<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 1998.
REGISTRATION NO. 333-______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
SOMANETICS CORPORATION
(Exact name of registrant as specified in its charter)
<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
(248) 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
(248) 689-3050
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------------------
COPIES TO:
<TABLE>
<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 48226-3583 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, 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 this Form is a post-effective amendment filed pursuant to Rule
462(d) 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
<TABLE>
<CAPTION>
===================================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER PRICE (1) REGISTRATION FEE
SHARE (1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares, par value $.01 per share 2,000,000 $6.31 $12,625,000 $3,724.38
===================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee,
based on a bona fide estimate of the maximum public offering price
pursuant to Rule 457(a), based on the closing sale price of the Common
Shares on February 27, 1998.
----------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
SUBJECT TO COMPLETION, DATED MARCH 3, 1998
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"). See "Plan of Distribution."
Since December 27, 1994, the Company's Common Shares have been
included in The Nasdaq SmallCap Market under the symbol "SMTS." On February
27, 1998, the last reported sales price of the Company's Common Shares was
$6.31.
-----------------------
THESE ARE SPECULATIVE SECURITIES. THE SHARES OFFERED HEREBY INVOLVE A
HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7 HEREOF.
-----------------------
THESE SECURITIES WILL BE OFFERED ON A BEST EFFORTS BASIS BY BREAN
MURRAY & CO., INC. (THE "PLACEMENT AGENT"). THE OFFERING WILL TERMINATE ON
APRIL 30, 1998, IF NOT COMPLETED EARLIER OR EXTENDED BY THE COMPANY. THERE IS
NO MINIMUM REQUIRED PURCHASE. BEFORE THE CLOSING DATE, ALL INVESTOR FUNDS WILL
BE PLACED IN ESCROW WITH CITIBANK, N.A., AS ESCROW AGENT, NO LATER THAN 12:00
NOON ON THE BUSINESS DAY FOLLOWING RECEIPT THEREOF.
-----------------------
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.
<TABLE>
<CAPTION>
==========================================================================================================
PRICE TO COMMISSIONS PROCEEDS
PUBLIC AND FEES (1) TO COMPANY (2)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share . . . . . . . . . . . . . . $ $ $
Total . . . . . . . . . . . . . . . . $ $ $
==========================================================================================================
</TABLE>
(1) The Common Shares are being offered, on an all or none basis, by the
Company. The Placement Agent has been retained to act, on a best
efforts basis, as agent for the Company in connection with the
arrangement of this transaction. The Company has agreed to pay the
Placement Agent a fee in connection with the arrangement of this
financing, to reimburse the Placement Agent for certain of its
expenses and to indemnify the Placement Agent against certain
liabilities, including liabilities under the Securities Act of 1933,
as amended. See "Plan of Distribution."
(2) Before deducting expenses of the offering payable by the Company
estimated to be $250,000.
-----------------------
BREAN MURRAY & CO., INC.
-----------------------
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE> 3
[RED HERRING LEGEND]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE> 4
WINDOW TO THE BRAIN
<TABLE>
<S> <C>
[Picture of the new model 4100 Cerebral Oximeter] "THIS PROVIDES AN EARLY WARNING
SYSTEM OF CHANGES IN BRAIN
OXYGENATION, SO WE CAN TAKE
ACTION TO PROTECT THE PATIENT WHILE
OXYGEN LEVELS ARE STILL ADEQUATE."
Martin Noveck, M.D.
Anesthesiologist
St. Joseph Mercy
Hospital Oakland
Pontiac, MI
Surgeons, anesthesiologists and other critical
care medical professionals use the information
provided by the Cerebral Oximeter as a "window
to the brain" to identify brain oxygen imbalances
and take corrective action.
[Picture of two SomaSensors on patient]
BENEFITS OF THE
CEREBRAL OXIMETER
- Non-invasive
- Continuous information The model 4100 Cerebral Oximeter is the only
- Organ specific FDA-cleared, non-invasive patient monitoring
- Bi-lateral monitoring system that provides continuous information
- Easy-to-use about changes in the blood oxygen level in both
- Relatively inexpensive sides of the adult brain. It uses a single-use,
- Effective in difficult circumstances non-invasive, disposable SomaSensor that can be
- Portable adhered to both sides of the patient's forehead
to offer simultaneous bi-lateral monitoring.
Users of the Cerebral Oximeter will be required
to purchase SomaSensors on a regular basis.
[Picture of Cerebral Oximeter being used during
carotid endarterectomy surgery] "WE HAVE HAD EXCELLENT RESULTS
WITH THE CEREBRAL OXIMETER . . . YOU
WOULD WANT THIS FOR YOURSELF OR
YOUR FAMILY."
Christ Stoyanovich, D.O.
Chairman
Anesthesia Department
Bi-County Hospital,
Warren, MI
The Cerebral Oximeter is being used during a
carotid endarterectomy surgery at Bi-
County Hospital in Warren, MI.
</TABLE>
2
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
CERTAIN TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
_________________________
No dealer, sales representative or any other person has been
authorized to give any information or to make any representations in connection
with this offering other than those contained in this Prospectus, and, if given
or made, such information or representations must not be relied upon as having
been authorized by the Company or the Placement Agent. 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> 6
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 gives
effect to a 1-for-10 reverse split effected April 10, 1997.
THE COMPANY
Somanetics develops, manufactures and markets the INVOS(R) 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 targets 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. 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. An independent
industry report estimates that there are approximately 62,000 operating rooms
worldwide performing approximately 48 million surgeries involving general
anesthesia every year.
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) dual single-use, disposable
sensors, the SomaSensors(R), (iii) proprietary software and (iv) a preamplifier
cable. SomaSensors can be adhered to both sides of a patient's forehead to
offer bi-lateral monitoring and are 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.
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 its technology to medical
device manufacturers. In addition, the Company is analyzing the feasibility of
other applications of its technology.
4
<PAGE> 7
The Company sells the Cerebral Oximeter in the United States through
its direct sales force and seven independent distributors. Internationally,
the Company sells its product through 26 independent distributors covering 70
countries, including Baxter Limited in Japan. From the commencement of
commercial shipments of the new model 4100 Cerebral Oximeter in January 1998
through February 28, 1998, the Company has sold 88 Cerebral Oximeters to
distributors and customers. More than 200 United States hospitals currently
use the Cerebral Oximeter, including the Mayo Clinic Scottsdale, UCLA Medical
Center, Orlando Regional Medical Center, the Duke Heart Center, University of
Louisville Hospital, the University of Pittsburgh Medical Center, the
University of Florida-Shands Hospital, the University of Alabama at Birmingham
Hospital, the State University of New York (SUNY) Health Center and Johns
Hopkins Medical Center.
The 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 (248) 689-3050.
THE OFFERING
<TABLE>
<S> <C>
Common Shares Offered by the Company . . . . . . . . 2,000,000 shares
Common Shares Outstanding After the Offering (1) . . 6,285,334 shares
Use of Proceeds . . . . . . . . . . . . . . . . . . . To finance the Company's operations, including
marketing and sales activities, research and development
programs and for other general corporate purposes, including
working capital. See "Use of Proceeds."
Nasdaq Symbol . . . . . . . . . . . . . . . . . . . . "SMTS"
</TABLE>
(1) Excludes (i) an aggregate of up to 1,043,872 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 568,495 Common Shares were outstanding as of February
28, 1998, (ii) 79,394 Common Shares issuable upon the exercise of
warrants (the "Regulation S 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 warrants issued to the underwriter in connection with
the Company's public offering of Common Shares which closed in June
1997 (the "Representative's Warrants"). See Notes 3 and 8 of Notes to
Financial Statements.
5
<PAGE> 8
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues . . . . . . . . . . . . . . . . . . $1,212 $778 $1,336 $938 $1,547
Cost of sales . . . . . . . . . . . . . . . . . . 632 385 658 464 763
Gross margin . . . . . . . . . . . . . . . . . . 580 393 678 474 784
Research, development and engineering expenses. . 736 235 286 550 1,150
Selling, general and administrative expenses. . . 6,238 3,550 3,303 4,347 6,063
Net loss . . . . . . . . . . . . . . . . . . . . $(6,155) $(3,304) $(2,818) $(4,332) $(6,136)
Net loss per Common Share (1) . . . . . . . . . . $(1.88) $(1.77) $(1.67) $(3.41) $(5.75)
Weighted average number of Common Shares
outstanding (1) . . . . . . . . . . . . . . . . 3,272 1,867 1,684 1,270 1,068
<CAPTION>
NOVEMBER 30, 1997
-----------------------------------------
ACTUAL AS ADJUSTED (2)
----------------- ----------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities . . . . . . . . . . . . . . . . . . . . . . . $4,603 $16,221
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,511 16,129
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,677 17,295
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (36,367) (36,367)
Shareholders' equity (3) . . . . . . . . . . . . . . . . . . . . . . . . . . 4,889 16,507
</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.
(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 commissions and fees payable to the
Placement Agent 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 of the Financial Statements
included in this Prospectus for an analysis of Common Share
transactions for the period from December 1, 1994 through November 30,
1997.
6
<PAGE> 9
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 incurred net losses in every year of its existence.
From its inception on January 15, 1982 through November 30, 1997, the Company
incurred an accumulated deficit of $36,366,536, including a net loss of
$6,155,483 for the year ended November 30, 1997. The Company should be
evaluated in light of the delays, expenses, problems and uncertainties
frequently encountered by companies developing markets for new products. 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 1998 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 1998. 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 includes an
explanatory paragraph referring to 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 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 in convincing physicians,
7
<PAGE> 10
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 1997 and 1996 were generally favorable, in 1996
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. 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 this
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. The
8
<PAGE> 11
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 into the year 2000.
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
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 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 1998. Competition for qualified
employees is intense, and an inability to attract, retain and motivate
additional, highly-skilled employees required for the expansion of the
Company's operations could adversely affect the Company's business, financial
condition and results of operations. The Company's ability to retain existing
employees and attract new employees may be adversely affected by its current
financial situation. There can be no assurance that the Company will be able
to retain its existing personnel or attract additional, qualified persons when
required and on acceptable terms. See "Business--Employees," and "Management."
DEPENDENCE ON DISTRIBUTORS
The Company is substantially dependent on its distributors to generate
sales of Cerebral Oximeters, especially internationally. Although the Company
believes its current distributors to be knowledgeable and has a training
program for new distributors concerning the Company's technology and its
product, independent distributors
9
<PAGE> 12
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 and one United States distributor
accounted for approximately 28%, 11% and 12%, respectively, of net revenues for
fiscal 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 thirteen United States patents have been issued to the
Company with respect to its technology, only eight 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, 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 this
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 developing or from using similar or related technology to compete against
the Company's product. There can be
10
<PAGE> 13
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 Rights 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 fear that the cost of a new device will lower its 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.
In October 1997, the Company obtained FDA clearance for advances in
its INVOS technology that are incorporated in its new model 4100 Cerebral
Oximeter. The Company has made additional changes to the model 3100A Cerebral
Oximeter that resulted in the model 4100 Cerebral Oximeter. The Company does
not believe that these changes affect the safety or efficacy of the Cerebral
Oximeter and, therefore, the Company believes that these changes do not require
the submission of a new 510(k) notice. There can be no assurance, however,
that the FDA would agree with the Company's determination not to submit a new
510(k) notice for the new model 4100 Cerebral Oximeter or that the FDA would
not require the Company to submit a new 510(k) notice for any changes made to
the device. If the FDA requires the Company to submit a new 510(k) notice for
its new model 4100 Cerebral
11
<PAGE> 14
Oximeter or for any device modification, the Company may be prohibited from
marketing the modified device until the 510(k) notice is cleared by the FDA.
See "Business--Government Regulation."
There can be no assurance that the Company's current FDA clearance to
market the Cerebral Oximeter in the United States will not be rescinded or
that, if and when any additional products are developed by the Company, they
will receive FDA clearance. If any current or future clearances or approvals
are rescinded or 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.
Congress recently enacted the FDA Modernization Act of 1997. This law
is intended to make the regulatory process more consistent and efficient. It
is too early to determine whether, or how, these new requirements will affect
the Company.
PRODUCTS LIABILITY
The testing, marketing and sale of patient monitoring devices entail
an inherent risk that products 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, products 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 products liability insurance with a liability limit of $2,000,000.
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 products 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."
12
<PAGE> 15
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING AND SUPPLY
The Company is dependent on various suppliers for manufacturing the
components for its Cerebral Oximeter and the related disposable SomaSensor.
The Company believes each component is generally available from several
potential suppliers. However, engaging additional or replacing existing
suppliers of custom-designed components is costly and time consuming. The
Company does not intend to maintain significant inventories of components,
Cerebral Oximeters or SomaSensors. Therefore, the Company might incur delays in
meeting delivery deadlines in the event a particular supplier is unable or
unwilling to meet the Company's requirements. The Company would require
approximately three to four months to change SomaSensor suppliers. In
addition, the Company does not have direct control over the activities of its
suppliers and is dependent on them for quality control, capacity, processing
technologies and, in required cases, compliance with FDA GMP regulations. If
the Company cannot replace certain suppliers on a timely basis when necessary,
its business, financial condition and results of operations may be adversely
affected. In addition, because the Company does not have long-term agreements
with its suppliers, it may be subject to unexpected price increases which may
adversely affect its profit margins. See "Business--Manufacturing."
SUBSTANTIAL DILUTION
At November 30, 1997, the Company had a net tangible shareholders'
equity of $1.12 per share. A purchaser of Common Shares in this offering will
experience immediate and substantial dilution of $3.70 per share in that the
offering price exceeds the net tangible book value of the Company after giving
effect to the offering. To the extent outstanding options and warrants to
purchase Common Shares are exercised, there will be further dilution to new
investors. See "Dilution."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Shares may be highly volatile.
Quarterly operating results of the Company, changes in general conditions in
the economy, the financial markets, or the medical equipment industry, changes
in financial estimates by securities analysts or failure by the Company to meet
such estimates, litigation involving the Company, actions by governmental
agencies or other developments affecting the Company or its competitors, could
cause the market price of the Common Shares to fluctuate substantially. In
particular, the stock market may experience significant price and volume
fluctuations which may affect the market price of the Common Shares for reasons
that are unrelated to the Company's operating performance and that are beyond
the Company's control.
BROAD DISCRETION OF MANAGEMENT TO ALLOCATE NET PROCEEDS
The Company intends to use the net proceeds of this offering primarily
to finance its operations, including increased marketing and sales activities,
expanding research and development programs and for other general corporate
purposes, including working capital. The amounts identified for the foregoing
under "Use of Proceeds" in this Prospectus are estimates and the amounts
actually expended for each such purpose and the timing of such expenditures may
vary depending upon numerous factors. Management will retain broad discretion
to determine the allocation of the net proceeds of this offering and the timing
of expenditures.
FUTURE SALES OF COMMON SHARES; REGISTRATION RIGHTS; EXERCISE OF OPTIONS AND
WARRANTS
The number of the Company's outstanding Common Shares held by
non-affiliates is large relative to the trading volume of the Common Shares.
The Company is unable to predict the effect that sales of Common Shares may
have on the then prevailing market price of the Common Shares. Any substantial
sale of Common Shares or even the possibility of such sales occurring may have
an adverse effect on the market price of the Common Shares.
13
<PAGE> 16
As of February 28, 1998, the Company had outstanding options and
warrants to purchase an aggregate of 963,409 Common Shares. The Company has
also reserved up to an additional 475,377 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 Regulation S Agent Warrants have piggy-back registration rights
with respect to the underlying securities, and the holder of the
Representative's Warrants has 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 "Description of Capital Stock" and "Plan of
Distribution."
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."
14
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 Common
Shares offered hereby after deducting the Placement Agent's commissions and
fees and estimated offering expenses payable by the Company, are estimated to
be approximately $11,617,500, assuming a public offering price of $6.31 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 (3) . . . . . . . . . . . . . . . . . . 7,917,500
----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,617,500
===========
</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 SomaSensor and the development of
new products through its consulting arrangement with NeuroPhysics
Corporation.
(3) Includes working capital and other ongoing Selling, General and
Administrative expenses. See the Financial Statements as of, and for
the year ended, November 30, 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> 18
PRICE RANGE OF COMMON SHARES AND DIVIDEND POLICY
The Common Shares trade on The Nasdaq SmallCap Market under the
trading symbol "SMTS." 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, 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 Ended November 30, 1997
First Quarter . . . . . . . . . . . . . . . . . . $15.00 $5.63
Second Quarter . . . . . . . . . . . . . . . . . . 11.25 3.38
Third Quarter . . . . . . . . . . . . . . . . . . 4.19 3.13
Fourth Quarter . . . . . . . . . . . . . . . . . . 8.13 3.00
Fiscal Year Ending November 30, 1998
First Quarter $4.50 $6.50
</TABLE>
On February 27, 1998 the last reported sales price for the Common
Shares on The Nasdaq SmallCap Market was $6.31 per share. At February 28,
1998, the Company had 567 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> 19
CAPITALIZATION
The following table sets forth the actual capitalization of the
Company as of November 30, 1997 and as adjusted to give effect to the sale of
the 2,000,000 Common Shares offered by the Company hereby at an assumed public
offering price of $6.31 and the application of the estimated net proceeds of
$11,617,500 therefrom (after deducting the Placement Agent's commissions and
fees 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 NOVEMBER 30, 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, 20,000,000 shares of $.01 par value;
issued and outstanding, 4,285,334 shares at November 30,
1997 (6,285,334 shares, as adjusted) (1) . . . . . . . . $43 $63
Additional paid-in capital . . . . . . . . . . . . . . . . . 41,213 52,811
Accumulated deficit (2) . . . . . . . . . . . . . . . . . . (36,367) (36,367)
------- -------
Total shareholders' equity and total capitalization . . $ 4,889 $16,507
======= =======
</TABLE>
__________________________
(1) Excludes (i) an aggregate of up to 1,043,872 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 568,495 Common Shares were outstanding as of February
28, 1998, (ii) 79,394 Common Shares issuable upon the exercise of the
Regulation S 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
issued in connection with the Company's public offering of Common
Shares which closed in June 1997. See Notes 3 and 8 of Notes to
Financial Statements.
(2) Management believes the accumulated deficit increased during the first
quarter ended February 28, 1998 and will continue to increase in the
second quarter ending May 31, 1998, and there has been and will
continue to be a corresponding decrease in total capitalization.
17
<PAGE> 20
DILUTION
The net tangible book value of the Company as of November 30, 1997 was
$4,816,739, or $1.12 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 an assumed public
offering price of $6.31 per share, the net tangible book value of the Company
as of November 30, 1997 would have been $16,434,239, or $2.61 per share. This
represents an immediate increase in such net tangible book value of $1.49 per
share to existing shareholders and an immediate dilution of $3.70 per share to
new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share . . . . . . . . . . . . . . . . . $6.31
Net tangible book value per share at November 30, 1997 . . . . . . $1.12
Increase in net tangible book value per share attributable to new
investors . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.49
------
Net tangible book value per share after giving effect to this offering . . 2.61
-----
Dilution per share to new investors . . . . . . . . . . . . . . . . . . . $3.70
=====
</TABLE>
The foregoing assumes no exercise of options and warrants after
November 30, 1997. As of February 28, 1998, there were outstanding options and
warrants to purchase an aggregate of 963,409 Common Shares, and the Company had
also reserved up to an additional 475,377 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> 21
SELECTED FINANCIAL DATA
The following selected financial data as of November 30, 1997, 1996,
1995, 1994 and 1993, and for each of the years in the five-year period ended
November 30, 1997 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 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>
FISCAL YEAR ENDED NOVEMBER 30,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues (1) . . . . . . . . . . . . . . . . $ 1,212 $ 778 $ 1,336 $ 938 $ 1,547
Cost of sales . . . . . . . . . . . . . . . . . . 632 385 658 464 763
Gross margin . . . . . . . . . . . . . . . . . . 580 393 678 474 784
Research, development and engineering expenses. . 736 235 286 550 1,150
Selling, general and administrative expenses. . . 6,238 3,550 3,303 4,347 6,063
Net loss . . . . . . . . . . . . . . . . . . . . $(6,155) $(3,304) $(2,818) $(4,332) $(6,136)
Net loss per Common Share (2) . . . . . . . . . . $ (1.88) $ (1.77) $ (1.67) $ (3.41) $ (5.75)
Weighted average number of Common Shares
outstanding (2). . . . . . . . . . . . . . . . . 3,272 1,867 1,684 1,270 1,068
<CAPTION>
AT NOVEMBER 30,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities . . . . . . . $ 4,603 $ 3,292 $ 941 $ 2,405 $ 2,929
Working capital . . . . . . . . . . . . . . . 4,511 3,862 1,846 2,982 3,326
Total assets . . . . . . . . . . . . . . . . 5,677 4,672 2,861 4,327 5,142
Total liabilities . . . . . . . . . . . . . . 788 618 568 808 1,039
Long-term debt and redeemable Convertible
Preferred Shares . . . . . . . . . . . . -- -- 20 20 60
Accumulated deficit (4) . . . . . . . . . . . (36,367) (30,211) (26,907) (24,089) (19,757)
Shareholders' equity (3)(4) . . . . . . . . . 4,889 4,054 2,294 3,519 4,103
</TABLE>
__________________________________
(1) Net revenues recorded in fiscal years 1997, 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 loss of, and regaining, FDA clearance to
market the Cerebral Oximeter in the United States, see
"Business--Government Regulation," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity
and Capital Resources."
(2) See Note 4 of Notes to Financial Statements included in this
Prospectus for information with respect to the calculation of per
share data.
(3) See Statements of Shareholders' Equity of the Financial Statements
included in this Prospectus for an analysis of Common Share
transactions for the period from December 1, 1994 through November 30,
1997.
(4) Management believes the accumulated deficit increased during the first
quarter ended February 28, 1998 and will continue to increase in the
second quarter ending May 31, 1998, and there has been and will
continue to be a corresponding decrease in total capitalization.
19
<PAGE> 22
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
Somanetics develops, manufactures and markets the INVOS Cerebral
Oximeter, the only FDA-cleared, non-invasive patient monitoring system that
continuously measures changes in the blood oxygen level in the adult brain. In
1988, the Company began clinical studies of the Cerebral Oximeter on human
patients. In June 1992, the Company received 510(k) clearance from the FDA to
market the Cerebral Oximeter in the United States for use on adults. The
Company began commercial shipments of Cerebral Oximeters and SomaSensors in May
1993. In November 1993, the FDA rescinded the Company's clearance to market the
Cerebral Oximeter and the related disposable SomaSensor in the United States,
and the Company suspended all commercial sales. In February 1994, the Company
resumed marketing its product in several foreign countries, and in June 1996
the Company received clearance from the FDA to market the Cerebral Oximeter and
the related disposable SomaSensor in the United States. In October 1997, the
Company obtained FDA clearance for advances in its INVOS technology that are
incorporated in its new model 4100 Cerebral Oximeter. The new model 4100
Cerebral Oximeter was introduced in October 1997 and became available in the
first quarter of fiscal 1998.
During fiscal 1997, 1996 and 1995, the Company's primary activities
consisted of research and development of the INVOS technology, the Cerebral
Oximeter and the related disposable SomaSensor. The Company recently emerged
from the development stage and had an accumulated deficit of $36,366,536
through November 30, 1997. 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 in the United States 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 model 3100A Cerebral
Oximeters for its model 3100 Cerebral Oximeters. The Company refurbished the
model 3100 Cerebral Oximeters it received and sold them approximately at cost
in countries that do not require compliance with the standards met by the model
3100A. In the first quarter of 1998, the Company began offering to exchange
model 4100 Cerebral Oximeters for model 3100A Cerebral Oximeters and cash equal
to the difference in sales prices of the two models. Such sales reduce the
Company's overall gross margin.
FISCAL YEAR ENDED NOVEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED NOVEMBER 30,
1996
Net revenues increased approximately $434,000, or 56%, from $778,200
in the fiscal year ended November 30, 1996 to $1,211,784 in the fiscal year
ended November 30, 1997. The increase in revenues was primarily attributable
to an increase in United States sales for fiscal 1997 of approximately
$490,000, from approximately $33,000 in fiscal 1996 to approximately $523,000
in fiscal 1997. The sales increase was partially offset by a
20
<PAGE> 23
$56,000 decrease in international sales in fiscal 1997 compared to fiscal 1996,
primarily due to reduced shipments to Baxter Limited in Japan, which is
delaying purchases until shipment of the new model 4100 Cerebral Oximeter is
permitted in Japan, and a 21% decrease in the average selling price of Cerebral
Oximeters in fiscal 1997 compared to fiscal 1996 primarily as a result of lower
international prices for the Cerebral Oximeter, partially offset by increased
prices realized by the Company as a result in a change in the mix between sales
directly to hospitals and sales through distributors.
Approximately 57% of the Company's net revenues in fiscal 1997 were
export sales, as compared to approximately 96% in fiscal 1996. Sales of model
3100A Cerebral Oximeters, SomaSensors, and refurbished model 3100 Cerebral
Oximeters comprised approximately 60%, 30% and 10%, respectively, of the
Company's fiscal year 1997 net revenues, and 63%, 23% and 14%, respectively, of
the Company's fiscal year 1996 net revenues. Two international distributors
and one United States distributor accounted for approximately 28%, 11%, and
12%, respectively, of net revenues for fiscal year 1997, and two international
distributors accounted for approximately 62% and 15%, respectively, of net
revenues for fiscal year 1996.
Gross margin as a percentage of net revenues for the fiscal years
ended November 30, 1997 and 1996 were approximately 48% and 51%, respectively.
Gross margin as a percentage of net revenues decreased in fiscal 1997 from
fiscal 1996 primarily because the Company realized lower average selling prices
for model 3100A Cerebral Oximeters in fiscal 1997, the cost to the Company of
the SomaSensor was higher in fiscal 1997, and SomaSensors were a larger portion
of overall sales. This decrease was partially offset by the decrease in the
portion of net revenues attributable to refurbished model 3100 Cerebral
Oximeters in fiscal 1997.
The Company's research, development and engineering expenses increased
approximately $501,000, or 213%, from $235,354 for the fiscal year ended
November 30, 1996 to $736,427 for the fiscal year ended November 30, 1997. The
increase in fiscal 1997 is primarily attributable to increased costs of
development materials and consulting fees in connection with new product
development, principally the new model adult Cerebral Oximeter, increased
clinical testing and an increase in research, development, and engineering
personnel from two employees at November 30, 1996 to five employees at November
30, 1997.
Selling, general and administrative expenses increased approximately
$2,688,000, or 76%, from $3,549,939 for the fiscal year ended November 30, 1996
to $6,238,330 for the fiscal year ended November 30, 1997. The increase for
fiscal 1997 is primarily attributable to (i) a $1,539,000 increase in salaries,
wages, incentive compensation and related expenses as a result of the
additional personnel hired during fiscal 1997 (from 30 employees as of November
30, 1996, eight of which were hired during the fourth quarter of fiscal 1996,
to 40 employees as of November 30, 1997, most of whom were on the payroll for
the entire fiscal 1997), (ii) a $446,000 increase in selling-related expenses
primarily as a result of increased expenses for employee travel, medical
affairs, marketing, clinical research, and sales demonstration equipment use,
and industry trade shows and advertising, (iii) a $280,000 increase in
miscellaneous expense primarily related to inventory obsolescence reserves
recorded during the third and fourth quarters of fiscal 1997, (iv) a $152,000
increase in bad debt expense and (v) a $276,000 increase in other personnel and
office-related expenses, including temporary services, telephone, recruiting
and training, and office supplies.
FISCAL YEAR ENDED NOVEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED NOVEMBER 30,
1995
Net revenues 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 revenues 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 revenues 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 revenues, and 10%, 74% and 16%, respectively, of the Company's
fiscal year 1995 net revenues.
21
<PAGE> 24
Two international distributors accounted for approximately 62% and
15%, respectively, of net revenues for fiscal year 1996, and approximately 53%
and 13%, respectively, of net revenues 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 revenues for the fiscal years
ended November 30, 1996 and 1995 were approximately 51% and 51%, respectively.
Gross margin as a percentage of net revenues decreased in fiscal 1996 from
fiscal 1995 primarily because 14% of net revenues 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.
The Company's research, development and engineering expenses decreased
approximately $51,000, or 18%, from $285,893 for the fiscal year ended November
30, 1995 to $235,354 for the fiscal year ended November 30, 1996. The decrease
in fiscal 1996 is primarily attributable to an approximately $70,000 charge in
fiscal 1995 to engineering expenses for obsolete purchased parts inventory
relating to engineering design changes to the model 3100A Cerebral Oximeter,
partially offset by increased consulting fees in fiscal 1996 in connection with
new product development since the Company received 510(k) clearance for the
Cerebral Oximeter.
Selling, general and administrative expenses increased approximately
$247,000, or 7%, from $3,302,751 for the fiscal year ended November 30, 1995 to
$3,549,939 for the fiscal year ended November 30, 1996. The increase for
fiscal 1996 is primarily attributable to (i) a $217,000 increase in
selling-related expenses, primarily due to the costs of providing Cerebral
Oximeters for clinical research and to United States sales personnel and the
added cost of promotional equipment and materials in the United States,
partially offset by a decrease in travel and related expenses and two fewer
employees in sales and marketing for approximately seven months of the fiscal
year, (ii) one-time charges of $175,000 for write-downs of excess refurbished
model 3100 Cerebral Oximeters and obsolete inventory, (iii) an increase in
non-productive, 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.
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 1997 was approximately
$5,436,000. Cash was used primarily to fund the Company's net loss, including
selling, general and administrative expenses and research, development
22
<PAGE> 25
and engineering expenses (approximately $6,105,000, net of depreciation and
amortization expense). This primary use of cash was partially offset by a
decrease in net inventory (approximately $498,000) due to management's decision
to lower inventory levels of INVOS 3100A Cerebral Oximeters and its components
to prepare for the introduction of the new model 4100 Cerebral Oximeter and
increased inventory obsolescence recorded in the third and fourth quarters of
fiscal 1997 in anticipation of the new product launch, and an increase in
accrued liabilities (approximately $144,000) as of the end of fiscal 1997.
Accounts receivable increased only $262. Higher sales were substantially
offset by increased allowances for doubtful accounts. Accounts payable
increased $26,462. The Company used some of the proceeds of its public
offering of Common Shares, which closed on June 4, 1997, to pay previously
delayed balances due vendors; however, as of November 30, 1997 payables were
increasing due to inventory purchases related to the beginning of production of
the Company's new model 4100 Cerebral Oximeter. Capital expenditures in fiscal
1997 were approximately $244,000, primarily for tooling to manufacture the new
model 4100 Cerebral Oximeter.
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 of the Company's Financial Statements
included elsewhere in this Prospectus. On June 4, 1997, the Company closed the
public offering of 2,000,000 newly-issued Common Shares, at a price of $4.00
per share, for gross proceeds of $8,000,000, through an offering underwritten
by Brean Murray & Co., Inc. The net proceeds to the Company, after deducting
the underwriting discount and expenses of the offering, were approximately
$7,000,000.
As of November 30, 1997 the Company had working capital of $4,510,973,
cash, cash equivalents and marketable securities of $4,603,156, total current
liabilities of $788,476 and shareholders' equity of $4,888,956.
The Company expects that its primary needs for liquidity in fiscal
1998 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 1998; (c) further development and
testing of enhancements to the SomaSensor, 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 $370,000 for capital
expenditures during fiscal 1998, primarily for demonstration units of its new
model 4100 Cerebral Oximeter.
The Company believes that the cash, cash equivalents and marketable
securities on hand at November 30, 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 into the year 2000. 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 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, cash equivalents and
marketable securities 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 the SomaSensor, and product
extensions of the Cerebral Oximeter, to conduct research and development
concerning additional potential applications of the Company's technology and
for working capital will not be substantially greater than current estimates.
The Company does not believe that product sales will be sufficient to
fund the Company's operations in fiscal 1998. There can be no assurance that
the Company will be able to achieve the level of sales necessary to sustain its
operations. The report of the Company's Independent Auditors contains an
explanatory paragraph relating to the uncertainty concerning the Company's
ability to continue as a going concern. See "Independent Auditors Report"
accompanying the Financial Statements included elsewhere in this Prospectus.
23
<PAGE> 26
As of November 30, 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 February 28, 1998. In addition, the placement
agents and their transferees hold warrants to purchase 64,394 Common Shares
exercisable at $12.50 per share and 15,000 warrants exercisable at $14.40 per
share. Also, the underwriter of the 1997 public offering received warrants to
purchase 200,000 Common Shares exercisable at $4.80 per share. It is unlikely
that these warrants will be exercised if the exercise price exceeds the market
price of the Common Shares.
The Company has no loan commitments.
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.
YEAR 2000 COMPLIANCE
The Company does not expect the cost of converting its computer
systems to year 2000 compliance will be material to its financial condition or
results of operations. The Company believes that it will be able to achieve
year 2000 compliance by the end of 1999, and does not currently anticipate any
disruption in its operations as the result of any failure by the Company to be
in compliance. The Company does not currently have any information concerning
the year 2000 compliance status of its suppliers and customers.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("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 quarter ended February 28, 1998.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15, 1997.
This Statement establishes standards for reporting and display of comprehensive
income and its components in financial statements. The Statement is effective
for the Company's financial statements for the year ending November 30, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. This statement establishes
standards for the way a public business enterprise reports certain information
about operating segments, and discloses enterprise-wide information about the
company's products and services, activities in different geographic areas, and
the company's reliance on major customers. The statement is effective for the
Company's financial statements for the year ending November 30, 1999.
24
<PAGE> 27
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 targets 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.
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) dual single-use, disposable sensors, the
SomaSensors, (iii) proprietary software and (iv) a preamplifier cable.
SomaSensors can be adhered to both sides of a patient's forehead to offer
bi-lateral monitoring and are 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.
In October 1997, the Company obtained FDA clearance for advances in
its INVOS technology that are incorporated in its new model INVOS 4100 Cerebral
Oximeter. The new model 4100 Cerebral Oximeter was introduced in October 1997
at two industry trade shows and became available in the first quarter of fiscal
1998. 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
25
<PAGE> 28
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.
Brain oxygen information is important in surgical procedures requiring
general anesthesia, in other critical care situations with a high risk of brain
oxygen imbalances, as well as in the treatment of patients with head injuries
or strokes. These procedures include cardiovascular and vascular surgeries,
surgeries on elderly patients involving abnormal blood pressure, any
neurosurgery, major surgeries involving the neck, transplant surgeries and
treatments of patients with diseases resulting from high blood pressure, lung
problems, or head, organ or heart injuries and 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.
An independent industry report estimates that there are approximately
62,000 operating rooms worldwide performing approximately 48 million surgeries
involving general anesthesia every year. Industry sources estimate that, in
1993, there were more than 4.4 million surgeries involving the heart or the
blood vessels around the heart in the United States. 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, 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
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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 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.
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, 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 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 targets 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
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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 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 is sponsoring 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. Research being conducted on children and newborns is
expected to result in a SomaSensor that can fit smaller heads. The Company
believes that non-invasive monitoring is especially important in this patient
population, as they generally have lower oxygen reserves than adults, have less
blood volume from which to make invasive blood gas measurements and are less
tolerant of painful skin punctures and infections.
License its 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 a consulting arrangement with
NeuroPhysics Corporation in connection with research into the feasibility of
four new products. See "--Research and Development."
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
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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
effect 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) dual single-use,
disposable sensors, the SomaSensors, (iii) proprietary software and (iv) a
preamplifier cable. SomaSensors can be adhered to both sides of a patient's
forehead to offer bi-lateral monitoring and are 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 new model 4100
Cerebral Oximeter measures approximately 9 inches wide, 8 inches high and 8
inches deep and weighs approximately 15 pounds.
The suggested list prices for the new model 4100 Cerebral Oximeter and
the SomaSensor in the United States are $11,995 and $35, 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:
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<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 both sides of 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>
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
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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 of how dual sensors work]
Patented Dual Detector SomaSensor (R)
[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 signal 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 SomaSensor. The Company is currently
sponsoring clinical studies of the Cerebral Oximeter for use on children and
newborns, and is redesigning the SomaSensor for use on smaller heads. The
Company believes that non-invasive monitoring is especially important in this
patient population, as they generally have lower oxygen reserves than adults,
have less blood volume from which to make invasive blood gas measurements and
are less tolerant of painful skin punctures and infections.
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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.
In October 1997, NeuroPhysics Corporation was awarded a $746,000 Phase
II contract from the National Institute of Neurological Disorders and Stroke of
the National Institutes of Health. This award follows the completion of a
Phase I contract during which NeuroPhysics demonstrated the conceptual
feasibility of its non-invasive method for monitoring fetal cerebral oxygen
during labor and delivery. The Phase II award will be used to continue the
development of this technology, assemble a prototype fetal cerebral oximeter
based on the new method, and conduct animal and human studies. If Phase II is
successful, it is expected to be followed by the development of a product and
clinical trials in Phase III.
During fiscal years 1997, 1996 and 1995, the Company spent $736,427,
$235,354 and $285,893, 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 concentrated their sales efforts on the major teaching
hospitals in the United States and selected foreign markets in which the
Company has commenced commercial sales and on other large United States
hospitals, especially those the Company considers opinion leaders. Product
evaluations have already begun at over 200 teaching 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 its 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
1997, a total of 37 presentations concerning the Cerebral Oximeter were made at
17 meetings, and 14 peer-reviewed articles (three of which were presented at
meetings) discussing the Cerebral Oximeter were published.
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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 19 states exclusively and supporting seven distributors
in the other 31 states and Puerto Rico. 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 informs its member hospital administrators that the
Company is its sole supplier of cerebral oximetry equipment and forwards the
Company's marketing materials to such administrators. In exchange, for its
marketing assistance, the Company's product is available to the members of the
buying group at a discount.
From the commencement of commercial shipments of the new model 4100
Cerebral Oximeter in January 1998 through February 28, 1998, the Company has
sold 88 Cerebral Oximeters to distributors and customers. More than 200 United
States hospitals currently use the Cerebral Oximeter, including the Mayo Clinic
Scottsdale, UCLA Medical Center, Orlando Regional Medical Center, the Duke
Heart Center, University of Louisville Hospital, the University of Pittsburgh
Medical Center, the University of Florida-Shands Hospital, the University of
Alabama at Birmingham Hospital, the State University of New York (SUNY) Health
Center and Johns Hopkins Medical Center. The Company's backlog of firm orders
for its new model 4100 Cerebral Oximeter as of February 28, 1998 is a result of
the time between the product's introduction in October 1997 and its first
shipment in the first quarter of fiscal 1998. The Company did not have any
backlog of firm orders as of February 28, 1997. The Company does not believe
that its backlog is indicative of trends in its business.
Internationally, the Company has distribution agreements with 26
independent distributors covering 70 countries. In March 1995, the Company
engaged Baxter Limited as its exclusive distributor in Japan. In April 1995,
Baxter Limited was licensed by the Japanese Ministry of Health and Welfare to
market the INVOS 3100A Cerebral Oximeter in Japan and is in the process of
applying to the Japanese Ministry of Health and Welfare to market the new model
4100 Cerebral Oximeter there. There can be no assurance that the application
will be approved before the fourth quarter of fiscal 1998.
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 was the Company's largest customer in the first three
months of fiscal 1998 and in fiscal 1997, 1996 and 1995. 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 fiscal years ended November 30,
1997, 1996 and 1995 were approximately $689,000, $745,000 and $1,336,000,
respectively. See Note 10 of Notes to Financial Statements included elsewhere
in this Prospectus. For a description of the breakdown of sales between
refurbished model 3100 Cerebral Oximeters and replacement model 4100 Cerebral
Oximeters, model 3100A Cerebral Oximeters, model 4100 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
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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. 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 this 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 RIGHTS INFORMATION
The Company has thirteen United States patents and fourteen
corresponding patents in various foreign countries. 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
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in the Cerebral Oximeter, only eight 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 with related patents
issued in the ten Western European countries which were then member states, and
the corresponding Japanese patent was issued in 1991. The Company's twelve
additional United States patents expire on various dates from February 2005 to
December 2014. The Company also has two patent applications pending in the
United States and several pending patent applications filed in various foreign
countries, with respect to other aspects of its technology relating to the
interaction of light with tissue.
Notwithstanding the Company's patents as noted above, many other
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,
which is the primary use of the Cerebral Oximeter. No patent infringement
claims have been asserted against the Company.
In addition to its patent rights, the Company has obtained United
States Trademark registrations for its trademarks "SOMANETICS," "SOMAGRAM,"
"INVOS," "SOMASENSOR" and "WINDOW TO THE BRAIN," and has also obtained
registrations of its basic mark, "SOMANETICS," in thirteen foreign countries.
The Company also relies on trade secret, copyright and other laws and
on confidentiality agreements to protect its technology, but believes that
neither its patents nor other legal rights will necessarily prevent third
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 three to six months from the date of submission to obtain
510(k) clearance, but it can take substantially longer. The Cerebral Oximeter
has been classified as a class II device.
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<PAGE> 39
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 the IRB at each clinical site without the need for
FDA approval.
In June 1992, the Company received 510(k) clearance from the FDA to
market the Cerebral Oximeter in the United States for use on adults. The
Company began commercial shipments of Cerebral Oximeters and SomaSensors in May
1993. In November 1993, the Company received notification that the FDA had
rescinded the Company's 510(k) clearance to market the Cerebral Oximeter. As a
result, all commercial sales of the Company's product were suspended. In
February 1994, the Company resumed marketing its product in several foreign
countries. In June 1996 the Company received 510(k) clearance from the FDA to
market the Cerebral Oximeter, including the SomaSensor, in the United States.
In October 1997, the Company obtained FDA clearance for advances in its INVOS
technology that are incorporated in its new model 4100 Cerebral Oximeter. The
new model 4100 Cerebral Oximeter was introduced in October 1997 and became
available in the first quarter of fiscal 1998.
In October 1997, the Company obtained FDA clearance for advances in
its INVOS technology that are incorporated in its new model 4100 Cerebral
Oximeter. The Company has made additional changes to the model 3100A Cerebral
Oximeter that resulted in the model 4100 Cerebral Oximeter. The Company does
not believe that these changes affect the safety or efficacy of the Cerebral
Oximeter and, therefore, the Company believes that these changes do not require
the submission of a new 510(k) notice. There can be no assurance, however,
that the FDA would agree with the Company's determination not to submit a new
510(k) notice for the new model 4100 Cerebral Oximeter or that the FDA would
not require the Company to submit a new 510(k) notice for any changes made to
the device. If the FDA requires the Company to submit a new 510(k) notice for
its new model 4100 Cerebral Oximeter or 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."
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 most recent FDA GMP inspection occurred in May 1997. The FDA
finalized changes to the GMP regulations in 1997, which has increased the cost
of compliance with GMP
37
<PAGE> 40
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 it
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.
Congress recently enacted the FDA Modernization Act of 1997. This law
is intended to make the regulatory process more consistent and efficient. It
is too early to determine whether, or how, these new requirements will affect
the Company.
SEASONALITY
The Company's business is seasonal. The Company's third quarter sales
have typically been lower, compared to other fiscal quarters, principally
because the fiscal quarter coincides with the summer vacation season,
especially in Europe, the United States and Japan.
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 products
liability claims. The Company has obtained products liability insurance with a
liability limit of $2,000,000. 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 February 28, 1998, the Company employed 44 full-time
individuals, including 23 in sales and marketing, five in research and
development, eight in general and administration and eight in manufacturing,
quality and service. In addition, the Company has engaged a full- time
international sales consultant. The Company believes that its future success
is dependent, in large part, on its ability to attract and retain highly
qualified managerial, marketing and technical personnel. The Company's
employees are not represented by a union or subject to a collective bargaining
agreement. The Company believes that its relations with its current employees
are good.
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 agreement was extended in fiscal 1997,
with the extension commencing January 1, 1998 and expiring December 31, 1999.
The extension also provides the Company with an option to extend for another
year under the same terms and conditions. The minimum monthly lease payment
for the extended term is approximately $14,700, excluding other occupancy
costs. The Company believes that, depending
38
<PAGE> 41
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 the settlement in December 1997 of a suit filed
by a shareholder of the Company on April 25, 1994 in the United States District
Court for the Eastern District of Michigan, individually and on behalf of all
others similarly situated, against the Company and Gary D. Lewis, former
Chairman of the Board, in an action captioned Benjamin Langford v. Somanetics
Corporation and Gary D. Lewis, see Note 7 of Notes to Financial Statements
included elsewhere in this Prospectus.
39
<PAGE> 42
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company as of February 28,
1998 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 . . . . . . . . . . . . . 40 Executive Vice President, Chief Financial Officer
and Treasurer
Richard S. Scheuing . . . . . . . . . . . 42 Vice President, Research and Development
Mary Ann Victor . . . . . . . . . . . . . 40 Vice President, Communications and Administration
and Secretary
Ronald A. Widman . . . . . . . . . . . . 47 Vice President, Medical Affairs
Pamela A. Winters . . . . . . . . . . . . 39 Vice President, Operations
H. Raymond Wallace (1) . . . . . . . . . 62 Chairman of the Board
Daniel S. Follis (1) . . . . . . . . . . 60 Director
Dr. James I. Ausman . . . . . . . . . . 60 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 as a director of the Company 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. From
September 1981 until June 1987, he served as the group product manager of
hemodynamic monitoring products of Baxter Edwards Critical Care, an affiliate
of Baxter International, Inc., another health care equipment manufacturer and
distributor. Mr. Barrett 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 since May 1993 and as its Chief Financial Officer and Treasurer
since February 1991. From May 1993 until January 1998, he also served as the
Company's Secretary. 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.
Richard S. Scheuing. Mr. Scheuing has served as the Company's Vice
President, Research and Development since January 1998. From March 1993 to
January 1998, he served as the Company's Director of Research and Development.
He joined the Company in 1991 as its Director of Mechanical Engineering. He is
an inventor on three 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.
Mary Ann Victor. Ms. Victor has served as the Company's Vice
President, Communications and Administration and Secretary since January 1998.
From July 1997 until January 1998, she served as the Company's Director,
Communications and Administration and was a consultant to the Company from
September 1996 until July
40
<PAGE> 43
1997. She also served as Somanetics' Director of Corporate Communications from
July 1991 until February 1994. Prior experience includes serving as Director
of Investor Relations with the Taubman Company from February to May 1994, legal
assistant from June 1994 to November 1994 and then attorney from November 1994
to September 1995 with Varnum Riddering Schmidt & Howlett, and Human Resources
Consultant in the Actuarial Benefits and Compensation Consulting Group of
Deloitte & Touche LLP from September 1995 to September 1996. Ms. Victor
received a B.S. in political science from the University of Michigan and a J.D.
from the University of Detroit.
Ronald A. Widman. Mr. Widman has served as the Company's Vice
President, Medical Affairs since January 1998. From August 1994 to January
1998, he served as the Company's Director of Medical Affairs. 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.
Pamela A. Winters. Ms. Winters has served as the Company's Vice
President, Operations since January 1998. From February 1996 to January 1998,
she served as the Company's Director of Operations. From May 1992 to February
1996, she served as the Company's Manager of Quality Assurance. From October
1991 to May 1992, Ms. Winters served as the Company's Quality Assurance
Supervisor. Ms. Winters is pursuing a B.S. degree in management from
University of Phoenix.
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 also
served as Chairman of the Board of Cardiometrics, Inc., a cardiovascular
medical device company, from December 1993 until its merger into Endosonics,
Inc. in July 1997, and has served 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 in 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 in Detroit. 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 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 with the Company they currently hold. Officers of the Company serve at
the discretion of the Board of Directors. The Directors of the Company will
hold office until the Annual Meeting of Shareholders to be held in 1999 for
Daniel S. Follis and Dr. James I. Ausman, the Annual Meeting of Shareholders to
be held in 2000 for H. Raymond Wallace, and the Annual Meeting of Shareholders
to be held in
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<PAGE> 44
2001 for Bruce J. Barrett, and until their successors are elected and
qualified, or until their earlier death, resignation or removal. Directors may
not be removed without cause.
SCIENTIFIC ADVISORS TO THE COMPANY
The Company uses scientific advisors primarily for individual
consultation in their areas of expertise, including assisting it with technical
issues regarding its technology and assisting it in identifying and evaluating
potential additional applications of the Company's INVOS technology.
The following are scientific advisors to the Company:
James I. Ausman, M.D., Ph.D. For a description of the principal
occupation and employment of Dr. Ausman, see "--Directors and Executive
Officers."
Gregory Crosby, M.D. Dr. Crosby has served as the Evan & Marion
Helfaer Professor and Chairman of the Department of Anesthesiology at the
University of Wisconsin Medical School, Madison, Wisconsin, since 1996. For 15
years prior to 1996, he was affiliated with Harvard Medical School and
Massachusetts General Hospital. Dr. Crosby is a neuroanesthesiologist who
serves as an examiner on the American Board of Anesthesiology, on the American
Society of Anesthesiologists subcommittee on Clinical Neurosciences, as
Associate Editor of Anesthesiology, as Section Editor for Neuroanesthesia of
the Journal of Clinical Anesthesia and as a member of the editorial board for
the Journal of Neurosurgical Anesthesiology.
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
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<PAGE> 45
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 is a consultant to business in the
fields of science and technology. For forty years he has invented and
developed products for medicine and industry using diverse technologies such as
imaging, image processing, radiation detection, optics, x-rays, spectroscopy,
lasers, computers and electronics. Examples include the first commercial brain
scanner based on positron emission, the Harvard scanner for high resolution
imaging of brain function and systems for non-invasive infrared spectroscopy of
the human body. He is presently Principle Investigator on two R&D projects,
funded by the National Institute of Health and the United States Army,
involving medical applications of in vivo near-infrared spectroscopy. He has
participated as president, vice-president, director, or product manager in a
number of medical device and high-technology companies, including the Atomic
Instrument Company, Baird, Atomium, Perkin-Elmer, Bedford Engineering, Cleon,
Union Carbide Imaging Systems, Strichman Medical and NeuroPhysics, where he is
currently Chairman and Senior Scientist. He served as President and Chief
Executive Officer of Strichman Medical Equipment Inc. from 1988 to 1993, and
Vice President and Director of Union Carbide Imaging Systems from 1976 to 1980.
Strichman Medical is a manufacturer of computer workstations for nuclear
medicine and scanners for producing images of the functioning of the human
brain. Union Carbide Imaging Systems is a developer and manufacturer of
nuclear medical imaging equipment.
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 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, 1997, 1996 and 1995 concerning compensation of (i) all
individuals serving as the Company's Chief Executive Officer during the fiscal
year ended November 30, 1997 and (ii) each other executive officer of the
Company whose total annual salary and bonus exceeded $100,000 in fiscal 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
---------------------------- ---- ------ ----- ------- -----------------
<S> <C> <C> <C> <C> <C>
Bruce J. Barrett . . . . . . 1997 $200,688 $12,188 135,000 $--
President and Chief Executive 1996 195,000 -- 43,200(1) --
Officer 1995 195,000 -- 33,000(1) --
Raymond W. Gunn . . . . . . . 1997 110,250 4,823 45,000 --
Executive Vice President 1996 105,000 -- 19,100(1) --
and Chief Financial Officer 1995 95,625 -- 10,000(1) --
- ----------------------------------
</TABLE>
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<PAGE> 46
(1) The fiscal 1995 numbers include options to purchase 16,500 and 5,000
Common Shares granted to Messrs. Barrett and Gunn, respectively,
subject to shareholder approval of an amendment to the Company's 1991
Incentive Stock Option Plan at the 1995 Annual Meeting of
Shareholders. Although more than 85% of those voting approved the
proposed amendment to the 1991 Incentive Stock Option Plan, as a
result of a significant number of broker non-votes, there were
insufficient votes in favor of the amendment, it was not approved and
the options were cancelled. The fiscal 1995 numbers also include
options to purchase 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.
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 Board meeting. The Company also reimburses Outside Directors for their
reasonable expenses of attending Board and Board committee meetings.
On January 14, 1993, the Board of Directors adopted the Somanetics
Corporation 1993 Director Stock Option Plan (the "Directors Plan"). The
Directors Plan provided for the grant of options to purchase 1,500 shares every
three years beginning June 30, 1993 (including June 30, 1996) to each director
who was not an officer or employee of the Company. The exercise price of the
options was the fair market value of the Common Shares on the date of grant.
Options vested in one-third annual increments beginning on the date of grant
and expired ten years after the date of grant. In addition, each director who
was not an officer or employee of the Company and who first became a director
of the Company after the date the Directors Plan was adopted was 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.
The Board of Directors has (i) terminated the Directors Plan, which
means that no future grants of stock options will be made under the Directors
Plan, (ii) determined to grant Outside Directors who continue to serve as
directors of the Company after the annual meeting of shareholders (beginning
with the 1998 Annual Meeting), 10-year options to purchase 2,000 Common Shares
each year on the date of the annual meeting of shareholders, exercisable at the
fair market value of the Common Shares on the date of grant and (iii) effective
as of March 17, 1998, in exchange for the cancellation of certain outstanding
stock options, granted ten-year stock options under the 1997 Stock Option Plan
to Mr. Follis, Dr. Ausman and Mr. Wallace to purchase 7,500, 5,511, and 5,511
Common Shares, respectively, at an exercise price equal to $____, the closing
sale price of the Common Shares as of March 17, 1998 (the "Replacement
Options").
The Replacement Options cover the same number of shares and are
subject to the same terms and conditions as the options previously granted to
such directors under the Directors Plan or under the 1991 Incentive Stock
Option Plan, except that the exercise price of the Replacement Options is $___,
the fair market value of the Common Shares as of March 17, 1998. The
Replacement Options were effective only when the director canceled all options
previously granted to him under the Directors Plan and the 1991 Incentive Stock
Option Plan. Dr. Ausman also has an option to purchase 2,000 Common Shares at
$5.00 a share granted independent of the Company's plans that is not being
canceled. The Board determined to replace the stock options previously granted
to the Outside Directors under the Directors Plan and the 1991 Incentive Stock
Option Plan because it determined that options with exercise prices equal to
the then current market price of the Company's Common Shares would
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<PAGE> 47
provide better incentives to the directors. The Board believes that such
options would better motivate the Company's directors and give them increased
incentive to remain with the Company and make contributions to the long-term
performance and growth of the Company. The Board also believes that such
options would more closely join the interests of such directors with the
interests of shareholders of the Company.
The Company's 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, 1997.
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, 1999, which term is automatically renewed each year unless terminated by
either party by at least 30 days notice prior to the renewal of the agreement.
Pursuant to this agreement, the Company has entered into a Consulting Order
with NeuroPhysics Corporation, a research and development company owned by Mr.
Stoddart and his son, pursuant to which the Company is funding a portion of
NeuroPhysics' research into the feasibility and development of prototypes of
four new products. See "Business--Research and Development." During fiscal
1997, the Company paid approximately $166,560 in fees and expenses to Mr.
Stoddart and Neurophysics under this agreement. Also, effective April 24,
1997, the Company granted Mr. Stoddart's son, also a consultant to the Company,
a ten-year option to purchase 1,500 Common Shares at $4.75 a share in exchange
for cancellation of his 10-year option to purchase 1,500 Common Shares at
$14.375 a 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."
OPTION GRANTS TABLE
The following table sets forth information concerning individual
grants of stock options made during the fiscal year ended November 30, 1997 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 . . . 135,000(1) 44.0% $4.75 4/24/07 $403,279 $1,021,987
Raymond W. Gunn . . . . 45,000(1) 14.7 4.75 4/24/07 134,426 340,662
</TABLE>
__________________________
(1) Options to purchase 135,000 and 45,000 Common Shares were granted to
Messrs. Barrett and Gunn, respectively, in fiscal 1997 under the
Company's 1997 Stock Option Plan, exercisable at the then current fair
market value of the underlying Common Shares. Each of the options set
forth in the table is exercisable in one-third cumulative annual
increments beginning April 24, 1998. Each option also becomes 100%
exercisable immediately 10 days before or upon specified changes in
control of the Company.
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<PAGE> 48
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.
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, 1997 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, 1997:
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT 11/30/97 AT 11/30/97
ACQUIRED ON VALUE ---------------------------- -----------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bruce J. Barrett . -- $-- 68,275 149,925 $13,016 $206,839
Raymond W. Gunn . . -- -- 35,575 51,025 6,874 69,791
</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 salary is currently $204,750, 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. The Company adopted bonus plans both for fiscal 1997 and for fiscal
1998. 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 and Treasurer of the
Company (or in such other position as the Board of Directors determines) for a
period ending April 30, 2000. Mr. Gunn's 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
46
<PAGE> 49
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 February 28, 1998, that are not already 100% exercisable
immediately, including options granted to Messrs. Barrett and Gunn, become 100%
exercisable immediately 10 business days before or upon specified changes in
control of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended November 30, 1997, 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, 1997, 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 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,
1997, 1996 and 1995, the Company had no sales to Somatek, Inc. pursuant to its
distributor agreement. Effective February 28, 1997, the Company terminated its
distribution agreement with Somatek, Inc. and in connection with such
termination, the Company wrote off $12,500 of its receivables from Somatek,
Inc. in exchange for the return of two INVOS 3100A Cerebral Oximeters from
Somatek, Inc. As of November 30, 1996 and 1997 and February 28, 1998, Somatek,
Inc. had no outstanding indebtedness to the Company. As of November 30, 1995,
Somatek, Inc. owed the Company $67,690.
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
47
<PAGE> 50
Act of 1933, as amended, or the Michigan Uniform Securities Act, as amended.
The Company's Bylaws and Mr. Barrett's and Mr. Gunn's employment agreements
also provide for indemnification. The Company believes that such
indemnification will assist the Company in continuing to attract and retain
talented directors and officers in light of the risk of litigation directed
against directors and officers of publicly-held corporations.
The Michigan Business Corporation Act, as amended, also permits
Michigan corporations to limit the personal liability of directors for a breach
of their fiduciary duty. The provisions of the Restated Articles of
Incorporation limit director liability to the maximum extent currently
permitted by Michigan law. Michigan law allows a corporation to provide in its
articles of incorporation that a director of the corporation will not be
personally liable to the corporation or its shareholders for monetary damages
for breach of fiduciary duty as a director, except for liability for specified
acts. As a result of the inclusion of such a provision, shareholders of the
Company may be unable to recover monetary damages against directors for actions
taken by them which constitute negligence or gross negligence or which are in
violation of their fiduciary duties, although it may be possible to obtain
injunctive or other equitable relief with respect to such actions. If
equitable remedies are found not to be available to shareholders in any
particular case, shareholders may not have any effective 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 "Management--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), President and Chief Executive Officer (until May 31,
1994), (i) Mr. Lewis voluntarily resigned from all of his positions with the
Company, except as a director of the Company, and his employment agreement
terminated without any obligations of either party, (ii) Mr. Lewis agreed to
provide consulting services to the Company through January 31, 1997, (iii) the
Company agreed to provide Mr. Lewis with (a) $150,000 a year for two years, (b)
the same health, medical and dental benefits as are provided to the Company's
executive officers from time to time for two years, (c) a facsimile machine,
computer equipment and office furniture and (d) $2,500 for legal fees and
reimbursement of Mr. Lewis' business-related expenses, (iv) the Company and Mr.
Lewis amended and restated the Company's note receivable from Mr. Lewis, (v)
Mr. Lewis agreed to confidentiality, non- compete and non-solicitation
provisions for periods specified in the agreement and (vi) each party released
the other from all claims through the date of the agreement.
On February 1, 1993, the Company made a $200,000 loan to Gary D.
Lewis, the Company's former Chairman of the Board, President and Chief
Executive Officer and a former director of the Company, secured by a second
mortgage on the home Mr. Lewis purchased at that time. The principal and all
accrued interest were originally due on January 31, 1998. The loan bore
interest at 8% a year. In July 1994, Mr. Lewis agreed to make
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<PAGE> 51
regular periodic reductions in the outstanding principal balance of the note,
with the entire amount to be paid back to the Company within one year. Mr.
Lewis paid the Company $25,000 toward the outstanding principal balance on
November 30, 1994.
Pursuant to the Agreement and Release between Mr. Lewis and the
Company, the Company and Mr. Lewis amended and restated the promissory note
evidencing the loan. As amended, Mr. Lewis' promissory note provided for the
repayment of the $175,000 balance from the Company on January 31, 1998, with
interest at an annual rate equal to the Company's bank's prime rate plus .75%.
The note was further secured by 17,500 of Mr. Lewis' options to purchase the
Company's stock and the underlying securities.
On November 6, 1996, Gary D. Lewis paid the Company $175,000 (the
outstanding principal amount of the loan at the time) in full satisfaction of
all of his obligations under the loan, and the Company wrote off approximately
$29,750 of accrued interest with respect to that loan. The largest principal
amount of the loan outstanding during fiscal 1996 was $175,000 (not including
approximately $29,750 of accrued interest), and as of November 6, 1996 the loan
was fully repaid.
49
<PAGE> 52
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the
beneficial ownership of the Company's Common Shares as of February 28, 1998,
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 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 . . . . . . . 120,892(3) 2.7% 1.9%
RAYMOND W. GUNN . . . . . . . . 53,425(4) 1.2% *
H. RAYMOND WALLACE . . . . . . 6,236(5) * *
DANIEL S. FOLLIS . . . . . . . 28,056(6) * *
DR. JAMES I. AUSMAN . . . . . . 18,410(7) * *
ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP (9 PERSONS) 255,387(8) 5.7% 3.9%
</TABLE>
__________________________________
* Represents less than 1% of outstanding Common Shares.
(1) Based on 4,285,334 Common Shares outstanding as of February 28, 1998.
(2) Based on 6,285,334 Common Shares outstanding, assuming all 2,000,000
Common Shares offered hereby are sold to third parties.
(3) Includes 117,400 Common Shares that Mr. Barrett has the right to
acquire within 60 days and 500 shares owned by his wife.
(4) Includes 51,825 Common Shares that Mr. Gunn has the right to acquire
within 60 days.
(5) Includes 4,636 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 6,625 Common Shares that Mr. Follis has the right to acquire
within 60 days. The 28,056 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 5,636 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 209,390 Common Shares which all executive officers and
directors as a group have the right to acquire within 60 days.
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<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital shares of the Company consist of an aggregate
of 20,000,000 Common Shares, par value $0.01 per share, and 1,000,000 Preferred
Shares, par value $0.01 per share. As of February 28, 1998, 4,285,334 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 1999 for Daniel S. Follis and Dr. James I. Ausman,
the Annual Meeting of Shareholders to be held in 2000 for H. Raymond Wallace,
and the Annual Meeting of Shareholders to be held in 2001 for Bruce J. Barrett,
and until their successors are elected and qualified, or until their earlier
death, resignation or removal. 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.
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<PAGE> 54
PREFERRED SHARES
The Company has also authorized the issuance of up to 1,000,000
Preferred Shares, $0.01 par value per share, none of which is outstanding as of
the date of this Prospectus. The Preferred Shares may be issued from time to
time in one or more series. The Board of Directors is authorized to determine
the rights, preferences, privileges and restrictions granted to, and imposed
upon, each series of Preferred Shares and to fix the number of shares of any
series of Preferred Shares and the designation of any such series. The
issuance of Preferred Shares could be used, under certain circumstances, as a
method of preventing a takeover of the Company and could permit the Board of
Directors, without any action of the holders of the Common Shares, to issue
Preferred Shares which could have a detrimental effect on the rights of holders
of the Common Shares, including loss of voting control. Anti-takeover
provisions that could be included in the Preferred Shares when issued may have
a depressive effect on the market price of the Company's securities and may
limit shareholders' ability to receive a premium on their shares by
discouraging takeover and tender offer bids. The Company has no present plans
to issue any Preferred Shares.
TRANSFER AGENT
American Stock Transfer & Trust Company serves as transfer agent for
the Common Shares. As of February 28, 1998 there were 567 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 Regulation S
Agent Warrants. In addition, the underwriter of the Company's 1997 public
offering of Common Shares has demand and piggy-back registration rights in
connection with the warrant issued to it in connection with that offering. See
"Plan of Distribution." 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, subject to specified limitations.
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<PAGE> 55
PLAN OF DISTRIBUTION
The Common Shares are being offered, on an all or none basis, for sale
by the Company. Brean Murray & Co., Inc. (the "Placement Agent") has been
retained to act as agent for the Company in connection with the arrangement of
such offers and sales on a best efforts basis. It is anticipated that the
Placement Agent will obtain indications of interest from potential investors
for the amount of the offering and that effectiveness of the Registration
Statement will not be requested and no investor funds will be accepted until
indications of interest have been received for the amount of the offering.
Confirmation and definitive prospectuses will be distributed to all investors
at the time of pricing, informing investors of the closing date, which will be
scheduled for three business days after pricing. No investor funds will be
accepted prior to effectiveness of the Registration Statement. Prior to the
closing date, all investors' funds will be placed in escrow with Citibank,
N.A., as escrow agent (the "Escrow Agent"), not later than 12:00 noon on the
business day following receipt thereof in an escrow account established for the
benefit of the investors. The Escrow Agent will hold such funds in accordance
with Rule 15c2-4 promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Prior to the closing date, the Escrow Agent will
advise the Company that the investors have deposited the requisite funds in the
escrow account at the Escrow Agent. Upon receipt of such notice, and subject
to the satisfaction of certain other conditions, the Company will deposit with
Depository Trust Company ("DTC") the Common Shares to be credited to the
respective accounts of the investors. Investor funds, together with interest
thereon, if any, will only be collected by the Company through the facilities
of the Escrow Agent on the scheduled closing date. The offering will not
continue after the closing date. In the event that investor funds are not
received in the full amount necessary to satisfy the requirements of the
offering or the other closing conditions are not satisfied or waived, all funds
deposited in the escrow account, plus the interest earned thereon in excess of
certain expenses, will be promptly returned. The Company has agreed (i) to pay
the Placement Agent 6% of the proceeds from the offering as the Placement Fee,
(ii) to indemnify the Placement Agent against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities Act")
and (iii) to reimburse the Placement Agent for its out-of-pocket expenses up to
a maximum of $75,000. If this offering is not consummated for any reason or if
fewer than 2,000,000 Common Shares are sold hereunder, the Company will pay the
Placement Agent's out-of-pocket expenses, fees and disbursements, including
its legal fees and related blue sky fees, up to a maximum of $75,000.
Under the terms of an agreement with the Placement Agent, the Company
and its officers and directors (who beneficially hold in the aggregate 255,387
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 Placement Agent.
The Placement Agent was the underwriter of a public offering of the
Company's Common Shares that closed on June 4, 1997. In connection with that
offering, the Placement Agent received (i) $520,000 of underwriting discounts,
(ii) warrants to purchase 200,000 Common Shares at $4.80 a share exercisable
during the four-year period beginning May 30, 1998 and (iii) reimbursement of
its expenses.
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<PAGE> 56
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.
EXPERTS
The financial statements included in this Prospectus and the related
financial statement schedule included elsewhere in the registration statement,
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein and elsewhere in the registration statement
(which reports express an unqualified opinion and include an explanatory
paragraph referring to an uncertainty concerning the Company's ability to
continue as a going concern), and have been so included 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 (the "Exchange Act"), 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 Exchange Act filings are also available to the public on the
Commission's Internet site (http://www.sec.gov).
This Prospectus, which constitutes part of a Registration Statement on
Form S-1 filed with the Commission under the Securities Act of 1933, as
amended, by the Company (the "Registration Statement"), omits certain of the
information contained in the Registration Statement. Reference is hereby made
to the Registration Statement and to the exhibits to the Registration Statement
for further information about the Company and the Common Shares. Statements in
this Prospectus concerning provisions of documents are summaries of such
documents, and each statement is qualified by reference to the copy of the
applicable document filed with the Commission. Copies of such material,
including the complete Registration Statement and the exhibits, can be
inspected, without charge at the offices of the Commission, or obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
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<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 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 three to six 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.
55
<PAGE> 58
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.
INTRACRANIAL PRESSURE MONITORING: A sensor is placed in the intracranial space
through a drilled hole to monitor the pressure on the brain inside the
patient's skull, which may increase as a secondary effect of certain brain
damage or head injuries.
INVASIVE JUGULAR BULB CATHETER MONITORING: Blood is drawn from a patient's
jugular vein (a vein in the neck near the base of the brain), and the oxygen
content, acidity and other blood gases are analyzed directly from the removed
blood.
INVOS: In Vivo Optical Spectroscopy is the name of the patented technology
that the Company uses in the operation of the INVOS Cerebral Oximeter.
ISCHEMIA: Tissue oxygen starvation due to the obstruction of the inflow of
arterial blood.
NEUROLOGICAL EXAM: Uses physical responses to test for signs of brain damage.
NEUROSURGERY: Surgery of the nervous system, including the brain.
OPEN HEART SURGERY: Any cardiac surgical procedure where the heart is exposed,
such as a valve replacement or repair, heart transplant or congenital repair.
It includes bypass surgery.
OPTICAL SPECTROSCOPY: Study of the spectra (series of colors). Relates to the
theories behind INVOS and the interaction between matter and light.
OXIMETRY: Use of photoelectric apparatus for determining the amount of oxygen
in the blood. Usually done by measuring the amount of light transmitted
through a translucent part of the tissue.
OXYGEN SATURATION: The percentage of total hemoglobin contained in a given
amount of blood which is combined (saturated) with oxygen.
OXYGENATED HEMOGLOBIN: Hemoglobin that is bound to oxygen.
PULMONARY ARTERY: The artery that carries the venous blood from the right
ventricle to the lungs.
PULSE OXIMETRY: A device that measures hemoglobin oxygen saturation in the
arteries in peripheral tissue.
SPECTROPHOTOMETER: A device for measuring the amount of color in a solution by
comparison with the spectrum.
SPECTROPHOTOMETRY: The estimation of coloring of matter in a solution by use
of a spectrophotometer or spectroscope.
STROKE: The sudden loss of consciousness caused by hemorrhage into the brain,
the formation of an embolus or thrombus that blocks an artery, or the rupture
of an extracerebral artery causing ischemia in parts of the brain.
SUBDURAL HEMATOMA: Internal bleeding between the skull and brain.
TRANSCRANIAL DOPPLER: A device using ultrasound for measuring velocity of
blood in a vessel.
VENOUS BLOOD: The dark blood carried back to the heart by the veins, after
oxygen has been extracted by the tissues.
56
<PAGE> 59
SOMANETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Balance Sheets --- November 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . F-3
Statements of Operations --- For the Years Ended November 30, 1997, 1996 and 1995 . . . . . F-4
Statements of Shareholders' Equity --- For the Years Ended November 30, 1997, 1996 and 1995 F-5
Statements of Cash Flows --- For the Years Ended November 30, 1997, 1996 and 1995 . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</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") as of November 30, 1997 and 1996, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended November 30, 1997. 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, 1997 and 1996,
and the results of its operations and its cash flows for each of the three
years in the period ended November 30, 1997 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. 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.
The Company was in the development stage at November 30, 1996; during the year
ended November 30, 1997, the Company completed its development activities and
commenced its planned principal operations.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
January 9, 1998
F-2
<PAGE> 61
SOMANETICS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
November 30,
----------------------------------
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 4) . . . . . . . . . . . . . . . . . . . . $ 2,132,376 $ 3,291,911
Marketable Securities (Note 4) . . . . . . . . . . . . . . . . . . . . . . 2,470,780 --
Accounts receivable, net of allowance for doubtful accounts of approximately
$166,000 and $46,000 at November 30, 1997 and November 30, 1996,
respectively (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . 191,698 191,436
Inventory, net (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . 433,014 931,135
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,581 65,435
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 5,299,449 4,479,917
------------ ------------
PROPERTY AND EQUIPMENT: (Note 4)
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 722,905 479,757
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . 184,351 193,343
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . 166,770 166,770
------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,074,026 839,870
Less accumulated depreciation and amortization . . . . . . . . . . . . . . (784,860) (743,775)
------------ ------------
Net property and equipment . . . . . . . . . . . . . . . . . . . . . . . 289,166 96,095
------------ ------------
OTHER ASSETS:
Patents and trademarks, net (Note 4) . . . . . . . . . . . . . . . . . . . 72,217 79,129
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,600 16,600
------------ ------------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,817 95,729
------------ ------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,677,432 $ 4,671,741
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 390,494 $ 364,032
Accrued liabilities (Notes 5 and 7) . . . . . . . . . . . . . . . . . . . . 397,982 254,110
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 788,476 618,142
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 7) . . . . . . . . . . . . . . . . . . . . -- --
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, 4,285,334 and 2,285,351 shares at November 30, 1997
and November 30, 1996, respectively . . . . . . . . . . . . . . . . . . 42,853 22,854
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 41,212,639 34,241,798
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (36,366,536) (30,211,053)
------------ ------------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . 4,888,956 4,053,599
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . $ 5,677,432 $ 4,671,741
============ ============
</TABLE>
See notes to financial statements
F-3
<PAGE> 62
SOMANETICS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended November 30,
--------------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
NET REVENUES (Notes 4, 9 and 10) . . . . . $ 1,211,784 $ 778,200 $ 1,335,970
COST OF SALES . . . . . . . . . . . . . . . 631,425 385,136 657,614
-------------- -------------- -------------
Gross margin . . . . . . . . . . . . . 580,359 393,064 678,356
-------------- -------------- -------------
OPERATING EXPENSES:
Research, development and engineering
(Note 4) . . . . . . . . . . . . . . 736,427 235,354 285,893
Selling, general and administrative
(Note 9) . . . . . . . . . . . . . . 6,238,330 3,549,939 3,302,751
-------------- -------------- -------------
Total operating expenses . . . . . . 6,974,757 3,785,293 3,588,644
-------------- -------------- -------------
OPERATING LOSS . . . . . . . . . . . . . . (6,394,398) (3,392,229) (2,910,288)
------------- -------------- -------------
OTHER INCOME (EXPENSE):
Interest income . . . . . . . . . . . . 206,663 61,603 94,769
Interest expense . . . . . . . . . . . -- (449) (772)
Other . . . . . . . . . . . . . . . . . 32,252 27,372 (2,112)
-------------- -------------- -------------
Total other income . . . . . . . . . 238,915 88,586 91,885
-------------- -------------- -------------
NET LOSS . . . . . . . . . . . . . . . . . $ (6,155,483) $ (3,303,703) $ (2,818,403)
============= ============== =============
NET LOSS PER COMMON SHARE
(Notes 4 and 11) . . . . . . . . . . . $ (1.88) $ (1.77) $ (1.67)
============= ============= ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
(Notes 4 and 11) . . . . . . . . . . . 3,271,642 1,866,751 1,684,368
============== ============== =============
</TABLE>
See notes to financial statements
F-4
<PAGE> 63
SOMANETICS CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PRICE
PER SHARES SHARE
SHARE (NOTE 3) VALUE
----- -------- -----
<S> <C> <C> <C>
Balance at December 1, 1994 . . . . . . . . . . . 1,626,755 $ 16,268
Exercise of stock options for cash . . . . . . $ 8.40 100 1
For cash, less issuance costs of $282,475 12.50 150,000 1,500
Net loss . . . . . . . . . . . . . . . . . . .
--------- ----------
Balance at November 30, 1995 . . . . . . . . . . . 1,776,855 17,769
Exercise of stock options for cash . . . . . . 8.40-14.70 7,717 77
For cash, less issuance costs of $143,587 . . . 12.50 114,240 1,143
Exercise of warrants for cash, less issuance
costs of $16,350 . . . . . . . . . . . . . . 17.50-20.00 19,698 197
For cash, less issuance costs of $650,872 . . . 11.50 366,841 3,668
Redemption of Class B Warrants . . . . . . . . 0.50
Net loss . . . . . . . . . . . . . . . . . . .
---------- ----------
Balance at November 30, 1996 . . . . . . . . . . . 2,285,351 22,854
Redemption of fractional shares . . . . . . . (17) (1)
For cash, less issuance costs of $1,008,782 . . 4.00 2,000,000 20,000
Net loss . . . . . . . . . . . . . . . . . . .
---------- ----------
Balance at November 30, 1997 . . . . . . . . . . 4,285,334 $ 42,853
========== ==========
<CAPTION>
ADDITIONAL ACCUM- TOTAL
PAID-IN ULATED SHAREHOLDERS'
CAPITAL DEFICIT EQUITY
------- ------- ------
<S> <C> <C> <C>
Balance at December 1, 1994 . . . . . . . . . . . $ 27,591,268 $(24,088,947) $3,518,589
Exercise of stock options for cash . . . . . . 843 844
For cash, less issuance costs of $282,475 . . . 1,591,125 1,592,625
Net loss . . . . . . . . . . . . . . . . . . . (2,818,403) (2,818,403)
------------ ----------- -----------
Balance at November 30, 1995 . . . . . . . . . . . 29,183,236 (26,907,350) 2,293,655
Exercise of stock options for cash . . . . . . 75,030 75,107
For cash, less issuance costs of $143,587 . . . 1,283,270 1,284,413
Exercise of warrants for cash, less issuance. .
costs of $16,350 . . . . . . . . . . . . . . 339,886 340,083
For cash, less issuance costs of $650,872 . . . 3,564,135 3,567,803
Redemption of Class B Warrants. . . . . . . . . (203,759) (203,759)
Net loss . . . . . . . . . . . . . . . . . . . (3,303,703) (3,303,703)
------------ ----------- -----------
Balance at November 30, 1996 . . . . . . . . . . . 34,241,798 (30,211,053) 4,053,599
Redemption of fractional shares . . . . . . . . (377) (378)
For cash, less issuance costs of $1,008,782 . . 6,971,218 6,991,218
Net loss . . . . . . . . . . . . . . . . . . . (6,155,483) (6,155,483)
------------ ----------- -----------
Balance at November 30, 1997 . . . . . . . . . . . $ 41,212,639 $(36,366,536) $4,888,956
============ ============ ===========
</TABLE>
See notes to financial statements
F-5
<PAGE> 64
SOMANETICS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended November 30,
----------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . $ (6,155,483) $ (3,303,703) $ (2,818,403)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization . . . . . . . . 50,497 66,222 133,128
Changes in assets and liabilities:
Accounts receivable (increase) decrease . (262) 252,423 (17,913)
Inventory (increase) decrease . . . . . . 498,121 5,286 (61,452)
Prepaid expenses (increase) decrease . . (6,146) 6,726 (8,083)
Other assets (increase) decrease . . . . 6,912 88,016 (9,545)
Accounts payable increase (decrease) . . 26,462 232,631 (98,807)
Accrued liabilities increase (decrease). . 143,872 (162,246) (111,532)
-------------- --------------- --------------
Net cash (used in) operations . . . . . . . . (5,436,027) (2,814,645) (2,992,607)
-------------- --------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities . . . . . . . (2,470,780) -- --
Proceeds from sale of marketable securities . . -- -- 1,564,826
Acquisition of property and equipment (net) . . (243,568) (68,914) (19,267)
Proceeds (investment) under note receivable-related
party -- 190,240 (15,240)
-------------- ------------- ------------
Net cash provided by (used in) investing
activities (2,714,348) 121,326 1,530,319
-------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Shares . . . . 6,991,218 5,267,406 1,593,469
Redemption of Redeemable Convertible Preferred Shares -- (19,843) --
Redemption of Class B Warrants and fractional shares (378) (203,759) --
Proceeds from issuance of notes payable and long-term
debt -- 205,000 --
Repayment of notes payable and long-term debt. . -- (205,000) (30,000)
-------------- --------------- --------------
Net cash provided by financing activities . . 6,990,840 5,043,804 1,563,469
-------------- --------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS . . . . . . . . . . . . . . . . (1,159,535) 2,350,485 101,181
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD . . . . . . . . . . . . . . 3,291,911 941,426 840,245
-------------- --------------- --------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD . . . . . . . . . . . . . . . . . $ 2,132,376 $ 3,291,911 $ 941,426
============== =============== ==============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest for the years ended November 30, 1997, 1996 and 1995
approximated $0, $450 and $1,000, respectively.
See notes to financial statements
F-6
<PAGE> 65
SOMANETICS CORPORATION
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 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 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.
The Company was in the development stage at November 30, 1996; during
the year ended November 30, 1997, the Company completed its development
activities and commenced its planned principal operations.
2. FINANCIAL STATEMENT PRESENTATION
The Company has not achieved sales necessary to support operations.
The Company has incurred an accumulated deficit of $36,366,536 through November
30, 1997. The Company had working capital of $4,510,973, cash, cash
equivalents and marketable securities of $4,603,156, total current liabilities
of $788,476 and shareholders' equity of $4,888,956, as of November 30, 1997.
On June 6, 1996 and October 13, 1997 the Company received clearance
from the FDA to market its model 3100A adult Cerebral Oximeter and enhancements
to its Cerebral Oximeter, respectively, in the United States. The Company's
current financial condition and results of operations and the status of its
product marketing efforts and sales have been affected by the process of
obtaining such clearances.
As of January 9, 1998, the Company had 25 international distributors,
7 United States distributors (including Puerto Rico), 19 direct sales personnel
and 1 international sales consultant. During fiscal 1997, the Company sold its
product to 13 of its international distributors and all of its United States
distributors, and devoted most of its marketing to introducing cerebral
oximetry patient monitoring into the operating rooms of hospitals. 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 product. The likelihood of success of the Company must be
considered in view of the Company's limited resources and current financial
condition, the problems and expenses frequently encountered in connection with
formation of a new business, the ability to raise new funds, the development
and application of new technology and the competitive environment in which the
Company operates.
The net proceeds from the sales of Common Shares in the Regulation S
offering in November 1996 (Note 3) and the net proceeds from the public
offering of Common Shares in June 1997 (Note 3) were sufficient to fund the
Company's working capital requirements for the fiscal year ended November 30,
1997. Current sales are not sufficient to fund operations. During fiscal 1997,
the Company received approximately $7.0 million in net proceeds from the sale
of Common Shares in a public offering registered under the Securities Act of
1933 (Note 3).
F-7
<PAGE> 66
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
The Company believes that the cash, cash equivalents and marketable
securities on hand at November 30, 1997 will be sufficient to sustain the
Company's operations at budgeted levels and its needs for liquidity into the
second half of fiscal 1998. By that time the Company will be required to raise
additional cash either through additional sales of its product, through sales
of securities, by incurring indebtedness or by some combination of the
foregoing. If the Company is unable to raise additional cash by that time, it
will be required to reduce or discontinue its operations.
The estimated length of time current cash and cash equivalents will
sustain the Company's operations is based on certain estimates and assumptions
made by the Company. Such estimates and assumptions are subject to change as a
result of actual experience. There can be no assurance that actual capital
requirements necessary to market the Cerebral Oximeter and SomaSensor, to
develop enhancements to the SomaSensor, and product extensions of the Cerebral
Oximeter, to conduct research and development concerning additional potential
applications of the Company's technology and for working capital will not be
substantially greater than current estimates.
The Company does not believe that product sales will be sufficient to
fund the Company's operations in fiscal 1998.
See Note 11 for a discussion of negotiations with an underwriter for
sales of securities.
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.
3. STOCK OFFERINGS AND COMMON SHARES
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 Securities Act of 1933, as
amended (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
$0.01 per share, and one warrant to purchase one Common Share.
The Warrants are immediately exercisable and transferable separately
from the Common Shares. Each Warrant entitles the holder to purchase one
Common Share at an initial exercise price of $20.00 per share, subject to
adjustment, at any time through July 13, 2000, unless earlier redeemed. The
Warrants are redeemable for $0.10 by the Company at any time after January 13,
1996, if certain conditions are met; these conditions had not been met as of
January 9, 1998.
F-8
<PAGE> 67
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 consisted of two
newly-issued Common Shares, par value $0.01 per share, and one warrant to
purchase one Common Share.
The Warrants are immediately exercisable and transferable separately
from the Common Shares. Each Warrant entitles the holder to purchase one
Common Share at an initial exercise price of $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 January 9, 1998.
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, 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 January 9, 1998. 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.
On January 15, 1997, the Company's Board of Directors approved an
amendment and restatement of the Company's Restated Articles of Incorporation
to (i) effect a one-for-ten reverse stock split of the Company's Common Shares
while keeping 6,000,000 authorized Common Shares, at a par value of $0.01, and
(ii) remove provisions relating to the Convertible Preferred Shares redeemed
February 28, 1996, all subject to shareholder approval at the 1997 Annual
Meeting of Shareholders. The Company's shareholders approved such amendment
and restatement at the 1997 Annual Meeting of Shareholders on March 25, 1997,
and the reverse stock split became
F-9
<PAGE> 68
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
effective on April 10, 1997. All information contained in these financial
statements gives retroactive effect to the 1-for-10 reverse stock split
effected April 10, 1997.
On June 4, 1997, the Company closed the public offering of 2,000,000
newly issued Common Shares at a price of $4.00 per share, for gross proceeds of
$8,000,000, through an offering underwritten by Brean Murray & Co., Inc. The
net proceeds to the Company, after deducting the underwriting discount and the
expenses of the offering, were approximately $7,000,000. The Company also
granted the underwriter warrants to purchase 200,000 Common Shares at $4.80 per
share exercisable during the four-year period beginning May 30, 1998.
Common shares reserved for future issuance upon exercise of stock
options and warrants as discussed above at November 30, 1997, are as follows:
<TABLE>
<S> <C>
1983 Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,317
1991 Incentive Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . 110,289
1993 Director Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . 23,998
1997 Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 295,000
Options Granted Independent of Option Plans . . . . . . . . . . . . . . . . 175,168
Placement Agent Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . 79,394
Regulation S Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,520
Underwriter Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
-------
Total reserved for future issuance . . . . . . . . . . . . . . . . . . . 1,008,686
=========
</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.
Marketable Securities consist of AAA rated corporate bonds, classified
as available for sale, maturing approximately six months from the date of
acquisition and are stated at cost, which approximates fair market value.
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,
--------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Finished goods . . . . . . . . . . . . . . . . . . . $100,224 $437,079
Work in process . . . . . . . . . . . . . . . . . . 174,363 307,510
Purchased components . . . . . . . . . . . . . . . . 514,725 386,996
--------- ---------
Sub-total . . . . . . . . . . . . . . . . . . . 789,312 1,131,585
Less reserve for obsolete
and excess inventory . . . . . . . . . . . . . . (356,298) (200,450)
--------- ---------
Total . . . . . . . . . . . . . . . . . . . . . $433,014 $931,135
======== ========
</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.
F-10
<PAGE> 69
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
Patents and Trademarks are recorded at cost and are being amortized on
the straight-line method over 17 years. Accumulated amortization was $39,516
and $32,604 at November 30, 1997 and 1996, 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 3)
Accounting Pronouncements In March 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("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 quarter ending
February 28, 1998.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15, 1997.
This Statement establishes standards for reporting and display of comprehensive
income and its components in financial statements. The Statement is effective
for the Company's financial statements for the year ending November 30, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. This statement establishes
standards for the way a public business enterprise reports certain information
about operating segments, and discloses enterprise-wide information about the
company's products and services, activities in different geographic areas, and
the company's reliance on major customers. The statement is effective for the
Company's financial statements for the year ending November 30, 1999.
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:
F-11
<PAGE> 70
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
November 30,
--------------------------------
1997 1996
----------- ----------
<S> <C> <C>
Professional Fees . . . . . . . . . . . . . . . . . . . $120,726 $101,697
Clinical Research . . . . . . . . . . . . . . . . . . . 43,330 --
Product Upgrades . . . . . . . . . . . . . . . . . . . . 25,842 18,261
Warranty . . . . . . . . . . . . . . . . . . . . . . . . 31,166 12,421
Accrued Insurance . . . . . . . . . . . . . . . . . . . 29,768 32,231
Accrued Incentive . . . . . . . . . . . . . . . . . . . 50,500 --
Other . . . . . . . . . . . . . . . . . . . . . . . . . 96,650 89,500
---------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . $ 397,982 $ 254,110
========== =========
</TABLE>
6. INCOME TAX
Deferred income taxes 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
$12,440,000 and $9,124,000 for the years ended November 30, 1997 and 1996,
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,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
November 30,
-----------------------
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
Net operating loss carryforwards . . . . . . . . . . $11,943 $8,718
Accrued liabilities . . . . . . . . . . . . . . . . 230 139
Research and general business tax credit carryforwards 267 267
------- -------
Subtotal . . . . . . . . . . . . . . . . . . . . 12,440 9,124
Valuation allowance . . . . . . . . . . . . . . . . (12,440) (9,124)
-------- -------
Deferred tax asset . . . . . . . . . . . . . . . $ -- $ --
======== ========
</TABLE>
As of November 30, 1997, net operating loss carryforwards of
approximately $35.2 million were available for Federal income tax purposes.
The Company's ability to use the net operating loss carryforwards incurred on
or before March 27, 1991 (the date the Company closed 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 1998 through
2012.
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.
F-12
<PAGE> 71
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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
current lease, as amended, expires December 31, 1999 and grants the Company a
one-year renewal option.
Operating and building lease expense for the years ended November 30,
1997, 1996 and 1995 was approximately $175,700, $173,500, and $278,000,
respectively. Approximate future minimum lease commitments are as follows:
<TABLE>
<CAPTION>
Year ended November 30,
-----------------------
<S> <C> <C>
1998 . . . . . . . . . . . . . . . . . . . . . . 176,400
1999 . . . . . . . . . . . . . . . . . . . . . . 176,400
2000 . . . . . . . . . . . . . . . . . . . . . . 14,700
----------
Total . . . . . . . . . . . . . . . . . . . . $ 367,500
==========
</TABLE>
In December 1991, the Company amended and restated its profit sharing
plan to include a 401(k) plan covering substantially all employees. Under
provisions of the plan, participants may contribute, annually, between 1% and
15% of their compensation. The Company, at the discretion of its Board of
Directors, may contribute matching contributions or make other annual
discretionary contributions to the plan, all of which, together with the
participants' contributions, cannot exceed 15% of the total compensation paid
by the Company to eligible employees. No Company matching or discretionary
contributions were made to the plan for the years ended November 30, 1997, 1996
or 1995.
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
alleged that Company documents contained material misstatements and omissions
in violation of various securities laws. The plaintiff generally sought
unspecified rescissionary damages, interest, punitive damages and attorneys'
fees. The Company settled a class action in 1996 raising similar issues, but
approximately 11 persons, including Benjamin Langford, opted out of that action
and the related settlement and, therefore, were not barred by the settlement
from pursuing their own claims against the Company. As a result, however, Mr.
Langford's action was no longer a class action. The Company, the Company's
insurance company and Mr. Langford entered into a Settlement Agreement in
December 1997 that required the Company and its insurance Company to make a
cash payment to Mr. Langford. The Company's portion of the cash payment was
immaterial, and the lawsuit was dismissed with prejudice in December 1997.
At November 30, 1997, 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 April 30, 2000 for
Mr. Barrett and 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, 1997 were $204,750 and $110,250, respectively,
plus potential discretionary bonuses. Both parties have agreed not to compete
with the Company during specified periods.
The Company may become subject to products liability claims by
patients or physicians, and may become a defendant in products liability or
malpractice litigation. The Company has obtained products liability insurance
F-13
<PAGE> 72
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 products liability.
8. STOCK OPTION PLANS
In January 1983, February 1991, and January 1997, the Company adopted
stock option plans (the "1983 Plan," the "1991 Plan," and the "1997 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, 115,000
Common Shares under the 1991 Plan, and 295,000 Common Shares under the 1997
Plan. In addition, the Company granted options to employees independent of
the plans ("Non-Plan"). Awards and expirations under the 1983 Plan, 1991
Plan, 1997 Plan, and Non-Plan during the years ended November 30, 1997, 1996
and 1995 are listed below.
At November 30, 1997, no additional options may be granted under the
1983 Plan, 3,577 Common Shares were available for options to be granted under
the 1991 Plan, and 41,800 Common Shares were available under the 1997 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 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.
In October 1995, SFAS No. 123, "Accounting for Stock-Based
Compensation," was issued which encourages, but does not require, companies to
record compensation expense for the fair value of stock options and other
equity instruments granted under stock-based employee compensation
arrangements. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. Accordingly, compensation costs for stock options
are measured as the excess, if any, of the market price of the Company's stock
at the date of the grant over the amount an employee must pay to acquire the
stock. No compensation expense has been charged against income for stock option
grants.
Had compensation expense for the Company's stock options been
determined based on the fair value of the options on the grant date pursuant to
the methodology of SFAS No. 123, the Company's net loss for 1997 and 1996 on a
pro forma basis would have increased by approximately $901,000 to $(7,057,000),
or $(2.16) per Common Share, and increased by approximately $628,000 to
$(3,932,000), or $(2.11) per Common Share, respectively. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
1997 and 1996: expected volatility (the measure by which the stock price has
fluctuated or is expected to fluctuate during the period) 88.26%, risk-free
interest rate of 6%, expected lives of 4 years and dividend yield of 0%.
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts. SFAS No. 123 does not apply to awards prior
to 1996.
F-14
<PAGE> 73
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
A summary of the Company's stock option activity and related
information for years ended November 30, 1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
COMMON EXERCISE COMMON EXERCISE COMMON EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
December 1, . . . . . 295,517 $12.38 234,702(1) $13.76 184,888(1) $14.45
Options granted . . . 306,850 5.08 165,335 9.56 81,616 13.31
Options exercised. . . -- -- (6,936) 9.34 (100) 8.40
Options canceled (47,450) 15.21 (97,584) 11.20 (31,702) 16.76
------- ------ ------- ------ ------- ------
Options outstanding
November 30, (2)(3). . 554,917 $8.23 295,517 $12.38 234,702 $13.76
======== ====== ======= ====== ======= ======
Options exercisable
November 30, . . . . . 218,847 $13.76 177,509 $13.08 79,565 $13.24
======== ====== ======= ====== ======= ======
</TABLE>
- ----------------------------------
(1) Plus 13,239 redeemable Convertible Preferred Shares, which were
redeemed on February 28, 1996
(2) Exercise dates range from February 21, 1991 to October 1, 2007.
(3) As of November 30, 1997, options outstanding have exercise prices
between $4.00 and $42.50, and a weighted average remaining contractual
life of 8.12 years.
Also, see Note 11 for a proposed amendment to the 1997 Stock Option
Plan.
9. RELATED PARTY TRANSACTIONS
The Company received legal services from certain shareholders.
Services from such parties amounted to approximately $365,800, $348,570 and
$236,000 during the years ended November 30, 1997, 1996 and 1995, 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-15
<PAGE> 74
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
The Company recognized no revenue in fiscal 1997, 1996 and 1995,
respectively, from Somatek, Inc., one of the Company's former United States
distributors whose principal owner is a director of the Company. Effective
February 28, 1997 the Company terminated its distribution agreement with
Somatek, Inc. The Company wrote off approximately $12,500, $68,000 and $0 of
trade receivables from Somatek, Inc. in fiscal 1997, 1996 and 1995,
respectively, in exchange for the return of Cerebral Oximeters.
10. MAJOR CUSTOMERS AND FOREIGN SALES
The Company had two international distributors and one United States
distributor which accounted for approximately 28% (Japan), 11% (Latin America)
and 12% (United States), respectively, of total sales for the year ended
November 30, 1997, two distributors which accounted for approximately 62%
(Japan) and 15% (Latin America), respectively, of total sales for fiscal year
1996 and two distributors which accounted for approximately 53% (Japan) and 13%
(Latin America), respectively, of total sales for fiscal year 1995.
Additionally, total sales to foreign customers for the years ended
November 30, 1997, 1996 and 1995 include approximately $689,000, $745,000 and
$1,336,000, respectively.
11. SUBSEQUENT EVENTS (UNAUDITED)
On January 15, 1998, the Company's Board of Directors approved an
amendment and restatement of the Company's Restated Articles of Incorporation
to (i) increase the Company's authorized Common Shares from 6,000,000 to
20,000,000 shares, and (ii) remove provisions relating to the reverse stock
split effected April 10, 1997, all subject to shareholder approval at the 1998
Annual Meeting of Shareholders, which is scheduled for March 17, 1998.
In addition, on January 15, 1998, the Company's Board of Directors
approved an amendment to the Somanetics Corporation 1997 Stock Option Plan to
increase the number of Common Shares reserved for issuance pursuant to the
exercise of options granted under the 1997 Plan by 450,000 shares, from 295,000
to 745,000 shares, subject to shareholder approval at the 1998 Annual Meeting
of Shareholders, which is scheduled for March 17, 1998.
The Company has entered into a Letter Agreement, dated as of February
17, 1998, pursuant to which the Company has exclusively retained a placement
agent to introduce the Company to certain investors as prospective purchasers
of 2,000,000 of the Company's common shares. The offering would be a best
efforts, all or none offering, registered under the Securities Act of 1933.
Any such public offering will be made only by means of a prospectus. Among
other things, the offering will be contingent on satisfactory completion of a
due diligence investigation of the Company by the placement agent. In
addition, the type and amount of security, if any, that might ultimately be
issued in any such offering have not yet been definitively determined and will
be dependent on negotiations with the placement agent, market conditions and
management's then current estimate of the proceeds necessary or desired to
sustain the Company's operations. There can be no assurance that such offering
will occur or that the Company will be able to raise any capital or capital in
amounts it desires, or on terms and conditions acceptable to the Company.
F-16
<PAGE> 75
<TABLE>
<S> <C> <C>
[Picture of Cerebral Oximeter being used during
open heart surgery]
"THIS IS A SIMPLE-TO-USE DEVICE
THAT PROVIDES RELIABLE
INFORMATION ABOUT THE ADEQUACY
OF CEREBRAL OXYGENATION,
ENABLING MORE EFFECTIVE AND
EFFICIENT PATIENT CARE."
James May, M.D.
Cardiothoracic Surgeon
Columbia Trident Regional
James May, M.D., (left) cardiothoracic surgeon at Medical Center
Columbia Trident Regional Medical Center in Charleston, SC
Charleston, SC, performs an open heart surgery
and uses the Cerebral Oximeter to monitor the
patient's brain oxygen saturation. Robert
Blackard, M.D. (right), chief of anesthesia, also
keeps an alert eye on the monitor's information.
[Picture of Cerebral Oximeter being used in a
carotid endarterectomy surgery]
"WE UTILIZE THE CEREBRAL OXIMETER TO
DETERMINE WHETHER TO SHUNT A
PATIENT, WHICH HELPS SAVE TIME,
MONEY AND OPERATING ROOM
EXPENSE."
Steven Chapman, M.D.
Cardiac Surgeon
Piedmont Healthcare System
Rock Hill, SC
A carotid endarterectomy surgery is being
performed by Steven Chapman, M.D. (center) at
Piedmont Healthcare System in Rock Hill, SC.,
while the anesthesiologist and surgical nurse
look to the monitor for information to ensure
adequate cerebral oxygenation of the patient.
FUTURE APPLICATIONS
[Picture of SomaSensor on newborn] Research being conducted on children and
newborns is expected to result in a SomaSensor
that can fit smaller heads and be more cost
effective to manufacture. Non-invasive
monitoring is especially important in this
patient population, as they generally have
lower oxygen reserves than adults, have less
blood volume from which to make invasive blood
gas measurements and are less tolerant of
painful skin punctures and infections.
Somanetics, INVOS. "Window to the Brain" and SomaSensor
are registered trademarks of Somanetics Corporation. [SOMANETICS LOGO]
</TABLE>
<PAGE> 76
[SOMANETICS LOGO]
WINDOW TO THE BRAIN(TM)
<PAGE> 77
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 the Placement Agent's fees):
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee . . . $ 3,724
NASD Filing Fee . . . . . . . . . . . . . . . . . . . . . 1,763
Nasdaq Listing Fee . . . . . . . . . . . . . . . . . . . . 7,500
Printing and Engraving Expenses . . . . . . . . . . . . . 35,000
Accounting Fees and Expenses . . . . . . . . . . . . . . . 25,000
Legal Fees and Expenses . . . . . . . . . . . . . . . . . 75,000
Blue Sky Fees and Expenses . . . . . . . . . . . . . . . . 15,000
Transfer Agent's and Registrar's Fees and Expenses . . . . 7,000
Placement Agent's Accountable Expenses . . . . . . . . . . 75,000
Miscellaneous Expenses . . . . . . . . . . . . . . . . . . 5,013
-------------
Total . . . . . . . . . . . . . . . . . . . . . . $ 250,000
=============
</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 Placement Agency 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.
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
II-1
<PAGE> 78
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
"Regulation S 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 Regulation S 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 Regulation S 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 $0.10 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 Regulation S 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 $0.10 by the Company at any time
after January 13, 1996, 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.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
See Exhibit Index immediately preceding the exhibits.
II-2
<PAGE> 79
(B) FINANCIAL STATEMENT SCHEDULES
Schedule Page
Schedule II -- Valuation and Qualifying Accounts S-1
and Reserves for the years ended November 30, 1997,
1996 and 1995.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, 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> 80
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Troy,
State of Michigan, on March 3, 1998.
SOMANETICS CORPORATION
(Registrant)
By: /s/ BRUCE J. BARRETT
-------------------------
BRUCE J. BARRETT
Its: President and Chief
Executive Officer
-----------------
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned
officers and directors of Somanetics Corporation, a Michigan corporation (the
"Company"), hereby constitutes and appoints Bruce J. Barrett, Raymond W. Gunn
and William M. Iacona, and each of them (with full power of substitution and
re-substitution), his or her true and lawful attorneys-in-fact and agents for
each of the undersigned and on his or her behalf and in his or her name, place
and stead, in any and all capacities, with full power and authority in such
attorneys-in-fact and agents and in any one or more of them, to sign, execute
and affix his seal thereto and file with the Securities and Exchange Commission
and any state securities regulatory board or commission the registration
statement on Form S-1 to be filed by the Company under the Securities Act of
1933, as amended, which registration statement relates to the registration and
sale of Common Shares, par value $0.01 per share, by the Company, any and all
amendments or supplements to such registration statement, including any
amendment or supplement thereto changing the amount of securities for which
registration is being sought, any post-effective amendment, and any
registration statement or amendment to such registration statement for the same
offering that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933, with all exhibits and any and all documents required to
be filed with respect thereto with any regulatory authority, including, without
limitation, The Nasdaq Stock Market, the National Association of Securities
Dealers, Inc. and any federal or state regulatory authority pertaining to such
registration statement; granting unto such attorneys-in-fact, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as he or she might or
could do if personally present, hereby ratifying and confirming all that such
attorneys-in-fact and agents, and each of them and any of their substitutes,
may lawfully do or cause to be done by virtue of this Power of Attorney.
-----------------
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ BRUCE J. BARRETT President, Chief Executive Officer and a Director March 3, 1998
- ----------------------------------
BRUCE J. BARRETT (Principal Executive Officer)
/s/ RAYMOND W. GUNN Executive Vice President and Chief Financial Officer March 3, 1998
- ----------------------------------
RAYMOND W. GUNN (Principal Financial Officer)
/s/ WILLIAM M. IACONA Corporate Controller March 3, 1998
- ----------------------------------
WILLIAM M. IACONA (Principal Accounting Officer)
/s/ H. RAYMOND WALLACE Chairman of the Board of Directors March 3, 1998
- ----------------------------------
H. RAYMOND WALLACE
/s/ DANIEL S. FOLLIS Director March 3, 1998
- ----------------------------------
DANIEL S. FOLLIS
/s/ JAMES I. AUSMAN, M.D., Ph.D. Director March 3, 1998
- ----------------------------------
JAMES I. AUSMAN, M.D., PH.D.
</TABLE>
II-4
<PAGE> 81
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
for the years ended November 30, 1997, 1996 and 1995
<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, 1997 $46,047 $176,790 -- $56,847 $165,990
Year ended November 30, 1996 193,766 46,056 -- 193,775 46,047
Year ended November 30, 1995 224,509 -- -- 30,743 193,766
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, 1997 $200,450 $442,448 -- $286,600 $356,298
Year ended November 30, 1996 95,078 170,554 -- 65,182 200,450
Year ended November 30, 1995 25,000 70,078 -- -- 95,078
</TABLE>
Note: (3) Write-off obsolete, excess inventory, net of recoveries
S-1
<PAGE> 82
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
1.1* Proposed form of Placement Agency Agreement.
1.2* Proposed form of Escrow Agreement.
3(i) Restated Articles of Incorporation of Somanetics Corporation, incorporated by reference to
Exhibit A to the Company's Proxy Statement, dated as of February 4, 1998 in connection with
the 1998 Annual Meeting of Shareholders held on March 17, 1998.
3(ii) Amended and Restated Bylaws of Somanetics Corporation, 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 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 Development Company, dated
July 22, 1994, incorporated by reference to Exhibit 10.11 to the Company's Quarterly Report
on Form 10-Q for the quarter ended August 31, 1994.
10.3 Change in ownership of Lease Agreement for 1653 E. Maple Road, 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 Second Addendum, between Somanetics Corporation and First Industrial Mortgage Partnership,
L.P., dated April 14, 1997, incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 31, 1997.
10.5 Somanetics Corporation Amended and Restated 1983 Stock 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.
10.6 Somanetics Corporation Amended and Restated 1991 Incentive 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.
10.7 Fourth Amendment to Somanetics Corporation 1991 Incentive 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.
10.8 Amended and Restated Fifth Amendment to Somanetics 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.
10.9 Somanetics Corporation 1993 Director Stock Option Plan, 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.
10.10 Somanetics Corporation 1997 Stock Option Plan, incorporated by reference to Exhibit 10.9 to
the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996.
10.11 First Amendment to Somanetics Corporation 1997 Stock Option Plan, incorporated by reference
to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1997.
10.12 Somanetics Corporation 1997 Employee Incentive Compensation 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.
</TABLE>
1
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
10.13 Somanetics Corporation 1998 Employee Incentive Compensation Plan, incorporated by reference
to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1997.
10.14 Employment Agreement, dated as of December 1, 1992, between Somanetics Corporation and
Raymond W. Gunn, incorporated by reference to Exhibit 10.14 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1992.
10.15 Employment Agreement, dated May 13, 1994, between Somanetics Corporation and Bruce J.
Barrett, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended May 31, 1994.
10.16 Amendment to Employment Agreement, dated as of February 23, 1994, between Somanetics
Corporation and Raymond W. Gunn, incorporated by reference to Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the fiscal year ended November 30, 1993.
10.17 Amendment to Employment Agreement, dated as of July 21, 1994, between Somanetics Corporation
and Bruce J. Barrett, incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1994.
10.18 Amendment to Employment Agreement, dated as of July 21, 1994, between Somanetics Corporation
and Raymond W. Gunn, incorporated by reference to Exhibit 10.3 to the Company's Quarterly
report on Form 10-Q for the quarter ended August 31, 1994.
10.19 Amendment to Employment Agreement, dated as of December 1, 1995, between Somanetics
Corporation and Raymond W. Gunn, incorporated by reference to Exhibit 10.20 to the Company's
Annual Report on Form 10-K for the fiscal year ended November 30, 1995.
10.20 Amendment to Employment Agreement, dated as of November 18, 1996, between Somanetics
Corporation and Raymond W. Gunn, incorporated by reference to Exhibit 10.20 to the Company's
Annual Report on Form 10-K for the fiscal year ended November 30, 1996.
10.21 Amendment to Employment Agreement, dated as of April 24, 1997, between Somanetics
Corporation and Bruce J. Barrett, incorporated by reference to Exhibit 10.21 to
Amendment No. 1 to the Registration Statement on Form S-1 (file no. 333-25275), filed with
the Securities and Exchange Commission on May 30, 1997.
10.22 Amendment to Employment Agreement, dated as of April 24, 1997, between Somanetics
Corporation and Raymond W. Gunn, incorporated by reference to Exhibit 10.22 to
Amendment No. 1 to the Registration Statement on Form S-1 (file no. 333-25275), filed with
the Securities and Exchange Commission on May 30, 1997.
10.23 Stock Option Agreement, dated May 16, 1994, between Somanetics Corporation and Bruce J.
Barrett, incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1994.
10.24 Stock Option Agreement, dated July 21, 1994, between Somanetics Corporation and Bruce J.
Barrett, incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1994.
10.25 Stock Option Agreement, dated July 21, 1994, between Somanetics Corporation and Gary D.
Lewis, incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1994.
10.26 Stock Option Agreement, dated July 21, 1994, between Somanetics Corporation and Raymond W.
Gunn, incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1994.
</TABLE>
2
<PAGE> 84
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
10.27 Stock Option Agreements, dated July 20, 1995, between Somanetics Corporation and Richard
Farkas, incorporated by reference to Exhibit 10.28 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1995.
10.28 Form of Stock Option Agreement, dated December 22, 1995, 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, 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, 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, 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, incorporated by reference to Exhibit 10.32 to Amendment No. 1 to
the Registration Statement on Form S-1 (file no. 333-25275), filed with the Securities and
Exchange Commission on May 30, 1997.
10.33 Consulting Agreement, dated February 28, 1983, as amended, 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 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 Amendment to Stock Option Agreement, dated as of February 1, 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.
10.36 Current Form of Somanetics Corporation Confidentiality 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.
10.37 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, February 11, 1986 and February 11,
1986, from Gary D. Lewis to Somanetics Corporation in connection with the Company's INVOS(R)
technology, incorporated by reference to Exhibit 10.17 to the Company's Registration
Statement on Form S-1 (file no. 33-38438).
10.39 Assignments, dated October 5, 1983, August 28, 1985, February 11, 1986, February 12, 1986,
and September 24, 1986, from Hugh F. Stoddart to Somanetics Corporation in connection with
the Company's INVOS(R) technology, incorporated by reference to Exhibit 10.18 to the
Company's Registration Statement on Form S-1 (file no. 33-38438).
</TABLE>
3
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
10.40 Warrant Agreement, dated as of August 2, 1994, between Somanetics Corporation and Rauscher
Pierce & Clark Limited, incorporated by reference to Exhibit 10.15 to the Company's
Quarterly Report on Form 10-Q for the quarter ended August 31, 1994.
10.41 Form of Warrant to Purchase Common Stock of Somanetics 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 Form of Warrant, between Somanetics Corporation and 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.
10.43 Warrant Agreement, dated as of July 14, 1995, 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 August 31, 1995.
10.44 Warrant to Purchase Common Stock of Somanetics Corporation, 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.
10.45 Engagement Letter, dated as of March 25, 1996, among 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).
10.46 Form of Purchase Agreement, between Somanetics Corporation 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.
10.47 Form of Warrant between Somanetics Corporation and 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.
10.48 Warrant Agreement, dated as of April 2, 1996, between 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.
10.49 Warrant to Purchase Common Stock of Somanetics Corporation, 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.
10.50 Side Letter, dated as of April 2, 1996, among 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 February 29, 1996.
10.51 Amendment to Side Letter, dated as of June 18, 1996, among 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.
10.52 Engagement Letter, dated as of October 23, 1996, among 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.
</TABLE>
4
<PAGE> 86
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
10.53 Amendment to Engagement Letter, dated as of November 1, 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.
10.54 Form of Purchase Agreement, between Somanetics Corporation 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.
10.55 Placement Agent Agreement, dated as of November 21, 1996, 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.
10.56 Form of Underwriting Agreement, dated May 30, 1997, between Somanetics Corporation and Brean
Murray & Co., Inc., incorporated by reference to Exhibit 1.1 to Amendment No. 1 to the
Registration Statement on Form S-1 (file no. 333-25275), filed with the Securities and
Exchange Commission on May 30, 1997.
10.57 Form of Warrant Agreement and Warrant, dated June 4, 1997, between Somanetics Corporation
and Brean Murray & Co., Inc., incorporated by reference to Exhibit 10.60 to Amendment No. 1
to the Registration Statement on Form S-1 (file no. 333-25275), filed with the Securities
and Exchange Commission on May 30, 1997.
10.58 Letter Agreement, dated as of February 20, 1997, between 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 of Deloitte & Touche LLP and Report on Schedule.
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 registrant contained on page II-4 of
this registration statement).
</TABLE>
__________________________
*To be filed by amendment.
5
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
We consent to the use in this Registration Statement relating to 2,000,000
Common Shares of Somanetics Corporation on Form S-1 of our report dated January
9, 1998 (which includes an explanatory paragraph relating to an uncertainty
concerning Somanetics Corporation'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
Somanetics Corporation'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.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
March 3, 1998
