<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange
Act of 1934 (Amendment No. )
---
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
Somanetics Corporation
--------------------------------------------------
(Name of Registrant as Specified in its Charter)
--------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------
(5) Total fee paid:
------------------------------------------------
[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by the
registration statement number, or the Form or Schedule and the date of
its filing.
(1) Amount Previously Paid:
------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
[SOMANETICS LOGO]
1653 EAST MAPLE ROAD
TROY, MICHIGAN 48083-4208
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 13, 1999
To the Shareholders of Somanetics Corporation:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
Somanetics Corporation will be held at the Sterling Inn Banquet & Conference
Center, 34911 Van Dyke, Sterling Heights, Michigan 48312, at 10:30 a.m. Eastern
Daylight Time on Tuesday, April 13, 1999 for the following purposes:
1. To select two directors, each to serve until the 2002
Annual Meeting of Shareholders and until his successor is elected and
qualified.
2. To consider and act upon a proposal to approve 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 295,000 shares, from 745,000
to 1,040,000 shares.
3. To transact such other business as may properly come before
the meeting and any adjournment thereof.
Only shareholders of record on February 12, 1999 will be entitled to
notice of, and to vote at, the meeting or any adjournment thereof.
All shareholders are cordially invited to attend the meeting. Whether
or not you expect to attend the meeting, please complete, date and sign the
enclosed proxy and return it as promptly as possible to ensure your
representation at the meeting. A return postage-prepaid envelope is enclosed for
that purpose. If you return the proxy, you may withdraw your proxy and vote your
shares in person if you attend the meeting.
Your attention is called to the attached Proxy Statement and the
accompanying proxy. A copy of the Annual Report of the Company for the fiscal
year ended November 30, 1998 accompanies this notice.
By order of the Board of Directors
Bruce J. Barrett
President and Chief Executive Officer
Troy, Michigan
March 3, 1999
<PAGE> 3
SOMANETICS CORPORATION
1653 EAST MAPLE ROAD
TROY, MICHIGAN 48083-4208
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
APRIL 13, 1999
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Somanetics Corporation (the "Company")
for use at the 1999 Annual Meeting of Shareholders to be held at the Sterling
Inn Banquet & Conference Center, 34911 Van Dyke, Sterling Heights, Michigan
48312, at 10:30 a.m. Eastern Daylight Time on Tuesday, April 13, 1999, and at
any adjournment thereof, for the purposes set forth in the accompanying Notice
of Annual Meeting of Shareholders. The mailing of this Proxy Statement and
accompanying proxy will take place on or about March 3, 1999.
Solicitation
The Company will bear the entire cost of solicitation of proxies in the
enclosed form, including the preparation, assembly, printing and mailing of this
Proxy Statement, the accompanying proxy and any additional information furnished
to shareholders. The solicitation of proxies by mail may be supplemented by
telephone, telegraph or personal solicitation by directors, officers or other
regular employees of the Company; no additional compensation will be paid to
directors, officers or other regular employees for such services. The Company
has also engaged Shareholder Communications Corporation, to solicit proxies by
mail or telephone or in person, at a cost to the Company expected to be
approximately $5,000 plus reasonable out-of-pocket expenses. Brokers, nominees
and other similar record holders will be requested to forward soliciting
material and will be reimbursed by the Company upon request for their
out-of-pocket expenses.
VOTING SECURITIES AND PRINCIPAL HOLDERS
Voting Rights and Outstanding Shares
Only shareholders of record at the close of business on February 12,
1999 will be entitled to notice of, and to vote at, the Annual Meeting or any
adjournment of the meeting. As of the close of business on February 12, 1999,
the Company had 6,035,597 outstanding Common Shares, $0.01 par value ("Common
Shares"), the only class of stock outstanding and entitled to vote.
Each Common Share is entitled to one vote on each matter submitted for
a vote at the meeting. The presence, in person or by proxy, of the holders of
record of a majority of the outstanding Common Shares entitled to vote, or
3,017,799 shares, is necessary to constitute a quorum for the transaction of
business at the meeting or any adjournment thereof.
1
<PAGE> 4
Revocability of Proxies
A shareholder giving a proxy may revoke it at any time before it is
voted by giving written notice of such revocation to the Secretary of the
Company or by executing and delivering to the Secretary a later dated proxy.
Attendance at the meeting by a shareholder who has given a proxy will not have
the effect of revoking it unless such shareholder gives such written notice of
revocation to the Secretary before the proxy is voted. Any written notice
revoking a proxy, and any later dated proxy, should be sent to Somanetics
Corporation, 1653 East Maple Road, Troy, Michigan 48083-4208, Attention:
Investor Relations Department.
Valid proxies in the enclosed form which are returned in time for the
meeting and executed and dated in accordance with the instructions on the proxy
will be voted as specified in the Proxy. If no specification is made, the
proxies will be voted FOR the election as directors of the nominees listed below
and FOR the proposed increase in the number of Common Shares reserved for
issuance pursuant to the exercise of options granted under the 1997 Option Plan.
Principal Holders of the Company's Voting Securities
The following table contains information as of February 12, 1999, with
respect to the beneficial ownership of voting shares of the Company by each
person known by the Company to beneficially own more than 5% of the Company's
Common Shares, its only outstanding class of voting shares:
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT AND NATURE OF COMMON SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OWNED (1)
- ------------------------------------------------------------ --------------------------- ------------------
<S> <C> <C>
Awad Asset Management, Inc.................................. 962,450 (2) 15.9%
250 Park Avenue, 2nd Floor
New York, New York 10177
</TABLE>
- ------------------------------------
(1) Based on 6,035,597 Common Shares outstanding as of February 12, 1999.
(2) The information with respect to Awad Asset Management, Inc. is
based solely on a Schedule 13G report, dated February 12, 1999. Awad Asset
Management, Inc. is an investment adviser. Awad Asset Management, Inc. has sole
voting and investment power with respect to the Common Shares shown above as
beneficially owned by it.
I. ELECTION OF DIRECTORS
The Board of Directors proposes that the two persons named below as
nominees for election as directors for a three-year term be elected as directors
of the Company to hold office until the Annual Meeting of Shareholders to be
held in 2002, and until his successor is elected and qualified. Mr. Follis and
Dr. Ausman were elected as directors at the 1996 Annual Meeting of Shareholders
on May 21, 1996. If a quorum is present, the two nominees receiving the greatest
number of votes cast at the meeting or its adjournment shall be elected.
Withheld votes and broker non-votes will not be deemed votes cast in determining
which nominees receive the greatest number of votes cast, but will be counted
for purposes of determining whether a quorum is present. The persons named in
the accompanying proxy intend to vote all valid proxies received by them FOR the
election of the nominees listed below unless the giver of the proxy withholds
authority to vote for such nominees. The nominees listed below have consented to
serve if elected. If any nominee is unable or declines to serve, which is not
expected, it is
2
<PAGE> 5
intended that the proxies be voted in accordance with the best judgment of the
proxy holders for another qualified person.
The following information is furnished as of February 12, 1999 with
respect to the nominees for election as directors, with respect to each person
whose term of office as a director will continue after the meeting, with respect
to each executive officer of the Company named in the Summary Compensation Table
below, and with respect to all directors and executive officers as a group:
<TABLE>
<CAPTION>
AMOUNT AND PERCENTAGE
NATURE OF OF
POSITION AND OFFICES WITH COMMON SHARES COMMON TERM
DIRECTOR THE COMPANY AND OTHER BENEFICIALLY SHARES TO
NAME SINCE AGE PRINCIPAL OCCUPATION OWNED OWNED(1) EXPIRE
---- ----- --- -------------------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
NOMINEES FOR ELECTION AS DIRECTORS FOR A THREE-YEAR TERM
Daniel S. Follis........ 4/89 61 Director of the 30,931 (2) * 2002
Company and President
of Verschuren & Follis, Inc.
Dr. James I. Ausman..... 6/94 61 Director of the Company, 21,785 (3) * 2002
Professor and Head of the
Department of Neurosurgery
at the University of Illinois
at Chicago
DIRECTORS CONTINUING IN OFFICE
H. Raymond Wallace...... 6/94 63 Chairman of the Board and 19,111 (4) * 2000
a Director of the Company
Robert R. Henry.........12/98 58 Director of the Company, 150,000 2.5 2000
and President of Robert R.
Henry & Co., Inc.
Bruce J. Barrett........ 6/94 39 President, Chief Executive 241,692 (5) 3.9% 2001
Officer and a Director
of the Company
<CAPTION>
OTHER CURRENT EXECUTIVE OFFICERS
<S> <C> <C>
Raymond W. Gunn........................................................ 68,200 (6) 1.1%
Richard S. Scheuing.................................................... 26,790 (7) *
Ronald A. Widman....................................................... 20,748 (8) *
Pamela A. Winters...................................................... 24,146 (9) *
All directors and executive officers as a group (10 persons)........... 617,253 (10) 9.7%
</TABLE>
- --------------------------
* Less than 1%
(1) Based on 6,035,597 Common Shares outstanding as of February 12, 1999.
(2) Includes 9,500 Common Shares that Mr. Follis has the right to acquire
within 60 days of February 12, 1999. The 30,931 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
3
<PAGE> 6
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.
(3) Includes 9,011 Common Shares that Dr. Ausman has the right to acquire
within 60 days of February 12, 1999, 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.
(4) Includes 7,511 Common Shares that Mr. Wallace has the right to acquire
within 60 days of February 12, 1999 and 1,000 shares held in a living
trust; Mr. Wallace has sole voting and dispositive power over the
shares held in the trust.
(5) Includes 188,200 Common Shares that Mr. Barrett has the right to
acquire within 60 days of February 12, 1999 and 500 Common Shares owned
by his wife.
(6) Includes 64,600 Common Shares that Mr. Gunn has the right to acquire
within 60 days of February 12, 1999.
(7) Includes 26,790 Common Shares that Mr. Scheuing has the right to
acquire within 60 days of February 12, 1999.
(8) Includes 20,748 Common Shares that Mr. Widman has the right to acquire
within 60 days of February 12, 1999.
(9) Includes 24,146 Common Shares that Ms. Winters has the right to acquire
within 60 days of February 12, 1999.
(10) Includes 359,256 Common Shares that all executive officers and
directors as a group have the right to acquire within 60 days of
February 12, 1999.
BIOGRAPHICAL INFORMATION
The following is a brief account of the business experience during the
past five years of each nominee for the Board of Directors of the Company and of
each director whose term of office will continue after the meeting:
Daniel S. 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. has served as a director of the Company
since June 1994. He has been Professor and Head of the Department of
Neurosurgery at the University of Illinois at Chicago since August 1991. From
September 1978 until July 1991 he was Chairman of the Department of Neurosurgery
at Henry Ford Hospital 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.
4
<PAGE> 7
H. Raymond Wallace has served as the Company's Chairman of the Board
since January 1995 (as a non-officer Chairman of the Board since April 1995) and
as a director of the Company since June 1994. He also served as a consultant to
the Company from April 1994 until January 1995. He 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.
Robert R. Henry has served as a director of the Company since December
9, 1998. He has been President of Robert R. Henry & Co., a financial consulting
and investment firm, since 1989. Mr. Henry has been an advisory director of
Morgan Stanley Dean Witter since 1989, and from 1977 through 1989 was a managing
director of Morgan Stanley. He received an MBA from Harvard Business School and
a B.A. from Williams College.
Bruce J. 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.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During the fiscal year ended November 30, 1998, the Board of Directors
held three meetings.
Audit Committee
The Board of Directors has an Audit Committee which consists of two
directors. H. Raymond Wallace and Daniel S. Follis are the current members of
this committee. The Audit Committee (i) recommends to the Board the conditions,
compensation and term of appointment of independent certified public accountants
for the audit of the Company's financial statements, (ii) reviews examination
reports of the Company prepared by regulatory authorities, and (iii) provides
the Board with such assistance as is necessary with respect to the Company's
corporate and reporting practices. The Audit Committee may also from time to
time confer with the auditors to exchange views relating to the scope and
results of the audit. During the fiscal year ended November 30, 1998, the Audit
Committee held two meetings.
5
<PAGE> 8
Compensation Committee
The Board of Directors has a Compensation Committee which consists of
two directors. H. Raymond Wallace and Daniel S. Follis are the current members
of this committee. The Compensation Committee makes recommendations to the Board
of Directors with respect to compensation arrangements and plans for senior
management, officers and directors of the Company and administers the Company's
1983 Stock Option Plan, 1991 Incentive Stock Option Plan, 1997 Option Plan and
1993 Director Stock Option Plan. During the fiscal year ended November 30, 1998,
the Compensation Committee held three meetings.
The Company does not have a nominating committee.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information for each of the fiscal years
ended November 30, 1998, 1997 and 1996 concerning compensation of (i) all
individuals serving as the Company's Chief Executive Officer during the fiscal
year ended November 30, 1998, and (ii) the Company's four most
highly-compensated other executive officers whose total annual salary and bonus
exceeded $100,000 in fiscal 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
NAME AND ------------------- UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)
------------------ ---- --------- -------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Bruce J. Barrett, President
and Chief Executive Officer 1998 204,750 32,978 180,000 -0-
1997 200,688 12,188 135,000 -0-
1996 195,000 -0- 43,200 (1) -0-
Raymond W. Gunn, Executive
Vice President and Chief
Financial Officer.......... 1998 110,250 12,430 24,000 -0-
1997 110,250 4,823 45,000 -0-
1996 105,000 -0- 19,100 (1) -0-
Richard S. Scheuing, Vice
President, Research and
Development (2)............ 1998 89,828 13,606 45,000 -0-
Ronald A. Widman, Vice
President, Medical
Affairs (2)................ 1998 79,840 11,469 41,000 -0-
Pamela A. Winters, Vice
President, Operations (2).. 1998 74,192 11,853 45,000 -0-
</TABLE>
- ------------------------
(1) The fiscal 1996 numbers include options to purchase 16,500 and 5,000
Common Shares granted to Messrs. Barrett and Gunn, respectively,
independent of the Company's stock option plans and not subject to
6
<PAGE> 9
shareholder approval. These options were granted to replace options for
the same number of shares and exercisable at the same exercise price
granted 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.
The 1995 options were cancelled in December 1995 (and the proposed
amendment was cancelled).
(2) Messrs. Scheuing and Widman and Ms. Winters became executive officers
of the Company effective January 22, 1998. The table reflects all
compensation paid by the Company to them during fiscal 1998.
Option Grants Table
The following table sets forth information concerning individual grants
of stock options made during the fiscal year ended November 30, 1998 to each of
the executive officers of the Company named in the Summary Compensation Table
above:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
- ---------------------------------------------------------------------------------------
Potential
% of Realizable Value at
Total Assumed Annual
Number of Options Rates of Stock Price
Securities Granted to Appreciation
Underlying Employees Exercise for Option Term
Options in Fiscal Price Expiration ---------------------------
Name Granted (#) Year ($/Sh) Date 5% ($) 10% ($)
---- ----------- ----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Bruce J. Barrett........... 180,000 (1) 40.4 $5.875 4/2/08 665,056 1,685,383
Raymond W. Gunn............ 24,000 (1) 5.4 $5.875 4/2/08 88,674 224,718
Richard S. Scheuing........ 5,000 (2) 1.1 $4.75 1/22/08 14,936 37,851
40,000 (1) 9.0 $5.875 4/2/08 147,790 374,529
Ronald A. Widman........... 5,000 (2) 1.1 $4.75 1/22/08 14,936 37,851
36,000 (1) 8.1 $5.875 4/2/08 133,011 337,077
Pamela A. Winters.......... 5,000 (2) 1.1 $4.75 1/22/08 14,936 37,851
40,000 (1) 9.0 $5.875 4/2/08 147,790 374,529
</TABLE>
- ----------------------
(1) Options to purchase 180,000, 24,000, 40,000, 36,000 and 40,000 Common
Shares were granted to Messrs. Barrett, Gunn, Scheuing, and Widman, and
Ms. Winters, respectively, in fiscal 1998 under the Company's 1997
Option Plan, exercisable at the then current fair market value of the
underlying Common Shares. Each of such options is exercisable in
one-third cumulative annual increments beginning April 2, 1999. Each
option also becomes 100% exercisable immediately 10 days before or upon
specified changes in control of the Company. The portion of each of
such options which is exercisable at the date of termination of
employment remains exercisable until the expiration date of the option,
unless termination is for cause.
(2) Options to purchase 5,000, 5,000 and 5,000 Common Shares were granted
to Messrs. Scheuing, and Widman, and Ms. Winters, respectively, in
fiscal 1998 under the Company's 1997 Option Plan, exercisable at the
then current fair market value of the underlying Common Shares. Each of
such options is exercisable
7
<PAGE> 10
in one-fourth cumulative annual increments beginning January 22, 1999.
Each option also becomes 100% exercisable immediately 10 days before or
upon specified changes in control of the Company.
If, upon exercise of any of the options described above, 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, 1998 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, 1998:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES FY-END (#) FY-END ($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Bruce J. Barrett........... -0- -0- 124,075/274,125 0/0
Raymond W. Gunn............ -0- -0- 55,350/55,250 0/0
Richard S. Scheuing........ -0- -0- 9,687/57,238 0/0
Ronald A. Widman........... -0- -0- 6,165/49,665 0/0
Pamela A. Winters.......... -0- -0- 7,375/53,875 0/0
</TABLE>
Compensation of Directors
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.
The Board of Directors has (i) terminated the Somanetics Corporation
1993 Director Stock Option Plan (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 each annual meeting of shareholders (beginning with the
8
<PAGE> 11
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, the date of the 1998 Annual Meeting, in exchange for the
cancellation of certain outstanding stock options, granted ten-year stock
options under the 1997 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 $5.875, the closing sale price of the Common Shares as of the
date of the Annual Meeting (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 date of the 1998
Annual Meeting. The Replacement Options became 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 was not canceled or replaced. 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 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.
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 1998 and for fiscal
1999. 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
9
<PAGE> 12
employment under the agreement is terminated without cause or if the agreement
expires without being renewed. The agreement also provides that Mr. Gunn will
not compete against the Company during specified periods following the
termination of his employment.
Stock Option Terms. All options granted under the Company's stock
option plans through February 12, 1999, that are not already 100% exercisable
immediately, including options granted to Messrs. Barrett, Gunn, Scheuing and
Widman and Ms. Winters, become 100% exercisable immediately ten days before or
upon specified changes in control of the Company.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended November 30, 1998, 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, 1998, 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. Neither of the committee members
had any relationship with the Company requiring disclosure by the Company
pursuant to Securities and Exchange Commission rules regarding disclosure of
related-party transactions.
Board Compensation Committee Report on Executive Compensation
General. The Compensation Committee's overall compensation policy
applicable to the Company's executive officers is to provide a compensation
package that is intended to attract and retain qualified executives for the
Company and to provide them with incentives to achieve Company goals and
increase shareholder value. The Compensation Committee implements this policy
through salaries, bonuses, stock options, a 401(k) plan, and employment
agreements and miscellaneous personal benefits.
Salaries. The Compensation Committee's policy is to provide salaries
that it believes are necessary to attract and retain qualified executives. In
determining its recommendations for executive officer salaries, the Compensation
Committee consults other members of the Board, but generally relies to a
significant extent on Mr. Barrett's recommendations as the Company's Chief
Executive Officer. The Compensation Committee also considers its members'
knowledge of salaries paid by companies of comparable size in the electronics
and medical electronics industry (including some companies included in the
industry index used by the Company in its performance graph below), individual
performance, the executive's position, the Company's financial resources and
prospects and the salaries of other officers and employees within the Company.
Salaries for fiscal 1998 were determined based on a subjective evaluation of the
factors described above, without giving any specific priority or weighting to
any of the factors.
Bonuses. The Compensation Committee's policy is to recommend bonuses
that compensate executive officers for achieving Company goals. In addition, the
Compensation Committee's policy is to pay discretionary bonuses, determined near
the end of the fiscal year, to compensate executive officers for performance or
achievements during the fiscal year not covered by bonuses paid earlier in the
year.
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<PAGE> 13
For fiscal 1998, the Company adopted the 1998 Incentive Compensation
Plan for all officers and non-commissioned, full-time employees. Half of the
potential bonuses under the plan were based on the Company's revenues,
determined quarterly ("Plan A"). The quarterly bonus equalled (i) the percentage
of the Company's year-to-date revenues compared to budgeted revenues, (ii)
multiplied by a factor, (iii) multiplied by the employee's salary, (iv)
multiplied by a "pay-out rate", and (v) multiplied by .125 (i.e., one-half of
the potential bonus, divided among the four quarters). No bonus was payable for
revenues less than 70% of budgeted revenues, and the formula required an
improvement in revenues for every quarter. The factors ranged from .50 for
revenues from 70% to 80% of budget to 1.50 for revenues in excess of 125% of
budget, and equalled 1.00 for revenues equal to 100% of the budget. Pay-out
rates ranged from 10% to 50%, depending on the employee, and were 50%, 35%, 25%,
25% and 25% for Messrs. Barrett, Gunn, Scheuing and Widman, and Ms. Winters,
respectively.
The other half of the bonuses under the plan was based on pre-defined
objectives for each employee, which were weighted according to level of
importance ("Plan B"). This half of the bonus for one group of employees
(including Messrs. Barrett and Gunn) equalled (i) the percentage of objectives
achieved, (ii) multiplied by the employee's salary, (iii) multiplied by the
"pay-out rate", (iv) multiplied by .5 (i.e., half of the total potential bonus),
(v) multiplied by the Company's percentage of revenues compared to planned
revenues, and (vi) multiplied by the percentage of the Company's profits
compared to planned profits. This formula required improvements in sales and in
net loss.
For the rest of the participants in the plan (including Messrs.
Scheuing and Widman and Ms. Winters), this half of the bonus equalled (i) the
percentage of objectives achieved, (ii) multiplied by the employee's salary,
(iii) multiplied by the "pay-out rate", and (iv) multiplied by .5 (i.e., half of
the total potential bonus) ("Plan C"). No bonuses were payable to these
employees if they did not achieve at least 50% of their objectives. The
Compensation Committee retained discretion to increase or decrease performance
bonuses to both groups by 20%. In 1998, the Company met 156%, 93%, 81% and 67%
of its cumulative revenue targets in the first, second, third and fourth
quarters, respectively, and, therefore, paid a sales bonus under Plan A in the
first three quarters, but it paid no Plan B performance bonuses because
cumulative annual sales were below 70% of targeted sales. The Company also paid
bonuses under Plan C. As a result of the Company's sales and lack of
profitability, the Company's desire to control overhead and the Company's
financial condition at the end of the year, the Compensation Committee
recommended that no additional bonuses be paid to executive officers for fiscal
1998.
Stock Options. The Compensation Committee's policy is to award stock
options to each officer, employee, director and scientific advisor of the
Company in amounts reflecting the participant's position and ability to
influence the Company's overall performance, determined based on the Committee's
subjective judgment after reviewing the number of options previously granted to
such person, the number of options granted to persons in similar positions both
at the Company and at other companies deemed comparable to the Company (based on
the members' knowledge of options granted by other companies), the number of
options remaining available for grant and management's recommendations. The
number of options granted in 1998 to executives was determined based on the
above factors and recommended levels of share ownership by the underwriter of
the Company's 1998 public offering, management's recommendations and the
Compensation Committee's subjective judgment primarily after reviewing the
previous grants of options to such executives and their ownership of Common
Shares. Options are intended to provide participants with an increased incentive
to make
11
<PAGE> 14
contributions to the long-term performance and growth of the Company, to join
the interests of participants with the interests of shareholders of the Company
and to attract and retain qualified employees.
The Compensation Committee's policy is to grant options with a term of
ten years to provide a long-term incentive and to fix the exercise price of the
options at the fair market value of the underlying shares on the date of grant.
Such options only provide compensation if the price of the underlying shares
increases. In addition, the Committee's policy is to grant options that vest
over a specific period to provide the executive with an incentive to remain with
the Company. Generally, options granted to the Company's executives vest in
three equal annual installments beginning one year after the date of grant. The
Committee's policy is also to provide new executives with options to attract
them to the Company based on negotiations with new executives, management's
recommendations and the Committee's subjective judgment primarily after
reviewing the number of options granted to similar executives of the Company.
Generally, the Compensation Committee reserves the right to pay
compensation to Company executives in amounts it deems appropriate regardless of
whether such compensation is deductible for federal income tax purposes. Options
granted to executives in fiscal 1998 are potentially subject to limits on
permitted federal income tax deductions upon exercise of such options, including
under current treasury regulations concerning the $1,000,000 cap on executive
compensation deductions under Section 162(m) of the Internal Revenue Code of
1986, as amended. The Committee determined that such grants were more important
to the Company than the potential loss of related compensation deductions upon
exercise of the options, especially in light of the Company's net operating loss
carryforwards, its current inability to use additional compensation deductions
and the non-cash nature of deductions available upon exercise of stock options.
401(k) Plan. The Company has adopted a 401(k) plan to provide all
eligible employees a means to accumulate retirement savings. Participants may
defer specified portions of their compensation and the Company may, but is not
required to, make (i) matching contributions equal to a percentage of such
deferrals and (ii) additional discretionary contributions. The Compensation
committee's policy is to make matching or additional contributions to the 401(k)
plan either (i) out of the Company's profits to reward employees for their
collective efforts in producing profits, or (ii) contingent on achieving
specified goals to provide additional incentives to meet those goals. The amount
of such contributions is based on the Committee's subjective judgment of what is
appropriate, after reviewing management's recommendation. As a result of a lack
of profits in fiscal 1998 and in light of the Company's resources and its desire
to control overhead, the Committee recommended that the Company not make a
contribution to the 401(k) plan for fiscal 1998.
Employment Agreements and Miscellaneous Personal Benefits. The
Compensation Committee's policy has been to have employment agreements with
Messrs. Barrett and Gunn to provide them with specified minimum positions,
periods of employment, salaries, fringe benefits and severance benefits. These
benefits are intended to permit these executive officers to focus their
attention on performing their duties to the Company, rather than on the security
of their employment, and to provide such officers with benefits deemed by the
Compensation Committee to be suitable for their offices. The Compensation
Committee's policy, however, is that personal benefits (other than severance
pay) should not exceed 10% of the executive's salary and bonus for the year.
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<PAGE> 15
Fiscal 1998 Compensation Decisions Concerning CEO. In October 1997, the
Compensation Committee recommended that Mr. Barrett's salary remain at $204,750
for 1998. As described in "Salaries", the amount of the recommended salary for
Mr. Barrett was based primarily on the Committee's subjective evaluation of Mr.
Barrett's recommendation, its members' consultation with other directors, its
members' knowledge of salaries paid by companies of comparable size in the
electronics and medical electronics industries, Mr. Barrett's performance in
fiscal 1997 and his position with the Company, the Company's financial resources
and prospects and the salaries of other officers and employees within the
Company.
In October 1997, the Committee recommended the approval of the 1998
Incentive Compensation Plan, and in March 1998 and January 1999, the Committee
recommended paying the Plan A and Plan C portions of the bonus under that plan,
including $32,977.55 to Mr. Barrett under Plan A, based on the Company's sales
in 1998. In January 1999, the Committee recommended that no additional bonuses
be paid to the Company's executive officers for fiscal 1998 and that no
contribution be made to the 401(k) plan for fiscal 1998. The Committee
recommended adoption of the bonus plan as a means to compensate executive
officers for achieving Company goals, specifically its sales, profitability and
individual officer goals. The bonus paid to Mr. Barrett based on achievement of
at least 70% of the Company's revenue goals for the first three quarters of
fiscal 1998 pursuant to the formula contained in the plan and described above.
No additional year-end bonuses or 401(k) contributions for fiscal 1998 were
recommended as a result of the Company's lack of sales and profitability, the
Company's desire to control overhead and the Company's financial condition at
the end of the year.
In April 1998, the Committee recommended that the Board grant Mr.
Barrett a 10-year option to purchase 180,000 Common Shares at $5.875 a share.
The amount granted to Mr. Barrett was based on the factors described in "Stock
Options," including his position and ability to influence the Company's overall
performance, determined based on the Committee's subjective judgment after
reviewing the number of options previously granted to him and his ownership of
Common Shares, the number of options granted in the past to persons in similar
positions both at the Company and at other companies deemed comparable to the
company (based on the directors' knowledge of options granted by other
companies), the number of options remaining available for grant, the recommended
levels of share ownership by the underwriter of the Company's 1998 public
offering, management's recommendation and the Committee's subjective judgment.
By the Compensation Committee
H. Raymond Wallace
Daniel S. Follis
Performance Graph
The following line graph compares for the fiscal years ended November
30, 1994, 1995, 1996, 1997 and 1998 (i) the yearly percentage change in the
Company's cumulative total shareholder return (i.e., the change in share price
divided by the initial share price, expressed as the resulting value of a $100
investment; the Company has not paid cash dividends) on the Company's Common
Shares, with (ii) the cumulative total return of The Standard & Poor's SmallCap
600 Index and with (iii) the cumulative total return on the publicly-traded
equity of an
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<PAGE> 16
old and a new peer group selected by the Company based on companies in
electronic medical monitoring fields within Standard Industrial Classification
Code 3845 (Electromedical and Electrotherapeutic Apparatus) that the Company
believes are in fields similar to the Company's business.
COMPARISON OF CUMULATIVE TOTAL RETURN*
AMONG SOMANETICS CORPORATION,
STANDARD & POOR'S SMALLCAP 600 INDEX AND
PEER GROUP INDEX**
[GRAPH]
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Somanetics Corporation........................... 100.00 36.36 22.73 47.71 22.73 5.91
Standard & Poor's SmallCap 600 Index............. 100.00 96.34 126.16 153.78 191.52 181.26
Electronic Medical Monitoring Peer
Group Index (New Group)........................ 100.00 106.74 157.02 130.36 126.39 115.74
Electronic Medical Monitoring Peer
Group Index (Old Group)........................ 100.00 117.17 145.58 126.13 125.36 158.67
</TABLE>
Assumes $100 invested on November 30, 1993 in Somanetics Corporation Common
Shares, The Standard & Poor's SmallCap 600 Index and both the old and the new
Peer Group Index.
- ----------------------
*Total return assumes reinvestment of dividends.
**Fiscal Year ending November 30.
The companies that the Company currently believes are in fields similar
to the Company's business, that are in electronic medical monitoring fields
within Standard Industrial Classification Code 3845 (Electromedical and
Electrotherapeutic Apparatus) and that have publicly-traded securities are as
follows: Abaxis Inc., Applied Biometrics Inc., Biocontrol Technology, Inc.,
Conmed Corporation, Novametrix Medical Systems Inc., Physiometrix, Inc.,
Protocol Systems, Inc., Q Med, Inc., Spacelabs Medical, Inc. and SpectRx, Inc.
In addition to these companies, Marquette Medical Systems Inc. and Physio
Control International Corporation were also included in the old peer group
index, but have been excluded from the new peer group
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<PAGE> 17
because they were parties to business combinations, and the Company believes the
resulting entity is no longer primarily engaged in fields similar to the
Company's business.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than ten-percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) reports they file. Based solely on review of the copies of such reports
furnished to the Company during or with respect to fiscal 1998, or written
representations that no Forms 5 were required, the Company believes that during
the fiscal year ended November 30, 1998 all Section 16(a) filing requirements
applicable to its officers, directors and greater than ten-percent beneficial
owners were complied with.
II. PROPOSAL TO APPROVE AN AMENDMENT TO THE
SOMANETICS CORPORATION 1997 OPTION PLAN
TO INCREASE AUTHORIZED SHARES
GENERAL
At the meeting, shareholders will be asked to consider and act upon a
proposal to approve an amendment to the Somanetics Corporation 1997 Stock Option
Plan (the "1997 Option Plan") to increase the number of Common Shares, par value
$0.01 per share ("Common Shares"), reserved for issuance pursuant to the
exercise of options granted under the 1997 Option Plan by 295,000 shares, from
745,000 to 1,040,000 shares (the "1997 Option Plan Amendment"). Pursuant to the
1997 Option Plan, 745,000 Common Shares, are currently reserved for issuance
pursuant to options granted or to be granted to key employees (including
officers), directors, consultants or advisors (the "Participants") of or to the
Company or of or to any corporation or other entity in which the Company has a
direct or indirect ownership interest of 50% or more of the total combined
voting power of all classes of outstanding voting equity interests
("Subsidiary") as the Company's Board of Directors or a committee appointed by
the Board of Directors shall determine.
Options granted under the 1997 Option Plan may be "Incentive Stock
Options" (options meeting the requirements set forth in the 1997 Option Plan and
which are also intended to be and qualify as incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and the
applicable rules and regulations thereunder (the "Code")), nonqualified options
(options which meet the requirements set forth in the 1997 Option Plan but are
not intended to be, or do not qualify as, an incentive stock option within the
meaning of Section 422) or both. The 1997 Option Plan contains various
provisions to ensure that Incentive Stock Options comply with Section 422. The
Board of Directors adopted the 1997 Option Plan on January 15, 1997, amended the
1997 Option Plan on January 15, 1998 to increase the number of shares reserved
for issuance under the 1997 Option Plan, and approved the 1997 Option Plan
Amendment on December 9, 1998, subject to shareholder approval.
The Company's 1983 Stock Option Plan (the "1983 Plan") terminated in
1993, except as to options granted before that date. As of February 12, 1999,
options to purchase 9,317 Common
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<PAGE> 18
Shares remained outstanding under the 1983 Plan. The Company's 1991 Incentive
Stock Option Plan ("1991 Plan") authorizes the issuance of up to 115,000 Common
Shares, of which options to purchase 4,711 Common Shares have been exercised,
options to purchase 95,622 Common Shares are outstanding, and options to
purchase 14,667 Common Shares are available for future grants as of February 12,
1999. In addition, as of February 12, 1999, the Company had granted, and there
remained outstanding, options independent of any of its stock option plans to
purchase 170,578 Common Shares. As of February 12, 1999, (i) options to purchase
723,222 Common Shares were outstanding under the 1997 Option Plan, (ii) options
to purchase 200 Common Shares granted under the 1997 Option Plan had been
exercised, and (iii) 21,578 Common Shares remained available for the grant of
options under the 1997 Option Plan. The proposed 1997 Option Plan Amendment
would increase the number of Common Shares reserved for issuance pursuant to
options granted or to be granted under the 1997 Option Plan by 295,000 Common
Shares.
The Company's 1993 Director Stock Option Plan (the "Directors Plan")
terminated in 1998, except as to options granted before that date. As of
February 12, 1999, options to purchase 2,498 Common Shares remained outstanding
under the Directors Plan. The Board of Directors has (i) 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, all under the amended 1997 Option Plan, and (ii)
effective as of March 17, 1998, the date of the 1998 Annual Meeting, in exchange
for the cancellation of certain outstanding stock options, granted ten-year
stock options under the amended 1997 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 the
date of the Annual Meeting (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 $5.875, the
fair market value of the Common Shares as of March 17, 1998, the date of the
1998 Annual Meeting. 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 was not canceled.
The Company also has the following warrants outstanding: (i) warrants
granted to the placement agent in connection with three Regulation S offerings
of Common Shares in 1994, 1995 and 1996 to purchase an aggregate of 79,394
Common Shares, (ii) warrants issued to purchasers in connection with two
Regulation S offerings of Common Shares in 1995 and 1996 to purchase an
aggregate of 115,520 Common Shares as of February 12, 1999, and (iii) warrants
granted to the underwriter in connection with the Company's 1997 public offering
of Common Shares to purchase an aggregate of 200,000 Common Shares.
The Board of Directors believes that it is in the best interests of the
Company and its shareholders to approve the 1997 Option Plan Amendment to allow
the Company to continue to grant options to Participants in accordance with the
terms of the 1997 Option Plan.
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<PAGE> 19
The purpose of the 1997 Option Plan is to provide key employees
(including officers), directors, consultants and advisors of the Company and its
Subsidiaries with an increased incentive to make significant and extraordinary
contributions to the long-term performance and growth of the Company, to join
the interests of key employees, directors, consultants and advisors with the
interests of shareholders of the Company and to facilitate attracting and
retaining key employees, directors, consultants and advisors of the Company. The
1997 Option Plan, however, could have an "anti-takeover" effect, particularly
with regard to the Committee's ability to accelerate the exercisability of stock
options in connection with a change in control.
Persons deemed to be affiliates of the Company, i.e., persons who
directly or indirectly through one or more intermediaries, control, are
controlled by, or are under common control with, the Company, must resell
securities acquired under the 1997 Option Plan pursuant to a registration
statement under the Securities Act of 1933, as amended, and the rules and
regulations thereunder (the "Securities Act"), Rule 144 under the Securities Act
or an applicable exemption under the Securities Act.
The Company is the issuer of the securities offered pursuant to the
1997 Option Plan. The Common Shares of the Company issuable upon exercise of
stock options under the 1997 Option Plan may be either authorized and unissued
or reacquired Common Shares of the Company. The 1997 Option Plan is not subject
to any provisions of the Employee Retirement Income Security Act of 1974 and is
not qualified under Section 401(a) of the Code.
APPROVAL OF THE 1997 OPTION PLAN AMENDMENT
The approval by a majority of the votes cast by the holders of Common
Shares at the meeting and entitled to vote on the action is necessary for
shareholder approval of the 1997 Option Plan Amendment. Abstentions, withheld
votes and broker non-votes will not be deemed votes cast in determining approval
of this proposal, but will be counted in determining the number of Common Shares
present or represented by proxy in determining whether a quorum is present. The
Board does not intend to place the 1997 Option Plan Amendment into effect unless
such approval is obtained at the Annual Meeting, and such approval is sought, in
part, in order to exempt the granting of options under the 1997 Option Plan from
the provisions of Section 162(m) of the Code and in order to comply with
shareholder approval requirements for securities traded on The Nasdaq SmallCap
Market.
A FULL COPY OF THE 1997 OPTION PLAN, AS PROPOSED TO BE AMENDED, MARKED
TO SHOW THE PROPOSED CHANGES, IS ATTACHED AS EXHIBIT A TO THIS PROXY STAtEMENT.
THE MAJOR FEATURES OF THE 1997 OPTION PLAN, AS PROPOSED TO BE AMENDED, ARE
SUMMARIZED BELOW, BUT THIS IS ONLY A SUMMARY AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE ACTUAL TEXT. CAPITaLIZED TERMS NOT OTHERWISE DEFINED IN THIS
PROXY STATEMENT HAVE THE MEANINGS GIVEN THEM IN THE 1997 OPTION PLAN. AS OF THE
RECORD DATE, THE CLOSING SALES PRICE OF THE COMPANY'S COMMON SHARES WAS $2.75.
17
<PAGE> 20
ADMINISTRATION
The 1997 Option Plan is administered by a committee or entity appointed
by the Board of Directors to perform any of the functions and duties of the
Committee under the 1997 Option Plan and, with respect to administration of the
1997 Option Plan regarding Participants who are subject to Section 16(a) and (b)
of the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder (the "Exchange Act"), that is a committee meeting the
standards of Rule 16b-3 under the Exchange Act, or any similar successor rule,
or the Board of Directors as a whole (the "Committee"). Members of the Committee
serve at the pleasure of the Board of Directors and may be removed or replaced
by the Board of Directors at any time. The Committee currently consists of
Daniel S. Follis and H. Raymond Wallace or the Board of Directors as a whole.
Subject to the provisions of the 1997 Option Plan, the Committee is
authorized to interpret the 1997 Option Plan, to promulgate, amend and rescind
rules and regulations relating to the 1997 Option Plan, and to make all other
determinations necessary or advisable for the 1997 Option Plan's administration.
Interpretation and construction of any provision of the 1997 Option Plan by the
Committee is, unless otherwise determined by the Board of Directors of the
Company, final and conclusive. Subject to the provisions of the 1997 Option
Plan, the Committee determines, from those eligible to be Participants under the
Plan, the persons to be granted stock options, the amount of stock to be
optioned to each such person, the time such options shall be granted, the time
or times such option shall be exercisable and the terms and conditions of any
stock options. Such terms and conditions may, in the Committee's sole
discretion, with no requirement whatsoever that the Committee follow past
practices, act in a manner consistent with past practices, or treat any key
employee, director, consultant or advisor in a manner consistent with the
treatment afforded other key employees, directors, consultants or advisors with
respect to the Plan or otherwise ("Discretion"), include, without limitation,
provisions providing for termination of the option, forfeiture of the gain on
any option exercises or both if the Participant competes with the Company or
otherwise acts contrary to the Company's interests, and provisions imposing
restrictions, potential forfeiture or both on shares acquired upon exercise of
options granted pursuant to this Plan. The Committee may condition any grant on
the potential Participant's agreement to such terms and conditions.
Subject to the requirements of the Code with respect to Incentive
Options that are intended to remain Incentive Options, in connection with a
Participant ceasing to be an employee of the Company or a subsidiary for any
reason, the stock option agreement may provide for the acceleration of, or the
Committee may accelerate, in its Discretion (exercised at the date of the grant
of the stock option or after the date of grant), in whole or in part, the time
or times or installments with respect to which any stock option granted under
the 1997 Option Plan shall be exercisable in connection with termination of a
Participant's employment with the Company or a subsidiary, subject to any
restrictions, terms and conditions fixed by the Committee either at the date of
the award or at the date it exercises such Discretion.
In addition to such other rights of indemnification as they may have,
the members of the Committee will be indemnified by the Company in connection
with any claim, action, suit or proceeding relating to any action taken or
failure to act under or in connection with the 1997 Option Plan or any option
granted under the 1997 Option Plan to the full extent provided for under the
Company's Restated Articles of Incorporation or bylaws with respect to
indemnification of directors of the Company.
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<PAGE> 21
1997 OPTION PLAN PARTICIPANTS
The selection of persons who are eligible to participate in the 1997
Option Plan and grants and awards to those individuals are determined by the
Committee, in its Discretion. The only established criterion to determine
eligibility under the 1997 Option Plan is that individuals must be key employees
(including officers), directors, consultants or advisors of or to the Company or
any Subsidiary, as determined by the Committee in its Discretion; provided that
Incentive Options may be granted only to employees (as defined in the Code) of
the Company or a corporate Subsidiary, to the extent required by Section 422 of
the Code, or any successor provision.
Approximately 44 key employees, 4 directors, and 8 consultants and
advisors are currently eligible to participate in the 1997 Option Plan, most of
whom have been granted options under the 1983 Plan, the 1991 Plan, the 1997
Option Plan, the Directors Plan or independent of any stock option plan.
Subject to adjustments as described under "Shares Subject to Grant or
Award", no Participant may be granted stock options to purchase more than
200,000 Common Shares in the aggregate in any fiscal year. In addition, grants
and awards are subject to the maximum number of shares remaining with respect to
which stock options may be granted at any time under the 1997 Option Plan. There
are also certain limitations on the maximum value of Incentive Options which may
become first exercisable by any person in any year. Each grant or award under
the 1997 Option Plan must be evidenced by a written agreement containing such
provisions as may be approved by the Committee.
SHARES SUBJECT TO GRANT OR AWARD
The maximum number of Common Shares with respect to which stock options
may be granted under the 1997 Option Plan is currently 745,000 Common Shares and
is proposed to be amended to be 1,040,000 Common Shares, which may consist in
whole or in part of authorized and unissued or reacquired Common Shares. Unless
the 1997 Option Plan has terminated, shares covered by the unexercised portion
of canceled, expired or otherwise terminated options under the 1997 Option Plan
are again available for option and sale.
The number and type of shares subject to each outstanding stock option,
the option price with respect to outstanding stock options, the aggregate number
and type of shares remaining available under the 1997 Option Plan, and the
maximum number and type of shares that may be granted to any Participant in any
fiscal year are subject to such adjustment as the Committee, in its Discretion,
deems appropriate to reflect such events such as stock dividends, stock splits,
recapitalizations, mergers, statutory share exchanges or reorganizations of or
by the Company; provided that no fractional shares may be issued pursuant to the
1997 Option Plan, no rights may be granted under the 1997 Option Plan with
respect to fractional shares, and any fractional shares resulting from such
adjustments shall be eliminated from any outstanding option.
AMENDMENT OR TERMINATION OF THE 1997 OPTION PLAN
The Board of Directors may terminate or amend the 1997 Option Plan, or
amend any stock option agreement under the 1997 Option Plan, at any time;
provided that, (i) to the extent
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<PAGE> 22
required by Section 162(m) of the Code and related regulations, or any successor
rule, but only with respect to amendments or revisions affecting Participants
whose compensation is subject to Section 162(m) of the Code, and to the extent
required by Section 422 of the Code, or any successor section, but only with
respect to Incentive Stock Options, no such amendment or revision may increase
the maximum number of shares in the aggregate that are subject to the 1997
Option Plan without the approval or ratification of the shareholders of the
Company, and (ii) no such amendment or revision may change the option price or
alter or impair any stock option previously granted under the 1997 Option Plan,
in a manner adverse to a Participant, without the consent of such Participant,
all except as described under the caption "Shares Subject to Grant".
Unless sooner terminated by the Board of Directors, the 1997 Option
Plan will terminate on January 15, 2007, which is ten years after its original
adoption by the Board of Directors, and no stock options may be granted under
the 1997 Option Plan after that date. The termination of the 1997 Option Plan
will not affect the validity of any option outstanding on the date of
termination.
STOCK OPTIONS
Grant of Stock Options
Both Incentive Options and Nonqualified Options may be granted under
the 1997 Option Plan. An Incentive Option is intended to be, and qualifies as,
an incentive stock option within the meaning of Section 422 of the Code. Any
Incentive Option granted under the 1997 Option Plan must have an exercise price
not less than 100% of the fair market value of the shares on the date on which
such option is granted. With respect to an Incentive Option granted to a
Participant who owns more than 10% of the total combined voting shares of the
Company or of any parent or Subsidiary of the Company, the exercise price of
such option must not be less than 110% of the fair market value of the shares
subject to such option on the date such option is granted. A Nonqualified Option
granted under the 1997 Option Plan must have an exercise price of not less than
the par value, if any, of the Common Shares.
At the time of the exercise of any option granted pursuant to the 1997
Option Plan, the Participant must pay the full option price for all shares
purchased (a) in cash or, (b) with the consent of the Committee, in its
Discretion, (i) in Common Shares, (ii) by a promissory note payable to the order
of the Company which is acceptable to the Committee, (iii) by a cash down
payment and a promissory note for the unpaid balance, (iv) subject to such
conditions as may be established by the Committee, by the Company retaining from
the shares to be delivered upon exercise of the stock option that number of
shares having a fair market value on the date of exercise equal to the option
price of the number of shares with respect to which the Participant exercises
the option, (v) by delivery to the Company of written notice of the exercise in
such form as the Committee may prescribe, accompanied by irrevocable
instructions to a stock broker to promptly deliver to the Company full payment
for the shares with respect to which the option is exercised from the proceeds
of the stockbroker's sale of, or loan against, the shares, or (vi) in such other
manner as the Committee determines is appropriate, in its Discretion. The
aggregate fair market value (determined as of the date the option is granted) of
the underlying stock with respect to which Incentive Options are exercisable for
the first time by such individual during any calendar year (under all of such
plans of the Company and its parent and Subsidiary corporations ) cannot exceed
$100,000.
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<PAGE> 23
Term of Stock Options
If not sooner terminated, each stock option granted under the 1997
Option Plan will expire not more than ten years from the date of grant; provided
that, with respect to an Incentive Option granted to a Participant who, at the
time of the grant, owns more than 10% of the total combined voting stock of all
classes of stock of the Company or of any parent or Subsidiary, such option must
expire not more than five years after the date of the grant.
Continuation of Employment
Options granted under the 1997 Option Plan may be exercised only while
the Participant is an employee, director, consultant or advisor of or to the
Company or a Subsidiary, except as described under "Extraordinary Transactions"
and except that the Committee may, in its Discretion, permit the exercise of all
or any portion of the options granted to such Participant (i) for a period not
to exceed three months following such termination with respect to Incentive
Options that are intended to remain Incentive Options if such termination is not
due to death or permanent disability of the Participant, (ii) for a period not
to exceed one year following termination of employment with respect to Incentive
Options that are Intended to remain Incentive Options if termination of
employment is due to the death or permanent disability of the Participant, and
(iii) for a period not to extend beyond the expiration date with respect to
Nonqualified Options or Incentive Options that are not intended to remain
Incentive Options, all subject to any restrictions, terms and conditions fixed
by the Committee either at the date of the award or at the date it exercises
such Discretion.
In no event, however, shall an option be exercisable after its
expiration date, and, unless the Committee in its Discretion determines
otherwise (pursuant to the 1997 Option Plan), an option may only be exercised
after termination of a Participant's employment, consultation or other service
by or to the Company to the extent exercisable on the date of such termination
or to the extent exercisable as a result of the reason for such termination. The
Committee may evidence the exercise of its Discretion in any manner it deems
appropriate, including by resolution or by a provision in, or amendment to, the
option.
Subject to the requirements of the Code with respect to Incentive
Options that are intended to remain Incentive Options, in connection with a
Participant ceasing to be an employee of the Company or a subsidiary for any
reason, the stock option agreement may provide for the acceleration of, or the
Committee may accelerate, in its Discretion (exercised at the date of the grant
of the stock option or after the date of grant), in whole or in part, the time
or times or installments with respect to which any option granted under the 1997
Option Plan shall be exercisable in connection with termination of a
Participant's employment with the Company or a Subsidiary, subject to any
restrictions, terms and conditions fixed by the Committee either at the date of
the award or at the date it exercises such Discretion.
The Committee may require, in its Discretion, that any Participant
under the 1997 Option Plan to whom an option shall be granted shall agree in
writing as a condition of the granting of such option to remain in his or her
position as an employee, director, consultant or advisor of the Company or a
Subsidiary of the Company for a designated minimum period from the date of the
granting of such stock option as shall be fixed by the Committee. Nothing
contained in the 1997 Option Plan or in any option granted pursuant to the 1997
Option Plan, nor any action taken by
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<PAGE> 24
the Committee under the 1997 Option Plan confers upon any Participant any right
with respect to continuation of employment, consultation or other service by or
to the Company or any Subsidiary or interfere in any way with the right of the
Company or a Subsidiary to terminate such person's employment, consultation or
other service at any time.
Sequential Exercise
Successive stock options may be granted to the same Participant whether
or not the option or options previously granted to such Participant remain
unexercised. A Participant may exercise any option granted under the 1997 Option
Plan, if then exercisable, notwithstanding that options granted to such
Participant before the option then being exercised remain unexercised.
Transferability of Options
Except as otherwise described below, to the extent required by Section
422 of the Code, or any successor section, but only with respect to Incentive
Options, or to the extent determined by the Committee in its Discretion (either
by resolution or by a provision in, or amendment to, the option), (i) no option
granted under the 1997 Option Plan to a Participant shall be transferable by
such Participant otherwise than by will, or by the laws of descent and
distribution or, with respect to Nonqualified Options only (unless permitted by
Section 422 of the Code or any successor section), pursuant to a qualified
domestic relations order as defined in the Code or Title I of the Employee
Retirement Income Security Act, or the rules thereunder, and (ii) each option is
exercisable, during the lifetime of the Participant, only by the Participant.
The Committee may, in its Discretion, authorize all or a portion of the
options to be granted to an optionee to be on terms which permit transfer by
such optionee to, and the exercise of such option by, (i) the spouse, children
or grandchildren of the optionee ("Immediate Family Members"), (ii) a trust or
trusts for the exclusive benefit of such Immediate Family Members, (iii) a
partnership in which such Immediate Family Members are the only partners, or
(iv) such other persons or entities as determined by the Committee, in its
Discretion, on such terms and conditions as the Committee, in its Discretion,
may determine; provided that (y) the stock option agreement pursuant to which
such options are granted must be approved by the Committee and must expressly
provide for transferability in a manner consistent with these provisions of the
1997 Option Plan, and (z) subsequent transfers of transferred options are
prohibited except for transfers the original optionee would be permitted to make
(if he or she were still the owner of the option) in accordance with the 1997
Option Plan.
Following transfer, any such options shall continue to be subject to
the same terms and conditions as were applicable immediately before transfer,
provided that for some purposes under the 1997 Option Plan (generally relating
to exercise of the option) the term "Participant" shall be deemed to refer to
the transferee. The events of termination of employment, described above under
the caption "Continuation of Employment", continue to be applied with respect to
the original optionee. Following such events of termination of employment of the
original optionee, the options are exercisable by the transferee only to the
extent, and for the periods, described above under the caption "Continuation of
Employment". The original optionee remains subject to withholding taxes and
related requirements upon exercise described below under the caption "Federal
Income Taxes--Withholding Payments". The Company has no obligation to provide
any notice to any transferee, including, without limitation, notice of any
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<PAGE> 25
termination of the option as a result of termination of the original optionee's
employment with, or other service to, the Company.
Shareholder Rights
No Participant in the 1997 Option Plan has any of the rights of a
shareholder of the Company under any option granted under the 1997 Option Plan
until the actual issuance of shares to the Participant, and before such issuance
no adjustment will be made for dividends, distributions or other rights in
respect of such shares, except as described under the caption "Shares Subject to
Grant".
EXTRAORDINARY TRANSACTIONS
If the Company engages in specified consolidations, mergers, transfers
of substantially all of its properties and assets, dissolutions, liquidations,
reorganizations or reclassifications in such a way that holders of Common Shares
are entitled to receive stock, securities, cash or other assets with respect to,
or in exchange for, the Common Shares (each a "Transaction"), then each
Participant holding a stock option granted under the 1997 Option Plan upon the
exercise of such option after consummation of a Transaction will be entitled to
receive (for the same aggregate exercise price) the stock and other securities,
cash and assets the Participant would have received upon consummation of the
Transaction if he or she had exercised the option in full immediately before
consummation of the Transaction.
In addition, in connection with a Transaction, the Committee, acting in
its Discretion without the consent of any Participant and regardless of any
other provision of the 1997 Option Plan, may (i) permit stock options
outstanding under the 1997 Option Plan to be exercised in full for a limited
period of time, after which all unexercised stock options and all rights of
Participants under such options would terminate, (ii) permit stock options
outstanding under the 1997 Option Plan to be exercised in full for their then
remaining terms, or (iii) require all stock options outstanding under the 1997
Option Plan to be surrendered to the Company for cancellation and payment to
each Participant in cash of the excess of the fair market value of the
underlying Common Shares as of the date such Transaction is effective over the
exercise price, less any applicable withholding taxes. The 1997 Option Plan
provides, however, that the Committee may not select an alternative for a
Participant that would result in his or her liability under Section 16(b) of the
Exchange Act, without the Participant's consent. If all of the alternatives have
such a result, the Committee will take such action to put such Participant in as
close to the same position as he or she would have been in if one of the
alternatives described above had been selected, but without resulting in any
payment by such Participant under Section 16(b) of the Exchange Act.
Notwithstanding the foregoing, with the consent of each Participant, the
Committee may make such provision with respect to any Transaction as it deems
appropriate.
FEDERAL INCOME TAX CONSEQUENCES
The rules governing the tax treatment of options and shares acquired
upon the exercise of options are quite technical. Therefore, the description of
federal income tax consequences set forth below is necessarily general in nature
and does not purport to be complete. Moreover, statutory provisions are subject
to change, as are their interpretations, and their application may
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<PAGE> 26
vary in individual circumstances. Finally, the tax consequences under applicable
state and local income tax laws may not be the same as under the federal income
tax laws.
Incentive Options
Incentive Options granted pursuant to the 1997 Option Plan are intended
to qualify as "Incentive Stock Options" within the meaning of Section 422 of the
Code. If the Participant makes no disposition of the shares acquired pursuant to
exercise of an Incentive Option within one year after the transfer of shares to
such Participant and within two years from grant of the option, such Participant
will realize no taxable income as a result of the grant or exercise of such
option, and any gain or loss that is subsequently realized upon a sale or other
disposition of the shares may be treated as long-term capital gain or loss, as
the case may be. Under these circumstances, the Company will not be entitled to
a deduction for federal income tax purposes with respect to either the issuance
of such Incentive Options or the transfer of shares upon their exercise.
If shares acquired upon exercise of Incentive Options are disposed of
prior to the expiration of the above time periods, the Participant will
recognize ordinary income in the year in which the disqualifying disposition
occurs, the amount of which will generally be the lesser of (i) the excess of
the market value of the shares on the date of exercise over the option price, or
(ii) the gain recognized on such disposition. Such amount will ordinarily be
deductible by the Company for federal income tax purposes in the same year,
provided that the amount constitutes reasonable compensation. Moreover, the
Company may be required to satisfy certain federal income tax withholding
requirements in respect to such compensation, although deductibility of the
compensation will not be conditioned on satisfying withholding requirements. In
addition, the excess, if any, of the amount realized on a disqualifying
disposition over the market value of the shares on the date of exercise will be
treated as capital gain.
Nonqualified Options
A Participant who acquires shares by exercise of a Nonqualified Option
generally realizes as taxable ordinary income, at the time of exercise, the
difference between the exercise price and the fair market value of the shares on
the date of exercise. Such amount will ordinarily be deductible by the Company
in the same year, provided that the amount constitutes reasonable compensation.
Moreover, the Company will be required to satisfy certain federal income tax
withholding requirements in respect of such compensation, although deductibility
of the compensation will not be conditioned on satisfying withholding
requirements. Subsequent appreciation or decline in the value of the shares will
generally be treated as capital gain or loss on the sale or other disposition of
the shares.
Capital Gains Rates
If a Participant recognizes capital gain upon the sale or other
disposition of shares acquired upon exercise of options, the tax rate applicable
to such gain will depend on a number of factors, including the date the options
are granted, the date the options are exercised, the date the shares are sold or
otherwise disposed of, the length of time the Participant holds the shares, and
the Participant's marginal tax bracket. Participants should consult their own
tax advisors concerning the impact to them of the long-term capital gain tax
rates, as well as the other tax consequences of participation in the 1997 Option
Plan.
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<PAGE> 27
Withholding Payments
If upon the exercise of any Nonqualified Option or a disqualifying
disposition (within the meaning of Section 422 of the Code) of shares acquired
upon exercise of an Incentive Option, there shall be payable by the Company or a
Subsidiary any amount for income tax withholding, in the Committee's Discretion,
either the Participant shall pay such amount to the Company or such Subsidiary,
or the amount of Common Shares delivered by the Company to the Participant will
be appropriately reduced, to reimburse the Company or such Subsidiary for such
payment.
The Company or any of its Subsidiaries will have the right to withhold
the amount of such taxes from any other sums or property due or to become due
from the Company or any of its Subsidiaries to the Participant upon such terms
and conditions as the Committee shall prescribe. The Company may also defer
issuance of the stock upon exercise of such option until payment by the
Participant to the Company of the amount of any such tax. The Committee may, in
its Discretion, permit Participants to satisfy such withholding obligations, in
whole or in part, by electing to have the amount of Common Shares delivered or
deliverable by the Company upon exercise of a stock option appropriately
reduced, or by electing to tender Common Shares back to the Company subsequent
to exercise of a stock option to reimburse the Company for such income tax
withholding, subject to such rules and regulations, if any, as the Committee may
adopt. The Committee may make such other arrangements with respect to income tax
withholding as it shall determine.
Limitation on Compensation Deduction
Publicly-held corporations are precluded from deducting compensation
paid to certain of their executive officers in excess of $1 million. The
employees covered by the $1 million limitation on deductibility of compensation
consist of the chief executive officer and those employees whose annual
compensation is required to be reported to the Securities and Exchange
Commission because the employee is one of the company's four highest compensated
employees for the taxable year (other than the chief executive officer).
Ordinary income attributable to stock options generally is included in an
employee's compensation for purposes of the $1 million limitation on
deductibility of compensation.
However, there is an exception to the $1 million deduction limitation
for compensation (including compensation attributable to stock options) paid
pursuant to a qualified performance-based compensation plan. Compensation
attributable to a stock option is deemed to satisfy the qualified
performance-based compensation exception if (i) the grant is made by a
compensation committee comprised of outside directors, (ii) the plan under which
the options may be granted states the maximum number of shares with respect to
which options may be granted during a specified period to any employee, (iii)
under the terms of the option, the amount of compensation the employee would
receive is based solely on an increase in the value of the shares after the date
of the grant (e.g., the option is granted at an exercise price equal to or
greater than fair market value as of the date of the grant), and (iv) the
individuals eligible to receive grants, the maximum number of shares for which
grants may be made to any employee, the exercise price of the options and other
disclosures required by SEC proxy rules are disclosed to, and subsequently
approved by, shareholders.
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<PAGE> 28
If the amount of compensation a covered employee may receive under the
grant is not based solely on an increase in the value of the shares after the
date of the grant (e.g., an option is granted with an exercise price that is
less than the fair market value as of the date of the grant), none of the
compensation attributable to the grant is qualified performance-based
compensation unless the grant is made on account of the attainment of a
performance goal that has been previously established and approved by the
shareholders of the Company and otherwise qualifies under Section 162(m) of the
Code. The Company has not established any performance goals for grants under the
1997 Option Plan that meet the requirements of the performance-based
compensation standard required by Section 162(m) of the Code. The grant of
options by the Board of Directors or by a committee not meeting the requirements
of Section 162(m) will not qualify for the performance-based compensation
exception to the $1 million compensation deduction limitation.
ACCOUNTING TREATMENT
Generally, under current accounting rules applicable to the Company,
neither the grant nor the exercise of an Incentive Option or a Nonqualified
Option under the 1997 Option Plan requires any charge against earnings, if the
exercise price of the option is equal to the fair market value of the shares on
the date of grant. Footnote disclosure of the value of such options, however, is
required. If the exercise price is below the fair market value of the shares on
the date of grant, an earnings charge equal to the difference will be required
either at the date of grant or possibly over the term of the option. If the
optionee is allowed to pay the exercise price of an option with shares held less
than six months (or possibly, if such price is paid by the Company withholding
shares issuable upon exercise of the option), the Company will recognize an
earnings charge equal to the difference between the fair market value of the
shares issuable upon exercise of the option and the exercise price.
OPTION GRANTS UNDER THE PLANS
No options have been granted by the Company from December 1, 1998
through February 12, 1999. Options may be granted under the 1997 Option Plan at
the Committee's Discretion, subject to shareholder approval of the 1997 Option
Plan Amendment, if options are granted in excess of the 745,000 Common Shares
currently authorized and before such approval. The following table sets forth,
as to Bruce J. Barrett, Raymond W. Gunn, Richard S. Scheuing, Ronald A. Widman,
Pamela A. Winters, all current executive officers as a group, all current
directors who are not executive officers as a group, all employees (including
officers) who are not executive officers, as a group, and all other consultants
and advisors, as a group, the options granted under the 1997 Option Plan, the
1983 Plan, the 1991 Plan, the Directors Plan and independent of any option plan
(collectively, the "Plans") during the fiscal year ended November 30, 1998:
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<PAGE> 29
NEW PLAN BENEFITS
Somanetics Corporation 1983 Stock Option Plan
Somanetics Corporation 1991 Incentive Stock Option Plan
Somanetics Corporation 1997 Stock Option Plan
Somanetics Corporation Stock Options Granted Independent of Any Plan
Somanetics Corporation 1993 Director Stock Option Plan
<TABLE>
<CAPTION>
Number of Common
Shares Subject to Options
Granted Under the Plans
In the Fiscal Year Ended
Name and Position November 30, 1998 (1)
----------------- ---------------------------
<S> <C>
Bruce J. Barrett, President and Chief Executive Officer............................. 180,000
Raymond W. Gunn, Executive Vice President and Chief Financial Officer............... 24,000
Richard S. Scheuing, Vice President, Research and Development....................... 45,000
Ronald A. Widman, Vice President, Medical Affairs................................... 41,000
Pamela A. Winters, Vice President, Operations....................................... 45,000
All current executive officers as a group (6 persons) .............................. 358,000
All current directors who are not executive officers as a group (4 persons)......... 24,522
All employees (including officers) who are not executive officers as a
group (47 persons)................................................................ 88,000
All other consultants and advisors as a group (8 persons)........................... 4,000
</TABLE>
The dollar values of such options cannot be determined because they
depend on the market value of the underlying shares on the date of exercise. No
associate of any director, nominee or executive officer has been granted options
under the Plans. In addition, no person not named above has received five
percent or more of the options authorized under the Plans, in the aggregate.
The Board of Directors 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, the date of the 1998 Annual Meeting, in exchange for the
cancellation of certain outstanding stock options, granted ten-year stock
options under the 1997 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 the date of the
Annual Meeting (the "Replacement Options").
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<PAGE> 30
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 $5.875, the
fair market value of the Common Shares as of the date of the 1998 Annual
Meeting. 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
was 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 provide better
incentives to the directors. The Board believes that such options 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 more closely join the
interests of such directors with the interests of shareholders of the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE PROPOSED
1997 OPTION PLAN AMENDMENT, AND YOUR PROXY WILL BE SO VOTED UNLESS YOU SPECIFY
OTHERWISE.
III. OTHER MATTERS
ANNUAL REPORT
A COPY OF THE ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR ENDED
NOVEMBER 30, 1998 ACCOMPANIES THIS PROXY STATEMENT. THE COMPANY FILEs AN ANNUAL
REPORT ON FORM 10-K WITH THE SECURITIES AND EXCHANGE COMMISSION. THE COMPANY
WILL PROVIDE, WITHOUT CHARGE, TO EACH PERSON BEING SOLICITED BY THIS PROXY
STATEMENT, UPON THE WRITTEN REQUEST OF ANY SUCH PERSON, A COPY OF THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1998 (AS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION, EXCLUDING EXHIBITS FOR WHICH A
REASONABLE CHARGE SHALL BE IMPOSED). ALL SUCH REQUESTS SHOULD BE DIRECTED TO
SOMANETICS CORPORATION, 1653 EAST MAPLE ROAD, TROY, MICHIGAN 48083-4208,
ATTENTION: INVESTOR RELATIONS DEPARTMENT.
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP are the independent accountants for the Company
and have reported on the Company's financial statements in the Company's 1998
Annual Report to Shareholders which accompanies this proxy statement. The
Company's independent accountants are appointed by the Board of Directors after
receiving the recommendation of its Audit Committee. The Company will not select
its independent accountants for the fiscal year ended November 30, 1999 until
later in its fiscal year.
A representative of Deloitte & Touche LLP is expected to be present at
the Annual Meeting of Shareholders and will have the opportunity to make a
statement at the meeting if he desires to do so. The representative will also be
available to respond to appropriate questions.
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<PAGE> 31
SHAREHOLDER PROPOSALS
Proposals of shareholders that are intended to be presented at the
Company's 2000 Annual Meeting of Shareholders must be received by the Company's
Secretary at the Company's offices, 1653 East Maple Road, Troy, Michigan
48083-4208, no later than November 4, 1999 to be considered for inclusion in the
Proxy Statement and Proxy relating to that meeting. Such proposals should be
sent by certified mail, return receipt requested.
The Company must receive notice of any proposals of shareholders that
are intended to be presented at the Company's 2000 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
January 18, 2000 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.
OTHER BUSINESS
Neither the Company nor the members of its Board of Directors intend to
bring before the Annual Meeting any matters other than those set forth in the
Notice of Annual Meeting of Shareholders, and they have no present knowledge
that other matters will be presented for action at the Annual Meeting by others.
However, if other matters are properly presented to the meeting, the persons
named in the enclosed Proxy intend to vote the shares represented thereby in
accordance with their best judgment.
By order of the Board of Directors
Bruce J. Barrett
President and Chief Executive Officer
Troy, Michigan
March 3, 1999
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<PAGE> 32
EXHIBIT A
AMENDED AND RESTATED
SOMANETICS CORPORATION
1997 STOCK OPTION PLAN
1. Definitions: As used herein, the following terms shall have
the following meanings:
(a) "Code" shall mean the Internal Revenue Code of 1986, as
amended, and the applicable rules and regulations thereunder.
(b) "Committee" shall mean, (i) with respect to administration
of the Plan regarding Participants who are subject to Section 16(a) and
(b) of the Exchange Act, a committee meeting the standards of Rule
16b-3 of the Rules and Regulations under the Exchange Act, or any
similar successor rule, appointed by the Board of Directors of the
Company to perform any of the functions and duties of the Committee
under the Plan, or the Board of Directors as a whole, and (ii) with
respect to administration of the Plan regarding all other Participants,
such committee or the Board of Directors of the Company, as described
in clause (i), or such other committee or entity appointed by the Board
of Directors of the Company to perform any of the functions and duties
of the Committee under the Plan.
(c) "Common Shares" shall mean the Common Shares, par value
$.01 per share, of the Company.
(d) "Company" shall mean Somanetics Corporation, a Michigan
corporation, or any successor thereof.
(e) "Discretion" shall mean the sole discretion of the
Committee, with no requirement whatsoever that the Committee follow
past practices, act in a manner consistent with past practices, or
treat any key employee, director, consultant or advisor in a manner
consistent with the treatment afforded other key employees, directors,
consultants or advisors with respect to the Plan or otherwise.
(f) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder.
(g) "Incentive Option" shall mean an option to purchase Common
Shares which meets the requirements set forth in the Plan and also is
intended to be, and qualifies as, an incentive stock option within the
meaning of Section 422 of the Code.
(h) "Nonqualified Option" shall mean an option to purchase
Common Shares which meets the requirements set forth in the Plan but is
not intended to be, or does not qualify as, an incentive stock option
within the meaning of the Code.
<PAGE> 33
(i) "Participant" shall mean any individual designated by the
Committee under Paragraph 6 for participation in the Plan.
(j) "Plan" shall mean this Somanetics Corporation 1997 Stock
Option Plan.
(k) "Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations thereunder.
(l) "Subsidiary" shall mean any corporation or other entity in
which the Company has a direct or indirect ownership interest of 50% or
more of the total combined voting power of all classes of outstanding
voting equity interests.
2. Purpose of Plan: The purpose of the Plan is to provide key employees
(including officers), directors, consultants and advisors of the Company and its
Subsidiaries (collectively, "key employees") with an increased incentive to make
significant and extraordinary contributions to the long-term performance and
growth of the Company and its Subsidiaries, to join the interests of key
employees, directors, consultants and advisors with the interests of the
shareholders of the Company, and to facilitate attracting and retaining key
employees, directors, consultants and advisors of exceptional ability.
3. Administration: The Plan shall be administered by the Committee.
Subject to the provisions of the Plan, the Committee shall determine, from those
eligible to be Participants under the Plan, the persons to be granted stock
options, the amount of stock to be optioned to each such person, the time such
options shall be granted and the terms and conditions of any stock options. Such
terms and conditions may, in the Committee's Discretion, include, without
limitation, provisions providing for termination of the option, forfeiture of
the gain on any option exercises or both if the Participant competes with the
Company or otherwise acts contrary to the Company's interests, and provisions
imposing restrictions, potential forfeiture or both on shares acquired upon
exercise of options granted pursuant to this Plan. The Committee may condition
any grant on the potential Participant's agreement to such terms and conditions.
Subject to the provisions of the Plan, the Committee is authorized to
interpret the Plan, to promulgate, amend and rescind rules and regulations
relating to the Plan and to make all other determinations necessary or advisable
for its administration. Interpretation and construction of any provision of the
Plan by the Committee shall, unless otherwise determined by the Board of
Directors of the Company, be final and conclusive. A majority of the Committee
shall constitute a quorum, and the acts of a majority of the members present at
any meeting at which a quorum is present, or acts approved in writing by a
majority of the Committee, shall be the acts of the Committee.
4. Indemnification: In addition to such other rights of indemnification
as they may have, the members of the Committee shall be indemnified by the
Company in connection with any claim, action, suit or proceeding relating to any
action taken or failure to act under or in connection with the Plan or any
option granted hereunder to the full extent provided for under
2
<PAGE> 34
the Company's articles of incorporation or bylaws with respect to
indemnification of directors of the Company.
5. Maximum Number of Shares Subject to Plan: The maximum number of
shares with respect to which stock options may be granted under the Plan shall
be an aggregate of <1,040,000> Common Shares, which may consist in whole
or in part of authorized and unissued or reacquired Common Shares. Unless the
Plan shall have been terminated, shares covered by the unexercised portion of
canceled, expired or otherwise terminated options under the Plan shall again be
available for option and sale.
Subject to Paragraph 16, the number and type of shares subject to each
outstanding stock option, the option price with respect to outstanding stock
options, the aggregate number and type of shares remaining available under the
Plan, and the maximum number and type of shares that may be granted to any
Participant in any fiscal year of the Company pursuant to Paragraph 6, shall be
subject to such adjustment as the Committee, in its Discretion, deems
appropriate to reflect such events as stock dividends, stock splits,
recapitalizations, mergers, statutory share exchanges or reorganizations of or
by the Company; provided that no fractional shares shall be issued pursuant to
the Plan, no rights may be granted under the Plan with respect to fractional
shares, and any fractional shares resulting from such adjustments shall be
eliminated from any outstanding option.
6. Participants: The Committee shall determine and designate from time
to time, in its Discretion, those key employees (including officers), directors,
consultants and advisors of or to the Company or any Subsidiary to whom options
are to be granted and who thereby become Participants under the Plan; provided,
however, that (a) Incentive Options shall be granted only to employees (as
defined in the Code) of the Company or a corporate Subsidiary, to the extent
required by Section 422 of the Code, or any successor provision, and (b) no
Participant may be granted stock options to purchase more than 200,000 Common
Shares in the aggregate in any fiscal year of the Company, subject to any
adjustments provided in the final paragraph of Paragraph 5 and in Paragraph 16.
7. Allotment of Shares: The Committee shall determine and fix the
number of Common Shares to be offered to each Participant; provided that no
Incentive Option may be granted under the Plan to any one Participant which
would result in the aggregate fair market value, determined as of the date the
option is granted, of the underlying stock with respect to which Incentive
Options are exercisable for the first time by such individual during any
calendar year (under all of such plans of the Company and its parent and
Subsidiary corporations) exceeding $100,000.
8. Option Price: Subject to the rules set forth in this Paragraph 8,
the Committee, in its Discretion, shall establish the option price at the time
any option is granted. With respect to an Incentive Option, such option price
shall not be less than 100% of the fair market value of the stock on the date on
which such option is granted; provided that with respect to an Incentive Option
granted to an employee who at the time of the grant owns (after applying the
attribution rules of Section 424(d) of the Code) more than 10% of the total
combined voting stock of the
3
<PAGE> 35
Company or of any parent or Subsidiary, the option price shall not be less than
110% of the fair market value of the stock subject to the Incentive Option on
the date such option is granted. With respect to a Nonqualified Option, the
option price shall be not less than the par value, if any, of the Common Shares.
Fair market value of a share shall be determined by the Committee and may be
determined by using the closing sale price of the Company's stock on any
exchange or other market on which the Common Shares shall be traded on such
date, or if there is no sale on such date, on the next following date on which
there is a sale, or the average of the closing bid and asked prices in any
market or quotation system in which the Common Shares shall be listed or traded
on such date. The option price will be subject to adjustment in accordance with
the provisions of Paragraphs 5 and 16 of the Plan.
9. Granting and Exercise of Options: The granting of options under the
Plan shall be effected in accordance with determinations made by the Committee
pursuant to the provisions of the Plan, by execution of instruments in writing
in form approved by the Committee. Such instruments shall constitute binding
contracts between the Company and the Participant.
Subject to the terms of the Plan, the Committee, in its Discretion, may
grant to Participants Incentive Options, Nonqualified Options or any combination
thereof. Each option granted under the Plan shall designate the number of shares
covered thereby, if any, with respect to which the option is an Incentive Option
and the number of shares covered thereby, if any, with respect to which the
option is a Nonqualified Option.
Subject to the terms of the Plan, each option granted under the Plan
shall be exercisable at any such time or times or in any such installments as
may be determined by the Committee in its Discretion; provided that the
aggregate fair market value (determined as of the date the option is granted) of
the underlying stock with respect to which Incentive Options are exercisable for
the first time by such individual during any calendar year (under all of such
plans of the Company and its parent and Subsidiary corporations) shall not
exceed $100,000. Except as provided in Paragraph 13, options may be exercised
only while the Participant is an employee, director, consultant or advisor of
the Company or a Subsidiary.
Notwithstanding any other term or provision of this Plan, but subject
to the requirements of the Code with respect to Incentive Options that are
intended to remain Incentive Options, in connection with a Participant ceasing
to be an employee of the Company or a Subsidiary for any reason, the stock
option agreement may provide for the acceleration of, or the Committee may
accelerate, in its Discretion (exercised at the date of the grant of the stock
option or after the date of grant), in whole or in part, the time or times or
installments with respect to which any option granted under this Plan shall be
exercisable in connection with termination of a Participant's employment with
the Company or a Subsidiary, subject to any restrictions, terms and conditions
fixed by the Committee either at the date of the award or at the date it
exercises such Discretion.
Successive stock options may be granted to the same Participant,
whether or not the option or options previously granted to such Participant
remain unexercised. A Participant may exercise any option granted under the
Plan, if then exercisable, notwithstanding that options granted to such
Participant prior to the option then being exercised remain unexercised.
4
<PAGE> 36
10. Payment of Option Price: At the time of the exercise in whole or in
part of any option granted under this Plan, payment in full in cash, or with the
consent of the Committee, in its Discretion, in Common Shares or by a promissory
note payable to the order of the Company which is acceptable to the Committee,
shall be made by the Participant for all shares so purchased. Such payment may,
with the consent of the Committee, in its Discretion, also consist of a cash
down payment and delivery of such a promissory note in the amount of the unpaid
exercise price. In the Discretion of, and subject to such conditions as may be
established by, the Committee, payment of the option price may also be made by
the Company retaining from the shares to be delivered upon exercise of the stock
option that number of shares having a fair market value on the date of exercise
equal to the option price of the number of shares with respect to which the
Participant exercises the option. In the Discretion of the Committee, a
Participant may exercise an option, if then exercisable, in whole or in part, by
delivery to the Company of written notice of the exercise in such form as the
Committee may prescribe, accompanied by irrevocable instructions to a stock
broker to promptly deliver to the Company full payment for the shares with
respect to which the option is exercised from the proceeds of the stock broker's
sale of or loan against some or all of the shares. Such payment may also be made
in such other manner as the Committee determines is appropriate, in its
Discretion. No Participant shall have any of the rights of a shareholder of the
Company under any option until the actual issuance of shares to such
Participant, and prior to such issuance no adjustment shall be made for
dividends, distributions or other rights in respect of such shares, except as
provided in Paragraphs 5 and 16.
11. Transferability of Option: Except as otherwise provided in this
Paragraph 11, (i) to the extent required by Section 422 of the Code, or any
successor section, but only with respect to Incentive Options, or (ii) to the
extent determined by the Committee in its Discretion (either by resolution or by
a provision in, or amendment to, the option), (a) no option granted under the
Plan to a Participant shall be transferable by such Participant otherwise than
(1) by will, or (2) by the laws of descent and distribution or, (3) with respect
to Nonqualified Options only (unless permitted by Section 422 of the Code or any
successor section), pursuant to a qualified domestic relations order as defined
in the Code or Title I of the Employee Retirement Income Security Act, or the
rules thereunder, and (b) such option shall be exercisable, during the lifetime
of the Participant, only by the Participant.
The Committee may, in its Discretion, authorize all or a portion of the
options to be granted to an optionee to be on terms which permit transfer by
such optionee to, and the exercise of such option by, (i) the spouse, children
or grandchildren of the optionee ("Immediate Family Members"), (ii) a trust or
trusts for the exclusive benefit of such Immediate Family Members, (iii) a
partnership in which such Immediate Family Members are the only partners, or
(iv) such other persons or entities as determined by the Committee, in its
Discretion, on such terms and conditions as the Committee, in its Discretion,
may determine; provided that (y) the stock option agreement pursuant to which
such options are granted must be approved by the Committee and must expressly
provide for transferability in a manner consistent with this Paragraph 11, and
(z) subsequent transfers of transferred options shall be prohibited except for
transfers the original
5
<PAGE> 37
optionee would be permitted to make (if he or she were still the owner of the
option) in accordance with this Paragraph 11.
Following transfer, any such options shall continue to be subject to
the same terms and conditions as were applicable immediately before transfer,
provided that for purposes of Paragraphs 9, 10, 14, 16 and 18 the term
"Participant" shall be deemed to refer to the transferee. The events of
termination of employment of Paragraph 13 shall continue to be applied with
respect to the original optionee, following which the options shall be
exercisable by the transferee only to the extent, and for the periods, specified
in Paragraph 13. The original optionee shall remain subject to withholding taxes
and related requirements upon exercise provided in Paragraph 15. The Company
shall have no obligation to provide any notice to any transferee, including,
without limitation, notice of any termination of the option as a result of
termination of the original optionee's employment with, or other service to, the
Company.
12. Continuance of Employment; No Right to Continued Employment: The
Committee may require, in its Discretion, that any Participant under the Plan to
whom an option shall be granted shall agree in writing as a condition of the
granting of such option to remain in his or her position as an employee,
director, consultant or advisor of the Company or a Subsidiary for a designated
minimum period from the date of the granting of such option as shall be fixed by
the Committee.
Nothing contained in the Plan or in any option granted pursuant to the
Plan, nor any action taken by the Committee hereunder, shall confer upon any
Participant any right with respect to continuation of employment, consultation
or other service by or to the Company or a Subsidiary nor interfere in any way
with the right of the Company or a Subsidiary to terminate such person's
employment, consultation or other service at any time.
13. Termination of Employment; Expiration of Options: Subject to the
other provisions of the Plan, including, without limitation, Paragraphs 9 and 16
and this Paragraph 13, all rights to exercise options shall terminate when a
Participant ceases to be an employee, director, consultant or advisor of or to
the Company or a Subsidiary for any cause, except that the Committee may, in its
Discretion, permit the exercise of all or any portion of the options granted to
such Participant
(i) for a period not to exceed three months following such
termination with respect to Incentive Options that are intended to
remain Incentive Options if such termination is not due to death or
permanent disability of the Participant,
(ii) for a period not to exceed one year following termination
of employment with respect to Incentive Options that are Intended to
remain Incentive Options if termination of employment is due to the
death or permanent disability of the Participant, and
(iii) for a period not to extend beyond the expiration date
with respect to Nonqualified Options or Incentive Options that are not
intended to remain Incentive Options,
6
<PAGE> 38
all subject to any restrictions, terms and conditions fixed by the Committee
either at the date of the award or at the date it exercises such Discretion. In
no event, however, shall an option be exercisable after its expiration date,
and, unless the Committee in its Discretion determines otherwise (pursuant to
Paragraph 9 or Paragraph 16), an option may only be exercised after termination
of a Participant's employment, consultation or other service by or to the
Company to the extent exercisable on the date of such termination or to the
extent exercisable as a result of the reason for such termination. The Committee
may evidence the exercise of its Discretion under this Paragraph 13 in any
manner it deems appropriate, including by resolution or by a provision in, or
amendment to, the option.
If not sooner terminated, each stock option granted under the Plan
shall expire not more than 10 years from the date of the granting thereof;
provided that with respect to an Incentive Option granted to a Participant who,
at the time of the grant, owns (after applying the attribution rules of Section
424(d) of the Code) more than 10% of the total combined voting stock of all
classes of stock of the Company or of any parent or Subsidiary, such option
shall expire not more than 5 years after the date of granting thereof.
14. Investment Purpose: If the Committee in its Discretion determines
that as a matter of law such procedure is or may be desirable, it may require a
Participant, upon any exercise of any option granted under the Plan or any
portion thereof and as a condition to the Company's obligation to deliver
certificates representing the shares subject to exercise, to execute and deliver
to the Company a written statement, in form satisfactory to the Committee,
representing and warranting that the Participant's purchase of Common Shares
upon exercise thereof shall be for such person's own account, for investment and
not with a view to the resale or distribution thereof and that any subsequent
sale or offer for sale of any such shares shall be made either pursuant to (a) a
Registration Statement on an appropriate form under the Securities Act, which
Registration Statement has become effective and is current with respect to the
shares being offered and sold, or (b) a specific exemption from the registration
requirements of the Securities Act, but in claiming such exemption the
Participant shall, prior to any offer for sale or sale of such shares, obtain a
favorable written opinion from counsel for or approved by the Company as to the
availability of such exemption. The Company may endorse an appropriate legend
referring to the foregoing restriction upon the certificate or certificates
representing any shares issued or transferred to the Participant upon exercise
of any option granted under the Plan.
15. Withholding Payments: If upon the exercise of any Nonqualified
Option or a disqualifying disposition (within the meaning of Section 422 of the
Code) of shares acquired upon exercise of an Incentive Option, there shall be
payable by the Company or a Subsidiary any amount for income tax withholding, in
the Committee's Discretion, either the Participant shall pay such amount to the
Company, or the amount of Common Shares delivered by the Company to the
Participant shall be appropriately reduced, to reimburse the Company or such
Subsidiary for such payment. The Company or any of its Subsidiaries shall have
the right to withhold the amount of such taxes from any other sums or property
due or to become due from the Company or any of its Subsidiaries to the
Participant upon such terms and conditions as the Committee shall prescribe. The
Company may also defer issuance of the stock upon exercise of such option
7
<PAGE> 39
until payment by the Participant to the Company of the amount of any such tax.
The Committee may, in its Discretion, permit Participants to satisfy such
withholding obligations, in whole or in part, by electing to have the amount of
Common Shares delivered or deliverable by the Company upon exercise of a stock
option appropriately reduced, or by electing to tender Common Shares back to the
Company subsequent to exercise of a stock option to reimburse the Company or
such Subsidiary for such income tax withholding, subject to such rules and
regulations, if any, as the Committee may adopt. The Committee may make such
other arrangements with respect to income tax withholding as it shall determine.
16. Extraordinary Transactions: In case the Company (i) consolidates
with or merges into any other corporation or other entity and is not the
continuing or surviving entity of such consolidation or merger, or (ii) permits
any other corporation or other entity to consolidate with or merge into the
Company and the Company is the continuing or surviving entity but, in connection
with such consolidation or merger, the Common Shares are changed into or
exchanged for stock or other securities of any other corporation or other entity
or cash or any other assets, or (iii) transfers all or substantially all of its
properties and assets to any other corporation or other person or entity, or
(iv) dissolves or liquidates, or (v) effects a capital reorganization or
reclassification in such a way that holders of Common Shares shall be entitled
to receive stock, securities, cash or other assets with respect to or in
exchange for the Common Shares, then, and in each such case, proper provision
shall be made so that, each Participant holding a stock option upon the exercise
of such option at any time after the consummation of such consolidation, merger,
transfer, dissolution, liquidation, reorganization or reclassification (each
transaction, for purposes of this Paragraph 16, being herein called a
"Transaction"), shall be entitled to receive (at the aggregate option price in
effect for all Common Shares issuable upon such exercise immediately prior to
such consummation and as adjusted to the time of such Transaction), in lieu of
Common Shares issuable upon such exercise prior to such consummation, the stock
and other securities, cash and assets to which such Participant would have been
entitled upon such consummation if such Participant had so exercised such stock
option in full immediately prior thereto (subject to adjustments subsequent to
such Transaction provided for in Paragraph 5).
Notwithstanding anything in the Plan to the contrary, in connection
with any Transaction and effective as of a date selected by the Committee, which
date shall, in the Committee's judgment, be far enough in advance of the
Transaction to permit Participants holding stock options to exercise their
options and participate in the Transaction as a holder of Common Shares, the
Committee, acting in its Discretion without the consent of any Participant, may
effect one or more of the following alternatives with respect to all of the
outstanding stock options (which alternatives may be made conditional on the
occurrence of the applicable Transaction and which may, if permitted by law,
vary among individual Participants): (a) accelerate the time at which stock
options then outstanding may be exercised so that such stock options may be
exercised in full for a limited period of time on or before a specified date
fixed by the Committee after which specified date all unexercised stock options
and all rights of Participants thereunder shall terminate; (b) accelerate the
time at which stock options then outstanding may be exercised so that such stock
options may be exercised in full for their then remaining term; or (c) require
the mandatory surrender to the Company of outstanding stock options held by such
Participants
8
<PAGE> 40
(irrespective of whether such stock options are then exercisable) as of a date,
before or not later than sixty days after such Transaction, specified by the
Committee, and in such event the Company shall thereupon cancel such stock
options and shall pay to each Participant an amount of cash equal to the excess
of the fair market value of the aggregate Common Shares subject to such stock
option, determined as of the date such Transaction is effective, over the
aggregate option price of such shares, less any applicable withholding taxes;
provided, however, the Committee shall not select an alternative (unless
consented to by the Participant) such that, if a Participant exercised his or
her accelerated stock option pursuant to alternative (a) or (b) and participated
in the Transaction or received cash pursuant to alternative (c), the alternative
would result in the Participant's owing any money by virtue of the operation of
Section 16(b) of the Exchange Act. If all such alternatives have such a result,
the Committee shall, in its Discretion, take such action to put such Participant
in as close to the same position as such Participant would have been in had
alternative (a), (b) or (c) been selected but without resulting in any payment
by such Participant pursuant to Section 16(b) of the Exchange Act.
Notwithstanding the foregoing, with the consent of affected Participants, each
with respect to such Participant's option only, the Committee may in lieu of the
foregoing make such provision with respect to any Transaction as it deems
appropriate.
17. Effectiveness of Plan: This Plan shall be effective on the date the
Board of Directors of the Company adopts this Plan, provided that the
shareholders of the Company approve the Plan within 12 months before or after
its adoption by the Board of Directors. Options may be granted before
shareholder approval of this Plan, but each such option shall be subject to
shareholder approval of this Plan. No option granted under this Plan shall be
exercisable unless and until this Plan shall have been approved by the Company's
shareholders.
18. Termination, Duration and Amendments to the Plan: The Plan may be
abandoned or terminated at any time by the Board of Directors of the Company.
Unless sooner terminated, the Plan shall terminate on the date ten years after
the earlier of its adoption by the Board of Directors or its approval by the
shareholders of the Company, and no stock options may be granted under the Plan
thereafter. The termination of the Plan shall not affect the validity of any
option which is outstanding on the date of termination.
For the purpose of conforming to any changes in applicable law or
governmental regulations, or for any other lawful purpose, the Board of
Directors shall have the right, with or without approval of the shareholders of
the Company, to amend or revise the terms of this Plan or any option agreement
under this Plan at any time; provided, however, that (i) to the extent required
by Section 162(m) of the Code and related regulations, or any successor rule,
but only with respect to amendments or revisions affecting Participants whose
compensation is subject to Section 162(m) of the Code, and to the extent
required by Section 422 of the Code, or any successor section, but only with
respect to Incentive Options, no such amendment or revision shall increase the
maximum number of shares in the aggregate which are subject to this Plan
(subject, however, to the provisions of Paragraphs 5 and 16) without the
approval or ratification of the shareholders of the Company, and (ii) no such
amendment or revision shall change the option price (except as contemplated by
Paragraphs 5 and 16) or alter or impair any option which
9
<PAGE> 41
shall have been previously granted under this Plan, in a manner adverse to a
Participant, without the consent of such Participant.
As adopted by the Board of Directors on January 15, 1997, and amended
on January 15, 1998 <AND JANUARY 21, 1999>.
10
<PAGE> 42
PROXY
SOMANETICS CORPORATION
BOARD OF DIRECTORS PROXY FOR ANNUAL MEETING APRIL 13, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF SOMANETICS CORPORATION
The undersigned hereby appoints Bruce J. Barrett, Raymond W. Gunn and Mary Ann
Victor, and each of them, attorneys and proxies with full power of substitution
in each of them, in the name, place and stead of the undersigned to vote as
proxy all the Common Shares, par value $.01 per share, of the undersigned in
Somanetics Corporation (the "Company") which the undersigned is entitled to vote
at the Annual Meeting of Shareholders of the Company to be held on April 13,
1999, and at any and all adjournments thereof.
(To be Signed on Reverse Side)
____________
|SEE REVERSE |
| SIDE |
|____________|
<PAGE> 43
<TABLE>
<S><C>
/X/ Please mark your
votes as in this
example.
FOR ALL OF THE WITHHOLD
NOMINEES LISTED AUTHORITY TO
(EXCEPT AS MARKED VOTE FOR ALL OF
TO THE CONTRARY THE NOMINEES FOR AGAINST ABSTAIN
BELOW) LISTED 2. Approval of an amendment to the Somanetics / / / / / /
Corporation 1997 Stock Option Plan to
1. Election of increase the number of Common Shares
Directors / / / / reserved for issuance pursuant to the
exercise of options granted under the
NOMINEES: DANIEL S. FOLLIS AND DR. JAMES I. AUSMAN 1997 Plan by 295,000 shares, from 745,000
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY to 1,040,000 shares.
INDIVIDUAL NOMINEE, WRITE THAT NOMINEE'S NAME IN THE
SPACE PROVIDED BELOW.)
3. In their discretion with respect to any other matters that may
__________________________________________ properly come before the meeting.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE
WITH THE SPECIFICATIONS MADE HEREIN. THE SHARES REPRESENTED BY
THIS PROXY WILL BE VOTED FOR THE ELECTION OF THE DIRECTORS NAMED
IN PROPOSAL 1 AND FOR PROPOSAL 2 IF NO INSTRUCTIONS TO THE
CONTRARY ARE INDICATED OR IF NO INSTRUCTION IS GIVEN.
PLEASE DATE, SIGN AND RETURN THIS PROXY PROMPTLY IN THE ENCLOSED
ENVELOPE.
SIGNATURE(S) _____________________________________________ DATE: ____________________________, 1999
SIGNATURE(S) _____________________________________________ DATE: ____________________________, 1999
(NOTE: PLEASE SIGN EXACTLY AS NAME APPEARS HEREON. EXECUTORS, ADMINISTRATORS, ATTORNEYS, GUARDIANS, TRUSTEES, ETC. SHOULD SO
INDICATE WHEN SIGNING, GIVING FULL TITLE AS SUCH. IF SIGNER IS A CORPORATION, EXECUTE IN FULL CORPORATE NAME BY AUTHORIZED
OFFICER. IF SHARES ARE HELD IN THE NAME OF TWO OR MORE PERSONS, ALL SHOULD SIGN.)
</TABLE>
