<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended FEBRUARY 28, 1999
OR
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______ to __________
Commission file number 0-19095
SOMANETICS CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2394784
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1653 EAST MAPLE ROAD,
TROY, MICHIGAN
48083-4208
(Address of principal executive offices)
(Zip Code)
(248) 689-3050
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Number of common shares outstanding at March 29, 1999: 6,035,597
<PAGE> 2
PART I FINANCIAL INFORMATION
SOMANETICS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
February 28, November 30,
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS: (Unaudited) (Audited)
Cash and cash equivalents.......................................... $ 1,572,472 $ 1,976,829
Marketable securities.............................................. 3,890,972 4,916,942
Accounts receivable, net of allowance for doubtful accounts of
approximately $12,000 and $153,000 at February 28, 1999 and
November 30, 1998, respectively................................. 813,370 615,682
Inventory, net..................................................... 611,218 660,964
Prepaid expenses................................................... 77,465 92,050
--------------- ---------------
Total current assets............................................ 6,965,497 8,262,467
--------------- ---------------
PROPERTY AND EQUIPMENT (at cost):
Machinery and equipment............................................ 1,353,260 1,309,539
Furniture and fixtures............................................. 184,949 184,949
Leasehold improvements............................................. 166,770 166,770
--------------- ---------------
Total........................................................... 1,704,979 1,661,258
Less accumulated depreciation and amortization..................... (1,023,834) (957,083)
--------------- ---------------
Net property and equipment...................................... 681,145 704,175
--------------- ---------------
OTHER ASSETS:
Patents and trademarks, net........................................ 63,577 65,305
Other.............................................................. 15,000 15,000
--------------- ---------------
Total other assets.............................................. 78,577 80,305
--------------- ---------------
TOTAL ASSETS........................................................... $ 7,725,219 $ 9,046,947
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 245,995 $ 262,932
Accrued liabilities................................................ 258,487 366,222
--------------- ---------------
Total current liabilities....................................... 504,482 629,154
--------------- ---------------
COMMITMENTS AND CONTINGENCIES.......................................... - -
SHAREHOLDERS' EQUITY:
Preferred shares; authorized, 1,000,000 shares of $.01 par value;
no shares issued or outstanding................................. - -
Common shares; authorized, 20,000,000 shares of $.01 par value;
issued and outstanding, 6,035,597 shares at February 28, 1999
and November 30, 1998, respectively............................. 60,356 60,356
Additional paid-in capital......................................... 50,290,067 50,290,067
Accumulated unrealized losses on investments....................... (108,990) (96,262)
Accumulated deficit................................................ (43,020,696) (41,836,368)
---------------- ---------------
Total shareholders' equity...................................... 7,220,737 8,417,793
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $ 7,725,219 $ 9,046,947
=============== ===============
</TABLE>
See notes to financial statements
2
<PAGE> 3
SOMANETICS CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three-Month
Periods Ended February 28,
------------------------------
1999 1998
-------- --------
<S> <C> <C>
NET REVENUES .................................. $ 910,739 $ 803,365
COST OF SALES.................................. 447,089 389,998
------------- -------------
GROSS MARGIN................................... 463,650 413,367
------------- -------------
OPERATING EXPENSES:
Research, development and engineering.... 142,449 164,788
Selling, general and administrative...... 1,598,856 1,480,571
------------- -------------
Total operating expenses....... 1,741,305 1,645,359
------------- -------------
OPERATING LOSS................................. (1,277,655) (1,231,992)
------------- -------------
OTHER INCOME (EXPENSE):
Interest income.......................... 93,327 50,792
Other.................................... - 8,100
------------- -------------
Total other income................... 93,327 58,892
------------- -------------
NET LOSS....................................... $ (1,184,328) $ (1,173,100)
------------- -------------
NET LOSS PER COMMON SHARE -
BASIC AND DILUTED........................... $ (.20) $ (.27)
------------- -------------
WEIGHTED AVERAGE SHARES
OUTSTANDING................................ 6,035,597 4,285,334
============= =============
</TABLE>
See notes to financial statements
3
<PAGE> 4
SOMANETICS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Month
Periods Ended February 28,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................ $(1,184,328) $(1,173,100)
Adjustments to reconcile net loss to net cash used in
operations:
Depreciation and amortization ................... 34,315 23,617
Changes in assets and liabilities:
Accounts receivable (increase) .............. (197,688) (575,304)
Inventory decrease (increase) ............... 49,746 (315,424)
Prepaid expenses decrease (increase) ........ 14,585 (13,734)
Other assets (increase) ................... -- (17,310)
Accounts payable (decrease) increase ........ (16,937) 167,999
Accrued liabilities (decrease) increase ..... (107,735) 7,392
----------- -----------
Net cash (used in) operations ............. (1,408,042) (1,895,864)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities ......... 1,013,242 1,475,431
Acquisition of property and equipment (net) ......... (9,557) (193,062)
----------- -----------
Net cash provided by investing activities . 1,003,685 1,282,369
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash provided by financing activities . -- --
----------- -----------
NET (DECREASE) IN CASH AND CASH
EQUIVALENTS ......................................... (404,357) (613,495)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD ........................................... 1,976,829 2,132,376
----------- -----------
CASH AND CASH EQUIVALENTS, END
OF PERIOD ........................................... $ 1,572,472 $ 1,518,881
=========== ===========
</TABLE>
See notes to financial statements
4
<PAGE> 5
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
FEBRUARY 28, 1999
1. ORGANIZATION AND OPERATIONS
Somanetics Corporation (the "Company"), a Michigan corporation formed
in January 1982, develops, manufactures and markets the INVOS(R) Cerebral
Oximeter (the "Cerebral Oximeter"), the only FDA-cleared, non-invasive patient
monitoring system that continuously measures changes in the blood oxygen level
in the adult brain. The Cerebral Oximeter is based on the Company's proprietary
In Vivo Optical Spectroscopy ("INVOS(R)") technology. INVOS analyzes various
characteristics of human blood and tissue by measuring and analyzing
low-intensity visible and near infrared light transmitted into portions of the
body. The Company has incurred research, product development and other expenses
involved in designing, developing, marketing and selling its product, as well as
devoting efforts to raising capital.
2. FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited interim financial statements of Somanetics
Corporation have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, such financial statements do
not include all of the information and footnotes normally included in the
Company's annual financial statements prepared in accordance with generally
accepted accounting principles, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
The accompanying unaudited interim financial statements reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal recurring nature, except those not material to the Company's
financial condition or results of operations. Operating results for the
three-month period ended February 28, 1999, are not necessarily indicative of
the results that may be expected for the year ending November 30, 1999, although
the Company expects to continue to incur operating losses for the foreseeable
future. The unaudited interim financial statements should be read in conjunction
with the financial statements and footnotes thereto for the year ended November
30, 1998 included in the Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1998.
The Company has not achieved sales necessary to support operations. The
Company has incurred an accumulated deficit of $43,020,696 through February 28,
1999. The Company had working capital of $6,461,015, cash, cash equivalents, and
marketable securities of $5,463,444, total current liabilities of $504,482 and
shareholders' equity of $7,220,737 as of February 28, 1999.
Management believes that markets exist for the product the Company has
developed; however, there is an inherent uncertainty associated with the success
of such product. The likelihood of success of the Company must be considered in
view of the Company's limited resources and current financial condition, the
problems and expenses frequently encountered in connection with formation of a
new business, the ability to raise new funds, the development and application of
new technology, and the competitive environment in which the Company operates.
5
<PAGE> 6
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
FEBRUARY 28, 1999
The net proceeds from the public offering of Common Shares in April
1998 were sufficient to fund the Company's working capital requirements for the
three months ended February 28, 1999. Current sales are not sufficient to fund
operations.
The Company believes that the cash, cash equivalents, and marketable
securities on hand at February 28, 1999 will be sufficient to sustain the
Company's operations at budgeted levels and its needs for liquidity into the
second quarter of fiscal 2000. By that time the Company will be required to
raise additional cash either through additional sales of its product, through
sales of securities, by incurring indebtedness or by some combination of the
foregoing. If the Company is unable to raise additional cash by that time, it
will be required to reduce or discontinue its operations.
The estimated length of time current cash, cash equivalents, and
marketable securities will sustain the Company's operations is based on certain
estimates and assumptions made by the Company. Such estimates and assumptions
are subject to change as a result of actual experience. There can be no
assurance that actual capital requirements necessary to market the Cerebral
Oximeter and SomaSensor, to develop enhancements to, and product extensions of,
the Cerebral Oximeter, to conduct research and development concerning additional
potential applications of the Company's technology and for working capital will
not be substantially greater than current estimates.
The Company does not believe that product sales will be sufficient to
fund the Company's operations in fiscal 1999.
As of February 28, 1999, there were 60,400 redeemable warrants
outstanding, exercisable at $20.00 per share until July 13, 2000, and 55,120
redeemable warrants outstanding exercisable at $17.50 per share until April 1,
2001. These warrants were issued in the Company's 1995 and 1996 Regulation S
securities offerings. The conditions permitting the Company to redeem these
warrants have not been met as of March 9, 1999. In addition, the placement
agents and their transferees hold warrants to purchase 64,394 Common Shares
exercisable at $12.50 per share and 15,000 warrants exercisable at $14.40 per
share. Also, the underwriter of the June 1997 public offering received warrants
to purchase 200,000 Common Shares exercisable at $4.80 per share. It is unlikely
that these warrants will be exercised if the exercise price exceeds the market
price of the Common Shares.
On June 12, 1998, the Company entered into a $2,000,000 Revolving Note
and a Pledge Agreement with Fifth Third Bank of Northwestern Ohio, N.A. The
principal amount outstanding under the note bears interest, payable monthly, at
the bank's prime rate (7.75% as of March 9, 1999), is collateralized by all
property of the Company held at the bank, including marketable securities, and
is intended to be used for general corporate purposes, if necessary. The Company
has not borrowed any money under the line of credit. The line of credit expires
March 31, 1999. Before that date, the bank may, but is not obligated to, lend
the Company such amounts as may from time to time be requested by the Company,
up to $2,000,000 if no Event of Default shall exist. Events of default include
failure to furnish satisfactory additional security on demand or the bank
deeming itself insecure. The Company has no other loan commitments.
There can be no assurance that even if the Company receives additional
capital, it will be able to achieve the level of sales necessary to sustain its
operations. There can be no assurance that the Company will be able to obtain
any funds on terms acceptable to the Company and at times required by the
Company through sales of the Company's product, sales of securities or loans in
sufficient quantities. The report of the Company's Independent Auditors in the
Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1998
contains an explanatory paragraph relating to an uncertainty concerning the
Company's ability to continue as a going concern.
6
<PAGE> 7
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
FEBRUARY 28, 1999
These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Marketable Securities consist seventy-five percent of AAA rated
corporate bonds and twenty-five percent of lower rated, fixed income securities,
classified as available for sale, maturing approximately six months to one year
from the date of acquisition and are stated at the lower of cost or fair market
value.
Inventory is stated at the lower of cost or market on a first-in,
first-out (FIFO) basis. Inventory consists of:
<TABLE>
<CAPTION>
February 28, 1999 November 30, 1998
----------------- -----------------
<S> <C> <C>
Finished goods................... $ 73,484 $224,313
Work in process.................. 159,782 226,554
Purchased components............. 505,441 348,321
----------- ----------
Sub-total................... 738,707 799,188
Less reserve for obsolete
and excess inventory.......... (127,489) (138,224)
----------- -----------
Total....................... $611,218 $660,964
=========== ==========
</TABLE>
Patents and Trademarks are recorded at cost and are being amortized on
the straight-line method over 17 years. Accumulated amortization was $48,156 and
$46,428 at February 28, 1999 and November 30, 1998, respectively.
Loss Per Common Share - basic and diluted, is computed using the
weighted average number of common shares outstanding during each period. Common
Shares issuable under stock options and warrants have been considered in the
computation of the net loss per Common Share - diluted, but have not been
included because such inclusion would be antidilutive. As of February 28, 1999
and February 28,1998, the Company had outstanding 1,396,151 and 949,831,
respectively, of warrants and options to purchase Common Shares.
7
<PAGE> 8
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
FEBRUARY 28, 1999
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
February 28, 1999 November 30, 1998
----------------- -----------------
<S> <C> <C>
Professional Fees....................... $ 65,725 $112,902
Clinical Research....................... - 19,165
Product Upgrades........................ 21,297 21,297
Warranty................................ 27,919 37,487
Accrued Insurance....................... 26,272 42,204
Accrued Incentive....................... 62,499 34,000
Accrued Sales Commissions ............ 54,775 99,167
-------- --------
Total......................... $258,487 $366,222
======== ========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
The Company may become subject to product liability claims by patients
or physicians, and may become a defendant in product liability or malpractice
litigation. The Company has obtained product liability insurance and an umbrella
policy. There can be no assurance that the Company will be able to maintain such
insurance or that such insurance would be sufficient to protect the Company
against such product liability.
6. STOCK OPTIONS
On January 21, 1999, the Company's Board of Directors approved an
amendment to the Somanetics Corporation 1997 Stock Option Plan to increase the
number of Common Shares reserved for issuance pursuant to the exercise of
options granted under the 1997 Plan by 295,000 shares, from 745,000 to 1,040,000
shares, subject to shareholder approval at the 1999 Annual Meeting of
Shareholders.
8
<PAGE> 9
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FEBRUARY 28, 1999
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations includes forward-looking statements with
respect to the Company's future financial performance. These forward-looking
statements are subject to various risks and uncertainties, including the factors
described under the caption "Risk Factors" and elsewhere in the Company's
Registration Statement on Form S-1 (file no. 333-47225) effective April 2, 1998
and elsewhere in this Report, that could cause actual results to differ
materially from historical results or those currently anticipated.
RESULTS OF OPERATIONS
OVERVIEW
Somanetics Corporation develops, manufactures and markets the INVOS
Cerebral Oximeter, the only FDA-cleared, non-invasive patient monitoring system
that continuously measures changes in the blood oxygen level in the adult brain.
In June 1996, the Company received clearance from the FDA to market the Cerebral
Oximeter and the related disposable SomaSensor in the United States. In October
1997, the Company obtained FDA clearance for new advances in its INVOS
technology that are incorporated in its model 4100 Cerebral Oximeter. The model
4100 Cerebral Oximeter was introduced in October 1997 and shipments began in the
first quarter of fiscal 1998.
During fiscal 1998 and the first quarter of fiscal 1999, the Company's
primary activities consisted of sales and marketing of the model 4100 Cerebral
Oximeter and the related disposable SomaSensor. The Company had an accumulated
deficit of $43,020,696 through February 28, 1999. The Company believes that its
accumulated deficit will continue to increase for the foreseeable future.
The Company derives its revenues from sales of Cerebral Oximeters and
SomaSensors to its distributors and, since the June 1996 FDA clearance, to
hospitals in the United States through its direct sales employees. The Company
recognizes revenues when it ships its product to its distributors or to
hospitals. Payment terms are generally net 30 days for United States sales and
net 60 days or longer for international sales. The Company's primary expenses,
excluding the cost of its product, are selling, general and administrative and
research, development and engineering, which are generally expensed as incurred.
During fiscal 1998, the Company offered to exchange model 4100 Cerebral
Oximeters for model 3100A Cerebral Oximeters (which the Company scraps) and cash
equal to the difference in sales prices of the two models. Such sales reduce the
Company's average unit sales price and overall gross margin. Also, during fiscal
1998, the Company began a no-cap sales program whereby the Company ships the
model 4100 Cerebral Oximeter to the customer at no charge, in exchange for the
customer agreeing to purchase a minimum quantity of SomaSensors, on a monthly
basis, at a premium for a stated period of time. Currently, the Company expenses
the cost of the Cerebral Oximeter upon shipment, and recognizes revenue as the
SomaSensors are shipped to the customer.
9
<PAGE> 10
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FEBRUARY 28, 1999
THREE MONTHS ENDED FEBRUARY 28, 1999 COMPARED TO THREE MONTHS ENDED
FEBRUARY 28, 1998
Net revenues increased by approximately $107,000, or 13%, from $803,365
in the three-month period ended February 28, 1998 to $910,739 in the three-month
period ended February 28, 1999. The increase in revenues was primarily
attributable to an increase in United States sales of approximately $38,000,
from approximately $392,000 in the first quarter of fiscal 1998 to approximately
$430,000 in the first quarter of fiscal 1999, and an increase in international
sales of approximately $69,000, from approximately $411,000 in the first quarter
of fiscal 1998 to approximately $480,000 in the first quarter of fiscal 1999.
The increase in net revenues is primarily attributable to increased purchases of
the disposable SomaSensor, a stocking order for the model 4100 Cerebral Oximeter
from Baxter Limited as a result of Japanese Ministry of Health and Welfare
approval in the first quarter to market the model 4100 in Japan, a 19% increase
in the average selling price of the disposable SomaSensor due to the effect of
no-cap sales on average SomaSensor prices, and a 23% increase in the average
selling price of Cerebral Oximeters due to (i) a change in the mix between sales
directly to hospitals and sales through distributors, and (ii) the exchanges of
model 4100 Cerebral Oximeters for model 3100A Cerebral Oximeters with existing
customers during the first quarter of fiscal 1998. Effective March 1, 1999, the
Company increased the retail price of the Cerebral Oximeter and SomaSensor to
$14,995 and $37.50, respectively. The price increase does not apply to sales
quotations issued prior to March 1, 1999.
Sales of model 4100 Cerebral Oximeters, SomaSensors, model 4100
exchanges, and model 3100A Cerebral Oximeters comprised approximately 64%, 36%,
0%, and 0%, respectively, of the Company's net revenues in the first quarter of
fiscal 1999 and 65%, 13%, 13%, and 7%, respectively, of the Company's net
revenues in the first quarter of fiscal 1998. Approximately 53% of the Company's
net revenues in the first quarter of fiscal 1999 were export sales, compared to
51% of the Company's net revenues in the first quarter of fiscal 1998. One
international distributor accounted for approximately 34% of net revenues for
the three months ended February 28, 1999, and one United States distributor and
two international distributors accounted for approximately 21%, 16% and 10%,
respectively, of total net revenues for the three months ended February 28,
1998.
Gross margin as a percentage of net revenues for the quarters ended
February 28, 1999 and February 28, 1998 was approximately 51% and 51%,
respectively. Although the Company realized a higher average selling price for
the Cerebral Oximeters and SomaSensors in the first quarter of fiscal 1999,
gross margin as a percentage of net revenues remained relatively constant from
the first quarter of fiscal 1998 primarily because a higher percentage of the
Company's net revenues were derived from the sale of SomaSensors in the first
quarter of fiscal 1999, which have lower margins, partially offset by a decrease
in the percentage of net revenues attributable to model 4100 exchanges.
The Company's research, development and engineering expenses decreased
approximately $22,000, or 14%, from $164,788 for the three months ended February
28, 1998 to $142,449 for the three months ended February 28, 1999. The decrease
is primarily attributable to a $42,000 decrease in costs associated with
enhancements to the model 4100 Cerebral Oximeter, partially offset by an
increase in costs associated with the Company's new sensor development projects.
10
<PAGE> 11
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FEBRUARY 28, 1999
Selling, general and administrative expenses increased approximately
$118,000, or 8%, from $1,480,571 for the three months ended February 28, 1998 to
$1,598,856 for the three months ended February 28, 1999. The increase in
selling, general and administrative expense is primarily attributable to a
$195,000 increase in salaries, wages, commissions and related expenses as a
result of additional employees hired since March 1, 1998 (from 46 employees as
of February 28, 1998 to 49 employees as of February 28, 1999), partially offset
by a $36,000 decrease in accrued warranty expense, a $35,000 decrease in
professional service and investor relations fees, and a $24,000 decrease in
incentive compensation expense.
For the three-month period ended February 28, 1999, the Company
realized a 1% increase in its net loss over the same period in fiscal 1998. The
increase is primarily attributable to a 6% increase in operating expenses,
partially offset by a 13% increase in net revenues and increased interest
income.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the three-month period ended
February 28, 1999 was approximately $1,408,000. Cash was used primarily to (i)
fund the Company's net loss, primarily selling, general and administrative
expenses and research, development and engineering expenses (approximately
$1,150,000, net of depreciation and amortization expense), (ii) increase
accounts receivable (approximately $198,000) primarily due to higher sales in
the first quarter of fiscal 1999 than in the prior quarter, and (iii) decrease
accounts payable and accrued liabilities (approximately $125,000). These uses of
cash were partially offset by a decrease in inventory (approximately $50,000)
primarily due to first quarter sales. Management expects working capital
requirements to increase if sales increase. The Company capitalized
approximately $20,000 of costs for model 4100 Cerebral Oximeters being used as
demonstration units in the first quarter of fiscal 1999. The Company expects to
depreciate these costs as a marketing expense over three years.
On June 12, 1998, the Company entered into a $2,000,000 Revolving Note
and a Pledge Agreement with Fifth Third Bank of Northwestern Ohio, N.A. The
principal amount outstanding under the note bears interest, payable monthly, at
the bank's prime rate (7.75% as of March 9, 1999), is collateralized by all
property of the Company held at the bank, including marketable securities, and
is intended to be used for general corporate purposes, if necessary. The Company
has not borrowed any money under the line of credit. The line of credit expires
March 31, 1999. Before that date, the bank may, but is not obligated to, lend
the Company such amounts as may from time to time be requested by the Company,
up to $2,000,000 if no Event of Default shall exist. Events of default include
failure to furnish satisfactory additional security on demand or the bank
deeming itself insecure. The Company has no other loan commitments.
As of February 28, 1999 the Company has working capital of $6,461,015,
cash, cash equivalents and marketable securities of $5,463,444, total current
liabilities of $504,482 and shareholder's equity of $7,220,737.
The Company believes that the cash, cash equivalents and marketable
securities on hand at February 28, 1999 will be sufficient to sustain the
Company's operations at budgeted levels and its needs for liquidity into the
second quarter of fiscal 2000. By that time the Company will be required to
raise additional cash either through additional sales of its product, through
sales of securities, by incurring indebtedness or by some combination of the
foregoing. If the Company is unable to raise additional cash by that time, it
will be required to reduce or discontinue its operations.
11
<PAGE> 12
SOMANETICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FEBRUARY 28, 1999
The estimated length of time current cash, cash equivalents and
marketable securities will sustain the Company's operations is based on certain
estimates and assumptions made by the Company. Such estimates and assumptions
are subject to change as a result of actual experience. There can be no
assurance that actual capital requirements necessary to market the Cerebral
Oximeter and SomaSensor, to develop enhancements to, and product extensions of,
the Cerebral Oximeter, to conduct research and development concerning additional
potential applications of the Company's technology and for working capital will
not be substantially greater than current estimates.
The Company does not believe that product sales will be sufficient to
fund the Company's operations in fiscal 1999.
As of February 28, 1999, there were 60,400 redeemable warrants
outstanding, exercisable at $20.00 per share until July 13, 2000, and 55,120
redeemable warrants outstanding exercisable at $17.50 per share until April 1,
2001. These warrants were issued in the Company's 1995 and April 1996 Regulation
S securities offerings. The conditions permitting the Company to redeem these
warrants have not been met as of March 9, 1999. In addition, the placement
agents and their transferees hold warrants to purchase 64,394 Common Shares
exercisable at $12.50 per share and 15,000 warrants exercisable at $14.40 per
share. Also, the underwriter of the June 1997 public offering received warrants
to purchase 200,000 Common Shares exercisable at $4.80 per share. It is unlikely
that these warrants will be exercised if the exercise price exceeds the market
price of the Common Shares.
The Company's only current loan commitment is described above.
There can be no assurance that even if the Company receives additional
capital, it will be able to achieve the level of sales necessary to sustain its
operations. There can be no assurance that the Company will be able to obtain
any funds on terms acceptable to the Company and at times required by the
Company through sales of the Company's product, sales of securities or loans in
sufficient quantities. The report of the Company's Independent Auditors in the
Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1997
contains an explanatory paragraph relating to an uncertainty concerning the
Company's ability to continue as a going concern.
YEAR 2000 COMPLIANCE
The Company does not expect that the cost of converting its computer
systems to year 2000 compliance will be material to its financial condition or
results of operations. The Company, together with its independent network
consultant, has completed the evaluation of its hardware and software, and has
purchased the hardware and software necessary to replace what was determined to
be non-compliant. As of February 28, 1999, the Company had spent approximately
$80,000 towards the replacement of non-compliant hardware and software, and
estimates that the total costs associated with the implementation of the new
computer system, including hardware, software, and related consulting fees, will
approximate $100,000. The Company began implementation of some new hardware and
software during the fourth quarter of fiscal 1998, and completed the
implementation of the hardware and software during the first quarter of fiscal
1999. The Company is currently using the newly implemented hardware and software
in a test environment, and expects a full conversion to the new information
system by the second quarter of fiscal 1999. Because the Company expects its
system to be year 2000 compliant by the second quarter of fiscal 1999, it has
not prepared a contingency plan and does not currently believe that a
contingency plan is necessary. The Company has considered the cost of upgrading
its older products to make them year 2000 compliant, and does not believe that
such costs will be material to the Company's financial condition or results of
operations. The Company has also corresponded with its major vendors, as well as
a sampling of both its United States and international customers, to determine
their state of readiness with respect to year 2000 compliance. Based on the
responses from
12
<PAGE> 13
the vendors and customers, the Company does not anticipate any material
disruption to its operations as a result of year 2000 compliance failure, and
does not expect any material effect to its financial condition or results of
operations.
13
<PAGE> 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Company's financial
instruments that are sensitive to changes in interest rates, consisting of
investments in corporate bonds and other fixed income securities. For these
financial instruments, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates. Weighted average
variable rates are based on current rates. Weighted average fixed rates are
based on the contract rates. The actual cash flows of all instruments are
denominated in U.S. dollars. The Company invests its cash on hand not needed in
current operations in fixed income securities generally maturing within one year
from the date of acquisition.
<TABLE>
<CAPTION>
FEBRUARY 28, 1999
EXPECTED MATURITY DATES
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
MARKETABLE SECURITIES:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term Debt:
Fixed Rate ($)............. $2,999,956 - - - - - $2,999,956 $3,002,008
Average interest rate... 7.10% N/A N/A N/A N/A N/A 7.10%
Variable Rate ($).......... $1,000,006 - - - - - $1,000,006 $ 891,016
Average interest rate... 9.71% N/A N/A N/A N/A N/A 9.71%
</TABLE>
14
<PAGE> 15
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter for which this report is filed.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Somanetics Corporation
----------------------
(Registrant)
Date: March 29, 1999 By:/s/ Raymond W. Gunn
------------------ -----------------------
Raymond W. Gunn
Executive Vice President and Chief
Financial Officer (Duly Authorized
and Principal Financial Officer)
16
<PAGE> 17
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule.
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FINANCIAL STATEMENTS OF SOMANETICS CORPORATION AS OF, AND FOR THE
THREE MONTHS ENDED, FEBRUARY 28, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND ACCOMPANYING NOTES TO
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-END> FEB-28-1999
<CASH> 1,572,472
<SECURITIES> 3,890,972
<RECEIVABLES> 825,370
<ALLOWANCES> 12,000
<INVENTORY> 611,218
<CURRENT-ASSETS> 6,965,497
<PP&E> 1,704,979
<DEPRECIATION> 1,023,834
<TOTAL-ASSETS> 7,725,219
<CURRENT-LIABILITIES> 504,482
<BONDS> 0
0
0
<COMMON> 60,356
<OTHER-SE> 7,160,381
<TOTAL-LIABILITY-AND-EQUITY> 7,725,219
<SALES> 910,739
<TOTAL-REVENUES> 910,739
<CGS> 447,089
<TOTAL-COSTS> 447,089
<OTHER-EXPENSES> 1,741,305
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,184,328)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,184,328)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,184,328)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
