisions of
the Act and the Rules and Regulations, all applicable state securities laws and
regulations and the bylaws and rules of the NASD. The Representative represents
and warrants to the Company that the Representative has been authorized by the
several Underwriters to enter into this Agreement on their behalf and to act for
them in the manner provided in this Agreement.
5. Agreements of the Company. The Company covenants and agrees with each
of the several Underwriters as follows:
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<PAGE> 13
(a) The Company will not, either prior to the Effective Date or
thereafter during such period as the Prospectus is required by law to be
delivered in connection with sales of the Shares by an Underwriter or dealer,
file any amendment or supplement to the Registration Statement or the
Prospectus, unless a copy thereof shall first have been submitted to the
Representative and the Representative shall have consented thereto.
(b) If the Registration Statement is not yet effective, the Company
will use its best efforts to cause the Registration Statement to become
effective not later than the time indicated in Section 7(a) hereof. The Company
will notify the Representative promptly, and will confirm such advice in
writing, (i) when the Registration Statement has become effective (if later than
the date hereof) and when any post-effective amendment thereto becomes
effective, (ii) of any request by the Commission for amendments or supplements
to the Registration Statement or the Prospectus or for additional information,
(iii) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereto or any order suspending the use of any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto or the initiation of any
proceedings for any such purpose or the threat thereof, (iv) of the happening of
any event during the period mentioned in the first sentence of Section 5(f) that
in the reasonable judgment of the Company makes any statement of a material fact
made in the Registration Statement or the Prospectus untrue or that requires the
making of any changes in the Registration Statement or the Prospectus in order
to make the statements of material fact therein, in light of the circumstances
in which they are made, not misleading and (v) of receipt by the Company or any
representative or attorney of the Company during the period mentioned in the
first sentence of Section 5(f) of any other communication from the Commission
relating to the Company, the Registration Statement, any Preliminary Prospectus
or the Prospectus. The Company will use its best efforts to prevent the
issuance of any order suspending the effectiveness of the Registration Statement
or any post-effective amendment thereto or any order suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
and, if any such order is issued, the Company will use its best efforts to
obtain the withdrawal of such order at the earliest possible moment. The
Company will prepare the Prospectus in a form approved by the Representative and
will file such Prospectus pursuant to Rule 424(b) of the Rules and Regulations
not later than the Commission's close of business on the second business day
following the execution and delivery of this Agreement or, if applicable, such
earlier time as may be required by Rule 430A(a)(3) of the Rules and Regulations.
If the Company has omitted any information from the Registration Statement
pursuant to Rule 430A of the Rules and Regulations, the Company will use its
best efforts to comply with the provisions of and make all requisite filings
with the Commission pursuant to Rule 430A of the Rules and Regulations and to
notify the Representative promptly of all such filings.
(c) If, at any time when a Prospectus relating to the Shares is
required to be delivered under the Act, any event has occurred as a result of
which the Prospectus, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances
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<PAGE> 14
under which they were made, not misleading, or the Registration Statement, as
then amended or supplemented, would include any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein
not misleading, or if for any other reason it is necessary at any such time to
amend or supplement the Prospectus or the Registration Statement to comply with
the Act or the Rules and Regulations, the Company will promptly notify the
Representative thereof and, in accordance with Section 5(a) hereof, will prepare
and file with the Commission, at the Company's expense, an amendment to the
Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
(d) The Company will furnish to the Representative, without charge,
two signed copies of the Registration Statement and of any post-effective
amendment thereto, including financial statements and schedules, and all
exhibits thereto, other than exhibits incorporated by reference, and will
furnish to the Representative, without charge, for transmittal to each of the
other Underwriters, copies of the Registration Statement and any post-effective
amendment thereto, including financial statements and schedules but without
exhibits.
(e) The Company will comply with all the provisions of all
undertakings contained in the Registration Statement.
(f) On the Effective Date, and thereafter from time to time for such
period as the Prospectus is required by the Act to be delivered, the Company
will deliver to each of the Underwriters, without charge, as many copies of the
Prospectus or any amendment or supplement thereto as the Representative may
reasonably request. The Company consents to the use of the Prospectus or any
amendment or supplement thereto by the several Underwriters and by all dealers
to whom the Shares may be sold, both in connection with the offering or sale of
the Shares and for any period of time thereafter during which the Prospectus is
required by law to be delivered in connection therewith. If during such period
of time any event shall occur which in the judgment of the Company or counsel to
the Underwriters should be set forth in the Prospectus in order to make any
statement of a material fact therein, in the light of the circumstances under
which it was made, not misleading, or in the Registration Statement in order to
make any statement of a material fact therein not misleading, or if it is
necessary to supplement or amend the Prospectus or the Registration Statement to
comply with law, the Company will, in accordance with Section 5(a) hereof,
forthwith prepare and duly file with the Commission an appropriate supplement or
amendment thereto and will deliver to each of the Underwriters, without charge,
such number of copies thereof as the Representative may reasonably request.
(g) The Company will (i) take or cause to be taken all such actions
and furnish all such information as the Representative may reasonably request in
order to qualify the Shares for offer and sale under the state securities or
Blue Sky laws of such jurisdictions as the Representative may designate, (ii)
continue such qualifications in effect for as long as may be necessary to
complete the distribution of the Shares but not to exceed one year from the date
of this Agreement and (iii) make such applications, file such documents and
furnish such
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<PAGE> 15
information as may be required for the purposes set forth in the foregoing
clauses (i) and (ii); provided, that in no event shall the Company be obligated
to qualify to do business in any jurisdiction where it is not now so qualified
or to take any action which would subject it to general service of process or
to taxation in any jurisdiction where it is not now so subject.
(h) During the period of five years commencing on the Effective Date,
the Company will furnish to the Representative and each other Underwriter who
may so request copies of such financial statements and other periodic and
special reports as the Company may from time to time distribute generally to the
holders of any class of its capital stock and will furnish to the Representative
and each other Underwriter who may so request a copy of each annual or other
report it shall be required to file with the Commission.
(i) The Company will make generally available to holders of its
securities, as soon as may be practicable, but in no event later than the last
day of the fifteenth full calendar month following the calendar quarter in which
the Effective Date falls, an earnings statement (which need not be audited but
shall be in reasonable detail) for a period of 12 months commencing after the
Effective Date, and satisfying the provisions of Section 11(a) of the Act
(including Rule 158 of the Rules and Regulations).
(j) The Company will not for a period of 180 days after the date
hereof, without the prior written consent of the Representative, directly or
indirectly, offer, sell or otherwise dispose (or announce any offer, sale, grant
of any option to purchase or other disposition) of any Common Shares or any
securities convertible into, or exercisable or exchangeable for, Common Shares,
except pursuant to Section 1 hereof and except that the Company may grant
options, and issue shares pursuant to the options granted, under the Company's
Option Plans and the Company may issue shares pursuant to warrants outstanding
as of the date of this Agreement and warrants issued to the Representative or
permitted designees.
(k) The Company will not at any time, directly or indirectly, take
any action intended, or which might reasonably be expected, to cause or result
in, or which will constitute, stabilization of the price of the Common Shares to
facilitate the sale or resale of any of the Shares.
(l) The Company shall apply the net proceeds of the sale of the
Shares as set forth in the Prospectus.
(m) The Company shall not invest, or otherwise use, the proceeds
received by the Company from the sale of the Shares to the Underwriters in such
a manner as would require the Company to register as an investment company under
the Investment Company Act.
(n) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company or if required by The
Nasdaq Stock Market, Inc., a registrar for its Common Shares.
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<PAGE> 16
(o) The Company will timely file all such reports, forms or other
documents as may be required from time to time under the Act, the Rules and
Regulations, the Exchange Act, and the rules and regulations promulgated
thereunder, and all such reports, forms and documents filed will comply in all
material respects as to form and substance with the applicable requirements of
the Act, the Rules and Regulations, the Exchange Act, and the rules and
regulations promulgated thereunder.
6. Expenses. Whether or not the transactions contemplated by this
Agreement are consummated or this Agreement is terminated, the Company will pay,
or reimburse if paid by the Representative, all costs and expenses incident to
the performance of its obligations under this Agreement and the transactions
contemplated by this Agreement, including, but not limited to, costs and
expenses of or relating to (i) the preparation, printing and filing of the
Registration Statement and exhibits thereto, each Preliminary Prospectus, the
Prospectus, any amendment or supplement to the Registration Statement or the
Prospectus, (ii) the preparation and delivery of certificates representing the
Shares, (iii) the printing of this Agreement, the Warrant Agreement, the
Agreement among Underwriters, any Dealer Agreements and any Underwriters'
Questionnaire, (iv) furnishing (including costs of shipping and mailing) such
copies of the Registration Statement, the Prospectus and any Preliminary
Prospectus, and all amendments and supplements thereto, as may be requested for
use in connection with the offering and sale of the Shares by the Underwriters
or by dealers to whom Shares may be sold, (v) the quotation of the Shares on The
Nasdaq Stock Market, (vi) any filings required to be made by the Underwriters
with the NASD, (vii) the registration or qualification of the Shares for offer
and sale under the securities or Blue Sky laws of such jurisdictions designated
pursuant to Section 5(g) hereof, including the reasonable fees, disbursements
and other charges of counsel to the Underwriters in connection therewith, and
the preparation and printing of preliminary, supplemental and final Blue Sky
memoranda, (viii) counsel and accountants to the Company and (ix) the transfer
agent, and any registrar, for the Shares. Whether or not the transactions
contemplated by this Agreement are consummated or if this Agreement shall be
terminated by the Company pursuant to any provisions hereof, the Company will
reimburse the Representative for all of its accountable out-of-pocket fees and
expenses including, among other things, its travel and travel-related expenses
and its counsel fees and expenses, incurred by it in connection herewith, up to
an aggregate amount of $150,000.
7. Conditions to the Obligations of the Underwriters. The obligations of
each Underwriter hereunder are subject to the following conditions:
(a) Notification that the Registration Statement has become effective
shall be received by the Representative not later than 4:00 p.m., New York time,
on the date of this Agreement or at such later date and time as shall be
consented to in writing by the Representative and all filings required prior to
such effectiveness by Rule 424 and Rule 430A of the Rules and Regulations shall
have been made.
(b) (i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall be pending or
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<PAGE> 17
threatened by the Commission, (ii) no order suspending the effectiveness of the
Registration Statement or the qualification or registration of the Shares under
the securities or Blue Sky laws of any jurisdiction shall be in effect, and no
proceeding for such purpose shall be pending before or threatened or
contemplated by the authorities of any such jurisdiction, (iii) any request for
additional information on the part of the staff of the Commission or any such
authorities shall have been complied with to the satisfaction of the staff of
the Commission or such authorities and (iv) after the date hereof no amendment
or supplement to the Registration Statement or the Prospectus shall have been
filed unless a copy thereof was first submitted to the Representative and the
Representative consented thereto, and the Representative shall have received
certificates, dated the Closing Date and the Option Closing Date, if any, and
signed on behalf of the Company by the Chief Executive Officer of the Company
and the Chief Financial Officer of the Company (who may, as to proceedings
threatened, rely upon the best of their information and belief), to the effect
of the foregoing clauses (i), (ii) and (iii).
(c) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, (i) there shall not have been a
material adverse change in the general affairs, business, business prospects,
properties, management, condition (financial or otherwise), or results of
operations of the Company, whether or not arising from transactions in the
ordinary course of business, and (ii) the Company shall not have sustained any
material loss or interference with its business, assets or properties from fire,
explosion, flood or other casualty, whether or not covered by insurance, or from
any labor dispute or any court or legislative or other governmental action,
order or decree, which is not set forth in the Registration Statement and the
Prospectus, if in the judgment of the Representative any such development makes
it impracticable or inadvisable to consummate the sale and delivery of the
Shares by the Underwriters at the public offering price.
(d) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there shall have been no
litigation or other proceeding instituted against the Company or any of its
officers, directors or shareholders in their capacities as such, or any of its
assets or properties, before or by any Governmental Body in which litigation or
proceeding an unfavorable ruling, decision or finding would materially and
adversely affect the general affairs, business, properties, prospects, condition
(financial or otherwise), net worth or results of operations of the Company.
(e) Each of the representations and warranties of the Company
contained herein shall be true and correct in all material respects at the date
hereof, at the Closing Date and, with respect to the Option Shares, if any, at
the Option Closing Date, as if made on such date, and all covenants and
agreements contained herein and in the Warrant Agreement to be performed on the
part of the Company and all conditions contained herein to be fulfilled or
complied with by the Company at or prior to the Closing Date and, with respect
to the Option Shares, if any, at or prior to the Option Closing Date, shall have
been fully performed, fulfilled or complied with in all material respects.
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<PAGE> 18
(f) The Representative shall have received an opinion, dated the
Closing Date and the Option Closing Date, as applicable, from Honigman Miller
Schwartz and Cohn, Detroit, Michigan, counsel for the Company, to the following
effect:
(i) The Company has been duly incorporated and is validly
existing and in good standing under the laws of the State of Michigan;
(ii) The description of the Common Shares under the caption
"Description of Capital Stock" in the Prospectus, to the extent that it
constitutes statements of law or legal conclusions, conforms in all material
respects to the terms thereof contained in the Company's Restated Articles of
Incorporation, as amended (the "Articles"). The authorized capital stock of the
Company is as set forth in the Prospectus under the caption "Capitalization".
All of the issued and outstanding Common Shares have been, and the Shares, the
Warrants and the Warrant Shares, when issued, delivered and paid for by the
Underwriters in accordance with the terms of this Agreement (in the case of the
Shares) or by the Representative or its permitted designees in accordance with
the terms of the Warrants and the Warrant Agreement (in the case of the Warrants
and the Warrant Shares), will be, duly authorized, validly issued, fully paid
and nonassessable and will not be subject to any preemptive or similar right
arising under the Michigan Business Corporation Act, as amended, the Company's
Articles or Bylaws, or any agreement listed as an Exhibit to the Registration
Statement (the "Exhibits"). To such counsel's actual knowledge, neither the
filing of the Registration Statement nor the offering or sale of the Shares
pursuant to this Agreement gives rise to any rights for the registration of any
Common Shares or other securities of the Company pursuant to any of the
agreements listed as Exhibits, except as disclosed in the Registration
Statement, or such rights as have been satisfied, waived or terminated;
(iii) Based solely on such counsel's review of the minutes of
the meetings of the Company's shareholders and board of directors and committees
of the board of directors and a certificate of officers of the Company (the
"Certificate"), except as described in the Registration Statement and
Prospectus, there are no options, warrants, agreements, contracts or other
rights in existence to purchase or acquire from the Company any shares of
capital stock of the Company;
(iv) The Registration Statement has become effective under the
Act; and, to such counsel's actual knowledge, (i) no stop order suspending the
effectiveness of the Registration Statement or any amendment thereto has been
issued under the Act, and (ii) no proceedings for that purpose have been
instituted, are pending or are threatened by the Commission under the Act;
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<PAGE> 19
(v) The Registration Statement and, if any, each amendment
thereto and the Prospectus and, if any, each amendment and supplement thereto
(except the financial statements, schedules and other financial data contained
therein, as to which such counsel need not express any opinion), complies as to
form in all material respects with the requirements of the Act and Rules and
Regulations;
(vi) The descriptions contained in the Registration Statement
and in the Prospectus under the captions "Risk Factors -- Potential
Anti-Takeover Effect", "Business -- Research and Development", "Management --
Directors and Executive Officers", "-- Compensation", and "-- Indemnification of
Directors and Officers", "Certain Transactions", "Description of Capital Stock",
and Notes 7, 8, 9 and 11 of "Notes to Financial Statements" of statutes,
litigation, contracts and other documents, insofar as such descriptions relate
to matters of law, fairly present in all material respects summaries of such
statutes, litigation, contracts and other documents;
(vii) To such counsel's actual knowledge, there are no contracts
or documents which are required by the Act to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement which are not so described or filed;
(viii) Based solely on the Certificate and the results of an
inquiry circulated to the partners of such counsel's firm (the "Inquiry"), such
counsel confirms to you that, to such counsel's actual knowledge, there is not
pending or threatened against the Company any action, suit, arbitration, claim,
governmental or other proceeding (informal or formal) or investigation before or
by any Governmental Body which is required to be disclosed in the Registration
Statement or the Prospectus which is not so disclosed therein;
(ix) The Company has the corporate power and authority to
execute, deliver and comply with its obligations under each of the Transaction
Documents and to consummate the transactions provided for therein; and the
execution, delivery and performance by the Company of each of the Transaction
Documents have been duly authorized by all requisite corporate action on behalf
of the Company, and such counsel shall confirm to you that each of the
Transaction Documents has been executed and delivered on behalf of the Company
by a duly authorized officer of the Company.
(x) The choice of New York law as the governing law contained in
each of the Transaction Documents would, to the extent specifically pleaded and
proved, be recognized and applied in an action brought before a court of
competent jurisdiction in the State of Michigan or a Federal court applying the
laws of the State of Michigan, except that such court would not apply those laws
of the State of New York (i) which such court characterizes as procedural, (ii)
which are revenue or penal laws, (iii) the application of which would be
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<PAGE> 20
inconsistent with "public policy" as such term is understood under the laws of
the State of Michigan, or (iv) with respect to the enforceability, perfection or
priority of a security interest in real or personal property located in Michigan
or subject to Federal law. However, if the Transaction Documents were stated to
be governed by and construed in accordance with the law of the State of
Michigan, or if a Federal court or a Michigan court were to apply the law of the
State of Michigan to the Transaction Documents, each Transaction Document would
constitute a valid and binding obligation of the Company and, except for the
contribution and indemnification provisions hereof, as to which such counsel
need not express any opinion, would be enforceable against the Company in
accordance with its terms, except as limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws now or hereafter in effect
relating to or affecting creditors rights generally or by general principles of
equity relating to the availability of remedies;
(xi) The execution and delivery of the Transaction Documents by
the Company, and the Company's compliance with the terms of the Transaction
Documents (i) do not result in the creation or imposition of any Encumbrance
upon any property or assets of the Company pursuant to the terms or provisions
of, or constitute a breach of, or default under, any material contract or other
material agreement included as an Exhibit to the Registration Statement, and
(ii) do not violate (A) the Articles or Bylaws of the Company, (B) any laws
which are known to such counsel to be applicable to the Company where such
violation would reasonably be expected to have a material adverse effect on the
validity, performance or enforceability of any of the terms of this Agreement
applicable to the Company or relating to the rights and remedies of the
Underwriters and the Representative under the Transaction Documents, or (C)
based solely on the Certificate and the Inquiry, any of the Company's existing
obligations under any judgment, decree or order of any arbitrator or
Governmental Body naming the Company; no consent, approval, authorization or
order of, or filing with, any Governmental Body is legally required for the
execution, delivery and performance of any Transaction Document by the Company,
except such as may be required under the Act and the Rules and Regulations, such
as may be required by the bylaws and rules of the NASD in connection with the
purchase and distribution by the Underwriters of the Shares, the purchase by the
Representative or its permitted designees of the Warrants or the purchase of the
Warrant Shares upon exercise of the Warrants and such as may be required under
state securities or Blue Sky laws in connection with the purchase and
distribution by the Underwriters of the Shares, the purchase by the
Representative or such designees of the Warrants or the purchase of the Warrant
Shares upon exercise of the Warrants;
(xii) To such counsel's actual knowledge, the Company is not in
any breach or violation of any of the terms or provisions of, or in default
under (nor has an event occurred which with notice or lapse of time or both
would constitute a default or acceleration under), the terms of its Articles or
Bylaws, in each case as amended;
(xiii) To such counsel's actual knowledge, the Company is not an
"investment company" as such term is defined in the Investment Company Act.
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<PAGE> 21
In addition, such counsel shall state that, such counsel participated
in the preparation of the Registration Statement and the Prospectus and nothing
has come to such counsel's attention that causes such counsel to believe that
the Registration Statement as of the Effective Date and as of the date of such
opinion contained or contains any untrue statement of a material fact or omitted
or omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus as of the date
thereof and as of the date of such opinion, contained or contains any untrue
statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading (it
being understood that such counsel need not make any statement with respect to
the financial statements, schedules and other financial data included in the
Registration Statement or the Prospectus).
In rendering any such opinion, such counsel may (i) state that such
counsel expresses no opinion as to the laws of any jurisdiction other than the
laws of the State of Michigan and the Federal laws of the United States and
expresses no opinion concerning the FD&C Act (as defined below) or related rules
and regulations or any intellectual property law and (ii) may rely, as to
matters of fact on certificates of responsible officers of the Company and
public officials.
References to the Registration Statement and the Prospectus in this
paragraph (f) shall include any amendment or supplement thereto at the date of
such opinion.
(g) The Representative shall have received an opinion, dated the
Closing Date and the Option Closing Date, as applicable, from Hogan & Hartson
L.L.P, Washington, D.C., special FDA counsel for the Company, to the following
effect:
(i) The statements set forth in the Prospectus under the
captions "Risk Factors -- Government Regulation" and "Business -- Government
Regulation" and in the definition of "FDA-Cleared" in the Glossary, insofar as
such statements purport to summarize applicable provisions of the Federal Food,
Drug, and Cosmetics Act (the "FD&C Act") and the regulations promulgated
thereunder, are accurate summaries in all material respects of the provisions
purported to be summarized under such captions; and
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<PAGE> 22
(ii) There are no FDA enforcement actions or proceedings pending or,
to such counsel's knowledge, threatened, against the Company.
In addition such counsel shall state that, during the course of
preparation of the Registration Statement such counsel participated in certain
discussions with officers of the Company as to the FDA regulatory matters dealt
with under the captions "Risk Factors -- Government Regulation" and "Business --
Government Regulation" in the Prospectus and in the definition of "FDA-Cleared"
in the Glossary. While such counsel has not undertaken to determine
independently, and does not assume any responsibility for, the accuracy,
completeness or fairness of the statements under such captions and in such
definition in the Prospectus, such counsel shall state on the basis of these
discussions that no facts have come to such counsel's attention which cause
such counsel to believe that the statements under such captions and in such
definition, insofar as such statements relate to FDA regulatory matters, at the
time the Registration Statement became effective, contained an untrue statement
of material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that as
of the date of such opinion, contains an untrue statement of material fact or
omits to state a material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
In rendering any such opinion, such counsel may (i) state that such
counsel expresses no opinion as to the laws of any jurisdiction other than the
Federal laws of the United States and (ii) may rely, as to matters of fact, to
the extent such counsel deems proper, on certificates of responsible officers of
the Company and public officials and, as to matters involving the application of
laws of any other jurisdiction than the United States.
References to the Registration Statement and the Prospectus in this
paragraph (g) shall include any amendment or supplement thereto at the date of
such opinion.
(h) The Representative shall have received an opinion, dated the
Closing Date and the Option Closing Date, as applicable, from Price, Heneveld,
Cooper, DeWitt & Litton, Grand Rapids, Michigan, special counsel for the
Company, to the following effect:
(i) The statements set forth in the Registration Statement and
the Prospectus under the captions "Risk Factors -- Proprietary Rights; Risk of
Infringement" and "Business -- Proprietary Information" (the "Intellectual
Property Portion") are accurate summaries in all material respects of the
provisions purported to be summarized under such captions, of any legal matters
referred to therein;
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<PAGE> 23
(ii) The Company is recorded in the records of the United States
Patent and Trademark Office as the sole owner or assignee of record of each of
the issued patents noted on an appendix to such opinion (the "Patents") and each
of the patent applications noted on such appendix (the "Patent Applications").
To the actual knowledge of such counsel, there is no litigation pending or
stated to be threatened (whether orally or in writing) by any person relating to
the ownership of the Patents or Patent Applications, no material defects of form
in the preparation or filing of the Patent Applications and the applications
which led to the Patents and, unless otherwise noted on such appendix, none of
the Patent Applications are finally rejected;
(iii) To such counsel's actual knowledge, there is no there is
no litigation pending or stated to be threatened (whether orally or in writing)
against the Company alleging that any of the Company's products infringe any
patent, copyright, trademark, trade secret or other intellectual property rights
of any third party; and
(iv) To such counsel's actual knowledge, there is no litigation
pending or stated to be threatened (whether orally or in writing) against the
Company relating to the Patents, the Patent Applications, or the Company's
copyrights, trademarks, trade secrets or other intellectual property rights.
In rendering any such opinion, such counsel may (i) state that such
counsel expresses no opinion as to the laws of any jurisdiction other than the
Federal intellectual property laws of the United States and (ii) may rely, as to
matters of fact on certificates of responsible officers of the Company and
public officials.
References to the Registration Statement and the Prospectus in this
paragraph (h) shall include any amendment or supplement thereto at the date of
such opinion.
(i) The Representative shall have received an opinion, dated the
Closing Date and the Option Closing Date, as applicable, from Piper & Marbury
L.L.P., counsel to the Underwriters, which opinion shall be satisfactory in all
respects to the Representative.
(j) Concurrently with the execution and delivery of this Agreement,
or, if the Company elects to rely on Rule 430A of the Rules and Regulations, on
the date of the Prospectus, the Accountants shall have furnished to the
Representative a letter, dated the date of its delivery (the "Original Letter"),
addressed to the Representative and in form and substance satisfactory to the
Representative, to the effect that:
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<PAGE> 24
(i) They are independent certified public accountants with
respect to the Company within the meaning of the Act, the Rules and Regulations,
the Exchange Act and the rules and regulations thereunder;
(ii) In their opinion, the audited financial statements and
schedules examined by them and included in the Registration Statement, or
incorporated therein by reference, and in the Prospectus comply as to form in
all material respects with the applicable accounting requirements of the Act,
the Rules and Regulations, the Exchange Act and the rules and regulations
promulgated thereunder;
(iii) On the basis of a reading of the latest available interim
unaudited financial statements of the Company, carrying out certain specified
procedures (which do not constitute an audit made in accordance with generally
accepted auditing standards) that would not necessarily reveal matters of
significance with respect to the comments set forth in this paragraph (iii), a
reading of the minute books of the shareholders, the board of directors and any
committees thereof of the Company and inquiries of certain officials of the
Company who have responsibility for financial and accounting matters, nothing
came to their attention that caused them to believe that at a specific date not
more than five business days prior to the date of such letter, there were any
changes in the shares of capital stock or long-term indebtedness of the Company,
in each case compared with amounts shown on the February 28, 1997 balance sheet
included in the Registration Statement and the Prospectus, or for the period
from March 1, 1997 to such specified date there were any decreases, as compared
with the corresponding period of the preceding fiscal year, in net revenues,
except in all instances for changes, decreases or increases set forth in such
letter or as set forth in or contemplated in the Prospectus; and
(iv) They have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting records of
the Company and are included in its Annual Report on Form 10-K for the fiscal
year ended November 30, 1996 and have compared such amounts, percentages and
financial information with such records of the Company and with information
derived from such records and have found them to be in agreement, excluding any
questions of legal interpretation.
In the event that the letter referred to above set forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (A) such letters shall, if requested by the
Representative, be accompanied by a written explanation of the Company as to the
significance thereof and (B) such changes, decreases or increases do not, in the
sole judgment of the Representative, make it impractical or inadvisable to
proceed with the purchase and delivery of the Shares as contemplated by the
Registration Statement, as amended as of the date hereof.
At the Closing Date and, as to the Option Shares, if any, the Option
Closing Date, the Accountants shall have furnished to the Representative a
letter, dated the date of its delivery, which shall confirm, on the basis of a
review in accordance with the procedures set forth in the
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<PAGE> 25
Original Letter, that nothing has come to their attention during the period from
the date of the Original Letter referred to in the prior sentence to a date
(specified in such letter) not more than five days prior to the Closing Date or
the Option Closing Date, as the case may be, which would require any change in
the Original Letter if it were required to be dated and delivered at the Closing
Date or the Option Closing Date, as the case may be.
(k) At the Closing Date and, as to the Option Shares, if any, the
Option Closing Date, there shall be furnished to the Representative an accurate
certificate, dated the date of its delivery, signed on behalf of the Company by
each of the Chief Executive Officer and the Chief Financial Officer of the
Company, in form and substance satisfactory to the Representative, to the effect
that:
(i) Each signer of such certificate has carefully examined the
Registration Statement and the Prospectus and (A) as of the date of such
certificate, (x) neither the Registration Statement, nor any amendment or
supplement thereto, if any, contains any untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading and (y) neither the
Prospectus, nor any amendment or supplement thereto, if any, contains any untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, and (B) since the
Effective Date, no event has occurred as a result of which it is necessary to
amend or supplement the Prospectus in order to make the statements therein not
untrue or misleading in any material respect;
(ii) Each of the representations and warranties of the Company
contained in this Agreement were, when originally made, and are, at the time
such certificate is delivered, true and correct in all material respects; each
of the covenants required herein to be performed by the Company on or prior to
the date of such certificate has been duly, timely and fully performed in all
material respects and each condition herein required to be complied with by the
Company on or prior to the delivery of such certificate has been duly, timely
and fully complied with in all material respects.
(iii) The Registration Statement has become effective and no
stop order suspending the effectiveness of the Registration Statement or any
post-effective amendment thereto and no order directed at any document
incorporated by reference in the Registration Statement or any amendment thereto
or the Prospectus has been issued, and no proceedings for that purpose have been
instituted or, to the Company's knowledge, are threatened or contemplated by the
Commission.
(l) The Shares shall have been qualified for sale in such states as
the Representative may reasonably designate and each such qualification shall be
in full force and effect and not subject to any stop order or other proceeding
on the Closing Date and the Option Closing Date, if any.
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<PAGE> 26
(m) The Representative shall have received at or prior to the Closing
Date from Piper & Marbury L.L.P. a memorandum or summary, in form and substance
satisfactory to the Representative, with respect to the qualification for
offering and sale by the Underwriters of the Shares under the state securities
or Blue Sky laws of such jurisdictions as the Representative may reasonably have
designated to the Company.
(n) The Company shall have filed a Nasdaq SmallCap Market
Notification Form for the listing of the Firm Shares and Option Shares and shall
not have received any notice of delisting of any Common Shares.
(o) The Lockup Agreements and the Warrant Agreement shall be in full
force and effect and the Company shall have duly issued, sold and delivered the
Warrants to the Representative or its permitted designees.
(p) The Company shall have furnished to the Representative such
certificates, letters and other documents, in addition to those specifically
mentioned herein, as the Representative may have reasonably requested as to the
accuracy and completeness at the Closing Date and the Option Closing Date, if
any, of any statement in the Registration Statement or the Prospectus, as to the
accuracy at the Closing Date and the Option Closing Date, if any, of the
representations and warranties of the Company, as to the performance by the
Company of its obligations under the Transaction Documents or as to the
fulfillment of the conditions concurrent and precedent to the obligations
hereunder of the Underwriters.
All such opinions, certificates, letters and other documents will be
in compliance with the provisions hereof only if they are satisfactory in form
and substance to you. The Company will furnish you with such conformed copies
of such opinions, certificates, letters and other documents as you shall
reasonably request.
If any of the conditions hereinabove provided for in this Section 7
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated by
the Representative by notifying the Company of such termination in writing at or
prior to the Closing Date or the Option Closing Date, as the case may be.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, the directors, officers, employees and agents of each Underwriter
and each person, if any, who controls such Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, from and against any
and all losses, claims, damages or liabilities, joint or several (and actions in
respect thereof), to which they, or any of them, may become subject under the
Act or other Federal or state law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon (i) any misrepresentation or breach of
warranty made by the Company in Section 3 of this Agreement,
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<PAGE> 27
(ii) any untrue statement or alleged untrue statement of any material fact
contained in (A) any Preliminary Prospectus, the Registration Statement or the
Prospectus or any amendment or supplement to the Registration Statement or the
Prospectus or (B) any application or other document, or any amendment or
supplement thereto, executed by the Company or based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order to
qualify the Shares under the securities or Blue Sky laws thereof or filed with
the Commission, the NASD or any securities association or securities exchange
(each, an "Application"), or (iii) the omission or alleged omission to state in
any Preliminary Prospectus, the Registration Statement or the Prospectus or any
amendment or supplement to the Registration Statement or the Prospectus or any
Application a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse, as incurred, each
Underwriter and each such other person for any legal or other expenses
reasonably incurred by such Underwriter or such other person in connection with
investigating, defending or appearing as a third-party witness in connection
with any such loss, claim, damage, liability or action; provided, however, that
the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of an untrue statement or omission
or alleged untrue statement or omission in any of such documents made or omitted
to be made in reliance upon and in conformity with information furnished by such
Underwriter in writing to the Company by the Representative on behalf of any
Underwriter expressly for inclusion therein; provided, further, that such
indemnity with respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter (or any such other person) from whom the person
asserting any such loss, claim, damage, liability or action purchased Shares
which are the subject thereof to the extent that any such loss, claim, damage or
liability (i) results from the fact that such Underwriter failed to send or give
a copy of the Prospectus (as amended or supplemented) to such person at or prior
to the confirmation of the sale of such Shares to such person in any case where
such delivery is required by the Act and (ii) arises out of or is based upon an
untrue statement or omission of a material fact contained in such Preliminary
Prospectus that was corrected in the Prospectus (or any amendment or supplement
thereto), unless such failure to deliver the Prospectus (as amended or
supplemented) was the result of noncompliance by the Company with Section 5(f)
hereof. This indemnity agreement will be in addition to any liability that the
Company might otherwise have. The Company will not, without the prior written
consent of each Underwriter, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not such
Underwriter or any person who controls such Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act is a party to each
claim, action, suit or proceeding), unless such settlement, compromise or
consent includes an unconditional release of each Underwriter and each such
other person from all liability arising out of such claim, action, suit or
proceeding.
(b) Each Underwriter, severally and not jointly, will indemnify and
hold harmless the Company, the directors, officers, employees and agents of the
Company and each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, against any and all
losses, claims, damages or liabilities, joint or several
- 27 -
<PAGE> 28
(and actions in respect thereof), to which they, or any of them, may become
subject under the Act or other Federal or state law or regulation, at common law
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any amendment or
supplement to the Registration Statement or the Prospectus or any Application,
or (ii) the omission or the alleged omission to state in the Registration
Statement, any Preliminary Prospectus or the Prospectus or any amendment or
supplement to the Registration Statement or the Prospectus, or any Application,
a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made or omitted to be made in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through the Representative expressly for use therein; and, subject to the
limitation set forth immediately preceding this clause, will reimburse, as
incurred, the Company and each such other person for any legal or other expenses
reasonably incurred by the Company and each such other person in connection with
investigating, defending or appearing as a third-party witness in connection
with any such loss, claim, damage, liability or any action in respect thereof.
The Company acknowledges that, for all purposes under this Agreement, the
statements set forth under the heading "Underwriting" and the information set
forth in the last paragraph on the front cover page (insofar as such information
relates to the Underwriters) and the last two paragraphs on the inside front
cover of any Preliminary Prospectus and the Prospectus constitute the only
information furnished in writing to the Company by the Representative on behalf
of the Underwriters expressly for inclusion in the Registration Statement, any
Preliminary Prospectus or the Prospectus. This indemnity agreement will be in
addition to any liability that each Underwriter might otherwise have. No
Underwriter will, without the prior written consent of the Company, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action, suit or proceeding in respect of which indemnification may be
sought hereunder (whether or not the Company or any person who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act is a party to each claim, action, suit or proceeding), unless such
settlement, compromise or consent includes an unconditional release of the
Company and each such other person from all liability arising out of such claim,
action, suit or proceeding.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party or parties
under this Section 8, notify such indemnifying party or parties of the
commencement thereof; but the omission so to notify the indemnifying party or
parties will not relieve it or them from any liability which it or they may have
to any indemnified party under the foregoing provisions of this Section 8 or
otherwise unless, and only to the extent that, such omission results in the
forfeiture of substantive rights or defenses by the indemnifying party. If any
such action is brought against an indemnified party, the indemnifying party or
parties against which a claim is made will be entitled to participate therein
and, to the extent that it or they may wish, to assume the defense thereof with
counsel
- 28 -
<PAGE> 29
reasonably satisfactory to such indemnified party; provided, however, that if
the defendants in any such action include both the indemnified party and the
indemnifying party or parties and the indemnified party shall have reasonably
concluded that there may be one or more legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party or parties, the indemnifying party or
parties shall not have the right to direct the defense of such action on behalf
of such indemnified party or parties and such indemnified party or parties shall
have the right to select separate counsel to defend such action on behalf of
such indemnified party or parties. After notice from the indemnifying party or
parties to such indemnified party of its or their election so to assume the
defense thereof and approval by such indemnified party of counsel appointed to
defend such action, the indemnifying party or parties will not be liable to such
indemnified party under this Section 8 for any legal or other expenses other
than reasonable costs of investigation subsequently incurred by such indemnified
party in connection with the defense thereof, unless (i) the indemnified party
shall have employed separate counsel in accordance with the proviso to the next
preceding sentence (it being understood, however, that in connection with such
action the indemnifying party or parties shall not be liable for the expenses of
more than one separate counsel (in addition to local counsel) in any one action
or separate but substantially similar actions in the same jurisdiction arising
out of the same general allegations or circumstances, designated by the
Representative in the case of paragraph (a) of this Section 8, representing the
indemnified parties under such paragraph (a) who are parties to such action or
actions), or (ii) the indemnifying party has authorized in writing the
employment of counsel for the indemnified party at the expense of the
indemnifying party or parties. After such notice from the indemnifying party or
parties to such indemnified party, the indemnifying party or parties will not be
liable for the costs and expenses of any settlement of such action effected by
such indemnified party without the consent of the indemnifying party or parties.
(d) If the indemnification provided for in the foregoing paragraphs
of this Section 8 is unavailable or insufficient to hold harmless an indemnified
party under paragraph (a) or (b) above in respect of any losses, claims, damages
or liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) (i) in such proportion as is appropriate to reflect
the relative benefits received by the indemnifying party or parties, on the one
hand, and the indemnified party, on the other, from the offering of the Shares
or (ii) if, but only if, the allocation provided by the foregoing clause (i) is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the indemnifying party or parties on the one hand, and the
indemnified party, on the other, in connection with the statements or omissions
or alleged statements or omissions that resulted in such losses, claims, damages
or liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company, on the
one hand, and the Underwriters, on the other, shall be deemed to be in the same
proportion as the total proceeds from the offering of the Shares (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
- 29 -
<PAGE> 30
forth in the table on the cover page of the Prospectus. Relative fault shall be
determined by reference to whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Representative on behalf
of the Underwriters, the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this Section 8(d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the losses, claims, damages, liabilities (or
actions in respect thereof) referred to above in this Section 8(d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 8(d), no Underwriter
shall be required to contribute any amount in excess of the amount by which the
underwriting discounts and commissions applicable to the Shares purchased by
such Underwriter exceeds the amount of any damages that such Underwriter has
otherwise been required to pay in respect of the same or any substantially
similar claim. Notwithstanding the provisions of this Section 8(d), the Company
shall not be required to contribute any amount in excess of the amount by which
the total proceeds received by it from the sale of the Shares under this
Agreement, before deducting expenses, exceeds the aggregate amount of any
damages that the Company has otherwise been required to pay in respect of the
same or any substantially similar claim. No person found guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) will be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute as provided in
this Section 8(d) are several in proportion to their respective underwriting
obligations and not joint. For purposes of this Section 8(d), each person, if
any, who controls an Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act will have the same rights to contribution as such
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, will have the same rights to contribution as the Company, subject
in each case to the provisions of this Section 8(d). Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim for
contribution may be made under this Section 8(d), notify any such party or
parties from whom contribution may be sought, but the omission so to notify will
not relieve the party or parties from whom contribution may be sought from any
other obligation(s) it or they may have hereunder or otherwise than under this
Section 8(d), or to the extent that such party or parties were not adversely
affected by such omission. The contribution agreement set forth above shall be
in addition to any liabilities which any indemnifying party may otherwise have.
No party will be liable for contribution with respect to any action or claim
settled without its written consent (which consent will not be unreasonably
withheld).
- 30 -
<PAGE> 31
9. Termination. The obligations of the several Underwriters under this
Agreement may be terminated at any time prior to the Closing Date (or, with
respect to the Option Shares, if any, on or prior to the Option Closing Date),
by notice to the Company from the Representative, without liability on the part
of any Underwriter to the Company, if, prior to delivery and payment for the
Firm Shares (or the Option Shares, if any, as the case may be), (i) the Company
shall have failed, refused or been unable, at or prior to such Closing Date, to
perform all obligations on its part to be performed under the Transaction
Documents, (ii) any of the representations or warranties of the Company are not
accurate in any respect, (iii) since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there
shall have occurred any material adverse change in the general affairs,
business, business prospects, properties, management, condition (financial or
otherwise), net worth or results of operation, whether or not arising in the
ordinary course of business (iv) trading in the Common Shares or securities
generally shall have been suspended by the Commission or by The Nasdaq Stock
Market, (v) minimum or maximum prices shall have been established for the Common
Shares or securities generally on either The Nasdaq Stock Market or the New York
Stock Exchange, or additional material governmental restrictions, not in force
on the date of this Agreement, shall have been imposed upon trading in
securities generally by any such market or exchange or by order of the
Commission or any court or other governmental authority, (vi) a general banking
moratorium shall have been declared by the United States or New York State
authorities, (vii) there shall have been enacted, published, decreed or
otherwise promulgated any statute, regulation, rule or order of any court or
other Governmental Body which in the opinion of the Representative materially
and adversely affects or may materially and adversely affect the business or
operations of the Company or (viii) any material adverse change in the financial
or securities markets in the United States or any outbreak or material
escalation of hostilities or declaration by the United States of a national
emergency or war or other calamity or crisis shall have occurred, the effect of
any of which is such as to make it, in the sole judgment of the Representative,
impracticable or inadvisable to market the Shares on the terms and in the manner
contemplated by the Prospectus. This Agreement may also be terminated as
provided in Sections 7 and 10 of this Agreement. Any termination pursuant to
this Section 9 shall be without liability of any party to any other party except
as provided in Sections 6 and 8 hereof.
10. Default of Underwriters. If one or more Underwriters default in their
obligations to purchase Firm Shares or Option Shares hereunder and the aggregate
number of such Shares that such defaulting Underwriter or Underwriters agreed
but failed to purchase is ten percent (10%) or less of the aggregate number of
Firm Shares or Option Shares, as the case may be, to be purchased by all of the
Underwriters at such time hereunder, the other Underwriters may make
arrangements satisfactory to the Representative for the purchase of such Shares
by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representative), but if no such arrangements are
made by the Closing Date or the related Option Closing Date, as the case may be,
the other Underwriters shall be obligated severally in proportion to their
respective commitments hereunder to purchase the Firm Shares or Option Shares
that such defaulting Underwriter or Underwriters agreed but failed to purchase.
If one or more Underwriters so default with respect to an aggregate number of
Shares that is more than ten
- 31 -
<PAGE> 32
percent (10%) of the aggregate number of Firm Shares or Option Shares, as the
case may be, to be purchased by all of the Underwriters at such time hereunder,
and if arrangements satisfactory to the Representative are not made within 48
hours after such default for the purchase by other persons (who may include one
or more of the non-defaulting Underwriters, including the Representative) of the
Shares with respect to which such default occurs, this Agreement will terminate
without liability on the part of any non-defaulting Underwriter or the Company
other than as provided in Section 11 hereof. In the event of any default by one
or more Underwriters as described in this Section 10, the Representative shall
have the right to postpone the Closing Date or the Option Closing Date, as the
case may be, established as provided in Section 2 hereof for not more than seven
(7) business days in order that any necessary changes may be made in the
arrangements or documents for the purchase and delivery of the Firm Shares or
Option Shares, as the case may be. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 10. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.
11. Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company and the several
Underwriters set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement shall remain in full force and effect,
regardless of (i) any investigation made by or on behalf of the Company, any of
its officers or directors, any Underwriter or any controlling person referred to
in Section 8 hereof and (ii) delivery of and payment for the Shares. The
respective agreements, covenants, indemnities and other statements set forth in
Sections 6 and 8 hereof shall remain in full force and effect, regardless of any
termination or cancellation of this Agreement.
12. Notices. Notice given pursuant to any of the provisions of this
Agreement shall be in writing and, unless otherwise specified, shall be mailed
or delivered (a) if to the Company, at the office of the Company, 1653 East
Maple Road, Troy, Michigan 48083-4208, Attention: Chief Executive Officer,
Telephone: (810) 689-3050 and Facsimile: (810) 689-4294, with a copy to Honigman
Miller Schwartz and Cohn, 2290 First National Building, Detroit, Michigan 48226,
Attention: Robert J. Krueger, Esq., Telephone: (313) 256-7675 and Facsimile:
(313) 962-0176 or (b) if to the Underwriters, to the Representative at the
offices of Brean Murray & Co., Inc., 570 Lexington Avenue, New York, New York
10022-6822 Attention: Mr. A. Brean Murray, Telephone: (212) 702-6500 and
Facsimile: (212) 702-6649, with a copy to Piper & Marbury L.L.P., 1251 Avenue of
the Americas, New York, New York 10020-1104, Attention: Michael Hirschberg,
Esq., Telephone: (212) 835-6270 and Facsimile: (212) 835-6001. Any such notice
shall be effective only upon receipt. Any notice under Section 8 or 9 hereof
may be made by telephone or facsimile but if so made shall be subsequently
confirmed in writing.
13. Successors. This Agreement shall inure to the benefit of and shall be
binding upon the several Underwriters, the Company and their respective
successors and legal representatives, and nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any other person any legal
or equitable right, remedy or claim under or in respect of this Agreement, or
any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of such
- 32 -
<PAGE> 33
persons and for the benefit of no other person except that (i) the indemnities
of the Company contained in Section 8 of this Agreement shall also be for the
benefit of any person or persons who control any Underwriter within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act and (ii) the
indemnities of the Underwriters contained in Section 8 of this Agreement shall
also be for the benefit of the directors of the Company, the officers of the
Company who have signed the Registration Statement and any person or persons who
control the Company within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act. No purchaser of Shares from any Underwriter shall be deemed a
successor because of such purchase. This Agreement shall not be assignable by
any party hereto without the prior written consent of the other parties.
14. APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT,
AND THE TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS.
15. Submission to Jurisdiction. The Company hereby submits to the
nonexclusive jurisdiction of the United States District Court for the Southern
District of New York and of the Supreme Court of the State of New York sitting
in New York County (including its Appellate Division), and of any other
appellate court in the State of New York, for the purposes of all legal
proceedings arising out of or relating to any of the Transaction Documents or
the transactions contemplated hereby or thereby. The Company irrevocably
waives, to the fullest extent permitted by applicable law, any objection that it
may now or hereafter have to the laying of venue of any such proceeding brought
in such a court and any claim that any such proceeding brought in such a court
has been brought in an inconvenient forum.
16. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Please confirm that the foregoing correctly sets forth the agreement among
the Company and the several Underwriters.
Very truly yours,
SOMANETICS CORPORATION
By:_______________________________
Name: Bruce J. Barrett
Title: President and Chief Executive Officer
Confirmed as of the date first
above mentioned:
- 33 -
<PAGE> 34
BREAN MURRAY & CO., INC.
By:_________________________________
Name: A. Brean Murray
Title: Chairman
Acting on its behalf and
as the Representative of
the other several Underwriters
named in Schedule I hereof.
- 34 -
<PAGE> 35
SCHEDULE I
UNDERWRITERS
Aggregate
Number of
Shares to
be
Purchased
Brean Murray & Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . 2,000,000
Total . . . . . . . . . . . . . . . . . . . . . . . 2,000,000
- 35 -
<PAGE> 1
EXHIBIT 5.1
[HMS&C LETTERHEAD]
May 30, 1997
Somanetics Corporation
1653 East Maple Road
Troy, Michigan 48083-4208
Ladies and Gentlemen:
We have represented Somanetics Corporation, a Michigan corporation
(the "Company"), in connection with the preparation and filing with the
Securities and Exchange Commission (the "Commission") of a Registration
Statement on Form S-1, file no. 333-25275 (the "Registration Statement"), for
registration under the Securities Act of 1933, as amended (the "Securities
Act"), of a maximum of 2,300,000 of the Company's Common Shares, par value
$0.01 a share (the "Common Shares").
Based upon our examination of such documents and other matters as we
deem relevant, it is our opinion that when the Registration Statement has
become effective and the Company has approved the amount of Common Shares to be
sold and the sales price of such Common Shares, the Common Shares covered by
the Registration Statement will have been duly authorized and, when issued and
sold by the Company as described in the Registration Statement and in the
manner set forth in the Underwriting Agreement referred to in the Registration
Statement, in the amount approved by the Company, against payment therefor,
will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus included in the Registration Statement. In giving
such consents, we do not admit hereby that we come within the category of
persons whose consent is required under Section 7 of the Securities Act or the
Rules and Regulations of the Commission under the Securities Act.
Very truly yours,
HONIGMAN MILLER SCHWARTZ AND COHN
<PAGE> 1
EXHIBIT 10.21
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT ("Amendment") is made as of
April 24, 1997, between Somanetics Corporation, a Michigan corporation (the
"Company"), and Bruce J. Barrett ("Employee").
RECITALS
A. Employee and the Company entered into the Employment Agreement,
dated as of May 13, 1994, as amended July 21, 1994 (the "Agreement").
B. Employee and the Company desire to renew and amend the Agreement.
THEREFORE, Company and Employee agree as follows:
1. Amendment. Effective May 1, 1997, the first sentence of Section 2
of the Agreement is replaced with the following: "The term of Employee's
employment under this Agreement shall begin on June 1, 1994 and shall continue
until April 30, 2000, unless earlier terminated pursuant to Section 4."
2. Amendment. Effective May 1, 1997, Section 3(a) of the Agreement is
amended and restated to read as follows:
"(a) Salary and Bonus. (i) As salary for Employee's services to
be rendered under this Agreement, the Company shall pay Employee an annual
salary of $204,750, increased from time to time by an amount determined by
the Board of Directors. Such salary shall be paid semi-monthly in arrears
(or at such other interval, not less frequently than monthly, as the
Company shall designate). (ii) As a bonus, Employee will participate in
the Bonus Plan established by the Compensation Committee of the Board."
3. No Other Change. Except as modified by this Amendment, the
Agreement shall continue in full force according to its terms and is hereby
ratified.
IN WITNESS WHEREOF, the Company and Employee have executed this Amendment
as of the date set forth in the introductory paragraph of this Amendment.
SOMANETICS CORPORATION
By: /s/ Raymond W. Gunn
--------------------------
Its: Executive Vice President
-------------------------
/s/ Bruce J. Barrett
-----------------------------
BRUCE J. BARRETT
<PAGE> 1
EXHIBIT 10.22
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT ("Amendment") is made as of April
24, 1997, between Somanetics Corporation, a Michigan corporation (the
"Company"), and Raymond W. Gunn ("Employee").
RECITALS
A. Employee and the Company entered into the Employment Agreement,
dated as of December 1, 1992, as amended February 23, 1994, July 21, 1994,
December 1, 1995 and November 18, 1996 (the "Agreement").
B. Employee and the Company desire to renew and amend the Agreement.
THEREFORE, Company and Employee agree as follows:
1. Amendment. Effective May 1, 1997, the first sentence of Section 2
of the Agreement is replaced with the following: "The term of Employee's
employment under this Agreement shall begin on the date first written above and
shall continue until April 30, 2000, unless earlier terminated pursuant to
Section 4."
2. No Other Change. Except as modified by this Amendment, the
Agreement shall continue in full force according to its terms and is hereby
ratified.
IN WITNESS WHEREOF, the Company and Employee have executed this Amendment
as of the date set forth in the introductory paragraph of this Amendment.
SOMANETICS CORPORATION
By:/s/ Bruce J. Barrett
-----------------------------
Its: President
----------------------------
/s/ Raymond W. Gunn
--------------------------------
RAYMOND W. GUNN
<PAGE> 1
EXHIBIT 10.32
STOCK OPTION AGREEMENT
(Non Officer Options)
Dated as of: April 24, 1997
To: _____________________
Pursuant to resolutions of the Board of Directors of Somanetics
Corporation (the "Company"), the Company hereby grants to you an option (the
"Option") to purchase up to _________________ (_______) Common Shares, par
value $.01 per share, of the Company (the "Shares") at $____ per Share, upon
the terms and conditions contained in this Stock Option Agreement.
1. The Option herein granted may not be transferred by you
otherwise than by will or by the laws of descent and distribution, and during
your lifetime the Option is exercisable only by you.
2. (a) Subject to the other terms of this Option, you may
exercise the Option in accordance with the following schedule:
(i) Between the date of this option and April __,
1998, none of the Shares may be purchased.
(ii) Commencing April __, 1998, one-fourth (1/4) of
the Shares may be purchased.
(iii) Commencing April __, 1999, an additional
one-fourth (1/4) of the Shares may be purchased.
(iv) Commencing April __, 2000, an additional
one-fourth (1/4) of the Shares may be purchased.
(v) Commencing April __, 2001, the final one-fourth
(1/4) of the Shares may be purchased.
Notwithstanding anything in this Option to the contrary, the Option shall be
exercisable to purchase all of the Shares immediately, to the extent not
already purchased, (i) ten (10) business days before the consummation of a
"Transaction" as defined in Paragraph 16 of the Somanetics Corporation 1997
Stock Option Plan (the "1997 Plan"), which definition is incorporated into this
Option by reference and shall bind you and the company as if set forth in full
in this Option, and (ii) upon the acquisition by any person, entity or group
(as defined pursuant to Section 13(d) of the Securities Exchange Act of 1934,
as amended) of 51% or more of the Company's outstanding voting securities.
<PAGE> 2
(b) Subject to earlier termination in accordance with the
provisions of Paragraph 13 of the 1997 Plan (which provisions are incorporated
into this option by reference and shall bind you and the Company as if set forth
in full in this Option; references in such Paragraph 13 to "Participant",
"option", "Nonqualified Option" and "Plan" shall be deemed references to you,
this Option, this Option and this Option, respectively, for all purposes under
this Option), the Option shall expire (to the extent not previously exercised)
on April 24, 2007.
3. The Option shall be exercised by giving a written notice of
exercise to the Treasurer of the Company. Such notice shall specify the number
of Shares to be purchased and shall be accompanied by payment in full (in the
manner set forth in Paragraph 10 of the 1997 Plan, which paragraph is
incorporated into this Option by reference and shall bind you and the Company as
if set forth in full in this Option) of the aggregate option price for the
number of Shares purchased. The Company shall cause the Common Shares
underlying the Option to be registered with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended, on the
appropriate form and as required under any applicable state or foreign
securities or Blue Sky laws. Such exercise shall be effective only upon the
actual receipt of such written notice and no rights or privileges of a
shareholder of the Company in respect of any of the Shares issuable upon the
exercise of any part of the Option shall inure to you, or any other person
entitled to exercise the Option, unless and until certificates representing such
Shares shall have been issued, and prior to such issuance no adjustment shall be
made for dividends, distributions or other rights in respect of such Shares,
except as provided in paragraphs 6 and 7.
4. If upon the exercise of the Option there shall be payable by the
Company or a subsidiary any amount for income tax withholding, in the Company's
Board of Directors' sole discretion, either you shall pay such amount to the
Company, or the number of Shares delivered by the Company to you shall be
appropriately reduced, to reimburse the Company for such payment. The Company's
Board of Directors may, in its sole discretion, permit you to satisfy such
withholding obligations, in whole or in part, by electing to have the number of
Shares delivered or deliverable by the Company upon exercise of this Option
appropriately reduced, or by electing to tender Common Shares back to the
Company subsequent to exercise of the Option, to reimburse the Company for such
income tax withholding. The Company's Board of Directors may make such other
arrangements with respect to income tax withholding as it shall determine.
5. It is understood and agreed that nothing contained in the this
Agreement, nor any action taken by the Board, shall confer upon you any right
with respect to the continuation of your employment by, or other service to, the
Company or any subsidiary, nor interfere in any way with the right of the
Company or a subsidiary to terminate your employment or other service at any
time.
6. The provisions of Paragraph 16 of the 1997 Plan are incorporated
into this Option by reference and shall bind you and the Company as if set forth
in full in this Option. References in such Paragraph 16 to "Participant",
"stock option" and "Plan" shall be deemed references to you, this Option and
this Option, respectively, for all purposes under this Option.
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<PAGE> 3
7. Subject to Paragraph 16 of the 1997 Plan, the number and type of
shares subject to the Option and the option price with respect to the Option
shall be subject to such adjustment as the Committee (as defined in Paragraph
1(b) of the 1997 Plan, which definition is incorporated into this Option by
reference and shall bind you and the Company as if set forth in full in this
Option), in its discretion, deems appropriate to reflect such events as stock
dividends, stock splits, recapitalizations, mergers, statutory share exchanges
or reorganizations of or by the Company, such adjustments to be the same as the
adjustments such Committee deems appropriate for options outstanding under the
1997 Plan. However, no fractional shares shall be issued pursuant to the
Option, and any fractional shares resulting from such adjustments shall be
eliminated from this Option.
Very truly yours,
SOMANETICS CORPORATION,
a Michigan corporation
By:
---------------------
Its:
--------------------
The above is agreed to and
accepted.
- --------------------------
Dated:
--------------------
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<PAGE> 1
EXHIBIT 10.60
P&M DRAFT
05/29/97
FORM OF
WARRANT AGREEMENT
BY AND BETWEEN
SOMANETICS CORPORATION
AND
BREAN MURRAY & CO., INC.
DATED AS OF JUNE [__], 1997
<PAGE> 2
WARRANT AGREEMENT
WARRANT AGREEMENT dated as of June [__], 1997 by and between SOMANETICS
CORPORATION, a Michigan corporation (the "Company"), and BREAN MURRAY & CO.,
INC. (the "Representative") (the Company and the Representative are referred to
collectively herein as the "Parties").
The Company proposes to issue to the Representative warrants as
hereinafter described (the "Warrants") to purchase up to an aggregate of
200,000 shares of the Company's Common Shares, $0.01 par value per share (the
"Common Shares"), subject to adjustment as provided in Section 8 hereof (such
200,000 shares, as adjusted, being hereinafter referred to as the "Shares"),
each warrant entitling the holder ("Holder") thereof to purchase one Common
Share. All capitalized terms used herein and not otherwise defined herein
shall have the same meanings as in that certain underwriting agreement, of even
date herewith, by and between the Company and the several underwriters named
therein (the "Underwriting Agreement").
NOW, THEREFORE, in consideration of the following promises and mutual
agreements and for other good and valuable consideration, the Parties agree as
follows:
1. ISSUANCE OF WARRANTS; FORM OF WARRANT. On the Closing Date the
Company will issue, sell and deliver the Warrants to the Representative or its
bona fide officers for an aggregate price of $100. The Warrants shall be issued
to the Representative or such designees in the amounts set forth on Schedule I
attached hereto. The form of the Warrant and of the form of election to
purchase Shares to be attached thereto shall be substantially as set forth on
Exhibit A attached hereto. The Warrants shall be executed on behalf of the
Company by the manual or facsimile signature of the present or any future
President or any Vice President of the Company, under its corporate seal,
affixed or in facsimile, and attested by the manual or facsimile signature of
the present or any future Secretary or Assistant Secretary of the Company. The
Representative and each other Holder, severally and not jointly, represents and
warrants to the Company that (i) such Holder is acquiring the Warrants, and any
Shares acquired upon exercise of any Warrants, for such Holder's own account and
not with a view to, or for sale in connection with, any distribution of the
Warrants or any Common Shares, unless such distribution is registered or exempt
from registration under the Securities Act of 1933, as amended (the "Act"), and
any applicable state and foreign securities or blue sky laws and (ii) such
Holder is aware that the Warrants and the Shares have not been registered under
the Act or the securities or blue sky laws of any state or other jurisdiction,
and that the Warrants may not be exercised and the Warrants and the Shares may
not be resold (and the Holder covenants not to resell them) unless they are
registered under applicable Federal and state securities laws or unless
exemptions from all such applicable registration requirements are available, and
that the Warrants and the Shares will be legended to indicate the foregoing
restrictions.
2. REGISTRATION. The Warrants shall be numbered and shall be registered
in a Warrant register (the "Warrant Register"). The Company shall be entitled
to treat the registered holder of any Warrant on the Warrant Register as the
owner in fact thereof for all purposes and shall not be bound to recognize any
equitable or other claim to or interest in such Warrant on the part of any other
person, and shall not be liable for any registration or transfer of Warrants
which are registered or are to be registered in the name of a fiduciary or the
nominee of a fiduciary.
<PAGE> 3
The Warrants shall be registered initially in the name of the Representative in
such denominations as the Representative may request in writing from the
Company; provided, however, that the Representative may designate that all or a
portion of the Warrants be issued in varying amounts directly to its bona fide
officers and not to the Representative. Such designation will only be made by
the Representative if it determines that such issuances would not violate the
interpretation of the Board of Governors of the National Association of
Securities Dealers, Inc. (the "NASD"), relating to the review of corporate
financing arrangements.
3. TRANSFER OF WARRANTS. The Warrants will not be sold, transferred,
assigned or hypothecated, in part or in whole, prior to the first anniversary of
the effective date of the Registration Statement (the "Effective Date"), and
thereafter only to bona fide officers, directors, shareholders, employees or
registered representatives of the Representative upon written request to the
Company (including a certificate of the Holder that the transferee is a
permitted transferee under this Section 3) delivered in accordance with Section
12 hereof and upon delivery of the Warrant Certificate to the Company with the
form of assignment at the end thereof duly endorsed by the Holder or by its duly
authorized attorney or representative. In all cases of transfer by an attorney,
the original power of attorney, duly approved, or an official copy thereof, duly
certified, shall be deposited with the Company. In case of transfer by
executors, administrators, guardians or other legal representatives, duly
authenticated evidence of their authority shall be produced, and may be required
to be deposited with the Company in its discretion. Upon any registration of
transfer, the Company shall deliver a new Warrant or Warrants to the persons
entitled thereto. Any of the Warrants may be exchanged at the option of its
Holder for other Warrants of different denominations, of like tenor and
representing in the aggregate the right to purchase a like number of Common
Shares upon surrender of the Warrants to the Company or its duly authorized
agent. The Company may require payment of a sum sufficient to cover all taxes
and other governmental charges that may be imposed in connection with any
transfer, exchange or other disposition of the Warrants or Shares. However, the
Company shall have no obligation to cause Warrants or Shares to be transferred
on its books to any person, if such transfer would violate the Act, the rules
and regulations promulgated thereunder (the "Rules and Regulations") or
applicable state securities laws, rules and regulations.
4. TERM OF WARRANTS; EXERCISE OF WARRANTS.
(a) TERM OF WARRANTS. Each Warrant entitles the registered owner
thereof to purchase one fully paid and nonassessable Share at a purchase price
of $4.80 per Share (as adjusted from time to time pursuant to the provisions
hereof, the "Exercise Price") at any time from the first anniversary of the
Effective Date until 5:00 p.m., New York City time, on May 29, 2002 (the
"Warrant Expiration Date").
(b) EXERCISE OF WARRANTS. The Exercise Price and the Shares issuable
upon exercise of Warrants are subject to adjustment upon the occurrence of
certain events, pursuant to
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<PAGE> 4
the provisions of Section 8 of this Agreement. Subject to the provisions of
this Agreement, and in addition to the right to surrender Warrants without any
cash payment as set forth in subsection (c) below, each Holder shall have the
right, which may be exercised as set forth in such Warrants, to purchase from
the Company (and the Company shall issue and sell to such Holder) the number of
fully-paid and nonassessable Shares specified in such Warrants, upon surrender
to the Company, or its duly authorized agent, of such Warrants, with the form of
election to purchase attached thereto duly completed and signed, with signatures
guaranteed by a member firm of a national securities exchange, a commercial bank
(not a savings bank or savings and loan association) or trust company located in
the United States or a member of the NASD and upon payment to the Company of the
Exercise Price, as adjusted in accordance with the provisions of Section 8 of
this Agreement, for the number of Shares in respect of which such Warrants are
then exercised and upon compliance with the requirements of the Act, the Rules
and Regulations and applicable state securities laws, rules and regulations. No
adjustment shall be made for any cash dividends paid to shareholders of record
before the date on which the Warrants are exercised. Upon each surrender of
Warrants, payment of the Exercise Price and compliance with the requirements of
the Act, the Rules and Regulations and applicable state securities laws, rules
and regulations, the Company shall issue and cause to be delivered with all
reasonable dispatch, but in no event later than three (3) trading days following
such surrender, to or (subject to Section 3) upon the written order of the
Holder of such Warrants and (subject to Section 3) in such name or names as such
Holder may designate, a certificate or certificates for the number of full
Shares so purchased upon the exercise of such Warrants, together with cash, as
provided in Section 9 of this Agreement, in respect of any fractional Shares
otherwise issuable upon such surrender. Such certificate or certificates shall
be deemed to have been issued and any person so designated to be named therein
shall be deemed to have become a holder of record of such Shares as of the date
of the surrender of Warrants, payment of the Exercise Price and compliance with
the requirements of the Act, the Rules and Regulations and applicable state
securities laws, rules and regulations as aforesaid; provided, however, that if,
at the date of surrender of such Warrants, the transfer books for the Common
Shares or other class of securities issuable upon the exercise of such Warrants
shall be closed, the certificates for the Shares shall be issuable as of the
date on which such books shall next be opened (whether before, on or after the
Warrant Expiration Date) and until such date the Company shall be under no duty
to deliver any certificate for such Shares; provided, further, however, that the
transfer books of record, unless otherwise required by law, shall not be closed
at any one time for a period longer than twenty (20) days. The rights of
purchase represented by the Warrants shall be exercisable, at the election of
the Holder(s) thereof, either in full or from time to time in part and, in the
event that any Warrant is exercised in respect of less than all of the Shares
issuable upon such exercise at any time prior to the Warrant Expiration Date, a
new Warrant or Warrants will be issued for the remaining number of Shares
specified in the Warrant so surrendered.
(c) PAYMENT OF EXERCISE PRICE. Payment of the Exercise Price may be made
in cash, by wire transfer of immediately available funds or by certified check
or official bank check payable to the order of the Company. In addition and in
lieu of any cash payment, the Holder of the Warrants shall have the right at any
time and from time to time to exercise the Warrants in full or in part by
surrendering the Warrants in exchange for the number of Shares equal to the
product of (x) the number of shares as to which the Warrants are being exercised
multiplied by
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<PAGE> 5
(y) a fraction, the numerator of which is the Market Price (as defined in
Section 8(d) below) of the Shares less the Exercise Price and the denominator of
which is such Market Price.
5. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes, if
any, attributable to the issuance of Shares upon the exercise of Warrants;
provided, however, that the Company shall not be required to pay any taxes
payable in respect of any transfer involved in the issue or delivery of any
certificates for Shares in a name other than that of the Holder of Warrants in
respect of which such Shares are issued, which taxes shall be paid by the
Holder.
6. MUTILATED OR MISSING WARRANTS. In case any of the Warrants shall be
mutilated, lost, stolen or destroyed, the Company shall issue and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and substitution for the Warrant lost, stolen or destroyed, a new
Warrant of like tenor and representing an equivalent right or interest, but only
upon receipt of evidence reasonably satisfactory to the Company of ownership of
such Warrant and of such mutilation, loss, theft or destruction of such Warrant
and indemnity and affidavit of loss, if requested, reasonably satisfactory to
the Company. An applicant for such substitute Warrants shall also comply with
such other reasonable regulations and pay such other reasonable charges and
expenses as the Company may prescribe.
7. RESERVATION OF SHARES, ETC. The Company has reserved, and shall at all
times keep reserved, out of the authorized and unissued Common Shares, a number
of Common Shares sufficient to provide for the exercise of the rights of
purchase represented by the outstanding Warrants. American Stock Transfer &
Trust Company, transfer agent for the Common Shares (the "Transfer Agent"), and
any subsequent transfer agent for the Company's securities issuable upon the
exercise of the Warrants will be irrevocably authorized and directed at all
times until the Warrant Expiration Date to reserve such number of authorized and
unissued shares as shall be required for such purpose. The Company will keep a
copy of this Agreement on file with the Transfer Agent and with every subsequent
transfer agent for any shares of the Company's securities issuable upon the
exercise of the Warrants. The Company will supply the Transfer Agent or any
subsequent transfer agent with duly executed certificates for such purpose and
will itself provide or make available any cash distributable as provided in
Section 9 of this Agreement. All Warrants surrendered in the exercise in
compliance with this Agreement of the rights thereby evidenced shall be
canceled, and such canceled Warrants shall constitute sufficient evidence of the
number of Shares that are issuable upon the exercise of such Warrants. No
Common Shares shall be subject to reservation in respect of unexercised Warrants
after the Warrant Expiration Date.
8. ADJUSTMENTS OF EXERCISE PRICE AND NUMBER OF SHARES. The Exercise Price
and the number and kind of securities issuable upon exercise of each Warrant
shall be subject to adjustment from time to time upon the happening of certain
events, as follows:
(a) If the Company (i) declares a dividend on its Common Shares in
Common Shares or makes a distribution to all holders of its Common Shares in
Common Shares without charge to such holders, (ii) subdivides its outstanding
Common Shares, (iii) combines its outstanding Common Shares into a smaller
number of Common Shares or (iv) issues by
- 4 -
<PAGE> 6
reclassification of its Common Shares other securities of the Company (including
any such reclassification in connection with a consolidation or merger in which
the Company is the surviving entity, but excluding those referred to in
paragraph (b) below), the number and kind of Common Shares purchasable upon
exercise of each Warrant immediately prior thereto shall be adjusted so that the
Holder of each Warrant shall be entitled to receive the kind and number of
Common Shares or other securities of the Company which such Holder would have
owned or have been entitled to receive after the happening of any of the events
described above, had such Warrant been exercised immediately prior to the
happening of such event or any record date with respect thereto. Such
adjustment shall be made whenever any of the events listed above shall occur.
An adjustment made pursuant to this paragraph (a) shall become effective
immediately after the effective date of such event retroactive to immediately
after the record date, if any, for such event.
(b) If the Company issues rights, options or warrants to all holders
of its Common Shares, without any charge to such holders, entitling them to
subscribe for or to purchase Common Shares at a price per share lower than the
then current Market Price per Common Share at the record date mentioned below
(as defined in paragraph (d) below), the Holders of unexercised Warrants as of
such record date, upon exercise of such Warrants, shall receive the same rights,
options or warrants which such Holder would have received or have been entitled
to receive after such issuance, had such Warrants been exercised immediately
prior to such issuance or any record date with respect thereto. Such adjustment
shall be made whenever such rights, options or warrants are issued as described
above, and shall become effective retroactively to immediately after the record
date for the determination of shareholders entitled to receive such rights,
options or warrants.
(c) If the Company distributes to all holders of its Common Shares,
without any charge to such holders, shares of its stock other than Common Shares
or evidences of its indebtedness or assets (excluding cash dividends and
dividends or distributions referred to in paragraph (a) or (b) above) or rights,
options or warrants or convertible or exchangeable securities containing the
right to subscribe for or purchase Common Shares (excluding those referred to in
paragraph (a) or (b) above), then in each case the Holders of unexercised
Warrants as of the record date mentioned below, upon exercise of such warrants,
shall receive the same distribution which such Holder would have received or
have been entitled to receive after such distribution, had such Warrants been
exercised immediately prior to such distribution or any record date with respect
thereto. Such adjustment shall be made whenever any such distribution is made
as described above, and shall become effective on the date of distribution
retroactive to immediately after the record date for the determination of
shareholders entitled to receive such distribution.
(d) For the purpose of any computation under paragraph (b) of this
Section 8, the current "Market Price" per Common Share at any date shall be the
average of the daily closing prices for fifteen (15) consecutive trading days
commencing twenty (20) trading days before the date of such computation. The
closing price for each day shall be the last reported sale price regular way or,
in case no such reported sale takes place on such day, the average of the
- 5 -
<PAGE> 7
closing bid and asked prices regular way for such day, in either case on the
principal national securities exchange on which the shares are listed or
admitted to trading, or if they are not listed or admitted to trading on any
national securities exchange, but are traded in the over-the-counter market, the
closing sale price of the Common Shares or, in case no sale is publicly
reported, the average of the representative closing bid and asked quotations for
the Common Shares on The Nasdaq National or SmallCap Market or any comparable
system, or if the Common Shares are not listed on The Nasdaq Stock Market or a
comparable system, the closing sale price of the Common Shares or, in case no
sale is publicly reported, the average of the closing bid and asked prices as
furnished by two members of the NASD selected from time to time by the Company
for that purpose.
(e) No adjustment in the number of Shares purchasable hereunder shall
be required unless such adjustment would require an increase or decrease of at
least one percent (1%) in the number of Shares purchasable upon the exercise of
each Warrant; provided, however, that any adjustments which by reason of this
paragraph (e) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment but not later than three (3) years
after the happening of the specified event or events. All calculations shall be
made to the nearest one thousandth of a share.
(f) Whenever the number of Shares purchasable upon exercise of each
Warrant is adjusted, as herein provided, the Exercise Price shall be adjusted by
multiplying the Exercise Price in effect immediately prior to such adjustment by
a fraction, of which the numerator shall be the number of Shares purchasable
upon the exercise of each Warrant immediately prior to such adjustment, and of
which the denominator shall be the number of shares so purchasable immediately
thereafter.
(g) For the purpose of this Section 8, the term "Common Shares" shall
mean (i) the class of stock designated as the Common Shares of the Company at
the date of this Agreement or (ii) any other class of stock resulting from
successive changes or reclassifications of such shares consisting solely of
changes in par value, or from no par value to par value, or from par value to no
par value. If at any time, as a result of an adjustment made pursuant to
paragraph (a) above, the Holders become entitled to purchase any shares of
capital stock of the Company other than Common Shares, thereafter the number of
such other shares so purchasable upon exercise of each Warrant and the Exercise
Price of such shares shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Shares contained in paragraphs (a) through (f), inclusive, and
paragraphs (h) through (m), inclusive, of this Section 8, and the provisions of
Sections 4, 5, 7 and 10 hereof, with respect to the Shares, shall apply on like
terms to any such other shares.
(h) Upon the expiration of any rights, options, warrants or
conversion rights or exchange privileges that caused adjustments under this
Section 8, such adjustments with respect to any Warrants that have not been
exercised shall, upon such expiration, be readjusted and shall thereafter be
such as they would have been had such rights, options, warrants or conversion
rights or exchange privileges never existed.
- 6 -
<PAGE> 8
(i) The Company may, at its option at any time during the term of the
Warrants, reduce the then current Exercise Price to any amount deemed
appropriate by the Board of Directors of the Company.
(j) Whenever the number of Shares issuable upon the exercise of each
Warrant or the Exercise Price of such Shares is adjusted, as herein provided,
the Company shall promptly mail by first class-mail, postage prepaid, to each
Holder notice of such adjustment or adjustments. No failure to mail such notice
nor any defect therein or in the mailing thereof shall affect the validity
thereof except as to the Holder to whom the Company failed to mail such notice
or whose notice was defective. A certificate of an officer of the Company, on
behalf of the Company, that such notice has been mailed shall be prima facie
evidence of the facts stated therein. After any such adjustment, the Company
shall prepare a certificate setting forth the number of Shares issuable upon the
exercise of each Warrant and the Exercise Price of such Warrant after such
adjustment, setting forth a brief statement of the facts requiring such
adjustment. Such certificate shall, except as provided below, be conclusive as
to the correctness of such adjustment and each Holder shall have the right to
inspect such certificate during reasonable business hours. Any determination as
to whether an adjustment is required pursuant to this Section 8, or as to the
amount of any such adjustment, shall be initially made in good faith by the
Board of Directors of the Company. If the Holders of a majority of the then
outstanding Warrants shall, in the exercise of their discretion, object to such
determination, the amount of such adjustment shall be made by an independent
accounting or investment banking firm selected by the Holders of a majority of
the then outstanding Warrants and reasonably acceptable to the Company.
(k) Except as provided in this Section 8, no adjustment in respect of
any dividends shall be made during the term of a Warrant or upon the exercise of
a Warrant.
(l) If the Company consolidates with or merges into another
corporation or if the Company sells or conveys all or substantially all its
property to another corporation, or if the Company enters into a statutory share
exchange with another Company pursuant to which its Common Shares are exchanged
for, or changed into, securities or property of another Company, the Company or
such successor or purchasing corporation (or an affiliate of such successor or
purchasing corporation), as the case may be, agrees that each Holder shall have
the right thereafter upon payment of the Exercise Price in effect immediately
prior to such action to purchase upon exercise of each Warrant the kind and
amount of shares and other securities and property (including cash) which such
Holder would have owned or been entitled to receive after the happening of the
consolidation, merger, sale, conveyance or share exchange had such Warrant been
exercised immediately prior to such action. The provisions of this paragraph
(l) shall apply to successive consolidations, mergers, sales, conveyances or
share exchanges.
(m) Notwithstanding any adjustment in the Exercise Price or the
number or kind of shares purchasable upon the exercise of the Warrants pursuant
to this Agreement, certificates for Warrants issued prior or subsequent to such
adjustment may continue to express the same price and number and kind of shares
as are initially issuable pursuant to this Agreement.
- 7 -
<PAGE> 9
9. FRACTIONAL INTERESTS. The Company shall not be required to issue
fractions of Shares on the exercise of Warrants. If more than one Warrant is
presented for exercise in full at the same time by the same Holder, the number
of Shares issuable upon the exercise thereof shall be computed on the basis of
the aggregate number of Shares issuable on exercise of the Warrants so
presented. If any fraction of a Share would, except for the provisions of this
Section 9, be issuable on the exercise of any Warrants (or specified portions
thereof), the Company shall purchase such fraction for an amount in cash equal
to the same fraction of the current Market Price per share of Common Shares
(determined as provided in Section 8(d) of this Agreement) on the date of
exercise.
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<PAGE> 10
10. REGISTRATION RIGHTS.
(a) DEMAND REGISTRATION RIGHTS.
(i) The Company covenants and agrees with the Representative and
any other or subsequent Holders of the Registrable Securities (as
defined in paragraph (f) of this Section 10) that, upon the written
request of the then Holder(s) of Warrants, Registrable Securities, or
both, representing at least a majority of the Common Shares underlying
the Warrants originally issued to the Representative or its designees,
made at any time within the period commencing one (1) year and ending
five (5) years after the Effective Date, the Company will file as
promptly as practicable and, in any event, within 60 days after
receipt of such written request, at its expense (other than (x) all
underwriters', broker-dealers', placement agents' and similar selling
discounts, commissions and fees relating to the sale of the Holder's
Registrable Shares, (y) any costs and expenses of counsel, accountants
or other advisors retained by the Holder and (z) all transfer,
franchise, capital stock and other taxes, if any, applicable to the
Holder's Registrable Shares (collectively, "Holders' Expenses"), all
of which shall be paid by the Holder), no more than once (except as
otherwise provided below), a post-effective amendment (the
"Amendment") to the Company's Registration Statement on Form S-1,
Registration No. 333-25275 as filed with the Securities and Exchange
Commission on May 30, 1997, or a new registration statement on an
appropriate form under the Act, registering or qualifying the
Registrable Securities for sale in accordance with the intended method
of sale or other disposition described in such request. Within
fifteen (15) days after receiving any such notice, the Company shall
give notice to the other Holders of the outstanding Warrants or
Registrable Securities advising that the Company is proceeding with
such Amendment or registration statement and offering to include the
Registrable Securities of such Holders. The Company shall not be
obligated to any other such Holder unless that other Holder accepts
such offer by notice in writing to the Company within twenty (20) days
thereafter. The Company will use its best efforts, through its
officers, directors, auditors and counsel in all matters necessary or
advisable, to file and cause such Amendment or registration statement
to become effective as promptly as practicable (but in any event
within 90 days of the initial filing of such Amendment or registration
statement) and for a period of 12 months thereafter to reflect in the
Amendment or registration statement financial statements which are
prepared in accordance with Section 10(a)(3) of the Act and any facts
or events arising that, individually, or in the aggregate, represent a
fundamental or material change in the information set forth in the
Amendment or registration statement to enable Holders of the
Registrable Securities registered to sell such Registrable Securities.
The Holders may sell the Registrable Securities pursuant to the
Amendment or registration statement without exercising the Warrants.
If any registration pursuant to this paragraph (a) is an underwritten
offering, the Holders of a majority of the Registrable Securities to
be included in
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<PAGE> 11
such registration shall be entitled to select the underwriter or
managing underwriter (in the case of a syndicated offering) of such
offering.
(ii) Anything in this Section 10(a) to the contrary
notwithstanding, if the Company's securities proposed to be registered
for sale are to be distributed in an underwritten offering and the
managing underwriter shall advise the Company in writing that, in its
opinion, the amount of securities to be offered should be limited in
order to assure a successful offering, the amount of Registrable
Shares to be included in such Amendment or registration statement
shall be so limited and shall be allocated among the persons selling
such securities in the following order of priority: (x) first to be
registered will be the securities subject to any demand or piggyback
registration rights granted by the Company before the Effective Date,
(y) next to be registered will be the Registrable Shares in
proportion, as nearly as practicable, to the number of Registrable
Shares desired and eligible to be sold by each Holder of such
Registrable Shares and (z) next to be registered will be any other
Common Shares subject to similar demand or piggyback registration
rights granted by the Company in proportion, as nearly as practicable,
to the number of Common Shares desired and eligible to be sold by each
holder of such Common Shares. In the event that, (x) pursuant to the
preceding sentence, the managing underwriter limits the number of
Registrable Shares that the Holders desire to have registered, and (y)
the Company does not thereafter effect a registration to include the
Registrable Shares that the Holders were not then permitted to sell
within 180 days after the effective date of the Amendment or
registration statement from which the Holders have been excluded,
then, at any time after such 180-day period until the period ending
five years after the Effective Date, the Holders of a majority of such
Registrable Securities not so included may make a request to the
Company for registration under the Act of all or part of such
Registrable Securities not so included in accordance with Section
10(a)(ii).
(iii) Notwithstanding anything in this Section 10(a) to the
contrary, the Company will not be required to file an Amendment or
registration statement (i) at a time when the audited financial
statements required to be included therein are not available, which
time shall be limited to the period commencing 135 days after the end
of the Company's third quarter and ending 90 days after the end of
such fiscal year, or (ii) for the period beginning with the filing of
a registration statement under the Act with respect to a public
offering by the Company of its securities and ending 180 days after
the closing of such public offering, or (iii) if in the reasonable
opinion of the Company it would adversely impact the Company in its
capital raising plans or otherwise (in which latter case filing may be
delayed for up to 135 days).
(b) PIGGYBACK REGISTRATION RIGHTS. The Company covenants and agrees
with the Representative and any other Holders or subsequent Holders of the
Registrable Securities that if, at any time within the period commencing one (1)
year and ending five (5)
- 10 -
<PAGE> 12
years after the Effective Date, it proposes to file a new registration statement
with respect to the public sale of Common Shares for cash (other than in
connection with an offering to the Company's employees, an acquisition, merger
or similar transaction, an employee benefit plan, an exchange offer or a
dividend reinvestment plan) under the Act in a primary registration on behalf of
the Company and/or in a secondary registration on behalf of holders of such
securities and the registration form to be used may be used for registration of
the Registrable Securities, the Company will give written notice at least 30
days prior to such filing to the Holders of Warrants or Registrable Securities
(regardless whether some of the Holders have theretofore availed themselves of
the right provided in Section 10(a) of this Agreement) at the addresses
appearing on the records of the Company of its intention to file a registration
statement and will offer to use its reasonable efforts to include in such
registration statement any of the Registrable Securities, subject to paragraphs
(i) and (ii) of this paragraph (b), such number of Registrable Securities with
respect to which the Company has received written requests for inclusion therein
within twenty (20) days after the giving of notice by the Company. All
registrations requested pursuant to this paragraph (b) are referred to herein as
"Piggyback Registrations". All Piggyback Registrations pursuant to this
paragraph (b) will be made solely at the Company expense, except for the
Holders' Expenses, which shall be paid by the Holder. If the securities or blue
sky laws of any jurisdiction in which the securities so registered are proposed
to be offered would require the Holder's payment of greater registration
expenses than those otherwise required by this Section 10 and if the Company
shall determine, in good faith, that the offering of such securities in such
jurisdiction is necessary for the successful consummation of the registered
offering, then the Holder shall either agree to pay the portion of the
registration expenses required by the securities or blue sky laws of such
jurisdiction to be paid by the Holder or withdraw his request for inclusion of
his Registrable Shares in such registration.
(i) PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback
Registration is part of an underwritten primary registration for the
Company, and the managing underwriter(s) for such offering advise(s)
the Company in writing that, in its opinion, the amount of securities
to be offered should be limited in order to assure a successful
offering, the amount of Registrable Shares to be included in such
registration statement shall be so limited and shall be allocated
among the persons selling such securities in the following order of
priority: (w) first to be registered will be the securities the
Company proposes to sell, (x) next to be registered will be the
securities subject to any demand or other piggyback registration
rights granted by the Company before the Effective Date, (y) next to
be registered will be the Registrable Shares in proportion, as nearly
as practicable, to the number of Registrable Shares desired and
eligible to be sold by each Holder of such Registrable Shares and (z)
next to be registered will be any other Common Shares subject to
similar demand or piggyback registration rights granted by the
- 11 -
<PAGE> 13
Company in proportion, as nearly as practicable, to the number of
Common Shares desired and eligible to be sold by each holder of such
Common Shares.
(ii) PRIORITY ON SECONDARY REGISTRATIONS. If a Piggyback
Registration is part of an underwritten secondary registration for
holders of securities of the Company (other than pursuant to Section
10(a)) and not a primary registration for the Company, and the
managing underwriter(s) for such offering advise(s) the Company in
writing that, in its opinion, the amount of securities to be offered
should be limited in order to assure a successful offering, the amount
of Registrable Shares to be included in such registration statement
shall be so limited and shall be allocated among the persons selling
such securities in the following order of priority: (x) first to be
registered will be the securities subject to any demand or other
piggyback registration rights granted by the Company before the
Effective Date, (y) next to be registered will be the Registrable
Shares in proportion, as nearly as practicable, to the number of
Registrable Shares desired and eligible to be sold by each Holder of
such Registrable Shares and (z) next to be registered will be any
other Common Shares subject to similar demand or piggyback
registration rights granted by the Company in proportion, as nearly as
practicable, to the number of Common Shares desired and eligible to be
sold by each holder of such Common Shares.
Notwithstanding the provisions of this Section 10(b), the Company shall
have the right at any time and for any reason or for no reason after it shall
have given written notice pursuant to this Section 10(b) (irrespective of
whether a written request for inclusion of any such securities has been made) to
elect not to file any such proposed registration statement, or to withdraw the
same after the filing but before the effective date thereof and, thereupon,
shall be relieved from its obligation to proceed with such registration. If any
registration pursuant to this paragraph (b) is an underwritten offering, the
Company shall be entitled to select the underwriter or managing underwriter(s)
(in the case of a syndicated offering) of such offering.
- 12 -
<PAGE> 14
(c) OTHER REGISTRATION RIGHTS. In addition to the rights above
provided, during the period commencing one (1) year and ending five (5) years
after the Effective Date, the Company will cooperate with the then Holders of
the Registrable Securities in preparing and signing one (but not more than one)
registration statement, in addition to the registration statements discussed
above, required in order to sell or transfer the Registrable Securities and will
supply all information required therefor, but the then Holders shall pay the
costs and expenses of such additional registration (including all of the
Company's reasonable out-of-pocket costs and expenses); provided, however, that
if the Company elects to register or qualify additional Common Shares, the cost
and expense of such registration statement will be pro rated between the Company
and the Holders of the Registrable Securities according to the aggregate sales
price of the securities being issued. However, the Company will not be required
to file a registration statement pursuant to this paragraph (c) (i) at a time
when the audited financial statements required to be included therein are not
available, which time shall be limited to the period commencing 135 days after
the end of the Company's third quarter and ending 90 days after the end of such
fiscal year, or (ii) for the period beginning with the filing of a registration
statement under the Act with respect to a public offering by the Company of its
securities and ending 180 days after the closing of such public offering, or
(iii) if in the reasonable opinion of the Company it would adversely impact the
Company in its capital raising plans or otherwise (in which latter case filing
may be delayed for up to 135 days).
(d) ACTION TO BE TAKEN BY THE COMPANY. In connection with the
registration of Registrable Securities in accordance with paragraphs (a), (b) or
(c) of this Section 10, the Company agrees to:
(i) Bear the expenses of any registration or qualification under
paragraphs (a) or (b) of this Section 10, including, but not limited
to, legal, accounting and printing fees; provided, however, that in no
event shall the Company be obligated to pay any of the Holders'
Expenses, which shall be paid by the Holders; and
(ii) Use its reasonable efforts to register or qualify the
Registrable Securities included in an Amendment or registration
statement for offer or sale under state securities or Blue Sky laws of
such jurisdictions in which the Underwriters or such Holders shall
reasonably request and do all other acts or things necessary or
advisable to effect the registration or qualification of the
Registrable Securities covered by such Amendment or registration
statement in the various states; provided, however, that no
registration or qualification shall be required in any jurisdiction
where, as a result thereof, the Company would be subject to service of
general process, to taxation as a foreign corporation doing
- 13 -
<PAGE> 15
business in such jurisdiction, to any requirement that it qualify
generally to do business as a foreign corporation in such
jurisdiction, or to any requirement that it agree to restrictions on
future actions by the Company to which it is not then subject.
(e) ACTION TO BE TAKEN BY THE HOLDERS. Any written request to exercise
registration rights pursuant to paragraphs (a) or (b) of this Section 10 shall
contain, as applicable, (i) a description of the proposed plan of distribution
of the Registrable Securities, including the name of any underwriters, the
amounts underwritten and any material relationship between any proposed
underwriter and the Company, (ii) the full name of the Holder, the number of
Warrants, Registrable Securities and other securities of the Company owned by
such Holder and the number proposed to be registered and (iii) a description of
any position, office, or other material relationship which the Holder has had
within the past three years with the Company or any of its predecessors or
affiliates.
In addition, in connection with the registration of Registrable Securities
in accordance with paragraphs (a), (b) or (c) of this Section 10, the Company's
obligation shall be conditioned as to each such public offering upon a timely
receipt by the Company in writing of:
(i) Information as to participating Holders (to the extent
required by the Rules and Regulations) and the terms of such public
offering furnished by or on behalf of each Holder intending to make a
public offering of such Holder's Registrable Securities;
(ii) Such other information as the Company may reasonably require
from such Holders, or any underwriter for any of them, for inclusion
in such Registration Statement; and
(iii) All documents reasonably requested by any underwriter in
connection with the offering and any other documents customary in
similar offerings, signed and delivered by such Holder, including,
without limitation, underwriting agreements, custody agreements,
powers of attorney, indemnification agreements, and agreements
restricting other sales of securities.
(f) For purposes of this Section 10, (i) the term "Holder" shall
include holders of Registrable Shares received upon exercise of Warrants, and
(ii) the term "Registrable Securities" shall mean the Shares, if issued, until
five years after the Effective Date.
(g) The Holders agree that, upon receipt of any notice from the
Company of the happening of any of the following: (i) the issuance by the
Securities and Exchange Commission of any stop order denying or suspending the
effectiveness of any Amendment or registration statement covering Registrable
Shares or the initiation or threatening of any
- 14 -
<PAGE> 16
proceeding for that purpose, (ii) the Company's receipt of any stop order
denying registration or suspending the qualification of the Registrable
Securities for sale or the initiation or threatening of any proceeding for such
purpose or (iii) the happening of any event that makes any statement made in
such Amendment or registration statement, the related prospectus or any document
incorporated by reference therein untrue or that requires any change in such
Amendment or registration statement, prospectus or document incorporated by
reference therein to make the statements not include an untrue statement of
material fact or not omit any material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances then existing, the Holders shall discontinue the disposition of
Registrable Securities until the Holders receive a supplemental or amended
prospectus from the Company or until the Company advises such Holders in writing
that the Holders may resume the use of such prospectus, and have received copies
of any additional or supplemental filings which are incorporated by reference in
the prospectus. If the Company so directs, such Holders will deliver to the
Company (at the Company's expense) all copies, other than permanent file copies
then in the Holders' possession, of the prospectus covering the Registrable
Securities at the time the Holders received the notice. Upon the occurrence of
such event, the Company shall immediately take such action as may be necessary
to resume sale of the Registrable Securities and the use of such prospectus, by
amendment or otherwise.
11. NOTICES TO HOLDERS.
(a) Nothing in this Agreement or in any Warrants shall be construed as
conferring upon the Holders the right to vote or to receive dividends or to
consent or to receive notice as shareholders in respect of the meetings of
shareholders or the election of directors of the Company or any other matter, or
any rights whatsoever as shareholders of the Company prior to the exercise
hereof and such Holder becoming a holder of record of Shares; provided, however,
that in the event that any meeting of shareholders shall be called, the Company
shall cause a notice thereof to be sent by first-class mail, postage prepaid, at
least twenty (20) days prior to the date fixed as a record date or the date of
closing the transfer books in relation to such meeting, to each registered
Holder of Warrants at such Holder's address appearing on the Warrant Register.
(b) If the Company intends to make any distribution on its Common
Shares (or other securities which may be issuable in lieu thereof upon the
exercise of Warrants), including, without limitation, any such distribution to
be made in connection with a consolidation or merger in which the Company is the
surviving entity, or to issue subscription rights or warrants to holders of its
Common Shares, the Company shall cause a notice of its intention to make such
distribution to be sent by first-class mail, postage prepaid, at least twenty
(20) days prior to the date fixed as a record date or the date of closing the
transfer books in relation to such distribution, to each registered Holder of
Warrants at such Holder's address appearing on the Warrant Register, but failure
to mail or to receive such notice or any defect therein or in the mailing
thereof shall not affect the validity of any action taken in connection with
such distribution.
- 15 -
<PAGE> 17
12. NOTICES. Any notice pursuant to this Agreement to be given by the
Holder of any Warrant or the holder of any Share to the Company shall be
sufficiently given or made three business days after sent by first-class mail,
postage prepaid, addressed as follows or to such other address as the Company
may designate by notice given in-accordance with this Section 12, to the Holders
of Warrants or the holders of Shares:
Somanetics Corporation
1653 East Maple Road
Troy, Michigan 48083-4208
Attn.: President
Notices or demands authorized by this Agreement to be given or made by the
Company to or on the Holder of any Warrant or the holder of any Share shall be
sufficiently given or made (except as otherwise provided in this Agreement) if
sent by first-class mail, postage prepaid, addressed to such Holder or such
holder of Shares at the address of such Holder or such holder of Shares as shown
on the Warrant Register or the books of the Company, as the case may be.
13. GOVERNING LAW. This Agreement and each Warrant issued hereunder shall
be governed by and construed in accordance with the substantive laws of the
State of New York. The Company hereby agrees to accept service of process by
notice given to it pursuant to the provisions of Section 12 hereof.
14. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original; but
such counterparts together shall constitute one and the same instrument.
- 16 -
<PAGE> 18
IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly
executed as of the day, month and year first above written.
SOMANETICS CORPORATION
By:
-----------------------------
Its:
-------------------------
BREAN MURRAY & CO., INC.
By:
-----------------------------
Its:
-------------------------
- 17 -
<PAGE> 19
SCHEDULE I
NAME OF NUMBER OF
INITIAL HOLDER WARRANTS
- -------------- --------
Brean Murray & Co., Inc. 200,000
Total 200,000
<PAGE> 20
EXHIBIT A
No. _______
NEITHER THIS WARRANT NOR THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS
WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR UNDER THE SECURITIES OR BLUE SKY LAWS OF ANY STATE OR OTHER
JURISDICTION. THIS WARRANT MAY NOT BE EXERCISED, AND THIS WARRANT AND THE
COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE RESOLD OR
OTHERWISE TRANSFERRED, UNLESS THEY ARE REGISTERED UNDER APPLICABLE STATE AND
FEDERAL SECURITIES LAWS OR UNLESS EXEMPTIONS FROM ALL SUCH REGISTRATION
REQUIREMENTS ARE AVAILABLE.
VOID AFTER 5:00 P.M. NEW YORK CITY TIME
ON MAY 29, 2002
SOMANETICS CORPORATION
Warrant Certificate
THIS CERTIFIES THAT for value received ______________, or registered
assigns, is the owner of the number of Warrants set forth above, each of which
entitles the owner thereof to purchase at any time from May 30, 1998, until
5:00 p.m., New York City time on May 29, 2002 (the "Warrant Expiration
Date"), one fully paid and nonassessable Common Share, $0.01 par value per
share (a "Common Share"), of SOMANETICS CORPORATION, a Michigan corporation
(the "Company"), at the purchase price of $4.80 per Common Share (as
adjusted from time to pursuant to the Warrant Agreement referenced below, the
"Exercise Price") upon presentation and surrender of this Warrant Certificate
with the Form of Election to Purchase duly executed. The number of Warrants
evidenced by this Warrant Certificate (and the number of Common Shares which
may be purchased upon exercise hereof) set forth above, and the Exercise Price
per Common Share set forth above, are the number and Exercise Price as of the
date of original issuance of the Warrants, based on the Common Shares of the
Company as constituted at such date. As provided in the Warrant Agreement
referred to below, the Exercise Price and the number or kind of shares which
may be purchased upon the exercise of the Warrants evidenced by this Warrant
Certificate are, upon the happening of certain events, subject to modification
and adjustment. The Common Shares, as so modified and adjusted, are herein
referred to as the "Shares".
- 1 -
<PAGE> 21
This Warrant Certificate is subject to, and entitled to the benefits of,
all of the terms, provisions and conditions of an agreement dated as of June
[4], 1997 (the "Warrant Agreement") between the Company and Brean Murray &
Co., Inc., which Warrant Agreement is hereby incorporated herein by reference
and made a part hereof and to which Warrant Agreement reference is hereby made
for a full description of the rights, limitations of rights, duties and
immunities hereunder of the Company and the holders of the Warrant
Certificates. Copies of the Warrant Agreement are on file at the principal
office of the Company.
This Warrant Certificate, with or without other Warrant Certificates, upon
surrender at the principal office of the Company, may be exchanged for another
Warrant Certificate or Warrant Certificates of like tenor and date evidencing
Warrants entitling the holder to purchase a like aggregate number of Common
Shares as the Warrants evidenced by the Warrant Certificate or Warrant
Certificates surrendered entitled such holder to purchase. If this Warrant
Certificate shall be exercised in part, the holder hereof shall be entitled to
receive upon surrender hereof another Warrant Certificate or Warrant
Certificates for the number of whole Warrants not exercised.
No fractional Common Shares will be issued upon the exercise of any
Warrant or Warrants evidenced hereby, but in lieu thereof a cash payment will
be made, as provided in the Warrant Agreement.
No holder of this Warrant Certificate will be entitled to vote, receive
dividends, subscription rights or be deemed the holder of the Shares of the
Company which may at any time be issuable on the exercise hereof for any
purpose, nor shall anything contained in the Warrant Agreement or herein be
construed to confer upon the holder hereof, as such, any of the rights of a
shareholder of the Company or any right to vote for the election of directors
or upon any matter submitted to shareholders at any meeting thereof, or to give
or withhold consent to any corporate action (whether upon any recapitalization,
issue of stock, reclassification of stock, change of par value or change of
stock to no par value, consolidation, merger, conveyance, or otherwise) or,
except as provided in the Warrant Agreement, to receive notice of meetings,
until the Warrant or Warrants evidenced by this Warrant Certificate shall have
been exercised and such holder shall have become a holder of record of the
Shares as provided in the Warrant Agreement.
If this Warrant shall be surrendered for exercise within any period during
which the transfer books for the Shares purchasable upon the exercise of this
Warrant are closed for any purpose, the Company shall not be required to make
delivery of certificates for Shares purchasable upon such exercise until the
date of the reopening of said transfer books, provided, however, that such
books shall not be closed for longer than a 20-day period.
- 2 -
<PAGE> 22
IN WITNESS WHEREOF, SOMANETICS CORPORATION has caused the signature (or
facsimile signature) of its President and its Secretary to be printed hereon.
Dated June [4], 1997
SOMANETICS CORPORATION
By:
-----------------------------
Its: President
------------------------
Attest:
- ------------------------------
Raymond W. Gunn, Secretary
- 3 -
<PAGE> 23
FORM OF
ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
Warrant Certificates.)
FOR VALUE RECEIVED ________________________________ hereby sells, assigns
and transfers unto ________________________________ this Warrant Certificate,
together with all right, title and interest therein, and does hereby
irrevocably constitute and appoint __________________________, to transfer the
within Warrant Certificate on the books of the within-named Company, with full
power of substitution.
Dated: _________________________
__________________________________
Signature
Signature Guaranteed:
NOTICE
The signature on the foregoing Assignment must correspond to the name as
written upon the face of this Warrant Certificate in every particular, without
alteration or enlargement or any change whatsoever.
- 4 -
<PAGE> 24
FORM OF
ELECTION TO PURCHASE
(To be executed if holder desires to exercise the Warrants)
TO: SOMANETICS CORPORATION
The undersigned hereby irrevocably elects to exercise Warrants represented
by this Warrant Certificate to purchase __________ Common Shares issuable upon
the exercise of such Warrants and requests that certificates for such Common
Shares be issued in the name of:
Please insert social security, tax identification or other identifying number
- ------------------------
- ------------------------
- ------------------------
If such number of Warrants is not all the Warrants evidenced by this Warrant
Certificate, a new Warrant Certificate for the balance remaining of such
Warrants shall be registered in the name of and delivered to:
Please insert social security, tax identification or other identifying number
-------------------------------
-------------------------------
-------------------------------
(Please print name and address)
Dated:
-----------------------
----------------------------
Signature
(Signature must conform in all respects to
name of holder as specified on the face of
this Warrant Certificate)
Signature Guaranteed:
-5-
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
We consent to the use in this Amendment No. 1 to Registration Statement
(no. 333-25275) relating to 2,300,000 Common Shares of Somanetics Corporation on
Form S-1 of our report dated January 24, 1997 (April 10, 1997 as to paragraph 1
of Note 11) (which includes an explanatory paragraph relating to an uncertainty
concerning the Company's ability to continue as a going concern), appearing in
the Prospectus, which is a part of this Registration Statement, and to the
references to us under the headings "Selected Financial Data" and "Experts" in
such Prospectus.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of Somanetics Corporation
listed in Item 16(b). This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Detroit, Michigan
May 30, 1997
