<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended AUGUST 31, 1998
OR
( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
----------- ----------
Commission file number 0-19095
SOMANETICS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MICHIGAN 38-2394784
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
1653 EAST MAPLE ROAD,
TROY, MICHIGAN
48083-4208
(Address of principal executive offices)
(Zip Code)
(248) 689-3050
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------------------------------- ---------------------------
Number of common shares outstanding at September 30, 1998: 6,035,597
<PAGE> 2
PART I FINANCIAL INFORMATION
SOMANETICS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, November 30,
1998 1997
ASSETS ----------------- ------------------
<S> <C> <C>
CURRENT ASSETS: (Unaudited) (Audited)
Cash and cash equivalents.......................................... $ 3,332,718 $ 2,132,376
Marketable securities, at cost..................................... 4,936,981 2,470,780
Accounts receivable, net of allowance for doubtful accounts of
approximately $153,000 and $166,000 at August 31, 1998 and
November 30, 1997, respectively................................. 632,817 191,698
Inventory, net..................................................... 833,014 433,014
Prepaid expenses................................................... 58,321 71,581
--------------- ---------------
Total current assets............................................ 9,793,851 5,299,449
--------------- ---------------
PROPERTY AND EQUIPMENT (at cost):
Machinery and equipment............................................ 1,119,836 722,905
Furniture and fixtures............................................. 184,949 184,351
Leasehold improvements............................................. 166,770 166,770
--------------- ---------------
Total........................................................... 1,471,555 1,074,026
Less accumulated depreciation and amortization..................... (901,304) (784,860)
--------------- ---------------
Net property and equipment...................................... 570,251 289,166
--------------- ---------------
OTHER ASSETS:
Patents and trademarks, net........................................ 67,033 72,217
Other.............................................................. 15,000 16,600
--------------- ---------------
Total other assets.............................................. 82,033 88,817
--------------- ---------------
TOTAL ASSETS........................................................... $ 10,446,135 $ 5,677,432
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 171,955 $ 390,494
Accrued liabilities................................................ 374,450 397,982
--------------- ---------------
Total current liabilities....................................... 546,405 788,476
--------------- ---------------
COMMITMENTS AND CONTINGENCIES.......................................... - -
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, 6,035,597 and 4,285,334 shares at
August 31, 1998 and November 30, 1997, respectively............. 60,356 42,853
Additional paid-in capital......................................... 50,290,067 41,212,639
Accumulated deficit................................................ (40,450,693) (36,366,536)
--------------- ---------------
Total shareholders' equity...................................... 9,899,730 4,888,956
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $ 10,446,135 $ 5,677,432
=============== ===============
</TABLE>
See notes to financial statements
2
<PAGE> 3
SOMANETICS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended August 31, Ended August 31,
--------------------------------- --------------------------------
1998 1997 1998 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
NET REVENUES .................................... $ 523,222 $ 261,506 $ 1,837,273 $ 1,016,424
COST OF SALES ................................... 305,569 129,415 996,445 523,625
----------- ----------- ----------- -----------
GROSS MARGIN .................................... 217,653 132,091 840,828 492,799
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Research, development and engineering ........ 172,207 254,532 500,832 658,717
Selling, general and administrative .......... 1,718,389 1,329,834 4,689,477 4,102,726
----------- ----------- ----------- -----------
Total operating expenses ................. 1,890,596 1,584,366 5,190,309 4,761,443
----------- ----------- ----------- -----------
OPERATING LOSS .................................. (1,672,943) (1,452,275) (4,349,481) (4,268,644)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income .............................. 120,444 84,557 257,222 131,797
Other ........................................ -- 8,100 8,100 24,318
----------- ----------- ----------- -----------
Total other income ....................... 120,444 92,657 265,322 156,115
----------- ----------- ----------- -----------
NET LOSS ........................................ $(1,552,499) $(1,359,618) $(4,084,159) $(4,112,529)
----------- ----------- ----------- -----------
NET LOSS PER COMMON SHARE -
BASIC AND DILUTED ........................... $ (0.26) $ (0.32) $ (0.78) $ (1.40)
----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES
OUTSTANDING ................................. 6,035,597 4,220,117 5,217,942 2,934,978
=========== =========== =========== ===========
</TABLE>
See notes to financial statements
3
<PAGE> 4
SOMANETICS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Month
Periods Ended August 31,
----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................................. $(4,084,159) $(4,112,529)
Adjustments to reconcile net loss to net cash used in
operations:
Depreciation and amortization .................................................... 71,905 31,948
Changes in assets and liabilities:
Accounts receivable (increase) ............................................... (441,119) (261,317)
Inventory (increase) decrease ................................................ (400,000) 284,603
Prepaid expenses (increase) decrease ......................................... 13,260 (14,866)
Other assets decrease ...................................................... 1,600 5,184
Accounts payable (decrease) .................................................. (218,539) (117,836)
Accrued liabilities increase (decrease) ...................................... (23,532) 68,707
----------- -----------
Net cash (used in) operations .............................................. (5,080,584) (4,116,106)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities ................................................... (4,936,981) (2,929,960)
Proceeds from sale of marketable securities .......................................... 2,470,780 --
Acquisition of property and equipment (net) .......................................... (347,804) (31,203)
----------- -----------
Net cash (used in) investing activities .................................... (2,814,005) (2,961,163)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Shares .............................................. 9,094,931 6,990,840
----------- -----------
Net cash provided by financing activities ................................. 9,094,931 6,990,840
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .......................................................................... 1,200,342 (86,429)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD ........................................................................... 2,132,376 3,291,911
----------- -----------
CASH AND CASH EQUIVALENTS, END
OF PERIOD ........................................................................... $ 3,332,718 $ 3,205,482
=========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest for the nine-month period ended August 31, 1998 and 1997
was $0 and $0, respectively.
See notes to financial statements
4
<PAGE> 5
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1998
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 August 31, 1997; during the
year ended November 30, 1997, the Company completed its development activities
and commenced its planned principal operations.
2. FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited interim financial statements of Somanetics
Corporation have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, such financial statements do
not include all of the information and footnotes normally included in the
Company's annual financial statements prepared in accordance with generally
accepted accounting principles, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
The accompanying unaudited interim financial statements reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal recurring nature, except those not material to the Company's
financial condition or results of operations. Operating results for the
nine-month period ended August 31, 1998, are not necessarily indicative of the
results that may be expected for the year ending November 30, 1998, although the
Company expects to continue to incur operating losses for the foreseeable
future. The unaudited interim financial statements should be read in conjunction
with the financial statements and footnotes thereto for the year ended November
30, 1997 included in the Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1997.
The Company has not achieved sales necessary to support operations. The
Company has incurred an accumulated deficit of $40,450,693 through August 31,
1998. The Company had working capital of $9,247,446, cash and cash equivalents
of $3,332,718, marketable securities of $4,936,981, total current liabilities of
$546,405 and shareholders' equity of $9,899,730 as of August 31, 1998.
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.
5
<PAGE> 6
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1998
On April 8, 1998, the Company completed the public offering of
1,750,000 newly-issued Common Shares, at a price of $5.75 per share, for gross
proceeds of $10,062,500, through an offering underwritten by Brean Murray & Co.,
Inc. The net proceeds to the Company, after deducting the underwriting discount
and the estimated expenses of the offering, were approximately $9,100,000. The
net proceeds from the public offerings of Common Shares in June 1997 and April
1998 were sufficient to fund the Company's working capital requirements for the
nine months ended August 31, 1998. Current sales are not sufficient to fund
operations.
The Company believes that the cash, cash equivalents, and marketable
securities on hand at August 31, 1998 will be sufficient to sustain the
Company's operations at budgeted levels and its needs for liquidity into the
second quarter of fiscal 2000. 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, 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, 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.
As of August 31, 1998, there were 60,400 redeemable warrants
outstanding, exercisable at $20.00 per share until July 13, 2000, and 55,120
redeemable warrants outstanding exercisable at $17.50 per share until April 1,
2001. These warrants were issued in the Company's 1995 and 1996 Regulation S
securities offerings. The conditions permitting the Company to redeem these
warrants have not been met as of September 25, 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 June 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.
On June 12, 1998, the Company entered into a $2,000,000 Revolving Note
and a Pledge Agreement with Fifth Third Bank of Northwestern Ohio, N.A. The
principal amount outstanding under the note bears interest, payable monthly, at
the bank's prime rate (8.5% as of September 25, 1998), is collateralized by all
property of the Company held at the bank, including marketable securities, and
is intended to be used for general corporate purposes, if necessary. The Company
has not borrowed any money under the line of credit. The line of credit expires
March 31, 1999. Before that date, the bank may, but is not obligated to, lend
the Company such amounts as may from time to time be requested by the Company,
up to $2,000,000 if no Event of Default shall exist. Events of default include
failure to furnish satisfactory additional security on demand or the bank
deeming itself insecure. The Company has no other loan commitments.
6
<PAGE> 7
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1998
There can be no assurance that even if the Company receives additional
capital, it will be able to achieve the level of sales necessary to sustain its
operations. There can be no assurance that the Company will be able to obtain
any funds on terms acceptable to the Company and at times required by the
Company through sales of the Company's product, sales of securities or loans in
sufficient quantities. The report of the Company's Independent Auditors in the
Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1997
contains an explanatory paragraph relating to an uncertainty concerning the
Company's ability to continue as a going concern.
These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
3. COMMON SHARES AND STOCK OPTIONS
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 referring to the reverse stock split
effective April 10, 1997, all subject to shareholder approval at the 1998 Annual
Meeting of Shareholders. The Company's shareholders approved such amendment and
restatement at the 1998 Annual Meeting of Shareholders on 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, from 295,000 to
745,000 shares, subject to shareholder approval at the 1998 Annual Meeting of
Shareholders. The Company's shareholders approved such amendment at the 1998
Annual Meeting of Shareholders on March 17, 1998.
Effective January 22, 1998, the Company's Board of Directors granted
10-year stock options under the 1997 Stock Option Plan to purchase an aggregate
of 20,000 Common Shares at $4.75 per share (the closing sale price of the Common
Shares on the date of grant) to four executive officers of the Company. In
addition, effective March 17, 1998, the Company replaced options to purchase
18,522 Common Shares granted under the 1991 Incentive Stock Option Plan or the
1993 Director Stock Option Plan to the three directors of the Company who are
not officers or employees of the Company, with ten-year options granted under
the 1997 Stock Option Plan to purchase the same number of Common Shares at an
exercise price of $5.875 per share (the closing sale price of the Common Shares
on the date of grant). Also effective March 17, 1998, the Company granted such
directors ten-year options under the 1997 Stock Option Plan to purchase an
aggregate of 6,000 Common Shares at an exercise price of $5.875 per share. In
addition, effective April 2, 1998, the Company granted 10-year options under the
1997 Stock Option Plan to purchase 430,000 Common Shares to 22 employees and one
consultant of the Company at an exercise price of $5.875 per share (the closing
sale price of the Common Shares as of the date of grant).
On April 8, 1998, the Company completed the public offering of
1,750,000 newly-issued Common Shares, at a price of $5.75 per share, for gross
proceeds of $10,062,500, through an offering underwritten by Brean Murray & Co.,
Inc. The net proceeds to the Company, after deducting the underwriting discount
and the estimated expenses of the offering, were approximately $9,100,000.
7
<PAGE> 8
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1998
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Marketable Securities consist eighty percent of AAA rated corporate
bonds and twenty percent of lower rated, fixed income securities, classified as
available for sale, maturing six months to one year 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>
August 31, 1998 November 30, 1997
--------------- -----------------
<S> <C> <C>
Finished goods................... $234,344 $100,224
Work in process.................. 359,430 174,363
Purchased components............. 421,750 514,725
----------- ----------
Sub-total................... 1,015,524 789,312
Less reserve for obsolete
and excess inventory.......... (182,510) (356,298)
----------- ----------
Total....................... $833,014 $433,014
=========== ==========
</TABLE>
Patents and Trademarks are recorded at cost and are being amortized on
the straight-line method over 17 years. Accumulated amortization was $44,700 and
$39,516 at August 31, 1998 and November 30, 1997, respectively.
Loss Per Common Share - basic and diluted, is computed using the
weighted average number of common shares outstanding during each period. During
the first quarter of fiscal 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." The adoption of
SFAS No. 128 had no impact on the reported loss per share for all periods
presented. Common Shares issuable under stock options and warrants have been
considered in the computation of the net loss per Common Share - diluted, but
have not been included because such inclusion would be antidilutive. As of
August 31, 1998 and August 31,1997, the Company had outstanding 1,396,341 and
746,781, respectively, of warrants and options to purchase Common Shares.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
August 31, 1998 November 30, 1997
--------------- -----------------
<S> <C> <C>
Professional Fees....................... $25,282 $120,726
Clinical Research....................... 29,165 43,330
Product Upgrades........................ 21,297 25,842
Warranty................................ 88,167 31,166
Accrued Insurance....................... - 29,768
Accrued Incentive....................... 127,616 50,500
Other................................... 82,923 96,650
-------- --------
Total.................................. $374,450 $397,982
======== ========
</TABLE>
8
<PAGE> 9
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1998
6. COMMITMENTS AND CONTINGENCIES
The Company may become subject to product liability claims by patients
or physicians, and may become a defendant in product liability or malpractice
litigation. The Company has obtained product liability insurance and an umbrella
policy. There can be no assurance that the Company will be able to maintain such
insurance or that such insurance would be sufficient to protect the Company
against such product liability.
9
<PAGE> 10
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1998
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 the caption "Risk Factors" and elsewhere in the Company's
Registration Statement on Form S-1 (file no. 333-47225) effective April 2, 1998
and elsewhere in this Report, that could cause actual results to differ
materially from historical results or those currently anticipated.
RESULTS OF OPERATIONS
OVERVIEW
Somanetics Corporation develops, manufactures and markets the INVOS
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 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 new advances in its INVOS
technology that are incorporated in its next generation INVOS 4100 Cerebral
Oximeter. The next generation Cerebral Oximeter was introduced in October 1997
and shipments began in the first quarter of fiscal 1998.
During fiscal 1997, the Company's primary activities consisted of
research and development of the INVOS technology, the Cerebral Oximeter and the
related disposable SomaSensor. During the first three quarters of fiscal 1998,
the Company's primary activities consisted of sales and marketing related to the
new model 4100 Cerebral Oximeter. The Company recently emerged from the
development stage and had an accumulated deficit of $40,450,693 through August
31, 1998. 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.
Since May 1994, the Company has exchanged model 3100A Cerebral Oximeters for its
model 3100 Cerebral Oximeters. Until shipments of the model 4100 Cerebral
Oximeter began in the first quarter of fiscal 1998, 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 three quarters of 1998, the Company offered to exchange
model 4100 Cerebral Oximeters for model 3100A Cerebral Oximeters (which the
Company scraps) and cash equal to the difference in sales prices of the two
models. Such sales reduce the Company's average unit sales price and overall
gross margin.
10
<PAGE> 11
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1998
THREE MONTHS ENDED AUGUST 31, 1998 COMPARED TO THREE MONTHS ENDED AUGUST 31,
1997
Net revenues increased by approximately $262,000, or 100%, from
$261,506 in the three-month period ended August 31, 1997 to $523,222 in the
three-month period ended August 31, 1998. The increase in revenues was primarily
attributable to an increase in United States sales of approximately $183,000,
from approximately $157,000 in the third quarter of fiscal 1997 to approximately
$340,000 in the third quarter of fiscal 1998, and an increase in international
sales of approximately $78,000, from approximately $105,000 in the third quarter
of fiscal 1997 to approximately $183,000 in the third quarter of fiscal 1998.
The increase in net revenues is primarily attributable to sales of the model
4100 Cerebral Oximeter and SomaSensor which the Company began shipping in the
first quarter of fiscal 1998, purchases of the model 4100 by customers in the
United States, stocking orders for the model 4100 Cerebral Oximeter from a new
international distributor, and a 17% increase in the average selling price of
Cerebral Oximeters due to (i) a change in the mix between sales directly to
hospitals and sales through distributors and (ii) the higher price of the new
model 4100 Cerebral Oximeter, partially offset by exchanges of model 4100
Cerebral Oximeters for model 3100A Cerebral Oximeters with existing customers.
The sales increase for the third quarter of fiscal 1998 as compared to the third
quarter of fiscal 1997 was also partially offset by approximately $37,000 of
reduced shipments to Baxter Limited in Japan, which is delaying purchases until
shipment of the model 4100 Cerebral Oximeter is permitted in Japan pursuant to
Japanese Ministry of Health and Welfare approval. There can be no assurance as
to when the application for such permission will be approved.
Sales of model 4100 Cerebral Oximeters, model 4100 exchanges and
refurbished model 3100 Cerebral Oximeters, model 3100A Cerebral Oximeters, and
SomaSensors comprised approximately 61%, 11%, 0%, and 28%, respectively, of the
Company's net revenues in the third quarter of fiscal 1998 and 0%, 10%, 52%, and
38%, respectively, of the Company's net revenues in the third quarter of fiscal
1997. Approximately 35% of the Company's net revenues in the third quarter of
fiscal 1998 were export sales, compared to 40% of the Company's net revenues in
the third quarter of fiscal 1997. One international distributor accounted for
approximately 15% of net revenues for the three months ended August 31, 1998,
and three international distributors accounted for approximately 37%, 15% and
11%, respectively, of total net revenues for the three months ended August 31,
1997.
Gross margin as a percentage of net revenues for the quarters ended
August 31, 1998 and August 31, 1997 was approximately 42% and 51%, respectively.
Gross margin as a percentage of net revenues decreased in the third quarter
ended August 31, 1998 from the third quarter of fiscal 1997 primarily because of
the higher cost to the Company of the model 4100 Cerebral Oximeter as compared
to the cost of the model 3100A and refurbished model 3100, the increased
percentage of net revenues in the third quarter of fiscal 1998 from sales in
connection with model 4100 exchanges as compared to third quarter 1997
refurbished model 3100 sales, and the higher cost to the Company of the
SomaSensor in the third quarter of fiscal 1998. The decrease was partially
offset by the higher average selling price realized by the Company for the new
model 4100 Cerebral Oximeters.
The Company's research, development and engineering expenses decreased
approximately $82,000, or 32%, from $254,532 for the three months ended August
31, 1997 to $172,207 for the three months ended August 31, 1998. The decrease is
primarily attributable to approximately $113,000 in decreased consulting fees
and costs of development materials in fiscal 1998 in connection with the model
4100 Cerebral Oximeter, partially offset by an increase of approximately $30,000
related to development materials and costs associated with the Company's new
sensor development projects.
11
<PAGE> 12
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1998
Selling, general and administrative expenses increased approximately
$389,000, or 29%, from $1,329,834 for the three months ended August 31, 1997 to
$1,718,389 for the three months ended August 31, 1998. The increase in selling,
general and administrative expense is primarily attributable to a $279,000
increase in salaries, wages, commissions, and related expenses as a result of
the additional employees, principally sales and marketing, hired since August
31, 1997 (from an average of 39 employees in the third quarter of fiscal 1997 to
48 employees in the third quarter of fiscal 1998), an $80,000 increase in
selling-related expenses attributable to employee travel, industry trade shows,
marketing and advertising, a $60,000 increase in employee and office-related
expenses, a $47,000 increase in investor relations and professional service
fees, and a $45,000 increase in bad debt expense related to the termination of
two United States distributor relationships as part of the Company's planned
expansion of the direct sales force within several domestic territories,
partially offset by a $118,000 decrease in miscellaneous expense primarily
attributable to the additional inventory obsolescence reserve recorded in the
third quarter of fiscal 1997 for model 3100 and 3100A inventory parts. The
Company expects selling, general and administrative expenses to increase in the
fourth quarter of fiscal 1998 primarily as a result of the sales and marketing
costs associated with Company's participation in two major industry trade shows.
For the three-month period ended August 31, 1998, the Company realized
a 14% increase in its net loss over the same period in fiscal 1997. The increase
is primarily attributable to lower gross margins as a percentage of net revenues
and a 19% increase in operating expenses, partially offset by a 100% increase in
net revenues and increased interest income.
NINE MONTHS ENDED AUGUST 31, 1998 COMPARED TO NINE MONTHS ENDED AUGUST 31, 1997
Net revenues increased by approximately $821,000, or 81%, from
$1,016,424 in the nine-month period ended August 31, 1997 to $1,837,273 in the
nine-month period ended August 31, 1998. This increase in net revenues was
primarily attributable to approximately $1,014,000 of sales in the United States
in the first three quarters of fiscal 1998, compared to $423,000 in the first
three quarters of fiscal 1997, and approximately $823,000 of sales
internationally in the first three quarters of fiscal 1998, compared to $593,000
in the first three quarters of fiscal 1997. The increase in net revenues is
primarily attributable to sales of the model 4100 Cerebral Oximeter and
SomaSensor which the Company began shipping in the first quarter of fiscal 1998,
stocking orders for the model 4100 Cerebral Oximeter from both existing
distributors and new international distributors, purchases of the model 4100 by
customers in the United States, and a 23% increase in the average selling price
of Cerebral Oximeters due to (i) a change in the mix between sales directly to
hospitals and sales through distributors and (ii) the higher price of the new
model 4100 Cerebral Oximeter, partially offset by exchanges of model 4100
Cerebral Oximeters for model 3100A Cerebral Oximeters with existing customers.
The sales increase for the first three quarters of fiscal 1998 as compared to
the first three quarters of fiscal 1997 was also partially offset by
approximately $271,000 of reduced shipments to Baxter Limited in Japan, which is
delaying purchases until shipment of the model 4100 Cerebral Oximeter is
permitted in Japan pursuant to Japanese Ministry of Health and Welfare approval.
There can be no assurance as to when the application for such permission will be
approved.
12
<PAGE> 13
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1998
Sales of model 4100 Cerebral Oximeters, model 4100 exchanges and
refurbished model 3100 Cerebral Oximeters, model 3100A Cerebral Oximeters, and
SomaSensors comprised approximately 63%, 11%, 3%, and 23%, respectively, of the
Company's net revenues in the first three quarters of fiscal 1998 and 0%, 9%,
65%, and 26%, respectively, of the Company's net revenues in the first three
quarters of fiscal 1997. Approximately 45% of the Company's net revenues in the
first three quarters of fiscal 1998 were export sales, compared to 59% of the
Company's net revenues for the same period in fiscal 1997. One United States
distributor accounted for approximately 14% of net revenues for the nine months
ended August 31, 1998; however, this distributor relationship was terminated
during the third quarter of 1998 as part of the Company's planned expansion of
the direct sales force within several domestic territories. Two international
distributors and one United States distributor accounted for approximately 32%,
12%, and 11%, of total net revenues for the same period ended August 31, 1997.
Gross margin as a percentage of net revenues for the nine-month periods
ended August 31, 1998 and August 31, 1997 was approximately 46% and 48%,
respectively. Gross margin as a percentage of net revenues decreased in the
nine-month period ended August 31, 1998 from the same period of fiscal 1997
primarily because of the higher cost to the Company of the model 4100 Cerebral
Oximeter as compared to the cost of the model 3100A and refurbished model 3100,
the increased percentage of net revenues in the first three quarters of fiscal
1998 from sales in connection with model 4100 exchanges as compared to sales of
refurbished model 3100 units in the first three quarters of 1997, the higher
cost to the Company of the SomaSensor in the nine-month period ended August 31,
1998, and the decrease in the average selling price realized by the Company for
SomaSensors in the first three quarters of fiscal 1998. The decrease was
partially offset by the higher average selling price realized by the Company for
the new model 4100 Cerebral Oximeters.
The Company's research, development and engineering expenses decreased
approximately $158,000, or 24%, from $658,717 for the nine-month period ended
August 31, 1997 to $500,832 for the nine-month period ended August 31, 1998. The
decrease is primarily attributable to approximately $174,000 in decreased
consulting fees and costs of development materials in fiscal 1998 in connection
with the model 4100 Cerebral Oximeter, partially offset by an increase of
approximately $23,000 related to development materials and costs associated with
the Company's new sensor development projects.
Selling, general and administrative expenses increased approximately
$587,000, or 14%, from $4,102,726 for the nine-month period ended August 31,
1997 to $4,689,477 for the nine-month period ended August 31, 1998. The increase
in selling, general and administrative expense is primarily attributable to a
$471,000 increase in salaries, wages, commissions and related expenses as a
result of the additional employees, principally sales and marketing, hired since
August 31, 1997 (from an average of 35 employees in the nine-month period ended
August 31, 1997 to 46 employees in the same period of fiscal 1998), a $232,000
increase in selling-related expenses attributable to employee travel, industry
trade shows, marketing and advertising, a $77,000 increase in employee and
office-related expenses, and a $42,000 increase in accrued warranty expense for
sales of new products, partially offset by a $143,000 decrease in professional
service fees and regulatory certification fees and a $94,000 decrease in
miscellaneous expense primarily attributable to the additional inventory
obsolescence reserve recorded in the third quarter of fiscal 1997 for model 3100
and 3100A inventory parts.
For the nine-month period ended August 31, 1998, the Company realized a
1% decrease in its net loss over the same period in fiscal 1997. The decrease is
primarily attributable to an 81% increase in net revenues and increased interest
income, partially offset by a 9% increase in operating expenses and lower gross
margins as a percentage of net revenues.
13
<PAGE> 14
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1998
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the nine-month period ended August
31, 1998 was approximately $5,081,000. Cash was used primarily to (i) fund the
Company's net loss, primarily selling, general and administrative expenses and
research, development and engineering expenses (approximately $4,012,000, net of
depreciation and amortization expense), (ii) increase inventories of the model
4100 Cerebral Oximeter and its components (approximately $400,000), (iii)
increase accounts receivable (approximately $441,000) primarily due to higher
sales in the second and third quarters of fiscal 1998 than in the
fourth quarter of fiscal 1997, and (iv) decrease accounts payable and accrued
liabilities (approximately $242,000) resulting from the use of some of the
proceeds from the public offering. Management expects working capital
requirements to increase if sales increase. The Company capitalized
approximately $318,000 of costs for model 4100 Cerebral Oximeters being used as
demonstration units during the first three quarters of fiscal 1998. The Company
expects to depreciate these costs as a marketing expense over three years.
On April 8, 1998, the Company completed the public offering of
1,750,000 newly-issued Common Shares, at a price of $5.75 per share, for gross
proceeds of $10,062,500, through an offering underwritten by Brean Murray & Co.,
Inc. The net proceeds to the Company, after deducting the underwriting discount
and the estimated expenses of the offering, were approximately $9,100,000.
On June 12, 1998, the Company entered into a $2,000,000 Revolving Note
and a Pledge Agreement with Fifth Third Bank of Northwestern Ohio, N.A.. The
principal amount outstanding under the note bears interest, payable monthly, at
the bank's prime rate (8.5% as of September 25, 1998), is collateralized by all
property of the Company held at the bank, including marketable securities, and
is intended to be used for general corporate purposes, if necessary. The Company
has not borrowed any money under the line of credit. The line of credit expires
March 31, 1999. Before that date, the bank may, but is not obligated to, lend
the Company such amounts as may from time to time be requested by the Company,
up to $2,000,000 if no Event of Default shall exist. Events of default include
failure to furnish satisfactory additional security on demand or the bank
deeming itself insecure. The Company has no other loan commitments.
As of August 31, 1998 the Company has working capital of $9,247,446,
cash and cash equivalents of $3,332,718, marketable securities of $4,936,981,
total current liabilities of $546,405 and shareholder's equity of $9,899,730.
The Company believes that the cash, cash equivalents, and marketable
securities on hand at August 31, 1998 will be sufficient to sustain the
Company's operations at budgeted levels and its needs for liquidity into the
second quarter of fiscal 2000. 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.
14
<PAGE> 15
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AUGUST 31, 1998
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 and there can be no
assurance that actual capital requirements necessary to market the Cerebral
Oximeter and SomaSensor, to develop enhancements to, and product extensions of,
the Cerebral Oximeter, to conduct research and development concerning additional
potential applications of the Company's technology and for working capital will
not be substantially greater than current estimates.
The Company does not believe that product sales will be sufficient to
fund the Company's operations in fiscal 1998.
As of August 31, 1998, 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 securities offerings. The conditions permitting the Company to redeem these
warrants have not been met as of September 25, 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 June 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's only current loan commitment is described above.
There can be no assurance that even if the Company receives additional
capital, it will be able to achieve the level of sales necessary to sustain its
operations. There can be no assurance that the Company will be able to obtain
any funds on terms acceptable to the Company and at times required by the
Company through sales of the Company's product, sales of securities or loans in
sufficient quantities. The report of the Company's Independent Auditors in the
Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1997
contains an explanatory paragraph relating to an uncertainty concerning the
Company's ability to continue as a going concern.
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, together with its independent network consultant,
has completed the evaluation of its hardware and software, and has begun the
process of purchasing the hardware and software necessary to replace what was
determined to be non-compliant. The Company expects to begin implementation of
any new hardware and software during the fourth quarter of fiscal 1998, and
anticipates completing the conversion by the first quarter of fiscal 1999. The
Company estimates that the total costs associated with the implementation of the
new computer system, including hardware, software, and related consulting fees,
will approximate $100,000. Because the Company expects its system to be year
2000 compliant by the first quarter of fiscal 1999, it has not prepared a
contingency plan and does not currently believe that a contingency plan is
necessary. The Company has considered the cost of upgrading its older products
to make them year 2000 compliant, and does not believe that such costs will be
material to the Company's financial condition or results of operations. The
Company has also corresponded with its major vendors, as well as a sampling of
both its United States and international customers, to determine their state of
readiness with respect to year 2000 compliance. Based on the responses from the
vendors and customers, the Company does not anticipate any disruption to its
operations as a result of year 2000 compliance failure, and does not expect any
material effect to its financial condition or results of operations.
15
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
16
<PAGE> 17
PART II OTHER INFORMATION
Item 5. Other Information
The Company must receive notice of any proposals of shareholders that
are intended to be presented at the Company's 1999 Annual Meeting of
Shareholders, but that are not intended to be considered for inclusion in the
Company's Proxy Statement and Proxy related to that meeting, no later than
December 21, 1998 to be considered timely. Such proposals should be sent by
certified mail, return receipt requested and addressed to Somanetics
Corporation, 1653 East Maple Road, Troy, Michigan 48083-4208, Attention:
Investor Relations Department. If the Company does not have notice of the matter
by that date, the Company's form of proxy in connection with that meeting may
confer discretionary authority to vote on that matter, and the persons named in
the Company's form of proxy will vote the shares represented by such proxies in
accordance with their best judgment.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Revolving Note from Somanetics Corporation to Fifth
Third Bank of Northwestern Ohio, N.A., dated June
12, 1998
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter for which this report is filed.
17
<PAGE> 18
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Somanetics Corporation
------------------------------
(Registrant)
Date: September 30, 1998 By:/s/ Raymond W. Gunn
--------------------------- ---------------------------
Raymond W. Gunn
Executive Vice President and Chief
Financial Officer (Duly Authorized
and Principal Financial Officer)
18
<PAGE> 19
EXHIBIT INDEX
-------------
EXHIBIT DESCRIPTION
- ------- -----------
10.1 Revolving Note from Somanetics Corporation to Fifth Third Bank of
Northwestern Ohio, N.A., dated June 12, 1998.
27.1 Financial Data Schedule.
19
<PAGE> 1
EXHIBIT 10.1
<TABLE>
<CAPTION>
<S><C>
OHIO AFFILIATES A FIFTH THIRD BANCORP BANK 2
Note: Retain Customer Copy for your records REVOLVING
NOTE
OFFICER No. 598 Note No. 901123243-50013
------------------------ ---------------------------------------
$2,000,000.00 JUNE 12 ,19 98
- ----------------------------------- ---------------------- ---------------
City TOLEDO , State OHIO (Effective Date)
-------------------- ---------------------
On or before the Due Date below, the undersigned, a (check one) [X] corporation [ ] partnership [ ] individual
[ ] limited liability company, for value received
and if more than one, jointly and severally, promise to pay to the order of
FIFTH THIRD BANK OF NORTHWESTERN OHIO, N.A.
- -----------------------------------------------------------------------------------------------------------------------------------
606 MADISON AVENUE, TOLEDO, OHIO 43604 (hereinafter referred to as "Bank")
- ------------------------------------------------------------------------------------------------
the sum of TWO MILLION and 00/100*** Dollars
------------------------------------------------------------------------------------------------------------------
(hereinafter referred to as the "Borrowing") plus interest as provided herein, less such amounts as shall have been repaid in
accordance with this note. The outstanding balance of this note will appear on a supplemental bank record and is not necessarily
the face amount of this note. Such record shall be conclusive as to the balance due of this note at any time.
The principal sum outstanding shall bear interest per annum at the rate of 0% greater than the "Prime Rate" (the rate announced by
the Bank from time to time) on the above Effective Date. In the event of a change in said Prime Rate, the rate of this note shall
be changed immediately to that rate which shall be greater than the new Prime Rate by the amount stated in this clause. Interest
shall be computed based on a year of 360 days and charged for the actual number of days elapsed.
Prior to the Due Date, Bank may (but is not obligated to) lend to the undersigned such amounts as may from time to time be
requested by the undersigned provided that the principal amount borrowed shall not at any time exceed the Borrowing and further
provided that no Event of Default as defined herein shall exist.
Principal shall be due and payable: [ ] At Maturity: [ ] In Installments; Installments in the amount of $_____________________
shall be due on the __________ day of each [ ] MONTH [ ] QUARTER beginning _______________, 19____ with a final payment on
______________________, 19_____________ of the principal amount then owing plus all interest due therein. Principal and interest
payments shall be made at Bank's address above unless otherwise designed to Bank in writing.
Interest shall be due and payable: [X] At Maturity [X] On the LAST day of each [X] Month [ ] Quarter beginning
June, 1998.
To secure repayment of this note and all modifications, extensions and renewals thereof, and all other Obligations (as herein
defined) of the undersigned to Bank, the undersigned grants Bank a security interest in all of the undersigned's now owned or
hereafter acquired interests in all property in which Bank is, at any time, granted a lien for any Obligation, and all property
in possession of bank including, without limitation, money, securities, instruments, documents, letters of credit, chattel paper,
or other property delivered to Bank in transit, for safekeeping, or for collection or exchange for other property, all
distributions, dividends, warrants, securities or other rights in addition to such property, all right to payment form and claims
against bank and all proceeds thereof, and all real and personal property described below ("Collateral"). The undersigned agrees
to immediately deliver such additional dividends warrants, securities or other property or rights thereto bank immediately upon
receipt as additional Collateral and until delivery to hold same in trust for Bank. The undersigned agrees that the bank may, at
any time, call for additional Collateral satisfactory to it. All documents executed in connection wit this note and all
Collateral, including without limitation the following, further secure the Obligations:
MARKETABLE SECURITIES TO BE HELD AT THE OHIO COMPANY
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
The Obligations secured by the Collateral (herein, the "Obligations") shall include this note and each and every liability of the
undersigned jointly or severally to Bank and all affiliates of Fifth Third Bancorp however created, direct or contingent, due or
to become due whether now existing or hereafter arising, participated in whole or in part, created by trust agreement, lease, over-
draft, agreement, or otherwise, in any manner by the undersigned. The undersigned also grants Bank a security interest in all of
the Collateral as agent for all affiliates of Fifth Third Bancorp for all Obligations of the undersigned to such affiliates. Said
security interest shall not be enforced to the extent prohibited by the Truth in Lending Act as implemented by Federal Reserve
Regulation Z.
The undersigned certifies that the proceeds of this loan are to be used for business purposes. If this note is a renewal, in whole
or in part, of a previous Obligation, the acceptance by Bank of this note shall not effectuate a payment but rather a continuation
of the previous Obligation.
Bank may charge, and the undersigned agrees to pay on the above Effective Date, a note processing fee in an amount determined by
bank.
Events of Default:
This note, and all other Obligations of the undersigned to Bank, shall be and become immediately due and payable at the option of
the Bank, without any demand or notice whatsoever, upon the occurrence of any of the following described events, each of which
shall constitute an Event of Default:
1) Any failure to make any payment when due of the principal or interest on this note, the occurrence of any event of default as
therein defined on any other Obligation of the undersigned, or a default in the Obligations under any security documents.
2) The death or dissolution of the undersigned, of any endorser or guarantor, or if the undersigned is a partnership, the death
or dissolution of a general partner.
3) Any failure to submit to Bank current financial information upon request.
4) The creation of any lien (except a lien to Bank) or the issuance of an attachment against or seizure of any of the property of,
or the entry of a judgment against, the undersigned.
5) In the judgement of Bank, any adverse change occurs in the ability of the undersigned to repay the Obligations, or the Bank
deems itself insecure.
6) An assignment for the benefit of the creditors of, or the commencement of any bankruptcy, receivership, insolvency,
reorganization, or liquidation proceedings by or against the undersigned or any endorser or guarantor hereof.
7) The Institution of any garnishment proceedings by attachment, levy or otherwise, against any Collateral, any deposit balance
maintained or any property deposited with the Bank by the undersigned or any endorser or guarantor hereof.
8) Bank has called for additional security and the undersigned has not furnished satisfactory additional security on demand.
Upon the occurrence of an Event of Default herein described Bank may, at its option, cease making advances hereunder, declare
this note and all other Obligations of the undersigned, to be fully due and payable in their aggregate amount together with
accrued interest plus any applicable prepayment premiums, fees, and charges.
In addition to any other remedy permitted by law, the Bank may at any time, without notice, apply the Collateral to this note
or such other Obligations, whether due or not, and Bank may, at its option, proceed to enforce and protect its rights by an action
at law or in equity or by any other appropriate proceedings. Notwithstanding any other legal or equitable rights of Bank, Bank,
in the Event of Default, is (a) hereby irrevocably appointed and constituted attorney-in-fact, with full power of substitution, to
exercise all rights of ownership with respect to Collateral including, but not limited to, the right to collect all income of
other distributions arising therefrom and to exercise all voting rights connected with Collateral; and (b) is hereby give full
power to collect, sell, assign, transfer and deliver all of said Collateral or any part thereof, or any substitutes therefor, or
any additions thereto, through any private or public sale without either demand or notice to the undersigned, or any advertisement,
the same being hereby expressly waived, at which sale Bank is authorized to purchase said property or any part thereof, free from
any right of redemption on the part of the undersigned, which is hereby expressly waived and released. In case of sale for any
cause, after deducting all costs and expenses of every kind, bank may apply, as it shall deem proper, the residue of the proceeds
of such sale toward the payment of any one or more or all of the Obligations of the undersigned, whether due or not due, to Bank;
after such application and the return of any surplus, the undersigned agrees to be and remains liable to Bank for any and every
deficiency after application as aforesaid upon this and any other Obligation. the undersigned shall pay all costs of collection
incurred by Bank, including its attorney's fees, if this note is referred to an attorney for collection, whether or not payment is
obtained before entry of judgment, which costs and fees are Obligations secured by the Collateral.
If any payment is not paid when due (whether by acceleration or otherwise) or within 10 days thereafter, the undersigned agrees to
pay to Bank a late payment fee as provided for in any loan agreement or 5% of the payment amount, whichever is greater, with a
minimum fee of $20.00. After an Event of Default, the undersigned agrees to pay to Bank a fixed charge of $25.00, or the
undersigned agrees that Bank may, without notice, increase the above stated interest rate by 6%, whichever is greater. Under
no circumstances shall said interest rate be raised to a rate which shall be in excess of the maximum rate of interest allowable
under the state and/or federal usury laws in force at the time of such change.
The undersigned may prepay all or part of this note, which prepaid amounts shall be applied to the amounts due in reverse order of
their due dates. Upon such prepayments, including involuntary prepayment by acceleration, the undersigned shall pay a premium of
2% of the maximum principal amount permitted under this note. Partial prepayments shall not excuse any subsequent payment due.
ENTIRE AGREEMENT: The undesigned agrees that there are no conditions or understandings which are not expressed in this note and
the documents referred to herein.
WAIVER: No failure on the part of Bank to exercise any of its rights hereunder shall be deemed a waiver of any such rights of any
default. Demand, presentment, protest, and notice of dishonor, notice of protest, and notice of default are hereby waived. Each
of the undersigned, including but not limited to all co-makers and accommodation makers of this note, hereby waives all suretyship
defenses including but not limited to all defenses based upon impairment of collateral and all suretyship defenses described in
Section 3-605 of the Uniform Commercial Code, as revised in 1990 (the "UCC). Such waiver is entered to the full extent permitted
by Section 3-605 (i) of the UCC.
JURY WAIVER: THE UNDERSIGNED, ANY ENDORSER OR GUARANTOR HEREOF, WAIVE THE RIGHT TO A TRIAL BY JURY OF ANY MATTERS ARISING OUT
OF THIS NOTE OR THE TRANSACTIONS CONTEMPLATED HEREBY.
The declaration of invalidity of any provision of this note shall not affect any part of the remainder of the provisions.
[ ] This note is supplemented by the terms and conditions of a loan agreement dated_________________________ between the
undersigned and Bank.
Warrant of attorney: The undersigned,jointly and severally, authorize any attorney-at-law to appear in any court of record after
maturity of this note, whether by acceleration or otherwise, to waive the issuance and service of process and to confess judgment
against them in favor of the bank for the principal sum due herein together with interest, charges, court costs and attorney's fees,
and to waive and release all errors, rights of appeal, exemptions and stays of execution. The undersigned also agrees that the
attorney acting for the undersigned as set forth in this paragraph may be compensated by Bank for such services, and the undersigned
waive any conflict of interest caused by such representation and compensation arrangement. This warrant of attorney to confess
judgment shall be construed under the laws of the State of Ohio.
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGEMENT MAY
BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY
CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE
AGREEMENT, OR ANY OTHER CAUSE.
DUE DATE MARCH 31, 1999 SOMANETICS CORP
-------------------------------------------------------- ----------------------------------------------------------------
ADDRESS 1653 EAST MAPLE ROAD BY: /S/ Raymond W. Gunn
-------------------------------------------------------- ----------------------------------------------------------------
TROY, MI 48083
-------------------------------------------------------- ----------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SOMANETICS CORPORATION AS OF, AND FOR THE NINE MONTHS
ENDED, AUGUST 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> AUG-31-1998
<CASH> 3,332,718
<SECURITIES> 4,936,981
<RECEIVABLES> 785,817
<ALLOWANCES> 153,000
<INVENTORY> 833,014
<CURRENT-ASSETS> 9,793,851
<PP&E> 1,471,555
<DEPRECIATION> 901,304
<TOTAL-ASSETS> 10,446,135
<CURRENT-LIABILITIES> 546,405
<BONDS> 0
0
0
<COMMON> 60,356
<OTHER-SE> 9,839,374
<TOTAL-LIABILITY-AND-EQUITY> 10,446,135
<SALES> 1,837,273
<TOTAL-REVENUES> 1,837,273
<CGS> 996,445
<TOTAL-COSTS> 996,445
<OTHER-EXPENSES> 5,190,309
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,084,159)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,084,159)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,084,159)
<EPS-PRIMARY> (.78)
<EPS-DILUTED> (.78)
</TABLE>
