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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended NOVEMBER 30, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from TO Commission File No. 0-19095
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SOMANETICS CORPORATION
(Exact name of Registrant as specified in its charter)
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MICHIGAN 38-2394784
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(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
48083-4208
1653 EAST MAPLE ROAD, TROY, MICHIGAN (Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (248) 689-3050
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON SHARES, PAR VALUE $.01 PER SHARE
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Shares held by non-affiliates of the
Registrant as of February 22, 2000, computed by reference to the closing sale
price as reported by Nasdaq on such date, was approximately $22,253,000.
The number of the Registrant's Common Shares outstanding as of
February 22, 2000 was 6,035,597
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of Shareholders,
scheduled to be held April 18, 2000, are incorporated by reference in Part III,
if the Proxy Statement is filed no later than March 29, 2000.
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SOMANETICS CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1999
TABLE OF CONTENTS
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PART I
PAGE
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Item 1. Business .................................................................................... 2
Item 2. Properties.................................................................................... 14
Item 3. Legal Proceedings............................................................................. 14
Item 4. Submission of Matters to a Vote of Security Holders........................................... 14
Supplemental Item. Executive Officers of the Registrant.................................................. 15
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters......................... 17
Item 6. Selected Financial Data....................................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 19
Item 7A Quantitative and Qualitative Disclosures About Market Risk.................................... 24
Item 8. Financial Statements and Supplementary Data................................................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 39
PART III
Item 10. Directors and Executive Officers of Registrant................................................ 40
Item 11. Executive Compensation........................................................................ 40
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 40
Item 13. Certain Relationships and Related Transactions................................................ 40
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 41
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PART I
ITEM 1. BUSINESS
THE COMPANY
Somanetics Corporation ("Somanetics" or the "Company") was incorporated in
1982 and develops, manufactures and markets the INVOS(R) 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 was
developed to meet the need for information about oxygen in the brain, the organ
least tolerant of oxygen deprivation. Brain oxygen information, therefore, is
important, especially in surgical procedures requiring general anesthesia and in
other critical care situations with a high risk of brain oxygen imbalances. The
Company targets surgical procedures with a high risk of brain oxygen imbalances,
such as cardiovascular and vascular surgeries and surgeries 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 ("ICUs") and
emergency rooms. It is comprised of (i) a portable unit including a computer and
a display monitor, (ii) dual single-use, disposable sensors, the SomaSensors(R),
(iii) proprietary software and (iv) a preamplifier cable. SomaSensors can be
adhered to both sides of a patient's forehead to offer bi-lateral monitoring and
are connected to the computer through the preamplifier cable. The computer uses
the Company's proprietary software to analyze information received from the
SomaSensor and provides a continuous digital and trend display on the monitor of
an index of the oxygen saturation in the area of the brain under the SomaSensor.
Users of the Cerebral Oximeter will be required to purchase disposable
SomaSensors on a regular basis because of their single-use nature. Shipments of
the model 4100 Cerebral Oximeter began in the first quarter of fiscal 1998.
During the third quarter of fiscal 1999, the Company introduced its 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, the Company also submitted its 510(k) application to the
FDA for the model 5100 Cerebral Oximeter, and is awaiting FDA clearance to
market the model 5100 in the United States.
The Company's objective is to establish the Cerebral Oximeter as a "standard
of care" in surgical procedures requiring general anesthesia and in other
critical care situations.
MARKET OVERVIEW
INDUSTRY BACKGROUND
The brain is the human organ least tolerant of oxygen deprivation. Without
sufficient oxygen, brain damage may occur within a few minutes, which can result
in paralysis, severe and complex disabilities, or death. Undetected brain
hypoxia (insufficiency of oxygen delivery) and ischemia (tissue oxygen
starvation due to the obstruction of the inflow of arterial blood) are common
causes of brain damage and death during and after many surgical procedures and
in other critical care situations. A December 1996 article in The New England
Journal of Medicine 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 insufficiency
of oxygen delivery to the brain is a frequent cause of this problem. The Lancet
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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 such
injury.
Oxygen is carried to the brain by hemoglobin in the blood. Hemoglobin passes
through the lungs, bonds with oxygen and is pumped by the heart through arteries
and capillaries to the brain. Brain cells extract the oxygen and the blood
carries away carbon dioxide through the capillaries and veins back to the lungs.
Brain oxygen imbalances can be caused by several factors, including changes in
oxygen saturation (the percentage of hemoglobin contained in a given amount of
blood which carries oxygen) in the arteries, blood flow to the brain, hemoglobin
concentration and oxygen consumption by the brain.
Brain oxygen information is important in surgical procedures requiring
general anesthesia, in other critical care situations with a high risk of brain
oxygen imbalances, as well as in the treatment of patients with head injuries or
strokes. These procedures include cardiovascular and vascular surgeries,
surgeries involving elderly patients, any neurosurgery, major surgeries
involving the neck, transplant surgeries, treatment of patients with diseases
resulting from high blood pressure, lung problems, or head, organ or heart
injuries and treatment of patients suffering from strokes. These patients are
most commonly found in operating rooms as well as in the other critical care
areas of hospitals, especially recovery rooms, ICUs and emergency rooms. The
Company believes that medical professionals need immediate and continuous
information about changes in the oxygen levels in the blood in the brain to
identify brain oxygen imbalances. After they are alerted to such imbalances,
medical professionals have the information to take corrective action through the
introduction of medications, anesthetic agents or mechanical intervention,
potentially improving patient outcome and reducing the costs of care. Immediate
and continuous information about changes in brain oxygen levels also provides
immediate feedback regarding the adequacy of the selected therapy. Equally
important, without information about brain oxygen levels, therapy that may not
be necessary might be initiated to assure adequate brain oxygen levels.
Unnecessary therapy can have an adverse impact on patient safety and increase
hospital costs.
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 (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 ("EEG"), intracranial pressure monitoring and
neurological examination. These methods have not been widely adopted to monitor
brain oxygen levels in critical care situations for a variety of reasons. The
use of any of these methods is limited because it is either expensive, difficult
or impractical to use as a brain monitor, invasive, not available under certain
circumstances (such as when the patient is unconscious or has suppressed neural
activity), not able to measure all of the factors that may affect brain oxygen
imbalances, not organ specific, not able to provide continuous information or
able to measure only the effects of brain oxygen imbalances.
Arterial oxygen saturation is only one of the factors that can affect oxygen
imbalances in the brain. Pulse oximetry measures oxygen saturation in the
arteries. It is non-invasive, uses optical spectroscopy and has become a
standard of care for measuring arterial oxygen saturation in critical care
situations. However, pulse oximeters require a strong pulse, making them
unavailable during bypass surgeries, surgeries involving induced hypothermia or
any other time the patient does not have a strong peripheral pulse. Pulse
oximeters provide information about the oxygen saturation of the arteries in a
finger or earlobe, not oxygen imbalances in the brain. Changes in the oxygen
balance in the brain may not have any affect on the oxygen levels in a finger or
earlobe. For example, a blocked artery to the brain would affect oxygen in the
brain, but would not affect the amount of oxygen in the arteries in the finger.
The Cerebral Oximeter is the only 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
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imbalances. This information may facilitate timely intervention, 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
The Company believes the market for its products is driven by the following
market trends:
Less Invasive Medical Procedures. The Company believes there is a trend
toward less invasive medical procedures. Notable examples include laparoscopic
procedures in general surgery and arthroscopic procedures in orthopedic surgery.
Such procedures are designed to reduce trauma, thereby decreasing complications,
reducing pain and suffering, speeding recovery and decreasing costs associated
with patient care. The Company also believes that there is a trend to minimize
invasive procedures relating to the brain to increase the safety of patients and
medical professionals, reduce recovery time and minimize costs.
Demand to Reduce Health Care Costs. Hospitals in the United States are
increasingly faced with direct economic incentives to control health care costs
and improve the efficiency of health care through improved labor productivity,
shortened hospital stays and more selective performance of medical procedures
and use of facilities and equipment. Hospitals often receive a fixed fee from
Medicare, managed care organizations and private insurers based on the disease
diagnosed, rather than based on the services actually performed. Therefore,
hospitals are increasingly focused on avoiding unexpected costs, such as those
associated with increased hospital stays resulting from patients with brain
damage or other adverse outcomes following surgery. This focus on avoiding
unexpected costs is especially pronounced in the operating room and other
hospital critical care areas due to their high operating costs. The economic and
human costs of brain damage can be tremendous. Even short extensions of hospital
stays resulting from brain damage can be expensive. In addition, 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. The Company
believes that physicians and hospitals are increasingly interested in monitoring
the status of specific organs in the body, especially the brain. It also
believes there is an increased interest in understanding how the brain functions
and in finding ways to prevent injury to, and cures to diseases affecting, the
brain. The Company believes that this interest has led to a greater focus on
monitoring the brain, both to determine how it functions and to monitor the
effects of various actions on the brain.
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. The Company
believes that older patients require a higher level of medical care using more
procedures in which the patient or the procedure involves a risk of brain oxygen
imbalances. Medical and surgical procedure growth rate has remained steady
recently, and industry analysts expect this trend to continue.
BUSINESS STRATEGY
The Company's objective is to establish the Cerebral Oximeter as a "standard
of care" in surgical procedures requiring general anesthesia and in other
critical care situations. Key elements of the Company's strategy are as follows:
Target Surgical Procedures With a High Risk of Brain Oxygen Imbalances. The
Company targets surgical procedures with a high risk of brain oxygen imbalances,
such as cardiovascular and vascular surgeries and surgeries involving elderly
patients. The Company believes that the medical professionals involved in these
surgeries are the most aware of the risks of brain damage resulting from brain
oxygen imbalances. Therefore, the Company believes that it will be easier to
demonstrate the clinical benefits of the Cerebral Oximeter and potentially gain
market acceptance for its product in connection with these surgeries.
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Demonstrate Clinical Benefits and Promote Acceptance of the Cerebral
Oximeter. The Company sponsors clinical studies using the Cerebral Oximeter to
provide additional evidence of its benefits. The resulting publication of any
favorable peer-reviewed papers is used to help convince the medical community of
the clinical benefits of the Cerebral Oximeter. The Company also promotes
acceptance of the Cerebral Oximeter in the medical community by encouraging
surgeons, anesthesiologists and nurses in leading hospitals, whose opinions and
practices the Company believes are valued by other hospitals and physicians, to
use the Cerebral Oximeter on a trial basis. The Company believes that successful
evaluations of the Cerebral Oximeter by these medical professionals will
accelerate the acceptance of the Cerebral Oximeter by other medical
professionals. The Company is sponsoring discussions among physicians who have
used the Cerebral Oximeter about its clinical benefits.
Invest in Marketing and Sales Activities. The Company has established a
distribution network consisting of its direct sales employees and distributors.
The Company invests in its marketing and sales efforts to increase the medical
community's exposure to its INVOS technology and the Cerebral Oximeter,
including continued participation in trade shows and medical conferences, and
ongoing product evaluations. The Company is aggressively marketing its product
through its existing sales force and leverages its sales resources through the
use of its distributors, including Baxter Limited in Japan.
Develop Additional Applications of the Cerebral Oximeter. The Company has
filed a 510(k) application with the FDA to market in the United States a
product-line extension of the Cerebral Oximeter for use on children, and is in
the process of developing product-line extensions of the Cerebral Oximeter for
use on newborns and in other non-cerebral tissue applications. The Company
believes that these natural extensions of its existing product will increase the
market for the Cerebral Oximeter without the more significant development
efforts required for entirely new products. Research conducted on children has
resulted in a SomaSensor that can fit smaller heads. The Company believes that
non-invasive monitoring is especially important in this patient population, as
they generally have lower oxygen reserves than adults, have less blood volume
from which to make invasive blood gas measurements and are less tolerant of
painful skin punctures and infections.
License Its Technology to Medical Device Manufacturers. The Company plans to
license its Cerebral Oximeter technology to other medical device manufacturers
to expand the installed base of Cerebral Oximeters and increase the demand for
SomaSensors. Such a license might be made to a company interested in
incorporating the Cerebral Oximeter into a multi-function monitor. The Company
believes that such an arrangement could provide another distribution channel for
the Company's Cerebral Oximeter. The Company, however, has no current
commitments for any such licenses.
PRODUCTS AND TECHNOLOGY
THE CEREBRAL OXIMETER
The Company's 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 certain existing monitoring methods, the Cerebral Oximeter functions
even when the patient is unconscious, lacks a strong peripheral pulse or has
suppressed neural activity. The measurement made by the Cerebral Oximeter is
dominated by the blood in the veins. Therefore, it responds to the changes in
factors that affect the balance between cerebral oxygen supply and demand,
including changes in arterial oxygen saturation, cerebral blood flow, hemoglobin
concentration and cerebral oxygen consumption. The Cerebral Oximeter responds to
global changes in brain oxygen levels and to events that affect the brain oxygen
levels in the region beneath the SomaSensor.
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The Cerebral Oximeter monitoring system is comprised of (i) a portable unit
including a computer and a display monitor, (ii) dual single-use, disposable
sensors, the SomaSensors, (iii) proprietary software and (iv) a preamplifier
cable. SomaSensors can be adhered to both sides of a patient's forehead to offer
bi-lateral monitoring and are connected to the computer through the preamplifier
cable. The SomaSensor continuously transmits and receives predetermined
wavelengths of light sent through the scalp, muscle and skull into the brain
tissue. The computer receives the information about the intensity of the light
scattered by the blood and tissue in the area being monitored. The computer uses
the Company's proprietary software to analyze this information and provide a
continuous digital and trend display on the monitor of an index of the oxygen
saturation in the area of the brain under the SomaSensor.
The portable unit includes a menu-driven user interface which provides easy
access for setting high and low audible alarms and permits a customized display
format and data retrieval. Single-function keys offer a convenient means of
powering the Cerebral Oximeter, silencing alarms, marking important events and
printing results that can be stored for up to 24 hours and retrieved by a
variety of standard, commercially available printers. The 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 its effectiveness is not warranted by the Company. The
Company provides a one-year warranty on the Cerebral Oximeter, which the Company
will satisfy by repairing or exchanging those units in need of repair. The
Company also offers 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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FEATURES BENEFITS
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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
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OPTICAL SPECTROSCOPY TECHNOLOGY
The Company's proprietary In Vivo Optical Spectroscopy ("INVOS") technology
is based primarily on the physics of optical spectroscopy. Optical spectroscopy
is the interpretation of the interaction between matter and light. Spectrometers
and spectrophotometers function primarily by shining light through matter and
measuring the extent to which such light is transmitted through, or scattered or
absorbed by, matter. Physicians and scientists can use spectrophotometers to
examine human blood and tissue. Although most human tissue is opaque to ordinary
light, certain wavelengths penetrate tissue more easily than others. Therefore,
by shining light of appropriate wavelengths into the body and measuring its
transmission, scattering and absorption, or a combination, physicians can obtain
information about the matter under analysis. Optical spectroscopy generates no
ionizing radiation and produces no known hazardous effects.
Optical spectroscopy was first used clinically in the 1940s at the
Sloan-Kettering Institute for cancer research. The pulse oximeter uses optical
spectroscopy to determine the oxygen saturation of the blood in the arteries in
peripheral tissue, such as in a finger or an earlobe. By identifying the
hemoglobin and the oxygenated hemoglobin and measuring the relative amounts of
each, oxygen saturation of hemoglobin can be measured. However, the use of
optical spectroscopy in the body has not generally been useful when the
substances to be measured are surrounded by, are behind, or are near bone,
muscle or other tissue, because the transmission, scattering and absorption of
the transmitted light produces extraneous data that interferes with analysis of
the data from the area being examined.
INVOS TECHNOLOGY
The Cerebral Oximeter is based on INVOS technology. In 1982, the Company
commenced research and development efforts in connection with a spectroscopic
instrument for the measurement of breast tissue abnormalities. The Company's
first product, the Somanetics INVOS 2100 System (the "INVOS 2100"), used the
same INVOS technology as the Cerebral Oximeter. Subsequently, the Company
commenced analysis of the application of INVOS technology to the measurement of
changes in cellular metabolism in the brain. Early studies conducted in
conjunction with the Henry Ford Neurosurgical Institute demonstrated the ability
of the Company's INVOS technology to make certain measurements which were highly
correlated to controlled changes in animal brain cell metabolism. In 1988, the
Company began clinical studies of the Cerebral Oximeter on human patients in
operating rooms, emergency rooms and ICUs at Henry Ford Hospital and later at
Bowman Gray School of Medicine and Mount Sinai Medical Center.
Like other applications of optical spectroscopy, INVOS technology also
analyzes various characteristics of human blood and tissue by measuring and
analyzing low-intensity visible and near-infrared light transmitted into
portions of the body. It measures the composition of substances by detecting the
effect they have on light. The INVOS technology measurement is made by
transmitting low-intensity visible and near-infrared light through a portion of
the body and detecting the manner in which the molecules of the exposed
substance interact with light at specific wavelengths. INVOS technology detects
this interaction by measuring the intensity of the various wavelengths of light
received by light sensors. By measuring the effect on specific wavelengths of
light caused by oxygenated hemoglobin contained in blood in the region of the
brain being monitored, the Cerebral Oximeter can monitor changes in the
approximate oxygen saturation of the hemoglobin in such region of the brain.
The Company has developed a method of reducing extraneous spectroscopic data
caused by surrounding bone, muscle and other tissue. This method allows data to
be gathered from areas of the body which previously could not be analyzed using
optical spectroscopy. The dual detector design of the SomaSensor enables the
measurement of scattered light intensities from the intermediate tissues of
skin, muscle and skull in a separate process. The depth of penetration of the
light signal is related to the distance between the light source and the shallow
and deep detectors. While both detectors receive similar information about the
tissue outside the brain, the detector further from the light source receives
more information specific to the brain than does the detector closer to the
light source. By subtracting the two measurements, INVOS technology is able to
suppress the influence of the tissues outside the brain to provide a measurement
of changes in brain oxygen saturation.
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RESEARCH AND DEVELOPMENT
The Company is currently focusing its research and development efforts on
product-line extensions of the Cerebral Oximeter for use on newborns, other
non-cerebral tissue applications, and enhancements to the Cerebral Oximeter and
SomaSensor. The Company is currently awaiting FDA clearance to market the
Cerebral Oximeter for use on children in the United States, and has redesigned
the SomaSensor for use on smaller heads. The Company believes that non-invasive
monitoring is especially important in this patient population, as they generally
have lower oxygen reserves than adults, have less blood volume from which to
make invasive blood gas measurements, and are less tolerant of painful skin
punctures and infections.
During fiscal years 1999, 1998 and 1997 the Company spent $598,348,
$664,874 and $736,427, respectively, on research, development and engineering.
Effective April 28, 1999, the Company terminated its consulting order with
NeuroPhysics Corporation, except for general consulting which terminated in
February 2000, because of the cost to the Company to pursue its 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 amongst
those undergoing general anesthesia for various surgical procedures as well as
in the other critical care areas of hospitals, especially recovery rooms, ICUs
and emergency rooms. After the Cerebral Oximeter is accepted in hospitals,
future markets might include free-standing operating rooms, clinics, ambulances
and nursing homes.
The Company markets the Cerebral Oximeter primarily to cardiovascular and
vascular surgeons, neurosurgeons and anesthesiologists. The Company believes
that these specialists are the medical professionals most aware of the risks of
brain damage resulting from brain oxygen imbalances. The Company and its
distributors have concentrated their sales efforts on the major teaching
hospitals in the United States and selected foreign markets in which the Company
has commenced commercial sales and on other large United States hospitals,
especially those the Company considers opinion leaders. In addition, the Company
is sponsoring discussions among physicians who have used the Cerebral Oximeter
about its clinical benefits.
The Company believes that favorable peer review is a key element to a
product's success in the medical equipment industry. Accordingly, the Company
supports clinical research programs with third-party clinicians and researchers
intended to demonstrate the need for, and clinical benefits of, the Cerebral
Oximeter with the specific objective of publishing the results in peer-reviewed
journals. The research consists primarily of comparing the measurements obtained
from the Cerebral Oximeter to the data obtained from existing diagnostic
methods, including EEG, transcranial Doppler and invasive jugular bulb catheter
monitoring or reports of the results of the use of the Cerebral Oximeter in
various procedures. The Company attends trade shows and medical conferences in
order to introduce and promote 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 (some of which contained the
same subject matter as other presentations, articles or abstracts) 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. 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
The Company sells the Cerebral Oximeter through its direct sales force and
independent distributors. The Company has engaged distributors to provide it
with geographic coverage outside the United States. In the United States, the
Company sells the Cerebral Oximeter through its 12 direct salespersons and 5
clinical specialists covering 50 states exclusively. Sales compensation and
incentive plans are designed to motivate the Company's direct sales force by
making half of their targeted compensation dependent on meeting targeted sales
levels. The Company believes that the minimum selling cycle for new medical
devices is approximately six to nine months.
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The Company did not have any backlog of firm orders as of January 20, 2000
or as of January 20, 1999.
Internationally, the Company has distribution agreements with 17 independent
distributors covering 75 countries for the model 4100 Cerebral Oximeter; six of
these distributors and 10 countries will be terminated within the next 30 days,
two more distributors within the next year, and one more distributor within the
next two years in conjunction with the Company's recently announced exclusive
distributor agreement with Nellcor Puritan Bennett Export, Inc., a wholly-owned
subsidiary of Mallinckrodt, Inc. The Company's agreement with Nellcor Puritan
Bennett Export, Inc. covers 33 countries for the model 4100 and model 5100
Cerebral Oximeters. In March 1995, the Company engaged Baxter Limited as its
exclusive distributor in Japan. In January 1999, Baxter Limited was licensed by
the Japanese Ministry of Health and Welfare to market the INVOS 4100 Cerebral
Oximeter in Japan.
During fiscal 1998, the Company began a no-cap sales program whereby the
Company ships the model 4100 Cerebral Oximeter to the customer at no charge, in
exchange for the customer agreeing to purchase a minimum quantity of
SomaSensors, on a monthly basis, at a premium, for a stated period of time.
For a description of sales to major customers, see Note 10 of Notes to
Financial Statements included in Item 8 of this Report. The Company's
distributor in Japan was the Company's largest customer in fiscal 1999 and 1997.
The Company is dependent on its sales to Baxter Limited in Japan, and the loss
of Baxter Limited as a customer would have an adverse effect on the Company's
business, financial condition and results of operations.
The Company's export sales for the fiscal years ended November 30, 1999,
1998 and 1997 were approximately $1,632,000, $959,000 and $689,000,
respectively. 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
The Company assembles the Cerebral Oximeter in its facilities in Troy,
Michigan, from components purchased from outside suppliers. The Company
assembles the Cerebral Oximeter to control its quality and costs and to permit
it to make changes to the Cerebral Oximeter faster than it could with
third-party assembly. The Company believes that each component is generally
available from several potential suppliers. The SomaSensor, the printed circuit
boards, other mechanical components and the unit enclosure are the primary
components that must be manufactured according to specifications provided by the
Company. Although the Company is currently dependent on one manufacturer of the
SomaSensor, the Company believes that several potential suppliers are available
to assemble the components of the Cerebral Oximeter. The Company would, however,
require approximately three to four months to change SomaSensor suppliers. The
Company does not currently intend to manufacture on a commercial scale the
disposable SomaSensor or the components of the Cerebral Oximeter.
On June 11, 1998, the Company received ISO 9001 certification and met the
requirements under the European Medical Device Directive to use the CE Mark,
thereby allowing the Company to continue to market its products in the European
Economic Community.
COMPETITION
The Company does not believe there is currently any direct commercial
competition for the Cerebral Oximeter. The Company believes, however, that the
market for cerebral oximetry products is in the early stages of its development
and, if it develops, may become highly competitive. The Company is aware of
foreign companies that have sold products relating to cerebral metabolism
monitoring for research or evaluation.
The medical equipment industry is characterized by intense competition and
extensive research and development. Other companies and individuals are engaged
in research and development of non-invasive cerebral oximeters, and the Company
believes there are many other potential entrants into the market. Some of these
9
<PAGE> 11
potential competitors have well established reputations, customer relationships
and marketing, distribution and service networks, and have substantially longer
histories in the medical equipment industry, larger product lines and greater
financial, technical, manufacturing, research and development and management
resources than those of the Company. Many of these potential competitors have
long-term product supply relationships with the Company's potential customers.
These potential competitors may succeed in developing products that are at least
as reliable and effective as the Company's product, that make additional
measurements, or that are less costly than the product developed by the Company.
These potential competitors may be more successful than the Company in
manufacturing and marketing their products and may be able to take advantage of
the significant time and effort invested by the Company to gain medical
acceptance of cerebral oximetry. In addition, 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, making that technology
generally available and potentially helping the development of competing
products. See "Market Overview."
The Company also competes indirectly with the numerous companies that sell
various types of medical equipment to hospitals for the limited amount of
funding allocated to capital equipment in hospital budgets. The market for
medical equipment is subject to rapid change due to an increasingly competitive,
cost-conscious environment and to government programs intended to reduce the
cost of medical care. Many of these manufacturers of medical equipment are
large, well-established companies whose resources, reputations and ability to
leverage existing customer relationships may give them a competitive advantage
over the Company. The Company's product and technology also compete indirectly
with many other methods currently used to measure blood oxygen levels or the
effects of low blood oxygen levels.
The Company believes that a manufacturer's reputation for producing
accurate, reliable and technically advanced products, references from users,
features (speed, safety, ease of use, patient convenience and range of
applicability), product effectiveness and price are the principal competitive
factors in the medical equipment industry.
PROPRIETARY RIGHTS INFORMATION
The Company has fifteen United States patents and fifteen patents in various
foreign countries. The Company's patents basically cover methods and apparatus
for introducing light into a body part and receiving, measuring and analyzing
the resulting light and its interaction with tissue. Such methods also involve
receiving, measuring and analyzing the light transmissivity of various body
parts of a single subject, as well as of body parts of different subjects which
provides a standard against which a single subject can be compared. Although the
Company believes that one or more of its issued patents cover some of the
underlying technology used in the Cerebral Oximeter, only ten of the issued
patents expressly refer to examination of the brain or developments involving
the Cerebral Oximeter.
The Company's initial United States patent, covering the in vivo tissue
examination technology developed in conjunction with the INVOS 2100 and its
predecessor, the SOMA 100, was allowed and issued in 1986 and will expire on
October 14, 2003. The corresponding Canadian patent was issued in 1987, the
corresponding European Community patent was issued in 1990 with related patents
issued in the ten Western European countries which were then member states, and
the corresponding Japanese patent was issued in 1991. The Company's fourteen
additional United States patents expire on various dates from February 2005 to
December 2014. The Company also has three patent applications pending in the
United States and a number of patent applications in various foreign countries,
with respect to other aspects of its technology relating to the interaction of
light with tissue.
Notwithstanding the Company's patents as noted above, many other patents
have previously been issued to third parties involving optical spectroscopy and
the interaction of light with tissue, some of which relate to the use of optical
spectroscopy in the area of brain metabolism monitoring, the primary use of the
Cerebral Oximeter. No patent infringement claims have been asserted against the
Company.
In addition to its patent rights, the Company has obtained United States
Trademark registrations for its trademarks "SOMANETICS," "SOMAGRAM," "INVOS,"
"SOMASENSOR" and "WINDOW TO THE BRAIN," and has also obtained registrations of
its basic mark, "SOMANETICS," in thirteen foreign countries.
10
<PAGE> 12
The Company also relies on trade secret, copyright and other laws and on
confidentiality agreements to protect its technology, but believes that neither
its patents nor other legal rights will necessarily prevent third parties from
developing or from using similar or related technology to compete against the
Company's product. Moreover, the Company's technology primarily represents
improvements or adaptations of known optical spectroscopy technology, which
might be duplicated or discovered through its patents, reverse engineering or
both.
GOVERNMENT REGULATION
The testing, manufacture and sale of the Company's products are subject to
regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign agencies. Pursuant to the Federal Food, Drug,
and Cosmetic Act, and the regulations promulgated thereunder, the FDA regulates
the preclinical and clinical testing, manufacture, labeling, distribution and
promotion of medical devices. Noncompliance with applicable requirements can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing clearances or approvals and criminal prosecution.
A medical device may be marketed in the United States only with prior
authorization from the FDA unless it is subject to a specific exemption. Devices
classified by the FDA as posing less risk than class III devices are categorized
as class I or II and are eligible to seek "510(k) clearance." Such clearance
generally is granted when submitted information establishes that a proposed
device is "substantially equivalent" in intended use to a class I or II device
already legally on the market or to a "preamendment" class III device (i.e., one
that has been in commercial distribution since before May 28, 1976) for which
the FDA has not called for PMA applications (as defined below). The FDA in
recent years has been requiring a more rigorous demonstration of substantial
equivalence than in the past, including requiring clinical trial data in 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. The Company believes that it now usually
takes from three to six months from the date of submission to obtain 510(k)
clearance, but it can take substantially longer. There can be no assurance that
any of the Company's 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 (e.g., life-sustaining,
life-supporting or implantable devices), or devices that are not substantially
equivalent to a legally marketed class I or class II device. A class III device
generally must receive approval of a premarket approval ("PMA") application,
which requires proving the safety and effectiveness of the device to the FDA.
The process of obtaining PMA approval is expensive and uncertain. The Company
believes that is usually takes from one to three years after filing, but it can
take longer.
If human clinical trials of a device are required, whether for a 510(k) or a
PMA application, and the device presents a "significant risk," the sponsor of
the trial (usually the manufacturer or the distributor of the device) will have
to file an investigational device exemption ("IDE") application prior to
commencing human clinical trials. The IDE application must be supported by data,
typically including the results of animal and laboratory testing. If the IDE
application is approved by the FDA and one or more appropriate Institutional
Review Boards ("IRBs"), human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. If the device presents a "nonsignificant risk" to the patient, a sponsor
may begin the clinical trial after obtaining approval for the study by the IRB
at each clinical site without the need for FDA approval.
In June 1992, the Company received 510(k) clearance from the FDA to market
the Cerebral Oximeter in the United States for use on adults. The Company began
commercial shipments of Cerebral Oximeters and SomaSensors in May 1993. In
November 1993, the Company received notification that the FDA had rescinded the
Company's 510(k) clearance to market the Cerebral Oximeter. As a result, all
commercial sales of the Company's product were suspended. In February 1994, the
Company resumed marketing its product in several foreign countries. In June
1996, the Company received 510(k) clearance from the FDA to market the Cerebral
Oximeter, including the SomaSensor, in the United States. In October 1997, the
Company obtained FDA clearance for new
11
<PAGE> 13
advances in its INVOS technology that are incorporated in its model 4100
Cerebral Oximeter. The model 4100 Cerebral Oximeter was introduced in October
1997 and shipments began in the first quarter of fiscal 1998. In August 1999,
the Company submitted its 510(k) application to the FDA for the model 5100
Cerebral Oximeter and is awaiting FDA clearance to market the model 5100 in the
United States.
In October 1997, the Company obtained FDA clearance for advances in its
INVOS technology that are incorporated in its model 4100 Cerebral Oximeter. The
Company has made additional changes to the model 3100A Cerebral Oximeter that
resulted in the model 4100 Cerebral Oximeter and has made additional changes to
the SomaSensor. The Company does not believe that these changes affect the
safety or efficacy of the Cerebral Oximeter or the SomaSensor and, therefore,
the Company believes that these changes do not require the submission of a new
510(k) notice. There can be no assurance, however, that the FDA would agree with
the Company's determination not to submit a new 510(k) notice for the model 4100
Cerebral Oximter or SomaSensor or that the FDA would not require the Company to
submit a new 510(k) notice for any changes made to the device. If the FDA
requires the Company to submit a new 510(k) notice for its model 4100 Cerebral
Oximeter or SomaSensor or for any device modification, the Company may be
prohibited from marketing the modified device until the 510(k) notice is cleared
by the FDA.
Any devices manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA and certain state agencies. Manufacturers of medical devices for
marketing in the United States are required to adhere to applicable regulations
setting forth detailed Quality System Regulation ("QSR") requirements, which
include testing, control, documentation and other quality assurance procedures.
Manufacturers must also comply with Medical Device Reporting requirements that a
firm report to the FDA any incident in which its product may have caused or
contributed to a death or serious injury, or in which its product malfunctioned
and, if the malfunction were to recur, it would be likely to cause or contribute
to a death or serious injury. Labeling and promotional activities are subject to
scrutiny by the FDA and, in certain circumstances, by the Federal Trade
Commission. Current FDA enforcement policy prohibits the marketing of approved
medical devices for unapproved uses.
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with QSR requirements and other applicable regulations.
The most recent FDA QSR inspection occurred in May 1997. The Company also is
subject to numerous federal, state and local laws relating to such matters as
safe working conditions, manufacturing practices, environmental protection, fire
hazard control and disposal of hazardous or potentially hazardous substances.
If any of the Company's FDA clearances are denied or rescinded, sales of the
applicable Company product in the United States would be prohibited during the
period the Company does not have such clearances. In such cases the Company
would consider shipping such product internationally and/or assembling it
overseas if permissible and if the Company determines 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 the submission of an export request and prior FDA clearance provided
that (i) a company believes the device can be found to be substantially
equivalent through a 510(k) submission, (ii) the device is labeled and intended
for export only, (iii) the device is in accord with the specifications of the
foreign purchaser and (iv) other conditions of the export provisions of the
Food, Drug and Cosmetic Act have been met. The Company is relying on this
exemption for its 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 the Company.
SEASONALITY
The Company's business is seasonal. The Company's third quarter sales have
typically been lower, compared to other fiscal quarters, principally because the
fiscal quarter coincides with the summer vacation season, especially in Europe,
the United States and Japan.
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<PAGE> 14
INSURANCE
Because the Cerebral Oximeter is intended to be used in hospital critical
care units with patients who may be seriously ill or may be undergoing dangerous
procedures, the Company may be exposed to serious potential products liability
claims. The Company has obtained products liability insurance with a liability
limit of $2,000,000. The Company also maintains coverage for property damage or
loss, general liability, business interruption, travel-accident, directors' and
officers' liability and workers' compensation. The Company does not maintain
key-man life insurance.
EMPLOYEES
As of February 15, 2000, the Company 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. The Company also uses two consultants. The Company
believes that its future success is dependent, in large part, on its ability to
attract and retain highly qualified managerial, marketing and technical
personnel. The Company's employees are not represented by a union or subject to
a collective bargaining agreement. The Company believes that its relations with
its current employees are good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company is located in Troy, Michigan and has no other locations. The
Company's export sales for the fiscal years ended November 30, 1999, 1998 and
1997 were approximately $1,632,000, $959,000 and $689,000, respectively,
including $923,000, $103,000, and $336,000 to Baxter Limited, the Company's
distributor in Japan. See Note 10 of Notes to Financial Statements included in
Item 8 of this Report.
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<PAGE> 15
ITEM 2. PROPERTIES
The Company leases 23,392 square feet of office, manufacturing and warehouse
space in Troy, Michigan, of which approximately 12,000 square feet is office
space for sales and marketing, engineering, accounting and other administrative
activities. The lease agreement was extended in fiscal 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. The Company believes that, depending on sales of the Cerebral
Oximeter, its current facility is more than suitable and adequate for its
current needs, including assembly of the Cerebral Oximeter by the Company and
conducting Company operations in compliance with prescribed FDA/QSR guidelines
and will allow for substantial expansion of the Company's business and number of
employees.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended November 30, 1999.
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<PAGE> 16
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company and the positions held by them
are as follows:
<TABLE>
<CAPTION>
Executive
Name Officer Since Age Position
---- ------------- --- --------
<S> <C> <C> <C>
Bruce J. Barrett 6/94 40 President and Chief Executive Officer
Richard S. Scheuing 1/98 44 Vice President, Research and Development
Mary Ann Victor 1/98 42 Vice President, Communications and Administration, and Secretary
Ronald A. Widman 1/98 49 Vice President, Medical Affairs
Pamela A. Winters 1/98 41 Vice President, Operations
</TABLE>
Officers of the Company serve at the discretion of the Board of Directors.
BIOGRAPHICAL INFORMATION
Mr. Bruce J. Barrett has served as the Company's President and Chief
Executive Officer and as director of the Company since June 1, 1994. Mr. Barrett
previously served, from June 1993 until May 31, 1994, as the Director, Hospital
Products Division for Abbott Laboratories, Ltd., a health care equipment
manufacturer and distributor, and from September 1989 until May 1993 as the
Director, Sales and Marketing for Abbott Critical Care Systems, a division of
Abbott Laboratories, Inc., a health care equipment manufacturer and distributor.
While at Abbott Critical Care Systems, Mr. Barrett managed Abbott's invasive
oximetry products for approximately four years. From September 1981 until June
1987, he served as the group product manager of hemodynamic monitoring products
of Baxter Edwards Critical Care, an affiliate of Baxter International, Inc.,
another health care equipment manufacturer and distributor. Mr. Barrett received
a B.S. degree in marketing from Indiana State University and an M.B.A. degree
from Arizona State University.
Mr. Barrett is a party to an employment agreement with the Company pursuant
to which he is required to be elected to the offices he currently holds.
Mr. Richard S. Scheuing has served as the Company's Vice President,
Research and Development since January 1998. From March 1993 to January 1998, he
served as the Company's Director of Research and Development. He joined the
Company in 1991 as its Director of Mechanical Engineering. He is an inventor on
four of the Company's issued patents, and two patents that are pending. Before
joining the Company, he was Director of Mechanical Engineering for Irwin
Magnetic Systems, Inc. from 1987 until 1991 and was a Development Engineer with
the Sarns division of Minnesota Mining and Manufacturing Company ("3M") from
1982 to 1987. He received a B.S. degree in mechanical engineering from the
University of Michigan.
Ms. Mary Ann Victor has served as the Company's Vice President,
Communications and Administration and Secretary since January 1998. From July
1997 until January 1998 she served as the Company's Director, Communications and
Administration and was a consultant to the Company from September 1996 until
July 1997. She also served as Somanetics' Director of Corporate Communications
from July 1991 until February 1994. Prior experience includes serving as
Director of Investor Relations with the Taubman Company from February to May
1994, legal assistant from June 1994 to November 1994 and then attorney from
November 1994 to September 1995 with Varnum Riddering Schmidt & Howlett, and
Human Resources Consultant in the Actuarial Benefits and Compensation Consulting
Group of Deloitte & Touche LLP from September 1995 to September 1996. Ms. Victor
received a B.S. in political science from the University of Michigan and a J.D.
from the University of Detroit.
Mr. Ronald A. Widman has served as the Company's Vice President, Medical
Affairs since January 1998. From August 1994 to January 1998, he served as the
Company's Director of Medical Affairs. Before joining the Company as Marketing
Manager in 1991, he was employed by Mennen Medical, Inc., a manufacturer and
marketer of medical monitoring and diagnostic devices, for 12 years, where he
held various positions in domestic and international medical product marketing,
including Senior Product Manager from 1982 until 1991. He is the author of
several papers and articles related to medical care and monitoring devices.
15
<PAGE> 17
Ms. Pamela A. Winters has served as the Company's Vice President,
Operations since January 1998. From February 1996 to January 1998, she served as
the Company's Director of Operations. From May 1992 to February 1996, she served
as the Company's Manager of Quality Assurance. From October 1991 to May 1992,
Ms. Winters served as the Company's Quality Assurance Supervisor. Ms. Winters
received a B.S. degree in management from University of Phoenix.
16
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
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
</TABLE>
As of February 15, 2000, the Company had 619 shareholders of record.
The Company has never paid cash dividends on its Common Shares and does not
expect to pay such dividends in the foreseeable future. The Company currently
intends to retain any future earnings for use in the Company's business. The
payment of any future dividends will be determined by the Board in light of the
conditions then existing, including the Company's financial condition and
requirements, future prospects, restrictions in financing agreements, business
conditions and other factors deemed relevant by the Board.
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<PAGE> 19
ITEM 6. 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 the audited financial statements of the Company,
certain of which appear in Item 8 of this Report, together with the report of
Deloitte & Touche LLP, independent auditors, whose report includes an
explanatory paragraph relating to an uncertainty concerning the Company's
ability to continue as a going concern. The selected financial data should be
read in conjunction with the financial statements and notes thereto included in
Item 8 of this Report and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Item 7 of this
Report.
<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)............................ (.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 the Company's loss of, and regaining,
FDA clearance to market the Cerebral Oximeter in the United States, see
"Business -- Government Regulation." Thus, the selected financial data
presented above may not be indicative of the results to be expected for
fiscal 2000.
(2) See Note 4 of Notes to Financial Statements included in Item 8 of this
Report for information with respect to the calculation of per share data.
The net loss per Common Share data and weighted average number of Common
Shares outstanding data have been adjusted to give retroactive effect to
the 1-for-10 reverse stock split effected April 10, 1997. During the first
quarter of fiscal 1998, the Company adopted 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.
(3) See Statements of Shareholders' Equity of the Financial Statements included
in Item 8 of this Report for an analysis of Common Share transactions for
the period from December 1, 1996 through November 30, 1999.
(4) The Company believes its accumulated deficit has increased and
shareholders' equity has decreased since November 30, 1999.
18
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations includes forward-looking statements with
respect to the Company's future financial performance. These forward-looking
statements are subject to various risks and uncertainties, including the factors
described under the caption "Risk Factors" and elsewhere in the Company's
Registration Statement on Form S-1 (file no. 333-47225) effective April 2, 1998
and elsewhere in this Report, that could cause actual results to differ
materially from historical results or those currently anticipated.
RESULTS OF OPERATIONS
OVERVIEW
Somanetics Corporation develops, manufactures and markets the INVOS Cerebral
Oximeter, the only 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, the Company received clearance from the
FDA to market the Cerebral Oximeter and the related disposable SomaSensor in the
United States. In October 1997, the Company obtained FDA clearance for new
advances in its INVOS technology that are incorporated in its model 4100
Cerebral Oximeter. The model 4100 Cerebral Oximeter was introduced in October
1997 and shipments began in the first quarter of fiscal 1998. During the third
quarter of fiscal 1999, the Company introduced its 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, the Company also submitted its 510(k) application to the FDA for the model
5100 Cerebral Oximeter, and is awaiting FDA clearance to market the model 5100
in the United States.
During fiscal 1997, the Company's primary activities consisted of research
and development of the INVOS technology, the Cerebral Oximeter and the related
disposable SomaSensor. During fiscal 1998 and 1999, the Company's primary
activities consisted of sales and marketing of the model 4100 Cerebral Oximeter
and related disposable SomaSensor. The Company emerged from the development
stage in 1997 and had an accumulated deficit of $46,501,659 through November 30,
1999. The Company believes that its accumulated deficit will continue to
increase for the foreseeable future.
The Company derives its revenues from sales of Cerebral Oximeters and
SomaSensors to its distributors and to hospitals in the United States through
its direct sales employees. The Company recognizes revenues when it ships its
product to its distributors or to hospitals. Payment terms are generally net 30
days for United States sales and net 60 days or longer for international sales.
The Company's primary expenses, excluding the cost of its product, are selling,
general and administrative and research, development and engineering, which are
generally expensed as incurred. Since May 1994, the Company has exchanged model
3100A Cerebral Oximeters for its model 3100 Cerebral Oximeters. Until shipments
of the model 4100 Cerebral Oximeter began in the first quarter of fiscal 1998,
the Company refurbished the model 3100 Cerebral Oximeters it received and sold
them approximately at cost in countries that do not require compliance with the
standards met by the model 3100A. During fiscal 1998, the Company offered to
exchange model 4100 Cerebral Oximeters for model 3100A Cerebral Oximeters (which
the Company scraps) and cash equal to the difference in sales prices of the two
models. During the third quarter of fiscal 1999, the Company 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 the Company's average unit
sales price and overall gross margin. Also, during fiscal 1998, the Company
began a no-cap sales program whereby the Company ships the model 4100 Cerebral
Oximeter to the customer at no charge, in exchange for the customer agreeing to
purchase a minimum quantity of SomaSensors, on a monthly basis, at a premium for
a stated period of time.
FISCAL YEAR ENDED NOVEMBER 30, 1999 COMPARED TO FISCAL YEAR ENDED NOVEMBER 30,
1998
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 was primarily attributable 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
19
<PAGE> 21
international sales, from approximately $959,000 in fiscal 1998 to approximately
$1,632,000 in fiscal 1999. The increase in net revenues is primarily
attributable 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 placements 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 the Company's net revenues in fiscal 1999 were export
sales, as 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 comprised approximately 52%, 42%,
3%, 3% and 0%, respectively, of the Company's fiscal year 1999 net revenues, and
61%, 28%, 8%, 0% and 3%, respectively, of the Company's fiscal year 1998 net
revenues. 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, the Company increased the price of both the Cerebral Oximeter and
SomaSensor by 7%. This price increase does not apply to any existing sales
quotations which were issued prior to January 1, 2000.
Gross margin as a percentage of net revenues for the fiscal years ended
November 30, 1999 and 1998 was approximately 52% and 47%, respectively. Gross
margin as a percentage of net revenues increased in fiscal 1999 from fiscal 1998
primarily because of the higher average selling prices realized by the Company
for the model 4100 Cerebral Oximeter and the SomaSensor, increased shipments of
the Company's new model SomaSensor, which is less costly to manufacture than old
model SomaSensors, and a smaller percentage of model 4100 exchanges in fiscal
1999, partially offset by the higher percentage of the Company's net revenues
derived from the sale of SomaSensors in fiscal 1999, which still have lower
margins than Cerebral Oximeters.
The Company's 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 attributable to approximately $84,000 in decreased costs associated
with enhancements to the model 4100, and $35,000 in decreased consulting fees,
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 attributable to
a $144,000 increase in salaries, wages, commissions and related expenses
primarily as a result of increased sales commissions paid by the Company to its
sales force during fiscal 1999, and a $69,000 increase in professional service
and investor relations fees, 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
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 was primarily attributable 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.
The increase in net revenues is primarily attributable 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 (i) a change in the mix between sales directly to hospitals and
sales through distributors and (ii) the higher price of the new model 4100
Cerebral Oximeter, partially offset by 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.
20
<PAGE> 22
Approximately 39% of the Company's net revenues in fiscal 1998 were export
sales, as 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 comprised
approximately 61%, 8%, 3% and 28%, respectively, of the Company's fiscal year
1998 net revenues, and 0%, 10%, 60% and 30%, respectively, of the Company's
fiscal year 1997 net revenues. One United States distributor accounted for
approximately 10% of net revenues for fiscal year 1998; however, this
distributor relationship was terminated during the third quarter of fiscal 1998
as part of the Company's planned expansion of the direct sales force within
several domestic territories. Two international distributors and one domestic
distributor accounted for approximately 28%, 11%, and 12%, respectively, of net
revenues for fiscal year 1997.
Gross margin as a percentage of net revenues for the fiscal years ended
November 30, 1998 and 1997 was approximately 47% and 48%, respectively. Gross
margin as a percentage of net revenues decreased in fiscal 1998 from fiscal 1997
primarily because of the higher cost to the Company of the model 4100 Cerebral
Oximeter as compared to the cost of the model 3100A and refurbished model 3100,
no-cap sales shipments for 1998, and the higher cost to the Company of the
SomaSensor in fiscal 1998. This decrease was partially offset by the higher
average selling price realized in fiscal 1998 by the Company for the new model
4100 Cerebral Oximeter and SomaSensor.
The Company's 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 attributable to approximately $118,000 in consulting fees and costs
of development materials in fiscal 1997 in connection with the model 4100
Cerebral Oximeter, partially offset by an increase of approximately $38,000
related to development materials and costs associated with the Company's 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 attributable to
(i) 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 (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 (ii) 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 (i) a $432,000 decrease in
miscellaneous expense primarily related to inventory obsolescence reserves
recorded during the third and fourth quarters of fiscal 1997, (ii) a $188,000
decrease in professional service fees and regulatory certification fees, (iii) a
$176,000 decrease in bad debts expense primarily related to reserves recorded
during the fourth quarter of fiscal 1997, and (iv) a $68,000 decrease in
clinical research expenses for fiscal 1998.
EFFECTS OF INFLATION
The Company does not believe that inflation has had a significant impact on
its financial position or results of operations in the past three years.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during fiscal 1999 was approximately $4,500,000.
Cash was used primarily to (i) fund the Company's net loss, including selling,
general and administrative expenses and research, development and engineering
expenses (approximately $4,531,000, net of depreciation and amortization
expense), (ii) increase accounts receivable (approximately $148,000) primarily
due to higher sales in the fourth quarter of fiscal 1999 than in the fourth
quarter of fiscal 1998, and (iii) decrease accrued liabilities (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 as a result of the
Company delaying 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. Management expects working capital requirements to
increase if sales increase. The Company capitalized approximately $179,000 of
costs for model 4100 Cerebral
21
<PAGE> 23
Oximeters being used as demonstration units and no-cap units during fiscal 1999,
compared to approximately $374,000 in fiscal 1998. The Company expects 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 (approximately
$161,000) primarily for (i) model 4100 demonstration units and no-cap units
(approximately $179,000), and (ii) tooling to manufacture the model 4100 and
5100 Cerebral Oximeter and for the Company's new sensor (approximately $44,000).
The Company disposed of approximately $148,000 in obsolete assets during fiscal
1999; these assets were fully depreciated and had no book value.
The Company's principal sources of operating funds have been the proceeds of
equity investments from sales of the Company's Common Shares. See Statements of
Shareholders' Equity of the Company's Financial Statements included in Item 8 of
this Report. 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 expenses of the offering, were approximately $9,100,000.
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.
As of 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.
The Company expects that its primary needs for liquidity in fiscal 2000 will
be (i) to fund its losses and sustain its operations, including funding (a)
marketing costs for the Cerebral Oximeter; and (b) research and development
efforts related to product-line extensions of the Cerebral Oximeter for use on
newborns, other non-cerebral tissue applications, and enhancements to the
Cerebral Oximeter and SomaSensor; and (ii) for working capital, including
increased accounts receivable and inventories of components and sales units to
satisfy expected sales orders. In addition, management has budgeted
approximately $158,000 for capital expenditures during fiscal 2000, primarily
for new demonstration equipment and manufacturing tooling for the Cerebral
Oximeter and SomaSensor.
The Company believes that 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 need 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 Cerebral Oximeter for use
on newborns, other non-cerebral 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.
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, 2001. These
22
<PAGE> 24
warrants were issued in the Company's 1995 and 1996 Regulation S securities
offerings. The conditions permitting the Company to redeem these warrants have
not been met as of February 15, 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. It is unlikely that these warrants will be
exercised if the exercise price exceeds the market price of the Common Shares.
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.
The Company's only current loan commitment is described above.
There can be no assurance that even if the Company receives additional
capital, it will be able to achieve the level of sales necessary to sustain its
operations. There can be no assurance that the Company will be able to obtain
any funds on terms acceptable to the Company and at times required by the
Company through sales of the Company's products, sales of securities or loans in
sufficient quantities. The report of the Company's Independent Auditors contains
an explanatory paragraph relating to the uncertainty concerning the Company's
ability to continue as a going concern. See "Independent Auditors Report"
accompanying the Financial Statements in Item 8 of this Report.
The Company's ability to use its accumulated net operating loss
carryforwards to offset future income, if any, for income tax purposes, is
limited due to the initial public offering of its securities in March 1991. See
Note 6 of Notes to Financial Statements included in Item 8 of this Report.
23
<PAGE> 25
24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Company's financial
instruments that are sensitive to changes in interest rates, consisting of
investments in corporate bonds and other fixed income securities. For these
financial instruments, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates. Weighted average
variable rates are based on current rates. Weighted average fixed rates are
based on the contract rates. The actual cash flows of all instruments are
denominated in U.S. dollars. The Company invests its cash on hand not needed in
current operations in fixed income securities generally maturing within one year
from the date of acquisition.
NOVEMBER 30, 1999
EXPECTED MATURITY DATES
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
MARKETABLE SECURITIES:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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>
NOVEMBER 30, 1998
EXPECTED MATURITY DATES
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
MARKETABLE SECURITIES:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term Debt:
Fixed Rate ($)............. $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, the Company liquidated some of its investments in
corporate bonds and other fixed income securities to provide cash to finance its
operations. It liquidated fixed rate securities first because their market value
approximated their cost.
24
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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. Our audits also included the financial
statement schedule listed in the index at Item 14. These financial statements
and the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule 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. Also, 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.
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.
/s/ DELOITTE & TOUCHE LLP
- ---------------------------------
DELOITTE & TOUCHE LLP
Detroit, Michigan
January 24, 2000
25
<PAGE> 27
SOMANETICS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
November 30,
----------------------------------------
ASSETS 1999 1998
------------------ ----------------
<S> <C> <C>
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,
1999 and 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
26
<PAGE> 28
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
27
<PAGE> 29
SOMANETICS CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL UNREALIZED TOTAL
SHARE PAID-IN ACCUMULATED LOSSES ON SHAREHOLDERS' COMPREHENSIVE
VALUE CAPITAL DEFICIT INVESTMENTS EQUITY INCOME
----- ---------- ----------- ----------- ------------ -------------
<S> <C> <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) $ (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) (5,469,832)
Unrealized losses on investments....... (96,262) (96,262) (96,262)
------------
Comprehensive income................. $ (5,566,094)
-------- ------------ ------------ ----------- ------------ ============
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) (4,665,291)
Unrealized losses on investments....... (70,008) (70,008) (70,008)
------------
Comprehensive income................. $ (4,735,299)
-------- ------------ ------------ ----------- ------------ ============
Balance at November 30, 1999............ $ 60,356 $ 50,290,067 $(46,501,659) $ (166,270) $ 3,682,494
======== ============ ============ =========== ============
</TABLE>
See notes to financial statements
28
<PAGE> 30
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
29
<PAGE> 31
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.
30
<PAGE> 32
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 Cerebral Oximeter for use
on newborns, other non-cerebral 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
31
<PAGE> 33
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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, 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 (i)
effect a one-for-ten reverse stock split of the Company's Common Shares while
keeping 6,000,000 authorized Common Shares, at a par value of $0.01, and (ii)
remove provisions relating to the Convertible Preferred Shares redeemed February
28, 1996, all subject to shareholder approval at the 1997 Annual Meeting of
Shareholders. The Company's shareholders approved such amendment and restatement
at the 1997 Annual Meeting of Shareholders on March 25, 1997, and the reverse
stock split became 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 (i)
increase the Company's authorized Common Shares from 6,000,000 to 20,000,000
shares, and (ii) remove provisions referring to the reverse stock split 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.
32
<PAGE> 34
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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.
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
33
<PAGE> 35
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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>
34
<PAGE> 36
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
6. INCOME TAX
Deferred income taxes reflect the estimated future tax effect of (i)
temporary differences between the amount of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and regulations and
(ii) net operating loss and tax credit carryforwards. The Company's deferred tax
assets primarily represent the tax benefit of net operating loss carryforwards
and research and general business tax credit carryforwards. The Company had
deferred tax assets of approximately $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.
35
<PAGE> 37
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 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
36
<PAGE> 38
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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:
<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.
37
<PAGE> 39
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 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.
38
<PAGE> 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
39
<PAGE> 41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 regarding executive officers of
the Company is included in the Supplemental Item in Part I of this Report, and
is incorporated in this Item 10 by reference. The information required by this
Item 10 regarding directors of the Company will be set forth under the caption
"Election of Directors" in the Company's Proxy Statement in connection with the
2000 Annual Meeting of Shareholders scheduled to be held April 18, 2000, and is
incorporated in this Item 10 by reference. The information required by this Item
10 concerning compliance with Section 16(a) of the Securities Exchange Act of
1934 will be set forth under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement in connection with the
2000 Annual Meeting of Shareholders scheduled to be held April 18, 2000, and is
incorporated in this Item 10 by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 concerning executive compensation
will be set forth under the caption "Executive Compensation" in the Company's
Proxy Statement in connection with the 2000 Annual Meeting of Shareholders
scheduled to be held April 18, 2000, and is incorporated in this Item 11 by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 concerning security ownership of
certain beneficial owners and management will be set forth under the captions
"Voting Securities and Principal Holders" and "Election of Directors" in the
Company's Proxy Statement in connection with the 2000 Annual Meeting of
Shareholders scheduled to be held April 18, 2000, and is incorporated in this
Item 12 by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 concerning certain relationships
and related transactions, if any, will be set forth under the caption "Certain
Transactions" or "Compensation Committee Interlocks and Insider Participation"
in the Company's Proxy Statement in connection with the 2000 Annual Meeting of
Shareholders scheduled to be held April 18, 2000, and is incorporated in this
Item 13 by reference.
40
<PAGE> 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following financial statements of the Company are included in
response to Item 8 of this Report:
Independent Auditors' Report
Balance Sheets - November 30, 1999 and 1998
Statements of Operations - For Each of the Three Years in the
Period Ended November 30, 1999
Statements of Shareholders' Equity - For Each of the Three Years
in the Period Ended November 30, 1999
Statements of Cash Flows - For Each of the Three Years in the
Period Ended November 30, 1999
Notes to Financial Statements
(2) Financial Statement Schedule
The following financial statement schedule of the Company is included
in response to Item 8 of this Report:
Schedule II - Valuation and Qualifying Accounts and Reserves for
the Years Ended November 30, 1999, 1998 and 1997.
(3) Exhibits
The Exhibits to this Report are as set forth in the "Index to
Exhibits" on pages 44 to 47 of this Report. Each management contract
or compensatory plan or arrangement filed as an exhibit to this Report
is identified in the "Index to Exhibits" with an asterisk before the
exhibit number.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter
of the fiscal year ended November 30, 1999.
41
<PAGE> 43
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> <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
42
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Somanetics Corporation
Date: February 23, 2000 By: /s/ Bruce J. Barrett
--------------------
Bruce J. Barrett
President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Bruce J. Barrett President and Chief Executive Officer February 23, 2000
- ---------------------- and a Director (Principal Executive
Bruce J. Barrett Officer and Principal Financial
Officer)
/s/ H. Raymond Wallace Chairman of the Board of Directors February 23, 2000
- ------------------------
H. Raymond Wallace
/s/ William M. Iacona Corporate Controller (Principal February 23, 2000
- ----------------------- Accounting Officer)
William M. Iacona
/s/ Daniel S. Follis Director February 23, 2000
- ----------------------
Daniel S. Follis
/s/ James I. Ausman Director February 23, 2000
- ---------------------
James I. Ausman, M.D., Ph.D.
/s/ Robert R. Henry Director February 23, 2000
- ---------------------
Robert R. Henry
/s/ A. Brean Murray Director February 23, 2000
- ---------------------
A. Brean Murray
</TABLE>
43
<PAGE> 45
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.
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.
*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.
44
<PAGE> 46
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- ----------------------------------------------------------------------
*10.16 Somanetics Corporation 2000 Employee Incentive Compensation Plan.
*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.
45
<PAGE> 47
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- ----------------------------------------------------------------------
*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.
*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 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).
46
<PAGE> 48
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- ----------------------------------------------------------------------
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 Form of Warrant, between Somanetics Corporation and purchasers of
Units in the 1995 Regulation S Offering, incorporated by reference to
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 31, 1995.
10.43 Warrant Agreement, dated as of July 14, 1995, between Somanetics
Corporation and Rauscher Pierce & Clark Limited, incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on Form
10-Q for the quarter ended August 31, 1995.
10.44 Warrant to Purchase Common Stock of Somanetics Corporation, dated as
of July 14, 1995, between Somanetics Corporation and Rauscher Pierce &
Clark Limited, incorporated by reference to Exhibit 10.6 to the
Company's Quarterly Report on Form 10-Q for the quarter ended August
31, 1995.
10.45 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.
10.46 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.
10.47 Warrant to Purchase Common Stock of Somanetics Corporation, dated as
of April 2, 1996, between Somanetics Corporation and Rauscher Pierce &
Clark Limited, incorporated by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarter ended February
29, 1996.
10.48 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 Commisiion on May 30, 1997.
10.49 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.
10.50 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.
10.51 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.
27.1 Financial data Schedule.
47
<PAGE> 1
EXHIBIT 10.14
THIRD AMENDMENT TO
SOMANETICS CORPORATION
1997 STOCK OPTION PLAN
WHEREAS, SOMANETICS CORPORATION, a Michigan Corporation (the
"Company"), has previously adopted the Somanetics Corporation 1997 Stock Option
Plan (the "Plan");
WHEREAS, pursuant to Paragraph 18 of the Plan, the Company's Board of
Directors has retained right to amend the Plan; and
WHEREAS, the Company's Board of Directors now desires to amend the
Plan.
NOW THEREFORE IN CONSIDERATION of the premises and by resolution of the
Company's Board of Directors, the Plan is hereby amended as follows:
1. The first paragraph of Paragraph 5 is amended to read as follows:
"5. Maximum Number of Shares Subject to Plan: The maximum
number of shares with respect to which stock options may be granted under the
Plan shall be an aggregate of 1,335,000 Common Shares, which may consist in
whole or in part of the authorized and unissued or reacquired Common Shares.
Unless the plan shall have been terminated, shares covered by the unexercised
portion of canceled, expired or otherwise terminated options under the Plan
shall again be available for option and sale."
Dated: February 16, 2000
<PAGE> 1
EXHIBIT 10.16
2000 INCENTIVE COMPENSATION PLAN
PURPOSE: The purpose of the 2000 Incentive Compensation Plan is to
motivate and retain Officers and employees in order to maximize the performance
of the Company against pre-defined operating objectives.
BACKGROUND: Somanetics pursues a compensation program that includes salary,
incentive compensation, stock options and standard benefits (e.g. health
insurance) to achieve a market competitive package to attract, motivate and
retain key Officers and employees. The Incentive Compensation Plan is a core
component of the overall compensation package for Somanetics Officers and
employees and has been offered since 1996. The program affords the Officers and
employees the opportunity to be financially rewarded based on actual results and
affords the Company the benefit of conserving cash when business objectives are
not achieved.
PLAN SUMMARY: All Officers and non-commissioned, non-manufacturing, full-time
employees participate in the 2000 Incentive Compensation Plan. Potential
incentive compensation under the Plan is based on each participant's position,
salary level, individual performance against pre-defined objectives and Company
performance against pre-defined objectives. One half of actual incentive
compensation is paid quarterly based on year-to-date sales results versus the
2000 Sales Plan and the remaining one half is paid at the end of the fiscal year
based on performance against a variety of pre-defined individual and Company
objectives. New Officers and employees will be considered for participation at
the discretion of the President and/or the Compensation Committee.
PLAN DETAIL:
PLAN A: All Officers and non-commissioned, non-manufacturing, full-time
employees participate in Plan A of the program. This portion of the Plan
represents 50% of the incentive compensation potential for participants. The
basis for incentive compensation for this portion of the program is the
Company's year-to-date results versus the 2000 Sales Plan evaluated quarterly.
In the event that year-to-date performance versus the 2000 Sales Plan is less
than 85%, no payment is made under this portion of the Plan. Actual payment, if
any, is made in the month following the completion of each fiscal quarter,
except for payment relating to sales greater than 100% to Plan. Over
achievement, if any, is measured and paid at year-end.
PLAN B. Officers and eligible employees who do not participate in Plan
C participate in Plan B of the program. This portion of the Plan represents the
other 50% of the incentive compensation potential for these participants. The
basis for incentive compensation for this portion of the program is the
individual's performance and the Company's performance versus the 2000 Sales
Plan and company objectives. An individual must achieve at least 50% of their
objectives to be considered for any incentive compensation under this portion of
the Plan. To the extent that actual sales results are at least 85% to the 2000
Sales Plan and the company achieves its year-end company objectives, individuals
receive incentive compensation in relation to their achievement of pre-defined
individual objectives. Measurement, and actual payment, if any, is made at
year-end.
PLAN C. Employees who participate in Plan A, but do not participate in
Plan B, participate in Plan C (Vice Presidents of R&D, Operations and Medical
Affairs, and Engineering department employees). This portion of the Plan
represents the other 50% of the incentive compensation potential for these
participants. The basis for incentive compensation for this portion of the
program is the individual's performance against pre-defined objectives. An
individual must achieve at least 50% of individual objectives to be considered
for any incentive compensation under this portion of the Plan. Measurement, and
actual payment, if any, is made at year-end.
<PAGE> 2
2000 INCENTIVE COMPENSATION PAYMENT CALCULATIONS
PLAN A: QUARTERLY PAYMENT
YTD% TO SALES PLAN X FACTOR X SALARY X RATE X .125
FACTOR DETERMINATION:
% TO SALES PLAN FACTOR
--------------- ------
less than 85% 0
85% to 90% .5
90% to 95% .75
95% to 100% .9
100%+ 1.0
PLAN B: YEAR-END PAYMENT
%GOALS X SALARY X RATE X %SALES PLAN X %PROFITS PLAN X .5
PLAN C: YEAR-END PAYMENT
%GOALS X SALARY X RATE X .5
Note: The President and/or the Compensation Committee reserve the right to
adjust actual incentive compensation paid to individuals under Plan B or Plan C
by +/- 25%.
<PAGE> 3
PROGRAM ADMINISTRATION GUIDELINES
- - This Plan shall be administered by the Company's Compensation Committee,
which is authorized to interpret this Plan, to make, amend and rescind
rules and regulations relating to this Plan, to make awards under this
Plan, and to make all other determinations under this Plan necessary or
advisable for its administration.
- - All determinations, interpretations and constructions made by the
Compensation Committee shall be final and conclusive.
- - The Board reserves the right to pay bonuses to participants beyond those,
if any, called for by the Plan.
- - Rights under this Plan may not be transferred, assigned or pledged.
- - Nothing in this Plan confers any participant any right to continued
employment and does not interfere with the Company's right to terminate an
employee's employment.
- - Revenue and net income will be as reported in the Company's Form 10-Q and
10-K.
- - An Officer, or employee, must be a full-time employee in good standing at
the time of actual payment in order to receive any payment under the Plan.
No payment will be made to any person who leaves the full-time employ of
the Company before the payment date. And, no payment will be made to any
person who is subject to a formal, written performance action plan.
- - Any over achievement payment earned due to actual revenue exceeding Plan
revenue will be paid after the end of the fiscal year based on final
year-end sales results versus the 2000 Sales Plan.
- - Officer, or employee, participation in this Plan will be suspended during
periods of sick days beyond the allowable amount, long-term disability
periods, or any other extended leave of absence. Actual payment reductions
and/or discontinuation of participation in the program for the remainder of
the fiscal year will be at the discretion of the President and/or the
Compensation Committee.
- - Earned payments under Plan A, except for payments relating to over
achievement, are intended to be paid after the close of each fiscal quarter
based on year-to-date performance versus the 2000 Sales Plan. Payments
under Plan B and Plan C, and any over achievement relating to Plan A, shall
be paid at year-end. In either case, actual payment will be made as soon as
practicable after sales and net income are determined and the payment
confirmed by the Compensation Committee.
- - Payments under Plan A will be made for "catching up" on a year-to-date
basis. For example, if the Company finishes the first quarter below Plan,
participants can recoup their full first quarter bonus not earned at the
conclusion of the first quarter by "catching up" by the end of the second
quarter.
- - The year-end NOL Plan must be achieved in order for year-end payments to be
made to participants.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-93538, 33-41453, 33-48646, 33-77080, 333-4620, 333-31753, 333-59547 and
333-80071 on Forms S-8 of Somanetics Corporation of our report dated January 24,
2000 (which expresses an unqualified opinion and includes an explanatory
paragraph relating to an uncertainty concerning the Company's ability to
continue as a going concern), appearing in this Annual Report on Form 10-K of
Somanetics Corporation for the year ended November 30, 1999.
/S/DELOITTE & TOUCHE LLP
- ------------------------
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 23, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SOMANETICS CORPORATION AS OF, AND FOR THE FISCAL YEAR
ENDED, NOVEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-1-1998
<PERIOD-END> NOV-30-1999
<CASH> 1,423,423
<SECURITIES> 833,736
<RECEIVABLES> 764,153
<ALLOWANCES> 0
<INVENTORY> 611,332
<CURRENT-ASSETS> 3,722,346
<PP&E> 1,746,353
<DEPRECIATION> 1,097,695
<TOTAL-ASSETS> 4,444,397
<CURRENT-LIABILITIES> 761,903
<BONDS> 0
0
0
<COMMON> 60,356
<OTHER-SE> 3,622,138
<TOTAL-LIABILITY-AND-EQUITY> 4,444,397
<SALES> 4,000,972
<TOTAL-REVENUES> 4,000,972
<CGS> 1,905,541
<TOTAL-COSTS> 1,905,541
<OTHER-EXPENSES> 7,033,976
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,665,291)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,665,291)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,665,291)
<EPS-BASIC> (.77)
<EPS-DILUTED> (.77)
</TABLE>
