<PAGE> 1
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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 2000.
REGISTRATION NO. 333-______
====================================================================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------------------------------
SOMANETICS CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 3845 38-2394784
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
----------------------------------------
1653 East Maple Road
Troy, Michigan 48083-4208
(248) 689-3050
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
BRUCE J. BARRETT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SOMANETICS CORPORATION
1653 EAST MAPLE ROAD
TROY, MICHIGAN 48083-4208
(248) 689-3050
(Name, address, including zip code, and telephone number, including area code, of agent for service)
----------------------------------------
COPIES TO:
ROBERT J. KRUEGER KEITH M. ANDRUSCHAK
HONIGMAN MILLER SCHWARTZ AND COHN CLIFFORD CHANCE ROGERS & WELLS LLP
2290 FIRST NATIONAL BUILDING TWO HUNDRED PARK AVENUE
DETROIT, MICHIGAN 48226-3583 NEW YORK, NEW YORK 10166-0153
(313) 465-7452 (212) 878-8570
FAX NO.: (313) 465-7453 FAX NO.: (212) 878-8375
---------------------------------------
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box: |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_| ___________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_| ___________
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_| ___________
If the delivery of the Prospectus is expected to be made pursuant to
Rule 434, please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
====================================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER PRICE REGISTRATION FEE
SHARE
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- -------------------------------------------------- -------------------- --------------- ----------------------- --------------------
Common Shares, par value $.01 per share 1,000,000 $5.765625(1) $5,765,625.00 (1)
- -------------------------------------------------- -------------------- --------------- ----------------------- --------------------
Common Shares, par value $.01 per share 200,000 $4.36 (2) $872,000.00 (2)
- -------------------------------------------------- -------------------- --------------- ----------------------- --------------------
Total 1,200,000 $6,637,625.00 $1,752.33
====================================================================================================================================
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(1) Estimated solely for the purpose of computing the registration fee,
based on the average of the high and low reported sale prices of the
Registrant's Common Shares on March 21, 2000 as reported on The Nasdaq
SmallCap Market, pursuant to Rule 457 (c).
(2) The shares are issuable upon exercise of a Warrant. Estimated solely
for the purpose of computing the registration fee, based on the
exercise price of the Warrant, pursuant to Rule 457(g).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
PROSPECTUS
1,200,000
[SOMANETICS LOGO]
COMMON SHARES
------------------------
This Prospectus may be used by the selling shareholder, Kingsbridge
Capital Limited, to resell to the public up to 1,200,000 Common Shares, par
value $0.01 a share, of Somanetics Corporation. The shares being offered for
resale include:
- up to 1,000,000 Common Shares that may be issued and sold to
Kingsbridge by us pursuant to a Private Equity Line Agreement dated
March 6, 2000, and
- up to 200,000 Common Shares that may be purchased by Kingsbridge upon
exercise of a currently outstanding warrant held by Kingsbridge.
The shares covered by this Prospectus may be sold from time to time by
Kingsbridge for its own account. We will not receive any of the proceeds from
the sales of Common Shares by Kingsbridge.
Shares sold to Kingsbridge pursuant to the terms of the Equity Line
Agreement will be at a purchase price between 86% and 90% of the then current
average market price of our Common Shares, as defined in the Equity Line
Agreement, on the date of sale. The actual percentage will depend on an average
of the lowest trade prices of the Common Shares over a five day period beginning
two days before and ending two days after the date we notify Kingsbridge of the
sale. In addition, we must pay Brean Murray & Co., Inc. a 3.5% commission in
connection with such sales.
Kingsbridge may offer and sell the shares that we sell to it under the
Equity Line Agreement and the warrant pursuant to this Prospectus from time to
time in transactions in The Nasdaq SmallCap Market, in negotiated transactions,
or otherwise. Kingsbridge may effect these transactions by selling the shares to
or through broker-dealers, who may receive compensation in the form of discounts
or commissions from Kingsbridge or from the purchasers of the shares for whom
the broker-dealers may act as an agent or to whom they may sell as a principal,
or both. Kingsbridge is an "underwriter" within the meaning of the Securities
Act of 1933 in connection with sales of the shares offered pursuant to this
Prospectus. See "Plan of Distribution" beginning on page 56.
The last reported sale price of the Common Shares, which are listed on
The Nasdaq SmallCap Market under the symbol "SMTS," was $5.6875 per share on
March 21, 2000.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 TO READ ABOUT RISKS THAT YOU
SHOULD CONSIDER BEFORE BUYING COMMON SHARES.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is March __, 2000
<PAGE> 3
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TABLE OF CONTENTS
PAGE
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WHERE YOU CAN GET MORE INFORMATION................................................................................2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS.........................................................3
PROSPECTUS SUMMARY................................................................................................4
RISK FACTORS......................................................................................................8
THE EQUITY LINE AGREEMENT........................................................................................17
USE OF PROCEEDS..................................................................................................19
PRICE RANGE OF COMMON SHARES AND DIVIDEND POLICY.................................................................20
CAPITALIZATION...................................................................................................21
DILUTION.........................................................................................................22
SELECTED FINANCIAL DATA..........................................................................................23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................24
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.......................................................30
BUSINESS.........................................................................................................31
MANAGEMENT.......................................................................................................44
CERTAIN TRANSACTIONS.............................................................................................49
PRINCIPAL SHAREHOLDERS...........................................................................................50
SELLING SHAREHOLDER..............................................................................................52
DESCRIPTION OF CAPITAL STOCK.....................................................................................53
PLAN OF DISTRIBUTION.............................................................................................56
LEGAL MATTERS....................................................................................................58
EXPERTS..........................................................................................................58
INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
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You should rely only on the information contained in this Prospectus.
Neither Somanetics Corporation nor the selling shareholder has authorized anyone
to provide you with different or additional information. The selling shareholder
may offer to sell, and seek offers to buy, our Common Shares only in
jurisdictions where offers and sales are permitted. The information contained in
this Prospectus is accurate only as of the date of this Prospectus, regardless
of the time of delivery of this Prospectus or any sale of our Common Shares.
No action is being taken in any jurisdiction outside the United States
to permit a public offering of the Common Shares or possession or distribution
of this Prospectus in any such jurisdiction. Persons who come into possession of
this Prospectus in jurisdictions outside the United States are required to
inform themselves about and to observe the restrictions of that jurisdiction
related to this offering and the distribution of this Prospectus.
WHERE YOU CAN GET MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You can receive copies of such reports, proxy
and information statements, and other information, at prescribed rates, from the
SEC by addressing written requests to the SEC's Public Reference Room at 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. In addition, you
can read and copy such reports, proxy and information statements, and any other
information or materials we file with the SEC at the public reference facilities
and at the regional offices of the SEC, in Washington, D.C., New York, New York
and Chicago, Illinois, Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. The SEC also
maintains an Internet site that contains reports, proxy and information
statements and other information regarding issuers, such as us, that file
electronically with the SEC. The address of the SEC's Web site is
http://www.sec.gov.
We have filed with the SEC a Registration Statement on Form S-1 to
register the Common Shares that the selling shareholder is offering in this
Prospectus. This Prospectus is part of the Registration Statement. This
Prospectus does not include all of the information contained in the Registration
Statement. For further information about us and the Common Shares offered in
this Prospectus, you should review the Registration Statement. You can inspect
or copy the Registration Statement, at prescribed rates, at the SEC's public
reference facilities at the addresses listed above.
<PAGE> 4
Statements contained in this Prospectus concerning the provisions of
documents are necessarily summaries of such documents and when any such document
is an exhibit to the Registration Statement, each such statement is qualified in
its entirety by reference to the copy of such document filed with the SEC.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this Prospectus are forward-looking
statements. These forward-looking statements include statements relating to our
performance in the "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Use of Proceeds" and "Business" sections of this
Prospectus. In addition, we may make forward-looking statements in future
filings with the Securities and Exchange Commission and in written material,
press releases and oral statements issued by us or on our behalf.
Forward-looking statements include statements regarding the intent, belief or
current expectations of us or our officers, including statements preceded by,
followed by or including forward-looking terminology such as "may," "will,"
"should," "believe," "expect," "anticipate," "estimate," "continue," "predict"
or similar expressions, with respect to various matters.
It is important to note that our actual results could differ materially
from those anticipated from the forward-looking statements depending on various
important factors. These important factors include our history of losses and
ability to continue as a going concern, our current dependence on the Cerebral
Oximeter and SomaSensor, the challenges associated with developing new products,
the uncertainty of acceptance of our products by the medical community, the
lengthy sales cycle for our products, competition in our markets, our need for
additional financing, our dependence on our distributors, and the other factors
discussed in "Risk Factors" beginning on page 8.
All forward-looking statements in this Prospectus are based on
information available to us on the date of this Prospectus. We do not undertake
to update any forward-looking statements that may be made by us or on our behalf
in this Prospectus or otherwise. In addition, please note that matters set forth
under the caption "Risk Factors" constitute cautionary statements identifying
important factors with respect to the forward-looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from those in such forward-looking statements.
3
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights some information from this Prospectus. This
summary is not complete and does not contain all of the information you should
consider before investing in our Common Shares. You should read the entire
Prospectus carefully. Unless otherwise indicated, all information contained in
this Prospectus gives effect to a 1-for-10 reverse split effected April 10,
1997. Throughout this Prospectus we refer to Somanetics Corporation as
"Somanetics", the "Company", "we", "our" and "us".
THE COMPANY
THE CEREBRAL OXIMETER
We develop, manufacture and market the INVOS(R) Cerebral Oximeter, the
only non-invasive patient monitoring system commercially available in the United
States that continuously measures changes in the blood oxygen level in the adult
brain. We developed the Cerebral Oximeter to meet the need for information about
oxygen in the brain, the organ least tolerant of oxygen deprivation. Without
sufficient oxygen, brain damage may occur within a few minutes, which can result
in paralysis, severe and complex disabilities or death. Brain oxygen
information, therefore, is important, especially in surgical procedures
requiring general anesthesia and in other critical care situations with a high
risk of the brain getting less oxygen than it needs. We target surgical
procedures with a high risk of the brain oxygen imbalances, such as heart
surgeries, heart blood vessel surgeries, other blood vessel surgeries and
surgeries involving elderly patients. Surgeons, anesthesiologists and other
medical professionals use the Cerebral Oximeter to identify brain oxygen
imbalances and take corrective action, potentially improving patient outcome and
reducing the cost of care.
The Cerebral Oximeter is a relatively inexpensive, portable and
easy-to-use monitoring system placed at a patient's bedside in hospital critical
care areas, especially operating rooms, recovery rooms, intensive care units and
emergency rooms. It is comprised of
- a portable unit including a computer and a display monitor,
- dual single-use, disposable sensors, called SomaSensors(R),
- proprietary software and
- a preamplifier cable.
SomaSensors can be placed on both sides of a patient's forehead to offer
bi-lateral monitoring and are connected to the computer through the preamplifier
cable. The computer uses our proprietary software to analyze information
received from the SomaSensors and provides a continuous digital and trend
display on the monitor of an index of the oxygen saturation in the area of the
brain under the SomaSensors. Users of the Cerebral Oximeter will be required to
purchase disposable SomaSensors on a regular basis because of their single-use
nature. We began shipping the model 4100 Cerebral Oximeter in the first quarter
of fiscal 1998. During the third quarter of fiscal 1999, we introduced our new
model 5100 pediatric Cerebral Oximeter at an international trade show, and began
international shipments of the model 5100 in August 1999. During the third
quarter of fiscal 1999, we also submitted our 510(k) application to the FDA for
the model 5100 Cerebral Oximeter, and we are awaiting FDA clearance to market
the model 5100 in the United States.
INVOS TECHNOLOGY
The Cerebral Oximeter is based on our proprietary In Vivo Optical
Spectroscopy, or INVOS, technology. INVOS analyzes various characteristics of
human blood and tissue by measuring and analyzing low-intensity visible and
near-infrared light transmitted into portions of the body. Optical spectroscopy
was generally not useful when the substances to be measured were surrounded by,
were behind or were near bone, muscle or other tissue, because they produce
extraneous data that interferes with analysis of the data from the area being
examined. We have developed a method of reducing extraneous spectroscopic data
caused by surrounding bone, muscle and other tissue. This method allows us to
gather information about portions of the body that previously could not be
analyzed using traditional optical spectroscopy.
4
<PAGE> 6
BUSINESS STRATEGY
Our objective is to establish the Cerebral Oximeter as a standard of
care in surgical procedures requiring general anesthesia and in other critical
care situations. Key elements of our strategy are
- target surgical procedures with a high risk of brain oxygen
imbalances,
- demonstrate the clinical benefits, and promote acceptance, of the
Cerebral Oximeter,
- invest in marketing and sales activities,
- develop additional applications of the Cerebral Oximeter and
- license our technology to medical device manufacturers.
SALES AND DISTRIBUTION
We sell the Cerebral Oximeter in the United States through our 12
direct salespersons and five clinical specialists. Internationally, we have
distribution agreements with 11 independent distributors covering 65 countries
for the model 4100 Cerebral Oximeter, including Nellcor Puritan Bennett Export,
Inc. in Europe and Baxter Limited in Japan. Two of these distributors will be
terminated within the next year and one more distributor will be terminated
within the next two years in conjunction with our recently announced exclusive
distributor agreement with Nellcor Puritan Bennett Export, Inc., a wholly-owned
subsidiary of Mallinckrodt, Inc.
ABOUT US
Somanetics Corporation was incorporated in the State of Michigan on
January 15, 1982. Our headquarters are located at 1653 East Maple Road, Troy,
Michigan 48083-4208. Our telephone number is (248) 689-3050.
THE OFFERING
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Common Shares Offered by the Selling Shareholder.......... Up to 1,200,000 shares
Common Shares Outstanding as of March 21, 2000............ 6,035,597 shares
Use of Proceeds........................................... We will not receive any of the proceeds of the shares offered by the
selling shareholder. Any proceeds we receive from the sale of Common
Shares pursuant to the Equity Line Agreement will be used primarily to
finance our operations, including marketing and sales activities,
research and development programs and other general corporate
purposes, including working capital. See "Use of Proceeds."
Nasdaq SmallCap Market Symbol............................. SMTS
</TABLE>
The number of shares outstanding as of March 21, 2000 does not include:
- 1,325,782 Common Shares reserved for issuance under our 1983 Stock
Option Plan, 1991 Incentive Stock Option Plan, 1993 Director Stock
Option Plan, 1997 Stock Option Plan and non-plan options, of which
options to purchase an aggregate of 1,293,037 Common Shares were
outstanding as of March 21, 2000. The number of shares reserved
for issuance under our 1997 Stock Option Plan has been increased
by an additional 295,000 Common Shares, subject to shareholder
approval at our April 18, 2000 annual meeting of shareholders;
- 26,424 Common Shares issuable upon the exercise of warrants issued
to the placement agent in connection with Regulation S financings
completed in July 1995 and April 1996;
- 115,520 Common Shares issuable upon the exercise of warrants
issued in connection with the Regulation S Offerings completed in
July 1995 and April 1996;
5
<PAGE> 7
- 200,000 Common Shares issuable upon exercise of the warrants
issued to the underwriter in connection with our public offering
of Common Shares which closed in June 1997;
- 200,000 Common Shares issuable upon exercise of the warrant issued
to the selling shareholder in connection with our Equity Line
Agreement on March 6, 2000; and
- Common Shares issuable to the selling shareholder pursuant to the
Equity Line Agreement.
6
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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FISCAL YEAR ENDED NOVEMBER 30,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
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STATEMENT OF OPERATIONS DATA:
Net revenues........................................ $4,001 $2,491 $1,212 $778 $1,336
Cost of sales....................................... 1,906 1,326 631 385 658
Gross margin........................................ 2,095 1,165 580 393 678
Research, development and engineering expenses...... 598 665 736 235 286
Selling, general and administrative expenses........ 6,436 6,347 6,238 3,550 3,303
Net loss............................................ (4,665) (5,470) (6,155) (3,304) (2,818)
Net loss per Common Share -
Basic and Diluted (1).............................. (.77) (1.01) (1.88) (1.77) (1.67)
Weighted average number of Common Shares
outstanding (1)..................................... 6,036 5,422 3,272 1,867 1,684
</TABLE>
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NOVEMBER 30,
1999
--------------
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BALANCE SHEET DATA:
Cash and marketable securities................................................... $2,257
Working capital.................................................................. 2,960
Total assets..................................................................... 4,444
Total liabilities................................................................ 762
Long-term debt................................................................... --
Accumulated deficit (2).......................................................... (46,502)
Shareholders' equity (2) (3)..................................................... 3,682
- -------------------------------------
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(1) See Note 4 of Notes to Financial Statements included in this Prospectus
for information with respect to the calculation of per share data.
(2) We believe our accumulated deficit has increased and shareholders'
equity has decreased since November 30, 1999.
(3) See Statements of Shareholders' Equity of the Financial Statements
included in this Prospectus for an analysis of Common Share
transactions for the period from December 1, 1996 through November 30,
1999.
7
<PAGE> 9
RISK FACTORS
An investment in our Common Shares involves a high degree of risk. You
should carefully consider the specific factors listed below, together with the
cautionary statement under the caption "Cautionary Statement Regarding Forward
Looking Statements" and the other information included in this Prospectus,
before purchasing our Common Shares. The risks described below are not the only
ones that we face. Additional risks that are not yet known to us or that we
currently think are immaterial could also impair our business, operating results
or financial condition. If any of the following risks actually occur, our
business, financial condition or results of operations could be adversely
affected. In such case, the trading price of our Common Shares could decline,
and you may lose all or part of your investment.
WE HAVE INCURRED LOSSES IN EVERY YEAR OF OUR EXISTENCE AND EXPECT OUR LOSSES TO
CONTINUE IN FISCAL 2000; OUR ABILITY TO CONTINUE AS A GOING CONCERN IS
UNCERTAIN.
We have incurred net losses in every year of our existence. From our
inception on January 15, 1982 through November 30, 1999, we incurred an
accumulated deficit of $46,501,659, including a net loss of $4,665,291 for the
year ended November 30, 1999. Companies such as ours frequently encounter
delays, expenses, problems and uncertainties in developing products and markets
for new products. We do not believe that our product sales will be sufficient to
support our operations in fiscal 2000, for many reasons, including:
- the need for customer education about the clinical benefits of the
Cerebral Oximeter,
- the lengthy sales cycle for the Cerebral Oximeter,
- the expected costs of developing product-line extensions of the
Cerebral Oximeter for use on newborns, other non-brain tissue
applications of our INVOS technology and enhancements to the
Cerebral Oximeter and SomaSensor,
- our need to attract and service a customer base, and
- our ability to manufacture our products on a commercial scale in a
cost-effective manner.
For the foreseeable future, we believe that we will continue to incur net
losses. It is possible that we will never become profitable. Due to our history
of losses and our current financial condition, our independent auditors' report
includes an explanatory paragraph referring to an uncertainty concerning our
ability to continue as a going concern. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," Note 2 of Notes to
Financial Statements and "Independent Auditors' Report."
WE ARE CURRENTLY DEPENDENT ON SALES OF THE CEREBRAL OXIMETER AND SOMASENSOR TO
GENERATE ALL OF OUR REVENUES.
The Cerebral Oximeter and the related SomaSensor are currently our only
commercial products and are expected to account for substantially all of our
revenues for fiscal 2000 and 2001. We have limited experience in manufacturing,
marketing and selling the Cerebral Oximeter. The Cerebral Oximeter has not had
extensive commercial use and has not been evaluated for every medical procedure
in which it might be used. Further research or use of the Cerebral Oximeter
might reveal unexpected problems with its operation or performance, especially
in connection with medical procedures for which the Cerebral Oximeter has not
yet been evaluated. Although testing of the Cerebral Oximeter to date indicates
clinical benefits, subsequent performance problems or adverse research results
could prevent acceptance of the product by the medical community, result in
unexpected expense and adversely affect future sales. If the market for the
Cerebral Oximeter fails to develop as rapidly as expected, our business,
financial condition and results of operations could be adversely affected.
Although we are developing other products, there can be no assurance that any
commercial products will result from our efforts.
OUR PRODUCTS ARE NEW AND MIGHT NOT BE ACCEPTED BY THE MEDICAL COMMUNITY.
To date, the medical community has had little exposure to us or our
technology. Because the medical community is often skeptical of new companies
and new technologies, members of the medical community might not perceive a need
for the Cerebral Oximeter or be convinced of its clinical benefits. In addition,
hospital purchasing decisions for equipment like the Cerebral Oximeter are often
made by hospital purchasing committees that might not include the user of the
equipment. In such a case, the committees must be convinced to purchase our
8
<PAGE> 10
product. Even if we are successful in convincing physicians, other medical
professionals and their hospital purchasing committees of the need for the
Cerebral Oximeter, they might be unwilling or unable to commit funds to the
purchase of the Cerebral Oximeter due to limited budgets or decreases in capital
expenditures. In many cases, these limits are due to hospital cost controls,
increased managed care and fixed reimbursements for the medical procedures in
which the Cerebral Oximeter is used. If our products fail to achieve market
acceptance, our business, financial condition and results of operations could be
adversely affected.
PUBLICATION OF ADVERSE CLINICAL RESEARCH COULD ADVERSELY AFFECT OUR SALES.
Part of our marketing strategy is to support clinical research programs
and encourage peer-to-peer selling. While we believe favorable peer review is a
key element to a product's acceptance by the medical community, we cannot assure
you that additional papers will be submitted or that any such papers will help
us sell our products. In addition, researchers might publish adverse results.
For example, in fiscal 1993 researchers in the United Kingdom published adverse
results from research regarding an earlier prototype of the Cerebral Oximeter,
and in 1996 some researchers published adverse results after using the Cerebral
Oximeter beyond its indicated use. Negative reaction to adverse publications,
our financial condition and the rescission of our previous FDA clearance for the
Cerebral Oximeter could adversely affect our reputation in the medical community
and, as a result, our ability to market and sell our product.
THE LENGTHY SALES CYCLE FOR THE CEREBRAL OXIMETER COULD DELAY OUR SALES.
The decision-making process for our Cerebral Oximeter customers is
often complex and time-consuming. Based on our limited experience, we believe
the period between initial discussions concerning the Cerebral Oximeter and a
purchase of even one unit is six to nine months. The process can be delayed as a
result of hospital capital budgeting procedures. Moreover, even if one or two
units are sold to a hospital, we believe that it will take additional time and
experience with the Cerebral Oximeter before additional medical professionals in
the hospital might be interested in using the Cerebral Oximeter in other
procedures or other areas of the hospital. These delays could have an adverse
effect on our business, financial condition and results of operations. See
"Business--Marketing, Sales and Distribution."
THE MEDICAL PRODUCTS INDUSTRY IS INTENSELY COMPETITIVE.
We believe that the markets for cerebral oximetry products, if they
develop, may become highly competitive. We know of foreign companies that have
sold products relating to cerebral metabolism monitoring for research or
evaluation.
The medical products industry is characterized by intense competition
and extensive research and development. Other companies and individuals are
engaged in research and development of non-invasive cerebral oximeters. We
believe there are many other potential entrants into our markets. Some of these
potential competitors have well-established reputations, customer relationships
and marketing, distribution and service networks. Some of them have
substantially longer histories in the medical products industry, larger product
lines, and greater financial, technical, manufacturing, research and development
and management resources than we do. Many of these potential competitors have
long-term product supply relationships with our potential customers. These
potential competitors might succeed in developing products that are at least as
reliable and effective as our products, that make additional measurements, that
are less costly than our products, or that provide alternatives to our products,
such as additional or better treatments for congestive heart failure.
These potential competitors may be more successful than we are in
manufacturing and marketing their products, and may be able to take advantage of
the significant time and effort we have invested to gain medical acceptance of
cerebral oximetry. In addition, one patent issued to an unaffiliated third party
and relating to cerebral oximetry expired in 1999, two patents issued to an
unaffiliated third party and relating to cerebral oximetry expired in 1998, and
two patents issued to an unaffiliated third party and relating to cerebral
oximetry will expire in 2000. These expiring patents will make that technology
generally available and potentially help the development of competing products.
Successful commercial development of competing products could lead to loss of
market share and lower margins and have an adverse effect on our business,
financial condition and results of operations.
9
<PAGE> 11
We also compete indirectly with numerous companies that sell medical
equipment to hospitals for the limited amount of funding allocated to capital
equipment in hospital budgets. The market for medical equipment is subject to
rapid change due to an increasingly competitive, cost-conscious environment and
to government programs intended to reduce the cost of medical care. Many of
these manufacturers of medical equipment are large, well-established companies
whose resources, reputations and ability to leverage existing customer
relationships may give them a competitive advantage over us. Our products and
technology also compete indirectly with many other methods currently used to
measure blood oxygen levels or the effects of low blood oxygen levels. See
"Business--Market Overview," and "--Competition."
WE EXPECT TO NEED SUBSTANTIAL ADDITIONAL FINANCING TO FUND OUR OPERATIONS.
We will require substantial additional capital to further develop our
products, to commercialize our products and to sustain our operations. We will
not receive any of the proceeds of this offering. If we sell 1,000,000 Common
Shares to the selling shareholders pursuant to the Equity Line Agreement, based
on the market prices existing as of March 21, 2000, we expect that the net
proceeds of those sales will be adequate to satisfy our operating and capital
requirements through April 2001. By that time, we will be required to raise
additional cash either though additional sales of our products, through sales of
securities, by incurring indebtedness or by some combination of these
alternatives. We do not believe that our product sales will be sufficient to
sustain our operations at that time and we have no current commitments for any
debt financing. We also have no current commitments for any additional sales of
securities, other than pursuant to the Equity Line Agreement if we obtain
shareholder approval to issue additional shares. In the past, we have raised
required capital through sales of additional equity securities. If we are unable
to raise additional cash by that time, we will be required to reduce or
discontinue our operations.
Changes in the market price or trading volume of our Common Shares
could reduce the proceeds we receive for selling those Common Shares, decrease
the number of shares we can sell in a particular period or both. In addition,
changes in our business or business plans or unexpected expenses could change
our cash needs. Our future cash needs will depend on many factors, including:
- the time and cost involved in obtaining regulatory approvals;
- the cost of marketing and assembly activities,
- whether we can successfully market our products,
- the rate of market acceptance of our products,
- the scope of our research and development programs,
- the length of time required to collect accounts receivable, and
- competing technological and market developments.
Each of these factors could shorten the length of time the cash we receive from
sales of our Common Shares under the Equity Line Agreement will sustain our
operations. When we need additional financing, it might not be available on
terms acceptable to us or at the times we require it, if at all, and such
financing will likely dilute the interests of existing shareholders. See "Use of
Proceeds," and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
OUR QUARTERLY OPERATING RESULTS MIGHT FLUCTUATE SIGNIFICANTLY.
We have experienced, and we expect to continue to experience,
significant fluctuations in our quarterly operating results. Our future
operating results are dependent upon a number of factors, including:
- the demand for our products,
- the timing of our sales,
- the length of our sales cycle,
- the timing of introduction of new products,
- the timing and development of any competing products,
- the publication of clinical research results regarding our products,
- the use of any of our products as a "standard of care" by any
hospitals,
- the timing of new employee hiring, and
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- economic conditions, both generally and in the medical products
industry.
We do not expect to have a material backlog of unfilled orders, so any shortfall
in demand for our products in relation to our expectations, or any material
delay in orders from distributors or customers, could have an almost immediate
impact on our business, financial condition and results of operations.
OUR PERFORMANCE DEPENDS ON OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL.
Our future performance depends in significant part on the continued
service of our senior management, including Bruce J. Barrett, President and
Chief Executive Officer, and various scientific, technical and manufacturing
personnel. Our loss of any of these key personnel could have an adverse effect
on us. We do not maintain key-man life insurance on any of our key personnel. In
addition, competition for qualified employees is intense, and if we are unable
to attract, retain and motivate additional, highly-skilled employees required
for the expansion of our operations, our business, financial condition and
results of operations could be adversely affected. Our ability to retain
existing employees and attract new employees might be adversely affected by our
current financial situation. We cannot assure you that we will be able to retain
our existing personnel or attract additional, qualified persons when required
and on acceptable terms. See "Business--Employees," and "Management."
WE ARE DEPENDENT ON OUR DISTRIBUTORS FOR OUR INTERNATIONAL SALES.
We are dependent on our distributors to generate international sales of
Cerebral Oximeters. We believe that our current distributors are knowledgeable,
and we have a training program for new distributors concerning our technology
and our Cerebral Oximeter and SomaSensor. However, independent distributors
might not have sufficient knowledge about, or familiarity with, our technology
or products to demonstrate adequately their operation and clinical benefits. If
our distributors fail to market, promote and sell our products adequately, our
business, financial condition and results of operations would be adversely
affected.
We might not be able to engage additional distributors on a timely
basis, enter into other third-party marketing arrangements, or retain or replace
our existing distributors, when required. If we are unable to engage, replace or
retain distributors, our ability to market and sell our products internationally
could be adversely affected. In addition, any required distributor terminations
could increase our costs. Even if we are able to engage and retain distributors,
they might incur conflicting obligations to sell other companies' products or
they might distribute other products that provide greater revenues than are
provided by our products.
One international distributor accounted for approximately 23% of our
net revenues for fiscal 1999. In addition, in fiscal 2000 we entered into an
exclusive distributor agreement with Nellcor Puritan Bennett Export, Inc.
initially covering 33 countries for our Cerebral Oximeter. The loss of either of
these distributors could have an adverse effect on our business, financial
condition and results of operations. See "Business--Marketing, Sales and
Distribution."
OTHERS HAVE PATENTS IN OUR FIELD; WE COULD BE ADVERSELY AFFECTED IF WE ARE
INVOLVED IN INFRINGEMENT LITIGATION; OUR INTELLECTUAL PROPERTY RIGHTS MIGHT NOT
PROVIDE US WITH COMPETITIVE ADVANTAGES.
Although fifteen United States patents have been issued to us with
respect to our INVOS technology, only ten of such patents expressly refer to
examination of the brain or developments involving the Cerebral Oximeter. Many
patents have already been issued to third parties involving optical spectroscopy
and the interaction of light with tissue. Some of these patents relate to the
use of optical spectroscopy in the area of brain metabolism monitoring, the
primary use of the Cerebral Oximeter. No patent infringement claims have been
asserted against us, although potential competitors would have more incentive to
assert infringement claims or challenge our patents if a more significant market
for Cerebral Oximeters develops. The costs of defense of patent litigation can
be substantial and, if the defense is unsuccessful, we could be liable for
substantial damages. In addition, if our products infringe any claims of an
issued patent, we could be enjoined from manufacturing or selling those products
or forced to obtain a license to continue our manufacture or sale of those
products. The license could require us to pay a licensing fee or royalties of
unknown magnitude on sales of our products. If we were required to obtain a
license, it might not be available, or it might not be available on terms
acceptable to us. If we were unable to obtain
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required licenses on favorable terms, or at all, our business, financial
condition and results of operations could be adversely affected.
Our patents are subject to risks, including:
- additional patent applications might not be allowed,
- issued patents might not be upheld,
- issued patents might not provide us with significant competitive
advantages,
- challenges might be instituted against the validity or
enforceability of any of our patents and, if instituted, such
challenges might be successful.
If patents are not issued from future patent applications, we might be subject
to greater competition. The cost of litigation to uphold the validity of a
patent and prevent infringement can be very substantial and could be beyond our
financial capability even if we could otherwise prevail. Also, the laws of some
foreign countries do not protect our proprietary rights to the same extent as
the laws of the United States. Furthermore, individuals and companies might
independently develop similar technologies, duplicate our technology or design
around the patented aspects of our technology, or we might infringe patents or
other rights owned by other individuals and companies.
Although we seek to protect our proprietary rights through a variety of
means, we cannot promise that the actions we have taken are adequate to protect
these rights. Our INVOS technology primarily represents improvements or
adaptations of known optical spectroscopy technology, which might be duplicated
or discovered through our patents, reverse engineering or both. In addition, one
patent issued to an unaffiliated third party and relating to cerebral oximetry
expired in 1999, two patents issued to an unaffiliated third party and relating
to cerebral oximetry expired in 1998, and two patents issued to an unaffiliated
third party and relating to cerebral oximetry will expire in 2000. These
expiring patents will make that technology generally available and potentially
help the development of competing products. If competing products or
technologies are developed or emerge, our business, financial condition and
results of operations could be adversely affected. We also rely on trade secret,
copyright and other laws and on confidentiality agreements to protect our
technology. However, we believe that neither our patents nor other legal rights
will necessarily prevent other individuals and companies from developing or from
using similar or related technology to compete against our products. Our
confidentiality agreements might be breached and we might not have adequate
remedies for any breach. Despite our efforts to protect our proprietary rights
our trade secrets might become known to competitors or independently developed
by them. See "Business--Proprietary Rights Information."
WE MUST BE ABLE TO MANAGE OUR GROWTH EFFECTIVELY.
If we grow as fast as we hope, our growth could place a significant
strain on our management, customer service, operations, sales and administrative
personnel and other resources. To serve the needs of our existing and future
customers, we plan to increase our workforce, which will require us to attract,
train, motivate and manage qualified employees. We have incurred and continue to
incur significant costs to retain qualified management, sales and marketing,
engineering, production, manufacturing and administrative personnel and
scientists, as well as for marketing and promotional activities. Our ability to
manage our planned growth depends upon our success in expanding our operating,
management, information and financial systems, which might significantly
increase our operating expenses. We might not be able to manage effectively any
future growth, and if we fail to do so, our business, financial condition and
results of operations would be adversely affected. See "--Dependence Upon
Management and Key Personnel," "Business--Employees," and "Management--Directors
and Executive Officers."
NEW PRODUCT DEVELOPMENT IS EXPENSIVE AND MIGHT NOT RESULT IN COMMERCIALLY VIABLE
PRODUCTS.
We have invested substantial resources to develop the Cerebral Oximeter
and the related disposable SomaSensor. We expect to continue to invest
substantial resources to develop:
- product-line extensions of the Cerebral Oximeter for use on
newborns,
- other non-brain tissue applications of INVOS technology, and
- enhancements to the Cerebral Oximeter and SomaSensor.
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New products require extensive testing and regulatory clearance before they can
be marketed, and substantial customer education concerning the product's use,
advantages and effectiveness. In addition, sales of our cerebral oximetry
products might be limited because of resistance to major capital equipment
expenditures by hospital purchasing committees. Sales of all of our products
might be limited because hospitals might fear that the cost of a new device or
product will lower its profits because medical insurers generally fix
reimbursement amounts for the procedures in which our products might be used. We
might not be able to develop commercially viable products. See "Use of Proceeds"
and "Business--Research and Development."
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION AND COULD BE ADVERSELY
AFFECTED BY THOSE REGULATIONS.
The testing, manufacture and sale of our products are subject to
regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign agencies. Pursuant to the Federal Food, Drug,
and Cosmetic Act and the related regulations, the FDA regulates the preclinical
and clinical testing, manufacture, labeling, distribution and promotion of
medical devices. If we do not comply with applicable requirements, we might be
subject to:
- fines,
- injunctions,
- civil penalties,
- recall or seizure of products,
- total or partial suspension of production,
- failure of the government to grant premarket clearance or premarket
approval for devices,
- withdrawal of marketing clearances or approvals, and
- criminal prosecution.
Any of these actions could have an adverse effect on our business, financial
condition and results of operations.
In October 1997, we obtained FDA clearance for advances in our INVOS
technology that are incorporated in our model 4100 Cerebral Oximeter. We made
additional changes to the model 3100A Cerebral Oximeter that resulted in the
model 4100 Cerebral Oximeter and we have made additional changes to the
SomaSensor. We do not believe that these changes affect the safety or efficacy
of the Cerebral Oximeter or the SomaSensor and, therefore, we believe that these
changes do not require the submission of a new 510(k) notice. The FDA, however,
could disagree with our determination not to submit a new 510(k) notice for the
new model 4100 Cerebral Oximeter or SomaSensor and could require us to submit a
new 510(k) notice for any changes made to the device. If the FDA requires us to
submit a new 510(k) notice for our model 4100 Cerebral Oximeter or SomaSensor or
for any device modification, we might be prohibited from marketing the modified
device until the 510(k) notice is cleared by the FDA. See "Business--Government
Regulation."
The FDA could rescind our current FDA clearance to market the Cerebral
Oximeter in the United States. In addition, we cannot assure you that, if and
when we develop any additional products, they will receive FDA clearance. If any
current or future clearances or approvals are rescinded or denied, sales of our
applicable products in the United States would be prohibited during the period
we do not have such clearances or approvals. We cannot assure you that we will
be able to obtain necessary regulatory approvals or clearances on a timely basis
or at all. Our business, financial condition and results of operations would be
adversely affected if
- any approvals or clearances are delayed or not received at all,
- we lose previously received approvals or clearances,
- regulators impose limitations on the intended use of our products as
a condition of any approval or clearance,
- regulators impose limitations on the markets for our products as a
condition of any approval or clearance,
- the market introduction of any of our products is delayed as a
result of regulatory compliance issues, or
- we fail to comply with existing or future regulatory requirements.
See "Business--Government Regulation."
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We are subject to routine inspection by the FDA and state agencies for
compliance with Quality System Regulation requirements and other applicable
regulations. If existing requirements change or new requirements are adopted,
our business, financial condition and results of operations could be adversely
affected. We might incur significant costs to comply with laws and regulations
in the future, and laws and regulations would have an adverse effect on our
business, financial condition and results of operations.
We are also subject to numerous federal, state and local laws relating
to safe working conditions, manufacturing practices, environmental protection,
fire hazard control and disposal of hazardous or potentially hazardous
substances. We might be required to incur significant costs to comply with these
laws and regulations in the future, and these laws or regulations might have an
adverse effect on our ability to do business.
Congress enacted the FDA Modernization Act of 1997. This law is
intended to make the regulatory process more consistent and efficient. It is too
early to determine whether, or how, these new requirements will affect us.
PATIENTS MIGHT ASSERT PRODUCTS LIABILITY CLAIMS AGAINST US.
Because we test, market and sell a patient monitoring device and a
heart patch, patients might assert products liability claims against us. The
Cerebral Oximeter is used in operating rooms and other critical care hospital
units with patients who might be seriously ill or might be undergoing dangerous
procedures. On occasion, patients on whom the Cerebral Oximeter is being used
may be injured or die as a result of their medical treatment or condition. We
might be sued because of such injury or death, and regardless of whether we are
ultimately determined to be liable, we might incur significant legal expenses
not covered by insurance. In addition, products liability litigation could
damage our reputation and impair our ability to market our products. Litigation
could also impair our ability to retain products liability insurance or make our
insurance more expensive. We have products liability insurance with a liability
limit of $2,000,000. This insurance is costly and even though it has been
obtained, we might not be able to retain it. Even if we are able to retain this
insurance, it might not be sufficient to protect us in the event of a major
defect in the Cerebral Oximeter. If we are subject to an uninsured or
inadequately insured products liability claim based on the performance of the
Cerebral Oximeter, our business, financial condition and results of operations
could be adversely affected. See "Business--Insurance."
WE ARE DEPENDENT ON THIRD PARTIES FOR MANUFACTURING OUR PRODUCTS.
We are dependent on various suppliers for manufacturing the components
for our Cerebral Oximeter and the related disposable SomaSensor. We believe that
each component is generally available from several potential suppliers. However,
engaging additional or replacing existing suppliers of custom-designed
components is costly and time consuming. We do not intend to maintain
significant inventories of components, Cerebral Oximeters or SomaSensors.
Therefore, we might incur delays in meeting delivery deadlines if a particular
supplier is unable or unwilling to meet our requirements. We estimate that it
would require approximately three to four months to change SomaSensor suppliers.
In addition, we do not have direct control over the activities of our suppliers
and are dependent on them for quality control, capacity, processing technologies
and, in required cases, compliance with FDA Quality System Regulation
requirements. If we cannot replace suppliers on a timely basis when necessary,
our business, financial condition and results of operations may be adversely
affected. In addition, because we do not have long-term agreements with our
suppliers, we might be subject to unexpected price increases which might
adversely affect our profit margins. See "Business--Manufacturing."
PURCHASERS OF COMMON SHARES WILL EXPERIENCE SUBSTANTIAL DILUTION.
At November 30, 1999, our net tangible shareholders' equity was $0.60
per share. While we will not receive any of the proceeds of sales of Common
Shares by the selling shareholder, purchasers of Common Shares in this offering
will likely pay more for their Common Shares than the net book value of our
Common Shares. Therefore, a purchaser of Common Shares in this offering will
likely experience immediate and substantial dilution of $4.57 per share in that
the price he or she pays exceeds our net tangible book value after giving effect
to our assumed sale of 1,000,000 Common Shares to the selling shareholder
pursuant to the Equity Line Agreement, all based on the market price of the
Common Shares as of March 21, 2000. In addition, the sale of Common Shares
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pursuant to the Equity Line Agreement might dilute our current shareholders
because the shares will be sold at a discount to the then-prevailing market
price of our Common Shares. These discounted sales could cause the market price
of our Common Shares to drop. To the extent outstanding options and warrants to
purchase Common Shares are exercised, there will be further dilution to new
investors. See "Dilution."
THE MARKET PRICE OF OUR COMMON SHARES WILL FLUCTUATE, AND COULD FLUCTUATE
SIGNIFICANTLY.
The market price of our Common Shares might be highly volatile. The
following could cause the market price of the Common Shares to fluctuate
substantially:
- changes in our quarterly operating results,
- changes in general conditions in the economy,
- changes in the financial markets,
- changes in the medical equipment industry,
- changes in financial estimates by securities analysts or differences
between those estimates and our actual results,
- the liquidity of the market for the Common Shares,
- developments with respect to patents and proprietary rights,
- publication of clinical research results regarding our products,
- changes in health care policies in the United States or foreign
countries,
- grants or exercises of stock options or warrants,
- news announcements,
- litigation involving us,
- actions by governmental agencies, including the FDA, or changes in
regulations, or
- other developments affecting us or our competitors.
In particular, the stock market might experience significant price and volume
fluctuations that might affect the market price of the Common Shares for reasons
that are unrelated to our operating performance and that are beyond our control.
THE MARKET PRICE OF THE COMMON SHARES MIGHT BE LOWER BECAUSE OF SHARES ELIGIBLE
FOR FUTURE SALE, SHARES RESERVED FOR FUTURE ISSUANCE UPON THE EXERCISE OF
OPTIONS AND WARRANTS AND REGISTRATION RIGHTS WE HAVE GRANTED.
Future sales of substantial amounts of Common Shares in the public
market or the perception that such sales could occur could adversely affect the
market price of the Common Shares. The number of outstanding Common Shares held
by non-affiliates is large relative to the trading volume of the Common Shares.
We are unable to predict the effect that sales of Common Shares may have on the
then prevailing market price of the Common Shares. Any substantial sale of
Common Shares or even the possibility of such sales occurring may have an
adverse effect on the market price of the Common Shares.
As of March 21, 2000, we had outstanding options and warrants to
purchase an aggregate of 1,834,981 Common Shares. We have also reserved up to an
additional 32,745 Common Shares for issuance upon exercise of options which have
not yet been granted under our stock option plans, 327,745 Common Shares if
shareholders approve an amendment to our 1997 Stock Option Plan at the April 18,
2000 Annual Meeting of Shareholders. Holders of these warrants and options are
likely to exercise them when, in all likelihood, we could obtain additional
capital on terms more favorable than those provided by the options and warrants.
In addition, we are permitted to issue up to an additional $15 million of our
Common Shares under the Equity Line Agreement during the remainder of its term.
The shares we sell under the Equity Line Agreement will be available for resale
in the public market pursuant to this Prospectus. The market price of the Common
Shares could fall as a result of the sale of any of these shares.
In addition, holders of warrants originally issued to the placement
agent in previous Regulation S offerings have piggy-back registration rights
with respect to the underlying securities, and the holder of warrants issued to
the underwriter in our 1997 public offering of Common Shares has demand and
piggy-back registration rights with respect to the underlying securities.
Exercise of these registration rights may adversely affect the terms on which we
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may obtain additional financing. Further, while our warrants and options are
outstanding, our ability to obtain additional financing on favorable terms might
be adversely affected. See "Description of Capital Stock" and "Underwriting."
PROVISIONS OF OUR ARTICLES OF INCORPORATION, BYLAWS AND CORPORATE LAW HAVE
POTENTIAL ANTI-TAKEOVER EFFECTS.
Our Board of Directors has the authority, without further approval of
our shareholders, to issue preferred shares having such rights, preferences and
privileges as the Board of Directors may determine. Any such issuance of
Preferred Shares could, under some circumstances, have the effect of delaying or
preventing a change in control of Somanetics and might adversely affect the
rights of holders of Common Shares. In addition, we are subject to Michigan
statutes regulating business combinations, takeovers and control share
acquisitions, which might also hinder or delay a change in control of
Somanetics. Anti-takeover provisions that could be included in the Preferred
Shares when issued and the Michigan statutes regulating business combinations,
takeovers and control share acquisitions can depress the market price of our
securities and can limit the shareholders' ability to receive a premium on their
shares by discouraging takeover and tender offer bids, even if such events could
be viewed as beneficial by our shareholders.
Our directors serve staggered three-year terms, and directors may be
removed only for cause. Our Restated Articles of Incorporation also set the
minimum number of directors constituting the entire Board at three and the
maximum at fifteen, and they require approval of holders of 90% of our voting
shares to amend these provisions. These provisions could have an anti-takeover
effect by making it more difficult to acquire Somanetics by means of a tender
offer, a proxy contest or otherwise or by removing incumbent officers and
directors. These provisions could delay, deter or prevent a tender offer or
takeover attempt that a shareholder might consider in his or her best interests,
including those attempts that might result in a premium over the market price
for the Common Shares held by our shareholders. See "Description of Capital
Stock."
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THE EQUITY LINE AGREEMENT
On March 6, 2000, we entered into the Private Equity Line Agreement
with Kingsbridge Capital Limited, a private institutional investor. Pursuant to
the Equity Line Agreement we may issue and sell, from time to time, Common
Shares for cash consideration up to an aggregate of $15 million. As required by
the Equity Line Agreement, we have filed a registration statement, which
includes this Prospectus, to permit Kingsbridge to resell to the public any
shares that we sell to it pursuant to the Equity Line Agreement. Until two years
after the date of this Prospectus, we may sell, or "put," Common Shares to
Kingsbridge from time to time in amounts and at times we select at our sole
discretion, subject to specific restrictions set forth in the Equity Line
Agreement. The price for these sales is between 86% and 90% of the then current
average market price of our Common Shares. The actual percentage will depend on
an average market price of our Common Shares. In addition, we must pay Brean
Murray & Co., Inc. a 3.5% commission in connection with these sales. We are not
permitted to sell more than 19.9% of our outstanding Common Shares pursuant to
this arrangement unless we first obtain shareholder approval under The Nasdaq
SmallCap Market rules.
Puts can be made every 15 trading days in amounts ranging from a
minimum of $10,000 to a maximum of $1,000,000. The amounts depend on the then
current trading volume and average market price of our Common Shares at the time
of each put. We are required to put at least $7,500,000 of our Common Shares to
Kingsbridge over the life of the Equity Line Agreement or pay Kingsbridge the
discount on the unsold shares. As of the date of this Prospectus, we have not
issued any Common Shares under the Equity Line Agreement. Under the Equity Line
Agreement, the average market price of our Common shares for purposes of
calculating the purchase price to be paid by Kingsbridge is the average of the
lowest trade prices of the Common Shares as reported by Bloomberg L.P. on each
of five days on which The Nasdaq SmallCap Market is open for trading. The five
days are the two trading days before the day on which we deliver notice to
Kingsbridge that we are exercising a put, the trading day on which we deliver
such notice, and the two trading days after the trading day on which we deliver
the put notice.
The Equity Line Agreement provides that we may not put our Common
Shares to Kingsbridge unless the following conditions are satisfied or waived
(none of which are within the control of Kingsbridge):
- the registration statement must have been declared effective by the
SEC and must remain effective;
- the representations and warranties made by us in the Equity Line
Agreement must be accurate in all material respects as of the date
of each put and as of the date of the closing of the sale. One of
our representations is that since November 30, 1999 there has been
no material adverse change in our business, operations,
properties, prospects or financial condition, except as disclosed
in the registration statement or specified periodic reports filed
with the SEC pursuant to the Securities Exchange Act of 1934;
- we must have performed and complied with in all material respects
all obligations under the Equity Line Agreement, the warrant and
the Registration Rights Agreement entered into between us and
Kingsbridge in connection with the Equity Line Agreement that are
required to be performed as of the date of each put and as of the
date of the closing of the sale;
- no statute, rule, regulation, executive order, decree, ruling or
injunction may be in effect that prohibits or directly and
adversely affects any of the transactions contemplated by the
Equity Line Agreement;
- our Common Shares must not have been delisted from The Nasdaq
SmallCap Market nor suspended from trading;
- the issuance of the Common Shares must not violate the shareholder
approval requirements of The Nasdaq SmallCap Market;
- the number of shares to be put to Kingsbridge, together with any
shares then held by Kingsbridge, must not exceed 9.9% of our Common
Shares that would be outstanding upon completion of the put; and
- the average trading volume of our Common Shares for 26 of the 30
consecutive trading days immediately preceding a put must be at
least 30,000 shares a day. The two highest and the two lowest
trading volume days are excluded.
In consideration for Kingsbridge entering into the Equity Line
Agreement, we issued a warrant to Kingsbridge on March 6, 2000. The warrant
entitles the holder to purchase 200,000 Common Shares at a purchase price of
$4.36 per share. The warrant is exercisable at any time until September 3, 2005.
The warrant contains
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standard provisions that protect the holder against dilution by adjustment of
the exercise price and the number of shares issuable pursuant to the warrant if
any of the following occurs:
- stock split
- reverse stock split,
- stock dividend,
- reclassification,
- merger,
- statutory share exchange,
- similar transactions affecting our Common Shares, or
- specified issuances of common shares, convertible or exchangeable
securities, options and warrants at less than the market price of
the Common Shares, as defined in the Equity Line Agreement.
The warrant also provides for adjustments if we pay liquidating dividends. No
adjustments are required for instruments or benefits issued under any of our
stock option plans or in consideration of our acquisition of all or any part of
the assets of another person. The exercise price of the warrant is payable
either in cash or by a cashless exercise in which that number of Common Shares
underlying the warrant having an aggregate fair market value at the time of
exercise equal to the aggregate exercise price are cancelled as payment of the
exercise price.
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USE OF PROCEEDS
The proceeds from the sale of shares by Kingsbridge pursuant to this
Prospectus will be received directly by Kingsbridge. We will not receive any of
the proceeds from the sale of the Common Shares offered by this Prospectus. We
will, however, receive the put price paid pursuant to the Equity Line Agreement
if and to the extent we sell Common Shares pursuant to the Equity Line
Agreement. The purchase price for those shares will be between 86% and 90% of
the then current average market price of our Common Shares, as defined in the
Equity Line Agreement, on the date of sale. We will also receive the proceeds
from the sale of shares to Kingsbridge if it exercises the warrant. The exercise
price of the warrant is $4.36 per share. See "The Equity Line Agreement." If we
sell 1,000,000 Common Shares to Kingsbridge pursuant to the Equity Line
Agreement, based on the market prices of the Common Shares as of March 21, 2000,
the net proceeds to us, after deducting the discount to Kingsbridge, the
insurance fee, the Brean Murray commission and the estimated offering expenses
payable by us, are estimated to be approximately $4,280,000.
We currently intend to use the net proceeds from these sales of Common
Shares to finance our operations, including the following:
<TABLE>
<S> <C>
Marketing and Sales Activities (1).................................... $1,500,000
Research and Development Programs (2)................................. 300,000
General Corporate Purposes (3)........................................ 2,480,000
----------
Total............................................................. $4,280,000
==========
- ------------------------------------
</TABLE>
(1) Includes the cost of our direct sales force, attendance at trade shows
and other promotional activities.
(2) Includes the development of product-line extensions of the Cerebral
Oximeter for use on newborns, other non-brain tissue applications, and
enhancements to the Cerebral Oximeter and SomaSensor.
(3) Includes working capital and other ongoing Selling, General and
Administrative expenses. See the Financial Statements as of, and for
the year ended, November 30, 1999 for information about our current
working capital needs and ongoing Selling, General and Administrative
expenses.
If we sell 1,000,000 Common Shares to the selling shareholders pursuant
to the Equity Line Agreement, based on the market prices existing as of March
21, 2000, we expect that the net proceeds of those sales will be adequate to
satisfy our operating and capital requirements through April 2001. By that time,
we will be required to raise additional cash either though additional sales of
our products, through sales of securities, by incurring indebtedness or by some
combination of these alternatives. We do not believe that our product sales will
be sufficient to sustain our operations at that time and we have no current
commitments for any debt financing. We also have no current commitments for any
additional sales of securities, other than pursuant to the Equity Line Agreement
if we obtain shareholder approval to issue additional shares. In the past, we
have raised required capital through sales of additional equity securities. If
we are unable to raise additional cash by that time, we will be required to
reduce or discontinue our operations.
Changes in the market price or trading volume of our Common Shares
could reduce the proceeds we receive for selling those Common Shares, decrease
the number of shares we can sell in a particular period or both. In addition,
changes in our business or business plans or unexpected expenses could shorten
the length of time the cash we receive from sales of our Common Shares under the
Equity Line Agreement will sustain our operations. See "Risk Factors -- We
expect to need substantial additional financing to fund our operations."
The description above is our estimated allocation of the estimated net
proceeds from the sale of Common Shares pursuant to the Equity Line Agreement.
We might change the allocation among the categories discussed above or to new
categories in response to, among other things, changes in our business plans,
future revenues and expenses and industry, regulatory or competitive conditions.
The amount of our expenses and their timing will vary depending on a number of
factors, including changes in our expected operations or business plan and
changes in economic and industry conditions. Any such shifts will be at the
discretion of our Board of Directors and officers.
Pending the application of such proceeds, we intend to invest the net
proceeds of sales of Common Shares under the Equity Line Agreement in
short-term, investment-grade, interest-bearing investments.
19
<PAGE> 21
PRICE RANGE OF COMMON SHARES AND DIVIDEND POLICY
The Common Shares trade on The Nasdaq SmallCap Market under the trading
symbol "SMTS." The following table sets forth, for the periods indicated, the
range of high and low closing sales prices as reported by Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
Fiscal Year Ended November 30, 1998
First Quarter.......................................... $6.50 $4.50
Second Quarter......................................... 6.50 4.13
Third Quarter.......................................... 5.00 2.13
Fourth Quarter......................................... 2.25 1.56
Fiscal Year Ended November 30, 1999
First Quarter.......................................... $3.50 $1.25
Second Quarter......................................... 4.69 1.63
Third Quarter.......................................... 4.69 2.00
Fourth Quarter......................................... 2.69 1.38
Fiscal Year Ending November 30, 2000
First Quarter.......................................... $4.56 $1.13
Second Quarter (through March 21, 2000)................ 7.38 3.69
</TABLE>
On March 21, 2000 the last reported sales price for the Common Shares
on The Nasdaq SmallCap Market was $5.6875 per share. As of February 15, 2000,
we had 619 shareholders of record.
We have never paid cash dividends on our Common Shares and do not
expect to pay such dividends in the foreseeable future. We currently intend to
retain any future earnings for use in our business. The payment of any future
dividends will be determined by the Board in light of the conditions then
existing, including our financial condition and requirements, future prospects,
restrictions in financing agreements, business conditions and other factors
deemed relevant by the Board.
20
<PAGE> 22
CAPITALIZATION
The following table sets forth our actual capitalization as of November
30, 1999 and as adjusted to give effect to an assumed sale of 1,000,000 Common
Shares to the selling shareholder pursuant to the Equity Line Agreement, based
on the market price of the Common Shares as of March 21, 2000, and the
application of the estimated net proceeds of $4,280,000 from such sales (after
deducting the discount to Kingsbridge, the Brean Murray commission and the
estimated offering expenses payable by us) as described in "Use of Proceeds."
You should read this table together with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Financial Statements
and Notes to Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT NOVEMBER 30, 1999
------------------------------------
ACTUAL AS ADJUSTED
------------- ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Shareholders' equity:
Preferred shares; authorized, 1,000,000 shares of $.01 par value;
no shares issued or outstanding............................... -- --
Common shares; authorized, 20,000,000 shares of $.01 par value;
issued and outstanding, 6,035,597 shares at November 30,
1999 (7,035,597 shares, as adjusted) (1)...................... $60 $70
Additional paid-in capital........................................ 50,290 54,560
Accumulated unrealized losses on investments...................... (166) (166)
Accumulated deficit (2)........................................... (46,502) (46,502)
------- -------
Total shareholders' equity and total capitalization........... $ 3,682 $ 7,962
======= =======
</TABLE>
- --------------------------------------------
(1) The number of shares outstanding as of November 30, 1999 does not
include:
- 1,325,782 Common Shares reserved for issuance under our 1983 Stock
Option Plan, 1991 Incentive Stock Option Plan, 1993 Director Stock
Option Plan, 1997 Stock Option Plan and non-plan options, of which
options to purchase an aggregate of 1,293,037 Common Shares were
outstanding as of March 21, 2000. The number of shares reserved
for issuance under our 1997 Stock Option Plan has been increased
by an additional 295,000 Common Shares, subject to shareholder
approval at our April 18, 2000 annual meeting of shareholders;
- 26,424 Common Shares issuable upon the exercise of warrants issued
to the placement agent in connection with Regulation S financings
completed in July 1995 and April 1996;
- 115,520 Common Shares issuable upon the exercise of warrants
issued in connection with the Regulation S Offerings completed in
July 1995 and April 1996;
- 200,000 Common Shares issuable upon exercise of the warrants
issued to the underwriter in connection with our public offering
of Common Shares which closed in June 1997;
- 200,000 Common Shares issuable upon exercise of the warrant issued
to the selling shareholder in connection with our Equity Line
Agreement on March 6, 2000; and
- Common Shares issuable to the selling shareholder pursuant to the
Equity Line Agreement.
See Notes 3 and 8 of Notes to Financial Statements.
(2) Management believes the accumulated deficit increased during the first
quarter ended February 29, 2000 and will continue to increase in the
second quarter ending May 31, 2000, and there has been and will
continue to be a corresponding decrease in total capitalization.
21
<PAGE> 23
DILUTION
Our net tangible book value as of November 30, 1999 was $3,624,101, or
$0.60 per Common Share. Net tangible book value per share represents the amount
of net tangible assets, less total liabilities, divided by the number of Common
Shares outstanding. After giving effect to the assumed sale of 1,000,000 Common
Shares to the selling shareholder pursuant to the Equity Line Agreement, based
on the market price of the Common Shares as of March 21, 2000, our net tangible
book value as of November 30, 1999 would have been $7,904,084, or $1.12 per
share. This represents an immediate increase in such net tangible book value of
$0.52 per share to existing shareholders and an immediate dilution of $4.57 per
share to purchasers in this offering, assuming a purchase price of $5.69 per
share, the closing sale price of the Common Shares on March 21, 2000. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed purchase price per share (March 21, 2000 closing sale price)........... $5.69
Net tangible book value per share at November 30, 1999................ $0.60
Increase in net tangible book value per share attributable to
assumed Equity Line Agreement sales................................. 0.52
-----
Net tangible book value per share after giving effect to the sales............. 1.12
-----
Dilution per share to purchasers in this offering.............................. $4.57
=====
</TABLE>
This table assumes no exercise of options and warrants after November
30, 1999. As of March 21, 2000, we had outstanding options and warrants to
purchase an aggregate of 1,834,981 Common Shares, and we had also reserved up to
an additional 32,745 Common Shares for issuance upon the exercise of options
which had not yet been granted under our stock option plans, 327,745 Common
Shares if shareholders approve an amendment to our 1997 Stock Option Plan at the
April 18, 2000 Annual Meeting of Shareholders. To the extent outstanding options
or warrants are exercised, there will be further dilution to purchasers in this
offering. See "Capitalization."
22
<PAGE> 24
SELECTED FINANCIAL DATA
The following selected financial data as of November 30, 1999, 1998,
1997, 1996 and 1995, and for each of the years in the five-year period ended
November 30, 1999 have been derived from our audited financial statements, some
of which appear elsewhere in this Prospectus together with the report of
Deloitte & Touche LLP, independent auditors, whose report includes an
explanatory paragraph relating to an uncertainty concerning our ability to
continue as a going concern. You should read the selected financial data
together with the financial statements and notes to financial statements and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. This selected financial data
might not be a good indicator of our expected results for fiscal 2000.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues (1).................................. $4,001 $2,491 $1,212 $778 $1,336
Cost of sales..................................... 1,906 1,326 631 385 658
Gross margin...................................... 2,095 1,165 580 393 678
Research, development and engineering expenses.... 598 665 736 235 286
Selling, general and administrative expenses...... 6,436 6,347 6,238 3,550 3,303
Net loss.......................................... (4,665) (5,470) (6,155) (3,304) (2,818)
Net loss per Common Share - basic and diluted (2). (0.77) (1.01) (1.88) (1.77) (1.67)
Weighted average number of Common Shares
outstanding (2)................................... 6,036 5,422 3,272 1,867 1,684
</TABLE>
<TABLE>
<CAPTION>
AT NOVEMBER 30,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities.................... $2,257 $6,894 $4,603 $3,292 $941
Working capital................................... 2,960 7,633 4,511 3,862 1,846
Total assets...................................... 4,444 9,047 5,677 4,672 2,861
Total liabilities................................. 762 629 788 618 568
Long-term debt and redeemable Convertible
Preferred Shares.................................. -- -- -- -- 20
Accumulated deficit (4)........................... (46,502) (41,836) (36,367) (30,211) (26,907)
Shareholders' equity (3)(4)....................... 3,682 8,418 4,889 4,054 2,294
</TABLE>
(1) Net revenues recorded in fiscal years 1999, 1998, 1997, 1996 and
1995 relate primarily to the sale of Cerebral Oximeters and
SomaSensors for commercial use. For a description of our loss of,
and regaining, FDA clearance to market the Cerebral Oximeter in
the United States, see "Business--Government Regulation."
(2) See Note 4 of Notes to Financial Statements included in this
Prospectus for information with respect to the calculation of per
share data. During the first quarter of fiscal 1998, we adopted
SFAS No. 128, "Earnings Per Share." Our adoption of SFAS No. 128
had no impact on the reported loss per share for all periods
presented.
(3) See Statements of Shareholders' Equity of the Financial Statements
included in this Prospectus for an analysis of Common Share
transactions for the period from December 1, 1996 through November
30, 1999.
(4) We believe the accumulated deficit increased during the first
quarter ended February 29, 2000 and will continue to increase in
the second quarter ending May 31, 2000, and there has been and
will continue to be a corresponding decrease in shareholders'
equity.
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of our financial condition and results of
operations should be read together with the preceding Selected Financial Data.
Additionally, you should read and analyze our financial statements and notes to
our financial statements, as well as other data included in this Prospectus, in
combination with the analysis below. See also the "Cautionary Statement
Regarding Forward-Looking Statements."
RESULTS OF OPERATIONS
OVERVIEW
We develop, manufacture and market the INVOS Cerebral Oximeter, the
only non-invasive patient monitoring system commercially available in the United
States that continuously measures changes in the blood oxygen level in the adult
brain. In June 1996, we received clearance from the FDA to market the Cerebral
Oximeter and the related disposable SomaSensor in the United States. In October
1997, we obtained FDA clearance for new advances in our INVOS technology that
are incorporated in our model 4100 Cerebral Oximeter. The model 4100 Cerebral
Oximeter was introduced in October 1997 and we began shipping the model 4100 in
the first quarter of fiscal 1998. During the third quarter of fiscal 1999, we
introduced our new model 5100 pediatric Cerebral Oximeter at an international
trade show, and began international shipments of the model 5100 in August 1999.
During the third quarter of fiscal 1999, we also submitted our 510(k)
application to the FDA for the model 5100 Cerebral Oximeter, and we are awaiting
FDA clearance to market the model 5100 in the United States.
During fiscal 1997, our primary activities consisted of research and
development of the INVOS technology, the Cerebral Oximeter and the related
disposable SomaSensor. During fiscal 1998 and 1999, our primary activities
consisted of sales and marketing of the model 4100 Cerebral Oximeter and related
disposable SomaSensor. We emerged from the development stage in 1997 and had an
accumulated deficit of $46,501,659 through November 30, 1999. We believe that
our accumulated deficit will continue to increase for the foreseeable future.
We derive our revenues from sales of Cerebral Oximeters and SomaSensors
to our distributors and to hospitals in the United States through our direct
sales employees. We recognize revenues when we ship our products to distributors
or to hospitals. Payment terms are generally net 30 days for United States sales
and net 60 days or longer for international sales. Our primary expenses,
excluding the cost of our products, are selling, general and administrative and
research, development and engineering, which we generally expensed as incurred.
Since May 1994, we have exchanged model 3100A Cerebral Oximeters for our model
3100 Cerebral Oximeters. Until shipments of the model 4100 Cerebral Oximeter
began in the first quarter of fiscal 1998, we refurbished the model 3100
Cerebral Oximeters we received and sold them approximately at cost in countries
that do not require compliance with the standards met by the model 3100A. During
fiscal 1998, we offered to exchange model 4100 Cerebral Oximeters for model
3100A Cerebral Oximeters (which we then scrap) and cash equal to the difference
in sales prices of the two models. During the third quarter of fiscal 1999, we
agreed to a similar exchange program with Baxter Limited in Japan, as a result
of the Japanese Ministry of Health and Welfare approval in the first quarter of
fiscal 1999 to market the model 4100 in Japan. Such sales reduce our average
unit sales price and overall gross margin. Also, during fiscal 1998, we began a
no-cap sales program whereby we ship 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.
FISCAL YEAR ENDED NOVEMBER 30, 1999 COMPARED TO FISCAL YEAR ENDED NOVEMBER 30,
1998
Our net revenues increased approximately $1,510,000, or 61%, from
$2,490,851 in the fiscal year ended November 30, 1998 to $4,000,972 in the
fiscal year ended November 30, 1999. The increase in net revenues is primarily
due to
- an approximately $837,000 (55%) increase in United States sales,
from approximately $1,532,000 in fiscal 1998 to approximately
$2,369,000 in fiscal 1999, and
- an approximately $673,000 (70%) increase in international sales,
from approximately $959,000 in fiscal 1998 to approximately
$1,632,000 in fiscal 1999.
24
<PAGE> 26
These increases are primarily due to
- increased purchases of the disposable SomaSensor,
- purchases of the model 4100 Cerebral Oximeter by Baxter Limited as
a result of Japanese Ministry of Health and Welfare approval in
the first quarter of fiscal 1999 to market the model 4100 in
Japan,
- a 17% increase in the average selling price of Cerebral Oximeters,
primarily due to the March 1, 1999 increase in the price of the
Cerebral Oximeter and fewer no-cap and exchange unit sales in
fiscal 1999, and
- an 8% increase in the average selling price of the disposable
SomaSensor, due to the effects of no-cap sales and the March 1,
1999 increase in SomaSensor prices.
Approximately 41% of our net revenues in fiscal 1999 were export sales,
compared to approximately 39% in fiscal 1998. Sales of model 4100 Cerebral
Oximeters, SomaSensors, model 4100 exchanges, model 5100 Cerebral Oximeters, and
model 3100A Cerebral Oximeters as a percent of net revenues were as follows:
<TABLE>
<CAPTION>
PERCENT OF NET REVENUES
PRODUCT 1999 1998
------- ----------------- -----------------
<S> <C> <C>
Model 4100 Cerebral Oximeters...... 52% 61%
SomaSensors........................ 42% 28%
Model 4100 Exchanges............... 3% 8%
Model 5100 Cerebral Oximeters...... 3% 0%
Model 3100A Cerebral Oximeters..... 0% 3%
----------------- -----------------
Total.......................... 100% 100%
================= =================
</TABLE>
One international distributor accounted for approximately 23% of net revenues in
fiscal 1999, and one United States distributor accounted for approximately 10%
of net revenues for fiscal year 1998. Effective January 1, 2000, we increased
the price of both the Cerebral Oximeter and SomaSensor by 7%. This price
increase does not apply to any existing sales quotations issued before January
1, 2000.
Gross margin as a percentage of net revenues was approximately 52% for
the fiscal year ended November 30, 1999 and approximately 47% for the fiscal
year ended November 30, 1998. Gross margin as a percentage of net revenues
increased in fiscal 1999 from fiscal 1998 primarily due to
- the higher average selling prices we realized for the model 4100
Cerebral Oximeter and the SomaSensor,
- increased shipments of our new model SomaSensor, which is less
costly to manufacture than old model SomaSensors, and
- a smaller percentage of model 4100 exchanges in fiscal 1999.
These increases were partially offset by a higher percentage of our net revenues
derived from the sale of SomaSensors in fiscal 1999, which still have lower
margins than Cerebral Oximeters.
Our research, development and engineering expenses decreased
approximately $67,000, or 10%, from $664,874 for the fiscal year ended November
30, 1998 to $598,348 for the fiscal year ended November 30, 1999. The decrease
is primarily due to
- approximately $84,000 in decreased costs associated with
enhancements to the model 4100, and
- $35,000 in decreased consulting fees.
These decreases were partially offset by a $45,000 increase in costs associated
with enhancements to the design of the disposable SomaSensor.
Selling, general and administrative expenses increased approximately
$89,000, or 1%, from $6,346,595 for the fiscal year ended November 30, 1998 to
$6,435,628 for the fiscal year ended November 30, 1999. The increase in selling,
general and administrative expenses for fiscal 1999 is primarily due to
25
<PAGE> 27
- a $144,000 increase in salaries, wages, commissions and related
expenses, primarily as a result of increased sales commissions we
paid to our sales force during fiscal 1999, and
- a $69,000 increase in professional service and investor relations
fees.
These increases were partially offset by
- a $73,000 decrease in selling-related expenses, primarily
attributable to employee travel, industry trade shows, marketing
and advertising, and
- a $49,000 decrease in bad debts expense for fiscal 1999.
FISCAL YEAR ENDED NOVEMBER 30, 1998 COMPARED TO FISCAL YEAR ENDED NOVEMBER 30,
1997
Our net revenues increased approximately $1,279,000, or 106%, from
$1,211,784 in the fiscal year ended November 30, 1997 to $2,490,851 in the
fiscal year ended November 30, 1998. The increase in net revenues is primarily
due to
- an approximately $1,009,000 (193%) increase in United States
sales, from approximately $523,000 in fiscal 1997 to approximately
$1,532,000 in fiscal 1998, and
- an approximately $270,000 (39%) increase in international sales,
from approximately $689,000 in fiscal 1997 to approximately
$959,000 in fiscal 1998.
These increase are primarily due to
- stocking orders for the model 4100 Cerebral Oximeter from both
existing distributors and new international distributors,
- purchases of the model 4100 by customers in the United States, and
- an 8% increase in the average selling price of Cerebral Oximeters
due to
- a change in the mix between sales directly to hospitals and
sales through distributors, and
- the higher price of the new model 4100 Cerebral Oximeter
These average price increases were partially offset by no-cap
sales shipments and exchanges of model 4100 Cerebral Oximeters for
model 3100A Cerebral Oximeters with existing customers.
The sales increase was also partially offset by approximately $233,000 of
reduced shipments to Baxter Limited in Japan, which was delaying purchases until
shipment of the model 4100 Cerebral Oximeter was permitted in Japan pursuant to
Japanese Ministry of Health and Welfare approval.
Approximately 39% of our net revenues in fiscal 1998 were export sales,
compared to approximately 57% in fiscal 1997. Sales of model 4100 Cerebral
Oximeters, model 4100 exchanges and refurbished model 3100 Cerebral Oximeters,
model 3100A Cerebral Oximeters, and SomaSensors as a percentage of net sales
were as follows:
<TABLE>
<CAPTION>
PERCENT OF NET REVENUES
PRODUCT 1998 1997
------- ----------------- -----------------
<S> <C> <C>
Model 4100 Cerebral Oximeters...... 61% 0%
Model 4100 Exchanges and
Refurbished Model 3100......... 8% 10%
Model 3100A Cerebral Oximeters..... 3% 60%
SomaSensors........................ 28% 30%
----------------- -----------------
Total.......................... 100% 100%
================= =================
</TABLE>
One United States distributor accounted for approximately 10% of net revenues
for fiscal year 1998; however, we terminated this distributor relationship
during the third quarter of fiscal 1998 as part of our planned expansion of the
direct sales force within several domestic territories. Two international
distributors accounted for approximately 28% and 11% of net revenues for fiscal
1997, and one domestic distributor accounted for approximately
26
<PAGE> 28
28% and 11% of net revenues for fiscal 1997, and one domestic distributor
accounted for approximately 12% of net revenues for fiscal 1997.
Gross margin as a percentage of net revenues was approximately 47% for
the fiscal year ended November 30, 1998 and approximately 48% for the fiscal
year ended November 30, 1997. Gross margin as a percentage of net revenues
decreased in fiscal 1998 from fiscal 1997 primarily due to
- the higher cost of the model 4100 Cerebral Oximeter to us as
compared to the cost of the model 3100A and refurbished model
3100,
- no-cap sales shipments for fiscal 1998, and
- the higher cost of the SomaSensor to us in fiscal 1998.
This decrease was partially offset by the higher average selling price we
realized in fiscal 1998 for the new model 4100 Cerebral Oximeter and SomaSensor.
Our research, development and engineering expenses decreased
approximately $72,000, or 10%, from $736,427 for the fiscal year ended November
30, 1997 to $664,874 for the fiscal year ended November 30, 1998. The decrease
is primarily due to approximately $118,000 in consulting fees and costs of
development materials in fiscal 1997 in connection with the model 4100 Cerebral
Oximeter. This decrease was partially offset by an increase of approximately
$38,000 related to development materials and costs associated with our new
sensor development projects in fiscal 1998.
Selling, general and administrative expenses increased approximately
$108,000, or 2%, from $6,238,330 for the fiscal year ended November 30, 1997 to
$6,346,595 for the fiscal year ended November 30, 1998. The increase in selling,
general and administrative expenses for fiscal 1998 is primarily due to
- a $657,000 increase in salaries, wages, commissions and related
expenses as a result of the additional employees, principally
sales and marketing, hired during fiscal 1998. Our employees
increased from 40 employees as of November 30, 1997, to 50
employees as of November 30, 1998, most of whom were on the
payroll for the majority of fiscal 1998, and
- a $311,000 increase in selling-related expenses, primarily
attributable to employee travel, industry trade shows, marketing
and advertising.
These increases were partially offset by
- a $432,000 decrease in miscellaneous expense primarily related to
inventory obsolescence reserves recorded during the third and
fourth quarters of fiscal 1997,
- a $188,000 decrease in professional service fees and regulatory
certification fees,
- a $176,000 decrease in bad debts expense primarily related to
reserves recorded during the fourth quarter of fiscal 1997, and
- a $68,000 decrease in clinical research expenses for fiscal 1998.
EFFECTS OF INFLATION
We do not believe that inflation has had a significant impact on our
financial position or results of operations in the past three years.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during fiscal 1999 was approximately
$4,500,000. Cash was used primarily to
- fund our net loss, including selling, general and administrative
expenses and research, development and engineering expenses,
totaling approximately $4,531,000, net of depreciation and
amortization expense,
- increase accounts receivable by approximately $148,000, primarily
due to higher sales in the fourth quarter of fiscal 1999 than in
the fourth quarter of fiscal 1998, and
27
<PAGE> 29
- decrease accrued liabilities by approximately $102,000 as a result
of payments made in fiscal 1999, accruals that were reversed in
fiscal 1999, and timing.
These uses of cash were partially offset by
- an approximately $235,000 increase in accounts payable, primarily
because we delayed payment to vendors for cash management, and
- an approximately $50,000 decrease in inventories, primarily as a
result of increased sales of the model 4100 Cerebral Oximeter.
We expect our working capital requirements to increase if sales increase. We
capitalized approximately $179,000 of costs for model 4100 Cerebral Oximeters
being used as demonstration units and no-cap units during fiscal 1999, compared
to approximately $374,000 in fiscal 1998. We expect to depreciate these costs as
a marketing expense over three years.
Capital expenditures in fiscal 1999 were approximately $72,000, net of
depreciation for demonstration units as a marketing expense of approximately
$161,000. These expenditures before depreciation were primarily
- approximately $179,000 for model 4100 demonstration units and
no-cap units, and
- approximately $44,000 for tooling to manufacture the model 4100
and 5100 Cerebral Oximeter and for our new sensor.
We disposed of approximately $148,000 in obsolete assets during fiscal 1999;
these assets were fully depreciated and had no book value.
Our principal sources of operating funds have been the proceeds of
equity investments from sales of our Common Shares. See Statements of
Shareholders' Equity of our Financial Statements included elsewhere in this
Prospectus. On April 8, 1998, we completed the public offering of 1,750,000
newly-issued Common Shares, at a price of $5.75 per share, for gross proceeds of
$10,062,500, through an offering underwritten by Brean Murray & Co., Inc. Our
net proceeds, after deducting the underwriting discount and the expenses of the
offering, were approximately $9,100,000.
On April 1, 1999, we renewed our $2,000,000 Revolving Note and a Pledge
Agreement with Fifth Third Bank of Northwestern Ohio, N.A. The principal amount
outstanding under the note bears interest, payable monthly, at the bank's prime
rate (8.75% as of February 15, 2000), is collateralized by all of our property
held at the bank and, upon drawing against the line of credit, by any of our
securities accounts up to the value of the loan, and is intended to be used for
general corporate purposes, if necessary. We have not borrowed any money under
the line of credit. The line of credit expires March 31, 2000. Before that date,
the bank may, but is not obligated to, lend us such amounts as we request from
time to time, up to $2,000,000 if no Event of Default exists. Events of default
include failure to furnish satisfactory additional security on demand or the
bank deeming itself insecure. We have no other loan commitments.
As of November 30, 1999, we had working capital of $2,960,443, cash,
cash equivalents and marketable securities of $2,257,159, total current
liabilities of $761,903 and shareholders' equity of $3,682,494.
We expect that our primary needs for liquidity in fiscal 2000 will be
- to fund our losses and sustain our operations, including funding
- marketing costs for the Cerebral Oximeter; and
- research and development efforts related to development and
testing of product-line extensions of the Cerebral Oximeter
for use on newborns, other non-brain tissue applications, and
enhancements to the Cerebral Oximeter and SomaSensor; and
- for working capital, including increased accounts receivable and
inventories of components and sales units to satisfy expected
sales orders.
In addition, we have budgeted approximately $158,000 for capital expenditures
during fiscal 2000, primarily for new demonstration equipment and manufacturing
tooling for the Cerebral Oximeter and SomaSensor.
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<PAGE> 30
We believe that cash, cash equivalents and marketable securities on
hand at November 30, 1999 will be sufficient to sustain our operations at
budgeted levels and our need for liquidity into the second quarter of fiscal
2000. If we sell 1,000,000 Common Shares to the selling shareholders pursuant to
the Equity Line Agreement, based on the market prices existing as of March 21,
2000, we expect that the net proceeds of those sales will be adequate to satisfy
our operating and capital requirements through April 2001. By that time we will
be required to raise additional cash either through additional sales of our
products, through sales of securities, by incurring indebtedness or by some
combination of these alternatives. If we are unable to raise additional cash by
that time, we will be required to reduce or discontinue our operations. See
"Risk Factors -- We expect to need substantial additional financing to fund our
operations."
The estimated length of time current cash, cash equivalents and
marketable securities will sustain our operations is based on estimates and
assumptions we have made. These estimates and assumptions are subject to change
as a result of actual experience. Changes in the market price or trading volume
of our Common Shares could reduce the proceeds we receive for selling those
Common Shares under the Equity Line Agreement, decrease the number of shares we
can sell in a particular period or both. Actual capital requirements necessary
to market the Cerebral Oximeter and SomaSensor, to develop product-line
extensions of the Cerebral Oximeter for use on newborns, other non-brain tissue
applications, and enhancements to the Cerebral Oximeter and SomaSensor, and for
working capital might be substantially greater than current estimates.
We do not believe that product sales will be sufficient to fund our
operations in fiscal 2000.
As of November 30, 1999, we had 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 our 1995 and 1996 Regulation S securities offerings. The
conditions permitting us to redeem these warrants have not been met as of March
21, 2000. In addition, the placement agents and their transferees hold warrants
to purchase 11,424 Common Shares exercisable at $12.50 per share until April 1,
2001, and 15,000 warrants exercisable at $14.40 per share until July 13, 2000.
Also, the underwriter of the June 1997 public offering received warrants to
purchase 200,000 Common Shares exercisable at $4.80 per share until May 29,
2002. In addition, the selling shareholder received warrants to purchase 200,000
Common Shares exercisable at $4.36 per share until September 3, 2005 pursuant to
the Equity Line Agreement. It is unlikely that these warrants will be exercised
if the exercise price exceeds the market price of the Common Shares.
For a description of our Equity Line Agreement, see "The Equity Line
Agreement."
Our only current loan commitment is described above.
Even if we receive additional capital, we might not be able to achieve
the level of sales necessary to sustain our operations. We might not be able to
obtain any funds on terms acceptable to us and at times required by us through
sales of our products, sales of securities or loans in sufficient quantities.
Our Independent Auditors' report contains an explanatory paragraph relating to
the uncertainty concerning our ability to continue as a going concern. See
"Independent Auditors Report" accompanying the Financial Statements included
elsewhere in this Prospectus.
Our ability to use our accumulated net operating loss carryforwards to
offset future income, if any, for income tax purposes, is limited due to the
initial public offering of our securities in March 1991. See Note 6 of Notes to
Financial Statements included elsewhere in this Prospectus.
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<PAGE> 31
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about our 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. We invest our cash on hand not needed in current operations in fixed
income securities generally maturing within one year from the date of
acquisition.
<TABLE>
<CAPTION>
NOVEMBER 30, 1999
EXPECTED MATURITY DATES
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MARKETABLE SECURITIES:
- ---------------------
Short-term Debt:
Variable Rate ($)........ $1,000,006 -- -- -- -- -- $1,000,006 $833,736
Average interest rate.... 9.09% N/A N/A N/A N/A N/A 9.09%
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, 1999
EXPECTED MATURITY DATES
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MARKETABLE SECURITIES:
- ---------------------
Short-term Debt:
Fixed Rate ($).......... $4,013,198 -- -- -- -- -- $4,013,198 $4,013,718
Average interest rate... 7.10% N/A N/A N/A N/A N/A 7.10%
Variable Rate ($)....... $1,000,006 -- -- -- -- -- $1,000,006 $903,744
Average interest rate... 9.71% N/A N/A N/A N/A N/A 9.71%
</TABLE>
During fiscal 1999, we liquidated some of our investments in corporate
bonds and other fixed income securities to provide cash to finance our
operations. We liquidated fixed rate securities first because their market value
approximated their cost.
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<PAGE> 32
BUSINESS
THE COMPANY
We develop, manufacture and market the INVOS(R) Cerebral Oximeter, the
only non-invasive patient monitoring system commercially available in the United
States that continuously measures changes in the blood oxygen level in the adult
brain. We developed the Cerebral Oximeter to meet the need for information about
oxygen in the brain, the organ least tolerant of oxygen deprivation. Without
sufficient oxygen, brain damage may occur within a few minutes, which can result
in paralysis, severe and complex disabilities or death. Brain oxygen
information, therefore, is important, especially in surgical procedures
requiring general anesthesia and in other critical care situations with a high
risk of the brain getting less oxygen than it needs. We target surgical
procedures with a high risk of brain oxygen imbalances, such as heart surgeries,
heart blood vessel surgeries, other blood vessel surgeries and surgeries
involving elderly patients. Surgeons, anesthesiologists and other medical
professionals use the Cerebral Oximeter to identify brain oxygen imbalances and
take corrective action, potentially improving patient outcome and reducing the
cost of care.
The Cerebral Oximeter is a relatively inexpensive, portable and
easy-to-use monitoring system placed at a patient's bedside in hospital critical
care areas, especially operating rooms, recovery rooms, intensive care units and
emergency rooms. It is comprised of
- a portable unit including a computer and a display monitor,
- dual single-use, disposable sensors, called SomaSensors,
- proprietary software and
- a preamplifier cable.
SomaSensors can be placed on both sides of a patient's forehead to offer
bi-lateral monitoring and are connected to the computer through the preamplifier
cable. The computer uses our proprietary software to analyze information
received from the SomaSensors and provides a continuous digital and trend
display on the monitor of an index of the oxygen saturation in the area of the
brain under the SomaSensors. Users of the Cerebral Oximeter will be required to
purchase disposable SomaSensors on a regular basis because of their single-use
nature. We began shipping the model 4100 Cerebral Oximeter in the first quarter
of fiscal 1998. During the third quarter of fiscal 1999, we introduced our new
model 5100 pediatric Cerebral Oximeter at an international trade show, and began
international shipments of the model 5100 in August 1999. During the third
quarter of fiscal 1999, we also submitted our 510(k) application to the FDA for
the model 5100 Cerebral Oximeter, and we are awaiting FDA clearance to market
the model 5100 in the United States.
Our objective is to establish the Cerebral Oximeter as a standard of
care in surgical procedures requiring general anesthesia and in other critical
care situations.
MARKET OVERVIEW
INDUSTRY BACKGROUND
The brain is the human organ least tolerant of oxygen deprivation.
Without sufficient oxygen, brain damage may occur within a few minutes, which
can result in paralysis, severe and complex disabilities, or death. Undetected
brain hypoxia, which is the insufficiency of oxygen delivery, and ischemia,
which is tissue oxygen starvation due to the obstruction of the inflow of
arterial blood, are common causes of brain damage and death during and after
many surgical procedures and in other critical care situations. A December 1996
article in The New England Journal of Medicine and a March 1998 article in The
Lancet reported separately on the results of multi-center studies involving
surgeries. The New England Journal of Medicine article concluded that adverse
cerebral outcomes after coronary artery bypass graft surgery are relatively
common and serious and are associated with substantial increases in death,
length of hospitalization and use of intermediate- or long-term care facilities.
Adverse cerebral outcomes occurred in 6.1% of the patients included in the
study. The Lancet article reported that approximately 26% of patients over age
60 who had major abdominal or orthopedic surgery under general anesthesia
experienced a neurological injury. Additional studies have estimated that a
higher percentage of patients experience some neurological decline after heart
surgery and that insufficient oxygen delivery to the brain is a
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<PAGE> 33
frequent cause of this problem. The Lancet article reported that injured
patients require more assistance with everyday actions, and The New England
Journal of Medicine article further concluded that new diagnostic and
therapeutic strategies must be developed to lessen these injuries.
Oxygen is carried to the brain by hemoglobin in the blood. Hemoglobin
passes through the lungs, bonds with oxygen and is pumped by the heart through
arteries and capillaries to the brain. Brain cells extract the oxygen and the
blood carries away carbon dioxide through the capillaries and veins back to the
lungs. Brain oxygen imbalances can be caused by several factors, including
changes in oxygen saturation, which is the percentage of hemoglobin contained in
a given amount of blood which carries oxygen, in the arteries, blood flow to the
brain, hemoglobin concentration and oxygen consumption by the brain.
Brain oxygen information is important in surgical procedures requiring
general anesthesia, in other critical care situations with a high risk of brain
oxygen imbalances, as well as in the treatment of patients with head injuries or
strokes. These procedures include
- heart surgeries,
- heart blood vessel surgeries,
- other blood vessel surgeries,
- surgeries involving elderly patients,
- any neurosurgery,
- major surgeries involving the neck,
- transplant surgeries,
- treatment of patients with diseases resulting from high blood
pressure,
- lung problems,
- head, organ or heart injuries, and - treatment of patients
suffering from strokes.
These patients are most commonly found in operating rooms as well as in the
other critical care areas of hospitals, especially recovery rooms, intensive
care units and emergency rooms. We believe that medical professionals need
immediate and continuous information about changes in the oxygen levels in the
blood in the brain to identify brain oxygen imbalances. After they are alerted
to these imbalances, medical professionals have the information to take
corrective action through the introduction of medications, anesthetic agents or
mechanical intervention, potentially improving patient outcome and reducing the
costs of care. Immediate and continuous information about changes in brain
oxygen levels also provides immediate feedback regarding the adequacy of the
selected therapy. Equally important, without information about brain oxygen
levels, therapy that may not be necessary might be initiated to assure adequate
brain oxygen levels. Unnecessary therapy can have an adverse impact on patient
safety and increase hospital costs.
A 1999 independent industry report estimates that there are
approximately 60,000 operating rooms worldwide performing approximately 50
million surgeries involving general anesthesia every year. Industry sources
estimate that, in 1993, there were more than 4.4 million surgeries involving the
heart or the blood vessels around the heart in the United States. Such surgeries
include more than 600,000 open heart surgeries and 89,000 carotid
endarterectomies, which is the removal of blockage in the artery.
Currently, several different methods are used to detect one or more of
the factors affecting brain oxygen levels or the effects of brain oxygen
imbalances. These methods include
- invasive jugular bulb catheter monitoring,
- transcranial Doppler,
- electroencephalograms, or EEGs,
- intracranial pressure monitoring, and
- neurological examination.
These methods have not been widely adopted to monitor brain oxygen levels in
critical care situations for a variety of reasons. The use of any of these
methods is limited because it is either
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- expensive,
- difficult or impractical to use as a brain monitor,
- invasive,
- not available under some circumstances, such as when the patient
is unconscious or has suppressed neural activity,
- not able to measure all of the factors that may affect brain
oxygen imbalances,
- not organ specific,
- not able to provide continuous information, or
- able to measure only the effects of brain oxygen imbalances.
Arterial oxygen saturation is only one of the factors that can affect
oxygen imbalances in the brain. Pulse oximetry measures oxygen saturation in the
arteries. It is non-invasive, uses optical spectroscopy and has become a
standard of care for measuring arterial oxygen saturation in critical care
situations. However, pulse oximeters require a strong pulse, making them
unavailable during bypass surgeries, surgeries involving induced hypothermia or
any other time the patient does not have a strong peripheral pulse. Pulse
oximeters provide information about the oxygen saturation of the arteries in a
finger or earlobe, not oxygen imbalances in the brain. Changes in the oxygen
balance in the brain may not have any affect on the oxygen levels in a finger or
earlobe. For example, a blocked artery to the brain would affect oxygen in the
brain, but would not affect the amount of oxygen in the arteries in the finger.
The Cerebral Oximeter is the only non-invasive monitoring system
commercially available in the United States that provides continuous information
about changes in the blood oxygen level in the adult brain. It is easy to use
and relatively inexpensive and provides medical professionals with new
information to help them identify brain oxygen imbalances. This information may
help medical professionals intervene in a timely manner to correct brain oxygen
imbalances, provide feedback regarding the adequacy of the selected therapy and
provide medical professionals with additional assurance when they make decisions
regarding the need for therapy, thereby potentially improving patient outcome
and reducing the cost of care.
MARKET TRENDS
We believe the market for our products is driven by the following
market trends:
Less Invasive Medical Procedures. We believe there is a trend toward
less invasive medical procedures. Notable examples include laparoscopic
procedures in general surgery and arthroscopic procedures in orthopedic surgery.
Such procedures are designed to reduce trauma, thereby decreasing complications,
reducing pain and suffering, speeding recovery and decreasing costs associated
with patient care. We also believe that there is a trend to minimize invasive
procedures relating to the brain to increase the safety of patients and medical
professionals, reduce recovery time and minimize costs.
Demand to Reduce Health Care Costs. Hospitals in the United States are
increasingly faced with direct economic incentives to control health care costs
through improved labor productivity, shortened hospital stays and more selective
performance of medical procedures and use of facilities and equipment. Hospitals
often receive a fixed fee from Medicare, managed care organizations and private
insurers based on the disease diagnosed, rather than based on the services
actually performed. Therefore, hospitals are increasingly focused on avoiding
unexpected costs, such as those associated with increased hospital stays
resulting from patients with brain damage or other adverse outcomes following
surgery. This focus on avoiding unexpected costs is especially pronounced in the
operating room and other hospital critical care areas due to their high
operating costs. The economic and human costs of brain damage can be tremendous.
Even short extensions of hospital stays resulting from brain damage can be
expensive. In addition, over-treating a patient as a result of lack of knowledge
about brain oxygen levels can result in unnecessary costs.
Organ-Specific Monitoring; Current Emphasis on the Brain. We believe
that physicians and hospitals are increasingly interested in monitoring the
status of specific organs in the body, especially the brain. We also believe
there is an increased interest in understanding how the brain functions and in
finding ways to prevent injury to the
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brain and finding cures to diseases affecting the brain. We believe that this
interest has led to a greater focus on monitoring the brain, both to determine
how it functions and to monitor the effects of various actions on the brain.
Aging Population. According to the Administration on Aging, United
States Department of Health and Human Services, approximately 33.5 million
persons in the United States were age 65 or older in 1995, representing 13% of
the population. The number of Americans age 65 or older increased by
approximately 2.3 million, or 7%, between 1990 and 1995, compared to an increase
of 5% for the under-65 population. The Administration on Aging predicts that the
number of Americans age 65 or older will increase to approximately 34.7 million
by the year 2000 and to approximately 53.2 million by the year 2020. We believe
that older patients require a higher level of medical care using more procedures
in which the patient or the procedure involves a risk of brain oxygen
imbalances. Medical and surgical procedure growth rate has remained steady
recently, and industry analysts expect this trend to continue.
BUSINESS STRATEGY
Our objective is to establish the Cerebral Oximeter as a standard of
care in surgical procedures requiring general anesthesia and in other critical
care situations. Key elements of our strategy are as follows:
Target Surgical Procedures With a High Risk of Brain Oxygen Imbalances.
We target surgical procedures with a high risk of brain oxygen imbalances, such
as heart surgeries, heart blood vessel surgeries, other blood vessel surgeries
and surgeries involving elderly patients. We believe that the medical
professionals involved in these surgeries are the most aware of the risks of
brain damage resulting from brain oxygen imbalances. Therefore, we believe that
it will be easier to demonstrate the clinical benefits of the Cerebral Oximeter
and potentially gain market acceptance for our products in connection with these
surgeries.
Demonstrate Clinical Benefits and Promote Acceptance of the Cerebral
Oximeter. We sponsor clinical studies using the Cerebral Oximeter to provide
additional evidence of its benefits. We use the resulting publication of any
favorable peer-reviewed papers to help convince the medical community of the
clinical benefits of the Cerebral Oximeter. We also promote acceptance of the
Cerebral Oximeter in the medical community by encouraging surgeons,
anesthesiologists and nurses in leading hospitals, whose opinions and practices
we believe are valued by other hospitals and physicians, to use the Cerebral
Oximeter on a trial basis. We believe that successful evaluations of the
Cerebral Oximeter by these medical professionals will accelerate the acceptance
of the Cerebral Oximeter by other medical professionals. We are sponsoring
discussions among physicians who have used the Cerebral Oximeter about its
clinical benefits.
Invest in Marketing and Sales Activities. We have established a
distribution network consisting of our direct sales employees and distributors.
We invest in our marketing and sales efforts to increase the medical community's
exposure to our INVOS technology and the Cerebral Oximeter, including continued
participation in trade shows and medical conferences, and ongoing product
evaluations. We are aggressively marketing our products through our existing
sales force and we leverage our sales resources through the use of our
distributors, including Nellcor Puritan Bennett Export, Inc. in Europe and
Baxter Limited in Japan.
Develop Additional Applications of the Cerebral Oximeter. We have filed
a 510(k) application with the FDA to market a product-line extension of the
Cerebral Oximeter for use on children in the United States. We are also in the
process of developing product-line extensions of the Cerebral Oximeter for use
on newborns and in other non-brain tissue applications. We believe that these
natural extensions of our existing products will increase the market for the
Cerebral Oximeter without the more significant development efforts required for
entirely new products. Research conducted on children has resulted in a
SomaSensor that can fit smaller heads. We believe that non-invasive monitoring
is especially important in this patient population, as they generally have lower
oxygen reserves than adults, have less blood volume from which to make invasive
blood gas measurements and are less tolerant of painful skin punctures and
infections.
License Our Technology to Medical Device Manufacturers. We plan to
license our Cerebral Oximeter technology to other medical device manufacturers
to expand the installed base of Cerebral Oximeters and increase the demand for
SomaSensors. Such a license might be made to a company interested in
incorporating the Cerebral
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Oximeter into a multi-function monitor. We believe that such an arrangement
could provide another distribution channel for our Cerebral Oximeter. We,
however, have no current commitments for any such licenses.
PRODUCTS AND TECHNOLOGY
THE CEREBRAL OXIMETER
Our Cerebral Oximeter is the only non-invasive patient monitoring
system commercially available in the United States that provides continuous
information about changes in the blood oxygen level in the adult brain. It is a
portable and easy-to-use monitoring system that is placed at a patient's bedside
in hospital critical care areas, especially operating rooms, recovery rooms,
ICUs and emergency rooms. Surgeons, anesthesiologists and other medical
professionals use the information provided by the Cerebral Oximeter to identify
brain oxygen imbalances and take corrective action, potentially improving
patient outcome and reducing the cost of care. Once the cause of a cerebral
oxygen imbalance is identified and therapy is initiated, the Cerebral Oximeter
provides immediate feedback regarding the adequacy of the selected therapy. It
can also provide medical professionals with an additional level of assurance
when they make decisions regarding the need for therapy.
Unlike some existing monitoring methods, the Cerebral Oximeter
functions even when the patient is unconscious, lacks a strong peripheral pulse
or has suppressed neural activity. The measurement made by the Cerebral Oximeter
is dominated by the blood in the veins. Therefore, it responds to the changes in
factors that affect the balance between cerebral oxygen supply and demand,
including changes in arterial oxygen saturation, cerebral blood flow, hemoglobin
concentration and cerebral oxygen consumption. The Cerebral Oximeter responds to
global changes in brain oxygen levels and to events that affect the brain oxygen
levels in the region beneath the SomaSensor.
The Cerebral Oximeter monitoring system is comprised of
- a portable unit including a computer and a display monitor,
- dual single-use, disposable sensors, called SomaSensors,
- proprietary software and
- a preamplifier cable.
SomaSensors can be placed on both sides of a patient's forehead to offer
bi-lateral monitoring and are connected to the computer through the preamplifier
cable. The SomaSensors continuously transmit and receive predetermined
wavelengths of light sent through the scalp, muscle and skull into the brain
tissue. The computer receives the information about the intensity of the light
scattered by the blood and tissue in the area being monitored. The computer uses
our proprietary software to analyze this information and provide a continuous
digital and trend display on the monitor of an index of the oxygen saturation in
the area of the brain under the SomaSensors.
The portable unit includes menus that make it easy for users to set
high and low audible alarms, customize the display and retrieve data.
Single-function keys provide a convenient means to turn on the Cerebral
Oximeter, silence alarms, mark important events and print results that can be
stored for up to 24 hours and retrieved by a variety of standard,
commercially-available printers. The model 4100 Cerebral Oximeter measures
approximately 9 inches wide, 8 inches high, and 8 inches deep and weighs
approximately 15 pounds; the model 5100 has the same dimensions.
The suggested list prices for the model 4100 Cerebral Oximeter and the
SomaSensor in the United States are $15,995 and $40.00, respectively. Users of
the Cerebral Oximeter will be required to purchase disposable SomaSensors on a
regular basis. The SomaSensor may only be used once because after one use it may
become contaminated and we do not warrant its effectiveness after one use. We
provide a one-year warranty on the Cerebral Oximeter, which we will satisfy by
repairing or exchanging those units in need of repair. We also offer maintenance
agreements and service for the Cerebral Oximeter for a fee after the warranty
expires.
The following table summarizes the principal features and related
benefits of the Cerebral Oximeter:
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<TABLE>
<CAPTION>
FEATURES BENEFITS
- ------------------------------------ --------------------------------------------------
<S> <C>
FDA-cleared - Access to United States and certain foreign markets
Non-invasive - Consistent with market trend toward less invasive medical
procedures
- No risk to patients and medical professionals
- No added patient recovery costs
Continuous Information - Immediate information regarding brain oxygen imbalances
- Real-time guide to therapeutic interventions
New Organ-Specific Information - Provides information about oxygen imbalances in both sides
of the brain
Relatively Inexpensive - Low cost relative to other brain monitors and medical
devices
- Small portion of the cost of the procedures in which it is
used
- New information can potentially improve patient outcome and
reduce the cost of care
Easy-to-Use - Does not require a trained technician to operate or interpret
- Automatic SomaSensor calibration
- Simple user interface and controls
- Audible alarm limits
Effective in Difficult Circumstances
- Provides information when the patient is unconscious, lacks a
strong peripheral pulse or has suppressed neural activity,
specifically during cardiac arrest, hypothermia,
hypertension, hypotension and hypovolemia
- Indicates oxygen imbalances in the brain, not just blood
flow, oxygenation of the arteries or the effects of
imbalances
Portable - Placed at patient's bedside
</TABLE>
OPTICAL SPECTROSCOPY TECHNOLOGY
Our proprietary In Vivo Optical Spectroscopy, or INVOS, technology is
based primarily on the physics of optical spectroscopy. Optical spectroscopy is
the interpretation of the interaction between matter and light. Spectrometers
and spectrophotometers function primarily by shining light through matter and
measuring the extent to which the light is transmitted through, or scattered or
absorbed by, the matter. Physicians and scientists can use spectrophotometers to
examine human blood and tissue. Although most human tissue is opaque to ordinary
light, some wavelengths penetrate tissue more easily than others. Therefore, by
shining appropriate wavelengths of light into the body and measuring its
transmission, scattering and absorption, or a combination, physicians can obtain
information about the matter under analysis. Optical spectroscopy generates no
ionizing radiation and produces no known hazardous effects.
Optical spectroscopy was first used clinically in the 1940s at the
Sloan-Kettering Institute for cancer research. The pulse oximeter uses optical
spectroscopy to determine the oxygen saturation of the blood in the arteries in
peripheral tissue, such as in a finger or an earlobe. By identifying the
hemoglobin and the oxygenated hemoglobin and measuring the relative amounts of
each, oxygen saturation of hemoglobin can be measured. However, optical
spectroscopy was generally not useful when the substances to be measured were
surrounded by, were behind, or were near bone, muscle or other tissue, because
they produce extraneous data that interferes with analysis of the data from the
area being examined.
INVOS TECHNOLOGY
The Cerebral Oximeter is based on our INVOS technology. In 1982, we
began developing a spectroscopic instrument to measure breast tissue
abnormalities. Our first product, the Somanetics INVOS 2100 System, used the
same INVOS technology as the Cerebral Oximeter. Later, we began analyzing the
use of INVOS technology to measure changes in cellular metabolism in the brain.
Early studies conducted with the Henry Ford Neurosurgical Institute demonstrated
the ability of our INVOS technology to make measurements that were highly
correlated to controlled changes in animal brain cell metabolism. In 1988, we
began clinical studies of the Cerebral Oximeter on
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<PAGE> 38
human patients in operating rooms, emergency rooms and Intensive care units at
Henry Ford Hospital and later at Bowman Gray School of Medicine and Mount Sinai
Medical Center.
Like other applications of optical spectroscopy, 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. It measures the composition of substances by detecting the effect they
have on light. The INVOS technology measurement is made by transmitting
low-intensity visible and near-infrared light through a portion of the body and
detecting the manner in which the molecules of the exposed substance interact
with light at specific wavelengths. INVOS technology detects this interaction by
measuring the intensity of the various wavelengths of light received by light
sensors. By measuring the effect on specific wavelengths of light caused by
oxygenated hemoglobin contained in blood in the region of the brain being
monitored, the Cerebral Oximeter can monitor changes in the approximate oxygen
saturation of the hemoglobin in that region of the brain.
We have developed a method of reducing extraneous spectroscopic data
caused by surrounding bone, muscle and other tissue. This method allows us to
gather information about portions of the body that previously could not be
analyzed using traditional optical spectroscopy. The dual detector design of the
SomaSensor enables us to measure scattered light intensities from the
intermediate tissues of skin, muscle and skull in a separate process. Each
SomaSensor contains two light detectors and a light source. While both detectors
receive similar information about the tissue outside the brain, the detector
further from the light source detects light that has penetrated deeper into the
brain, and, therefore, receives more information specific to the brain than does
the detector closer to the light source. By subtracting the two measurements,
INVOS technology is able to suppress the influence of the tissues outside the
brain to provide a measurement of changes in brain oxygen saturation.
RESEARCH AND DEVELOPMENT
We are currently focusing our research and development efforts on
product-line extensions of the Cerebral Oximeter for use on newborns, other
non-brain tissue applications, and enhancements to the Cerebral Oximeter and
SomaSensor. We are currently awaiting FDA clearance to market the Cerebral
Oximeter for use on children in the United States, and have redesigned the
SomaSensor for use on smaller heads. We believe that non-invasive monitoring is
especially important in this patient population, as they generally have lower
oxygen reserves than adults, have less blood volume from which to make invasive
blood gas measurements, and are less tolerant of painful skin punctures and
infections.
During fiscal years 1999, 1998 and 1997 we spent $598,348, $664,874 and
$736,427, respectively, on research, development and engineering. Effective
April 28, 1999, we terminated our consulting order with NeuroPhysics
Corporation, except for general consulting which terminated in February 2000,
because of the cost to pursue their new products.
MARKETING, SALES AND DISTRIBUTION
MARKETING
The Cerebral Oximeter is for use on patients at risk of brain oxygen
imbalances. These patients are most commonly found in operating rooms undergoing
general anesthesia for various surgical procedures as well as in the other
critical care areas of hospitals, especially recovery rooms, intensive care
units and emergency rooms. After the Cerebral Oximeter is accepted in hospitals,
future markets might include free-standing operating rooms, clinics, ambulances
and nursing homes.
We market the Cerebral Oximeter primarily to cardiac, cardiovascular
and vascular surgeons, neurosurgeons and anesthesiologists. We believe that
these specialists are the medical professionals most aware of the risks of brain
damage resulting from brain oxygen imbalances. We and our distributors have
concentrated our sales efforts on the major teaching hospitals in the United
States and selected foreign markets in which we have commenced commercial sales
and on other large United States hospitals, especially those we consider opinion
leaders. In addition, we sponsor discussions among physicians who have used the
Cerebral Oximeter about its clinical benefits.
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<PAGE> 39
We believe that favorable peer review is a key element to a product's
success in the medical equipment industry. Accordingly, we support clinical
research programs with third-party clinicians and researchers intended to
demonstrate the need for the Cerebral Oximeter and its clinical benefits with
the specific objective of publishing the results in peer-reviewed journals. The
research consists primarily of comparing the measurements obtained from the
Cerebral Oximeter to the data obtained from existing diagnostic methods,
including EEG, transcranial Doppler and invasive jugular bulb catheter
monitoring, or reports of the results of the use of the Cerebral Oximeter in
various procedures. We attend trade shows and medical conferences to introduce
and promote the Cerebral Oximeter and to meet medical professionals with an
interest in submitting peer-reviewed papers to appropriate medical journals and
to major national meetings. In fiscal year 1999, a total of 52 presentations
concerning the Cerebral Oximeter were made at 31 meetings, 17 articles
mentioning the Cerebral Oximeter were published in peer-reviewed journals, and
20 abstracts mentioning the Cerebral Oximeter were published. Some of these
presentations contained the same subject matter as other presentations, articles
or abstracts. Also, in May 1999, at the University of Chicago Charles Huggins
Annual Research Conference, a researcher received the first place award for
research related to cerebral oximetry.
SALES AND DISTRIBUTION
We sell the Cerebral Oximeter through our direct sales force and
independent distributors. In the United States, we sell the Cerebral Oximeter
through our 12 direct salespersons and five clinical specialists covering 50
states exclusively. Our sales compensation and incentive plans are designed to
motivate our direct sales force by making half of their targeted compensation
dependent on meeting targeted sales levels. We believe that the minimum selling
cycle for new medical devices is approximately six to nine months.
Internationally, we have distribution agreements with 11 independent
distributors covering 65 countries for the model 4100 Cerebral Oximeter;
including Nellcor Puritan Bennet Export, Inc. in Europe and Baxter Limited in
Japan. Two of these distributors will be terminated within the next year and one
more distributor within the next two years in conjunction with our recently
announced exclusive distributor agreement with Nellcor Puritan Bennett Export,
Inc., a wholly-owned subsidiary of Mallinckrodt, Inc. Our agreement with Nellcor
Puritan Bennett Export, Inc. covers 33 countries for the model 4100 and model
5100 Cerebral Oximeters. In March 1995, we engaged Baxter Limited as our
exclusive distributor in Japan. In January 1999, the Japanese Ministry of Health
and Welfare licensed Baxter Limited to market the INVOS 4100 Cerebral Oximeter
in Japan.
During fiscal 1998, we began a no-cap sales program whereby we ship the
model 4100 Cerebral Oximeter to the customer at no charge, and the customer
agrees to purchase a minimum quantity of SomaSensors, on a monthly basis, at a
premium, for a stated period of time.
We did not have any backlog of firm orders as of January 20, 2000 or as
of January 20, 1999.
For a description of sales to major customers, see Note 10 of Notes to
Financial Statements included elsewhere in this Prospectus. Our distributor in
Japan was our largest customer in fiscal 1999 and 1997. We are dependent on our
sales to Nellcor Puritan Bennet Export, Inc. in Europe and Baxter Limited in
Japan, and the loss of either of them as a customer would have an adverse effect
on our business, financial condition and results of operations.
Our export sales were approximately $1,632,000 for the fiscal year
ended November 30, 1999, $959,000 for the fiscal year ended November 30, 1998
and $689,000 for the fiscal year ended November 30, 1997. See Note 10 of Notes
to Financial Statements. For a description of the breakdown of sales between
model 5100 Cerebral Oximeters, model 4100 Cerebral Oximeters, model 3100A
Cerebral Oximeters, model 4100 exchanges and refurbished model 3100 Cerebral
Oximeters, and SomaSensors, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations."
MANUFACTURING
We assemble the Cerebral Oximeter in our facilities in Troy, Michigan,
from components purchased from outside suppliers. We assemble the Cerebral
Oximeter to control its quality and costs and to permit us to make changes to
the Cerebral Oximeter faster than we could if third-parties assembled it. We
believe that each component
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<PAGE> 40
is generally available from several potential suppliers. The SomaSensor, the
printed circuit boards, other mechanical components and the unit enclosure are
the primary components that must be manufactured according to specifications
provided by us. Although we are currently dependent on one manufacturer of the
SomaSensor, we believe that several potential suppliers are available to
assemble the components of the Cerebral Oximeter. We would, however, require
approximately three to four months to change SomaSensor suppliers. We do not
currently intend to manufacture on a commercial scale the disposable SomaSensor
or the components of the Cerebral Oximeter.
On June 11, 1998, we received ISO 9001 certification and met the
requirements under the European Medical Device Directive to use the CE Mark,
thereby allowing us to continue to market our products in the European Economic
Community.
COMPETITION
We do not believe there is currently any direct commercial competition
for the Cerebral Oximeter. We believe, however, that the market for cerebral
oximetry products is in the early stages of its development and, if it develops,
might become highly competitive. We are aware of foreign companies that have
sold products relating to cerebral metabolism monitoring for research or
evaluation.
The medical products industry is characterized by intense competition
and extensive research and development. Other companies and individuals are
engaged in research and development of non-invasive cerebral oximeters, and we
believe there are many other potential entrants into the market. Some of these
potential competitors have well established reputations, customer relationships
and marketing, distribution and service networks, and have substantially longer
histories in the medical products industry, larger product lines and greater
financial, technical, manufacturing, research and development and management
resources than ours. Many of these potential competitors have long-term product
supply relationships with our potential customers. These potential competitors
might develop products that are at least as reliable and effective as our
products, that make additional measurements, or that are less costly than our
products. These potential competitors might be more successful than we are in
manufacturing and marketing their products and might be able to take advantage
of the significant time and effort we have invested to gain medical acceptance
of cerebral oximetry. In addition, one patent issued to an unaffiliated third
party and relating to cerebral oximetry expired in 1999, two patents issued to
an unaffiliated third party and relating to cerebral oximetry expired in 1998,
and two patents issued to an unaffiliated third party and relating to cerebral
oximetry will expire in 2000. These expiring patents will make that technology
generally available and potentially help the development of competing products.
See "Market Overview."
We also compete indirectly with the numerous companies that sell
various types of medical equipment to hospitals for the limited amount of
funding allocated to capital equipment in hospital budgets. The market for
medical products is subject to rapid change due to an increasingly competitive,
cost-conscious environment and to government programs intended to reduce the
cost of medical care. Many of these manufacturers of medical equipment are
large, well-established companies whose resources, reputations and ability to
leverage existing customer relationships might give them a competitive advantage
over us. Our products and technology also compete indirectly with many other
methods currently used to measure blood oxygen levels or the effects of low
blood oxygen levels.
We believe that a manufacturer's reputation for producing accurate,
reliable and technically advanced products, references from users, features
(speed, safety, ease of use, patient convenience and range of applicability),
product effectiveness and price are the principal competitive factors in the
medical products industry.
PROPRIETARY RIGHTS INFORMATION
We have fifteen United States patents and fifteen patents in various
foreign countries. Our patents basically cover methods and apparatus for
introducing light into a body part and receiving, measuring and analyzing the
resulting light and its interaction with tissue. These methods also involve
receiving, measuring and analyzing the light transmissivity of various body
parts of a single subject, as well as of body parts of different subjects, which
provides a standard against which a single subject can be compared. Although we
believe that one or more of our
39
<PAGE> 41
issued patents cover some of the underlying technology used in the Cerebral
Oximeter, only ten of the issued patents expressly refer to examination of the
brain or developments involving the Cerebral Oximeter.
Our initial United States patent, covering the in vivo tissue
examination technology developed in conjunction with the INVOS 2100 and its
predecessor, the SOMA 100, was allowed and issued in 1986 and will expire on
October 14, 2003. The corresponding Canadian patent was issued in 1987, the
corresponding European Community patent was issued in 1990, with related patents
issued in the ten Western European countries that were then member states, and
the corresponding Japanese patent was issued in 1991. Our fourteen additional
United States patents expire on various dates from February 2005 to December
2014. We also have three patent applications pending in the United States and a
number of patent applications in various foreign countries with respect to other
aspects of our technology relating to the interaction of light with tissue.
Many other patents have previously been issued to third parties
involving optical spectroscopy and the interaction of light with tissue, some of
which relate to the use of optical spectroscopy in the area of brain metabolism
monitoring, the primary use of the Cerebral Oximeter. No patent infringement
claims have been asserted against us.
In addition to our patent rights, we have obtained United States
Trademark registrations for our trademarks "SOMANETICS," "SOMAGRAM," "INVOS,"
"SOMASENSOR" and "WINDOW TO THE BRAIN." We have also obtained registrations of
our basic mark, "SOMANETICS," in thirteen foreign countries.
We also rely on trade secret, copyright and other laws and on
confidentiality agreements to protect our technology, but we believe that
neither our patents nor other legal rights will necessarily prevent third
parties from developing or using similar or related technology to compete
against our products. Moreover, our technology primarily represents improvements
or adaptations of known optical spectroscopy technology, which might be
duplicated or discovered through our patents, reverse engineering or both.
GOVERNMENT REGULATION
The testing, manufacture and sale of our products are subject to
regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign agencies. Pursuant to the Federal Food, Drug,
and Cosmetic Act, and the related regulations, the FDA regulates the preclinical
and clinical testing, manufacture, labeling, distribution and promotion of
medical devices. If we do not comply with applicable requirements, we can be
subject to, among other things,
- fines,
- injunctions,
- civil penalties,
- recall or seizure of products,
- total or partial suspension of production,
- failure of the government to gant premarket clearance or
premarket approval for devices,
- withdrawal of marketing clearances or approvals and
- criminal prosecution.
A medical device may be marketed in the United States only if the FDA
gives prior authorization, unless it is subject to a specific exemption. Devices
classified by the FDA as posing less risk than class III devices are categorized
as class I or II and are eligible to seek "510(k) clearance." Such clearance
generally is granted when submitted information establishes that a proposed
device is "substantially equivalent" in intended use to a class I or II device
already legally on the market or to a "preamendment" class III device, which is
one that has been in commercial distribution since before May 28, 1976, for
which the FDA has not called for PMA applications, which are defined below. In
recent years, the FDA has been requiring a more rigorous demonstration of
substantial equivalence than in the past, including requiring clinical trial
data in many cases. For any devices that are cleared through the 510(k) process,
modifications or enhancements that could significantly affect safety or
effectiveness, or constitute a major change in the intended use of the device,
will require new 510(k) submissions. We believe that it now usually takes from
three to six months from the date of submission to obtain 510(k) clearance, but
it can take
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<PAGE> 42
substantially longer. We cannot assure you that any of our devices or device
modifications will receive 510(k) clearance in a timely fashion, or at all. The
Cerebral Oximeter has been categorized as a class II device.
A device requiring prior marketing authorization that does not qualify
for 510(k) clearance is categorized as class III, which is reserved for devices
classified by FDA as posing the greatest risk, such as life-sustaining,
life-supporting or implantable devices, or devices that are not substantially
equivalent to a legally marketed class I or class II device. A class III device
generally must receive approval of a premarket approval, or PMA, application,
which requires proving the safety and effectiveness of the device to the FDA.
The process of obtaining PMA approval is expensive and uncertain. We believe
that is usually takes from one to three years after filing, but it can take
longer.
If human clinical trials of a device are required, whether for a 510(k)
or a PMA application, and the device presents a "significant risk," the sponsor
of the trial, which is usually the manufacturer or the distributor of the
device, will have to file an investigational device exemption, or IDE,
application before beginning human clinical trials. The IDE application must be
supported by data, typically including the results of animal and laboratory
testing. If the IDE application is approved by the FDA and one or more
appropriate Institutional Review Boards, or IRBs,, human clinical trials may
begin at a specific number of investigational sites with a specific number of
patients, as approved by the FDA. If the device presents a "nonsignificant risk"
to the patient, a sponsor may begin the clinical trial after obtaining approval
for the study by the IRB at each clinical site without the need for FDA
approval.
In June 1992, we received 510(k) clearance from the FDA to market the
Cerebral Oximeter in the United States for use on adults. We began commercial
shipments of Cerebral Oximeters and SomaSensors in May 1993. In November 1993,
we received notification that the FDA had rescinded our 510(k) clearance to
market the Cerebral Oximeter. As a result, all commercial sales of our product
were suspended. In February 1994, we resumed marketing our product in several
foreign countries. In June 1996, we received 510(k) clearance from the FDA to
market the Cerebral Oximeter, including the SomaSensor, in the United States. In
October 1997, we obtained FDA clearance for new advances in our INVOS technology
that are incorporated in our model 4100 Cerebral Oximeter. We introduced the
model 4100 Cerebral Oximeter in October 1997 and began shipments in the first
quarter of fiscal 1998. In August 1999, we submitted our 510(k) application to
the FDA for the model 5100 Cerebral Oximeter, and we are awaiting FDA clearance
to market the model 5100 in the United States.
In October 1997, we obtained FDA clearance for advances in our INVOS
technology that are incorporated in our model 4100 Cerebral Oximeter. We made
additional changes to the model 3100A Cerebral Oximeter that resulted in the
model 4100 Cerebral Oximeter and we have made additional changes to the
SomaSensor. We do not believe that these changes affect the safety or efficacy
of the Cerebral Oximeter or the SomaSensor and, therefore, we believe that these
changes do not require the submission of a new 510(k) notice. The FDA, however,
could disagree with our determination not to submit a new 510(k) notice for the
model 4100 Cerebral Oximeter or SomaSensor and could require us to submit a new
510(k) notice for any changes made to the device. If the FDA requires us to
submit a new 510(k) notice for our model 4100 Cerebral Oximeter or SomaSensor or
for any device modification, we might be prohibited from marketing the modified
device until the 510(k) notice is cleared by the FDA.
Any devices we manufacture or distribute pursuant to FDA clearances or
approvals are subject to pervasive and continuing regulation by the FDA and some
state agencies. Manufacturers of medical devices marketed in the United States
must comply with detailed Quality System Regulation, or QSR, requirements, which
include testing, control, documentation and other quality assurance procedures.
Manufacturers must also comply with Medical Device Reporting requirements. These
requirements require a manufacturer to report to the FDA any incident in which
its product may have caused or contributed to a death or serious injury, or in
which its product malfunctioned and, if the malfunction were to recur, it would
likely cause or contribute to a death or serious injury. Labeling and
promotional activities are subject to scrutiny by the FDA and, in some
circumstances, by the Federal Trade Commission. Current FDA enforcement policy
prohibits marketing approved medical devices for unapproved uses.
We are subject to routine inspection by the FDA and some state agencies
for compliance with QSR requirements and other applicable regulations. Our most
recent FDA QSR inspection occurred in May 1997. We are also subject to numerous
federal, state and local laws relating to such matters as safe working
conditions,
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<PAGE> 43
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances.
If any of our current or future FDA clearances or approvals are
rescinded or denied, sales of our applicable products in the United States would
be prohibited during the period we do not have such clearances or approvals. In
such cases we would consider shipping the product internationally and/or
assembling it overseas if permissible and if we determine such product to be
ready for commercial shipment. The FDA's current policy is that a medical device
that is not in commercial distribution in the United States, but which needs
510(k) clearance to be commercially distributed in the United States, can be
exported without submitting an export request and prior FDA clearance provided
that
- the company believes the device can be found to be substantially
equivalent through a 510(k) submission,
- the device is labeled and intended for export only,
- the device meets the specifications of the foreign purchaser and
- other conditions of the export provisions of the Food, Drug and
Cosmetic Act have been met.
We are relying on this exemption for our current international sales of the
model 5100 Cerebral Oximeter.
Congress enacted the FDA Modernization Act of 1997. This law is
intended to make the regulatory process more consistent and efficient. It is too
early to determine whether, or how, these new requirements will affect us.
SEASONALITY
Our business is seasonal. Our third quarter sales have typically been
lower, compared to other fiscal quarters, principally because the fiscal quarter
coincides with the summer vacation season, especially in Europe, the United
States and Japan.
INSURANCE
Because the Cerebral Oximeter is intended to be used in hospital
critical care units with patients who may be seriously ill or may be undergoing
dangerous procedures, we might be exposed to serious potential products
liability claims. We have obtained products liability insurance with a liability
limit of $2,000,000. We also maintain coverage for property damage or loss,
general liability, business interruption, travel-accident, directors' and
officers' liability and workers' compensation. We do not maintain key-man life
insurance.
EMPLOYEES
As of March 21, 2000, we employed 40 full-time individuals, including
18 in sales and marketing, five in research and development, eight in general
and administration and nine in manufacturing, quality and service, and one
part-time employee. We also use two consultants. We believe that our future
success is dependent, in large part, on our ability to attract and retain highly
qualified managerial, marketing and technical personnel. Our employees are not
represented by a union or subject to a collective bargaining agreement. We
believe that our relations with our current employees are good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
We are located in Troy, Michigan and have no other locations. Our
export sales were approximately $1,632,000 for the fiscal year ended November
30, 1999, $959,000 for the fiscal year ended November 30, 1998 and $689,000 for
the fiscal year ended November 30, 1997, including $923,000, $103,000, and
$336,000 to Baxter Limited, our distributor in Japan. See Note 10 of Notes to
Financial Statements included elsewhere in this Prospectus.
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<PAGE> 44
PROPERTIES
We lease 23,392 square feet of office, manufacturing and warehouse
space in Troy, Michigan. Approximately 12,000 square feet is office space for
sales and marketing, engineering, accounting and other administrative
activities. The lease agreement was extended in fiscal 1999, with the extension
commencing January 1, 2000 and expiring December 31, 2000. The minimum monthly
lease payment for the extended term is approximately $14,700, excluding other
occupancy costs. We believe that, depending on sales of the Cerebral Oximeter,
our current facility is more than suitable and adequate for our current needs,
including our assembly of the Cerebral Oximeter and conducting our operations in
compliance with prescribed FDA QSR guidelines, and will allow for substantial
expansion of our business and number of employees.
LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our executive officers and directors as of March 21, 2000 are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Bruce J. Barrett 40 President, Chief Executive Officer and a Director
Richard S. Scheuing 44 Vice President, Research and Development
Mary Ann Victor 42 Vice President, Communications and Administration
and Secretary
Ronald A. Widman 49 Vice President, Medical Affairs
Pamela A. Winters 41 Vice President, Operations
Dr. James I. Ausman 62 Director
Daniel S. Follis 62 Director
Robert R. Henry (1) 59 Director
A. Brean Murray 62 Director
H. Raymond Wallace (1) 64 Chairman of the Board
</TABLE>
- --------------------
(1) Member of the Compensation Committee and Member of the Audit Committee.
Bruce J. Barrett. Mr. Barrett has served as our President and Chief
Executive Officer and as one of our directors since June 1994. Mr. Barrett
previously served, from June 1993 until May 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. Mr. Barrett is a party to an employment agreement
with us pursuant to which he is required to be elected to the offices he
currently holds.
Richard S. Scheuing. Mr. Scheuing has served as our Vice President,
Research and Development since January 1998. From March 1993 to January 1998, he
served as our Director of Research and Development. He joined us in 1991 as our
Director of Mechanical Engineering. He is an inventor on four of our issued
patents, and two patents that are pending. Before joining us, he was Director of
Mechanical Engineering for Irwin Magnetic Systems, Inc. from 1987 until 1991 and
was a Development Engineer with the Sarns division of Minnesota Mining and
Manufacturing Company, or 3M, from 1982 to 1987. He received a B.S. degree in
mechanical engineering from the University of Michigan.
Mary Ann Victor. Ms. Victor has served as our Vice President,
Communications and Administration and Secretary since January 1998. From July
1997 until January 1998, she served as our Director, Communications and
Administration and was our consultant from September 1996 until July 1997. She
also served as our Director of Corporate Communications from July 1991 until
February 1994. Prior experience includes serving as Director of Investor
Relations with the Taubman Company from February to May 1994, legal assistant
from June 1994 to November 1994 and then attorney from November 1994 to
September 1995 with Varnum Riddering Schmidt & Howlett, and Human Resources
Consultant in the Actuarial Benefits and Compensation Consulting Group of
Deloitte & Touche LLP from September 1995 to September 1996. Ms. Victor received
a B.S. in political science from the University of Michigan and a J.D. from the
University of Detroit.
Ronald A. Widman. Mr. Widman has served as our Vice President, Medical
Affairs since January 1998. From August 1994 to January 1998, he served as our
Director of Medical Affairs. Before joining us as Marketing Manager in 1991, he
was employed by Mennen Medical, Inc., a manufacturer and marketer of medical
monitoring and diagnostic devices, for 12 years, where he held various positions
in domestic and international medical product
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marketing, including Senior Product Manager from 1982 until 1991. He is the
author of several papers and articles related to medical care and monitoring
devices.
Pamela A. Winters. Ms. Winters has served as our Vice President,
Operations since January 1998. From February 1996 to January 1998, she served as
our Director of Operations. From May 1992 to February 1996, she served as our
Manager of Quality Assurance. From October 1991 to May 1992, Ms. Winters served
as our Quality Assurance Supervisor. Ms. Winters is pursuing a B.S. degree in
management from the University of Phoenix.
James I. Ausman, M.D., Ph.D. Dr. Ausman has served as one or our
directors 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.
Daniel S. Follis. Mr. Follis has served as one of our directors since
April 1989. Since 1981, he has served as President of Verschuren & Follis, Inc.,
which advises and administers The Infinity Fund, a limited partnership that
invests in emerging growth companies. Mr. Follis received a B.A. degree in
business from Michigan State University.
Robert R. Henry. Mr. Henry has served as one of our directors since
December 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 is also a director of Middleby
Corporation. He received an MBA from Harvard Business School and a B.A. from
Williams College.
A. Brean Murray. Mr. Murray has served as one of our directors since
June 1999. Since it was founded in December 1973, he has served as Chairman,
Chief Executive Officer and a Director of Brean Murray & Co., Inc., an
investment banking company that is a wholly-owned subsidiary of BMI Holding Co.
He has also served as Chairman, Chief Executive Officer and a Director of BMI
Holding Co. since it was founded in December 1973. Brean Murray & Co., Inc. was
the underwriter of our public offerings of Common Shares in June 1997 and April
1998. Mr. Murray is also a director of Doral Financial Corporation. Mr. Murray
received a B.S. degree in economics from Villanova University.
H. Raymond Wallace. Mr. Wallace has served as our Chairman of the Board
since January 1995, as a non-officer Chairman of the Board since April 1995, and
as one of our directors since June 1994. He also served as our consultant 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.
Our officers serve at the discretion of the Board of Directors. Our
directors will hold office until the Annual Meeting of Shareholders to be held
in 2000 for Robert R. Henry and H. Raymond Wallace, the Annual Meeting of
Shareholders to be held in 2001 for Bruce J. Barrett and A. Brean Murray, and
the Annual Meeting of Shareholders to be held in 2002 for Dr. James I. Ausman
and Daniel S. Follis, and until their successors are elected and qualified, or
until their earlier death, resignation or removal.
Directors may be removed only for cause.
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COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information for each of the fiscal years
ended November 30, 1999, 1998 and 1997 concerning compensation of (1) all
individuals serving as our Chief Executive Officer during the fiscal year ended
November 30, 1999 and (2) our four most highly-compensated other executive
officers whose total annual salary and bonus exceeded $100,000 in fiscal 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
SECURITIES ALL OTHER
ANNUAL COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)
--------------------------- ---- --------- -------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Bruce J. Barrett, President..... 1999 204,750 30,213 60,000 -0-
and Chief Executive Officer 1998 204,750 32,978 180,000 -0-
1997 200,688 12,188 135,000 -0-
Raymond W. Gunn, Executive...... 1999 110,250 11,388 21,000 -0-
Vice President and Chief 1998 110,250 12,430 24,000 -0-
Financial Officer (1) 1997 110,250 4,823 45,000 -0-
Richard S. Scheuing, Vice....... 1999 91,140 8,069 21,000 -0-
President, Research and 1998 89,828 13,606 45,000 -0-
Development (1)
Ronald A. Widman, Vice.......... 1999 80,325 7,112 18,000 -0-
President, Medical Affairs (1) 1998 79,840 11,469 41,000 -0-
Pamela A. Winters, Vice......... 1999 75,000 6,640 21,000 -0-
President, Operations (1) 1998 74,192 11,853 45,000 -0-
</TABLE>
- ----------------------------
(1) Messrs. Scheuing and Widman and Ms. Winters became executive officers
effective January 22, 1998. The table reflects all compensation paid by
us to them during fiscal 1998 and fiscal 1999. Mr. Gunn resigned as an
executive officer effective January 14, 2000.
OPTION GRANTS TABLE
The following table sets forth information concerning individual grants
of stock options made during the fiscal year ended November 30, 1999 to each of
our executive officers named in the Summary Compensation Table above:
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<PAGE> 48
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- ----------------------------------------------------------------------------------------
% OF POTENTIAL
TOTAL REALIZABLE VALUE AT
NUMBER OF OPTIONS ASSUMED ANNUAL
SECURITIES GRANTED TO RATES OF STOCK PRICE
UNDERLYING EMPLOYEES EXERCISE APPRECIATION
OPTIONS IN FISCAL PRICE EXPIRATION FOR OPTION TERM
---------------------------
NAME GRANTED (#) YEAR ($/SH) DATE 5% ($) 10% ($)
---- ----------- ----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Bruce J. Barrett........... 60,000 (1) 25.8 $3.56 5/20/09 134,332 340,423
Raymond W. Gunn............ 21,000 (1) 9.0 $3.56 5/20/09 47,016 119,148
Richard S. Scheuing........ 21,000 (1) 9.0 $3.56 5/20/09 47,016 119,148
Ronald A. Widman........... 18,000 (1) 7.7 $3.56 5/20/09 40,300 102,127
Pamela A. Winters.......... 21,000 (1) 9.0 $3.56 5/20/09 47,016 119,148
</TABLE>
- ----------------------
(1) The options listed in the table were granted to Messrs. Barrett, Gunn,
Scheuing, and Widman, and Ms. Winters in fiscal 1999 under our 1997
Stock Option Plan, exercisable at the then current fair market value of
the underlying Common Shares. Each of these options is exercisable in
one-third cumulative annual increments beginning May 20, 2000. Each
option also becomes 100% exercisable immediately 10 days before or upon
specified changes in control of the Company. The portion of each of
these options that is exercisable at the date of termination of
employment remains exercisable until the expiration date of the option,
unless termination is for cause.
If, upon exercise of any of the options described above, we must pay
any amount for income tax withholding, in the Compensation Committee's or the
Board of Directors' sole discretion, either the optionee will pay such amount to
us or the number of Common Shares we deliver to the optionee will be
appropriately reduced to reimburse us for such payment. The Compensation
Committee or the Board may also permit the optionee to choose to have these
shares withheld or to tender Common Shares the optionee already owns. The
Compensation Committee or the Board may also make such other arrangements with
respect to income tax withholding as it shall determine.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth information concerning each exercise of
stock options during the fiscal year ended November 30, 1999 by each of the
executive officers named in the Summary Compensation Table above and the value
of unexercised options held by them as of November 30, 1999:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE OPTIONS AT FY-END (#) AT FY-END ($)
--------------------------- ---------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bruce J. Barrett...... 0 0 233,200 225,000 0 0
Raymond W. Gunn....... 0 0 79,600 52,000 0 0
Richard S. Scheuing... 0 0 29,188 58,737 0 0
Ronald A. Widman...... 0 0 22,747 51,083 0 0
Pamela A. Winters..... 0 0 25,645 56,605 0 0
</TABLE>
47
<PAGE> 49
"Value Realized" represents the fair value of the underlying securities on the
exercise date minus the aggregate exercise price of the options.
COMPENSATION OF DIRECTORS
We refer to our directors who are not our officers or employees as
Outside Directors. Our 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. We also reimburse Outside Directors for their reasonable expenses
of attending Board and Board committee meetings. In addition, our Board of
Directors has determined to grant Outside Directors who continue to serve as our
directors after each annual meeting of shareholders, 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.
Also, during fiscal 1999, we granted A. Brean Murray a 10-year option to
purchase 2,000 Common Shares on June 2, 1999, the date he was elected as a
director, exercisable at the fair market value of the Common Shares on the date
of grant.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Bruce J. Barrett. As of May 13, 1994, we 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. Mr. Barrett is also entitled to participate in any bonus plan
established by the Compensation Committee of the Board of Directors. We adopted
bonus plans for fiscal 1999 and for fiscal 2000. 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 us and
Mr. Gunn, dated December 1, 1992, as amended, Mr. Gunn was employed as Executive
Vice President and Chief Financial Officer and Treasurer for a period ending
April 30, 2000. Mr. Gunn's base salary under the agreement was $110,250. Mr.
Gunn was entitled to a bonus determined at the discretion of our Board of
Directors. Mr. Gunn was entitled to various fringe benefits under the agreement,
including disability insurance, a leased automobile, and twelve months of
compensation and benefits if his employment under the agreement was terminated
without cause or if the agreement expired without being renewed. The agreement
also provides that Mr. Gunn will not compete against us during specified periods
following the termination of his employment. Mr. Gunn resigned as an executive
officer effective January 14, 2000.
Stock Option Terms. All options granted under our stock option plans
through March 21, 2000, 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, 1999, Daniel S. Follis and H.
Raymond Wallace served as the members of our Compensation Committee until April
13, 1999 when Robert R. Henry replaced Mr. Follis on the committee. None of the
members of our Compensation Committee was, during the fiscal year ended November
30, 1999, one of our officers or employees, or one of our former officers,
except that Mr. Wallace became our non-salaried Chairman of the Board on January
27, 1995 and became a non-officer Chairman of the Board effective April 6, 1995.
None of the committee members had any relationship with us requiring disclosure
by us pursuant to Securities and Exchange Commission rules regarding disclosure
of related-party transactions, except that Mr. Follis had the relationship with
us described below:
48
<PAGE> 50
We entered into a distributorship agreement with Somatek, Inc. an
entity 50% owned by Daniel S. Follis, one of our directors. The distributorship
covered the territory of Michigan. The agreement was approved by our
disinterested directors and was made in the ordinary course of business on our
standard form of distributorship agreement. Transactions pursuant to the
distributorship agreement were on substantially the same terms, including the
purchase price of our product covered by the agreement, as those prevailing at
the time form comparable agreements and transactions with other distributors.
During the fiscal year ended November 30, 1997, we had no sales to Somatek, Inc.
pursuant to its distributor agreement. Effective February 28, 1997, we
terminated our distribution agreement with Somatek, Inc., and in connection with
such termination, we wrote off $12,500 of our receivables from Somatek, Inc. in
exchange for the return of two INVOS 3100A Cerebral Oximeters from Somatek, Inc.
As of November 30, 1997, Somatek, Inc. had no indebtedness outstanding to us.
CERTAIN TRANSACTIONS
See "Management - Compensation - Compensation Committee Interlocks and
Insider Participation" for a description of a distributorship agreement between
us and Mr. Follis.
Brean Murray & Co., Inc. was the underwriter of our public offerings of
Common Shares in June 1997 and in April 1998. In November 1999, we engaged Brean
Murray & Co., Inc. to provide investment banking advice and services to us for a
term of six months and then month-to-month thereafter, unless earlier terminated
by the parties. We agreed to pay Brean Murray & Co., Inc. a fee of $50,000 plus
reasonable out-of-pocket expenses for its services under this agreement. In
addition, Brean Murray & Co., Inc. will receive a 3.5% commission on sales of
our Common Shares to Kingsbridge pursuant to the Equity Line Agreement. A. Brean
Murray, one of our directors since June 1999, is the President and Chief
Executive Officer of Brean Murray & Co., Inc. Brean Murray & Co., Inc. is a
wholly-owned subsidiary of BMI Holding Co. A. Brean Murray is also the President
and Chief Executive Officer of BMI Holding Co. and he and his wife own 70% of
the outstanding voting stock of BMI Holding Co.
Pursuant to an engagement letter between us and Brean Murray & Co.,
Inc., dated March 1, 2000, we agreed to pay Brean Murray & Co., Inc. a
commission of 3.5% on proceeds of specified securities sales, including sales
pursuant to the Equity Line Agreement.
49
<PAGE> 51
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the
beneficial ownership of our Common Shares as of March 21, 2000, and as adjusted
to reflect an assumed sale of 1,000,000 Common Shares to Kingsbridge pursuant to
the Equity Line Agreement, by (1) each of our directors, (2) each of our
executive officers named in the Summary Compensation Table above, (3) all of our
directors and executive officers as a group and (4) each person known by us to
own more than 5% of our Common Shares.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED
NUMBER OF ----------------------------------------
COMMON SHARES BEFORE THE AFTER THE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING (1) OFFERING (2)
- ------------------------ ------------------ ------------ ------------
<S> <C> <C> <C>
BRUCE J. BARRETT.................... 505,692 (3) 7.9% 6.8%
RAYMOND W. GUNN..................... 83,200 (4) 1.4% 1.2%
RICHARD S. SCHEUING................. 55,692 (5) * *
RONALD A. WIDMAN.................... 39,330 (6) * *
PAMELA A. WINTERS................... 43,917 (7) * *
DR. JAMES I. AUSMAN................. 24,285 (8) * *
DANIEL S. FOLLIS.................... 32,931 (9) * *
ROBERT R. HENRY..................... 152,000 (10) 2.5% 2.2%
A. BREAN MURRAY..................... 322,290 (11) 5.2%% 4.5%
H. RAYMOND WALLACE.................. 21,111 (12) * *
ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP (10 PERSONS)... 1,220,598 (13) 18.0% 15.7%
</TABLE>
- ------------------------------------
* Represents less than 1% of the outstanding Common Shares.
(1) Based on 6,035,597 Common Shares outstanding as of March 21, 2000.
(2) Based on 7,035,597 Common Shares outstanding, assuming 1,000,000 Common
Shares are sold to Kingsbridge pursuant to the Equity Line Agreement.
(3) Includes 358,200 Common Shares that Mr. Barrett has the right to
acquire within 60 days of March 21, 2000 and 500 shares owned by his
wife. Mr. Barrett's address is 1653 East Maple Road, Troy, Michigan
48083-4208.
(4) Includes 79,600 Common Shares that Mr. Gunn has the right to acquire
within 60 days of March 21, 2000 and 3,600 shares owned jointly with
his wife. Mr. Gunn resigned as an executive officer effective January
14, 2000.
(5) Includes 55,692 Common Shares that Mr. Scheuing has the right to
acquire within 60 days of March 21, 2000.
(6) Includes 39,330 Common Shares that Mr. Widman has the right to acquire
within 60 days of March 21, 2000.
(7) Includes 43,917 Common Shares that Ms. Winters has the right to acquire
within 60 days of March 21, 2000.
(8) Includes 11,511 Common Shares that Dr. Ausman has the right to acquire
within 60 days of March 21, 2000, 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.
(9) Includes 11,500 Common Shares that Mr. Follis has the right to acquire
within 60 days of March 21, 2000. The 32,931 Common Shares shown above
as beneficially owned by Mr. Follis include 8,820 Common
50
<PAGE> 52
Shares owned by The Infinity Fund, a limited partnership in which Mr.
Follis is a 6.068% limited partner and a 50% general partner and which
is administered by Verschuren & Follis, Inc., a corporation in which
Mr. Follis is a 50% shareholder, a director and the President.
(10) Includes 2,000 Common Shares that Mr. Henry has the right to acquire
within 60 days of March 21, 2000.
(11) Includes (1) 30,000 Common Shares owned by A. Brean Murray, (2) 80,290
Common Shares owned by Brean Murray & Co., Inc., an investment banking
company that is a wholly-owned subsidiary of BMI Holding Co.; A. Brean
Murray owns 43.53% of the outstanding voting stock of BMI Holding Co.
and his wife owns 11.87% of the outstanding voting stock of BMI Holding
Co., (3) 10,000 Common Shares owned by the Brean Murray & Co., Inc.
Profit Sharing Trust, (4) 200,000 Common Shares that Brean Murray &
Co., Inc. has the right to acquire within 60 days of March 21, 2000
upon the exercise of warrants granted to Brean Murray & Co., Inc. in
connection with its underwriting of a public offering of our securities
in June 1997, and (5) 2,000 Common Shares that A. Brean Murray has the
right to acquire within 60 days of March 21, 2000 upon the exercise of
an option granted to A. Brean Murray by us in connection with his
service as one of our directors. Mr. Murray's address is 570 Lexington
Avenue, New York, New York 10022-6822.
(12) Includes 9,511 Common Shares that Mr. Wallace has the right to acquire
within 60 days of March 21, 2000 and 1,000 shares held in a living
trust; Mr. Wallace has sole voting and dispositive power over the
shares held in the trust.
(13) Includes 751,911 Common Shares which all executive officers and
directors as a group have the right to acquire within 60 days of March
21, 2000.
51
<PAGE> 53
SELLING SHAREHOLDER
The following table sets forth information regarding beneficial
ownership of our Common Shares by Kingsbridge as of March 21, 2000. Upon the
completion of the offering and assuming the sale by Kingsbridge of all of the
Common Shares available for resale under this Prospectus, Kingsbridge will own
less than 1% of our outstanding Common Shares.
<TABLE>
<CAPTION>
NUMBER OF SHARES BENEFICIALLY
SHARES BENEFICIALLY NUMBER OF OWNED
OWNED SHARES BEING AFTER OFFERING
----------------------------------------
NAME AND ADDRESS BEFORE OFFERING OFFERED NUMBER PERCENT
- ---------------- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Kingsbridge Capital Limited 0(1) 1,200,000(2) 0(3) *
3rd Floor
Barclays House
P.O. Box 3340
Wickhams Cay 1
Road Town
Tortola, British Virgin Islands
</TABLE>
.........
*Represents less than 1% of the outstanding Common Shares.
(1) Does not include 200,000 Common Shares that is subject to a warrant
held by Kingsbridge that is not exercisable until September 3, 2000.
(2) Includes 1,000,000 Common Shares that may be issued to Kingsbridge
pursuant to the Equity Line Agreement and 200,000 Common Shares subject
to the warrant issued to Kingsbridge on March 6, 2000.
(3) Assumes that all shares acquired pursuant to the Equity Line Agreement
and the warrant dated March 6, 2000 are sold pursuant to this
Prospectus.
Kingsbridge has not had any position, office or other material
relationship with us or any of our affiliates within the past three years other
than as a result of the ownership of Common Shares or as a result of the
negotiation and the execution of the Equity Line Agreement. The natural person
controlling Kingsbridge is Valentine O'Donoghue.
The shares offered by this Prospectus by Kingsbridge are to be acquired
pursuant to the Equity Line Agreement between us and Kingsbridge or upon
exercise of the warrant issued to Kingsbridge on March 6, 2000. Under the Equity
Line Agreement, we agreed to file a registration statement with the SEC to
permit Kingsbridge to resell the shares from time to time in the market or in
privately-negotiated transactions. We will prepare and file such amendments to
the registration statement, of which this Prospectus forms a part, and such
supplements to this Prospectus as may be necessary in accordance with the rules
and regulations of the Securities Act to keep it effective until two years after
termination of the Equity Line Agreement, or approximately four years after the
date of this Prospectus.
We have agreed to pay the expenses relating to the preparation of the
registration statement of which this Prospectus forms a part.
52
<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capital shares consist of an aggregate of 20,000,000
Common Shares, par value $0.01 per share, and 1,000,000 Preferred Shares, par
value $0.01 per share. As of March 21, 2000, 6,035,597 Common Shares and no
Preferred Shares were outstanding. All of the shares being offered in this
offering are Common Shares.
COMMON SHARES
Holders of Common Shares have one vote per share on each matter
submitted to a vote of the shareholders and a right to participate ratably in
our net assets upon liquidation. Holders of Common Shares participate ratably in
dividends and distributions that may be declared by the Board of Directors from
funds legally available for that purpose. See "Price Range of Common Shares and
Dividend Policy." The Common Shares have no conversion rights, are not
redeemable and are not entitled to any preemptive or subscription rights. The
Common Shares currently outstanding are, and the shares to be issued in pursuant
to the Equity Line Agreement and the warrant issued to Kingsbridge will be, duly
authorized, validly issued, fully paid and non-assessable. Holders of Common
Shares have no cumulative voting rights, and accordingly, holders of a majority
of the outstanding Common Shares are able to elect all of our directors.
Our Board of Directors is divided into three classes and the directors
serve staggered three-year terms. Our directors will hold office until the
Annual Meeting of Shareholders to be held in 2000 for Robert R. Henry and H.
Raymond Wallace, the Annual Meeting of Shareholders to be held in 2001 for Bruce
J. Barrett and A. Brean Murray, and the Annual Meeting of Shareholders to be
held in 2002 for Dr. James I. Ausman and Daniel S. Follis, and until their
successors are elected and qualified, or until their earlier death, resignation
or removal. Directors may be removed only for cause. Our Restated Articles of
Incorporation set the minimum and maximum number of directors constituting the
entire Board at three and fifteen, respectively, and require approval of holders
of 90% of our voting shares to amend this provision. In addition, our bylaws
require advance notice of any nominations for director, along with information
about the nominee and the shareholder.
BUSINESS COMBINATION PROVISIONS
Chapters 7A and 7B of the Michigan Business Corporation Act may affect
attempts to acquire control of us. In general, under Chapter 7A, "business
combinations" (defined to include, among other transactions, certain mergers,
dispositions of assets or shares and recapitalizations) between covered Michigan
business corporations or their subsidiaries and an "interested shareholder"
(defined as the direct or indirect beneficial owner of at least 10% of the
voting power of a covered corporation's outstanding shares) can only be
consummated if approved by at least 90% of the votes of each class of the
corporation's shares entitled to vote and by at least two-thirds of such voting
shares not held by the interested shareholder or affiliates, unless five years
have elapsed after the person involved became an "interested shareholder" and
unless certain price and other conditions are satisfied. The Board of Directors
has the power to elect to be subject to Chapter 7A as to specifically identified
or unidentified interested shareholders.
In general, under Chapter 7B, an entity that acquires "Control Shares"
of Somanetics may vote the Control Shares on any matter only if a majority of
all shares, and of all non-"Interested Shares", of each class of shares entitled
to vote as a class, approve such voting rights. Interested Shares are shares
owned by our officers, our employee-directors and the entity making the Control
Share Acquisition. Control Shares are shares that when added to shares already
owned by an entity, would give the entity voting power in the election of
directors over any of the three thresholds: one-fifth, one-third and a majority.
The effect of the statute is to condition the acquisition of voting control of a
corporation on the approval of a majority of the pre-existing disinterested
shareholders. The Board of Directors may amend the bylaws before a Control Share
Acquisition occurs to provide that Chapter 7B does not apply to us. In addition,
certain provisions of our bylaws could have the effect of delaying, deterring or
preventing changes in control of us. See "Risk Factors -- Provisions of our
Articles of Incorporation, Bylaws and corporate law have potential anti-takeover
effects."
53
<PAGE> 55
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Michigan Business Corporation Act permits Michigan corporations to
limit the personal liability of directors for a breach of their fiduciary
duties. Our Restated Articles of Incorporation so limit the liability of
directors. Our bylaws also provide for indemnification of directors and
executive officers. We believe that such indemnification will assist us in
continuing to attract and retain talented directors and officers in light of the
risk of litigation directed against directors and officers of publicly-held
corporations.
Our Restated Articles of Incorporation limit director liability to the
maximum extent permitted by Michigan law. Michigan law allows the articles of
incorporation of a Michigan corporation to contain a provision eliminating or
limiting a director's liability to the corporation or its shareholders for money
damages for money damages for any action taken or any failure to take any action
as a director, except for liability for specified acts. As a result of the
inclusion of such a provision, our shareholders may be unable to recover
monetary damages against directors for actions taken by them which constitute
negligence or gross negligence or which are in violation of their fiduciary
duties, although it may be possible to obtain injunctive or other equitable
relief with respect to such actions. If equitable remedies are found not to be
available to shareholders in any particular case, shareholders may not have any
effective remedy against the challenged conduct. These provisions, however, do
not affect liability under the Securities Act.
The Michigan Business Corporation Act authorizes a corporation under
specified circumstances to indemnify its directors and officers, including
reimbursement for expenses incurred. The provisions of our bylaws relating to
indemnification of directors and executive officers generally provide that
directors and executive officers will be indemnified to the fullest extent
permissible under Michigan law. The provision also provides for advancing
litigation expenses at the request of a director or executive officer. These
obligations are broad enough to permit indemnification with respect to
liabilities arising under the Securities Act or the Michigan Uniform Securities
Act. Mr. Barrett's employment agreement also provides for indemnification.
In addition, we have obtained Directors' and Officers' liability
insurance. The policy provides for $1,000,000 in coverage including prior acts
dating to our inception and liabilities under the Securities Act in connection
with this offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, we have been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
PREFERRED SHARES
We have also authorized the issuance of up to 1,000,000 Preferred
Shares, $0.01 par value per share, none of which is outstanding as of the date
of this Prospectus. The Preferred Shares may be issued from time to time in one
or more series. Our Board of Directors is authorized to determine the rights,
preferences, privileges and restrictions granted to, and imposed upon, each
series of Preferred Shares and to fix the number of shares of any series of
Preferred Shares and the designation of any such series. We could issue
Preferred Shares, under certain circumstances, to prevent a takeover of the
Company, and our Board of Directors may issue Preferred Shares without any
action of the holders of the Common Shares, which could have a detrimental
effect on the rights of holders of the Common Shares, including loss of voting
control. Anti-takeover provisions that could be included in the Preferred Shares
when issued might depress the market price of our securities and might limit the
shareholders' ability to receive a premium on their shares by discouraging
takeover and tender offer bids. We have no present plans to issue any Preferred
Shares.
TRANSFER AGENT
American Stock Transfer & Trust Company is the transfer agent for the
Common Shares. As of February 15, 2000 there were 619 holders of record of our
Common Shares.
54
<PAGE> 56
REGISTRATION RIGHTS
The placement agents for our Regulation S Offerings in 1995 and 1996
and their transferees have piggy-back registration rights with respect to the
Common Shares underlying the warrants to purchase 26,424 Common Shares we
granted to them. In addition, the underwriter of our 1997 public offering of
Common Shares, Brean Murray & Co., Inc., has demand and piggy-back registration
rights in connection with the warrant to purchase 200,000 Common Shares issued
to it in connection with that offering. These rights allow the holders to
include their Common Shares in any registration of our securities in a
registration statement under the Securities Act, subject to specified
limitations.
Pursuant to a Registration Rights Agreement we entered into with
Kingsbridge Capital Limited in connection with our Equity Line Agreement, we are
required to keep current a registration statement in order to permit Kingsbridge
to resell to the public any of our Common Shares that we sell to Kingsbridge
pursuant to the Equity Line Agreement, as well as shares that Kingsbridge may
acquire upon exercise of the warrant we issued to Kingsbridge on March 6, 2000.
For a description of the Equity Line Agreement and the warrant, see "The Equity
Line Agreement."
55
<PAGE> 57
PLAN OF DISTRIBUTION
Kingsbridge has advised us that it may sell the Common Shares offered
by this Prospectus from time to time in transactions on The Nasdaq SmallCap
Market, any other market where the Common Shares are then listed, in negotiated
transactions, or otherwise, or by a combination of these methods, at fixed
prices which may be changed, at market prices at the time of sale, at prices
related to market prices or at negotiated prices. Kingsbridge may effect these
transactions by selling the shares to or through broker-dealers, who may receive
compensation in the form of discounts, concessions or commissions from
Kingsbridge or the purchasers of the shares for whom the broker-dealer may act
as an agent or to whom they may sell the shares as a principal, or both. The
compensation to a particular broker-dealer may exceed customary commissions.
Kingsbridge is an "underwriter" within the meaning of the Securities
Act in connection with the sale of the shares offered by this Prospectus.
Assuming that we are in compliance with the conditions of the Equity Line
Agreement, Kingsbridge must accept puts of shares from us, subject to minimum
and maximum aggregate dollar amounts, during the term of the Equity Line
Agreement. Broker-dealers who act in connection with the sale of the shares may
also be deemed to be underwriters. Profits on any resale of the shares as a
principal by such broker-dealers and any commissions received by such
broker-dealers may be deemed to be underwriting discounts and commissions under
the Securities Act.
Any broker-dealer participating in such transactions as agent may
receive commissions from Kingsbridge, and, if they act as agent for the
purchaser of such shares, from the purchaser. Broker-dealers may agree with
Kingsbridge to sell a specified number of shares at a stipulated price per
share, and, to the extent such a broker-dealer is unable to do so acting as
agent for Kingsbridge, to purchase as principal any unsold shares at the price
required to fulfill the broker-dealer commitment to Kingsbridge. Broker-dealers
who acquire shares as principal may thereafter resell such shares from time to
time in transactions, which may involve crosses and block transactions and which
may involve sales to and through other broker-dealers, including transaction of
the nature described above, in the over-the-counter market, in negotiated
transactions or otherwise at market prices prevailing at the time of sale or at
negotiated prices, and in connection with such resales may pay to or receive
from the purchasers of such shares commissions computed as described above.
To the extent required under the Securities Act, a supplemental
Prospectus will be filed, disclosing:
- the name of any such broker-dealers;
- the number of shares involved;
- the price at which such shares are to be sold;
- the commissions paid or discounts or concessions allowed to such
broker-dealers, where applicable;
- that such broker-dealers did not conduct any investigation to
verify the information set out or incorporated by reference in
the Prospectus, as supplemented; and
- other facts material to the transaction.
Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of the shares may not simultaneously engage in
market making activities with respect to such securities for a period beginning
when such person becomes a distribution participant and ending when such person
completes such person's participation in the distribution, including
stabilization activities in the Common Shares to effect covering transactions,
to impose penalty bids or to effect passive market making bids. In addition and
without limiting the foregoing, in connection with transaction in the shares,
Somanetics and Kingsbridge will be subject to applicable provisions of the
Exchange Act and the rules and regulations under the Exchange Act, including,
without limitation, Rule10b-5 and, insofar as Somanetics and Kingsbridge are
distribution participants, Regulation M and Rules 100, 101, 102, 103, 104 and
105 of Regulation M. All of the foregoing might affect the marketability of the
shares.
Kingsbridge will pay all commissions and some other expenses associated
with the resale of the shares put to it under the Equity Line Agreement. The
shares offered by this Prospectus are being registered pursuant to our
contractual obligations, and we have agreed to pay the costs of registering the
shares under this Prospectus, including some legal fees, commissions, transfer
taxes and some other expenses for the resale of the Common Shares. We have also
agreed to indemnify Kingsbridge with respect to the shares offered by this
Prospectus against
56
<PAGE> 58
some liabilities, including, without limitation, some liabilities under the
Securities Act, or, if the indemnity is unavailable, to contribute toward
amounts required to be paid in respect of such liabilities.
Shares sold to Kingsbridge pursuant to the terms of the Equity Line
Agreement will be at a purchase price between 86% and 90% of the then current
average market price of our Common Shares, as defined in the Equity Line
Agreement, on the date of sale. Based on the average market price of the Common
Shares for the five trading day period ended March 21, 2000 of $5.30625,
calculated pursuant to the Equity Line Agreement, a summary of our potential
expenses in connection with the Equity Line Agreement is as follows:
- a discount to Kingsbridge of $0.63675 per share;
- a warrant to Kingsbridge to purchase 200,000 Common Shares
exercisable by Kingsbridge at $4.36 a share;
- expenses of this offering payable by us of approximately $86,000;
- reimbursement for securities liability insurance equal to 3% of
each put amount, or $0.140085 per share; and
- a cash commission payable to Brean Murray & Co., Inc. equal to
3.5% of each put amount, or $0.1634325 per share. A. Brean Murray
is one of our directors. See "Certain Transactions" for a
description of transactions among Mr. Murray, Brean Murray & Co.,
Inc. and us.
57
<PAGE> 59
LEGAL MATTERS
The validity of the issuance of the Common Shares offered by this
Prospectus will be passed upon for Somanetics by Honigman Miller Schwartz and
Cohn, Detroit, Michigan.
EXPERTS
The financial statements included in this Prospectus and the related
financial statement schedule included elsewhere in the registration statement,
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein and elsewhere in the registration statement
(which reports express an unqualified opinion and include an explanatory
paragraph referring to an uncertainty concerning the Company's ability to
continue as a going concern) and have been so included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
58
<PAGE> 60
SOMANETICS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
PAGE
<S> <C>
Independent Auditors' Report.............................................................................. F-2
Balance Sheets --- November 30, 1999 and 1998............................................................. F-3
Statements of Operations --- For the Years Ended November 30, 1999, 1998 and 1997......................... F-4
Statements of Shareholders' Equity --- For the Years Ended November 30, 1999, 1998 and 1997.............. F-5
Statements of Cash Flows --- For the Years Ended November 30, 1999, 1998 and 1997......................... F-6
Notes to Financial Statements............................................................................. F-7
</TABLE>
F-1
<PAGE> 61
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Somanetics Corporation
Troy, Michigan
We have audited the accompanying balance sheets of Somanetics Corporation (the
"Company") as of November 30, 1999 and 1998, and the related statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended November 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at November 30, 1999 and 1998,
and the results of its operations and its cash flows for each of the three years
in the period ended November 30, 1999 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, conditions exist which raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans concerning
these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
DELOITTE & TOUCHE LLP
Detroit, Michigan
January 24, 2000
F-2
<PAGE> 62
SOMANETICS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
November 30,
-----------------------------------
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 4).......................................... $ 1,423,423 $ 1,976,829
Marketable Securities (Note 4).............................................. 833,736 4,916,942
Accounts receivable, net of allowance for doubtful accounts of approximately
$0 and $153,000 at November 30, 1999 and 1998, respectively (Note 9).... 764,153 615,682
Inventory, net (Note 4)..................................................... 611,332 660,964
Prepaid expenses............................................................ 89,702 92,050
------------- -------------
Total current assets.................................................... 3,722,346 8,262,467
------------- -------------
PROPERTY AND EQUIPMENT: (Note 4)
Machinery and equipment..................................................... 1,397,214 1,309,539
Furniture and fixtures...................................................... 183,497 184,949
Leasehold improvements...................................................... 165,642 166,770
------------- -------------
Total................................................................... 1,746,353 1,661,258
Less accumulated depreciation and amortization.............................. (1,097,695) (957,083)
-------------- --------------
Net property and equipment.............................................. 648,658 704,175
------------- -------------
OTHER ASSETS:
Patents and trademarks, net (Note 4)........................................ 58,393 65,305
Other....................................................................... 15,000 15,000
------------- -------------
Total other assets...................................................... 73,393 80,305
------------- -------------
TOTAL ASSETS.................................................................... $ 4,444,397 $ 9,046,947
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................ $ 498,008 $ 262,932
Accrued liabilities (Notes 5 and 7)......................................... 263,895 366,222
------------- -------------
Total current liabilities............................................... 761,903 629,154
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 7).......................................... -- --
SHAREHOLDERS' EQUITY: (Notes 3 and 11)
Preferred shares; authorized, 1,000,000 shares of $.01 par value;
no shares issued or outstanding......................................... -- --
Common shares; authorized, 20,000,000 shares of $.01 par value;
issued and outstanding, 6,035,597 and 6,035,597 shares at
November 30, 1999and 1998, respectively................................. 60,356 60,356
Additional paid-in capital.................................................. 50,290,067 50,290,067
Accumulated unrealized losses on investments................................ (166,270) (96,262)
Accumulated deficit......................................................... (46,501,659) (41,836,368)
-------------- --------------
Total shareholders' equity.............................................. 3,682,494 8,417,793
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................................... $ 4,444,397 $ 9,046,947
============= =============
</TABLE>
See notes to financial statements
F-3
<PAGE> 63
SOMANETICS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended November 30,
----------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
NET REVENUES (Notes 4 and 10)................. $ 4,000,972 $ 2,490,851 $ 1,211,784
COST OF SALES................................. 1,905,541 1,326,160 631,425
-------------- -------------- --------------
Gross margin.............................. 2,095,431 1,164,691 580,359
-------------- -------------- --------------
OPERATING EXPENSES:
Research, development and engineering
(Note 4).............................. 598,348 664,874 736,427
Selling, general and administrative
(Note 9).............................. 6,435,628 6,346,595 6,238,330
-------------- -------------- --------------
Total operating expenses.............. 7,033,976 7,011,469 6,974,757
-------------- -------------- --------------
OPERATING LOSS................................ (4,938,545) (5,846,778) (6,394,398)
--------------- --------------- ---------------
OTHER INCOME:
Interest income........................... 273,254 368,846 206,663
Other..................................... -- 8,100 32,252
-------------- -------------- --------------
Total other income.................... 273,254 376,946 238,915
-------------- -------------- --------------
NET LOSS...................................... $ (4,665,291) $ (5,469,832) $ (6,155,483)
=============== =============== ===============
NET LOSS PER COMMON SHARE --
BASIC AND DILUTED (Note 4)................ $ (.77) $ (1.01) $ (1.88)
============== ============== ==============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
(Note 4).................................. 6,035,597 5,421,795 3,271,642
============== ============== ==============
</TABLE>
See notes to financial statements
F-4
<PAGE> 64
SOMANETICS CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL UNREALIZED TOTAL
SHARE PAID-IN ACCUMULATED LOSSES ON SHAREHOLDERS
VALUE CAPITAL DEFICIT INVESTMENTS EQUITY
----- ------- ------- ----------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 1, 1996................ $ 22,854 $ 34,241,798 $ (30,211,053) $ 4,053,599
Redemption of fractional shares............ (1) (377) (378)
For cash, less issuance costs of $1,008,782 20,000 6,971,218 6,991,218
Net loss and comprehensive income...... (6,155,483) (6,155,483)
Balance at November 30, 1997............... ------ ------------ ----------- -------- -----------
42,853 41,212,639 (36,366,536) 4,888,956
Exercise of stock options for cash......... 3 1,345 1,348
For cash, less issuance costs of $968,917.. 17,500 9,076,083 9,093,583
Net loss................................... (5,469,832) (5,469,832)
Unrealized losses on investments........... (96,262) (96,262)
Comprehensive income................... ------ ------------ ----------- -------- ------------
Balance at November 30, 1998...............
------ ------------ ----------- -------- -------------
60,356 50,290,067 (41,836,368) (96,262) 8,417,793
Net loss................................... (4,665,291) (4,665,291)
Unrealized losses on investments........... (70,008) (70,008)
Comprehensive income................... ------ ------------ ----------- -------- ------------
Balance at November 30, 1999............... $ 60,356 $ 50,290,067 $ (46,501,659) $(166,270) $ (3,682,494)
====== ============ ============ ========= ============
</TABLE>
<TABLE>
<CAPTION>
COMPREHENSIVE
INCOME
------
<S> <C>
Balance at December 1, 1996................
Redemption of fractional shares............
For cash, less issuance costs of $1,008,782 $ (6,155,483)
Net loss and comprehensive income...... ============
Balance at November 30, 1997...............
Exercise of stock options for cash.........
For cash, less issuance costs of $968,917.. (5,469,832)
Net loss................................... (96,262)
Unrealized losses on investments........... ------------
Comprehensive income................... $ (5,566,094)
Balance at November 30, 1998............... ============
(4,665,291)
Net loss................................... (70,008)
Unrealized losses on investments........... ------------
Comprehensive income................... $ (4,735,299)
Balance at November 30, 1999............... ============
</TABLE>
See notes to financial statements.
F-5
<PAGE> 65
SOMANETICS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended November 30,
------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $ (4,665,291) $ (5,469,832) $ (6,155,483)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization.................... 134,347 93,537 50,497
Changes in assets and liabilities:
Accounts receivable (increase)................ (148,471) (423,984) (262)
Inventory (increase) decrease................. 49,632 (227,950) 498,121
Prepaid expenses (increase) decrease.......... 2,348 (20,469) (6,146)
Other assets decrease......................... -- 8,512 6,912
Accounts payable increase (decrease).......... 235,076 (78,568) (22,532)
Accrued liabilities increase (decrease)....... (102,327) (80,754) 192,866
---------------- ---------------- ---------------
Net cash (used in) operations.................... (4,494,686) (6,199,508) (5,436,027)
---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities................... -- (5,013,204) (2,470,780)
Proceeds from sale of marketable securities.......... 4,013,198 2,470,780 --
Acquisition of property and equipment (net).......... (71,918) (508,546) (243,568)
---------------- ---------------- ----------------
Net cash provided by (used in) investing activities 3,941,280 (3,050,970) (2,714,348)
--------------- ----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Shares.............. -- 9,094,931 6,991,218
Redemption of Class B Warrants and fractional shares. -- -- (378)
--------------- --------------- ----------------
Net cash provided by financing activities........ -- 9,094,931 6,990,840
--------------- --------------- ---------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS............. (553,406) (155,547) (1,159,535)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD.................................. 1,976,829 2,132,376 3,291,911
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD........................................ $ 1,423,423 $ 1,976,829 $ 2,132,376
=============== =============== ===============
</TABLE>
See notes to financial statements
F-6
<PAGE> 66
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Somanetics Corporation (the "Company"), a Michigan corporation formed
in January 1982, develops, manufactures and markets the INVOS Cerebral Oximeter
(the "Cerebral Oximeter"), the only non-invasive patient monitoring system
commercially available in the United States 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
products, as well as devoting efforts to raising capital.
2. FINANCIAL STATEMENT PRESENTATION
The Company has not achieved sales necessary to support operations. The
Company has incurred an accumulated deficit of $46,501,659 through November 30,
1999. The Company had working capital of $2,960,443, cash, cash equivalents and
marketable securities of $2,257,159, total current liabilities of $761,903 and
shareholders' equity of $3,682,494, as of November 30, 1999.
On June 6, 1996 and October 13, 1997 the Company received clearance
from the FDA to market its model 3100A adult Cerebral Oximeter and enhancements
to its Cerebral Oximeter, respectively, in the United States. During the third
quarter of fiscal 1999, the Company also submitted its 510(k) application to the
FDA for the pediatric model Cerebral Oximeter, and is awaiting FDA clearance to
market the pediatric model in the United States. The Company's current financial
condition and results of operations and the status of its product marketing
efforts and sales have been affected by the process of obtaining such
clearances.
As of February 17, 2000, the Company had 17 international distributors
for the model 4100 Cerebral Oximeter, one international distributor for the
model 5100 Cerebral Oximeter, 12 direct sales personnel, 5 clinical specialists,
and one international sales consultant. During fiscal 1999, the Company sold its
product to 20 of its international distributors and four of its United States
distributors, and devoted most of its marketing to introducing cerebral oximetry
patient monitoring into the operating rooms of hospitals. There can be no
assurance that the Company will be successful or profitable in marketing the
Cerebral Oximeter and the related SomaSensor.
Management believes that markets exist for the products the Company has
developed and is developing; however, there is an inherent uncertainty
associated with the success of such products. The likelihood of success of the
Company must be considered in view of the Company's limited resources and
current financial condition, the problems and expenses frequently encountered in
connection with formation of a new business, the ability to raise new funds, the
development and application of new technology and the competitive environment in
which the Company operates.
The net proceeds from the public offering of Common Shares in April
1998 (Note 3) were sufficient to fund the Company's working capital requirements
for the fiscal year ended November 30, 1999. Current sales are not sufficient to
fund operations.
The Company believes that the cash, cash equivalents and marketable
securities on hand at November 30, 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 product-line extensions of the
F-7
<PAGE> 67
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Cerebral Oximeter for use on newborns, other non-brain tissue applications, and
enhancements to the Cerebral Oximeter and SomaSensor, 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 2000.
The Company is negotiating with a placement agent and potential
purchasers for a private equity line financing. The equity line would require
the purchasers to purchase up to $15 million of newly-issued Common Shares from
the Company at times and in amounts selected by the Company over a period of up
to two years. Individual purchases would have to be at least 15 trading days
apart and would be limited to $10,000 to $1,000,000 depending on an average
market price and daily trading volume for the Company's Common Shares. The
purchase price for the Common Shares would be 86% to 90% of an average market
price for the Common Shares. The percentage would vary depending on the average
market price of the Common Shares. In addition, the Company would be obligated
to pay a 3% insurance premium to the purchasers and a 3-1/2% fee to the
placement agent. The Company must obtain shareholder approval under The Nasdaq
SmallCap Market rules if and when it issues 20% or more of its outstanding
shares under this arrangement. The Company would also be required to register
the purchasers' resales of the Common Shares they purchase. This description
does not constitute an offer of any securities for sale, and any such public
offering will be made only by means of a prospectus. The Company would be
obligated to sell a minimum of $7,500,000 of Common Shares to the purchasers or
pay them the discount on the unsold shares. The Company would also be required
to grant the purchasers a 5-1/2 year warrant to purchase 200,000 Common Shares
exercisable at 115% of an average market value of the Common Shares.
The type and amount of securities, if any, that might ultimately be
issued in any such offering and the specific terms and conditions of any such
offering have not yet been definitively determined and will be dependent on
negotiations with the placement agent and the potential purchasers, market
conditions and management's then current estimate of the proceeds necessary or
desired to sustain the Company's operations. There can be no assurance that such
equity line or any other offering will occur or that the Company will be able to
raise any capital or capital in amounts it desires, or on terms and conditions
acceptable to the Company.
On April 1, 1999, the Company renewed its $2,000,000 Revolving Note and
a Pledge Agreement with Fifth Third Bank of Northwestern Ohio, N.A. The
principal amount outstanding under the note bears interest, payable monthly, at
the bank's prime rate (8.75% as of February 15, 2000), is collateralized by all
property of the Company held at the bank and, upon drawing against the line of
credit, by any securities account of the Company up to the value of the loan,
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, 2000. 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 obtain any funds on
terms acceptable to the Company and at times required by the Company through
sales of the Company's products, sales of securities or loans in sufficient
quantities.
These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
3. STOCK OFFERINGS AND COMMON SHARES
As of November 30, 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,
F-8
<PAGE> 68
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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 February 15, 2000. In addition, the placement
agents in those offerings and their transferees hold warrants to purchase 11,424
Common Shares exercisable at $12.50 per share until April 1, 2001, and 15,000
Common Shares exercisable at $14.40 per share until July 13, 2000. It is
unlikely that these warrants will be exercised if the exercise price exceeds the
market price of the Common Shares. The Company has the right to reduce the
exercise price of these warrants.
On January 15, 1997, the Company's Board of Directors approved an
amendment and restatement of the Company's Restated Articles of Incorporation to
(1) effect a one-for-ten reverse stock split of the Company's Common Shares
while keeping 6,000,000 authorized Common Shares, at a par value of $0.01, and
(2) remove provisions relating to the Convertible Preferred Shares redeemed
February 28, 1996, all subject to shareholder approval at the 1997 Annual
Meeting of Shareholders. The Company's shareholders approved such amendment and
restatement at the 1997 Annual Meeting of Shareholders on March 25, 1997, and
the reverse stock split became effective on April 10, 1997. All information
contained in these financial statements gives retroactive effect to the 1-for-10
reverse stock split effected April 10, 1997.
On June 4, 1997, the Company completed the public offering of 2,000,000
newly issued Common Shares at a price of $4.00 per share, for gross proceeds of
$8,000,000, through an offering underwritten by Brean Murray & Co., Inc. The net
proceeds to the Company, after deducting the underwriting discount and the
estimated expenses of the offering, were approximately $7,000,000. The Company
also granted the underwriter warrants to purchase 200,000 Common Shares at $4.80
per share exercisable during the four-year period beginning May 30, 1998.
On January 15, 1998, the Company's Board of Directors approved an
amendment and restatement of the Company's Restated Articles of Incorporation to
(1) increase the Company's authorized Common Shares from 6,000,000 to 20,000,000
shares, and (2) remove provisions referring to the reverse stock split effected
April 10, 1997, all subject to shareholder approval at the 1998 Annual Meeting
of Shareholders. The Company's shareholders approved such amendment and
restatement at the 1998 Annual Meeting of Shareholders on March 17, 1998.
On April 8, 1998, the Company completed the public offering of
1,750,000 newly-issued Common Shares at a price of $5.75 per share, for gross
proceeds of $10,062,500, through an offering underwritten by Brean Murray & Co.,
Inc. The net proceeds to the Company, after deducting the underwriting discount
and the estimated expenses of the offering, were approximately $9,100,000.
Common shares reserved for future issuance upon exercise of stock
options and warrants as discussed above at November 30, 1999, are as follows:
<TABLE>
<S> <C>
1983 Stock Option Plan........................................ 9,317
1991 Incentive Stock Option Plan.............................. 110,289
1993 Director Stock Option Plan............................... 2,498
1997 Stock Option Plan........................................ 1,039,800
Options Granted Independent of Option Plans................... 164,178
Placement Agent Warrants...................................... 26,424
Regulation S Warrants......................................... 115,520
Underwriter Warrants.......................................... 200,000
-----------
Total reserved for future issuance................... 1,668,026
===========
</TABLE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents consist of short-term, interest-bearing investments
maturing within three months of their acquisition by the Company.
Marketable Securities consist of 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.
F-9
<PAGE> 69
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Inventory is stated at the lower of cost or market on a first-in,
first-out (FIFO) basis. Inventory consists of:
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Finished goods..................................... $ 107,820 $ 224,313
Work in process.................................... 38,682 226,554
Purchased components............................... 464,830 348,321
----------- -----------
Sub-total...................................... 611,332 799,188
Less reserve for obsolete and excess inventory..... (-- ) (138,224)
----------- -----------
Total........................................ $ 611,332 $ 660,964
=========== ===========
</TABLE>
Property and Equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets, which range from three to five years.
Patents and Trademarks are recorded at cost and are being amortized on
the straight-line method over 17 years. Accumulated amortization was $53,340 and
$46,428 at November 30, 1999 and 1998, respectively.
Revenue Recognition occurs upon shipment to customers.
Research, Development and Engineering costs are expensed as incurred.
Loss Per Common Share - basic and diluted is computed using the
weighted average number of common shares outstanding during each period. During
the first quarter of fiscal 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." The adoption of
SFAS No. 128 had no impact on the reported loss per share for all periods
presented. Common Shares issuable under stock options and warrants have been
considered in the computation of the net loss per Common Share - diluted, but
have not been included because such inclusion would be antidilutive. As of
November 30, 1999 and November 30, 1998, the Company had outstanding 1,568,481
and 1,393,651, respectively, of warrants and options to purchase Common Shares.
On April 10, 1997, the Company effected a 1-for-10 reverse stock split (Note 3).
Use Of Estimates The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses for each fiscal period. Actual results
could differ from those estimated.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Accrued Sales Commissions.......................... $ 133,863 $ 99,167
Professional Fees.................................. 88,250 112,902
Accrued Insurance.................................. 20,082 42,204
Warranty........................................... 11,700 37,487
Clinical Research.................................. -- 19,165
Product Upgrades................................... -- 21,297
Accrued Incentive.................................. -- 34,000
Other.............................................. 10,000 --
----------- -----------
Total........................................ $ 263,895 $ 366,222
=========== ===========
</TABLE>
F-10
<PAGE> 70
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
6. INCOME TAX
Deferred income taxes reflect the estimated future tax effect of (1)
temporary differences between the amount of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and regulations and
(2) net operating loss and tax credit carryforwards. The Company's deferred tax
assets primarily represent the tax benefit of net operating loss carryforwards
and research and general business tax credit carryforwards. The Company had
deferred tax assets of approximately $15,646,000 and $14,233,000 for the years
ended November 30, 1999 and 1998, respectively, which were entirely offset by
valuation allowances, due to the uncertainty of utilizing such assets against
future earnings, prior to their expiration. The components of deferred income
tax assets as of November 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------------------------
1999 1998
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards................................. $ 15,289 $ 13,763
Accrued liabilities.............................................. 7 158
Research and general business tax credit carryforwards........... 350 312
----------- -----------
Subtotal................................................... 15,646 14,233
Valuation allowance.............................................. (15,646) (14,233)
----------- -----------
Deferred tax asset......................................... $ -- $ --
=========== ===========
</TABLE>
As of November 30, 1999, net operating loss carryforwards of
approximately $45.0 million were available for Federal income tax purposes. The
Company's ability to use the net operating loss carryforwards incurred on or
before March 27, 1991 (the date the Company completed its initial public
offering) is limited to approximately $296,000 per year. Research and business
general tax credits of $350,000 are also available to offset future taxes. These
losses and credits expire, if unused, at various dates from 2000 through 2019.
Utilization of the Company's net operating loss carryforwards, tax
credit carryforwards and certain future deductions could be restricted, in the
event of future changes in the Company's equity structure, by provisions
contained in the Tax Reform Act of 1986.
7. COMMITMENTS AND CONTINGENCIES
On September 10, 1991 the Company entered into a lease agreement for a
23,392 square foot, stand-alone office, assembly and warehouse facility. The
current lease, as amended, expires December 31, 2000.
Operating and building lease expense for the years ended November 30,
1999, 1998 and 1997 was approximately $184,000, $184,600, and $175,700,
respectively. Approximate future minimum lease commitments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-----------------------
<S> <C>
2000.................................... $ 176,400
2001.................................... 14,700
------------
Total................................... $ 191,100
============
</TABLE>
In December 1991, the Company amended and restated its profit sharing
plan to include a 401(k) plan covering substantially all employees. Under
provisions of the plan, participants may contribute, annually, between 1% and
15% of their compensation. The Company, at the discretion of its Board of
Directors, may contribute matching contributions or make other annual
discretionary contributions to the plan, all of which, together with the
participants' contribution, cannot exceed 15% of the total compensation paid by
the Company to eligible employees. No Company matching or discretionary
contributions were made to the plan for the years ended November 30, 1999, 1998
or 1997.
As of November 30, 1999, the Company had employment agreements with
Bruce J. Barrett, its President
F-11
<PAGE> 71
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
and Chief Executive Officer ("Mr. Barrett"), and Raymond W. Gunn, its Executive
Vice President and Chief Financial Officer ("Mr. Gunn"). Mr. Gunn resigned in
January 2000. Mr. Barrett's employment agreement, as amended, expires April 30,
2000 unless earlier terminated as provided in the agreement. Messrs. Barrett and
Gunn were entitled to receive annual base salaries which at November 30, 1999
were $204,750 and $110,250, respectively, plus potential discretionary bonuses.
Both parties have agreed not to compete with the Company during specified
periods.
The Company may become subject to product liability claims by patients
or physicians, and may become a defendant in product liability or malpractice
litigation. The Company has obtained product liability insurance and an umbrella
policy. There can be no assurance that the Company will be able to maintain such
insurance or that such insurance would be sufficient to protect the Company
against such product liability.
8. STOCK OPTION PLANS
In January 1983, February 1991, and January 1997, the Company adopted
stock option plans (the "1983 Plan," the "1991 Plan," and the "1997 Plan,"
respectively) for key management employees, directors, consultants and advisors
of the Company. The plans provide for the issuance of options by the Company to
purchase a maximum of 15,668 Common Shares under the 1983 Plan, 115,000 Common
Shares under the 1991 Plan, and 1,040,000 Common Shares under the 1997 Plan. In
addition, the Company granted options to employees independent of the plans
("Non-Plan"). Awards and expirations under the 1983 Plan, 1991 Plan, 1997 Plan,
and Non-Plan during the years ended November 30, 1999, 1998 and 1997 are listed
below.
At November 30, 1999, no additional options may be granted under the
1983 Plan, 14,667 Common Shares were available for options to be granted under
the 1991 Plan, and 84,878 Common Shares were available under the 1997 Plan.
In January 1993, the Company adopted the Somanetics Corporation 1993
Director Stock Option Plan (the "Directors Plan"). The Directors Plan provided
up to 24,000 Common Shares for the grant of options to each director who was not
an officer or employee of the Company. In January 1998, the Company's Board of
Directors terminated the Directors Plan, except as to options previously granted
under the Directors Plan. Therefore, no additional options may be granted under
the Directors Plan.
In October 1995, SFAS No. 123, "Accounting for Stock-Based
Compensation," was issued. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation costs for
stock options are measured as the excess, if any, of the market price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock. No compensation expense has been charged against income for
stock option grants.
Had compensation expense for the Company's stock options been
determined based on the fair value of the options on the grant date pursuant to
the methodology of SFAS No. 123, the Company's net loss for 1999, 1998 and 1997
on a pro forma basis would have increased by approximately $ 571,000 to
$(5,236,000),or $(.87) per Common Share, increased by approximately $1,589,000
to $(7,059,000), or $(1.30) per Common Share, and increased by approximately
$901,000 to $(7,057,000), or $(2.16) per Common Share, respectively. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for 1999, 1998 and 1997: expected volatility (the measure by
which the stock price has fluctuated or is expected to fluctuate during the
period) 95.05% for 1999 (72.34% for 1998 and 88.26% for 1997), risk-free
interest rate of 6.5% for 1999 (5% for 1998 and 6% for 1997), expected lives of
4 years and dividend yield of 0%.
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts.
A summary of the Company's stock option activity and related
information for years ended November 30, 1999, 1998 and 1997 follows:
F-12
<PAGE> 72
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
COMMON EXERCISE COMMON EXERCISE COMMON EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
December 1,............ 998,737 $ 6.81 554,917 $ 8.23 295,517 $ 12.38
Options granted........ 242,900 3.38 476,122 5.82 306,850 5.08
Options exercised...... -- -- (263) 4.75 -- --
Options canceled....... (15,100) 4.62 (32,039) 16.68 (47,450) 15.21
----------- --------- ------------ --------- ----------- --------
Options outstanding
November 30, (1) (2)... 1,226,537 6.16 998,737 6.81 554,917 8.23
========== ========= =========== ========= =========== ========
Options exercisable
November 30,........... 585,952 $ 8.03 356,589 $ 9.70 218,847 $ 13.76
========== ========= =========== ========= =========== ========
</TABLE>
---------------------------
(1) Exercise dates range from February 21, 1991 to October 27, 2009.
(2) As of November 30, 1999, options outstanding have exercise prices
between $1.44 and $42.50, and a weighted average remaining contractual
life of 7.63 years.
Also, see Note 11 for approval of an amendment to the 1997 Stock Option Plan.
9. RELATED PARTY TRANSACTIONS
The Company received legal services from certain shareholders. Services
from such parties amounted to approximately $160,400, $195,500 and $365,800
during the years ended November 30, 1999, 1998 and 1997, respectively.
The Company paid a non-refundable fee of $50,000 to Brean Murray & Co.,
Inc. during fiscal 1999 for financial advisory services.
The Company recognized no revenue in fiscal 1997 from Somatek, Inc.,
one of the Company's former United States distributors whose principal owner is
a director of the Company. Effective February 28, 1997 the Company terminated
its distribution agreement with Somatek, Inc. The Company wrote off
approximately $12,500 of trade receivables from Somatek, Inc. in fiscal 1997 in
exchange for the return of Cerebral Oximeters.
10. MAJOR CUSTOMERS AND FOREIGN SALES
The Company had one international distributor which accounted for
approximately 23% (Japan) of net revenues for the year ended November 30, 1999,
one United States distributor which accounted for approximately 10% of net
revenues for the year ended November 30, 1998 (this relationship was terminated
in the third quarter of fiscal 1998 as part of the Company's planned expansion
of the direct sales force within the United States), and two international
distributors and one United States distributor which accounted for approximately
28% (Japan), 11% (Latin America) and 12% (United States), respectively, of net
revenues for the year ended November 30, 1997.
Additionally, net revenues from foreign customers for the years ended
November 30, 1999, 1998 and 1997 were approximately $1,632,000, $959,000 and
$689,000, respectively.
11. SUBSEQUENT EVENTS (UNAUDITED)
On February 16, 2000, the Company's Board of Directors approved an
amendment to the Somanetics
F-13
<PAGE> 73
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
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 1,040,000 to 1,335,000 shares, subject to
shareholder approval at the 2000 Annual Meeting of Shareholders.
On February 17, 2000, the Company announced an exclusive distributor
agreement with Nellcor Puritan Bennett Export, Inc., a wholly-owned subsidiary
of Mallinckrodt, Inc., under which various Mallinckrodt subsidiaries will market
and sell the Company's INVOS Cerebral Oximeter. The territory will initially
encompass 33 countries, with the potential for additional countries to be added
to the agreement over time.
The Company entered into a Private Equity Line Agreement with
Kingsbridge Capital Limited on March 6, 2000. The equity line requires
Kingsbridge to purchase up to $15 million of newly-issued Common Shares from the
Company at times and in amounts selected by the Company over a period of up to
two years, subject to specific restrictions and conditions set forth in the
Equity Line Agreement. Assuming compliance with the terms of the Equity Line
Agreement, the Company may begin to draw on the facility upon effectiveness of a
registration statement it must file under the Securities Act of 1933 to permit
Kingsbridge to resell to the public any shares that we sell to it from the
Company under this agreement. The decision to draw on any funds and the timing
and amount of any such draw are at the Company's sole discretion, subject to
specified conditions. Individual purchases must be at least 15 trading days
apart and are limited to $10,000 to $1,000,000 depending on the then current
average market price and daily trading volume for the Company's Common Shares.
The purchase price for the Common Shares is 86% to 90% of an average
market price for the Common Shares. The actual percentage will depend on an
average market price of the Common Shares. In addition, we must pay Brean Murray
& Co., Inc. a 3.5% commission in connection with these sales. The Company is not
permitted to sell more than 19.9% of its outstanding Common Shares pursuant to
this arrangement unless it first obtains shareholder approval under The Nasdaq
SmallCap Market rules. In addition, the number of shares to be sold to
Kingsbridge, together with any shares then held by Kingsbridge, must not exceed
9.9% of the Common Shares that would be outstanding upon completion of the sale.
No shares may be sold unless the average trading volume of Somanetics' Common
Shares on The Nasdaq SmallCap Market is at least 30,000 shares a day. The
Company would also be required to register the purchasers' resales of the Common
Shares they purchase. This description does not constitute an offer of any
securities for sale, and any such public offering will be made only by means of
a prospectus. During the two-year term of the agreement, the Company is
obligated to sell a minimum of $7,500,000 of Common Shares to Kingsbridge or pay
them the discount on the unsold shares.
In connection with the Equity Line Agreement, the Company issued a
warrant to Kingsbridge to purchase 200,000 Common Shares at an exercise price of
$4.36 per share. The warrant is exercisable until September 3, 2005. The warrant
contains provisions that protect the holder against dilution by adjustment of
the exercise price and the number of shares issuable pursuant to the warrant if
specified events occur.
F-14
<PAGE> 74
QUARTERLY INFORMATION (UNAUDITED)
The following is a summary of our quarterly operating results for the
fiscal years ended November 30, 1999 and 1998:
<TABLE>
<CAPTION>
QUARTER
------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
----------- ----------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
YEAR ENDED NOVEMBER 30, 1999
Net revenues............... $910,739 $1,041,479 $877,346 $1,171,408
Gross margin............... 463,650 522,620 419,251 689,910
Net loss................... (1,184,328) (1,265,587) (1,035,091) (1,180,285)
Net loss per common
share -basic and
diluted................ $(0.20) $(0.21) $(0.17) $(0.20)
YEAR ENDED NOVEMBER 30, 1998
Net revenues............... $803,365 $510,687 $523,222 $653,577
Gross margin............... 413,367 209,809 217,653 323,862
Net loss................... (1,173,100) (1,358,558) (1,552,499) (1,385,675)
Net loss per common
share -basic and
diluted................ $(0.27) $(0.26) $(0.26) $(0.23)
</TABLE>
F-15
<PAGE> 75
[SOMANETICS LOGO]
WINDOW TO THE BRAIN(TM)
<PAGE> 76
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated amounts of expenses to be
borne by us in connection with the issuance and distribution of the securities
being registered, other than underwriting discounts and commissions:
<TABLE>
<S> <S> <C>
Securities and Exchange Commission Registration Fee........... $ 1,752
Nasdaq Listing Fee............................................ 10,000
Printing and Engraving Expenses............................... 5,000
Accounting Fees and Expenses.................................. 15,000
Legal Fees and Expenses....................................... 50,000
Transfer Agent's, Registrar's and Trustee's Fees and Expenses. 3,500
Miscellaneous Expenses........................................ 748
--------
Total................................................ $ 86,000
========
</TABLE>
All of these expenses, except the Securities and Exchange Commission
registration fee and the NASD filing fee, represent estimates only.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Sections 561-571 of the Michigan Business Corporation Act
directors and officers of a Michigan corporation may be entitled to
indemnification by the corporation against judgments, expenses, fines and
amounts paid by the director or officer in settlement of claims brought against
them by third persons or by or in the right of the corporation if those
directors and officers acted in good faith and in a manner reasonably believed
to be in, or not opposed to, the best interests of the corporation or its
shareholders.
We are obligated under our bylaws and an employment agreement with our
chief executive officer to indemnify our present or former directors or
executive officers and may indemnify any other person, to the fullest extent now
or hereafter permitted by law in connection with any actual or threatened civil,
criminal, administrative or investigative action, suit or proceeding arising out
of their past or future service to us or a subsidiary, or to another
organization at our request or at the request of one of our subsidiaries. In
addition, our Restated Articles of Incorporation limit certain personal
liabilities of our directors.
Reference is also made to Article IX of the Private Equity Line
Agreement and Article III of the related Registration Rights Agreement, forms of
which are attached to this Registration Statement as Exhibits, with respect to
undertakings by Kingsbridge to indemnify us, our directors and officers and each
person who controls us within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), against certain civil liabilities, including
certain liabilities under the Securities Act.
We have obtained Directors' and Officers' liability insurance. The
policy provides for $1,000,000 in coverage including prior acts dating to our
inception and liabilities under the Securities Act in connection with this
offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following securities of ours were sold by us during the past three
years without being registered under the Securities Act:
1. On March 6, 2000, we entered into the Equity Line Agreement
with Kingsbridge, pursuant to which we may issue and sell, from time to time,
Common Shares for cash consideration up to an aggregate of $15 million. Pursuant
to the requirements of the Equity Line Agreement, we have filed this
Registration Statement in order to permit Kingsbridge to resell to the public
any shares that we sell to it pursuant to the Equity Line Agreement. Beginning
on the date this Registration Statement is declared effective by the SEC and
II-1
<PAGE> 77
continuing for a period of 24 months after the effective date, we may, from time
to time, at our sole discretion, and subject to specified restrictions set forth
in the Equity Line Agreement, sell, or put, Common Shares to Kingsbridge at a
price between 86% and 90% of the then current average market price of our Common
Shares, as determined under the Equity Line Agreement. Puts can be made every 15
trading days in amounts ranging from a minimum of $10,000 to a maximum of
$1,000,000, depending on the trading volume and the market price of our Common
Shares at the time of each put. We are required to put at least $7,500,000 worth
or our Common Shares to Kingsbridge over the life of the Equity Line Agreement
or pay Kingsbridge the discount on the difference. To date, no Common Shares
have been issued under the Equity Line Agreement. The Common Shares to be issued
are expected to be issued in reliance on the exemptions from registration
contained in Sections 4(2) and 4(6) of the Securities Act.
2. In connection with the Equity Line Agreement, on
March 6, 2000, we issued to Kingsbridge a warrant to purchase 200,000 of our
Common Shares at a price of $4.36 a share. The warrant is exercisable at any
time between September 3, 2000 and September 3, 2005. The warrant contains
provisions that protect against dilution by adjustment of the exercise price and
the number of shares issuable under the warrant upon the occurrence of specified
events, such as a merger, stock split, reverse stock split, stock dividend,
recapitalization, or issuance of Common Shares, options, warrants or convertible
or exchangeable securities at less than the then current market value of the
Common Shares. The exercise price of the warrant is payable either in cash, or
by a cashless exercise, in which that number of Common Shares underlying the
warrant having a fair market value at the time of exercise equal to the
aggregate exercise price are cancelled as payment of the exercise price. The
warrant was not registered, but was issued in reliance upon the exemptions from
registration contained in Sections 4(2) and 4(6) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
See Exhibit Index immediately preceding the exhibits.
(B) FINANCIAL STATEMENT SCHEDULES
Schedule Page
Schedule II -- Valuation and Qualifying Accounts S-1
and Reserves for the years ended November 30, 1999,
1998 and 1997.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
II-2
<PAGE> 78
(iii) To include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in
the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-3
<PAGE> 79
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Troy, State
of Michigan, on March 21, 2000.
SOMANETICS CORPORATION
(Registrant)
By: /s/ BRUCE J. BARRETT
-------------------------------------
BRUCE J. BARRETT
Its: President and Chief Executive Officer
-----------------------
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned
officers and directors of Somanetics Corporation, a Michigan corporation (the
"Company"), hereby constitutes and appoints Bruce J. Barrett, Mary Ann Victor
and William M. Iacona, and each of them, with full power of substitution and
re-substitution, his or her true and lawful attorneys-in-fact and agents for
each of the undersigned and on his or her behalf and in his or her name, place
and stead, in any and all capacities, with full power and authority in such
attorneys-in-fact and agents and in any one or more of them, to sign, execute
and affix his or her seal thereto and file with the Securities and Exchange
Commission and any state securities regulatory board or commission the
registration statement on Form S-1 to be filed by the Company under the
Securities Act of 1933, as amended, which registration statement relates to the
registration and sale of Common Shares, par value $0.01 per share, by the
selling shareholder, any and all amendments or supplements to such registration
statement, including any amendment or supplement thereto changing the amount of
securities for which registration is being sought, any post-effective amendment,
and any registration statement or amendment to such registration statement for
the same offering that is to be effective upon filing pursuant to Rule 462(b)
under the Securities Act of 1933, with all exhibits and any and all documents
required to be filed with respect thereto with any regulatory authority,
including, without limitation, The Nasdaq Stock Market, the National Association
of Securities Dealers, Inc. and any federal or state regulatory authority
pertaining to such registration statement; granting unto such attorneys-in-fact,
and each of them, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises in order
to effectuate the same as fully to all intents and purposes as he or she might
or could do if personally present, hereby ratifying and confirming all that such
attorneys-in-fact and agents, and each of them and any of their substitutes, may
lawfully do or cause to be done by virtue of this Power of Attorney.
-----------------------
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ BRUCE J. BARRETT President, Chief Executive Officer and a Director March 21, 2000
- ------------------------------------
BRUCE J. BARRETT (Principal Executive Officer and Principal Financial Officer)
/s/ H. RAYMOND WALLACE Chairman of the Board of Directors March 21, 2000
- ------------------------------------
H. RAYMOND WALLACE
/s/ WILLIAM M. IACONA Corporate Controller March 21, 2000
- ------------------------------------
WILLIAM M. IACONA (Principal Accounting Officer)
/s/ DANIEL S. FOLLIS Director March 21, 2000
- ------------------------------------
DANIEL S. FOLLIS
/s/ JAMES I AUSMAN Director March 21, 2000
- ------------------------------------
JAMES I. AUSMAN, M.D., PH.D.
/s/ ROBERT R. HENRY Director March 21, 2000
- ------------------------------------
ROBERT R. HENRY
/s/ A. BREAN MURRAY Director March 21, 2000
- ------------------------------------
A. BREAN MURRAY
</TABLE>
II-4
<PAGE> 80
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------------------------- -------- --------
ADDITIONS
----------------------------
(2) CHARGED TO
BALANCE AT CHARGED TO OTHER (1)(3) BALANCE AT
BEGINNING COSTS AND ACCOUNTS, DEDUCTIONS, END OF
OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended November 30, 1999 $152,602 $-- -- $152,602 $--
Year ended November 30, 1998 165,990 4,319 -- 17,707 152,602
Year ended November 30, 1997 46,047 176,790 -- 56,847 165,990
Note: (1) Write-off uncollectible accounts, net of recoveries
Note: (2) Reserve of additional uncollectible accounts, net of recoveries
Inventory reserve for obsolescence:
Year ended November 30, 1999 $138,224 $1,199 -- $139,423 $--
Year ended November 30, 1998 356,298 40,817 -- 258,891 138,224
Year ended November 30, 1997 200,450 442,448 -- 286,600 356,298
</TABLE>
Note: (3) Write-off obsolete, excess inventory, net of recoveries
S-1
<PAGE> 81
EXHIBIT INDEX
Exhibit Description
- ------- -----------
3(i) Restated Articles of Incorporation of Somanetics Corporation,
incorporated by reference to Exhibit 3(i) to the Company's
Quarterly Report on Form 10-Q for the quarter ended February
28, 1998.
3(ii) Amended and Restated Bylaws of Somanetics Corporation,
incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8 filed with the Securities
and Exchange Commission on June 16, 1995.
5.1* Opinion of Honigman Miller Schwartz and Cohn concerning the
legality of the securities being offered.
10.1 Lease Agreement, dated September 10, 1991, between Somanetics
Corporation and WS Development Company, incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1991.
10.2 Extension of Lease, between Somanetics Corporation and WS
Development Company, dated July 22, 1994, incorporated by
reference to Exhibit 10.11 to the Company's Quarterly Report
on Form 10-Q for the quarter ended August 31, 1994.
10.3 Change in ownership of Lease Agreement for 1653 E. Maple Road,
Troy, MI 48083, dated September 12, 1994, between Somanetics
Corporation and First Industrial, L.P., incorporated by
reference to Exhibit 10.12 to the Company's Quarterly Report
on Form 10-Q for the quarter ended August 31, 1994.
10.4 Second Addendum, between Somanetics Corporation and First
Industrial Mortgage Partnership, L.P., dated April 14, 1997,
incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 31,
1997.
10.5 Third Amendment, between Somanetics Corporation and First
Industrial Mortgage Partnership, L.P., dated April 23, 1999,
incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 31,
1999.
10.6 Somanetics Corporation Amended and Restated 1983 Stock Option
Plan, incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1991.
10.7 Somanetics Corporation Amended and Restated 1991 Incentive
Stock Option Plan, incorporated by reference to Exhibit 10.5
to the Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1991.
10.8 Fourth Amendment to Somanetics Corporation 1991 Incentive
Stock Option Plan, incorporated by reference to Exhibit 10.7
to the Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1992.
10.9 Amended and Restated Fifth Amendment to Somanetics Corporation
1991 Incentive Stock Option Plan, incorporated by reference to
Exhibit 10.10 to the Company's Annual Report on Form 10-K for
the fiscal year ended November 30, 1995.
10.10 Somanetics Corporation 1993 Director Stock Option Plan,
incorporated by reference to Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the fiscal year ended November
30, 1992.
10.11 Somanetics Corporation 1997 Stock Option Plan, incorporated by
reference to Exhibit 10.9 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1996.
10.12 First Amendment to Somanetics Corporation 1997 Stock Option
Plan, incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1997.
10.13 Second Amendment to Somanetics Corporation 1997 Stock Option
Plan, incorporated by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1998.
10.14 Third Amendment to Somanetics Corporation 1997 Stock Option
Plan, incorporated by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1999.
10.15 Somanetics Corporation 1999 Employee Incentive Compensation
Plan, incorporated by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1998.
<PAGE> 82
Exhibit Description
- ------- -----------
10.16 Somanetics Corporation 2000 Employee Incentive Compensation
Plan, incorporated by reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1999.
10.17 Employment Agreement, dated as of December 1, 1992, between
Somanetics Corporation and Raymond W. Gunn, incorporated by
reference to Exhibit 10.14 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1992.
10.18 Employment Agreement, dated May 13, 1994, between Somanetics
Corporation and Bruce J. Barrett, incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended May 31, 1994.
10.19 Amendment to Employment Agreement, dated as of February 23,
1994, between Somanetics Corporation and Raymond W. Gunn,
incorporated by reference to Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the fiscal year ended November
30, 1993.
10.20 Amendment to Employment Agreement, dated as of July 21, 1994,
between Somanetics Corporation and Bruce J. Barrett,
incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended August 31,
1994.
10.21 Amendment to Employment Agreement, dated as of July 21, 1994,
between Somanetics Corporation and Raymond W. Gunn,
incorporated by reference to Exhibit 10.3 to the Company's
Quarterly report on Form 10-Q for the quarter ended August 31,
1994.
10.22 Amendment to Employment Agreement, dated as of December 1,
1995, between Somanetics Corporation and Raymond W. Gunn,
incorporated by reference to Exhibit 10.20 to the Company's
Annual Report on Form 10-K for the fiscal year ended November
30, 1995.
10.23 Amendment to Employment Agreement, dated as of November 18,
1996, between Somanetics Corporation and Raymond W. Gunn,
incorporated by reference to Exhibit 10.20 to the Company's
Annual Report on Form 10-K for the fiscal year ended November
30, 1996.
10.24 Amendment to Employment Agreement, dated as of April 24, 1997,
between Somanetics Corporation and Bruce J. Barrett,
incorporated by reference to Exhibit 10.21 to Amendment No. 1
to the Registration Statement on Form S-1 (file no.
333-25275), filed with the Securities and Exchange Commission
on May 30, 1997.
10.25 Amendment to Employment Agreement, dated as of April 24, 1997,
between Somanetics Corporation and Raymond W. Gunn,
incorporated by reference to Exhibit 10.22 to Amendment No. 1
to the Registration Statement on Form S-1 (file no.
333-25275), filed with the Securities and Exchange Commission
on May 30, 1997.
10.26 Stock Option Agreement, dated May 16, 1994, between Somanetics
Corporation and Bruce J. Barrett, incorporated by reference to
Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q
for the quarter ended August 31, 1994.
10.27 Stock Option Agreement, dated July 21, 1994, between
Somanetics Corporation and Bruce J. Barrett, incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1994.
10.28 Stock Option Agreement, dated July 21, 1994, between
Somanetics Corporation and Gary D. Lewis, incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1994.
10.29 Stock Option Agreement, dated July 21, 1994, between
Somanetics Corporation and Raymond W. Gunn, incorporated by
reference to Exhibit 10.6 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1994.
10.30 Stock Option Agreements, dated July 20, 1995, between
Somanetics Corporation and Richard Farkas, incorporated by
reference to Exhibit 10.28 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1995.
10.31 Form of Stock Option Agreement, dated December 22, 1995,
between Somanetics Corporation and various employees,
incorporated by reference to Exhibit 10.29 to the Company's
Annual Report on Form 10-K for the fiscal year ended November
30, 1995.
10.32 Form of Stock Option Agreement, dated December 22, 1995,
between Somanetics Corporation and various officers,
incorporated by reference to Exhibit 10.30 to the Company's
Annual Report on Form 10-K for the fiscal year ended November
30, 1995.
<PAGE> 83
Exhibit Description
- ------- -----------
10.33 Form of new Stock Option agreement, dated December 22, 1995,
between Somanetics Corporation and various employees,
incorporated by reference to Exhibit 10.31 to the Company's
Annual Report on Form 10-K for the fiscal year ended November
30, 1995.
10.34 Form of Stock Option Agreement, dated January 5, 1996, between
Somanetics Corporation and two officers, incorporated by
reference to Exhibit 10.32 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1995.
10.35 Form of Stock Option Agreement, dated as of April 24, 1997,
between Somanetics Corporation and twenty-three employees,
incorporated by reference to Exhibit 10.32 to Amendment No. 1
to the Registration Statement on Form S-1 (file no.
333-25275), filed with the Securities and Exchange Commission
on May 30, 1997.
10.36 Amendment to Stock Option Agreement, dated as of February 1,
1995, between Somanetics Corporation and Gary D. Lewis,
amending July 21, 1994 Stock Option Agreement, incorporated by
reference to Exhibit 10.31 to Post-Effective Amendment No. 5
to the Company's Registration Statement on Form S-1 (file no.
33-38438) filed with the Securities and Exchange Commission on
March 30, 1995.
10.37 Consulting Agreement, dated February 28, 1983, as amended,
between Somanetics Corporation and Hugh F. Stoddart,
incorporated by reference to Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the fiscal year ended November
30, 1991.
10.38 Current Form of Somanetics Corporation Confidentiality
Agreement used for testing hospitals and clinics, incorporated
by reference to Exhibit 10.22 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1992.
10.39 Current Form of Somanetics Corporation Confidentiality
Agreement used for the Company's employees and agents,
incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended August 31,
1992.
10.40 Assignments, dated October 6, 1983, January 23, 1986, February
11, 1986 and February 11, 1986, from Gary D. Lewis to
Somanetics Corporation in connection with the Company's INVOS
technology, incorporated by reference to Exhibit 10.17 to the
Company's Registration Statement on Form S-1 (file no.
33-38438).
10.41 Assignments, dated October 5, 1983, August 28, 1985, February
11, 1986, February 12, 1986, and September 24, 1986, from Hugh
F. Stoddart to Somanetics Corporation in connection with the
Company's INVOS technology, incorporated by reference to
Exhibit 10.18 to the Company's Registration Statement on Form
S-1 (file no. 33-38438).
10.42* Private Equity Line Agreement, dated as of March 6, 2000,
between Somanetics Corporation and Kingsbridge Capital
Limited.
10.43* Warrant, dated as of March 6, 2000, from Somanetics
Corporation to Kingsbridge Capital Limited.
10.44* Registration Rights Agreement, dated as of March 6, 2000,
between Somanetics Corporation and Kingsbridge Capital
Limited.
10.45 Form of Warrant, between Somanetics Corporation and purchasers
of Units in the 1995 Regulation S Offering, incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1995.
10.46 Warrant Agreement, dated as of July 14, 1995, between
Somanetics Corporation and Rauscher Pierce & Clark Limited,
incorporated by reference to Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ended August 31,
1995.
10.47 Warrant to Purchase Common Stock of Somanetics Corporation,
dated as of July 14, 1995, between Somanetics Corporation and
Rauscher Pierce & Clark Limited, incorporated by reference to
Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q
for the quarter ended August 31, 1995.
10.48 Form of Warrant between Somanetics Corporation and purchasers
of Units in the April 1996 Regulation S Offering, incorporated
by reference to Exhibit 10.3 to the Company's Quarterly Report
on Form 10-Q for the quarter ended February 29, 1996.
10.49 Warrant Agreement, dated as of April 2, 1996, between
Somanetics Corporation and Rauscher Pierce & Clark Limited,
incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended February
29, 1996.
10.50 Warrant to Purchase Common Stock of Somanetics Corporation,
dated as of April 2, 1996,
<PAGE> 84
Exhibit Description
- ------- -----------
between Somanetics Corporation and Rauscher Pierce &
ClarkLimited, incorporated by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
February 29, 1996.
10.51 Form of Warrant Agreement and Warrant, dated June 4, 1997,
between Somanetics Corporation and Brean Murray & Co., Inc.,
incorporated by reference to Exhibit 10.60 to Amendment No. 1
to the Registration Statement on Form S-1 (file no.
333-25275), filed with the Securities and Exchange Commission
on May 30, 1997.
10.52 Form of Underwriting Agreement, dated April 3, 1998, between
Somanetics Corporation and Brean Murray & Co., Inc.,
incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended February
28, 1998.
10.53 Revolving Note from Somanetics Corporation to Fifth Third Bank
of Northwestern Ohio, N.A., dated June 12, 1998, incorporated
by reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended August 31, 1998.
10.54 Revolving Note from Somanetics Corporation to Fifth Third Bank
of Northwestern Ohio, N.A., dated April 1, 1999, incorporated
by reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 31, 1999.
23.1* Consent of Deloitte & Touche LLP and Report on Schedule.
23.2* Consent of Honigman Miller Schwartz and Cohn (included in the
opinion filed as Exhibit 5.1 to this registration statement).
24.1 Powers of Attorney (included after the signature of the
registrant contained on page II-4 of this registration
statement).
- ----------------------
*Filed with this registration statement.
<PAGE> 1
EXHIBIT 5.1
[HMS&C LETTERHEAD]
March 24, 2000
Somanetics Corporation
1653 East Maple Road
Troy, Michigan 48083-4208
Ladies and Gentlemen:
We have represented Somanetics Corporation, a Michigan corporation (the
"Company"), in connection with the preparation and filing with the Securities
and Exchange Commission (the "Commission") of a Registration Statement on Form
S-1 (the "Registration Statement"), for registration under the Securities Act of
1933, as amended (the "Securities Act"), of a maximum of 1,200,000 of the
Company's Common Shares, par value $0.01 a share (the "Common Shares"). The
Common Shares are being registered for resale by Kingsbridge Capital Corporation
("Kingsbridge"). The Common Shares being resold by Kingsbridge are issuable by
the Company pursuant to a Private Equity Line Agreement, dated as of March 6,
2000, between the Company and Kingsbridge (the "Equity Line Agreement") or
pursuant to the exercise of a Warrant, dated as of March 6, 2000, issued by the
Company to Kingsbridge (the "Warrant").
Based upon our examination of such documents and other matters as we
deem relevant, it is our opinion that the Common Shares covered by the
Registration Statement have been duly authorized and, when issued and sold by
the Company as described in the Registration Statement and in the manner set
forth in the Equity Line Agreement or the Warrant referred to in the
Registration Statement, in the amount approved by the Company, against payment
therefor, will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus included in the Registration Statement. In giving
such consents, we do not admit hereby that we come within the category of
persons whose consent is required under Section 7 of the Securities Act or the
Rules and Regulations of the Commission under the Securities Act.
Very truly yours,
/s/ HONIGMAN MILLER SCHWARTZ AND COHN
RJK
<PAGE> 1
EXHIBIT 10.42
---------------------------------------------
PRIVATE EQUITY LINE AGREEMENT
by and between
KINGSBRIDGE CAPITAL LIMITED
and
SOMANETICS CORPORATION
--------------------------------------------
dated as of March 6, 2000
<PAGE> 2
PRIVATE EQUITY LINE AGREEMENT
by and between
KINGSBRIDGE CAPITAL LIMITED
and
Somanetics Corporation
dated as of March 6, 2000
This PRIVATE EQUITY LINE AGREEMENT is entered into as of this
6th day of March, 2000 (this "Agreement"), by and between KINGSBRIDGE CAPITAL
LIMITED (the "Investor"), an entity organized and existing under the laws of the
British Virgin Islands, and Somanetics Corporation a corporation organized and
existing under the laws of the State of Michigan (the "Company").
WHEREAS, the parties desire that, upon the terms and subject
to the conditions set forth herein, the Company may issue and sell to the
Investor, from time to time as provided herein, and the Investor shall purchase
from the Company, up to $15,000,000 of the Common Stock (as defined below); and
WHEREAS, such investments will be made in reliance upon the
provisions of Section 4(2) ("Section 4(2)") and Regulation D ("Regulation D") of
the United States Securities Act of 1933, as amended and the rules and
regulations promulgated thereunder (the "Securities Act"), and/or upon such
other exemption from the registration requirements of the Securities Act as may
be available with respect to any or all of the investments in Common Stock to be
made hereunder; and
WHEREAS, in consideration for the Investor's execution and
delivery of, and its performance of its obligations under, this Agreement, the
Company is concurrently issuing to the Investor a Warrant (as defined below)
pursuant to which the Investor may purchase from the Company up to 200,000
shares of Common Stock, upon the terms and subject to the conditions set forth
therein; and
WHEREAS, the parties hereto are concurrently entering into a
Registration Rights Agreement (as defined below) pursuant to which the Company
shall register the Common Stock issued and sold to the Investor under this
Agreement and under the Warrant, upon the terms as subject to the conditions set
forth therein;
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1. Average Daily Trading Volume. shall mean, with respect to
any date, the average of the daily trading volumes for the Common Stock on the
Principal Market for twenty-six (26) of the thirty (30) Trading Days immediately
preceding such date, without regard for the Trading Days with the two (2)
highest trading volumes and the Trading Days with the two (2) lowest trading
volumes.
<PAGE> 3
Section 1.2. Bid Price. shall mean the closing bid price (as reported by
Bloomberg L.P.) of the Common Stock on the Principal Market.
Section 1.3. Blackout Shares. shall have the meaning assigned to them in
Section 2.6.
Section 1.4. "Capital Shares" shall mean the Common Stock and any shares
of any other class of common stock whether now or hereafter authorized, having
the right to participate in the distribution of dividends (as and when declared)
and assets (upon liquidation of the Company).
Section 1.5. "Closing" shall mean one of the closings of a purchase and
sale of the Common Stock pursuant to Section 2.1.
Section 1.6. "Closing Date" shall mean, with respect to a Closing, the
second (2nd) Trading Day following the Valuation Period related to such Closing,
provided that all of the conditions precedent to such Closing have been
satisfied on or before such Trading Day.
Section 1.7. "Commitment Period" shall mean the period commencing on the
earlier to occur of (i) the Effective Date or (ii) such earlier date as the
Company and the Investor may mutually agree in writing, and expiring on the
earlier to occur of (x) the date on which the Investor shall have purchased Put
Shares pursuant to this Agreement for an aggregate Purchase Price equal to the
Maximum Commitment Amount, (y) the date this Agreement is terminated by the
Investor pursuant to Section 2.4, or (z) the date occurring twenty four (24)
months from the date of commencement of the Commitment Period.
Section 1.8. "Common Stock" shall mean the Company's common shares, $.01
par value per share.
Section 1.9. "Common Stock Equivalents" shall mean any securities that
are convertible into or exchangeable for Common Stock or any warrants, options
or other rights to subscribe for or purchase Common Stock or any such
convertible or exchangeable securities.
Section 1.10. "Condition Satisfaction Date" shall have the meaning set
forth in Section 7.2 of this Agreement.
Section 1.11. "Damages" shall mean any loss, claim, damage, liability,
costs and expenses (including, without limitation, reasonable attorneys' fees
and disbursements and costs and expenses of expert witnesses and investigation).
Section 1.12. "Discount" shall mean with respect to any Put (i) fourteen
percent (14%) if the Market Price shall be less than three dollars ($3.00) per
share in respect of the applicable Put Date; (ii) twelve percent (12%) if the
Market Price shall be greater than or equal to three dollars ($3.00) per share
but less than eight dollars ($8.00) per share in respect of the applicable Put
Date; or (iii) ten percent (10%) if the Market Price shall be equal to or
greater than eight dollars ($8.00) per share in respect of the applicable Put
Date. Notwithstanding the foregoing, in the event that the Company fails to
issue and sell to the Investor Common Stock in respect of Puts for at least the
Minimum Commitment Amount in accordance with Section 2.1(b), or any amount
becomes due under Section 2.1(b) after termination of this Agreement by the
Investor in accordance with Section 2.4, the Discount shall be equal to fourteen
percent (14%).
Section 1.13. "Effective Date" shall mean the date on which the SEC first
declares effective a Registration Statement registering the resale of the
Registrable Securities as set forth in Section 7.2(a).
2
<PAGE> 4
Section 1.14. "Escrow Agreement" shall mean the escrow agreement in the
form of Exhibit A entered into pursuant to Section 7.2(o) hereof.
Section 1.15. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended and the rules and regulations promulgated thereunder.
Section 1.16. "Investment Amount" shall mean the dollar amount (within the
range specified in Section 2.2) to be invested by the Investor to purchase Put
Shares with respect to any Put Notice as provided by the Company to the Investor
in accordance with Section 2.2 hereof.
Section 1.17. "Legend" shall have the meaning specified in Section 8.1.
Section 1.18. "Market Price" on any given date shall mean the average of
the lowest intra-day prices of the Common Stock over the Valuation Period.
"Lowest intra-day price" shall mean the lowest trade price of the Common Stock
(as reported by Bloomberg L.P.) during any Trading Day.
Section 1.19. "Maximum Commitment Amount" shall mean FIFTEEN MILLION
DOLLARS ($15,000,000).
Section 1.20. "Maximum Put Amount" shall mean, with respect to any Put,
the amount determined in accordance with the table set forth on Annex A hereto.
Section 1.21. "Minimum Commitment Amount" shall mean SEVEN MILLION FIVE
HUNDRED THOUSAND DOLLARS ($7,500,000).
Section 1.22. "Minimum Put Amount" shall mean TEN THOUSAND DOLLARS
($10,000).
Section 1.23. "Material Adverse Effect" shall mean any effect on the
business, operations, properties, prospects, or financial condition of the
Company that is material and adverse to the Company or to the Company and such
other entities controlling or controlled by the Company, taken as a whole,
and/or any condition, circumstance, or situation that would prohibit or
otherwise interfere with the ability of the Company to enter into and perform
its obligations under any of (i) this Agreement, (ii) the Registration Rights
Agreement, (iii) the Escrow Agreement and (iv) the Warrant.
Section 1.24. "NASD" shall mean the National Association of Securities
Dealers, Inc.
Section 1.25. "Outstanding" when used with reference to Common Stock or
Capital Shares (collectively the "Shares"), shall mean, at any date as of which
the number of such Shares is to be determined, all issued and outstanding
Shares, and shall include all such Shares issuable in respect of outstanding
scrip or any certificates representing fractional interests in such Shares;
provided, however, that "Outstanding" shall not refer to any such Shares then
directly or indirectly owned or held by or for the account of the Company.
Section 1.26. "Person" shall mean an individual, a corporation, a
partnership, an association, a trust or other entity or organization, including
a government or political subdivision or an agency or instrumentality thereof.
Section 1.27. "Preferred Stock" shall mean the Company's preferred stock,
par value $.01 per share.
3
<PAGE> 5
Section 1.28. "Principal Market" shall mean the Nasdaq National Market,
the Nasdaq SmallCap Market or the New York Stock Exchange, whichever is at the
time the principal trading exchange or market for the Common Stock, it being
acknowledged and agreed by the parties that, as of the date hereof, the
Principal Market is the Nasdaq SmallCap Market.
Section 1.29. "Purchase Price" shall mean, with respect to a Put, the
Market Price less the product of the Discount and the Market Price.
Section 1.30. "Put" shall mean each occasion the Company elects to
exercise its right to tender a Put Notice requiring the Investor to purchase the
Company's Common Stock for the Investment Amount specified in such Put Notice,
upon the terms and subject to the conditions set forth in this Agreement.
Section 1.31. "Put Date" shall mean the Trading Day during the Commitment
Period on which a Put Notice to sell Common Stock to the Investor is deemed
delivered by the Company to the Investor pursuant to Section 2.2(b) hereof.
Section 1.32. "Put Notice" shall mean a written notice to the Investor
setting forth the Investment Amount that the Company intends to require the
Investor to pay to purchase Common Stock upon the terms and subject to the
conditions set forth in this Agreement.
Section 1.33. "Put Shares" shall mean all shares of Common Stock issued or
issuable pursuant to a Put that has been exercised or may be exercised upon the
terms and subject to the conditions set forth in this Agreement.
Section 1.34. "Registrable Securities" shall mean the (i) Put Shares, (ii)
the Warrant Shares, (iii) the Blackout Shares and (iv) any securities issued or
issuable with respect to any of the foregoing by way of exchange, stock dividend
or stock split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization or otherwise. As to any particular
Registrable Securities, once issued such securities shall cease to be
Registrable Securities when (w) the Registration Statement has been declared
effective by the SEC and all Registrable Securities have been disposed of
pursuant to the Registration Statement, (x) all Registrable Securities have been
sold under circumstances under which all of the applicable conditions of Rule
144 (or any similar provision then in force) under the Securities Act ("Rule
144") are met, (y) such time as all Registrable Securities have been otherwise
transferred to holders who may trade such shares without restriction under the
Securities Act, and the Company has delivered a new certificate or other
evidence of ownership for such securities not bearing a restrictive legend or
(z) in the opinion of counsel to the Company, which counsel shall be reasonably
acceptable to the Investor, all Registrable Securities may be sold without
registration and without any time, volume or manner limitations pursuant to Rule
144(k) (or any similar provision then in effect) under the Securities Act.
Section 1.35. "Registration Rights Agreement" shall mean the
registration rights agreement in the form of Exhibit B hereto.
Section 1.36. "Registration Statement" shall mean a registration statement
on Form S-1 or such other form promulgated by the SEC for which the Company then
qualifies and which counsel for the Company shall deem appropriate, and which
form shall be available for the resale of the Registrable Securities to be
registered thereunder in accordance with the provisions of this Agreement, the
Registration Rights Agreement, and the Warrant and in accordance with the
intended method of distribution of such securities), for the registration of the
resale by the Investor of the Registrable Securities under the Securities Act.
4
<PAGE> 6
Section 1.37. "Regulation D" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.38. "SEC" shall mean the Securities and Exchange Commission.
Section 1.39. "SEC Documents" shall mean the Company's latest Form 10-K as
of the time in question, all Forms 10-Q and 8-K filed thereafter, the Proxy
Statement for its latest fiscal year as of the time in question and the
Registration Statement until such time the Company no longer has an obligation
to maintain the effectiveness of a Registration Statement as set forth in the
Registration Rights Agreement.
Section 1.40. "Section 4(2)" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.41. "Securities Act" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.42. "Subscription Date" shall mean the date on which this
Agreement is executed and delivered by the parties hereto.
Section 1.43. "Trading Cushion" shall mean the mandatory fifteen (15)
Trading Days that must expire after any given Put Date before the Company may
tender a subsequent Put Notice to the Investor.
Section 1.44. "Trading Day" shall mean any day during which the Principal
Market shall be open for trading.
Section 1.45. "Underwriter" shall mean any underwriter participating in
any disposition of the Registrable Securities on behalf of the Investor pursuant
to the Registration Statement.
Section 1.46. "Valuation Event" shall mean an event in which the Company
at any time during a Valuation Period takes any of the following actions:
(a) subdivides or combines its Common Stock;
(b) pays a dividend in its Capital Stock or makes any other
distribution of its Capital Shares, except for dividends
paid with respect to the Preferred Stock;
(c) issues any additional Capital Shares ("Additional Capital
Shares"), otherwise than as provided in the foregoing
Subsections (a) and (b) above, at a price per share less, or
for other consideration lower, than the Bid Price in effect
immediately prior to such issuance, or without
consideration;
(d) issues any warrants, options or other rights to subscribe
for or purchase any Additional Capital Shares and the price
per share for which Additional Capital Shares may at any
time thereafter be issuable pursuant to such warrants,
options or other rights shall be less than the Bid Price in
effect immediately prior to such issuance;
(e) issues any securities convertible into or exchangeable for
Capital Shares and the consideration per share for which
Additional Capital Shares may at any time thereafter be
issuable pursuant to the terms of such convertible or
exchangeable securities shall be less than the Bid Price in
effect immediately prior to such issuance;
5
<PAGE> 7
(f) makes a distribution of its assets or evidences of
indebtedness to the holders of its Capital Shares as a
dividend in liquidation or by way of return of capital or
other than as a dividend payable out of earnings or surplus
legally available for dividends under applicable law or any
distribution to such holders made in respect of the sale of
all or substantially all of the Company's assets (other than
under the circumstances provided for in the foregoing
subsections (a) through (e)); or
(g) takes any action affecting the number of Outstanding Capital
Shares, other than an action described in any of the
foregoing Subsections (a) through (f) hereof, inclusive,
which in the opinion of the Company's Board of Directors,
determined in good faith, would have a materially adverse
effect upon the rights of the Investor at the time of a Put
or exercise of the Warrant.
Section 1.47. "Valuation Period" shall mean the period of five (5) Trading
Days during which the Market Price of the Common Stock is valued, which period
shall be with respect to the Market Price on any Put Date, the two (2) Trading
Days preceding and the two (2) Trading Days following the Trading Day on which
the applicable Put Notice is deemed to be delivered, as well as the Trading Day
on which such notice is deemed to be delivered; provided, however, that if a
Valuation Event occurs during any Valuation Period, a new Valuation Period shall
begin on the Trading Day immediately after the occurrence of such Valuation
Event and end on the fifth (5th) Trading Day after the occurrence of such
Valuation Event.
Section 1.48. "Warrant" shall mean the Warrant in the form of Exhibit C
hereto issued pursuant to Section 2.5 of this Agreement.
Section 1.49. "Warrant Shares" shall mean all shares of Common Stock
issued or issuable pursuant to exercise of the Warrant.
ARTICLE II
PURCHASE AND SALE OF COMMON STOCK; TERMINATION OF
OBLIGATIONS; WARRANT; BLACKOUT SHARES
Section 2.1. Investments.
(a) Puts. Upon the terms and conditions set forth herein
(including, without limitation, the provisions of Article
VII hereof), on any Put Date the Company may exercise a Put
by the delivery of a Put Notice. The number of Put Shares
that the Investor shall receive pursuant to such Put shall
be determined by dividing the Investment Amount specified in
the Put Notice by the Purchase Price with respect to such
Put Date, rounded to the nearest whole share.
(b) Minimum Amount of Puts. The Company shall, in accordance
with Section 2.2(a), issue and sell Put Shares to the
Investor and the Investor shall purchase Put Shares from the
Company for an amount totaling (in aggregate Investment
Amounts) at least the Minimum Commitment Amount. If the
Company for any reason fails to issue and deliver such Put
Shares during the Commitment Period, on the first Trading
Day after the expiration of the Commitment Period, the
Company shall pay to Investor by wire transfer of
immediately available funds an
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amount equal to the product of (X) the Minimum Commitment
Amount minus the aggregate Investment Amounts of the Put
Shares delivered to the Investor hereunder and (Y) the
Discount.
(c) Maximum Sale of Common Stock. Unless the Company obtains the
requisite approval of its shareholders in accordance with
the corporate laws of Michigan and the applicable rules of
the Principal Market and the NASD, no more than 19.9% of the
Outstanding shares of Common Stock may be issued and sold in
the aggregate pursuant to this Agreement.
Section 2.2. Mechanics.
(a) Put Notice. At any time during the Commitment Period, the
Company may deliver a Put Notice to the Investor, subject to
the conditions set forth in Section 7.2; provided, however,
the Investment Amount for each Put as designated by the
Company in the applicable Put Notice shall be neither less
than the Minimum Put Amount nor more than the Maximum Put
Amount.
(b) Date of Delivery of Put Notice. A Put Notice shall be deemed
delivered on (i) the Trading Day it is received by facsimile
or otherwise by the Investor if such notice is received
prior to 12:00 noon New York time, or (ii) the immediately
succeeding Trading Day if it is received by facsimile or
otherwise after 12:00 noon New York time on a Trading Day or
at any time on a day which is not a Trading Day. No Put
Notice may be deemed to have been delivered on any day that
is not a Trading Day.
Section 2.3. Closings. On each Closing Date for a Put, (i) the Company
shall deliver into escrow one or more certificates, at the Investor's option,
representing the Put Shares to be purchased by the Investor pursuant to Section
2.1 herein, registered in the name of the Investor and (ii) the Investor shall
deliver into escrow the Investment Amount specified in the Put Notice by wire
transfer of immediately available funds to the account provided for in the
Escrow Agreement. In addition, on or prior to such Closing Date, each of the
Company and the Investor shall deliver to the other all documents, instruments
and writings required to be delivered or reasonably requested by either of them
pursuant to this Agreement in order to implement and effect the transactions
contemplated herein. Payment of the Investment Amount to the Company and
delivery of such certificate(s) to the Investor shall occur out of escrow in
accordance with the Escrow Agreement; provided, however, that to the extent the
Company has not paid the fees, expenses and disbursements of the Investor's
counsel in accordance with Section 12.1 as billed to date, the amount of such
fees, expenses and disbursements shall be paid in immediately available funds,
at the direction of the Investor, to Investor's counsel with no reduction in the
number of Put Shares issuable to the Investor on such Closing Date; provided
further, that so long as the Investor shall maintain professional liability,
errors and omissions liability and or directors' and officers' insurance
("Private Equity Insurance") for its activities related to the Put Shares, the
Warrant Shares or the Blackout Shares, three percent (3%) of such Investment
Amount shall be retained by the Investor in respect of premium for such Private
Equity Insurance with no reduction in the number of Put Shares issuable to the
Investor on such Closing Date. Notwithstanding the immediately preceding
proviso, in the event that the premium charged to the Investor in respect of the
Private Equity Insurance is reduced, the amount of the Purchase Price retained
by the Investor shall be reduced proportionately.
Section 2.4. Termination.
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(a) The Investor may, at its sole discretion, terminate this
Agreement upon written notice to the Company in the event
that (i) the Registration Statement is not effective within
one hundred twenty days following the Subscription Date or
(ii) there shall occur any stop order or suspension of the
effectiveness of the Registration Statement for an aggregate
of thirty (30) Trading Days during the Commitment Period,
for any reason other than deferrals or suspension during a
Blackout Period in accordance with the Registration Rights
Agreement, as a result of corporate developments subsequent
to the Subscription Date that would require such
Registration Statement to be amended to reflect such event
in order to maintain its compliance with the disclosure
requirements of the Securities Act or (iii) the Company
shall at any time fail to comply with the requirements of
Section 6.3 (with respect to maintaining its listing on a
Principal Market), 6.4 (with respect to continued
registration and reporting obligations to the SEC), or 6.6
(with respect to maintenance of its corporate existence). In
the event that the Investor terminates this Agreement in
accordance with this Section 2.4, in addition to any and all
amounts due and payable by the Company to the Investor under
the Registration Rights Agreement, any and all amounts that
would have been due and payable by the Company to the
Investor in respect of Section 2.1(b) hereof had such
termination occurred at the end of the Commitment Period
shall also become immediately due and payable.
(b) The Company may, at its sole discretion, terminate this
Agreement upon written notice to the Investor in the event
that the Company has, in accordance with Section 2.1(b) of
this Agreement, issued and sold Put Shares to the Investor
for an amount equal to or greater than (in aggregate
Investment Amounts) the Minimum Commitment Amount.
Notwithstanding the foregoing, so long as the Investor (i)
holds Registrable Securities issued hereunder or under the
Warrant, and/or (ii) the Warrant has not expired and is
unexercised in whole or in part, the Company's obligations
hereunder and under the Registration Rights Agreement with
respect to the Registration Statement shall survive such
termination of this Agreement.
Section 2.5. The Warrant. On the Subscription Date, the Company shall
issue the Warrant to the Investor. The Warrant shall be delivered by the Company
to the Investor upon execution of this Agreement by the parties hereto. The
Warrant Shares shall be registered for resale pursuant to the Registration
Rights Agreement.
Section 2.6. Blackout Shares. (a) In the event that, within five (5)
Trading Days following any Closing Date, the Company gives a Blackout Notice to
the Investor of a Blackout Period in accordance with the Registration Rights
Agreement, and (b) the Bid Price on the Trading Day immediately preceding such
Blackout Period ("Old Bid Price") is greater than the Bid Price on the first
Trading Day following such Blackout Period that the Investor may sell its
Registrable Securities pursuant to an effective Registration Statement ("New Bid
Price"), then the Company shall issue to the Investor the number of additional
shares of Registrable Securities (the "Blackout Shares") equal to the difference
between (X) the product of the number of Registrable Securities held by Investor
immediately prior to the Blackout Period multiplied by the Old Bid Price,
divided by the New Bid Price, and (Y) the number of Registrable Securities held
by Investor immediately prior to the Blackout Period.
Section 2.7. Liquidated Damages. The parties hereto acknowledge and agree
that the sum payable under Section 2.1(b) and the requirement to issue Blackout
Shares under Section 2.6 above shall give rise to liquidated damages and not
penalties. The parties further acknowledge that (a) the amount of
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loss or damages likely to be incurred is incapable or is difficult to precisely
estimate, (b) the amounts specified in such Sections bear a reasonable
proportion and are not plainly or grossly disproportionate to the probable loss
likely to be incurred by the Investor in connection with the failure by the
Company to make Puts with aggregate Purchase Prices totalling at least the
Minimum Commitment Amount or in connection with a Blackout Period under the
Registration Rights Agreement, and (c) the parties are sophisticated business
parties and have been represented by sophisticated and able legal and financial
counsel and negotiated this Agreement at arm's length.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INVESTOR
The Investor represents and warrants to the Company that:
Section 3.1. Intent. The Investor is entering into this Agreement for its
own account and the Investor has no present arrangement (whether or not legally
binding) at any time to sell the Common Stock to or through any person or
entity; provided, however, that by making the representations herein, the
Investor does not agree to hold the Common Stock for any minimum or other
specific term and reserves the right to dispose of the Common Stock at any time
in accordance with federal and state securities laws applicable to such
disposition.
Section 3.2. Sophisticated Investor. The Investor is a sophisticated
investor (as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited
investor (as defined in Rule 501 of Regulation D), and Investor has such
knowledge and experience in business and financial matters that it is capable of
evaluating the merits and risks of an investment in Common Stock. The Investor
acknowledges that an investment in the Common Stock is speculative and involves
a high degree of risk.
Section 3.3. Authority. Each of this Agreement, the Registration Rights
Agreement, and the Escrow Agreement has been duly authorized by all necessary
corporate action and no further consent or authorization of the Company, or its
Board of Directors or stockholders is required. Each of this Agreement, the
Registration Rights Agreement, and the Escrow Agreement was validly executed and
delivered by the Investor and each is a valid and binding agreement of the
Investor enforceable against it in accordance with its terms, subject to
applicable bankruptcy, insolvency, or similar laws relating to, or affecting
generally the enforcement of, creditors' rights and remedies or by other
equitable principles of general application.
Section 3.4. Not an Affiliate. The Investor is not an officer, director
or "affiliate" (as that term is defined in Rule 405 of the Securities Act) of
the Company.
Section 3.5. Organization and Standing. Investor is duly organized,
validly existing, and in good standing under the laws of the British Virgin
Islands.
Section 3.6. Absence of Conflicts. The execution and delivery of this
Agreement and any other document or instrument contemplated hereby, and the
consummation of the transactions contemplated thereby, and compliance with the
requirements thereof, will not (a) violate any law, rule, regulation, order,
writ, judgment, injunction, decree or award binding on Investor, or, to the
Investor's knowledge, (b) violate any provision of any indenture, instrument or
agreement to which Investor is a party or is subject, or by which Investor or
any of its assets is bound, (c) conflict with or constitute a material default
thereunder, (d) result in the creation or imposition of any lien pursuant to the
terms of any such indenture, instrument or agreement, or constitute a breach of
any fiduciary duty owed by Investor to any third party, or (e) require the
approval of any third-party (that has not been obtained) pursuant to any
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material contract to which Investor is subject or to which any of its assets,
operations or management may be subject.
Section 3.7. Disclosure; Access to Information. Investor has received
all documents, records, books and other information pertaining to Investor's
investment in the Company that have been requested by Investor. The Investor has
reviewed or received copies of the SEC Documents.
Section 3.8. Manner of Sale. At no time was Investor presented with or
solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Investor that:
Section 4.1. Organization of the Company. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Michigan and has all requisite corporate power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted. Except as set forth in the SEC Documents, the Company does not own
more than fifty percent (50%) of the outstanding capital stock of or control any
other business entity. The Company is duly qualified as a foreign corporation to
do business and is in good standing in every jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary, other than those in which the failure so to qualify would not have a
Material Adverse Effect.
Section 4.2. Authority. (i) The Company has the requisite corporate power
and authority to enter into and perform its obligations under this Agreement,
the Registration Rights Agreement, the Warrant and the Escrow Agreement and to
issue the Put Shares, the Warrant, the Warrant Shares and the Blackout Shares;
(ii) the execution and delivery of this Agreement and the Registration Rights
Agreement, and the execution, issuance and delivery of the Warrant, by the
Company and the consummation by it of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action and no
further consent or authorization of the Company or its Board of Directors or
stockholders is required; and (iii) each of this Agreement and the Registration
Rights Agreement has been duly executed and delivered, and the Warrant has been
duly executed, issued and delivered, by the Company and constitute valid and
binding obligations of the Company enforceable against the Company in accordance
with their respective terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, or similar laws relating to, or affecting
generally the enforcement of, creditors' rights and remedies or by other
equitable principles of general application.
Section 4.3. Capitalization. As of November 30, 1999, the authorized
capital stock of the Company consisted of 20,000,000 shares of Common Stock, of
which 6,035,597 shares were issued and outstanding, and 1,000,000 shares of
Preferred stock, of which no shares were issued and outstanding. Except for
options to purchase Common Stock issued to officers, directors, employees,
consultants and advisors pursuant to stock option plans in the ordinary course
of the Company's business and (ii) warrants to purchase not more than 341,944
shares of Common Stock with purchase prices between $4.80 and $20.00 per share,
there are no options, warrants, or rights to subscribe to, securities, rights or
obligations convertible into or exchangeable for or giving any right to
subscribe for any shares of capital stock of the Company. All of the outstanding
shares of Common Stock of the Company have been duly and validly authorized and
issued and are fully paid and nonassessable.
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Section 4.4. Common Stock. The Company has registered its Common Stock
pursuant to Section 12(b) or 12(g) of the Exchange Act and is in full compliance
with all reporting requirements of the Exchange Act, and the Company has
maintained all requirements for the continued listing or quotation of its Common
Stock, and such Common Stock is currently listed or quoted on the Principal
Market. As of the date hereof, the Principal Market is the Nasdaq SmallCap
Market.
Section 4.5. SEC Documents. The Company has delivered or made available
to the Investor true and complete copies of the SEC Documents (including,
without limitation, proxy information and solicitation materials). The Company
has not provided to the Investor any information that, according to applicable
law, rule or regulation, should have been disclosed publicly prior to the date
hereof by the Company, but which has not been so disclosed. As of their
respective dates, the SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, and
other federal, state and local laws, rules and regulations applicable to such
SEC Documents, and none of the SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Documents comply as to form and
substance in all material respects with applicable accounting requirements and
the published rules and regulations of the SEC or other applicable rules and
regulations with respect thereto. Such financial statements have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto or (ii) in the case
of unaudited interim statements, to the extent they may not include footnotes or
may be condensed or summary statements) and fairly present in all material
respects the financial position of the Company as of the dates thereof and the
results of operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments).
Section 4.6. Exemption from Registration; Valid Issuances. The sale and
issuance of the Warrant, the Warrant Shares, the Put Shares and any Blackout
Shares in accordance with the terms and on the bases of the representations and
warranties set forth in this Agreement, may and shall be properly issued
pursuant to Section 4(2), Regulation D and/or any applicable state law. When
issued and paid for as herein provided, the Put Shares, the Warrant Shares and
any Blackout Shares shall be duly and validly issued, fully paid, and
nonassessable. Neither the sales of the Put Shares, the Warrant, the Warrant
Shares or any Blackout Shares pursuant to, nor the Company's performance of its
obligations under, this Agreement, the Registration Rights Agreement, or the
Warrant shall (i) result in the creation or imposition of any liens, charges,
claims or other encumbrances upon the Put Shares, the Warrant Shares, any
Blackout Shares or any of the assets of the Company, or (ii) entitle the holders
of Outstanding Capital Shares to preemptive or other rights to subscribe to or
acquire the Capital Shares or other securities of the Company. The Put Shares,
the Warrant Shares and any Blackout Shares shall not subject the Investor to
personal liability by reason of the ownership thereof.
Section 4.7. No General Solicitation or Advertising in Regard to this
Transaction. Neither the Company nor any of its affiliates nor any distributor
or any person acting on its or their behalf (i) has conducted or will conduct
any general solicitation (as that term is used in Rule 502(c) of Regulation D)
or general advertising with respect to any of the Put Shares, the Warrant, the
Warrant Shares or any Blackout Shares, or (ii) made any offers or sales of any
security or solicited any offers to buy any security under any circumstances
that would require registration of the Common Stock under the Securities Act
since 1998.
Section 4.8. Corporate Documents. The Company has furnished or made
available to the Investor true and correct copies of the Company's Articles of
Incorporation, as amended and in effect on
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the date hereof (the "Certificate"), and the Company's By-Laws, as amended and
in effect on the date hereof (the "By-Laws").
Section 4.9. No Material Breach or Violation with Law. The execution,
delivery and performance of this Agreement by the Company and the consummation
by the Company of the transactions contemplated hereby, including without
limitation the issuance of the Put Shares, the Warrant, the Warrant Shares and
the Blackout Shares do not and will not (i) result in a violation of the
Certificate or By-Laws or (ii) constitute a material default (or an event that
with notice or lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation of,
any material agreement, indenture, instrument or any "lock-up" or similar
provision of any underwriting or similar agreement to which the Company is a
party, or (iii) result in a violation of any federal, state, local or foreign
law, rule, regulation, order, judgment or decree (including federal and state
securities laws and regulations) applicable to the Company or by which any
property or asset of the Company is bound or affected (except for such defaults,
terminations, amendments, accelerations, cancellations and violations as would
not, individually or in the aggregate, have a Material Adverse Effect) nor is
the Company otherwise in violation of, in default under, any of the foregoing;
provided, however, that for purposes of the Company's representations and
warranties as to violations of foreign law, rule or regulation referenced in
clause (iii), such representations and warranties are made only to the best of
the Company's knowledge insofar as the execution, delivery and performance of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby are or may be affected by the status of the
Investor under or pursuant to any such foreign law, rule or regulation. The
business of the Company is not being conducted in violation of any law,
ordinance or regulation of any governmental entity, except for possible
violations that either singly or in the aggregate do not and will not have a
Material Adverse Effect. The Company is not required under federal, state or
local law, rule or regulation to obtain any consent, authorization or order of,
or make any filing or registration with, any court or governmental agency in
order for it to execute, deliver or perform any of its obligations under this
Agreement or issue and sell the Common Stock or the Warrant in accordance with
the terms hereof (other than any SEC, NASD or state securities filings that may
be required to be made by the Company subsequent to any Closing, any
registration statement that may be filed pursuant hereto, and any shareholder
approval required by the rules applicable to companies whose common stock trades
on the Nasdaq SmallCap Market); provided that, for purposes of the
representation made in this sentence, the Company is assuming and relying upon
the accuracy of the relevant representations and agreements of the Investor
herein.
Section 4.10. No Material Adverse Change. Since November 30, 1999 no
event has occurred that would have a Material Adverse Effect on the Company,
except as disclosed in the SEC Documents.
Section 4.11. No Undisclosed Liabilities. The Company has no liabilities
or obligations that are material, individually or in the aggregate, and that are
not disclosed in the SEC Documents or otherwise publicly announced, other than
those incurred in the ordinary course of the Company's businesses since November
30, 1999 and which, individually or in the aggregate, do not or would not have a
Material Adverse Effect on the Company.
Section 4.12. No Undisclosed Events or Circumstances. Since November 30,
1999, no event or circumstance has occurred or exists with respect to the
Company or its businesses, properties, prospects, operations or financial
condition, that, under applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company but which has
not been so publicly announced or disclosed in the SEC Documents.
Section 4.13. No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or
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solicited any offers to buy any security since 1998, other than pursuant to this
Agreement and employee benefit plans, under circumstances that would require
registration of the Common Stock under the Securities Act.
Section 4.14. Litigation and Other Proceedings. Except as may be set forth
in the SEC Documents, there are no lawsuits or proceedings pending or to the
best knowledge of the Company threatened, against the Company, nor has the
Company received any written or oral notice of any such action, suit, proceeding
or investigation, which might have a Material Adverse Effect. Except as set
forth in the SEC Documents, no judgment, order, writ, injunction or decree or
award has been issued by or, so far as is known by the Company, requested of any
court, arbitrator or governmental agency which might result in a Material
Adverse Effect.
Section 4.15. No Misleading or Untrue Communication. The Company, any
Person representing the Company, and, to the knowledge of the Company, any other
Person selling or offering to sell the Put Shares, the Warrant, the Warrant
Shares or the Blackout Shares in connection with the transactions contemplated
by this Agreement, have not made, at any time, any oral communication in
connection with the offer or sale of the same which contained any untrue
statement of a material fact or omitted to state any material fact necessary in
order to make the statements, in the light of the circumstances under which they
were made, not misleading.
Section 4.16. Material Non-Public Information. The Company is not in
possession of, nor has the Company or its agents disclosed to the Investor, any
material non-public information that (i) if disclosed, would, or could
reasonably be expected to have, an effect on the price of the Common Stock or
(ii) according to applicable law, rule or regulation, should have been disclosed
publicly by the Company prior to the date hereof but which has not been so
disclosed.
ARTICLE V
COVENANTS OF THE INVESTOR
The Investor's trading activities with respect to shares of the Company's
Common Stock will be in compliance with all applicable state and federal
securities laws, rules and regulations (including, without limitation, the
regulations set forth in Regulation M under the Securities Act) and the rules
and regulations of the Principal Market on which the Company's Common Stock is
listed.
ARTICLE VI
COVENANTS OF THE COMPANY
Section 6.1. Registration Rights. The Company shall cause the
Registration Rights Agreement to remain in full force and effect and the Company
shall comply in all respects with the terms thereof.
Section 6.2. Reservation of Common Stock. As of the date hereof, the
Company has available and the Company shall reserve and keep available at all
times, free of preemptive rights, shares of Common Stock for the purpose of
enabling the Company to satisfy any obligation to issue the Put Shares, the
Warrant Shares and the Blackout Shares; such amount of shares of Common Stock to
be reserved shall be calculated based upon a good faith estimate by the Company
of the minimum aggregate Purchase Price for the Put Shares under the terms and
conditions of this Agreement and the Exercise Price of the Warrant and a good
faith estimate by the Company in consultation with the Investor of the number
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of Blackout Shares that will need to be issued. The number of shares so reserved
from time to time, as theretofore increased or reduced as hereinafter provided,
may be reduced by the number of shares actually delivered hereunder.
Section 6.3. Listing of Common Stock. The Company shall maintain the
listing of the Common Stock on a Principal Market, and as soon as practicable
(but in any event prior to the commencement of the Commitment Period) will cause
the Put Shares, the Warrant Shares and any Blackout Shares to be listed on the
Principal Market. The Company further shall, if the Company applies to have the
Common Stock traded on any other Principal Market, include in such application
the Put Shares, the Warrant Shares and any Blackout Shares, and shall take such
other action as is necessary or desirable in the opinion of the Investor to
cause the Common Stock to be listed on such other Principal Market as promptly
as possible. The Company shall use commercially reasonable efforts to continue
the listing and trading of its Common Stock on the Principal Market (including,
without limitation, maintaining sufficient net tangible assets) and will comply
in all respects with the Company's reporting, filing and other obligations under
the bylaws or rules of the NASD and the Principal Market.
Section 6.4. Exchange Act Registration. The Company shall (i) cause its
Common Stock to continue to be registered under Section 12(g) or 12(b) of the
Exchange Act, will comply in all respects with its reporting and filing
obligations under said Act, and will not take any action or file any document
(whether or not permitted by said Act or the rules thereunder) to terminate or
suspend such registration or to terminate or suspend its reporting and filing
obligations under said Act.
Section 6.5. Legends. The certificates evidencing the Put Shares, the
Warrant Shares and the Blackout Shares shall be free of legends, except as
provided for in Article VIII.
Section 6.6. Corporate Existence. The Company shall take all steps
necessary to preserve and continue the corporate existence of the Company.
Section 6.7. Additional SEC Documents. The Company shall deliver to the
Investor, as and when the originals thereof are submitted to the SEC for filing,
copies of all SEC Documents so furnished or submitted to the SEC.
Section 6.8. Notice of Certain Events Affecting Registration; Suspension
of Right to Make a Put. The Company shall immediately notify the Investor upon
the occurrence of any of the following events in respect of a registration
statement or related prospectus in respect of an offering of Registrable
Securities: (i) receipt of any request for additional information by the SEC or
any other federal or state governmental authority during the period of
effectiveness of the registration statement for amendments or supplements to the
registration statement or related prospectus; (ii) the issuance by the SEC or
any other federal or state governmental authority of any stop order suspending
the effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose; (iii) receipt of any notification with respect to
the suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; (iv) the happening of any event
that makes any statement made in such Registration Statement or related
prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of any
changes in the registration statement, related prospectus or documents so that,
in the case of the Registration Statement, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
that in the case of the related prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and (v) the Company's
reasonable determination that a post-effective
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amendment to the registration statement would be appropriate, and the Company
shall promptly make available to the Investor any such supplement or amendment
to the related prospectus. The Company shall not deliver to the Investor any Put
Notice during the continuation of any of the foregoing events.
Section 6.9. Expectations Regarding Put Notices. Within ten (10) days
after the commencement of each calendar quarter occurring subsequent to the
commencement of the Commitment Period, the Company undertakes to notify the
Investor as to its reasonable expectations as to the dollar amount it intends to
raise during such calendar quarter, if any, through the issuance of Put Notices.
Such notification shall constitute only the Company's good faith estimate with
respect to such calendar quarter and shall in no way obligate the Company to
raise such amount during such calendar quarter or otherwise limit its ability to
deliver Put Notices during such calendar quarter. The failure by the Company to
comply with this provision can be cured by the Company's notifying the Investor
at any time as to its reasonable expectations with respect to the current
calendar quarter.
Section 6.10. Consolidation; Merger. The Company shall not, at any time
after the date hereof, effect any merger or consolidation of the Company with or
into, or a transfer of all or substantially all of the assets of the Company to,
another entity unless the resulting successor or acquiring entity (if not the
Company) assumes by written instrument the obligation to deliver to the Investor
such shares of stock and/or securities as the Investor is entitled to receive
pursuant to this Agreement and the Warrant.
Section 6.11. Issuance of Put Shares, Warrant Shares and Blackout Shares.
The sale of the Put Shares, the issuance of the Warrant Shares pursuant to
exercise of the Warrant and the issuance of any Blackout Shares shall be made in
accordance with the provisions and requirements of Regulation D and any
applicable state law. Issuance of the Warrant Shares pursuant to exercise of the
Warrant through a cashless exercise shall be made in accordance with the
provisions and requirements of Section 3(a)(9) under the Securities Act and any
applicable state law.
Section 6.12. Legal Opinion on Subscription Date. The Company's
independent counsel shall deliver to the Investor on the Subscription Date an
opinion in the form of Exhibit D, except for paragraph 6 thereof.
ARTICLE VII
CONDITIONS TO DELIVERY OF
PUT NOTICES AND CONDITIONS TO CLOSING
Section 7.1. Conditions Precedent to the Obligation of the Company to
Issue and Sell Common Stock. The obligation hereunder of the Company to issue
and sell the Put Shares to the Investor incident to each Closing is subject to
the satisfaction, at or before each such Closing, of each of the conditions set
forth below.
(a) Accuracy of the Investor's Representation and Warranties.
The representations and warranties of the Investor shall be
true and correct in all material respects as of the date of
this Agreement and as of the date of each such Closing as
though made at each such time.
(b) Performance by the Investor. The Investor shall have
performed, satisfied and complied in all respects with all
covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the
Investor at or prior to such Closing.
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Section 7.2. Conditions Precedent to the Right of the Company to Deliver
a Put Notice and the Obligation of the Investor to Purchase Put Shares. The
right of the Company to deliver a Put Notice and the obligation of the Investor
hereunder to acquire and pay for the Put Shares incident to a Closing is subject
to the satisfaction, on (i) the applicable Put Date and (ii) the applicable
Closing Date (each a "Condition Satisfaction Date"), of each of the following
conditions:
(a) Registration of the Registrable Securities with the SEC. As
set forth in the Registration Rights Agreement, the Company
shall have filed with the SEC a Registration Statement with
respect to the resale of the Registrable Securities by the
Investor that shall have been declared effective by the SEC
prior to the first Put Date, but in no event later than one
hundred twenty (120) days after Subscription Date.
(b) Effective Registration Statement. Upon the terms and subject
to the conditions as set forth in the Registration Rights
Agreement, the Registration Statement shall have previously
become effective and shall remain effective on each
Condition Satisfaction Date and (i) neither the Company nor
the Investor shall have received notice that the SEC has
issued or intends to issue a stop order with respect to the
Registration Statement or that the SEC otherwise has
suspended or withdrawn the effectiveness of the Registration
Statement, either temporarily or permanently, or intends or
has threatened to do so (unless the SEC's concerns have been
addressed and the Investor is reasonably satisfied that the
SEC no longer is considering or intends to take such
action), and (ii) no other suspension of the use or
withdrawal of the effectiveness of the Registration
Statement or related prospectus shall exist.
(c) Accuracy of the Company's Representations and Warranties.
The representations and warranties of the Company shall be
true and correct in all material respects as of each
Condition Satisfaction Date as though made at each such time
(except for representations and warranties specifically made
as of a particular date).
(d) Performance by the Company. The Company shall have
performed, satisfied and complied in all material respects
with all covenants, agreements and conditions required by
this Agreement, the Registration Rights Agreement and the
Warrant to be performed, satisfied or complied with by the
Company at or prior to each Condition Satisfaction Date.
(e) No Injunction. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted,
entered, promulgated or adopted by any court or governmental
authority of competent jurisdiction that prohibits the
transactions contemplated by this Agreement or otherwise has
a Material Adverse Effect, and no actions, suits or
proceedings shall be in progress, pending or threatened by
any Person, that seek to enjoin or prohibit the transactions
contemplated by this Agreement or otherwise could reasonably
be expected to have a Material Adverse Effect. For purposes
of this paragraph (e), no proceeding shall be deemed pending
or threatened unless one of the parties has received written
or oral notification thereof prior to the applicable Closing
Date.
(f) No Suspension of Trading In or Delisting of Common Stock.
The trading of the Common Stock shall not have been
suspended by the SEC, the Principal Market
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or the NASD and the Common Stock shall have been approved
for listing or quotation on and shall not have been delisted
from the Principal Market. The issuance of shares of Common
Stock with respect to the applicable Closing, if any, shall
not violate the shareholder approval requirements of the
Principal Market.
(g) Legal Opinion. The Company shall have caused to be delivered
to the Investor, within five (5) Trading Days of the
effective date of the Registration Statement, an opinion of
the Company's independent counsel in the form of Exhibit D
hereto, addressed to the Investor.
(h) Adequacy of Disclosure. No dispute between the Company and
the Investor shall exist pursuant to Section 7.3 as to the
adequacy of the disclosure contained in the Registration
Statement.
(i) Ten Percent Limitation. On each Closing Date, the number of
Put Shares then to be purchased by the Investor shall not
exceed the number of such shares that, when aggregated with
all other shares of Registerable Securities then owned by
the Investor beneficially or deemed beneficially owned by
the Investor, would result in the Investor owning no more
than 9.9% of all of such Common Stock as would be
outstanding on such Closing Date, as determined in
accordance with Section 16 of the Exchange Act and the
regulations promulgated thereunder. For purposes of this
Section, in the event that the amount of Common Stock
outstanding as determined in accordance with Section 16 of
the Exchange Act and the regulations promulgated thereunder
is greater on a Closing Date than on the date upon which the
Put Notice associated with such Closing Date is given, the
amount of Common Stock outstanding on such Closing Date
shall govern for purposes of determining whether the
Investor, when aggregating all purchases of Common Stock
made pursuant to this Agreement and, if any, Warrant Shares
and Blackout Shares, would own more than 9.9% of the Common
Stock following such Closing Date.
(j) Minimum Average Daily Trading Volume. The Average Daily
Trading Volume for the Common Stock with respect to the
applicable Put Date and Closing Date equals or exceeds
30,000 shares per Trading Day.
(k) No Knowledge. The Company shall have no knowledge of any
event more likely than not to have the effect of causing
such Registration Statement to be suspended or otherwise
ineffective (which event is more likely than not to occur
within the fifteen Trading Days following the Trading Day on
which such Notice is deemed delivered).
(l) Trading Cushion. The Trading Cushion shall have elapsed
since the immediately preceding Put Date.
(m) Shareholder Vote. The issuance of shares of Common Stock
with respect to the applicable Closing, if any, shall not
violate the shareholder approval requirements of the NASD or
the Principal Market.
(n) Escrow Agreement. The parties hereto shall have entered into
the Escrow Agreement.
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(o) Other. On each Condition Satisfaction Date, the Investor
shall have received and been reasonably satisfied with such
other certificates and documents as shall have been
reasonably requested by the Investor in order for the
Investor to confirm the Company's satisfaction of the
conditions set forth in this Section 7.2., including,
without limitation, a certificate in substantially the form
and substance of Exhibit F hereto, executed in either case
by an executive officer of the Company and to the effect
that all the conditions to such Closing shall have been
satisfied as at the date of each such certificate.
Section 7.3. Review of Registration Statement; Non-Disclosure of
Non-Public Information.
(a) The Company shall make available for inspection and review
by the Investor, advisors to and representatives of the
Investor (who may or may not be affiliated with the Investor
and who are reasonably acceptable to the Company), any
Underwriter, any Registration Statement or amendment or
supplement thereto or any blue sky, NASD or other filing,
all financial and other records, all SEC Documents and other
filings with the SEC, and all other corporate documents and
properties of the Company as may be reasonably necessary for
the purpose of such review, and cause the Company's
officers, directors and employees to supply all such
information reasonably requested by the Investor or any such
representative, advisor or Underwriter in connection with
such Registration Statement (including, without limitation,
in response to all questions and other inquiries reasonably
made or submitted by any of them), prior to and from time to
time after the filing and effectiveness of the Registration
Statement for the sole purpose of enabling the Investor and
such representatives, advisors and Underwriters and their
respective accountants and attorneys to conduct initial and
ongoing due diligence with respect to the Company and the
accuracy of the Registration Statement.
(b) Each of the Company, its officers, directors, employees and
agents shall in no event disclose non-public information to
the Investor, advisors to or representatives of the Investor
unless prior to disclosure of such information the Company
identifies such information as being non-public information
and provides the Investor, such advisors and representatives
with the opportunity to accept or refuse to accept such
non-public information for review. The Company may, as a
condition to disclosing any non-public information
hereunder, require the Investor's advisors and
representatives to enter into a confidentiality agreement in
form reasonably satisfactory to the Company and the
Investor.
(c) Nothing herein shall require the Company to disclose
non-public information to the Investor or its advisors or
representatives, and the Company represents that it does not
disseminate non-public information to any investors who
purchase stock in the Company in a public offering, to money
managers or to securities analysts; provided, however, that
notwithstanding anything herein to the contrary, the Company
shall, as hereinabove provided, immediately notify the
advisors and representatives of the Investor and any
Underwriters of any event or the existence of any
circumstance (without any obligation to disclose the
specific event or circumstance) of which it becomes aware,
constituting non-public information (whether or not
requested of the Company specifically or generally during
the course of due diligence by such persons or entities),
which, if not disclosed in the prospectus included in the
Registration Statement would cause such prospectus to
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include a material misstatement or to omit a material fact
required to be stated therein in order to make the
statements, therein, in light of the circumstances in which
they were made, not misleading. Nothing contained in this
Section 7.3 shall be construed to mean that such persons or
entities other than the Investor (without the written
consent of the Investor prior to disclosure of such
information) may not obtain non-public information in the
course of conducting due diligence in accordance with the
terms and conditions of this Agreement and nothing herein
shall prevent any such persons or entities from notifying
the Company of their opinion that based on such due
diligence by such persons or entities, that the Registration
Statement contains an untrue statement of a material fact or
omits a material fact required to be stated in the
Registration Statement or necessary to make the statements
contained therein, in light of the circumstances in which
they were made, not misleading.
ARTICLE VIII
LEGENDS
Section 8.1. Legends. Each of the Warrant and, unless otherwise provided
below, each certificate representing Registrable Securities will bear the
following legend (the "Legend"):
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH
OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED,
PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT
TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION.
THE HOLDER OF THIS CERTIFICATE IS THE BENEFICIARY OF CERTAIN OBLIGATIONS OF
THE COMPANY SET FORTH IN A PRIVATE EQUITY LINE AGREEMENT BETWEEN SOMANETICS
CORPORATION AND KINGSBRIDGE CAPITAL LIMITED DATED AS OF MARCH 6, 2000. A
COPY OF THE PORTION OF THE AFORESAID AGREEMENT EVIDENCING SUCH OBLIGATIONS
MAY BE OBTAINED FROM THE COMPANY'S EXECUTIVE OFFICES.
As soon as practicable after the execution and delivery hereof, but in any
event within five (5) Trading Days hereafter, the Company shall issue to the
transfer agent for its Common Stock (and to any substitute or replacement
transfer agent for its Common Stock upon the Company's appointment of any such
substitute or replacement transfer agent) instructions in substantially the form
of Exhibit F hereto, with a copy to the Investor. Such instructions shall be
irrevocable by the Company from and after the date hereof or from and after the
issuance thereof to any such substitute or replacement transfer agent, as the
case may be, except as otherwise expressly provided in the Registration Rights
Agreement. It is the intent and purpose of such instructions, as provided
therein, to require the transfer agent for the Common Stock from time to time
upon transfer of Registrable Securities by the Investor to issue certificates
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evidencing such Registrable Securities free of the Legend during the following
periods and under the following circumstances and without consultation by the
transfer agent with the Company or its counsel and without the need for any
further advice or instruction or documentation to the transfer agent by or from
the Company or its counsel or the Investor:
(a) At any time after the Effective Date to the extent
accompanied by a notice requesting the issuance of
certificates free of the Legend; provided that (i) the
Registration Statement shall then be effective and (ii) if
reasonably requested by the transfer agent the Investor
confirms to the transfer agent that the Investor has
complied with or will comply with the prospectus delivery
requirement under the Securities Act.
(b) At any time upon any surrender of one or more certificates
evidencing Registrable Securities that bear the Legend, to
the extent accompanied by a notice requesting the issuance
of new certificates free of the Legend to replace those
surrendered and containing representations that (i) the
Investor is permitted to dispose of such Registrable
Securities without limitation as to amount or manner of sale
pursuant to Rule 144(k) under the Securities Act or (ii) the
Investor has sold, pledged or otherwise transferred or
agreed to sell, pledge or otherwise transfer such
Registrable Securities in a manner other than pursuant to an
effective registration statement, to a transferee who shall
upon such transfer be entitled to freely tradeable
securities.
Section 8.2. No Other Legend or Stock Transfer Restrictions. No legend
other than the one specified in Section 8.1 has been or shall be placed on the
share certificates representing the Common Stock issued to the Investor and no
instructions or "stop transfers orders," so called, "stock transfer
restrictions," or other restrictions have been or shall be given to the
Company's transfer agent with respect thereto other than as expressly set forth
in this Article VIII.
Section 8.3. Investor's Compliance. Nothing in this Article VIII shall
affect in any way the Investor's obligations under any agreement to comply with
all applicable securities laws upon resale of the Common Stock.
ARTICLE IX
INDEMNIFICATION
Section 9.1. Indemnification.
(a) The Company agrees to indemnify and hold harmless the
Investor, its partners, affiliates, officers, directors,
employees, and duly authorized agents, and each Person or
entity, if any, who controls the Investor within the meaning
of Section 15 of the Securities Act or Section 20 of the
Exchange Act, together with the Controlling Persons (as
defined in the Registration Rights Agreement) from and
against any Damages, joint or several, and any action in
respect thereof to which the Investor, its partners,
affiliates, officers, directors, employees, and duly
authorized agents, and any such Controlling Person becomes
subject to, resulting from, arising out of or relating to
any misrepresentation, breach of warranty or nonfulfillment
of or failure to perform any covenant or agreement on the
part of Company contained in this Agreement, as such Damages
are incurred, except to
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the extent that such damages result solely from the
Investor's failure to perform any covenant or agreement
contained in this Agreement, provided, however, that the
Company shall not be liable in any such case to the extent
that any such Damages arise out of or are based upon
information furnished to the Company by or on behalf of the
Investor in writing.
(b) the Investor agrees to indemnify and hold harmless the
Company, its partners, affiliates, officers, directors,
employees and duly authorized agents and its Controlling
Persons (as defined in the Registration Rights Agreement)
from and against any Damages, joint or several, and any
action in respect thereof to which the Company, its
partners, affiliates, officers, directors, employees, and
duly authorized agents, and any such Controlling Person
becomes subject to, resulting from, arising out of or
relating to any misrepresentation, breach of warranty or
nonfulfillment of or failure to perform any covenant or
agreement on the part of Investor contained in this
Agreement, as such Damages are incurred, except to the
extent that such damages result solely from the Company's
failure to perform any covenant or agreement contained in
this Agreement; provided, however, that the indemnification
obligation of the Investor under this Section 9.1 shall not
exceed an aggregate maximum amount of $750,000.
Section 9.2. Method of Asserting Indemnification Claims. All claims for
indemnification by any Indemnified Party (as defined below) under Section 9.1
shall be asserted and resolved as follows:
(a) In the event any claim or demand in respect of which any
person claiming indemnification under any provision of
Section 9.1 (an "Indemnified Party") might seek indemnity
under Section 9.1 is asserted against or sought to be
collected from such Indemnified Party by a person other than
the Company, the Investor or any affiliate of the Company or
(a "Third Party Claim"), the Indemnified Party shall deliver
a written notification, enclosing a copy of all papers
served, if any, and specifying the nature of and basis for
such Third Party Claim and for the Indemnified Party's claim
for indemnification that is being asserted under any
provision of Section 9.1 against any person (the
"Indemnifying Party"), together with the amount or, if not
then reasonably ascertainable, the estimated amount,
determined in good faith, of such Third Party Claim (a
"Claim Notice") with reasonable promptness to the
Indemnifying Party. If the Indemnified Party fails to
provide the Claim Notice with reasonable promptness after
the Indemnified Party receives notice of such Third Party
Claim, the Indemnifying Party shall not be obligated to
indemnify the Indemnified Party with respect to such Third
Party Claim to the extent that the Indemnifying Party's
ability to defend has been irreparably prejudiced by such
failure of the Indemnified Party. The Indemnifying Party
shall notify the Indemnified Party as soon as practicable
within the period ending thirty (30) calendar days following
receipt by the Indemnifying Party of either a Claim Notice
or an Indemnity Notice (as defined below) (the "Dispute
Period") whether the Indemnifying Party disputes its
liability or the amount of its liability to the Indemnified
Party under Section 9.1 and whether the Indemnifying Party
desires, at its sole cost and expense, to defend the
Indemnified Party against such Third Party Claim.
(i) If the Indemnifying Party notifies the Indemnified
Party within the Dispute Period that the Indemnifying
Party desires to defend the
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Indemnified Party with respect to the Third Party
Claim pursuant to this Section 9.2(a), then the
Indemnifying Party shall have the right to defend,
with counsel reasonably satisfactory to the
Indemnified Party, at the sole cost and expense of
the Indemnifying Party, such Third Party Claim by all
appropriate proceedings, which proceedings shall be
vigorously and diligently prosecuted by the
Indemnifying Party to a final conclusion or will be
settled at the discretion of the Indemnifying Party
(but only with the consent of the Indemnified Party
in the case of any settlement that provides for any
relief other than the payment of monetary damages or
that provides for the payment of monetary damages as
to which the Indemnified Party shall not be
indemnified in full pursuant to Section 9.1). The
Indemnifying Party shall have full control of such
defense and proceedings, including any compromise or
settlement thereof; provided, however, that the
Indemnified Party may, at the sole cost and expense
of the Indemnified Party, at any time prior to the
Indemnifying Party's delivery of the notice referred
to in the first sentence of this clause (i), file any
motion, answer or other pleadings or take any other
action that the Indemnified Party reasonably believes
to be necessary or appropriate to protect its
interests; and provided further, that if requested by
the Indemnifying Party, the Indemnified Party will,
at the sole cost and expense of the Indemnifying
Party, provide reasonable cooperation to the
Indemnifying Party in contesting any Third Party
Claim that the Indemnifying Party elects to contest.
The Indemnified Party may participate in, but not
control, any defense or settlement of any Third Party
Claim controlled by the Indemnifying Party pursuant
to this clause (i), and except as provided in the
preceding sentence, the Indemnified Party shall bear
its own costs and expenses with respect to such
participation. Notwithstanding the foregoing, the
Indemnified Party may take over the control of the
defense or settlement of a Third Party Claim at any
time if it irrevocably waives its right to indemnity
under Section 9.1 with respect to such Third Party
Claim.
(ii) If the Indemnifying Party fails to notify the
Indemnified Party within the Dispute Period that the
Indemnifying Party desires to defend the Third Party
Claim pursuant to Section 9.2(a), or if the
Indemnifying Party gives such notice but fails to
prosecute vigorously and diligently or settle the
Third Party Claim, or if the Indemnifying Party fails
to give any notice whatsoever within the Dispute
Period, then the Indemnified Party shall have the
right to defend, at the sole cost and expense of the
Indemnifying Party, the Third Party Claim by all
appropriate proceedings, which proceedings shall be
prosecuted by the Indemnified Party in a reasonable
manner and in good faith or will be settled at the
discretion of the Indemnified Party (with the consent
of the Indemnifying Party, which consent will not be
unreasonably withheld). The Indemnified Party will
have full control of such defense and proceedings,
including any compromise or settlement thereof;
provided, however, that if requested by the
Indemnified Party, the Indemnifying Party will, at
the sole cost and expense of the Indemnifying Party,
provide reasonable cooperation to the Indemnified
Party and its counsel in contesting any Third Party
Claim which the Indemnified Party is contesting.
Notwithstanding the foregoing provisions of this
clause (ii), if the
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Indemnifying Party has notified the Indemnified Party
within the Dispute Period that the Indemnifying Party
disputes its liability or the amount of its liability
hereunder to the Indemnified Party with respect to
such Third Party Claim and if such dispute is
resolved in favor of the Indemnifying Party in the
manner provided in clause (iii) below, the
Indemnifying Party will not be required to bear the
costs and expenses of the Indemnified Party's defense
pursuant to this clause (ii) or of the Indemnifying
Party's participation therein at the Indemnified
Party's request, and the Indemnified Party shall
reimburse the Indemnifying Party in full for all
reasonable costs and expenses incurred by the
Indemnifying Party in connection with such
litigation. The Indemnifying Party may participate
in, but not control, any defense or settlement
controlled by the Indemnified Party pursuant to this
clause (ii), and the Indemnifying Party shall bear
its own costs and expenses with respect to such
participation.
(iii) If the Indemnifying Party notifies the Indemnified
Party that it does not dispute its liability or the
amount of its liability to the Indemnified Party with
respect to the Third Party Claim under Section 9.1,
or fails to notify the Indemnified Party within the
Dispute Period whether the Indemnifying Party
disputes its liability or the amount of its liability
to the Indemnified Party with respect to such Third
Party Claim, the Loss in the amount specified in the
Claim Notice shall be conclusively deemed a liability
of the Indemnifying Party under Section 9.1 and the
Indemnifying Party shall pay the amount of such Loss
to the Indemnified Party on demand. If the
Indemnifying Party has timely disputed its liability
or the amount of its liability with respect to such
claim, the Indemnifying Party and the Indemnified
Party shall proceed in good faith to negotiate a
resolution of such dispute, and if not resolved
through negotiations within the Resolution Period,
such dispute shall be resolved by arbitration in
accordance with paragraph (c) of this Section 9.2.
(b) In the event any Indemnified Party should have a claim under
Section 9.1 against the Indemnifying Party that does not
involve a Third Party Claim, the Indemnified Party shall
deliver a written notification of a claim for indemnity
under Section 9.1 specifying the nature of and basis for
such claim, together with the amount or, if not then
reasonably ascertainable, the estimated amount, determined
in good faith, of such claim (an "Indemnity Notice") with
reasonable promptness to the Indemnifying Party. The failure
by any Indemnified Party to give the Indemnity Notice shall
not impair such party's rights hereunder except to the
extent that the Indemnifying Party demonstrates that it has
been irreparably prejudiced thereby. If the Indemnifying
Party notifies the Indemnified Party that it does not
dispute the claim or the amount of the claim described in
such Indemnity Notice, or fails to notify the Indemnified
Party within the Dispute Period whether the Indemnifying
Party disputes the claim or the amount of the claim
described in such Indemnity Notice, the Loss in the amount
specified in the Indemnity Notice will be conclusively
deemed a liability of the Indemnifying Party under Section
9.1 and the Indemnifying Party shall pay the amount of such
Loss to the Indemnified Party on demand. If the Indemnifying
Party has timely disputed its liability or the amount of its
liability with respect to such claim, the Indemnifying Party
and the Indemnified Party shall proceed in good faith to
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negotiate a resolution of such dispute, and if not resolved
through negotiations within the Resolution Period, such
dispute shall be resolved by arbitration in accordance with
paragraph (c) of this Section 9.2.
(c) Any dispute under this Agreement or the Warrant shall be
submitted to arbitration (including, without limitation,
pursuant to this Section 9.2) and shall be finally and
conclusively determined by the decision of a board of
arbitration consisting of three (3) members (the "Board of
Arbitration") selected as hereinafter provided. Each of the
Indemnified Party and the Indemnifying Party shall select
one (1) member and the third member shall be selected by
mutual agreement of the other members, or if the other
members fail to reach agreement on a third member within
twenty (20) days after their selection, such third member
shall thereafter be selected by the American Arbitration
Association upon application made to it for such purpose by
the Indemnified Party. The Board of Arbitration shall meet
on consecutive business days in New York County, New York or
such other place as a majority of the members of the Board
of Arbitration determines more appropriate, and shall reach
and render a decision in writing (concurred in by a majority
of the members of the Board of Arbitration) with respect to
the amount, if any, which the Indemnifying Party is required
to pay to the Indemnified Party in respect of a claim filed
by the Indemnified Party. In connection with rendering its
decisions, the Board of Arbitration shall adopt and follow
such rules and procedures as a majority of the members of
the Board of Arbitration deems necessary or appropriate. To
the extent practical, decisions of the Board of Arbitration
shall be rendered no more than thirty (30) calendar days
following commencement of proceedings with respect thereto.
The Board of Arbitration shall cause its written decision to
be delivered to the Indemnified Party and the Indemnifying
Party. Any decision made by the Board of Arbitration (either
prior to or after the expiration of such thirty (30)
calendar day period) shall be final, binding and conclusive
on the Indemnified Party and the Indemnifying Party and
entitled to be enforced to the fullest extent permitted by
law and entered in any court of competent jurisdiction. Each
party to any arbitration shall bear its own expense in
relation thereto, including but not limited to such party's
attorneys' fees, if any, and the expenses and fees of the
Board of Arbitration shall be divided between the
Indemnifying Party and the Indemnified Party in the same
proportion as the portion of the related claim determined by
the Board of Arbitration to be payable to the Indemnified
Party bears to the portion of such claim determined not to
be so payable.
ARTICLE X
MISCELLANEOUS
Section 10.1. Fees and Expenses. Each of the Company and the Investor agrees to
pay its own expenses incident to the performance of its obligations hereunder,
except that the Company shall pay the fees, expenses and disbursements of the
Investor's counsel incurred in connection with the drafting, negotiation,
execution and delivery of this Agreement, the Registration Rights Agreement, the
Warrant and the Escrow Agreement up to an aggregate maximum amount of
twenty-five thousand dollars ($25,000) and that the Company shall pay the fees,
expenses and disbursements of the Investor's counsel incurred in connection with
such counsel's review of the Registration Statement in accordance with the terms
of the Registration Rights Agreement, including the limitation contained
therein.
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Section 10.2. Reporting Entity for the Common Stock. The reporting entity
relied upon for the determination of the trading price or trading volume of the
Common Stock on any given Trading Day for the purposes of this Agreement shall
be Bloomberg, L.P. or any successor thereto. The written mutual consent of the
Investor and the Company shall be required to employ any other reporting entity.
Section 10.3. Brokerage. Each of the parties hereto represents that it has
had no dealings in connection with this transaction with any finder or broker
who will demand payment of any fee or commission from the other party. The
Company on the one hand, and the Investor, on the other hand, agree to indemnify
the other against and hold the other harmless from any and all liabilities to
any persons claiming brokerage commissions or finder's fees on account of
services purported to have been rendered on behalf of the indemnifying party in
connection with this Agreement or the transactions contemplated hereby.
Section 10.4. Notices. All notices, demands, requests, consents, approvals,
and other communications required or permitted hereunder shall be in writing
and, unless otherwise specified herein, shall be (i) personally served, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery or facsimile, addressed as set
forth below or to such other address as such party shall have specified most
recently by written notice given in accordance herewith. Any notice or other
communication required or permitted to be given hereunder shall be deemed
effective (a) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the second business day
following the date of mailing by express courier service, fully prepaid,
addressed to such address, or upon actual receipt of such mailing, whichever
shall first occur. The addresses for such communications shall be:
If to the Company:
Somanetics Corporation
1653 East Maple Road,
Troy, Michigan 48083-4208
(248) 689-3050
Telephone: (248) 689-3050
Facsimile: (248) 689-4272
Attention: Bruce J. Barrett
with a copy (which shall not constitute notice) to:
Honigman Miller Schwartz and Cohn
2290 First National Building
660 Woodward Avenue
Detroit, Michigan 48226-3583
Telephone: (313) 465-7452
Facsimile: (313) 465-7453
Attention: Robert J. Krueger, Esq.
if to the Investor:
Kingsbridge Capital Limited
c/o Kingsbridge Corporate Services Limited
25
<PAGE> 27
Main Street
Kilcullen, County Kildare
Republic of Ireland
Telephone: 011-353-45-481-811
Facsimile: 011-353-45-482-003
Attention: Adam Gurney
with a copy (which shall not constitute notice) to:
Clifford Chance Rogers & Wells LLP
200 Park Avenue, 52nd Floor
New York, NY 10166
Telephone: (212) 878-8000
Facsimile: (212) 878-8375
Attention: Keith M. Andruschak, Esq.
Either party hereto may from time to time change its address or facsimile
number for notices under this Section by giving at least ten (10) days'
prior written notice of such changed address or facsimile number to the
other party hereto.
Section 10.5. Assignment. Neither this Agreement nor any rights of the
Investor or the Company hereunder may be assigned by either party to any other
person. Notwithstanding the foregoing, (a) the provisions of this Agreement
shall inure to the benefit of, and be enforceable by, any transferee of any of
the Common Stock purchased or acquired by the Investor hereunder with respect to
the Common Stock held by such person, and (b) the Investor's interest in this
Agreement may be assigned at any time, in whole or in part, to any other person
or entity (including any affiliate of the Investor) upon the prior written
consent of the Company, which consent shall not be unreasonably withheld.
Section 10.6. Amendment; No Waiver. No party shall be liable or bound to
any other party in any manner by any warranties, representations or covenants
except as specifically set forth in this Agreement or therein. Except as
expressly provided in this Agreement, neither this Agreement nor any term hereof
may be amended, waived, discharged or terminated other than by a written
instrument signed by both parties hereto. The failure of the either party to
insist on strict compliance with this Agreement, or to exercise any right or
remedy under this Agreement, shall not constitute a waiver of any rights
provided under this Agreement, nor estop the parties from thereafter demanding
full and complete compliance nor prevent the parties from exercising such a
right or remedy in the future.
Section 10.7. Annexes and Exhibits; Entire Agreement. All annexes and
exhibits to this Agreement are incorporated herein by reference and shall
constitute part of this Agreement. This Agreement, the Warrant, the Registration
Rights Agreement and the Escrow Agreement set forth the entire agreement and
understanding of the parties relating to the subject matter hereof and thereof
and supersede all prior and contemporaneous agreements, negotiations and
understandings between the parties, both oral and written, relating to the
subject matter hereof.
Section 10.8. Termination; Survival. This Agreement shall terminate on the
earlier of (i) twenty four (24) months after the commencement of the Commitment
Period (ii) such date the Investor or the Company terminates this Agreement in
accordance with its terms and (iii) the date on which the Company has made Puts
with an aggregate Investment Amount equal to the Maximum Commitment Amount;
provided, however, that the provisions of Articles VI, VIII, IX and X, and of
Section 2.1(b) and Section 7.3, shall survive the termination of this Agreement.
26
<PAGE> 28
Section 10.9. Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that such severability shall be
ineffective if it materially changes the economic benefit of this Agreement to
any party.
Section 10.10. Title and Subtitles. The titles and subtitles used in this
Agreement are used for the convenience of reference and are not to be considered
in construing or interpreting this Agreement.
Section 10.11. Counterparts. This Agreement may be executed in multiple
counterparts, each of which may be executed by less than all of the parties and
shall be deemed to be an original instrument which shall be enforceable against
the parties actually executing such counterparts and all of which together shall
constitute one and the same instrument.
Section 10.12. Choice of Law. This Agreement shall be construed under the
laws of the State of Michigan, without giving effect to conflicts of law
principles of such jurisdiction.
27
<PAGE> 29
IN WITNESS WHEREOF, the parties hereto have caused this Private Equity
Line Agreement to be executed by the undersigned, thereunto duly authorized, as
of the date first set forth above.
KINGSBRIDGE CAPITAL LIMITED
By:
-------------------------------------
Valentine O'Donoghue
Director
SOMANETICS CORPORATION
By:
-------------------------------------
Bruce J. Barrett
Chief Executive Officer
<PAGE> 30
ANNEX A
MAXIMUM PUT AMOUNT
The Maximum Put Amount with respect to a Put shall be determined based upon
the Average Daily Trading Volume of shares of Common Stock with respect to the
relevant Put Date and the Market Price as of such Put Date of shares of Common
Stock as follows:
<TABLE>
<CAPTION>
===========================================================================================
Average Daily Trading Volume
======================== ====================== ====================== ====================== ======================
Market Price ($ 30,000-45,000 45,001-60,000 60,001-75,000 75,001 and above
per share)
====================================================================================================================
<S> <C> <C> <C> <C>
0.01-1.00 $10,000 $20,000 $30,000 $30,000
======================== ---------------------- ---------------------- ---------------------- ======================
1.01-2.25 $100,000 $150,000 $200,000 $300,000
======================== ---------------------- ---------------------- ---------------------- ======================
2.26-3.50 $200,000 $300,000 $400,000 $500,000
======================== ---------------------- ---------------------- ---------------------- ======================
3.51-5.00 $300,000 $400,000 $500,000 $600,000
======================== ---------------------- ---------------------- ---------------------- ======================
5.01-6.50 $400,000 $500,000 $600,000 $700,000
======================== ---------------------- ---------------------- ---------------------- ======================
6.51-8.00 $500,000 $650,000 $750,000 $850,000
======================== ====================== ====================== ====================== ======================
8.00 and above $600,000 $750,000 $850,000 $1,000,000
======================== ====================== ====================== ====================== ======================
</TABLE>
<PAGE> 31
2
EXHIBIT A
[FORM OF ESCROW AGREEMENT]
<PAGE> 32
3
EXHIBIT B
[FORM OF REGISTRATION RIGHTS AGREEMENT]
<PAGE> 33
4
EXHIBIT C
[FORM OF WARRANT]
<PAGE> 34
5
EXHIBIT D
FORM OF OPINION OF THE COMPANY'S INDEPENDENT COUNSEL
[FORM PROVIDED BY COMPANY COUNSEL]
<PAGE> 35
EXHIBIT E
COMPLIANCE CERTIFICATE
SOMANETICS CORPORATION
The undersigned, Bruce J. Barrett hereby certifies, with respect to common
shares of Somanetics Corporation (the "Company") issuable in connection with the
Put Notice, dated (the "Notice"), delivered pursuant to Article II
of the Private Equity Line Agreement, dated March 6, 2000, by and between the
Company and Kingsbridge Capital Limited (the "Agreement"), as follows:
1. The undersigned is the duly elected Chief Executive Officer of the
Company.
2. The representations and warranties of the Company set forth in Article
IV of the Agreement are true and correct in all material respects as though made
on and as of the date hereof.
3. The Company has performed in all material respects all covenants and
agreements to be performed by the Company on or prior to the Closing Date
related to the Notice and has complied in all material respects with all
obligations and conditions contained in Article VII of the Agreement.
The undersigned has executed this Certificate this day of ,
2000.
------------------------------------
Bruce J. Barrett
Chief Executive Officer
<PAGE> 36
EXHIBIT F
INSTRUCTIONS TO TRANSFER AGENT
SOMANETICS CORPORATION
________________, 2000
[Name, address and phone and facsimile number of Transfer Agent]
Ladies and Gentlemen::
Reference is made to the Private Equity Line Agreement (the "Agreement"),
dated as of February __, 2000 between Kingsbridge Capital Limited (the
"Investor") and Somanetics Corporation (the "Company"). Pursuant to the
Agreement, subject to the terms and conditions set forth in the Agreement the
Investor has agreed to purchase from the Company and the Company has agreed to
sell to the Investor from time to time during the term of the Agreement shares
of common shares of the Company, $.01 par value per share (the "Common Stock").
As a condition to the effectiveness of the Agreement, the Company has agreed to
issue to you, as the transfer agent for the Common Stock (the "Transfer Agent"),
these instructions relating to the Common Stock to be issued to the Investor (or
a permitted assignee) pursuant to the Agreement. All terms used herein and not
otherwise defined shall have the meaning set forth in the Agreement.
1. ISSUANCE OF COMMON STOCK WITHOUT THE LEGEND
Pursuant to the Agreement, the Company is required to prepare and file with
the Commission, and maintain the effectiveness of, a registration statement or
registration statements registering the resale of the Common Stock to be
acquired by the Investor under the Agreement. The Company will advise the
Transfer Agent in writing of the effectiveness of any such registration
statement promptly upon its being declared effective. The Transfer Agent shall
be entitled to rely on such advice and shall assume that the effectiveness of
such registration statement remains in effect unless the Transfer Agent is
otherwise advised in writing by the Company and shall not be required to
independently confirm the continued effectiveness of such registration
statement. In the circumstances set forth in the following two paragraphs, the
Transfer Agent shall deliver to the Investor certificates representing Common
Stock not bearing the Legend without requiring further advice or instruction or
additional documentation from the Company or its counsel or the Investor or its
counsel or any other party (other than as described in such paragraphs).
At any time after the effective date of the applicable registration
statement (provided that the Company has not informed the Transfer Agent in
writing that such registration statement is not effective) upon a notice
requesting the issuance of certificates free of the Legend, the Transfer Agent
shall deliver to the Investor the certificates representing the Common Stock not
bearing the Legend, in such names and denominations as the Investor shall
request, provided that:
(a) in connection with such event, if so requested by the Transfer Agent,
the Investor (or its permitted assignee) shall confirm in writing to the
Transfer Agent that the Investor has complied with the prospectus delivery
requirement under the Securities Act;
<PAGE> 37
2
(b) if so requested by the Transfer Agent, the Investor (or its permitted
assignee) shall represent that it is permitted to dispose thereof without
limitation as to amount or manner of sale pursuant to Rule 144(k) under the
Securities Act; or
(c) the Investor, its permitted assignee, or either of their brokers
confirms to the transfer agent that (i) the Investor has held the shares of
Common Stock for at least one year, (ii) counting the shares surrendered as
being sold upon the date the unlegended Certificates would be delivered to
the Investor (or the Trading Day immediately following if such date is not
a Trading Day), the Investor will not have sold more than the greater of
(a) one percent (1%) of the total number of outstanding shares of Common
Stock or (b) the average weekly trading volume of the Common Stock for the
preceding four weeks during the three months ending upon such delivery date
(or the Trading Day immediately following if such date is not a Trading
Day), and (iii) the Investor has complied with the manner of sale and
notice requirements of Rule 144 under the Securities Act.
Any advice, notice or instructions to the Transfer Agent required or
permitted to be given hereunder may be transmitted via facsimile to the Transfer
Agent's facsimile number of (___)-___-____.
2. MECHANICS OF DELIVERY OF CERTIFICATES
REPRESENTING COMMON STOCK
In connection with any Closing pursuant to which the Investor acquires
Common Stock under the Agreement, the Transfer Agent shall deliver certificates
representing Common Stock (with or without the Legend, as appropriate) as
promptly as practicable, but in no event later than three business days, after
such Closing.
3. FEES OF TRANSFER AGENT; INDEMNIFICATION
The Company agrees to pay the Transfer Agent for all fees incurred in
connection with these Irrevocable Instructions. The Company agrees to indemnify
the Transfer Agent and its officers, employees and agents, against any losses,
claims, damages or liabilities, joint or several, to which it or they become
subject based upon the performance by the Transfer Agent of its duties in
accordance with the Irrevocable Instructions.
<PAGE> 38
3
4. THIRD PARTY BENEFICIARY
The Company and the Transfer Agent acknowledge and agree that the
Investor is an express third party beneficiary of these Irrevocable Instructions
and shall be entitled to rely upon, and enforce, the provisions hereof.
By:
-------------------------------------
Name
Title
AGREED:
[NAME OF TRANSFER AGENT]
By:
---------------------------------
Name:
Title:
<PAGE> 39
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Section 1.1. Average Daily Trading Volume......................................................... 1
Section 1.2. Bid Price............................................................................ 2
Section 1.3. Blackout Shares...................................................................... 2
Section 1.4. "Capital Shares\..................................................................... 2
Section 1.5. "Closing\............................................................................ 2
Section 1.6. "Closing Date\....................................................................... 2
Section 1.7. "Commitment Period................................................................... 2
Section 1.8. "Common Stock"....................................................................... 2
Section 1.9. "Common Stock Equivalents"........................................................... 2
Section 1.10. "Condition Satisfaction Date"........................................................ 2
Section 1.11. "Damages"............................................................................ 2
Section 1.12. "Discount"........................................................................... 2
Section 1.13. "Effective Date"..................................................................... 2
Section 1.14. "Escrow Agreement"................................................................... 3
Section 1.15. "Exchange Act"....................................................................... 3
Section 1.16. "Investment Amount".................................................................. 3
Section 1.17. "Legend"............................................................................. 3
Section 1.18. "Market Price"....................................................................... 3
Section 1.19. "Maximum Commitment Amount".......................................................... 3
Section 1.20. "Maximum Put Amount"................................................................. 3
Section 1.21. "Minimum Commitment Amount".......................................................... 3
Section 1.22. "Minimum Put Amount"................................................................. 3
Section 1.23. "Material Adverse Effect"............................................................ 3
Section 1.24. "NASD"............................................................................... 3
Section 1.25. "Outstanding"........................................................................ 3
Section 1.26. "Person"............................................................................. 3
Section 1.27. "Preferred Stock".................................................................... 3
Section 1.28. "Principal Market"................................................................... 4
Section 1.29. "Purchase Price"..................................................................... 4
Section 1.30. "Put"................................................................................ 4
Section 1.31. "Put Date"........................................................................... 4
Section 1.32. "Put Notice"......................................................................... 4
</TABLE>
-i-
<PAGE> 40
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Section 1.33. "Put Shares"......................................................................... 4
Section 1.34. "Registrable Securities"............................................................. 4
Section 1.35. "Registration Rights Agreement"...................................................... 4
Section 1.36. "Registration Statement"............................................................. 4
Section 1.37. "Regulation D"....................................................................... 5
Section 1.38. "SEC"................................................................................ 5
Section 1.39. "SEC Documents"...................................................................... 5
Section 1.40. "Section 4(2)"....................................................................... 5
Section 1.41. "Securities Act"..................................................................... 5
Section 1.42. "Subscription Date".................................................................. 5
Section 1.43. "Trading Cushion".................................................................... 5
Section 1.44. "Trading Day"........................................................................ 5
Section 1.45. "Underwriter"........................................................................ 5
Section 1.46. "Valuation Event".................................................................... 5
Section 1.47. "Valuation Period"................................................................... 6
Section 1.48. "Warrant"............................................................................ 6
Section 1.49. "Warrant Shares"..................................................................... 6
ARTICLE II PURCHASE AND SALE OF COMMON STOCK; TERMINATION OF OBLIGATIONS; WARRANT; BLACKOUT
SHARES.................................................................................... 6
Section 2.1. Investments.......................................................................... 6
Section 2.2. Mechanics............................................................................ 7
Section 2.3. Closings............................................................................. 7
Section 2.4. Termination.......................................................................... 7
Section 2.5. The Warrant.......................................................................... 8
Section 2.6. Blackout Shares...................................................................... 8
Section 2.7. Liquidated Damages................................................................... 8
ARTICLE III REPRESENTATIONS AND WARRANTIES OF INVESTOR................................................ 9
Section 3.1. Intent............................................................................... 9
Section 3.2. Sophisticated Investor............................................................... 9
Section 3.3. Authority............................................................................ 9
Section 3.4. Not an Affiliate..................................................................... 9
Section 3.5. Organization and Standing............................................................ 9
Section 3.6. Absence of Conflicts................................................................. 9
</TABLE>
-ii-
<PAGE> 41
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Section 3.7. Disclosure; Access to Information................................................... 10
Section 3.8. Manner of Sale...................................................................... 10
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................................ 10
Section 4.1. Organization of the Company......................................................... 10
Section 4.2. Authority........................................................................... 10
Section 4.3. Capitalization...................................................................... 10
Section 4.4. Common Stock........................................................................ 11
Section 4.5. SEC Documents....................................................................... 11
Section 4.6. Exemption from Registration; Valid Issuances........................................ 11
Section 4.7. No General Solicitation or Advertising in Regard to this Transaction................ 11
Section 4.8. Corporate Documents................................................................. 11
Section 4.9. No Material Breach or Violation with Law............................................ 12
Section 4.10. No Material Adverse Change.......................................................... 12
Section 4.11. No Undisclosed Liabilities.......................................................... 12
Section 4.12. No Undisclosed Events or Circumstances.............................................. 12
Section 4.13. No Integrated Offering.............................................................. 12
Section 4.14. Litigation and Other Proceedings.................................................... 13
Section 4.15. No Misleading or Untrue Communication............................................... 13
Section 4.16. Material Non-Public Information..................................................... 13
ARTICLE V COVENANTS OF THE INVESTOR................................................................ 13
ARTICLE VI COVENANTS OF THE COMPANY................................................................. 13
Section 6.1. Registration Rights................................................................. 13
Section 6.2. Reservation of Common Stock......................................................... 13
Section 6.3. Listing of Common Stock............................................................. 14
Section 6.4. Exchange Act Registration........................................................... 14
Section 6.5. Legends............................................................................. 14
Section 6.6. Corporate Existence................................................................. 14
Section 6.7. Additional SEC Documents............................................................ 14
Section 6.8. Notice of Certain Events Affecting Registration; Suspension of Right to Make a
Put................................................................................. 14
Section 6.9. Expectations Regarding Put Notices.................................................. 15
Section 6.10. Consolidation; Merger............................................................... 15
Section 6.11. Issuance of Put Shares, Warrant Shares and Blackout Shares.......................... 15
</TABLE>
-iii-
<PAGE> 42
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Section 6.12. Legal Opinion on Subscription Date.................................................. 15
ARTICLE VII CONDITIONS TO DELIVERY OF PUT NOTICES AND CONDITIONS TO CLOSING.......................... 15
Section 7.1. Conditions Precedent to the Obligation of the Company to Issue and Sell Common
Stock............................................................................... 15
Section 7.2. Conditions Precedent to the Right of the Company to Deliver a Put Notice and the
Obligation of the Investor to Purchase Put Shares................................... 16
Section 7.3. Review of Registration Statement; Non-Disclosure of Non-Public Information.......... 18
ARTICLE VIII LEGENDS.................................................................................. 19
Section 8.1. Legends............................................................................. 19
Section 8.2. No Other Legend or Stock Transfer Restrictions...................................... 20
Section 8.3. Investor's Compliance............................................................... 20
ARTICLE IX INDEMNIFICATION.......................................................................... 20
Section 9.1. Indemnification..................................................................... 20
Section 9.2. Method of Asserting Indemnification Claims.......................................... 21
ARTICLE X MISCELLANEOUS............................................................................ 24
Section 10.1. Fees and Expenses................................................................... 24
Section 10.2. Reporting Entity for the Common Stock............................................... 25
Section 10.3. Brokerage........................................................................... 25
Section 10.4. Notices............................................................................. 25
Section 10.5. Assignment.......................................................................... 26
Section 10.6. Amendment; No Waiver................................................................ 26
Section 10.7. Annexes and Exhibits; Entire Agreement.............................................. 26
Section 10.8. Termination; Survival............................................................... 26
Section 10.9. Severability........................................................................ 27
Section 10.10. Title and Subtitles................................................................. 27
Section 10.11. Counterparts........................................................................ 27
Section 10.12. Choice of Law....................................................................... 27
</TABLE>
-iv-
<PAGE> 1
EXHIBIT 10.43
WARRANT
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER
APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN
MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED
OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION WHICH IS EXEMPT FROM, OR
NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS CERTIFICATE IS THE
BENEFICIARY OF CERTAIN OBLIGATIONS OF THE COMPANY SET FORTH IN A PRIVATE EQUITY
LINE AGREEMENT, DATED AS OF MARCH 6, 2000, BETWEEN SOMANETICS CORPORATION AND
KINGSBRIDGE CAPITAL LIMITED. A COPY OF THE PORTION OF THE AFORESAID AGREEMENT
EVIDENCING SUCH OBLIGATIONS MAY BE OBTAINED FROM SOMANETICS CORPORATION'S
EXECUTIVE OFFICES.
March 6, 2000
Warrant to Purchase up to 200,000 of Common Shares of Somanetics
Corporation.
Somanetics Corporation, a Michigan corporation (the "Company"), hereby
agrees that Kingsbridge Capital Limited (the "Investor") or any other Warrant
Holder is entitled, on the terms and conditions set forth below, to purchase
from the Company at any time during the Exercise Period up to 200,000 fully paid
and nonassessable common shares, par value $.01 per share, of the Company (the
"Common Stock"), as the same may be adjusted from time to time pursuant to
Section 6 hereof, at the Exercise Price (hereinafter defined), as the same may
be adjusted pursuant to Section 6 hereof. The resale of the shares of Common
Stock or other securities issuable upon exercise or exchange of this Warrant is
subject to the provisions of the Registration Rights Agreement (as defined
below).
Section 1. Definitions.
"Agreement" shall mean the Private Equity Line Agreement,
dated the date hereof, between the Company and the Investor.
"Capital Shares" shall mean the Common Stock and any shares of
any other class of common stock whether now or hereafter authorized, having the
right to participate in the distribution of earnings and assets of the Company.
"Date of Exercise" shall mean the date that the advance copy
of the Exercise Form is sent by facsimile to the Company, provided that the
original Warrant and Exercise Form are received by the Company within reasonable
time thereafter. If the Warrant Holder has not sent advance notice by facsimile,
the Date of Exercise shall be the date the original Exercise Form is received by
the Company.
"Exercise Period" shall mean that period beginning on the
181st day after the Subscription Date and continuing until the expiration of the
five-year period thereafter; provided that such period shall be extended one day
for each day after such 181st day after the Subscription Date, that a
Registration Statement is not effective during the period such Registration
Statement is required to be effective pursuant to the Registration Rights
Agreement.
"Exercise Price" as of the date hereof shall mean one hundred
fifteen percent (115%) of the average of the lowest intra-day bid prices per
share of Common Stock (as reported by Bloomberg,
<PAGE> 2
L.P.) for the five (5) Trading Days immediately preceding the Subscription
Date and shall hereafter be subject to the adjustments provided for in Section 6
of this Warrant.
"Per Share Warrant Value" shall mean the difference resulting
from subtracting the Exercise Price from the Bid Price of one share of Common
Stock on the Trading Day next preceding the Date of Exercise.
"Registration Rights Agreement" shall mean the registration
rights agreement, dated the date hereof between the Company and the Investor.
"Subscription Date" shall mean the date on which the Agreement
is executed and delivered by the parties hereto.
"Warrant Holder" shall mean the Investor or any assignee or
transferee of all or any portion of this Warrant; and other capitalized terms
used but not defined herein shall have their respective meanings set forth in
the Agreement.
Section 2. Exercise; Cashless Exercise.
(a) Method of Exercise. This Warrant may be exercised
in whole or in part (but not as to a fractional share of Common Stock), at any
time and from time to time during the Exercise Period, by the Warrant Holder by
(i) surrender of this Warrant, with the form of exercise attached hereto as
Exhibit A duly executed by the Warrant Holder (the "Exercise Notice"), to the
Company at the address set forth in Section 13 hereof, accompanied by payment of
the Exercise Price multiplied by the number of shares of Common Stock for which
this Warrant is being exercised (the "Aggregate Exercise Price") or (ii)
telecopying an executed and completed Exercise Notice to the Company and
delivering to the Company within three business days thereafter the original
Exercise Notice, this Warrant and the Aggregate Exercise Price. Each date on
which an Exercise Notice is received by the Company in accordance with clause
(i) and each date on which the Exercise Notice is telecopied to the Company in
accordance with clause (ii) above shall be deemed an "Exercise Date".
(b) Payment of Aggregate Exercise Price. Subject to
paragraph (c) below, payment of the Aggregate Exercise Price shall be made by
check or bank draft payable to the order of the Company or by wire transfer to
an account designated by the Company. If the amount of the payment received by
the Company is less than the Aggregate Exercise Price, the Warrant Holder will
be notified of the deficiency and shall make payment in that amount within five
(5) business days. In the event the payment exceeds the Aggregate Exercise
Price, the Company will refund the excess to the Warrant Holder within three (3)
business days of receipt.
(c) Cashless Exercise. As an alternative to payment
of the Aggregate Exercise Price in accordance with paragraph (b) above, the
Warrant Holder may elect to effect a cashless exercise by so indicating on the
Exercise Notice and including a calculation of the number of shares of Common
Stock to be issued upon such exercise in accordance with the terms hereof (a
"Cashless Exercise"). In the event of a Cashless Exercise, the Warrant Holder
shall surrender this Warrant for that number of shares of Common Stock
determined by (i) multiplying the number of Warrant Shares for which this
Warrant is being exercised by the Per Share Warrant Value and (ii) dividing the
product by the Bid Price of one share of the Common Stock on the Trading Day
next preceding the Date of Exercise and rounding to the nearest whole share.
(d) Replacement Warrant. In the event that the
Warrant is not exercised in full, the number of Warrant Shares shall be reduced
by the number of such Warrant Shares for which this Warrant is exercised, and
the Company, at its expense, shall forthwith issue and deliver to or upon the
order of the Warrant Holder a new Warrant of like tenor in the name of the
Warrant Holder or as the Warrant Holder may request, reflecting such adjusted
number of Warrant Shares.
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Section 3. Ten Percent Limitation. The Warrant Holder
may not exercise this Warrant such that the number of Warrant Shares to be
received pursuant to such exercise aggregated with all other shares of Common
Stock then owned by the Warrant Holder beneficially or deemed beneficially owned
by the Warrant Holder would result in the Warrant Holder owning more than 9.9%
of all of such Common Stock as would be outstanding on such Closing Date, as
determined in accordance with Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder. As of any date prior to the Date of
Exercise, the aggregate number of shares of Common Stock into which this Warrant
is exercisable, together with all other shares of Common Stock then beneficially
owned (as such term is defined in Rule 16a-1 under the Exchange Act) by such
Warrant Holder and its affiliates, shall not exceed 9.9% of the total
outstanding shares of Common Stock as of such date.
Section 4. Delivery of Stock Certificates.
(a) Subject to the terms and conditions of this Warrant,
as soon as practicable after the exercise of this Warrant in full or in part,
and in any event within three (3) Trading Days thereafter, the Company at its
expense (including, without limitation, the payment by it of any applicable
issue taxes) will cause to be issued in the name of and delivered to the Warrant
Holder, or as the Warrant Holder may lawfully direct, a certificate or
certificates for the number of validly issued, fully paid and non-assessable
Warrant Shares to which the Warrant Holder shall be entitled on such exercise,
together with any other stock or other securities or property (including cash,
where applicable) to which the Warrant Holder is entitled upon such exercise in
accordance with the provisions hereof; provided, however, that any such delivery
to a location outside of the United States shall be made within five (5) Trading
Days after the exercise of this Warrant in full or in part.
(b) This Warrant may not be exercised as to fractional
shares of Common Stock. In the event that the exercise of this Warrant, in full
or in part, would result in the issuance of any fractional share of Common
Stock, then in such event the Warrant Holder shall receive the number of shares
rounded to the nearest whole share.
Section 5. Representations, Warranties and Covenants of
the Company.
(a) The Company shall take all necessary action and
proceedings as may be required and permitted by applicable law, rule and
regulation for the legal and valid issuance of this Warrant and the Warrant
Shares to the Warrant Holder.
(b) From the date hereof through the last date on which
this Warrant is exercisable, the Company shall take all steps reasonably
necessary and within its control to insure that the Common Stock remains listed
or quoted on the Principal Market.
(c) The Warrant Shares, when issued in accordance with
the terms hereof, will be duly authorized and, when paid for or issued in
accordance with the terms hereof, shall be validly issued, fully paid and
non-assessable.
(d) The Company has authorized and reserved for issuance
to the Warrant Holder the requisite number of shares of Common Stock to be
issued pursuant to this Warrant. The Company shall at all times reserve and keep
available, solely for issuance and delivery as Warrant Shares hereunder, such
shares of Common Stock as shall from time to time be issuable as Warrant Shares.
Section 6.1 Adjustment of the Exercise Price. The
Exercise Price and, accordingly, the number of Warrant Shares issuable upon
exercise of the Warrant, shall be subject to adjustment from time to time upon
the happening of certain events as follows:
(a) Reclassification, Consolidation, Merger or Mandatory
Share Exchange. If the Company, at any time while this Warrant is unexpired and
not exercised in full, (i) reclassifies or changes
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its Outstanding Capital Shares (other than a change in par value, or from par
value to no par value per share, or from no par value per share to par value or
as a result of a subdivision or combination of outstanding securities issuable
upon exercise of the Warrant) or (ii) consolidates, merges or effects a
mandatory share exchange with or into another corporation (other than a merger
or mandatory share exchange with another corporation in which the Company is a
continuing corporation and that does not result in any reclassification or
change, other than a change in par value, or from par value to no par value per
share, or from no par value per share to par value, or as a result of a
subdivision or combination of Outstanding Capital Shares issuable upon exercise
of the Warrant) at any time while this Warrant is unexpired and not exercised in
full, then in any such event the Company, or such successor or purchasing
corporation, as the case may be, shall, without payment of any additional
consideration therefore, amend this Warrant or issue a new Warrant providing
that the Warrant Holder shall have rights not less favorable to the holder than
those then applicable to this Warrant and to receive upon exercise under such
amendment of this Warrant or new Warrant, in lieu of each share of Common Stock
theretofore issuable upon exercise of the Warrant hereunder, the kind and amount
of shares of stock, other securities, money or property receivable upon such
reclassification, change, consolidation, merger, mandatory share exchange, sale
or transfer by the holder of one share of Common Stock issuable upon exercise of
the Warrant had the Warrant been exercised immediately prior to such
reclassification, change, consolidation, merger, mandatory share exchange or
sale or transfer. Such amended Warrant shall provide for adjustments which shall
be as nearly equivalent as may be practicable to the adjustments provided for in
this Section 6.1. The provisions of this subsection (a) shall similarly apply to
successive reclassifications, changes, consolidations, mergers, mandatory share
exchanges and sales and transfers.
(b) Subdivision or Combination of Shares. If the Company,
at any time while this Warrant is unexpired and not exercised in full, shall
subdivide its Common Stock, the Exercise Price shall be proportionately reduced
as of the effective date of such subdivision, or, if the Company shall take a
record of holders of its Common Stock for the purpose of so subdividing, as of
such record date, whichever is earlier. If the Company, at any time while this
Warrant is unexpired and not exercised in full, shall combine its Common Stock,
the Exercise Price shall be proportionately increased as of the effective date
of such combination, or, if the Company shall take a record of holders of its
Common Stock for the purpose of so combining, as of such record date, whichever
is earlier.
(c) Stock Dividends. If the Company, at any time while
this Warrant is unexpired and not exercised in full, shall pay a dividend in its
Capital Shares, or make any other distribution of its Capital Shares, then the
Exercise Price shall be adjusted, as of the date the Company shall take a record
of the holders of its Capital Shares for the purpose of receiving such dividend
or other distribution (or if no such record is taken, as at the date of such
payment or other distribution), to that price determined by multiplying the
Exercise Price in effect immediately prior to such payment or other distribution
by a fraction:
1. the numerator of which shall be the total number of
Outstanding Capital Shares immediately prior to such dividend or distribution,
and
2. the denominator of which shall be the total number of
Outstanding Capital Shares immediately after such dividend or distribution. The
provisions of this subsection (c) shall not apply under any of the circumstances
for which an adjustment is provided in subsections (a) or (b).
(d) Issuance of Additional Capital Shares. If the Company, at any
time while this Warrant is unexpired and not exercised in full, shall issue any
additional Capital Shares ("Additional Capital Shares"), otherwise than as
provided in the foregoing subsections (a) through (c) above, at a price per
share less, or for other consideration lower, than the Bid Price in effect
immediately prior to such issuance, or without consideration, then upon such
issuance the Exercise Price shall be reduced to that price determined by
multiplying the Exercise Price in effect immediately prior to such event by a
fraction:
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1. the numerator of which shall be the number of
Outstanding Capital Shares immediately prior to the issuance of the Additional
Capital Shares plus the number of Capital Shares that the aggregate
consideration for the total number of such Additional Capital Shares so issued
would purchase at the then effective Bid Price, and
2. the denominator of which shall be the number of
Outstanding Capital Shares immediately after the issuance of the Additional
Capital Shares. The provisions of this subsection (d) shall not apply under any
of the circumstances for which an adjustment is provided in subsections (a), (b)
or (c).
The provisions of this subsection (d) shall not apply to the issuance of
any Additional Capital Shares that are issued pursuant to the exercise of
any warrants, options or other subscription or purchase rights or pursuant
to the exercise of any conversion or exchange rights in any convertible or
exchangeable securities.
(e) Issuance of Warrants, Options or Other Rights. If the
Company, at any time while this Warrant is unexpired and not exercised in full,
shall issue any warrants, options or other rights to subscribe for or purchase
any Additional Capital Shares
and the price per share for which Additional Capital Shares may at any
time thereafter be issuable pursuant to such warrants, options or other
rights shall be less than the Bid Price in effect immediately prior to such
issuance, then, upon the issuance of such warrants, options or other
rights, the Exercise Price shall be adjusted as provided in subsection (d)
hereof on the basis that:
1. the maximum number of Additional Capital Shares
issuable on the date of determination (subject to adjustment on the date(s) of
exercise) pursuant to all such warrants, options or other rights shall be deemed
to have been issued as of the date of actual issuance of such warrants, options
or other rights, and
2. the aggregate consideration for such maximum number
of Additional Capital Shares issuable pursuant to such warrants, options or
other rights, shall be deemed to be the consideration received by the Company
for the issuance of such warrants, options, or other rights plus the minimum
consideration to be received by the Company for the issuance of Additional
Capital Shares pursuant to such warrants, options, or other rights.
(f) Issuance of Convertible or Exchangeable Securities.
If the Company, at any time while this Warrant is unexpired and not exercised in
full, shall issue any securities convertible into or exchangeable for Capital
Shares and the consideration per share for which Additional Capital Shares may
at any time thereafter be issuable pursuant to the terms of such convertible or
exchangeable securities shall be less than the Bid Price in effect immediately
prior to such issuance, then, upon the issuance of such convertible or
exchangeable securities, the Exercise Price shall be adjusted as provided in
subsection (d) hereof on the basis that:
1. the maximum number of Additional Capital Shares
necessary on the date of determination (subject to adjustment on the date(s) of
conversion or exchange) to effect the conversion or exchange of all such
convertible or exchangeable securities shall be deemed to have been issued as of
the date of issuance of such convertible or exchangeable securities, and
2. the aggregate consideration for such maximum number
of Additional Capital Shares shall be deemed to be the consideration received by
the Company for the issuance of such convertible or exchangeable securities plus
the minimum consideration received by the Company for the issuance of such
Additional Capital Shares pursuant to the terms of such convertible or
exchangeable securities.
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No adjustment of the Exercise Price shall be made under this subsection (f)
upon the issuance of any convertible or exchangeable securities that are
issued pursuant to the exercise of any warrants, options or other
subscription or purchase rights therefor, if the issuance of such warrants,
options or other rights was subject to subsection (e) hereof.
(g) Adjustment of Number of Shares. Upon each adjustment
of the Exercise Price pursuant to any provisions of this Section 6.1, the number
of Warrant Shares issuable hereunder at the option of the Warrant Holder shall
be calculated, and rounded to the nearest whole share, by multiplying the number
of Warrant Shares issuable prior to an adjustment by a fraction:
1. the numerator of which shall be the Exercise Price
before any adjustment pursuant to this Section 6.1; and
2. the denominator of which shall be the Exercise Price
after such adjustment.
(h) Liquidating Dividends, Etc. If the Company, at any
time while this Warrant is unexpired and not exercised in full, makes a
distribution of its assets or evidences of indebtedness to the holders of its
Capital Shares as a dividend in liquidation or by way of return of capital or
other than as a dividend payable out of earnings or surplus legally available
for dividends under applicable law or any distribution to such holders made in
respect of the sale of all or substantially all of the Company's assets (other
than under the circumstances provided for in the foregoing subsections (a)
through (g)) while an exercise is pending, then the Warrant Holder shall be
entitled to receive upon such exercise of the Warrant in addition to the Warrant
Shares receivable in connection therewith, and without payment of any
consideration other than the Exercise Price, an amount in cash equal to the
value of such distribution per Capital Share multiplied by the number of Warrant
Shares that, on the record date for such distribution, are issuable upon such
exercise of the Warrant (with no further adjustment being made following any
event which causes a subsequent adjustment in the number of Warrant Shares
issuable), and an appropriate provision therefor shall be made a part of any
such distribution. The value of a distribution that is paid in other than cash
shall be determined in good faith by the Board of Directors of the Company.
(i) Other Provisions Applicable to Adjustments Under this
Section. The following provisions will be applicable to the making of
adjustments in any Exercise Price hereinabove provided in this Section 6.1:
1. Computation of Consideration. To the extent that any
Additional Capital Shares or any convertible or exchangeable securities or any
warrants, options or other rights to subscribe for or purchase any Additional
Capital Shares or any convertible or exchangeable securities shall be issued for
a cash consideration, the consideration received by the Company therefor shall
be deemed to be the amount of the cash received by the Company therefor, or, if
such Additional Capital Shares or convertible or exchangeable securities are
offered by the Company for subscription, the subscription price, or, if such
Additional Capital Shares or convertible or exchangeable securities are sold to
or through underwriters or dealers for public offering without a subscription
offering, the initial public offering price, in any such case excluding any
amounts paid or incurred by the Company for and in the underwriting of, or
otherwise in connection with the issue thereof. To the extent that such issuance
shall be for a consideration other than cash, then, the amount of such
consideration shall be deemed to be the fair value of such consideration at the
time of such issuance as determined in good faith by the Company's Board of
Directors. The consideration for any Additional Capital Shares issuable pursuant
to any warrants, options or other rights to subscribe for or purchase the same
shall be the consideration received by the Company for issuing such warrants,
options or other rights, plus the additional consideration payable to the
Company upon the exercise of such warrants, options or other rights. The
consideration for any Additional Capital Shares issuable pursuant to the terms
of any convertible or exchangeable securities shall be the consideration paid or
payable to the Company in respect of the subscription for or purchase of
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such convertible or exchangeable securities, plus the additional consideration,
if any, payable to the Company upon the exercise of the right of conversion or
exchange in such convertible or exchangeable securities. In case of the issuance
at any time of any Additional Capital Shares or convertible or exchangeable
securities in payment or satisfaction of any dividend upon any class of stock
preferred as to dividends in a fixed amount, the Company shall be deemed to have
received for such Additional Capital Shares or convertible or exchangeable
securities a consideration equal to the amount of such dividend so paid or
satisfied.
2. Readjustment of Exercise Price. Upon the expiration
of the right to convert or exchange any convertible or exchangeable securities,
or upon the expiration of any rights, options or warrants, the issuance of which
convertible or exchangeable securities, rights, options or warrants effected an
adjustment in Exercise Price, if any such convertible or exchangeable securities
shall not have been converted or exchanged, or if any such rights, options or
warrants shall not have been exercised, the number of Capital Shares deemed to
be issued and Outstanding by reason of the fact that they were issuable upon
conversion or exchange of any such convertible or exchangeable securities or
upon exercise of any such rights, options, or warrants shall no longer be
computed as set forth above, and such Exercise Price shall forthwith be
readjusted and thereafter be the price that it would have been (but reflecting
any other adjustments in the Exercise Price made pursuant to the provisions of
this Section 6.1 after the issuance of such convertible or exchangeable
securities, rights, options or warrants) had the adjustment of the Exercise
Price made upon the issuance or sale of such convertible or exchangeable
securities or issuance of rights, options or warrants been made on the basis of
the issuance only of the number of Additional Capital Shares actually issued
upon conversion or exchange of such convertible or exchangeable securities, or
upon the exercise of such rights, options or warrants, and thereupon only the
number of Additional Capital Shares actually so issued, if any, shall be deemed
to have been issued and only the consideration actually received by the Company
(computed as set forth in sub-subsection (1. hereof) shall be deemed to have
been received by the Company. If the purchase price provided for in any rights,
options or warrants, or the additional consideration (if any) payable upon the
conversion or exchange of any convertible or exchangeable securities, or the
rate at which any convertible or exchangeable securities are convertible into or
exchangeable for Capital Shares changes at any time (other than under or by
reason of provisions designed to protect against dilution), the Exercise Price
in effect at the time of the change shall be adjusted to the Exercise Price that
would have been in effect at such time had such rights, options, warrants or
convertible or exchangeable securities still outstanding provided for such
changed purchase price, additional consideration or conversion rate, as the case
may be, at the time initially granted, issued or sold.
3. Other Action Affecting Capital Shares. In case after
the date hereof the Company shall take any action affecting the number of
Outstanding Capital Shares, other than an action described in any of the
foregoing subsections (a) through (h) hereof, inclusive, which in the opinion of
the Company's Board of Directors would have a materially adverse effect upon the
rights of the Warrant Holder at the time of exercise of the Warrant, the
Exercise Price shall be adjusted in such manner and at such time as the Board or
Directors on the advice of the Company's independent public accountants may in
good faith determine to be equitable in the circumstances.
(j) In the event the Company shall, at a time while the
Warrant is unexpired and outstanding, take any action which pursuant to
subsections (a) through (h) of this Section 6.1 may result in an adjustment of
the Exercise Price, the Company shall give to the Warrant Holder at its last
address known to the Company written notice of such action ten (10) days in
advance of its effective date in order to afford to the Warrant Holder an
opportunity to exercise the Warrant prior to such action becoming effective.
Section 6.2 No Adjustments Under Certain Circumstances.
Notwithstanding anything contained in the foregoing to the contrary, there shall
be no adjustment to the Exercise Price
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based upon, related to or in connection with any instrument or other benefit
issued or conferred by the Company under any of its stock option plans or in
consideration of the Company's acquisition of all or any part of the assets of
any other Person.
Section 6.3 Notice of Adjustments. Whenever the Exercise
Price or number of Warrant Shares shall be adjusted pursuant to Section 6.1
hereof, the Company shall promptly make a certificate signed by its President or
a Vice President and by its Treasurer or Assistant Treasurer or its Secretary or
Assistant Secretary, setting forth in reasonable detail the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated (including a description of the basis on which the Company's
Board of Directors made any determination hereunder), and the Exercise Price and
number of Warrant Shares purchasable at that Exercise Price after giving effect
to such adjustment, and shall promptly cause copies of such certificate to be
mailed (by first class and postage prepaid) to the Holder of the Warrant. In the
event the Company shall, at a time while the Warrant is unexpired and not
exercised in full, take any action that pursuant to subsections (a) through (g)
of Section 6.1 may result in an adjustment of the Exercise Price, the Company
shall give to the Holder of the Warrant at its last address known to the Company
written notice of such action ten (10) days in advance of its effective date in
order to afford to the Holder of the Warrant an opportunity to exercise the
Warrant prior to such action becoming effective.
Section 7. No Impairment. The Company will not, by
amendment of its Articles of Incorporation or By-Laws or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order to protect
the rights of the Warrant Holder against impairment. Without limiting the
generality of the foregoing, the Company (a) will not increase the par value of
any Warrant Shares above the amount payable therefor on such exercise, and (b)
will take all such action as may be reasonably necessary or appropriate in order
that the Company may validly and legally issue fully paid and nonassessable
Warrant Shares on the exercise of this Warrant.
Section 8. Rights As Shareholder. Prior to exercise of
this Warrant, the Warrant Holder shall not be entitled to any rights as a
shareholder of the Company with respect to the Warrant Shares, including
(without limitation) the right to vote such shares, receive dividends or other
distributions thereon or be notified of shareholder meetings. However, in the
event of any taking by the Company of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are entitled
to receive any dividend (other than a cash dividend) or other distribution, any
right to subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any other right, the
Company shall mail to each Warrant Holder, at least ten (10) days prior to the
date specified therein, a notice specifying the date on which any such record is
to be taken for the purpose of such dividend, distribution or right, and the
amount and character of such dividend, distribution or right.
Section 9. Replacement of Warrant. Upon receipt of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of the Warrant and, in the case of any such loss, theft or
destruction of the Warrant, upon delivery of an indemnity agreement or security
reasonably satisfactory in form and amount to the Company or, in the case of any
such mutilation, on surrender and cancellation of such Warrant, the Company at
its expense will execute and deliver, in lieu thereof, a new Warrant of like
tenor.
Section 10. Choice of Law. This Agreement shall be
construed under the laws of the State of Michigan without giving effect to
conflicts of law principles of such jurisdiction.
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Section 11. Entire Agreement; Amendments. This Warrant,
the Registration Rights Agreement, and the Agreement contain the entire
understanding of the parties with respect to the matters covered hereby and
thereby. No provision of this Warrant may be waived or amended other than by a
written instrument signed by the party against whom enforcement of any such
amendment or waiver is sought.
Section 12. Restricted Securities.
(a) Registration or Exemption Required. This Warrant has
been issued in a transaction exempt from the registration requirements of the
Securities Act in reliance upon the provisions of Section 4(2) promulgated by
the SEC under the Securities Act. This Warrant and the Warrant Shares issuable
upon exercise of this Warrant may not be resold except pursuant to an effective
registration statement or an exemption to the registration requirements of the
Securities Act and applicable state laws.
(b) Legend. Any replacement Warrants issued pursuant to
Section 2 hereof and any Warrant Shares issued upon exercise hereof, shall bear
the following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES
LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH
OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST
OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE
DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A
TRANSACTION WHICH IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH
REGISTRATION. THE HOLDER OF THIS CERTIFICATE IS THE
BENEFICIARY OF CERTAIN OBLIGATIONS OF THE COMPANY SET FORTH IN
A PRIVATE EQUITY LINE AGREEMENT, DATED AS OF MARCH 6, 2000,
BETWEEN SOMANETICS CORPORATION AND KINGSBRIDGE CAPITAL
LIMITED. A COPY OF THE PORTION OF THE AFORESAID AGREEMENT
EVIDENCING SUCH OBLIGATIONS MAY BE OBTAINED FROM THE COMPANY'S
EXECUTIVE OFFICES."
Removal of such legend shall be in accordance with the legend removal
provisions in the Agreement.
(c) No Other Legend or Stock Transfer Restrictions. No
legend other than the one specified in Section 12(b) has been or shall be placed
on the share certificates representing the Warrant Shares and no instructions or
"stop transfer orders," so called, "stock transfer restrictions" or other
restrictions have been or shall be given to the Company's transfer agent with
respect thereto other than as expressly set forth in this Section 12.
(d) Assignment. Assuming the conditions of Section 12(a)
above regarding registration or exemption have been satisfied, the Warrant
Holder may sell, transfer, assign, pledge or otherwise dispose of this Warrant,
in whole or in part. The Warrant Holder shall deliver a written notice to
Company, substantially in the form of the Assignment attached hereto as Exhibit
B, indicating the person or persons to whom the Warrant shall be assigned and
the respective number of warrants to be assigned to each assignee. The Company
shall effect the assignment within ten (10) days, and shall deliver to the
assignee(s) designated by the Warrant Holder a Warrant or Warrants of like tenor
and terms for the appropriate number of shares.
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(e) Investor's Compliance. Nothing in this Section 12
shall affect in any way the Investor's obligations under any agreement to comply
with all applicable securities laws upon resale of the Common Stock.
Section 13. Notices. All notices, demands, requests,
consents, approvals, and other communications required or permitted hereunder
shall be in writing and shall be (i) personally served, (ii) deposited in the
mail, registered or certified, return receipt requested, postage prepaid, (iii)
delivered by reputable air courier service with charges prepaid, or (iv)
transmitted by hand delivery, telegram or facsimile, addressed as set forth
below or to such other address as such party shall have specified most recently
by written notice. Any notice or other communication required or permitted to be
given hereunder shall be deemed effective (a) upon hand delivery or delivery by
facsimile (with accurate confirmation generated by the transmitting facsimile
machine) at the address or number designated below (if delivered on a business
day during normal business hours where such notice is to be received), or the
first business day following such delivery (if delivered other than on a
business day during normal business hours where such notice is to be received)
or (b) on the second business day following the date of mailing by express
courier service, fully prepaid, addressed to such address, or upon actual
receipt of such mailing, whichever shall first occur. The addresses for such
communications shall be:
if to the Company:
Somanetics Corporation
1653 East Maple Road
Troy, Michigan 48083-4208
(248) 689-3050
Telephone: (248) 689-3050
Facsimile: (248) 689-4272
Attention: Bruce J. Barrett
with a copy (which shall not constitute notice) to:
Honigman Miller Schwartz and Cohn
2290 First National Building
Detroit, Michigan 48226
Attention: Robert J. Krueger, Esq.
Telephone: (313) 465-7452
Facsimile: (313) 465-7453
if to the Investor:
Adam Gurney
Kingsbridge Capital Limited
Main Street
Kilcullen, County Kildare
Republic of Ireland
Telephone: 011-353-45-481-811
Facsimile: 011-353-45-482-003
with a copy (which shall not constitute notice) to:
Clifford Chance Rogers & Wells LLP
200 Park Avenue
New York, NY 10166
Attention: Keith M. Andruschak, Esq.
Telephone: (212) 878-8000
Facsimile: (212) 878-8375
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Either party hereto may from time to time change its address or facsimile
number for notices under this Section 13 by giving at least ten (10) days'
prior written notice of such changed address or facsimile number to the
other party hereto.
Section 14. Miscellaneous. This Warrant and any term
hereof may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of such change, waiver,
discharge or termination is sought. The headings in this Warrant are for
purposes of reference only, and shall not limit or otherwise affect any of the
terms hereof. The invalidity or unenforceability of any provision hereof shall
in no way affect the validity or enforceability of any other provision.
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IN WITNESS WHEREOF, this Warrant was duly executed by the
undersigned, thereunto duly authorized, as of the date first set forth above.
SOMANETICS CORPORATION
By:________________________________
Bruce J. Barrett
Chief Executive Officer
Attested:
By:________________________________
Name:
Secretary
<PAGE> 13
EXHIBIT A TO THE WARRANT
EXERCISE FORM
SOMANETICS CORPORATION
The undersigned hereby irrevocably exercises the right to purchase
__________________ Common Shares of Somanetics Corporation, a Michigan
corporation, evidenced by the attached Warrant, and herewith makes payment of
the Exercise Price with respect to such shares in full in the form of [cash or
certified check in the amount of $________], [______] Warrant Shares, which
represent the amount of Warrant Shares as provided in the attached Warrant to be
canceled in connection with such exercise], all in accordance with the
conditions and provisions of said Warrant.
The undersigned requests that stock certificates for such Warrant
Shares be issued, and a Warrant representing any unexercised portion hereof be
issued, pursuant to this Warrant in the name of the registered Holder and
delivered to the undersigned at the address set forth below.
Dated:_______________________________________
Signature of Registered Holder
Name of Registered Holder (Print)
_____________________________________________
Address
NOTICE
The signature to the foregoing Exercise Form must correspond to the
name as written upon the face of the attached Warrant in every particular,
without alteration or enlargement or any change whatsoever.
<PAGE> 14
EXHIBIT B TO THE WARRANT
ASSIGNMENT
(To be executed by the registered Warrant Holder desiring to transfer
the Warrant)
FOR VALUED RECEIVED, the undersigned Warrant Holder of the attached
Warrant hereby sells, assigns and transfers unto the persons below named the
right to purchase ______________ Common Shares of Somanetics Corporation
evidenced by the attached Warrant and does hereby irrevocably constitute and
appoint ______________________ attorney to transfer the said Warrant on the
books of the Company, with full power of substitution in the premises.
Dated:
______________________________
Signature
Fill in for new Registration of Warrant:
_________________________________________
Name
_________________________________________
Address
_________________________________________
Please print name and address of assignee
(including zip code number)
NOTICE
The signature to the foregoing Assignment must correspond to the name
as written upon the face of the attached Warrant in every particular, without
salteration or enlargement or any change whatsoever.
<PAGE> 1
EXHIBIT 10.44
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of
March 6, 2000, is by and between SOMANETICS CORPORATION (the "Company") and
KINGSBRIDGE CAPITAL LIMITED (the "Investor").
WHEREAS, the Company and the Investor have entered into that certain
Private Equity Line Agreement, dated as of the date hereof (the "Equity Line
Agreement"), pursuant to which the Company may issue, from time to time, to the
Investor up to $15,000,000 worth (as determined in accordance with the Equity
Line Agreement) of common shares, par value $.01 per share, of the Company (the
"Common Stock");
WHEREAS, pursuant to the terms of, and in partial consideration for,
the Investor entering into the Equity Line Agreement, the Company has issued to
the Investor a warrant dated as of the date hereof, exercisable from time to
time within five (5) years following the six-month anniversary of the date of
issuance (the "Warrant") for the purchase of an aggregate of up to 200,000
shares of Common Stock at a price specified in such Warrant;
WHEREAS, pursuant to the terms of, and in partial consideration for,
the Investor's agreement to enter into the Equity Line Agreement, the Company
has agreed to provide the Investor with certain registration rights with respect
to the Registrable Securities (as defined in the Equity Line Agreement) as set
forth herein;
NOW, THEREFORE, in consideration of the premises, the representations,
warranties, covenants and agreements contained herein, in the Warrant, and in
the Equity Line Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, intending to be legally
bound hereby, the parties hereto agree as follows (capitalized terms used herein
and not defined herein shall have the respective meanings ascribed to them in
the Equity Line Agreement):
ARTICLE I
REGISTRATION RIGHTS
Section 1.1. REGISTRATION STATEMENT.
(a) Filing of the Registration Statement. Upon the terms
and subject to the conditions set forth in this Agreement, the Company shall
file with the SEC within forty (40) days following the Subscription Date a
registration statement on Form S-1 under the Securities Act or such other form
as deemed appropriate for the registration for the resale by the Investor of the
Registrable Securities (the "Registration Statement").
(b) Effectiveness of the Registration Statement. The
Company shall use commercially reasonable efforts to have the Registration
Statement declared effective by the SEC as soon as practicable, but in any event
no later than one hundred twenty (120) days after Subscription Date and to
insure that the Registration Statement remains in effect throughout the term of
this Agreement as set forth in Section 4.2, subject to the terms and conditions
of this Agreement.
(c) Failure to Obtain Effectiveness of the Registration
Statement. In the event the Company fails for any reason to obtain the
effectiveness of the Registration Statement within the time period set forth in
Section 1.1(b), the Company shall pay to the Investor, within three (3) Trading
Days of the date by which such Registration Statement was required to have been
declared effective, seventy-five thousand dollars $75,000 by wire transfer of
immediately available funds into an account designated by the Investor.
<PAGE> 2
(d) Failure to Maintain Effectiveness of Registration
Statement. In the event the Company fails to maintain the effectiveness of the
Registration Statement (or the underlying prospectus) throughout the period set
forth in Section 4.2, other than temporary suspensions as set forth in Section
1.1(e) or 2.1(h), and the Investor holds any Registrable Securities at any time
during the period of such ineffectiveness (an "Ineffective Period"), the Company
shall pay to the Investor in immediately available funds into an account
designated by the Investor an amount equal to one percent (1%) of the aggregate
Purchase Price of all of the Registrable Securities then held by the Investor
for the each of the first four seven-calendar-day periods (or portion thereof)
of an Ineffective Period. Such payments shall be made on the first (1st) Trading
Day after the earliest to occur of (i) the expiration of the Commitment Period,
(ii) the expiration of an Ineffective Period, (iii) the expiration of the first
twenty-eight (28) calendar days of an Ineffective Period and (iv) the expiration
of each additional twenty-eight (28) calendar-day period during an Ineffective
Period.
(e) Deferral or Suspension During a Blackout Period.
Sections 1.1 (c) and (d) notwithstanding, if the Company shall furnish to the
Investor notice signed by the Chief Executive Officer of the Company stating
that the Board of Directors of the Company has, by duly authorized resolution,
determined in good faith that it would be seriously detrimental to the Company
and its shareholders for the Registration Statement to be filed (or remain in
effect) and it is therefore essential to defer the filing of such Registration
Statement (or temporarily suspend the effectiveness of such Registration
Statement or use of the related prospectus) (a "Blackout Notice"), the Company
shall have the right (i) immediately to defer such filing for a period of not
more than thirty (30) days beyond the date by which such Registration Statement
was otherwise required hereunder to be filed or (ii) suspend such effectiveness
for a period of not more than thirty (30) (any such deferral or suspension
period of up to thirty days, a "Blackout Period"). The Investor acknowledges
that it would be seriously detrimental to the Company and its shareholders for
such Registration Statement to be filed (or remain in effect) during a Blackout
Period and therefore essential to defer such filing (or suspend such
effectiveness) during such Blackout Period and agrees to cease any disposition
of the Registrable Securities during such Blackout Period. The Company may not
utilize any of its rights under this Section 1.1(e) to defer the filing of a
Registration Statement (or suspend its effectiveness) more than twice in any
twelve (12) month period. Following such deferral or suspension, the Investor
shall be entitled to such additional number of shares of Common Stock as set
forth in Section 2.6 of the Equity Line Agreement.
(f) Liquidated Damages. The Company and the Investor hereto
acknowledge and agree that the sums payable under subsections 1(c) or 1(d) above
shall constitute liquidated damages and not penalties. The parties further
acknowledge that (i) the amount of loss or damages likely to be incurred by the
Investor is incapable or is difficult to precisely estimate, (ii) the amounts
specified in such subsections bear a reasonable proportion and are not plainly
or grossly disproportionate to the probable loss likely to be incurred in
connection with any failure by the Company to obtain or maintain the
effectiveness of a Registration Statement, (iii) one of the reasons for the
Company and the Investor reaching an agreement as to such amounts was the
uncertainty and cost of litigation regarding the question of actual damages, and
(iv) the Company and the Investor are sophisticated business parties and have
been represented by sophisticated and able legal and financial counsel and
negotiated this Agreement at arm's length.
(g) SEC Disapproval. Sections 1.1 (b) and (c)
notwithstanding, the date by which a Registration Statement is required to
become effective shall be extended for up to sixty (60) days without default or
penalty in the event that the Company's failure to obtain effectiveness of a
Registration Statement by no later than one hundred twenty (120) days after
Subscription Date results solely from the SEC's disapproval of the structure of
the transactions contemplated by the Equity Line Agreement. In such event, the
parties agree to cooperate with one another in good faith to arrive at a
resolution acceptable to the SEC and the Company shall not be in default
hereunder or under the Equity Line
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Agreement and no liquidated damages or penalties shall accrue against or be
owing by the Company if the parties are unable to arrive at such a resolution.
(h) Additional Registration Statements. In the event and to
the extent that the Registration Statement fails to register a sufficient amount
of Common Stock necessary for the Company to issue and sell to the Investor and
the Investor to purchase from the Company all of the Registrable Securities to
be issued, sold and purchased under the Equity Line Agreement and the Warrant,
the Company shall prepare and file with the SEC an additional registration
statement or statements in order to effectuate the purpose of this Agreement,
the Equity Line Agreement, and the Warrant.
ARTICLE II
REGISTRATION PROCEDURES
Section 2.1. FILINGS; INFORMATION. The Company shall effect the
registration and facilitate the sale of the Registrable Securities by the
Investor in accordance with the intended methods of disposition thereof. Without
limiting the foregoing, the Company in each such case will do the following as
expeditiously as possible, but in no event later than the deadline, if any,
prescribed therefor in this Agreement:
(a) The Company shall (i) prepare and file with the SEC a
Registration Statement on Form S-1 or on such other form promulgated by the SEC
for which the Company then qualifies, that counsel for the Company shall deem
appropriate and which form shall be available for the sale of the Registrable
Securities to be registered thereunder in accordance with the provisions of this
Agreement and in accordance with the intended method of distribution of the
Registrable Securities; (ii) use comercially reasonable efforts to cause such
filed Registration Statement to become and to remain effective (pursuant to Rule
415 under the Securities Act or otherwise); (iii) prepare and file with the SEC
such amendments and supplements to such Registration Statement and the
prospectus used in connection therewith as may be necessary to keep such
Registration Statement effective for the time period prescribed by Section
1.1(b) and in order to effectuate the purpose of this Agreement, the Equity Line
Agreement, and the Warrant; and (iv) comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
Registration Statement during such period in accordance with the intended
methods of disposition by the Investor set forth in such Registration Statement;
provided, however, that the Investor shall be responsible for the delivery of a
prospectus to the Persons to whom the Investor sells the Put Shares, the
Blackout Shares and the Warrant Shares.
(b) If so requested by a managing underwriter or
underwriters, if any, or the holders of a majority of the Registrable Securities
being sold in connection with the filing of a Registration Statement under the
Securities Act for the offering on a continuous or delayed basis in the future
of all of the Registrable Securities (a "Shelf Registration"), the Company shall
(i) promptly incorporate in a prospectus supplement or post-effective amendment
such information as the managing underwriters, if any, and such holders agree
should be included therein, and (ii) make all required filings of such
prospectus supplement or post-effective amendment as soon as practicable after
the Company has received notification of the matters to be incorporated in such
prospectus supplement or post-effective amendment; provided, however, that the
Company shall not be required to take any action pursuant to this Section
2.1(b)(ii) that would, in the opinion of counsel for the Company, violate
applicable law.
(c) In connection with the filing of a Shelf Registration,
the Company shall enter into such reasonable agreements and take all such other
reasonable actions in connection therewith (including those reasonably requested
by the managing underwriters, if any, or the holders of a majority of the
Registrable Securities being sold) in order to expedite or facilitate the
disposition of such Registrable Securities, and in such connection, whether or
not an underwriting agreement is entered into and whether or not the
registration is an underwritten registration, the Company shall (i) make such
representations
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and warranties to the holders of such Registrable Securities and the
underwriters, if any, with respect to the business of the Company (including
with respect to businesses or assets acquired or to be acquired by the Company),
and the Registration Statement, prospectus and documents, if any, incorporated
or deemed to be incorporated by reference therein, in each case, in form,
substance and scope as are customarily made by issuers to underwriters in
underwritten offerings, and confirm such representations and warranties if and
when requested; (ii) if an underwriting agreement is entered into, it shall
contain indemnification provision and procedures no less favorable to the
selling holders of such Registrable Securities and the underwriters, if any,
than those set forth herein (or such other provisions and procedures acceptable
to the holders of a majority of Registrable Securities covered by such
Registration Statement and the managing underwriters, if any); and (iii) deliver
such documents and certificates as may be reasonably requested by the holders of
a majority of the Registrable Securities being sold, their counsel and the
managing underwriters, if any, to evidence the continued validity of their
representations and warranties made pursuant to clause (i) above and to evidence
compliance with any customary conditions contained in the underwriting agreement
or other agreement entered into by the Company.
(d) Five (5) Trading Days prior to filing the Registration
Statement or prospectus, or any amendment or supplement thereto (excluding
amendments deemed to result from the filing of documents incorporated by
reference therein), the Company shall deliver to the Investor and to counsel
representing the Investor, in accordance with the notice provisions of Section
4.8, copies of the Registration Statement, prospectus and/or any amendments or
supplements thereto as proposed to be filed, together with exhibits thereto,
which documents will be subject to review by the Investor and such counsel, and
thereafter deliver to the Investor and such counsel, in accordance with the
notice provisions of Section 4.8, such number of copies of the Registration
Statement, each amendment and supplement thereto (in each case including all
exhibits thereto), the prospectus included in the Registration Statement
(including each preliminary prospectus) and such other documents or information
as the Investor or counsel may reasonably request in order to facilitate the
disposition of the Registrable Securities.
(e) The Company shall deliver, in accordance with the
notice provisions of Section 4.8, to each seller of Registrable Securities
covered by the Registration Statement such number of conformed copies of the
Registration Statement and of each amendment and supplement thereto (in each
case including all exhibits and documents incorporated by reference), such
number of copies of the prospectus contained in the Registration Statement
(including each preliminary prospectus and any summary prospectus) and any other
prospectus filed under Rule 424 promulgated under the Securities Act relating to
such seller's Registrable Securities, and such other documents, as such seller
may reasonably request to facilitate the disposition of its Registrable
Securities.
(f) After the filing of the Registration Statement, the
Company shall promptly notify the Investor of any stop order issued or
threatened by the SEC in connection therewith and take all reasonable actions
required to prevent the entry of such stop order or to remove it if entered.
(g) The Company shall use commercially reasonable efforts
to (i) register or qualify the Registrable Securities under such other
securities or blue sky laws of each jurisdiction in the United States as the
Investor may reasonably (in light of its intended plan of distribution) request,
and (ii) cause the Registrable Securities to be registered with or approved by
such other governmental agencies or authorities in the United States as may be
necessary by virtue of the business and operations of the Company and do any and
all other acts and things that may be reasonably necessary or advisable to
enable the Investor to consummate the disposition of the Registrable Securities;
provided, however, that the Company will not be required to qualify generally to
do business in any jurisdiction where it would not otherwise be required to
qualify but for this paragraph (g), subject itself to taxation in any such
jurisdiction, consent or subject itself to general service of process in any
such jurisdiction or change any existing business practices, benefit plans or
outstanding securities.
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<PAGE> 5
(h) The Company shall immediately notify the Investor upon
the occurrence of any of the following events in respect of the Registration
Statement or related prospectus in respect of an offering of Registrable
Securities: (v) receipt of any request by the SEC or any other federal or state
governmental authority for additional information, amendments or supplements to
the Registration Statement or related prospectus; (w) the issuance by the SEC or
any other federal or state governmental authority of any stop order suspending
the effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose; (x) receipt of any notification with respect to
the suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; (y) the happening of any event
that makes any statement made in the Registration Statement or related
prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of any
changes in the Registration Statement, related prospectus or documents so that,
in the case of the Registration Statement, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
that in the case of the related prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and (z) the Company's
reasonable determination that a post-effective amendment to the Registration
Statement would be appropriate, and the Company will promptly make available to
the Investor any such supplement or amendment to the related prospectus.
(i) The Company shall enter into customary agreements and
take such other actions as are reasonably required in order to expedite or
facilitate the disposition of such Registrable Securities (whereupon the
Investor may, at its option, require that any or all of the representations,
warranties and covenants of the Company also be made to and for the benefit of
the Investor).
(j) The Company shall make available to the Investor (and will
deliver to Investor's counsel), subject to restrictions imposed by the United
States federal government or any agency or instrumentality thereof, copies of
all correspondence between the SEC and the Company, its counsel or its auditors
concerning the Registration Statement and will also make available for
inspection by the Investor and any attorney, accountant or other professional
retained by the Investor (collectively, the "Inspectors"), all financial and
other records, pertinent corporate documents and properties of the Company
(collectively, the "Records") as shall be reasonably necessary to enable them to
exercise their due diligence responsibility, and cause the Company's officers
and employees to supply all information reasonably requested by any Inspectors
in connection with the Registration Statement. Records that the Company
determines, in good faith, to be confidential and that it notifies the
Inspectors are confidential shall not be disclosed by the Inspectors unless (i)
the disclosure of such Records is necessary to avoid or correct a misstatement
or omission in the Registration Statement or (ii) the disclosure or release of
such Records is requested or required pursuant to oral questions,
interrogatories, requests for information or documents or a subpoena or other
order from a court of competent jurisdiction or other process; provided,
however, that prior to any disclosure or release pursuant to clause (ii), the
Inspectors shall provide the Company with prompt notice of any such request or
requirement so that the Company may seek an appropriate protective order or
waive such Inspectors' obligation not to disclose such Records; and, provided,
further, that if failing the entry of a protective order or the waiver by the
Company permitting the disclosure or release of such Records, the Inspectors,
upon advice of counsel, are compelled to disclose such Records, the Inspectors
may disclose that portion of the Records that counsel has advised the Inspectors
that the Inspectors are compelled to disclose. The Investor agrees that
information obtained by it solely as a result of such inspections (not including
any information obtained from a third party who, insofar as is known to the
Investor after reasonable inquiry, is not prohibited from providing such
information by a contractual, legal or fiduciary obligation to the Company)
shall be deemed confidential and shall not be used by it as the basis for any
market transactions in the securities of the
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Company or its affiliates unless and until such information is made generally
available to the public. The Investor further agrees that it will, upon learning
that disclosure of such Records is sought in a court of competent jurisdiction,
give notice to the Company and allow the Company, at its expense, to undertake
appropriate action to prevent disclosure of the Records deemed confidential.
(k) To the extent required by law or reasonably necessary
to effect a sale of Registrable Securities in accordance with prevailing
business practices at the time of any sale of Registrable Securities pursuant to
a Registration Statement, the Company shall deliver to the Investor a signed
counterpart, addressed to the Investor, of (1) an opinion or opinions of counsel
to the Company, and (2) a comfort letter or comfort letters from the Company's
independent public accountants, each in customary form and covering such matters
of the type customarily covered by opinions or comfort letters, as the case may
be, as the Investor therefor reasonably requests.
(l) The Company shall otherwise comply with all applicable
rules and regulations of the SEC, including, without limitation, compliance with
applicable reporting requirements under the Exchange Act.
(m) The Company shall appoint a transfer agent and
registrar for all of the Registrable Securities covered by such Registration
Statement not later than the effective date of such Registration Statement.
(n) The Company may require the Investor to promptly
furnish in writing to the Company such information as may be legally required in
connection with such registration including, without limitation, all such
information as may be requested by the SEC or the National Association of
Securities Dealers. The Investor agrees to provide such information requested in
connection with such registration within ten (10) business days after receiving
such written request and the Company shall not be responsible for any delays in
obtaining or maintaining the effectiveness of the Registration Statement caused
by the Investor's failure to timely provide such information.
Section 2.2. REGISTRATION EXPENSES. The Company shall pay all registration
expenses incurred in connection with the Registration Statement (the
"Registration Expenses"), including, without limitation: (i) all registration,
filing, securities exchange listing and fees required by the National
Association of Securities Dealers, (ii) all registration, filing, qualification
and other fees and expenses of compliance with securities or blue sky laws
(including reasonable fees and disbursements of counsel in connection with blue
sky qualifications of the Registrable Securities), (iii) all word processing,
duplicating, printing, messenger and delivery expenses, (iv) the Company's
internal expenses (including, without limitation, all salaries and expenses of
its officers and employees performing legal or accounting duties), (v) the fees
and expenses incurred by the Company in connection with the listing of the
Registrable Securities, (vi) reasonable fees and disbursements of counsel for
the Company and customary fees and expenses for independent certified public
accountants retained by the Company (including the expenses of any special
audits or comfort letters or costs associated with the delivery by independent
certified public accountants of such special audit(s) or comfort letter(s)
requested pursuant to Section 2.1(k) hereof), (vii) the fees and expenses of any
special experts retained by the Company in connection with such registration,
(viii) all reasonable fees and expenses of counsel for the Investor incurred in
connection with the review, and assistance in preparation, of the Registration
Statement up to $7,500, unless a greater amount is required due the nature of
the review performed by Investor's counsel or the extent of assistance provided
by Investor's counsel (an estimate of such greater fees and expenses of such
firm of counsel to be provided to the Company prior to the undertaking of such
counsel's review or assistance), (ix) premiums and other costs of the Company
for policies of insurance against liabilities arising out of any public offering
of the Registrable Securities being registered, and (x) any fees and
disbursements of underwriters customarily paid by issuers or sellers of
securities, but excluding underwriting fees, discounts, transfer taxes or
commissions, if any, attributable to the sale of Registrable Securities, which
shall be payable by each holder of Registrable Securities pro rata on the basis
of the
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number of Registrable Securities of each such holder that are included in a
registration under this Agreement.
ARTICLE III
INDEMNIFICATION
Section 3.1. INDEMNIFICATION. The Company agrees to indemnify and hold
harmless the Investor, its partners, Affiliates, officers, directors, employees
and duly authorized agents, and each Person or entity, if any, who controls the
Investor within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act, together with the partners, Affiliates, officers, directors,
employees and duly authorized agents of such controlling Person or entity
(collectively, the "Controlling Persons"), from and against any loss, claim,
damage, liability, costs and expenses (including, without limitation, reasonable
attorneys' fees and disbursements and costs and expenses of investigating and
defending any such claim) (collectively, "Damages"), joint or several, and any
action or proceeding in respect thereof to which the Investor, its partners,
affiliates, officers, directors, employees and duly authorized agents, and any
Controlling Person, may become subject under the Securities Act or otherwise, as
incurred, insofar as such Damages (or actions or proceedings in respect thereof)
arise out of, or are based upon, any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement, or in any
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement relating to the Registrable Securities or arises out of, or are based
upon, any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and shall reimburse the Investor, its partners, affiliates, officers, directors,
employees and duly authorized agents, and each such Controlling Person, for any
legal and other expenses reasonably incurred by the Investor, its partners,
affiliates, officers, directors, employees and duly authorized agents, or any
such Controlling Person, as incurred, in investigating or defending or preparing
to defend against any such Damages or actions or proceedings; provided, however,
that the Company shall not be liable to the extent that any such Damages arise
out of the Investor's failure to send or give a copy of the final prospectus or
supplement (as then amended or supplemented) to the persons asserting an untrue
statement or alleged untrue statement or omission or alleged omission at or
prior to the written confirmation of the sale of Registrable Securities to such
person if such statement or omission was corrected in such final prospectus or
supplement; provided, further, that the Company shall not be liable to the
extent that any such Damages arise out of or are based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in such
Registration Statement, or any such preliminary prospectus, final prospectus,
summary prospectus, amendment or supplement in reliance upon and in conformity
with written information furnished to the Company by or on behalf of the
Investor or any other person who participates as an underwriter in the offering
or sale of such securities, in either case, specifically stating that it is for
use in the preparation thereof.
Section 3.2. CONDUCT OF INDEMNIFICATION PROCEEDINGS. All claims for
indemnification under Section 3.1 shall be asserted and resolved in accordance
with the provisions of Section 9.2 of the Equity Line Agreement.
Section 3.3. ADDITIONAL INDEMNIFICATION. Indemnification similar to that
specified in the preceding paragraphs of this Article 3 (with appropriate
modifications) shall be given by the Company with respect to any required
registration or other qualification of securities under any federal or state law
or regulation of any governmental authority other than the Securities Act. The
provisions of this Article III shall be in addition to any other rights to
indemnification, contribution or other remedies which an Indemnified Party may
have pursuant to law, equity, contract or otherwise.
Section 3.4. CONTRIBUTION. If the indemnification provided for in this
Article III is unavailable to the Indemnified Parties in respect of any Damages
referred to herein, then the Indemnifying Party, in lieu
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of indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such Damages as between the
Company on the one hand and the Investor on the other, in such proportion as is
appropriate to reflect the relative fault of the Company and of the Investor in
connection with such statements or omissions, as well as other equitable
considerations. The relative fault of the Company on the one hand and of the
Investor on the other shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by such party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Investor agree that it would not be just and equitable if
contribution pursuant to this Section 3.4 were determined by pro rata allocation
or by any other method of allocation that does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The amount
paid or payable by an Indemnified Party as a result of the Damages referred to
in the immediately preceding paragraph shall be deemed to include, subject to
the limitations set forth above, any legal or other expenses reasonably incurred
by such Indemnified Party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 3.4, the
Investor shall in no event be required to contribute any amount in excess of the
amount by which the total price at which the Registrable Securities of the
Investor were sold to the public (less underwriting discounts and commissions)
exceeds the amount of any damages which the Investor has otherwise been required
to pay by reason of such untrue or alleged untrue statement or omission or
alleged omission. No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
ARTICLE IV
MISCELLANEOUS
Section 4.1. NO OUTSTANDING REGISTRATION RIGHTS. The Company represents and
warrants to the Investor that, except as set forth on Schedule 4.1 hereof, there
is not in effect on the date hereof any agreement by the Company pursuant to
which any holders of securities of the Company have a right to cause the Company
to register or qualify such securities under the Securities Act or any
securities or blue sky laws of any jurisdiction.
Section 4.2. TERM. The registration rights provided to the holders of
Registrable Securities hereunder shall terminate at the earlier of (i) such time
that is two years following the termination of the Equity Line Agreement or (ii)
such time as all Registrable Securities have been issued and have ceased to be
Registrable Securities. Notwithstanding the foregoing, paragraphs (c) and (d) of
Section 1.1, Article III, Section 4.8, and Section 4.9 shall survive the
termination of this Agreement.
Section 4.3. RULE 144. The Company will file in a timely manner,
information, documents and reports in compliance with the Securities Act and the
Exchange Act and will, at its expense, promptly take such further action as
holders of Registrable Securities may reasonably request to enable such holders
of Registrable Securities to sell Registrable Securities without registration
under the Securities Act within the limitation of the exemptions provided by (a)
Rule 144 under the Securities Act ("Rule 144"), as such Rule may be amended from
time to time, or (b) any similar rule or regulation hereafter adopted by the
SEC. If at any time the Company is not required to file such reports, it will,
at its expense, forthwith upon the written request of any holder of Registrable
Securities, make available adequate current public information with respect to
the Company within the meaning of paragraph (c)(2) of Rule 144 or such other
information as necessary to permit sales pursuant to Rule 144. Upon the request
of the
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Investor, the Company will deliver to the Investor a written statement, signed
by the Company's principal financial officer, as to whether it has complied with
such requirements.
Section 4.4. CERTIFICATE. The Company will, at its expense, forthwith upon
the request of any holder of Registrable Securities, deliver to such holder a
certificate, signed by the Company's principal financial officer, stating (a)
the Company's name, address and telephone number (including area code), (b) the
Company's Internal Revenue Service identification number, (c) the Company's
Commission file number, (d) the number of shares of each class of Stock
outstanding as shown by the most recent report or statement published by the
Company, and (e) whether the Company has filed the reports required to be filed
under the Exchange Act for a period of at least ninety (90) days prior to the
date of such certificate and in addition has filed the most recent annual report
required to be filed thereunder.
Section 4.5. AMENDMENT AND MODIFICATION. Any provision of this Agreement
may be waived, provided that such waiver is set forth in a writing executed by
both parties to this Agreement. The provisions of this Agreement, including the
provisions of this sentence, may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given,
unless the Company has obtained the written consent of the holders of a majority
of the then outstanding Registrable Securities. Notwithstanding the foregoing,
the waiver of any provision hereof with respect to a matter that relates
exclusively to the rights of holders of Registrable Securities whose securities
are being sold pursuant to a Registration Statement and does not directly or
indirectly affect the rights of other holders of Registrable Securities may be
given by holders of at least a majority of the Registrable Securities being sold
by such holders; provided that the provisions of this sentence may not be
amended, modified or supplemented except in accordance with the provisions of
the immediately preceding sentence. No course of dealing between or among any
Person having any interest in this Agreement will be deemed effective to modify,
amend or discharge any part of this Agreement or any rights or obligations of
any person under or by reason of this Agreement.
Section 4.6. SUCCESSORS AND ASSIGNS; ENTIRE AGREEMENT. This Agreement and
all of the provisions hereof shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns. The Investor may
assign its rights under this Agreement to any subsequent holder the Registrable
Securities, provided that the Company shall have the right to require any holder
of Registrable Securities to execute a counterpart of this Agreement as a
condition to such holder's claim to any rights hereunder. This Agreement,
together with the Equity Line Agreement and the Warrant(s) sets forth the entire
agreement and understanding between the parties as to the subject matter hereof
and merges and supersedes all prior discussions, agreements and understandings
of any and every nature among them.
Section 4.7. SEVERABILITY. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that such severability shall be
ineffective if it materially changes the economic benefit of this Agreement to
any party.
Section 4.8. NOTICES. All notices, demands, requests, consents, approvals,
and other communications required or permitted hereunder shall be in writing and
shall be (i) deposited in the mail, registered or certified, return receipt
requested, postage prepaid, (ii) delivered by reputable air courier service with
charges prepaid, or (iii) transmitted by hand delivery, telegram or facsimile,
addressed as set forth below or to such other address as such party shall have
specified most recently by written notice. Any notice or other communication
required or permitted to be given hereunder shall be deemed effective (a) upon
hand delivery or delivery by facsimile, with accurate confirmation generated by
the transmitting facsimile machine, at the address or number designated below
(if delivered on a business day during normal business hours where such notice
is to be received), or the first business day following such
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delivery (if delivered other than on a business day during normal business hours
where such notice is to be received) or (b) on the second business day following
the date of mailing by express courier service, fully prepaid, addressed to such
address, or upon actual receipt of such mailing, whichever shall first occur.
The addresses for such communications shall be:
If to the Company:
Somanetics Corporation
1653 East Maple Road
Troy, Michigan 48083-4208
(248) 689-3050
Telephone: (248) 689-3050
Facsimile: (248) 689-4272
Attention: Bruce J. Barrett
with a copy (which communication shall not constitute notice) to:
Honigman Miller Schwartz and Cohn
2290 First National Building
600 Woodward Avenue
Detroit, Michigan 48226-3583
Telephone: (313) 465-7452
Facsimile: (313) 465-7453
Attention: Robert J. Krueger, Esq.
if to the Investor:
Adam Gurney
Kingsbridge Capital Limited
Main Street
Kilcullen, County Kildare
Republic of Ireland
Telephone: 011-353-45-481-811
Facsimile: 011-353-45-482-003
with a copy (which communication shall not constitute notice) to:
Clifford Chance Rogers & Wells LLP
200 Park Avenue, 52nd Floor
New York, NY 10166
Attention: Keith M. Andruschak, Esq.
Telephone: (212) 878-8000
Facsimile: (212) 878-8375
Either party hereto may from time to time change its address or facsimile number
for notices under this Section 4.8 by giving at least ten (10) days' prior
written notice of such changed address or facsimile number to the other party
hereto.
Section 4.9. GOVERNING LAW. This Agreement shall be construed under the
laws of the State of Michigan, without giving effect to provisions regarding
conflicts of law or choice of law.
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Section 4.10. HEADINGS. The headings in this Agreement are for convenience
of reference only and shall not constitute a part of this Agreement, nor shall
they affect their meaning, construction or effect.
Section 4.11. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original instrument and all
of which together shall constitute one and the same instrument.
Section 4.12. FURTHER ASSURANCES. Each party shall cooperate and take such
action as may be reasonably requested by another party in order to carry out the
provisions and purposes of this Agreement and the transactions contemplated
hereby.
Section 4.13. ABSENCE OF PRESUMPTION. This Agreement shall be construed
without regard to any presumption or rule requiring construction or
interpretation against the party drafting or causing any instrument to be
drafted.
Section 4.14. EQUITABLE REMEDIES. In the event of a breach or a threatened
breach by any party to this Agreement of its obligations under this Agreement,
any party injured or to be injured by such breach will be entitled to specific
performance of its rights under this Agreement or to injunctive relief, in
addition to being entitled to exercise all rights provided in this Agreement and
granted by law. The parties agree that the provisions of this Agreement shall be
specifically enforceable, it being agreed by the parties that the remedy at law,
including monetary damages, for breach of any such provision will be inadequate
compensation for any loss and that any defense or objection in any action for
specific performance or injunctive relief that a remedy at law would be adequate
is waived.
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IN WITNESS WHEREOF, the parties hereto have caused this Registration
Rights Agreement to be executed by the undersigned, thereunto duly authorized,
as of the date first set forth above.
SOMANETICS CORPORATION
By:___________________________
Bruce J. Barrett
Chief Executive Officer
KINGSBRIDGE CAPITAL LIMITED
By: __________________________
Valentine O'Donoghue
Director
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
We consent to the use in this Registration Statement relating to
1,200,000 Common Shares of Somanetics Corporation on Form S-1 of our report
dated January 24, 2000 (which includes an explanatory paragraph relating to an
uncertainty concerning Somanetics Corporation's ability to continue as a going
concern), appearing in the Prospectus, which is a part of this Registration
Statement, and to the references to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
Our audits of the financial statements referred to in our
aforementioned report also included the financial statement schedule of
Somanetics Corporation listed in Item 16(b). This financial statement schedule
is the responsibility of Somanetics Corporation's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
March 23, 2000
