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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, 2001 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
SOMANETICS CORPORATION
(Exact name of Registrant as specified in its charter)
MICHIGAN 38-2394784
(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)
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
(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 ___
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. [ ]
The aggregate market value of the common shares held by non-affiliates of the
Registrant as of February 13, 2002, computed by reference to the closing sale
price as reported by Nasdaq on such date, was approximately $33,702,000.
The number of the Registrant's common shares outstanding
as of February 13, 2002 was 9,075,055
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2002 Annual Meeting of Shareholders,
scheduled to be held April 17, 2002, are incorporated by reference in Part III,
if the Proxy Statement is filed no later than March 30, 2002.
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SOMANETICS CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2001
TABLE OF CONTENTS
PART I
PAGE
Item 1. Business .................................................................................... 2
Item 2. Properties.................................................................................... 21
Item 3. Legal Proceedings............................................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders........................................... 21
Supplemental Item. Executive Officers of the Registrant................................................... 22
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters......................... 24
Item 6. Selected Financial Data....................................................................... 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 26
Item 7A Quantitative and Qualitative Disclosures About Market 33
Risk.........................................
Item 8. Financial Statements and Supplementary Data................................................... 34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 49
PART III
Item 10. Directors and Executive Officers of Registrant................................................ 50
Item 11. Executive Compensation........................................................................ 50
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 50
Item 13. Certain Relationships and Related Transactions................................................ 50
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 51
PART I
ITEM 1. BUSINESS
THE COMPANY
We were incorporated in 1982, and we develop, manufacture and market
the INVOS(R) Cerebral Oximeter, the only non-invasive patient monitoring system
commercially available in the United States that continuously measures changes
in the blood oxygen level in the brain. We are also developing the
CorRestore(TM) System for use in cardiac repair and reconstruction, including
heart surgeries called surgical ventricular restoration, or SVR. We developed
the Cerebral Oximeter to meet the need for information about oxygen in the
brain, the organ least tolerant of oxygen deprivation. Without sufficient
oxygen, brain damage may occur within a few minutes, which can result in
paralysis, severe and complex disabilities or death. Brain oxygen information,
therefore, is important, especially in surgical procedures requiring general
anesthesia and in other critical care situations with a high risk of the brain
getting less oxygen than it needs. We target surgical procedures with a high
risk of brain oxygen imbalances, such as heart surgeries, heart blood vessel
surgeries, other blood vessel surgeries and surgeries involving elderly
patients. Surgeons, anesthesiologists and other medical professionals use the
Cerebral Oximeter to identify brain oxygen imbalances and take corrective
action, potentially improving patient outcome and reducing the cost of care.
The Cerebral Oximeter is a relatively inexpensive, portable and
easy-to-use monitoring system placed at a patient's bedside in hospital critical
care areas, especially operating rooms, recovery rooms, intensive care units and
emergency rooms. It is comprised of
- a portable unit including a computer and a display monitor,
- dual single-use, disposable sensors, called SomaSensors(R),
- proprietary software, and
- a preamplifier cable.
SomaSensors can be placed on both sides of a patient's forehead to offer
bi-lateral monitoring and are connected to the computer through the preamplifier
cable. The computer uses our proprietary software to analyze information
received from the SomaSensors and provides a continuous digital and trend
display on the monitor of an index of the oxygen saturation in the area of the
brain under the SomaSensors. Users of the Cerebral Oximeter will be required to
purchase disposable SomaSensors on a regular basis because of their single-use
nature. We began shipping the model 4100 Cerebral Oximeter in the first quarter
of fiscal 1998. During the third quarter of fiscal 1999, we introduced our new
model 5100 Cerebral Oximeter at an international trade show, and began
international shipments of the model 5100 in August 1999. The model 5100
Cerebral Oximeter has the added capability of being able to monitor pediatric
patients. In September 2000, we received clearance from the FDA to market the
model 5100 Cerebral Oximeter in the United States.
Our objective is to establish the Cerebral Oximeter as a standard of
care in surgical procedures requiring general anesthesia and in other critical
care situations.
We are developing the CorRestore System, which includes a new cardiac
implant designed by CorRestore LLC, for use in cardiac repair and
reconstruction, including heart surgeries called surgical ventricular
restoration, or SVR. During SVR, the surgeon restores an enlarged, poorly
functioning left ventricle to more normal size and function by inserting an
implant, in most instances, or closing the defect directly. We entered into a
License Agreement as of June 2, 2000 giving us worldwide, royalty-bearing
licenses to specified rights relating to the CorRestore System, subject to the
terms and conditions of the license agreement. In November 2001 we received
clearance from the FDA to market the CorRestore patch in the United States. Our
objective is to obtain regulatory clearances or approvals necessary to market
the CorRestore System outside the United States and to have the system used in
SVR surgeries. Our initial target market is SVR surgeries on patients with
dilated ischemic cardiomyopathy due to a previous myocardial infarction
involving the anterior wall of the ventricle. Ischemic cardiomyopathy is a
damaged heart muscle caused by the obstruction of the inflow of blood from the
arteries, resulting in an enlarged ventricle. Myocardial infarction is the death
of an area of the middle muscle layer in the heart wall.
2
MARKET OVERVIEW
INDUSTRY BACKGROUND
The brain is the human organ least tolerant of oxygen deprivation.
Without sufficient oxygen, brain damage may occur within a few minutes, which
can result in paralysis, severe and complex disabilities, or death. Undetected
brain hypoxia, which is the insufficiency of oxygen delivery, and ischemia,
which is tissue oxygen starvation due to the obstruction of the inflow of
arterial blood, are common causes of brain damage and death during and after
many surgical procedures and in other critical care situations. A December 1996
article in The New England Journal of Medicine and a March 1998 article in The
Lancet reported separately on the results of multi-center studies involving
surgeries. The New England Journal of Medicine article concluded that adverse
cerebral outcomes after coronary artery bypass graft surgery are relatively
common and serious and are associated with substantial increases in death,
length of hospitalization and use of intermediate- or long-term care facilities.
Adverse cerebral outcomes occurred in 6.1% of the patients included in the
study. The Lancet article reported that approximately 26% of patients over age
60 who had major abdominal or orthopedic surgery under general anesthesia
experienced a neurological injury. Additional studies have estimated that a
higher percentage of patients experience some neurological decline after heart
surgery and that insufficient oxygen delivery to the brain is a frequent cause
of this problem. The Lancet article reported that injured patients require more
assistance with everyday actions, and The New England Journal of Medicine
article further concluded that new diagnostic and therapeutic strategies must be
developed to lessen these injuries.
Oxygen is carried to the brain by hemoglobin in the blood. Hemoglobin
passes through the lungs, bonds with oxygen and is pumped by the heart through
arteries and capillaries to the brain. Brain cells extract the oxygen and the
blood carries away carbon dioxide through the capillaries and veins back to the
lungs. Brain oxygen imbalances can be caused by several factors, including
changes in oxygen saturation, which is the percentage of hemoglobin contained in
a given amount of blood which carries oxygen, in the arteries, blood flow to the
brain, hemoglobin concentration and oxygen consumption by the brain.
Brain oxygen information is important in surgical procedures requiring
general anesthesia, in other critical care situations with a high risk of brain
oxygen imbalances, as well as in the treatment of patients with head injuries or
strokes. These procedures include
- heart surgeries,
- heart blood vessel surgeries,
- other blood vessel surgeries,
- surgeries involving elderly patients,
- any neurosurgery,
- major surgeries involving the neck,
- transplant surgeries,
- treatment of patients with diseases resulting from high blood
pressure,
- lung problems,
- head, organ or heart injuries, and
- treatment of patients suffering from strokes.
These patients are most commonly found in operating rooms as well as in the
other critical care areas of hospitals, especially recovery rooms, intensive
care units and emergency rooms. We believe that medical professionals need
immediate and continuous information about changes in the oxygen levels in the
blood in the brain to identify brain oxygen imbalances. After they are alerted
to these imbalances, medical professionals have the information to take
corrective action through the introduction of medications, anesthetic agents or
mechanical intervention, potentially improving patient outcome and reducing the
costs of care. Immediate and continuous information about changes in brain
oxygen levels also provides immediate feedback regarding the adequacy of the
selected therapy. Equally important, without information about brain oxygen
levels, therapy that may not be necessary might be initiated to assure adequate
brain oxygen levels. Unnecessary therapy can have an adverse impact on patient
safety and increase hospital costs.
3
A 1999 independent industry report estimates that there are
approximately 60,000 operating rooms worldwide performing approximately 50
million surgeries involving general anesthesia every year. Industry sources
estimate that, in 1993, there were more than 4.4 million surgeries involving the
heart or the blood vessels around the heart in the United States. Such surgeries
include more than 600,000 open heart surgeries and 89,000 carotid
endarterectomies, which is the removal of blockage in the artery.
Currently, several different methods are used to detect one or more of
the factors affecting brain oxygen levels or the effects of brain oxygen
imbalances. These methods include
- invasive jugular bulb catheter monitoring,
- transcranial Doppler,
- electroencephalograms, or EEGs,
- intracranial pressure monitoring, and
- neurological examination.
These methods have not been widely adopted to monitor brain oxygen levels in
critical care situations for a variety of reasons. The use of any of these
methods is limited because it is either
- expensive,
- difficult or impractical to use as a brain monitor,
- invasive,
- not available under some circumstances, such as when the patient
is unconscious or has suppressed neural activity,
- not able to measure all of the factors that may affect brain
oxygen imbalances,
- not organ specific,
- not able to provide continuous information, or
- able to measure only the effects of brain oxygen imbalances.
Arterial oxygen saturation is only one of the factors that can affect
oxygen imbalances in the brain. Pulse oximetry measures oxygen saturation in the
arteries. It is non-invasive, uses optical spectroscopy and has become a
standard of care for measuring arterial oxygen saturation in critical care
situations. However, pulse oximeters require a strong pulse, making them
unavailable during bypass surgeries, surgeries involving induced hypothermia or
any other time the patient does not have a strong peripheral pulse. Pulse
oximeters provide information about the oxygen saturation of the arteries in a
finger or earlobe, not oxygen imbalances in the brain. Changes in the oxygen
balance in the brain may not have any affect on the oxygen levels in a finger or
earlobe. For example, a blocked artery to the brain would affect oxygen in the
brain, but would not affect the amount of oxygen in the arteries in the finger.
The Cerebral Oximeter is the only non-invasive monitoring system
commercially available in the United States that provides continuous information
about changes in the blood oxygen level in the brain. It is easy to use and
relatively inexpensive and provides medical professionals with new information
to help them identify brain oxygen imbalances. This information may help medical
professionals intervene in a timely manner to correct brain oxygen imbalances,
provide feedback regarding the adequacy of the selected therapy and provide
medical professionals with additional assurance when they make decisions
regarding the need for therapy, thereby potentially improving patient outcome
and reducing the cost of care.
MARKET TRENDS
We believe the market for our products is driven by the following
market trends:
Less Invasive Medical Procedures. We believe there is a trend toward
less invasive medical procedures. Notable examples include laparoscopic
procedures in general surgery and arthroscopic procedures in orthopedic surgery.
Such procedures are designed to reduce trauma, thereby decreasing complications,
reducing pain and suffering, speeding recovery and decreasing costs associated
with patient care. We also believe that there is a trend
4
to minimize invasive procedures relating to the brain to increase the safety of
patients and medical professionals, reduce recovery time and minimize costs.
Demand to Reduce Health Care Costs. Hospitals in the United States are
increasingly faced with direct economic incentives to control health care costs
through improved labor productivity, shortened hospital stays and more selective
performance of medical procedures and use of facilities and equipment. Hospitals
often receive a fixed fee from Medicare, managed care organizations and private
insurers based on the disease diagnosed, rather than based on the services
actually performed. Therefore, hospitals are increasingly focused on avoiding
unexpected costs, such as those associated with increased hospital stays
resulting from patients with brain damage or other adverse outcomes following
surgery. This focus on avoiding unexpected costs is especially pronounced in the
operating room and other hospital critical care areas due to their high
operating costs. The economic and human costs of brain damage can be tremendous.
Even short extensions of hospital stays resulting from brain damage can be
expensive. In addition, over-treating a patient as a result of lack of knowledge
about brain oxygen levels can result in unnecessary costs.
Organ-Specific Monitoring; Current Emphasis on the Brain. We believe
that physicians and hospitals are increasingly interested in monitoring the
status of specific organs in the body, especially the brain. We also believe
there is an increased interest in understanding how the brain functions and in
finding ways to prevent injury to the brain and finding cures to diseases
affecting the brain. We believe that this interest has led to a greater focus on
monitoring the brain, both to determine how it functions and to monitor the
effects of various actions on the brain.
Aging Population. According to the Administration on Aging, United
States Department of Health and Human Services, approximately 33.5 million
persons in the United States were age 65 or older in 1995, representing 13% of
the population. The number of Americans age 65 or older increased by
approximately 2.3 million, or 7%, between 1990 and 1995, compared to an increase
of 5% for the under-65 population. The Administration on Aging predicts that the
number of Americans age 65 or older will increase to approximately 39.4 million
by the year 2010 and to approximately 69.4 million by the year 2030. We believe
that older patients require a higher level of medical care using more procedures
in which the patient or the procedure involves a risk of brain oxygen
imbalances.
BUSINESS STRATEGY
Our objective is to establish the Cerebral Oximeter as a standard of
care in surgical procedures requiring general anesthesia and in other critical
care situations. Key elements of our strategy are as follows:
Target Surgical Procedures With a High Risk of Brain Oxygen Imbalances.
We target surgical procedures with a high risk of brain oxygen imbalances, such
as heart surgeries, heart blood vessel surgeries, other blood vessel surgeries
and surgeries involving elderly patients. We believe that the medical
professionals involved in these surgeries are the most aware of the risks of
brain damage resulting from brain oxygen imbalances. Therefore, we believe that
it will be easier to demonstrate the clinical benefits of the Cerebral Oximeter
and potentially gain market acceptance for our products in connection with these
surgeries.
Demonstrate Clinical Benefits and Promote Acceptance of the Cerebral
Oximeter. We sponsor clinical studies using the Cerebral Oximeter to provide
additional evidence of its benefits. We use the resulting publication of any
favorable peer-reviewed papers to help convince the medical community of the
clinical benefits of the Cerebral Oximeter. We also promote acceptance of the
Cerebral Oximeter in the medical community by encouraging surgeons,
anesthesiologists and nurses in leading hospitals, whose opinions and practices
we believe are valued by other hospitals and physicians, to use the Cerebral
Oximeter on a trial basis. We believe that successful evaluations of the
Cerebral Oximeter by these medical professionals will accelerate the acceptance
of the Cerebral Oximeter by other medical professionals. We are sponsoring
discussions among physicians who have used the Cerebral Oximeter about its
clinical benefits.
Invest in Marketing and Sales Activities. We have established a
distribution network consisting of our direct sales employees, independent sales
representatives and distributors. We invest in our marketing and sales efforts
to increase the medical community's exposure to our INVOS technology and the
Cerebral Oximeter, including continued participation in trade shows and medical
conferences, and ongoing product evaluations. We are marketing our products
through our existing sales force and independent sales representatives and we
leverage our
5
sales resources through the use of our distributors, including Tyco Healthcare
AG, formerly Nellcor Puritan Bennett Export, Inc., in Europe and Baxter Limited
in Japan.
Develop Additional Applications of the Cerebral Oximeter. In September
2000, we received clearance from the FDA to market the model 5100 Cerebral
Oximeter in the United States. The model 5100 Cerebral Oximeter has the added
capability of being able to monitor pediatric patients. Over the longer term, we
expect to focus efforts on developing product-line extensions of the Cerebral
Oximeter for use on newborns and in other non-brain tissue applications. We
believe that these natural extensions of our existing products will increase the
market for the Cerebral Oximeter without the more significant development
efforts required for entirely new products. Research conducted on children has
resulted in a SomaSensor that can fit smaller heads. We believe that
non-invasive monitoring is especially important in this patient population, as
they generally have lower oxygen reserves than adults, have less blood volume
from which to make invasive blood gas measurements and are less tolerant of
painful skin punctures and infections.
License Our Technology to Medical Device Manufacturers. We plan to
license our Cerebral Oximeter technology to other medical device manufacturers
to expand the installed base of Cerebral Oximeters and increase the demand for
SomaSensors. Such a license might be made to a company interested in
incorporating the Cerebral Oximeter into a multi-function monitor. We believe
that such an arrangement could provide another distribution channel for our
Cerebral Oximeter. We, however, have no current commitments for any such
licenses.
PRODUCTS AND TECHNOLOGY
THE CEREBRAL OXIMETER
Our Cerebral Oximeter is the only non-invasive patient monitoring
system commercially available in the United States that provides continuous
information about changes in the blood oxygen level in the brain. It is a
portable and easy-to-use monitoring system that is placed at a patient's bedside
in hospital critical care areas, especially operating rooms, recovery rooms,
ICUs and emergency rooms. Surgeons, anesthesiologists and other medical
professionals use the information provided by the Cerebral Oximeter to identify
brain oxygen imbalances and take corrective action, potentially improving
patient outcome and reducing the cost of care. Once the cause of a cerebral
oxygen imbalance is identified and therapy is initiated, the Cerebral Oximeter
provides immediate feedback regarding the adequacy of the selected therapy. It
can also provide medical professionals with an additional level of assurance
when they make decisions regarding the need for therapy.
Unlike some existing monitoring methods, the Cerebral Oximeter
functions even when the patient is unconscious, lacks a strong peripheral pulse
or has suppressed neural activity. The measurement made by the Cerebral Oximeter
is dominated by the blood in the veins. Therefore, it responds to the changes in
factors that affect the balance between cerebral oxygen supply and demand,
including changes in arterial oxygen saturation, cerebral blood flow, hemoglobin
concentration and cerebral oxygen consumption. The Cerebral Oximeter responds to
global changes in brain oxygen levels and to events that affect the brain oxygen
levels in the region beneath the SomaSensor.
The Cerebral Oximeter monitoring system is comprised of
- a portable unit including a computer and a display monitor,
- dual single-use, disposable sensors, called SomaSensors,
- proprietary software, and
- a preamplifier cable.
SomaSensors can be placed on both sides of a patient's forehead to offer
bi-lateral monitoring and are connected to the computer through the preamplifier
cable. The SomaSensors continuously transmit and receive predetermined
wavelengths of light sent through the scalp, muscle and skull into the brain
tissue. The computer receives the information about the intensity of the light
scattered by the blood and tissue in the area being monitored. The computer uses
our proprietary software to analyze this information and provide a continuous
digital and trend display on the monitor of an index of the oxygen saturation in
the area of the brain under the SomaSensors.
6
The portable unit includes menus that make it easy for users to set
high and low audible alarms, customize the display and retrieve data.
Single-function keys provide a convenient means to turn on the Cerebral
Oximeter, silence alarms, mark important events and print results that can be
stored for up to 24 hours and retrieved by a variety of standard,
commercially-available printers. The model 4100 Cerebral Oximeter measures
approximately 9 inches wide, 8 inches high, and 8 inches deep and weighs
approximately 15 pounds; the model 5100 has the same dimensions.
The suggested list price in the United States for the model 4100
Cerebral Oximeter is $16,995, for the model 5100 Cerebral Oximeter is $24,000,
for the model 4100 SomaSensor is $50.00, and for the model 5100 SomaSensor is
$75.00. Users of the Cerebral Oximeter will be required to purchase disposable
SomaSensors on a regular basis. The SomaSensor may only be used once because
after one use it may become contaminated and we do not warrant its effectiveness
after one use. We provide a one-year warranty on the Cerebral Oximeter, which we
will satisfy by repairing or exchanging those units in need of repair. We also
offer maintenance agreements and service for the Cerebral Oximeter for a fee
after the warranty expires.
The following table summarizes the principal features and related
benefits of the Cerebral Oximeter:
FEATURES BENEFITS
-------- --------
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
OPTICAL SPECTROSCOPY TECHNOLOGY
Our proprietary In Vivo Optical Spectroscopy, or INVOS, technology is
based primarily on the physics of optical spectroscopy. Optical spectroscopy is
the interpretation of the interaction between matter and light. Spectrometers
and spectrophotometers function primarily by shining light through matter and
measuring the extent to which the light is transmitted through, or scattered or
absorbed by, the matter. Physicians and scientists can use spectrophotometers to
examine human blood and tissue. Although most human tissue is opaque to ordinary
light, some wavelengths penetrate tissue more easily than others. Therefore, by
shining appropriate wavelengths of light into the body and measuring its
transmission, scattering and absorption, or a combination, physicians can obtain
information about the matter under analysis. Optical spectroscopy generates no
ionizing radiation and produces no known hazardous effects.
7
Optical spectroscopy was first used clinically in the 1940s at the
Sloan-Kettering Institute for cancer research. The pulse oximeter uses optical
spectroscopy to determine the oxygen saturation of the blood in the arteries in
peripheral tissue, such as in a finger or an earlobe. By identifying the
hemoglobin and the oxygenated hemoglobin and measuring the relative amounts of
each, oxygen saturation of hemoglobin can be measured. However, optical
spectroscopy was generally not useful when the substances to be measured were
surrounded by, were behind, or were near bone, muscle or other tissue, because
they produce extraneous data that interferes with analysis of the data from the
area being examined.
INVOS TECHNOLOGY
The Cerebral Oximeter is based on our INVOS technology. In 1982, we
began developing a spectroscopic instrument to measure breast tissue
abnormalities. Our first product, the Somanetics INVOS 2100 System, used the
same INVOS technology as the Cerebral Oximeter. Later, we began analyzing the
use of INVOS technology to measure changes in cellular metabolism in the brain.
Early studies conducted with the Henry Ford Neurosurgical Institute demonstrated
the ability of our INVOS technology to make measurements that were highly
correlated to controlled changes in animal brain cell metabolism. In 1988, we
began clinical studies of the Cerebral Oximeter on human patients in operating
rooms, emergency rooms and intensive care units at Henry Ford Hospital and later
at Bowman Gray School of Medicine and Mount Sinai Medical Center.
Like other applications of optical spectroscopy, INVOS analyzes various
characteristics of human blood and tissue by measuring and analyzing
low-intensity visible and near-infrared light transmitted into portions of the
body. It measures the composition of substances by detecting the effect they
have on light. The INVOS technology measurement is made by transmitting
low-intensity visible and near-infrared light through a portion of the body and
detecting the manner in which the molecules of the exposed substance interact
with light at specific wavelengths. INVOS technology detects this interaction by
measuring the intensity of the various wavelengths of light received by light
sensors. By measuring the effect on specific wavelengths of light caused by
oxygenated hemoglobin contained in blood in the region of the brain being
monitored, the Cerebral Oximeter can monitor changes in the approximate oxygen
saturation of the hemoglobin in that region of the brain.
We have developed a method of reducing extraneous spectroscopic data
caused by surrounding bone, muscle and other tissue. This method allows us to
gather information about portions of the body that previously could not be
analyzed using traditional optical spectroscopy. The dual detector design of the
SomaSensor enables us to measure scattered light intensities from the
intermediate tissues of skin, muscle and skull in a separate process. Each
SomaSensor contains two light detectors and a light source. While both detectors
receive similar information about the tissue outside the brain, the detector
further from the light source detects light that has penetrated deeper into the
brain, and, therefore, receives more information specific to the brain than does
the detector closer to the light source. By subtracting the two measurements,
INVOS technology is able to suppress the influence of the tissues outside the
brain to provide a measurement of changes in brain oxygen saturation.
RESEARCH AND DEVELOPMENT
We are currently focusing our research and development efforts on the
advancement of the design and production processes of the Cerebral Oximeter and
SomaSensor. Over the longer term, we expect to focus efforts on developing
product-line extensions of the Cerebral Oximeter for use on newborns, other
non-brain tissue applications, and advancement of the design and production
processes of the Cerebral Oximeter and SomaSensor. In September 2000, we
received clearance from the FDA to market the model 5100 Cerebral Oximeter in
the United States. The model 5100 Cerebral Oximeter has the added capability of
being able to monitor pediatric patients. We have redesigned the SomaSensor for
use on smaller heads. We believe that non-invasive monitoring is especially
important in this patient population, as they generally have lower oxygen
reserves than adults, have less blood volume from which to make invasive blood
gas measurements, and are less tolerant of painful skin punctures and
infections.
We spent $777,974 during fiscal 2001 on research, development and
engineering, $513,816 during fiscal 2000, and $598,348 during fiscal 1999.
8
MARKETING, SALES AND DISTRIBUTION
MARKETING
The Cerebral Oximeter is for use on patients at risk of brain oxygen
imbalances. These patients are most commonly found in operating rooms undergoing
general anesthesia for various surgical procedures as well as in the other
critical care areas of hospitals, especially recovery rooms, intensive care
units and emergency rooms. After the Cerebral Oximeter is accepted in hospitals,
future markets might include free-standing operating rooms, clinics, ambulances
and nursing homes.
We market the Cerebral Oximeter primarily to cardiac, cardiovascular
and vascular surgeons, neurosurgeons and anesthesiologists. We believe that
these specialists are the medical professionals most aware of the risks of brain
damage resulting from brain oxygen imbalances. We and our distributors have
concentrated our sales efforts on the major teaching hospitals in the United
States and selected foreign markets in which we have commenced commercial sales
and on other large United States hospitals, especially those we consider opinion
leaders. In addition, we sponsor discussions among physicians who have used the
Cerebral Oximeter about its clinical benefits.
We believe that favorable peer review is a key element to a product's
success in the medical equipment industry. Accordingly, we support clinical
research programs with third-party clinicians and researchers intended to
demonstrate the need for the Cerebral Oximeter and its clinical benefits with
the specific objective of publishing the results in peer-reviewed journals. The
research primarily consists of studies comparing cerebral oximetry measurements
with objective measures of patient outcome and hospital costs, including patient
length of stay, length of time on the ventilator, and incidence of stroke. In
addition, fully randomized studies are being pursued that investigate the
ability of clinicians to improve patient outcomes and reduce hospital costs by
managing patients based on information provided by the Cerebral Oximeter. We
attend trade shows and medical conferences to introduce and promote the Cerebral
Oximeter and to meet medical professionals with an interest in performing
research and reporting their results in peer-reviewed medical journals and at
major international meetings. For example, a number of intervention outcome
studies were presented in 2001 demonstrating the relationship between monitoring
changes in regional brain blood oxygen saturation and reductions in neurological
complications and hospital length of stay:
- a 286-patient intervention outcome study conducted by Dr. Fun-Sun
Yao, M.D., Professor of Anesthesia, the Weill Medical College of
Cornell University demonstrated that maintaining adequate regional
brain blood oxygen saturation levels during cardiac surgery, by
monitoring with the Cerebral Oximeter and intervening as needed,
resulted in significantly reduced strokes and comas in these
patients. The intervention outcome study results were presented at
the 2001 annual meeting of the American Society of
Anesthesiologists in October 2001. The American Society of
Anesthesiologists considered these results important, and issued a
news release discussing the potential improvements in outcome
through intervention based on information provided by cerebral
oximetry.
- a 340-patient intervention outcome study from the Weill Medical
College of Cornell University demonstrated that maintaining
regional brain blood oxygen saturation at adequate levels during
cardiac surgery, as monitored with the Cerebral Oximeter and
intervening as needed, shortened intensive care unit and hospital
stays on average for these patients. The intervention group had
fewer and, on average, shorter brain blood oxygen desaturation
events and had significantly shorter average ICU and hospital
stays than the control group. On average, ICU stays were shortened
by one and a half days and hospital length of stay was reduced by
about two days. The intervention outcome study results were
presented in May 2001 at the annual meeting of the Society of
Cardiovascular Anesthesiologists in Vancouver.
- a 306-patient intervention outcome study performed at Hackensack
University Medical Center demonstrated that using the Cerebral
Oximeter to guide the management of brain blood oxygen saturation
during cardiac surgery reduced neurological complications, renal
failure and patient hospital length of stay on average for these
patients. Neurological complications were 55 percent lower, and
renal failure, which can be a significant and costly complication
of cardiac surgery, was 45 percent
9
lower in these patients compared to the control group. In
addition, overall hospital average length of stay of monitored
patients was 1.37 days shorter compared to a control group of
cardiac surgery patients operated on at the same time at the
facility. These findings suggest that inadequate brain
oxygenation may be responsible for neurological complications
that are preventable, and preventing these complications could
result in reduced length of stay. The study was presented at the
2001 Outcomes, Cardiac and Vascular Surgery: Neurobehavioral
Assessment, Physiological Monitoring and Cerebral Protective
Strategies meeting.
- a 56-patient study performed at the University of Louisville
Health Science Center reported that brain blood oxygenation, as
monitored by the Cerebral Oximeter, may decline during
cardiopulmonary bypass surgery, even when blood pressure is
considered to be adequate. In one-third of the cases, clinically
significant declines in brain blood oxygenation occurred despite
an apparently adequate blood pressure (mean arterial pressure
above 70 mm Hg). Frequent, temporary decreases in oxygen
saturation of the blood in the brain, as monitored by the Cerebral
Oximeter and confirmed by transcranial Doppler, occurred despite
presumably adequate blood pressure. This suggests that blood
pressure is an incomplete indicator of brain blood oxygenation
during cardiopulmonary bypass surgery. This observation may help
explain the inconsistent association between blood pressure during
an operation and neurological complications after the operation.
These results were presented at the 2001 Annual Meeting of the
American Society of Anesthesiologists.
SALES AND DISTRIBUTION
We sell the Cerebral Oximeter through our direct sales force,
independent sales representatives and independent distributors. In the United
States, we sell the Cerebral Oximeter through our eight direct salespersons, one
clinical specialist and 11 independent sales representatives. Our sales
compensation and incentive plans are designed to motivate our direct sales force
by making half of their targeted compensation dependent on meeting targeted
sales levels. We believe that the minimum selling cycle for new medical devices
is approximately six to nine months.
Internationally, we have distribution agreements with six independent
distributors covering 59 countries for the model 4100 Cerebral Oximeter, and our
distribution agreements with four of those distributors cover 57 countries for
the model 5100 Cerebral Oximeter. Our distributors include Tyco Healthcare AG,
formerly Nellcor Puritan Bennett Export, Inc., part of Tyco International Ltd.,
in Europe, and Baxter Limited in Japan. Our agreement with Tyco Healthcare AG
covers 40 countries for the model 4100 and model 5100 Cerebral Oximeters. In
March 1995, we engaged Baxter Limited as our exclusive distributor in Japan. In
January 1999, the Japanese Ministry of Health and Welfare licensed Baxter
Limited to market the INVOS 4100 Cerebral Oximeter in Japan.
During fiscal 1998, we began a no-cap sales program whereby we ship the
model 4100 Cerebral Oximeter to the customer at no charge, and the customer
agrees to purchase a minimum quantity of SomaSensors, on a monthly basis, at a
premium, for a stated period of time.
We did not have any backlog of firm orders as of January 10, 2002 or as
of January 2, 2001. We generally do not have a backlog of firm orders.
For a description of sales to major customers, see Note 10 of Notes to
Financial Statements included in Item 8 of this Report. Tyco Healthcare AG,
formerly Nellcor Puritan Bennett Export, Inc., was our largest customer in
fiscal 2001 and fiscal 2000, and our distributor in Japan was our largest
customer in fiscal 1999. We are dependent on our sales to Tyco Healthcare AG in
Europe, and the loss of them as a customer would have an adverse effect on our
business, financial condition and results of operations.
Our export sales were approximately $1,595,000 for the fiscal year
ended November 30, 2001, $2,265,000 for the fiscal year ended November 30, 2000,
and $1,632,000 for the fiscal year ended November 30, 1999. 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 4100
exchanges, and SomaSensors, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations."
10
MANUFACTURING
We assemble the Cerebral Oximeter in our facilities in Troy, Michigan,
from components purchased from outside suppliers. We assemble the Cerebral
Oximeter to control its quality and costs and to permit us to make changes to
the Cerebral Oximeter faster than we could if third-parties assembled it. We
believe that each component is generally available from several potential
suppliers. The SomaSensor, the printed circuit boards, other mechanical
components and the unit enclosure are the primary components that must be
manufactured according to specifications provided by us. Although we are
currently dependent on one manufacturer of the SomaSensor, we believe that
several potential suppliers are available to assemble the components of the
Cerebral Oximeter. We would, however, require approximately three to four months
to change SomaSensor suppliers. We do not currently intend to manufacture on a
commercial scale the disposable SomaSensor or the components of the Cerebral
Oximeter.
On June 11, 1998, we received ISO 9001 certification and met the
requirements under the European Medical Device Directive to use the CE Mark,
thereby allowing us to continue to market our products in the European Economic
Community. Our most recent ISO 9001 compliance surveillance audit occurred in
July 2001.
COMPETITION
We do not believe there is currently any direct commercial competition
for the Cerebral Oximeter. We believe, however, that the market for cerebral
oximetry products is in the early stages of its development and, if it develops,
might become highly competitive. We are aware of foreign companies that have
sold products relating to cerebral metabolism monitoring for research or
evaluation.
The medical products industry is characterized by intense competition
and extensive research and development. Other companies and individuals are
engaged in research and development of non-invasive cerebral oximeters, and we
believe there are many other potential entrants into the market. Some of these
potential competitors have well established reputations, customer relationships
and marketing, distribution and service networks, and have substantially longer
histories in the medical products industry, larger product lines and greater
financial, technical, manufacturing, research and development and management
resources than ours. Many of these potential competitors have long-term product
supply relationships with our potential customers. These potential competitors
might develop products that are at least as reliable and effective as our
products, that make additional measurements, or that are less costly than our
products. These potential competitors might be more successful than we are in
manufacturing and marketing their products and might be able to take advantage
of the significant time and effort we have invested to gain medical acceptance
of cerebral oximetry. In addition, two patents issued to an unaffiliated third
party and relating to cerebral oximetry expired in 2000, one patent issued to an
unaffiliated third party and relating to cerebral oximetry expired in 1999, and
two patents issued to an unaffiliated third party and relating to cerebral
oximetry expired in 1998. These expiring patents will make that technology
generally available and potentially help the development of competing products.
See "Market Overview."
We also compete indirectly with the numerous companies that sell
various types of medical equipment to hospitals for the limited amount of
funding allocated to capital equipment in hospital budgets. The market for
medical products is subject to rapid change due to an increasingly competitive,
cost-conscious environment and to government programs intended to reduce the
cost of medical care. Many of these manufacturers of medical equipment are
large, well-established companies whose resources, reputations and ability to
leverage existing customer relationships might give them a competitive advantage
over us. Our products and technology also compete indirectly with many other
methods currently used to measure blood oxygen levels or the effects of low
blood oxygen levels.
We believe that a manufacturer's reputation for producing accurate,
reliable and technically advanced products, references from users, features
(speed, safety, ease of use, patient convenience and range of applicability),
product effectiveness and price are the principal competitive factors in the
medical products industry.
11
PROPRIETARY RIGHTS INFORMATION
We have fifteen United States patents and fifteen patents in various
foreign countries. Our patents basically cover methods and apparatus for
introducing light into a body part and receiving, measuring and analyzing the
resulting light and its interaction with tissue. These methods also involve
receiving, measuring and analyzing the light transmissivity of various body
parts of a single subject, as well as of body parts of different subjects, which
provides a standard against which a single subject can be compared. Although we
believe that one or more of our issued patents cover some of the underlying
technology used in the Cerebral Oximeter, only ten of the issued patents
expressly refer to examination of the brain or developments involving the
Cerebral Oximeter.
Our initial United States patent, covering the in vivo tissue
examination technology developed in conjunction with the INVOS 2100 and its
predecessor, the SOMA 100, was allowed and issued in 1986 and will expire on
October 14, 2003. The corresponding Canadian patent was issued in 1987, the
corresponding European Community patent was issued in 1990, with related patents
issued in the ten Western European countries that were then member states, and
the corresponding Japanese patent was issued in 1991. Our fourteen additional
United States patents expire on various dates from February 2005 to December
2014. We also have one patent application pending in the United States and a
number of patent applications in various foreign countries with respect to other
aspects of our technology relating to the interaction of light with tissue.
Many other patents have previously been issued to third parties
involving optical spectroscopy and the interaction of light with tissue, some of
which relate to the use of optical spectroscopy in the area of brain metabolism
monitoring, the primary use of the Cerebral Oximeter. No patent infringement
claims have been asserted against us.
In addition to our patent rights, we have obtained United States
Trademark registrations for our trademarks "SOMANETICS," "SOMAGRAM," "INVOS,"
"SOMASENSOR" and "WINDOW TO THE BRAIN." We have also obtained registrations of
our basic mark, "SOMANETICS," in eleven foreign countries.
We also rely on trade secret, copyright and other laws and on
confidentiality agreements to protect our technology, but we believe that
neither our patents nor other legal rights will necessarily prevent third
parties from developing or using similar or related technology to compete
against our products. Moreover, our technology primarily represents improvements
or adaptations of known optical spectroscopy technology, which might be
duplicated or discovered through our patents, reverse engineering or both.
GOVERNMENT REGULATION
The testing, manufacture and sale of our products are subject to
regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign agencies. Pursuant to the Federal Food, Drug,
and Cosmetic Act, and the related regulations, the FDA regulates the preclinical
and clinical testing, manufacture, labeling, distribution and promotion of
medical devices. If we do not comply with applicable requirements, we can be
subject to, among other things,
- fines,
- injunctions,
- civil penalties,
- recall or seizure of products,
- total or partial suspension of production,
- failure of the government to 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 if the FDA
gives prior authorization, unless it is subject to a specific exemption. Devices
classified by the FDA as posing less risk than class III devices are categorized
as class I or II and are eligible to seek "510(k) clearance." 510(k) clearance
generally is granted when
12
submitted information establishes that a proposed device is "substantially
equivalent" in intended use and other factors, such as technological
characteristics, to a class I or II device already legally on the market or to a
"preamendment" class III device, which is one that has been in commercial
distribution since before May 28, 1976, for which the FDA has not called for PMA
applications, which are defined below. In recent years, the FDA has been
requiring a more rigorous demonstration of substantial equivalence than in the
past, including requiring clinical trial data in many cases. For any devices
that are cleared through the 510(k) process, modifications or enhancements that
could significantly affect safety or effectiveness, or constitute a major change
in the intended use of the device, will require new 510(k) submissions. We
believe that it now usually takes from three to six months from the date of
submission to obtain 510(k) clearance, but it can take substantially longer. We
cannot assure you that any of our devices or device modifications will receive
510(k) clearance in a timely fashion, or at all. The Cerebral Oximeter has been
categorized as a class II device. The CorRestore patch 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 the FDA as posing the greatest risk, such as life-sustaining,
life-supporting or implantable devices, or devices that are not substantially
equivalent to a legally marketed class I or class II device. A class III device
generally must receive approval of a premarket approval, or PMA, application,
which requires proving the safety and effectiveness of the device to the FDA.
The process of obtaining PMA approval is expensive and uncertain. We believe
that is usually takes from one to three years after filing, but it can take
longer.
If human clinical trials of a device are required, whether for a 510(k)
or a PMA application, and the device presents a "significant risk," the sponsor
of the trial, which is usually the manufacturer or the distributor of the
device, will have to file an investigational device exemption, or IDE,
application before beginning human clinical trials. The IDE application must be
supported by data, typically including the results of animal and laboratory
testing. If the IDE application is approved by the FDA and one or more
appropriate Institutional Review Boards, or IRBs, human clinical trials may
begin at a specific number of investigational sites with a specific number of
patients, as approved by the FDA. If the device presents a "nonsignificant risk"
to the patient, a sponsor may begin the clinical trial after obtaining approval
for the study by the IRB at each clinical site without the need for FDA
approval.
In June 1992, we received 510(k) clearance from the FDA to market the
Cerebral Oximeter in the United States for use on adults. We began commercial
shipments of Cerebral Oximeters and SomaSensors in May 1993. In November 1993,
we received notification that the FDA had rescinded our 510(k) clearance to
market the Cerebral Oximeter. As a result, all commercial sales of our product
were suspended. In February 1994, we resumed marketing our product in several
foreign countries. In June 1996, we received 510(k) clearance from the FDA to
market the Cerebral Oximeter, including the SomaSensor, in the United States. In
October 1997, we obtained FDA clearance for new advances in our INVOS technology
that are incorporated in our model 4100 Cerebral Oximeter. We introduced the
model 4100 Cerebral Oximeter in October 1997 and began shipments in the first
quarter of fiscal 1998. In September 2000, we received 510(k) clearance from the
FDA to market the model 5100 Cerebral Oximeter in the United States. The model
5100 Cerebral Oximeter has the added capability of being able to monitor
pediatric patients.
In October 1997, we obtained FDA clearance for advances in our INVOS
technology that are incorporated in our model 4100 Cerebral Oximeter. We made
additional minor changes to the model 3100A Cerebral Oximeter that resulted in
the model 4100 Cerebral Oximeter and we have made additional minor changes to
the SomaSensor. We do not believe that these changes could significantly affect
the safety or efficacy of the Cerebral Oximeter or the SomaSensor and,
therefore, we believe that these changes do not require the submission of a new
510(k) notice. The FDA, however, could disagree with our determination not to
submit a new 510(k) notice for the model 4100 Cerebral Oximeter or SomaSensor
and could require us to submit a new 510(k) notice for any changes made to the
device. If the FDA requires us to submit a new 510(k) notice for our model 4100
Cerebral Oximeter or SomaSensor or for any device modification, we might be
prohibited from marketing the modified device until the 510(k) notice is cleared
by the FDA.
In November 2001 we received clearance from the FDA to market the
CorRestore patch in the United States.
13
Any devices we manufacture or distribute pursuant to FDA clearances or
approvals are subject to pervasive and continuing regulation by the FDA and some
state agencies. Manufacturers of medical devices marketed in the United States
must comply with detailed Quality System Regulation, or QSR, requirements, which
include testing, control, documentation and other quality assurance procedures.
Manufacturers must also comply with Medical Device Reporting requirements. These
requirements require a manufacturer to report to the FDA any incident in which
its product may have caused or contributed to a death or serious injury, or in
which its product malfunctioned and, if the malfunction were to recur, it would
likely cause or contribute to a death or serious injury. Labeling and
promotional activities are subject to scrutiny by the FDA and, in some
circumstances, by the Federal Trade Commission. Current FDA enforcement policy
prohibits marketing approved medical devices for unapproved uses.
We are subject to routine inspection by the FDA and some state agencies
for compliance with QSR requirements and other applicable regulations. Our most
recent FDA QSR inspection occurred in October 2001. We are also 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 our current or future FDA clearances or approvals are
rescinded or denied, sales of our applicable products in the United States would
be prohibited during the period we do not have such clearances or approvals. In
such cases we would consider shipping the product internationally and/or
assembling it overseas if permissible and if we determine such product to be
ready for commercial shipment. The FDA's current policy is that a medical device
that is not in commercial distribution in the United States, but which needs
510(k) clearance to be commercially distributed in the United States, can be
exported without submitting an export request and prior FDA clearance provided
that
- the company believes the device can be found to be substantially
equivalent through a 510(k) submission,
- the device is labeled and intended for export only,
- the device meets the specifications of the foreign purchaser, and
- other conditions of the export provisions of the Federal Food,
Drug, and Cosmetic Act and the Export Reform Act have been met.
SEASONALITY
Our business is seasonal. Our third quarter sales have typically been
lower, compared to other fiscal quarters, principally because the fiscal quarter
coincides with the summer vacation season, especially in Europe, the United
States and Japan.
THE CORRESTORE SYSTEM
MARKET OVERVIEW
Congestive heart failure is when the heart is unable to pump enough
blood to meet the circulation needs of the body. It is the number one cause of
death for persons over age 65. Approximately 5,000,000 persons in the United
States have been diagnosed with congestive heart failure, and each year an
estimated 550,000 additional persons in the United States are diagnosed with
this condition. An estimated 30% of those with congestive heart failure are in
Class III or IV, based on the New York Heart Association classifications. These
classifications divide patients into four classes based on how debilitating
their condition is. Of these patients in Classes III and IV, only approximately
61% survive one year after they are diagnosed with congestive heart failure,
and, for all classes, there is a 40% annualized rate of admission to the
hospital for congestive heart failure.
One of the many causes of congestive heart failure is dilated
cardiomyopathy, which is generally a disease that damages the heart muscle,
resulting in an enlarged ventricle. The left ventricle is the chamber of the
heart that pumps the blood through the body. Most cases of congestive heart
failure result from the failure of the left ventricle and the resulting backup
of fluid in the lungs. As a result of dilated cardiomyopathy, the muscles in the
ventricle become thinner and weaker, the ventricle becomes enlarged, and it is
not able to pump blood through the body with enough force. Often the body reacts
with short-term solutions that further damage the muscle. Drug therapies can
14
be used to treat congestive heart failure, but they often only relieve symptoms
or reduce the body's reactions to the problem with the pump.
Ventricular restoration is a surgical technique that can be used to
treat some patients suffering from congestive heart failure. It involves
reducing the size of the ventricle to restore more normal function. During SVR,
the surgeon restores an enlarged, poorly functioning left ventricle to more
normal size and function by inserting an implant, in most instances, or closing
the defect directly. Two heart surgeons and their company, CorRestore LLC, have
designed and patented a patch for use in SVR that they believe is easier to
implant and provides a better seal against leaks at the perimeter than existing
patches, which are formed by the surgeon during the surgery out of dacron or
bovine pericardium tissue. These existing patches take time for the surgeon to
form, can be difficult to insert, and can leak around the edges. One study of
SVR surgeries using existing dacron patches indicates a higher 12-month and
18-month survival rate and a lower hospital re-admission rate for patients
undergoing SVR.
We believe that the trends in aging of the population and the demand to
reduce health care costs, and the increased survival rate after initial heart
problems, will increase the number of persons diagnosed with congestive heart
failure and will increase the demand for procedures that can increase the
survival rate and decrease the hospital re-admission rate for these patients.
BUSINESS STRATEGY
Our objective is to obtain regulatory clearance or approval to sell the
CorRestore System and to have the system used in SVR surgeries. Key elements of
our strategy are as follows:
Obtain Regulatory Clearance or Approval for the CorRestore System. We
are currently working to obtain regulatory approvals for the CorRestore System,
including CE certification, and to begin marketing the CorRestore System in the
United States. In November 2001 we received clearance from the FDA to market the
CorRestore patch in the United States.
Target Surgical Procedures Where Benefits Have Been Demonstrated. Our
initial target market is SVR surgeries on Class III and IV congestive heart
failure patients with dilated ischemic cardiomyopathy due to a previous
myocardial infarction in the anterior wall of the left ventricle. Dilated
ischemic cardiomyopathy is a damaged heart muscle caused by the obstruction of
the inflow of blood from the arteries and resulting in an enlarged ventricle.
Myocardial infarction is death of an area of the middle muscle layer in the
heart wall. One study of SVR surgeries on these patients, using patches that
were formed by the surgeon during the surgery out of dacron, indicates a higher
12-month and 18-month survival rate and a lower hospital re-admission rate for
patients undergoing SVR. These existing patches take time for the surgeon to
form, can be difficult to insert, and can leak around the edges. Therefore, we
believe it will be possible to demonstrate the clinical benefits of the
CorRestore System and to gain market acceptance for this product in connection
with these surgeries.
Demonstrate the Clinical Benefits and Promote Acceptance of the
CorRestore System. We intend to sponsor clinical studies using the CorRestore
System to provide additional evidence of its benefits. The resulting publication
of any favorable papers can be used to help convince the medical community of
the clinical benefits of the CorRestore System. We also expect to promote the
acceptance of the CorRestore System in the medical community by encouraging
cardiac surgeons in leading hospitals, whose opinions and practices we believe
are valued by other hospitals and physicians, to use the CorRestore System. We
believe that the successful evaluations of the CorRestore System by these
medical professionals will accelerate the acceptance of the CorRestore System by
other medical professionals.
Invest in Marketing and Sales Activities. We expect to use a
distribution network of direct sales employees and independent sales
representatives to distribute the product in the United States. We expect to be
dependent on international distributors for international sales of the
CorRestore System. We also expect to invest in marketing and sales efforts to
increase the medical community's exposure to the CorRestore System, including
participation in trade shows, conducting seminars and direct advertising. We
expect to realize some synergies with our Cerebral Oximeter selling efforts
because our sales personnel will be calling on some of the same customers to
sell both products.
15
Establish an Insurance Reimbursement Code for SVR. We desire to obtain
a reimbursement code for SVR from private and government insurers. These codes
permit medical insurance reimbursement for this procedure. We believe
reimbursement would increase use of the procedure and the CorRestore System. We
might not be able to get a reimbursement code for SVR, and sales of the
CorRestore System could be harmed if we fail to obtain these codes.
PRODUCT
We are developing the CorRestore System for use in cardiac repair and
reconstruction, including heart surgeries called surgical ventricular
restoration, or SVR. During SVR, the surgeon restores an enlarged, poorly
functioning left ventricle to more normal size and function by inserting an
implant, in most instances, or closing the defect directly. SVR is currently
generally performed using a patch that is formed by the surgeon during the
surgery out of dacron or bovine pericardium tissue. These existing patches take
time for the surgeon to form, can be difficult to insert, and can leak around
the edges.
As a result of these problems, the inventors developed a non-circular
bovine pericardium, or cow heart-sac, tissue patch with an integrated soft
dacron suture ring. It is being developed to make SVR easier for the surgeon and
to provide a better seal on the edges of the patch to minimize leaking. The
inventors and their company, CorRestore LLC, filed for a patent with respect to
their patch, which was issued in part in February 2000 and expires in May 2018.
Other claims under the patent application are still pending. The claims allowed
relate primarily to the product design of a soft suture ring integrated with a
patch. In addition, other United States and foreign patent applications are
pending.
We plan to offer the CorRestore System, which is a kit containing the
patches, needles, strips of pericardium, sizers, holders and sutures, to
hospitals performing SVR. We currently expect the retail price of these kits to
be $3,500 to $4,000, although we have done only preliminary market research
regarding our proposed pricing. See "Competition." Prices to distributors will
be significantly discounted from the retail price. Because of the requirements
for sterility and pursuant to our license agreement, the patches and kits will
be manufactured for us by PM Devices, Inc. We are dependent on PM Devices, Inc.
to manufacture our entire requirements for the patches and the kits. We have
already entered into a Contract Development and Manufacturing Agreement with PM
Devices, Inc. Although we are currently dependent on PM Devices, Inc. as a
manufacturer, we believe that several potential suppliers are available.
However, we are uncertain as to the length of time it would take to change
suppliers.
MARKETING
We believe that favorable peer review is a key element to a product's
success in the medical equipment industry. In May 2001, the results of a
13-center, 662-patient study evaluating the safety and effectiveness of SVR
reported improvement in patient function based on New York Heart Association
classification criteria, improvement in readmission and survival rates, and
improvement in ejection fraction for SVR patients. Most of the patients in the
study were severe New York Hospital Association Class III and Class IV
congestive heart failure patients. Of the 355 patients for whom New York Heart
Association classifications were reported at the last follow up, 91 percent
improved functionally, with 61 percent classified as Class I and 30 percent as
Class II. Readmission data was obtained on 658 patients. Of these patients, 88.7
percent were not readmitted to the hospital for congestive heart failure during
the three years after their SVR surgery. By comparison, the annual hospital
admission rate for Class III and IV heart failure patients is more than 40
percent and 24 percent are admitted two or more times each year.
The overall survival rate for the study group was 89.4 percent at three
years. In addition, post-operatively, the ejection fraction of these patients
increased from 29.7 % to 40% and the left ventricular end systolic volume index
decreased from 96 ml/m2 to 62 ml/m2. These results were presented at the May
2001 meeting of the American Association for Thoracic Surgery, and published in
the October 2001 issue of Seminars in Thoracic and Cardiovascular Surgery. They
updated the 18-month results of a study of 439 SVR patients that was published
in a peer-reviewed article in the April 2001 issue of the Journal of the
American College of Cardiology.
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SALES AND DISTRIBUTION
In the first quarter of fiscal 2002, we expect to execute the initial
phase of the CorRestore System market launch plan, including gaining our initial
customer experience and obtaining feedback that will be used to evaluate and
finalize our marketing and training programs and materials. In January 2002, we
performed the first implantation of our CorRestore System, and we expect to
start our broader market launch in the second quarter of 2002.
We expect that the target market for the CorRestore System will be
cardiac centers. In the United States, we expect to use a distribution network
of direct sales employees and independent sales representatives to distribute
the CorRestore System. Internationally, we intend to sell the CorRestore System
through independent distributors.
LICENSE AGREEMENT
We entered into a license agreement as of June 2, 2000 with the
inventors and their company, CorRestore LLC. The license grants us worldwide,
royalty-bearing licenses to specified rights relating to the CorRestore System
and related products and accessories for SVR, subject to the terms and
conditions of the license agreement. The license also grants us the right to use
the names of the inventors and CorRestore on CorRestore System products, as
trademarks and in advertising, as long as they do not object to such use within
20 days after the proposed use is submitted to them. We also have specified
rights to future developments relating to the CorRestore System products if we
incorporate the developments in the system products, begin testing them, receive
clearances to market them and actually begin marketing them within specified
time periods. Transfer and sublicensing of our licenses are restricted by the
license agreement.
Pursuant to the license agreement, CorRestore LLC has agreed to provide
us with various consulting services for up to 10 days during each of our fiscal
years during the term of the licenses. These services include the following
relating to the CorRestore System:
- assisting us in designing and executing the clinical tests
necessary to demonstrate the safety and efficacy of the CorRestore
System or to obtain regulatory approvals;
- assisting us in preparing and defending applications for regulatory
approvals and patent and other intellectual property applications;
- training our personnel and customers in the use of the CorRestore
System;
- providing ongoing technical and general consulting and advice;
- assisting with product designs; and
- consulting with us in connection with regulatory applications,
marketing efforts and efforts to obtain insurance reimbursement
codes.
We have agreed to pay all of the expenses of such consultation, of clinical
testing of the CorRestore System and of the existing patent and future patent
applications or registrations after the date of the license. We are dependent on
the inventors for further development of the CorRestore System, training doctors
in SVR and training our personnel and customers in the use of the CorRestore
System.
In exchange for the licenses and consulting services, we agreed to the
following compensation for CorRestore LLC and its agent, Wolfe & Company:
- A royalty of 10% of our net sales of products subject to the
licenses, for the term of the patent relating to the CorRestore
System, or for 10 years from the date of the first commercial sale
if the patent is determined to be invalid.
- Five-year warrants to purchase up to 400,000 common shares at $3.00
a share. The warrants became exercisable to purchase 300,000 shares
immediately and became exercisable to purchase an additional 50,000
shares when we received clearance from the FDA to market the
CorRestore patch in the United States and become exercisable to
purchase another 50,000 shares when we receive CE certification for
the CorRestore System. The warrant expires when the license
terminates, except that the vested
17
portion of the warrant remains exercisable for an additional 90
days or, if the licenses terminate because of specified breaches by
us, for the remaining term of the warrant.
- Five-year warrants to purchase 2,100,000 common shares at $3.00 a
share, granted when we received clearance from the FDA to market
the CorRestore patch in the United States. The warrants will become
exercisable based on our cumulative net sales of the CorRestore
System products as follows:
Additional Portion
Net Sales of Shares
--------- ---------
$5,000,000 233,330
$10,000,000 233,330
$20,000,000 233,340
$35,000,000 350,000
$55,000,000 466,000
$80,000,000 584,000
The warrant expires when the license terminates, except that the
vested portion of the warrant remains exercisable for an additional
90 days or, if the licenses terminate because of specified breaches
by us, for the remaining term of the warrant.
- A consulting fee of $25,000 a year to each of the inventors until
we sell 1,000 CorRestore patches.
We have also agreed to increase the size of our Board of Directors and
add CorRestore LLC's designee as a director. Joe B. Wolfe is CorRestore LLC's
designee and he has been added as a Class I director. We have also agreed to
cooperate with CorRestore LLC to establish a mutually acceptable medical
advisory board to provide us with information and advice regarding the
CorRestore System. The inventors and CorRestore LLC also agreed to specified
confidentiality, non-competition and non-solicitation provisions in the license
agreement and we agreed to specified confidentiality provisions in the license
agreement.
CorRestore LLC and the inventors may terminate the licenses as follows:
- In their sole discretion, within 120 days after we consummate
specified types of business combination transactions with another
entity and the holders of our common shares immediately before the
transaction hold less than 50% of the surviving entity's or its
ultimate parent's outstanding voting securities immediately after
the transaction, but only if (1) the transaction is consummated
before June 2, 2002, and (2) the consideration received by our
shareholders in the transaction has a fair market value of less
than $10.00 a share.
- In their sole discretion, if Bruce J. Barrett ceases to be our
chief executive officer or ceases to be responsible for our
activities relating to the licenses, but only if (1) one of these
events happens before June 2, 2005, and (2) CorRestore LLC or
either of the inventors exercises the right to terminate within 120
days after the event occurs.
- In their sole discretion, if we materially breach specified
covenants in the license agreement and fail to cure the breach
within 90 days (30 days for payment obligations) after CorRestore
LLC notifies us of the breach, but only if CorRestore LLC exercises
its right to terminate within 120 days after the 90-day cure period
expires.
- In their sole discretion, if our common shares are delisted from
The Nasdaq Stock Market and are not re-listed within 90 days, but
only if CorRestore LLC exercises its right to terminate within 120
days after the 90-day period expires.
- In their sole discretion, if we make an assignment for the benefit
of our creditors or voluntarily commence any bankruptcy,
receivership, insolvency or liquidation proceedings and the action
is not reversed or terminated within 90 days, but only if
CorRestore LLC exercises its right to terminate within 120 days
after the 90-day period expires.
CorRestore LLC and the inventors may limit the licenses as follows:
- CorRestore LLC may exclude specified countries from the geographic
scope of the license if we have not begun marketing the CorRestore
System products or begun the process of obtaining necessary
18
regulatory approval to sell CorRestore System products in that
country within one year after the date we file a 510(k) clearance
application or PMA approval application with the FDA with respect
to the CorRestore patch products. The countries may be excluded
from the license only if we fail to cure the breach of this
provision within 90 days after CorRestore LLC notifies us of the
breach.
- CorRestore LLC may change our licenses to be non-exclusive for
developments that we do not incorporate in the CorRestore System
products, begin marketing or testing, receive clearances to market
or IDE approvals and actually begin marketing within specified time
periods.
- Our licenses become non-exclusive for products that we do not begin
marketing and selling in the United States within 30 days after we
receive 510(k) clearance or approval of a PMA application from the
FDA to market the applicable product in the United States.
We may terminate the licenses as follows:
- In our sole discretion, within 120 days after we sign a definitive
agreement for specified types of business combination transactions
with another entity and the holders of our common shares
immediately before the transaction hold less than 50% of the
surviving entity's or its ultimate parent's outstanding voting
securities immediately after the transaction. If we use this
provision to terminate the licenses, we must pay $1,000,000 to
CorRestore LLC and the inventors.
- In our sole discretion, if CorRestore LLC or either of the
inventors materially breaches specified covenants in the license
agreement and fails to cure such breach within 90 days after we
notify the applicable party of the breach, but only if we exercise
our right to terminate within 120 days after the 90-day cure period
expires.
COMPETITION
The CorRestore System will compete against existing patches, which are
formed by the surgeon during SVR surgeries out of dacron or bovine pericardium
tissue. These existing patches take time for the surgeon to form, can be
difficult to insert, and can leak around the edges. Although we believe the
CorRestore System has important advantages over patches that are currently used,
including its ease of use and better seal against leaks at the edge, existing
patches are significantly less expensive. In addition to promoting SVR in
general as a treatment for congestive heart failure, we will have to convince
users that the advantages of the CorRestore System outweigh its additional cost.
At least one study using dacron patches indicates that they are effective. SVR
is in the early stages of its development and, if it develops, the market for
patches used in SVR might become highly competitive. There are many larger
companies in this industry that have significantly larger research and
development budgets than ours. Competitors may be able to develop additional or
better treatments for congestive heart failure.
We believe that a manufacturer's reputation for producing effective,
sterile, reliable and technically advanced and patented products, clinical
literature, association with leaders in the field, references from users,
surgeon convenience and price are the principal competitive factors in the
medical supply industry.
INSURANCE
Because the Cerebral Oximeter and the CorRestore System are intended to
be used in hospital critical care units with patients who may be seriously ill
or may be undergoing dangerous procedures, we might be exposed to serious
potential products liability claims. We have obtained products liability
insurance with a liability limit of $5,000,000. We expect to increase this
coverage when we begin recognizing revenues from the CorRestore System because
of the higher risk associated with this product. We also maintain coverage for
property damage or loss, general liability, business interruption,
travel-accident, directors' and officers' liability and workers' compensation.
We do not maintain key-man life insurance.
EMPLOYEES
As of February 5, 2002, we employed 28 full-time individuals, including
10 in sales and marketing, four in research and development, six in general and
administration and eight in manufacturing, quality and service. We also use two
consultants. We believe that our future success is dependent, in large part, on
our ability to attract and retain highly qualified managerial, marketing and
technical personnel. We expect to add additional sales and
19
marketing employees for the CorRestore System when we begin our broader market
launch in the second quarter of 2002. Our employees are not represented by a
union or subject to a collective bargaining agreement. We believe that our
relations with our current employees are good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
We are located in Troy, Michigan and have no other locations. Our
export sales were approximately $1,595,000 for the fiscal year ended November
30, 2001, $2,265,000 for the fiscal year ended November 30, 2000 and $1,632,000
for the fiscal year ended November 30, 1999, including $369,000 in fiscal 2001,
$582,000 in fiscal 2000, and $923,000 in fiscal 1999 to Baxter Limited, our
distributor in Japan, and $939,000 in fiscal 2001 and $1,190,000 in fiscal 2000
to Tyco Healthcare AG, formerly Nellcor Puritan Bennett Export, Inc., our
distributor in Europe. See Note 10 of Notes to Financial Statements included in
Item 8 of this Report.
20
ITEM 2. PROPERTIES
We lease 23,392 square feet of office, manufacturing and warehouse
space in Troy, Michigan. Approximately 12,000 square feet is office space for
sales and marketing, engineering, accounting and other administrative
activities. The lease agreement was extended in fiscal 2000, with the extension
commencing January 1, 2001 and expiring December 31, 2003. The minimum monthly
lease payment is approximately $16,200 for fiscal 2001, $16,500 for fiscal 2002,
and $16,800 for fiscal 2003, excluding other occupancy costs. We believe that,
depending on sales of the Cerebral Oximeter and the CorRestore System, our
current facility is more than suitable and adequate for our current needs,
including our assembly of the Cerebral Oximeter, storing inventories of
CorRestore System products and conducting our operations in compliance with
prescribed FDA QSR guidelines, and will allow for substantial expansion of our
business and number of employees.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings.
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, 2001.
21
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
Our current executive officers and the positions held by them are as
follows:
Executive
Name Officer Since Age Position
---- ------------- --- --------
Bruce J. Barrett 6/94 42 President and Chief Executive Officer
William M. Iacona 12/00 31 Vice President, Finance, Controller, and Treasurer
Richard S. Scheuing 1/98 46 Vice President, Research and Development
Mary Ann Victor 1/98 44 Vice President, Communications and Administration, and Secretary
Ronald A. Widman 1/98 51 Vice President, Medical Affairs
Pamela A. Winters 1/98 43 Vice President, Operations
Our officers serve at the discretion of the Board of Directors.
BIOGRAPHICAL INFORMATION
Mr. Bruce J. Barrett has served as our President and Chief Executive
Officer and as one of our directors since June 1994. Mr. Barrett previously
served, from June 1993 until May 1994, as the Director, Hospital Products
Division for Abbott Laboratories, Ltd., a health care equipment manufacturer and
distributor, and from September 1989 until May 1993, as the Director, Sales and
Marketing for Abbott Critical Care Systems, a division of Abbott Laboratories,
Inc., a health care equipment manufacturer and distributor. While at Abbott
Critical Care Systems, Mr. Barrett managed Abbott's invasive oximetry products
for approximately four years. From September 1981 until June 1987, he served as
the group product manager of hemodynamic monitoring products of Baxter Edwards
Critical Care, an affiliate of Baxter International, Inc., another health care
equipment manufacturer and distributor. Mr. Barrett received a B.S. degree in
marketing from Indiana State University and an M.B.A. degree from Arizona State
University. Mr. Barrett is a party to an employment agreement with us that
requires us to elect him to the offices he currently holds.
Mr. William M. Iacona has served as our Vice President, Finance since
December 2000, as our Treasurer since February 2000 and as our Controller since
April 1997. Before joining us, he was in the Finance Department of Ameritech
Advertising Services, a telephone directory company and a division of Ameritech
Corporation (now SBC Communications), from November 1994 until April 1997, and
was on the audit staff of Deloitte & Touche LLP, independent auditors, from
September 1992 until October 1994. He is a certified public accountant and
received a B.S. degree in accounting from the University of Detroit.
Mr. Richard S. Scheuing has served as our Vice President, Research and
Development since January 1998. From March 1993 to January 1998, he served as
our Director of Research and Development. He joined us in 1991 as our Director
of Mechanical Engineering. He is an inventor on four of our issued patents, and
one patent that is pending. Before joining us, he was Director of Mechanical
Engineering for Irwin Magnetic Systems, Inc. from 1987 until 1991 and was a
Development Engineer with the Sarns division of Minnesota Mining and
Manufacturing Company, or 3M, from 1982 to 1987. He received a B.S. degree in
mechanical engineering from the University of Michigan.
Ms. Mary Ann Victor has served as our Vice President, Communications
and Administration and Secretary since January 1998. From July 1997 until
January 1998, she served as our Director, Communications and Administration and
was our consultant from September 1996 until July 1997. She also served as our
Director of Corporate Communications from July 1991 until February 1994. Prior
experience includes serving as Director of Investor Relations with the Taubman
Company from February to May 1994, legal assistant from June 1994 to November
1994 and then attorney from November 1994 to September 1995 with Varnum
Riddering Schmidt & Howlett, and Human Resources Consultant in the Actuarial
Benefits and Compensation Consulting Group of Deloitte & Touche LLP from
September 1995 to September 1996. Ms. Victor received a B.S. in political
science from the University of Michigan and a J.D. from the University of
Detroit.
22
Mr. Ronald A. Widman has served as our Vice President, Medical Affairs
since January 1998. From August 1994 to January 1998, he served as our Director
of Medical Affairs. Before joining us as Marketing Manager in 1991, he was
employed by Mennen Medical, Inc., a manufacturer and marketer of medical
monitoring and diagnostic devices, for 12 years, where he held various positions
in domestic and international medical product 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.
Ms. Pamela A. Winters has served as our Vice President, Operations
since January 1998. From February 1996 to January 1998, she served as our
Director of Operations. From May 1992 to February 1996, she served as our
Manager of Quality Assurance. From October 1991 to May 1992, Ms. Winters served
as our Quality Assurance Supervisor. Ms. Winters received a B.S. degree in
management from the University of Phoenix.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our 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.
HIGH LOW
---- ---
Fiscal Year Ended November 30, 2000
First Quarter.................................. $ 4.13 $ 1.19
Second Quarter................................. 6.88 2.50
Third Quarter.................................. 4.38 2.63
Fourth Quarter................................. 3.75 1.81
Fiscal Year Ended November 30, 2001
First Quarter.................................. $ 2.75 $ 1.13
Second Quarter ................................ 4.07 1.88
Third Quarter ................................. 3.90 2.62
Fourth Quarter ................................ 3.95 1.91
As of February 5, 2002, we had 679 shareholders of record.
We have never paid cash dividends on our common shares and do not
expect to pay such dividends in the foreseeable future. We currently intend to
retain any future earnings for use in our business. The payment of any future
dividends will be determined by the Board in light of the conditions then
existing, including our financial condition and requirements, future prospects,
restrictions in financing agreements, business conditions and other factors
deemed relevant by the Board.
Pursuant to the CorRestore license agreement, effective November 21,
2001 we issued to CorRestore LLC and Wolfe & Company additional five-year
warrants to purchase an aggregate of 2,100,000 common shares at $3.00 a share,
as a result of our receipt of clearance from the FDA to market the CorRestore
patch in the United States. The warrants will become exercisable based on our
cumulative net sales of the CorRestore System products. All of the warrants
become exercisable if our cumulative net sales of the CorRestore System products
are at least $80 million. The warrants expire when the license terminates,
except that the vested portion of the warrant remains exercisable for an
additional 90 days or, if termination is a result of specified breaches by us,
for the remaining term of the warrants. The warrants are not registered, but
were issued in reliance upon the exemptions from registration contained in
Sections 4(2) and 4(6) of the Securities Act.
In connection with our public offering of securities that closed on
January 16, 2002, we issued to the placement agent, Brean Murray & Co., Inc.
warrants to purchase 100,000 common shares at $5.10 per share exercisable during
the four-year period beginning January 11, 2003. The common shares were not
registered, but were issued in reliance upon the exemptions from registration
contained in Sections 4(2) and 4(6) of the Securities Act.
24
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of November 30, 2001, 2000, 1999,
1998 and 1997, and for each of the years in the five-year period ended November
30, 2001 have been derived from our audited financial statements, some of which
appear in Item 8 of this Report together with the report of Deloitte & Touche
LLP, independent auditors. This selected financial data might not be a good
indicator of our expected results for fiscal 2002. You should read the selected
financial data together with the Financial Statements and Notes to Financial
Statements 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. In June 2000, we entered into the CorRestore license. In
November 2001 we received clearance from the FDA to market the CorRestore patch
in the United States. See Item 1. "Business - The CorRestore System."
FISCAL YEAR ENDED NOVEMBER 30,
-----------------------------------------------------------------
2001 2000 1999 1998 1997
----------- --------- -------- --------- -------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net revenues (1) ............................ $ 5,656 $ 5,103 $ 4,001 $ 2,491 $ 1,212
Cost of sales ............................... 2,094 2,370 1,906 1,326 631
Gross margin ................................ 3,561 2,733 2,095 1,165 580
Research, development and engineering
expenses ............................... 778 514 598 665 736
Selling, general, and administrative expenses 5,133 5,722 6,436 6,347 6,238
Net loss .................................... (2,331) (3,622) (4,665) (5,470) (6,155)
Net loss per common share-basic and
diluted (2) ........................... (.31) (.57) (.77) (1.01) (1.88)
Weighted average number of common shares
outstanding-basic and diluted(2) ....... 7,606 6,310 6,036 5,422 3,272
AT NOVEMBER 30,
------------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- ------- --------- -------------
(in thousands)
BALANCE SHEET DATA:
Cash and marketable securities.. $ 168 $ 122 $ 2,257 $ 6,894 $ 4,603
Working capital ................ 1,724 1,393 2,960 7,633 4,511
Total assets ................... 3,587 3,659 4,444 9,047 5,677
Total liabilities .............. 575 776 762 629 788
Accumulated deficit (4) ........ (52,455) (50,124) (46,502) (41,836) (36,367)
Shareholders' equity (3) (4) ... 3,013 2,883 3,682 8,418 4,889
(1) Net revenues recorded in fiscal years 2001, 2000, 1999, 1998 and 1997
relate primarily to the sale of Cerebral Oximeters and SomaSensors for
commercial use.
(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.
(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, 1998 through November 30, 2001.
(4) We believe our accumulated deficit has increased since November 30, 2001.
We also believe our shareholders' equity has increased since November 30,
2001, as a result of our offering of common shares that closed on January
16, 2002. Our net proceeds from that offering were approximately
$3,725,000.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Some of the statements in this report are forward-looking statements.
These forward-looking statements include statements relating to our performance
in this Management's Discussion and Analysis of Financial Condition and Results
of Operations. In addition, we may make forward-looking statements in future
filings with the Securities and Exchange Commission and in written material,
press releases and oral statements issued by us or on our behalf.
Forward-looking statements include statements regarding the intent, belief or
current expectations of us or our officers, including statements preceded by,
followed by or including forward-looking terminology such as "may," "will,"
"should," "believe," "expect," "anticipate," "estimate," "continue," "predict"
or similar expressions, with respect to various matters.
It is important to note that our actual results could differ materially
from those anticipated from the forward-looking statements depending on various
important factors. These important factors include our history of losses and
ability to continue as a going concern, our current dependence on the Cerebral
Oximeter and SomaSensor, the challenges associated with developing new products,
the uncertainty of acceptance of our products by the medical community, the
lengthy sales cycle for our products, competition in our markets, our dependence
on our distributors, and the other factors discussed under the caption "Risk
Factors" and elsewhere in our Registration Statement on Form S-1 (file no.
333-74788) effective January 11, 2002 and elsewhere in this report.
All forward-looking statements in this report are based on information
available to us on the date of this report. We do not undertake to update any
forward-looking statements that may be made by us or on our behalf in this
report or otherwise. In addition, please note that matters set forth under the
caption "Risk Factors" in our registration statement constitute cautionary
statements identifying important factors with respect to the forward-looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from those in such forward-looking statements.
RESULTS OF OPERATIONS
OVERVIEW
We develop, manufacture and market the INVOS Cerebral Oximeter, the
only non-invasive patient monitoring system commercially available in the United
States that continuously measures changes in the blood oxygen level in the
brain. We are also developing the CorRestore System for use in cardiac repair
and reconstruction, including heart surgeries called surgical ventricular
restoration, or SVR. During the third quarter of fiscal 1999, we introduced our
new model 5100 Cerebral Oximeter at an international trade show, and began
international shipments of the model 5100 in August 1999. The model 5100 has the
added capability of being able to monitor pediatric patients. In September 2000,
we received clearance from the FDA to market the model 5100 Cerebral Oximeter in
the United States. In June 2000, we entered into a license agreement for the
CorRestore System. In November 2001 we received clearance from the FDA to market
the CorRestore patch in the United States.
During fiscal 1999, 2000 and 2001, our primary activities consisted of
sales and marketing of the Cerebral Oximeter and related disposable SomaSensor.
We had an accumulated deficit of $52,454,657 through November 30, 2001.
We derive our revenues from sales of Cerebral Oximeters and SomaSensors
to our distributors and to hospitals in the United States through our direct
sales employees and independent sales representatives. We recognize revenue when
there is persuasive evidence of an arrangement with the customer, the product
has been delivered, the sales price is fixed or determinable, and collectibility
is reasonably assured. The product is considered delivered to the customer once
we have shipped it, as this is when title and risk of loss have transferred.
Payment terms are generally net 30 days for United States sales and net 60 days
or longer for international sales. Our primary expenses, excluding the cost of
our products, are selling, general and administrative and research, development
and engineering.
26
FISCAL YEAR ENDED NOVEMBER 30, 2001 COMPARED TO FISCAL YEAR ENDED NOVEMBER 30,
2000
Our net revenues increased approximately $552,000, or 11%, from
$5,103,098 in the fiscal year ended November 30, 2000 to $5,655,532 in the
fiscal year ended November 30, 2001. The increase in net revenues is primarily
attributable to
- an increase in United States sales of approximately
$1,223,000, from approximately $2,838,000 in fiscal 2000 to
approximately $4,061,000 in fiscal 2001, primarily due to
increased sales of the disposable SomaSensor and initial
purchases of demonstration equipment by independent sales
representatives, and
- a 12% increase in the average selling price of SomaSensors
primarily as a result of the 25% increase from the prior year
in the suggested retail price of the SomaSensor effective
September 1, 2001, and a change in the sales mix between sales
in the United States, which have higher average selling
prices, and sales to international distributors, and
- a 10% increase in the average selling price of Cerebral
Oximeters, primarily as a result of a change in the sales mix
between sales in the United States and sales to international
distributors, and increased sales of the model 5100 Cerebral
Oximeter in the United States in fiscal 2001.
The increase in net revenues was achieved despite a decrease in international
sales of approximately $670,000, from approximately $2,265,000 in fiscal 2000 to
approximately $1,595,000 in fiscal 2001. This decrease is primarily attributable
to
- stocking orders for model 4100 and model 5100 Cerebral
Oximeters and SomaSensors by Tyco Healthcare AG, formerly
Nellcor Puritan Bennett Export Inc., in fiscal 2000, and
delays in marketing the Cerebral Oximeter in 39 markets,
including Europe, in fiscal 2001, and
- decreased purchases by Baxter Limited in Japan in fiscal 2001
attributable to a change in product focus by Edwards
Lifesciences Corporation since being spun-off by Baxter
International, Inc. Baxter Limited in Japan is now part of
Edwards Lifesciences Corporation.
Approximately 28% of our net revenues in fiscal 2001 were export sales,
compared to approximately 44% of our net revenues in fiscal 2000. Sales of
SomaSensors, model 4100 Cerebral Oximeters, model 5100 Cerebral Oximeters, and
model 4100 exchanges as a percentage of net revenues were as follows:
PERCENT OF NET REVENUE
FISCAL YEAR ENDED NOVEMBER 30,
PRODUCT 2001 2000
------- ----------------- -----------------
SomaSensors........................ 60% 49%
Model 4100 Cerebral Oximeters...... 28% 30%
Model 5100 Cerebral Oximeters...... 12% 20%
Model 4100 Exchanges............... 0% 1%
----------------- -----------------
Total.......................... 100% 100%
================= =================
One international distributor accounted for approximately 17% of net revenues
for the fiscal year ended November 30, 2001, and two international distributors
accounted for approximately 23% and 11%, respectively, of net revenues for the
fiscal year ended November 30, 2000.
Gross margin as a percentage of net revenues was approximately 63% for
the fiscal year ended November 30, 2001 and approximately 54% for the fiscal
year ended November 30, 2000. The increase in gross margin as a percentage of
net revenues is primarily attributable to a 12% increase in the average selling
price of SomaSensors and a 10% increase in the average selling price of Cerebral
Oximeters described above, and increased sales of our latest model SomaSensor,
launched in May 2001, which is less costly to manufacture than the prior model
SomaSensor.
Our research, development and engineering expenses increased
approximately $264,000, or 51%, from $513,816 in fiscal 2000 to $777,974 in
fiscal 2001. The increase is primarily attributable to a $328,000 increase in
costs associated with the development of the CorRestore System. This increase
was partially offset by
27
- a $36,000 decrease in costs associated with the development of
the latest model SomaSensor, and
- a $19,000 decrease in engineering salaries as a result of one
less engineer.
Selling, general and administrative expenses decreased approximately
$589,000, or 10%, from $5,722,409 for the fiscal year ended November 30, 2000 to
$5,133,473 for the fiscal year ended November 30, 2001. The decrease in selling,
general and administrative expense is primarily attributable to
- a $541,000 decrease in salaries, wages, commissions and
related expenses, primarily as a result of a reduction in the
number of employees, principally sales and marketing (from an
average of 40 employees for the fiscal year ended November 30,
2000 to an average of 31 employees for the fiscal year ended
November 30, 2001),
- a $256,000 decrease in travel and selling-related expenses
primarily related to reduced trade show and travel expenses as
a result of the reduction in sales personnel, and reduced
marketing expenses as a result of promotional materials,
travel and training for Tyco Healthcare AG in fiscal 2000,
- a $124,000 decrease in office-related expenses primarily as a
result of the reduced number of employees and our focus on
cost containment,
- a $106,000 decrease in clinical research expenses, primarily
related to the model 5100 Cerebral Oximeter, and
- a $90,000 decrease in incentive compensation expense primarily
due to our executive officers not participating in the 2001
Employee Incentive Compensation Plan in exchange for a grant
of stock options,
These decreases were partially offset by
- $259,000 in commissions paid to our independent sales
representatives engaged in fiscal 2001,
- a $200,000 termination fee related to the Kingsbridge Capital
Limited Private Equity Line, and
- a $110,000 increase in intangible amortization expense related
to the amortization of license acquisition costs.
We expect our selling, general and administrative expenses to increase in fiscal
2002 as a result of marketing and selling the CorRestore System.
We realized a $212,000 loss on the sale of marketable securities in
fiscal 2000.
FISCAL YEAR ENDED NOVEMBER 30, 2000 COMPARED TO FISCAL YEAR ENDED NOVEMBER 30,
1999
Our net revenues increased approximately $1,102,000, or 28%, from
$4,000,972 in the fiscal year ended November 30, 1999 to $5,103,098 in the
fiscal year ended November 30, 2000. The increase in net revenues is primarily
attributable to
- an increase in international sales of approximately $633,000,
from approximately $1,632,000 in fiscal 1999 to approximately
$2,265,000 in fiscal 2000, primarily due to the stocking
orders for model 4100 and model 5100 Cerebral Oximeters and
SomaSensors by Nellcor Puritan Bennett Export, Inc., and
- an increase in United States sales of approximately $469,000,
from approximately $2,369,000 in fiscal 1999 to approximately
$2,838,000 in fiscal 2000, primarily due to increased
purchases of the disposable SomaSensor.
The increase in net revenues was achieved despite
- decreased purchases of the model 4100 by Baxter Limited in
Japan attributable to the initial stocking purchases and
exchange purchases made in fiscal 1999. In the third quarter
of fiscal 1999, we offered to exchange model 4100 Cerebral
Oximeters for model 3100A Cerebral Oximeters (which we then
scrapped) and cash equal to the difference in sales prices of
the two models to Baxter Limited in Japan, as a result of
28
the Japanese Ministry of Health and Welfare approval in the
first quarter of fiscal 1999 to market the model 4100 in
Japan,
- a 15% decrease in the average selling price of Cerebral
Oximeters primarily as a result of the stocking orders from
Nellcor Puritan Bennett Export, Inc., at lower per unit
prices, for use as demonstration equipment by its sales
personnel, and a change in the sales mix in the United States
between direct purchases of the model 4100 and no-cap
placements of the model 4100. During fiscal 1998, we began a
no-cap sales program whereby we ship the model 4100 Cerebral
Oximeter to the customer at no charge, in exchange for the
customer agreeing to purchase at a premium a minimum monthly
quantity of SomaSensors, and
- a 7% decrease in the average selling price of SomaSensors
primarily as a result of the initial stocking orders from
Nellcor Puritan Bennett Export, Inc., at lower per unit
prices, for use as demonstration equipment by its sales
personnel.
Approximately 44% of our net revenues in fiscal 2000 were export sales,
compared to approximately 41% of our net revenues in fiscal 1999. Sales of
SomaSensors, model 4100 Cerebral Oximeters, model 5100 Cerebral Oximeters, and
model 4100 exchanges as a percentage of net revenues were as follows:
PERCENT OF NET REVENUE
FISCAL YEAR ENDED NOVEMBER 30,
PRODUCT 2000 1999
------- ----------------- -----------------
SomaSensors........................ 49% 42%
Model 4100 Cerebral Oximeters...... 30% 52%
Model 5100 Cerebral Oximeters...... 20% 3%
Model 4100 Exchanges............... 1% 3%
----------------- -----------------
Total.......................... 100% 100%
================= =================
Two international distributors accounted for approximately 23% and 11%,
respectively, of net revenues for the fiscal year ended November 30, 2000, and
one international distributor accounted for approximately 23% of net revenues
for the fiscal year ended November 30, 1999.
Gross margin as a percentage of net revenues was approximately 54% for
the fiscal year ended November 30, 2000 and approximately 52% for the fiscal
year ended November 30, 1999. Although we realized a lower average selling price
for Cerebral Oximeters and SomaSensors in fiscal 2000, gross margin as a
percentage of net revenues increased primarily due to shipments of our new model
SomaSensor in fiscal 2000, which is less costly to manufacture than the old
model SomaSensors. The new model SomaSensor was sold for the entire year in
fiscal 2000, as compared to fiscal 1999 when it was launched and was sold
primarily in the second half of the year.
Our research, development and engineering expenses decreased
approximately $85,000, or 14%, from $598,348 in fiscal 1999 to $513,816 in
fiscal 2000. The decrease is primarily attributable to:
- a $123,000 decrease in consulting fees associated with the
termination of our consulting order with NeuroPhysics
Corporation, and
- a $72,000 decrease in costs associated with enhancements to
the design of the disposable SomaSensor.
These decreases were achieved despite:
- a $71,000 increase in costs associated with the development of
the CorRestore System, and
- a $37,000 increase in engineering salaries.
Selling, general and administrative expenses decreased approximately
$713,000, or 11%, from $6,435,628 for the fiscal year ended November 30, 1999 to
$5,722,409 for the fiscal year ended November 30, 2000. The decrease in selling,
general and administrative expense is primarily attributable to
29
- a $700,000 decrease in salaries, wages, commissions and
related expenses, primarily as a result of a reduction in the
number of employees, principally sales and marketing, (from an
average of 47 employees for the fiscal year ended November 30,
1999 to an average of 40 employees for the fiscal year ended
November 30, 2000) and reduced sales commissions,
- a $157,000 decrease in trade show expenditures during fiscal
2000,
- a $107,000 decrease in professional service fees primarily as
a result of decreased business consulting fees during fiscal
2000, and
- a $40,000 decrease in employee severance during fiscal 2000.
These decreases were incurred despite
- a $116,000 increase in selling-related expenses, primarily
related to marketing and promotional materials, travel, and
training related to our new distribution agreement with
Nellcor Puritan Bennett Export, Inc., and other employee
travel expenses,
- a $110,000 increase in intangible amortization expense related
to the amortization of license acquisition costs, and
- a $47,000 increase in clinical research expenses, primarily
related to the model 5100 Cerebral Oximeter.
We realized a $212,000 loss on the sale of marketable securities in
fiscal 2000.
EFFECTS OF INFLATION
We do not believe that inflation has had a significant impact on our
financial position or results of operations in the past three years.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during fiscal 2001 was approximately
$2,126,000. Cash was used primarily to
- fund our net loss, including selling, general and
administrative expenses and research, development and
engineering expenses, totaling approximately $1,833,000,
before depreciation and amortization expense,
- increase inventory by approximately $180,000, primarily due to
the purchase of components related to our new generation
SomaSensor,
- decrease accrued liabilities by approximately $175,000 and
accounts payable by $26,000, primarily as a result of payments
made in fiscal 2001.
These uses of cash were partially offset by an $87,000 decrease in accounts
receivable, primarily as a result of more timely collections in fiscal 2001.
We expect to increase our inventory in fiscal 2002, as a result of our
fourth quarter 2001 sales, and our expected sales of the Cerebral Oximeter,
SomaSensor and CorRestore System in fiscal 2002.
We expect our working capital requirements to increase if sales
increase. We capitalized approximately $115,000 of costs for model 4100 and
model 5100 Cerebral Oximeters being used as demonstration units and no-cap units
during fiscal 2001, compared to approximately $114,000 in fiscal 2000. We expect
to depreciate these costs over three years.
Capital expenditures in fiscal 2001 were approximately $167,000. These
expenditures were primarily for the costs for model 4100 and model 5100
demonstration and no-cap Cerebral Oximeters described above, and for
approximately $52,000 in tooling costs associated with our new model SomaSensor.
We expect our capital requirements to increase as a result of the costs of
developing and marketing the CorRestore System.
Our principal sources of operating funds have been the proceeds of
equity investments from sales of our common shares. See Statements of
Shareholders' Equity of our Financial Statements included in Item 8 of this
Report.
30
On March 6, 2000, we entered into the Private Equity Line Agreement
with Kingsbridge Capital Limited, a private institutional investor. We completed
the sales of 714,484 common shares under the Private Equity Line Agreement, for
gross proceeds of $2,000,000. Our net proceeds, after deducting the commissions
and the estimated expenses of the offerings, were approximately $1,793,000.
Effective March 5, 2001, we de-registered the remaining shares originally
registered for resale by Kingsbridge under the Private Equity Line Agreement,
because we no longer intend to sell any more shares to Kingsbridge, except upon
any exercise of its warrant, and Kingsbridge is no longer publicly offering for
resale the shares subject to the warrant we granted to them. On April 10, 2001,
we mutually agreed with Kingsbridge to terminate the Private Equity Line
Agreement, the related Registration Rights Agreement, and Kingsbridge's right to
the discount on any unsold shares, in exchange for our payment of $200,000 to
Kingsbridge.
On February 13, 2001, we entered into a Loan and Security Agreement
with Crestmark Bank for a working capital line of credit for up to $750,000,
collateralized by all of our assets. Under the Agreement, Crestmark Bank may,
but is not obligated to, lend us amounts we request from time to time, up to
$750,000, if no default exists. The loans are limited by a borrowing base based
on qualifying accounts receivable and lender reserves. The loan is payable on
demand, and collections of our receivables are directed to Crestmark Bank in
payment of any outstanding balance of the loan.
The principal amount outstanding bears interest, payable monthly, at
the prime rate (4.75% at February 5, 2002) plus 2% plus a 2.4% service fee, and
we paid a $45,000 commitment fee for the loan. Through November 30, 2001, we
have borrowed an aggregate of $920,050 under the agreement and repaid $920,050
in principal amount through Crestmark's collection of our receivables and by
using some of the proceeds from our April 9, 2001 offering. As of November 30,
2001, $750,000 was available for borrowing, at Crestmark's discretion, under the
facility. We have agreed to use the proceeds of the loans solely as working
capital. The line of credit requires us to maintain minimum tangible net worth
of $500,000 and a ratio of total liabilities to tangible net worth not to exceed
3:1. The line of credit terminates upon Crestmark's demand.
On April 9, 2001, we completed the private placement of 1,325,000
newly-issued common shares at a price of $1.75 per share, for gross proceeds of
$2,318,750. Our estimated net proceeds, after deducting the placement agent's
commission and the expenses of the offering, were approximately $2,152,000.
Brean Murray & Co., Inc. was our exclusive placement agent for the offering and
received for its services (1) $104,363 as a placement agent fee, and (2)
warrants to purchase 25,000 common shares at $2.10 per share exercisable during
the four-year period beginning April 9, 2002. A. Brean Murray, one of our
directors, and his wife control Brean Murray & Co., Inc. In addition, the Brean
Murray & Co., Inc. Profit Sharing Plan purchased 32,285 common shares in the
offering, and Robert R. Henry, one of our directors, purchased 100,000 common
shares in the offering.
As of November 30, 2001, we had working capital of $1,724,358, cash and
cash equivalents of $167,873, total current liabilities of $574,566 and
shareholders' equity of $3,012,547.
From December 1, 2001 through February 5, 2002, we have borrowed
$375,000 under the Loan and Security Agreement with Crestmark Bank. We have
repaid $326,632 in principal amount under the agreement through Crestmark's
collection of our receivables, and have repaid $48,368 in principal amount under
the agreement from the proceeds of our January 16, 2002 offering described
below. As of February 5, 2002, we had no outstanding principal loan balance, and
$548,468 was available for borrowing, at Crestmark's discretion, under the
facility.
On January 16, 2002, we completed the public offering of 1,000,000
newly-issued common shares at a price of $4.25 per share, for gross proceeds of
$4,250,000. Our estimated net proceeds, after deducting the placement agent's
commission and the estimated expenses of the offering, were approximately
$3,725,000. Brean Murray & Co., Inc. was our exclusive placement agent for the
offering and received for its services (1) $340,000 as a placement agent fee,
and (2) warrants to purchase 100,000 common shares at $5.10 per share
exercisable during the four-year period beginning January 11, 2003. A. Brean
Murray, one of our directors, and his wife control Brean Murray & Co., Inc.
We expect that our primary needs for liquidity in fiscal 2002 will be
- to fund our losses and sustain our operations, including
funding
31
- marketing costs for the Cerebral Oximeter and the CorRestore
System; and
- research and development efforts related to product-line
extensions of the Cerebral Oximeter for use on newborns, other
non-brain tissue applications, and enhancements to the
Cerebral Oximeter and SomaSensor; and
- for working capital, including increased accounts receivable and
inventories of components and sales units to satisfy expected sales
orders.
In addition, we have budgeted approximately $200,000 for capital expenditures
during fiscal 2002, primarily for new demonstration and no-cap equipment and
manufacturing tooling for the Cerebral Oximeter, SomaSensor, and CorRestore
System.
We believe that the cash and cash equivalents on hand at November 30,
2001, together with the net proceeds of our public offering of 1,000,000 common
shares that closed on January 16, 2002 described above and the estimated net
borrowings available under the Crestmark Bank Loan and Security Agreement
described above, will be adequate to satisfy our operating and capital
requirements for more than the next twelve months.
The estimated length of time current cash, cash equivalents and
available borrowings will sustain our operations is based on estimates and
assumptions we have made. These estimates and assumptions are subject to change
as a result of actual experience. Actual capital requirements necessary to
market the Cerebral Oximeter and SomaSensor, to develop and market the
CorRestore System, to undertake other product development activities, and for
working capital might be substantially greater than current estimates.
Our ability to use our accumulated net operating loss carryforwards to
offset future income, if any, for income tax purposes, is limited due to the
initial public offering of our securities in March 1991. See Note 6 of Notes to
Financial Statements included in Item 8 of this Report.
NEW ACCOUNTING PRONOUNCEMENTS
Effective December 1, 2000, we adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. This statement had no impact on our
financial statements.
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets." This Statement is effective for fiscal years beginning after December
15, 2001, and establishes accounting and reporting standards for goodwill and
other intangible assets. This Statement is effective for our financial
statements for the fiscal year ending November 30, 2003. We expect to adopt this
Statement early, for our first quarter of fiscal 2002. The effect of adopting
this Statement will be to discontinue amortizing our license acquisition costs
related to our acquisition of worldwide, royalty-bearing licenses to specified
rights relating to the CorRestore System and related products and accessories
because we believe these licenses have an indefinite life. Amortization expense
related to these licenses was approximately $219,000 for the year ended November
30, 2001.
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement is effective for
fiscal years beginning after December 15, 2001, and replaces Statement No. 121
and provisions of APB Opinion No. 30 for the disposal of segments of a business.
The statement creates one accounting model, based on the framework established
in Statement No. 121, to be applied to all long-lived assets including
discontinued operations. This Statement is effective for our financial
statements for the fiscal year ending November 30, 2003. We have not yet
determined the impact of this Statement on our financial statements.
32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
33
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, 2001 and 2000, and the related statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended November 30, 2001. 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 auditing standards generally accepted
in the United States of America. 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, 2001 and 2000,
and the results of its operations and its cash flows for each of the three years
in the period ended November 30, 2001 in conformity with accounting principles
generally accepted in the United States of America. 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.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
January 21, 2002
34
SOMANETICS CORPORATION
BALANCE SHEETS
November 30,
-----------------------------------
2001 2000
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 4).......................................... $ 167,873 $ 122,299
Accounts receivable......................................................... 1,263,039 1,349,726
Inventory (Note 4).......................................................... 793,757 613,930
Prepaid expenses............................................................ 74,255 83,100
------------- -------------
Total current assets.................................................... 2,298,924 2,169,055
------------- -------------
PROPERTY AND EQUIPMENT: (Note 4)
Machinery and equipment..................................................... 1,615,009 1,471,114
Furniture and fixtures...................................................... 183,497 183,497
Leasehold improvements...................................................... 165,642 165,642
------------- -------------
Total................................................................... 1,964,148 1,820,253
Less accumulated depreciation and amortization.............................. (1,631,907) (1,384,000)
-------------- --------------
Net property and equipment.............................................. 332,241 436,253
-------------- -------------
OTHER ASSETS:
Intangible assets, net (Note 4)............................................. 928,870 1,038,688
Other....................................................................... 27,078 15,000
------------- -------------
Total other assets...................................................... 955,948 1,053,688
------------- -------------
TOTAL ASSETS.................................................................... $ 3,587,113 $ 3,658,996
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................ $ 482,137 $ 508,647
Accrued liabilities (Notes 5 and 7)......................................... 92,429 267,184
------------- -------------
Total current liabilities............................................... 574,566 775,831
------------- -------------
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, 8,075,055 shares at November 30, 2001,
and 6,637,087 shares at November 30, 2000............................... 80,751 66,371
Additional paid-in capital.................................................. 55,386,453 52,940,540
Accumulated deficit......................................................... (52,454,657) (50,123,746)
-------------- --------------
Total shareholders' equity.............................................. 3,012,547 2,883,165
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................................... $ 3,587,113 $ 3,658,996
============= =============
See notes to financial statements
35
SOMANETICS CORPORATION
STATEMENTS OF OPERATIONS
For the Years Ended November 30,
----------------------------------------------------------------
2001 2000 1999
------------------ ------------------ ------------------
NET REVENUES (Notes 4 and 10)................. $ 5,655,532 $ 5,103,098 $ 4,000,972
COST OF SALES................................. 2,094,472 2,370,205 1,905,541
-------------- -------------- --------------
Gross margin.............................. 3,561,060 2,732,893 2,095,431
-------------- -------------- --------------
OPERATING EXPENSES:
Research, development and engineering
(Note 4).............................. 777,974 513,816 598,348
Selling, general and administrative
(Note 9).............................. 5,133,473 5,722,409 6,435,628
-------------- -------------- --------------
Total operating expenses.............. 5,911,447 6,236,225 7,033,976
-------------- -------------- --------------
OPERATING LOSS................................ (2,350,387) (3,503,332) (4,938,545)
--------------- --------------- ---------------
OTHER INCOME (EXPENSE):
Loss on sale of securities................ -- (211,560) --
Interest income........................... 22,177 92,805 273,254
Interest expense and other................ (2,701) -- --
--------------- -------------- --------------
Total other income (expense).......... 19,476 (118,755) 273,254
--------------- --------------- --------------
NET LOSS...................................... $ (2,330,911) $ (3,622,087) $ (4,665,291)
=============== =============== ===============
NET LOSS PER COMMON SHARE --
BASIC AND DILUTED (Note 4)................ $ (.31) $ (.57) $ (.77)
============== ============== ==============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING --
BASIC AND DILUTED (Note 4)................ 7,605,865 6,310,109 6,035,597
============== ============== ==============
See notes to financial statements
36
SOMANETICS CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL UNREALIZED TOTAL
SHARE PAID-IN ACCUMULATED LOSSES ON SHAREHOLDERS' COMPREHENSIVE
VALUE CAPITAL DEFICIT INVESTMENTS EQUITY INCOME
------------ ------------ ------------ ----------- ------------- -------------
Balance at December 1, 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
For cash, less issuance costs of $193,619.. 6,015 1,600,366 1,606,381
Warrants issued to acquire license, less
acquisition costs of $46,791 ........... 1,050,107 1,050,107
Net loss .................................. (3,622,087) (3,622,087) (3,622,087)
Unrealized losses on investments .......... (45,290) (45,290) (45,290)
Reclassification of unrealized losses ..... 211,560 211,560 211,560
Comprehensive income ................... $(3,455,817)
------------ ------------ ------------ ---------- ----------- ===========
Balance at November 30, 2000 .............. $ 66,371 $ 52,940,540 $(50,123,746) $ -- $ 2,883,165
For cash, less issuance costs of $13,000... 1,130 185,870 187,000
For cash, less issuance costs of $166,488.. 13,250 2,138,587 2,151,837
Warrants issued to acquire license ........ 116,472 116,472
Stock options issued to consultant ........ 4,984 4,984
Net loss and comprehensive income ......... (2,330,911) (2,330,911) $(2,330,911)
------------ ------------ ------------ ---------- ----------- ===========
Balance at November 30, 2001 .............. $ 80,751 $ 55,386,453 $(52,454,657) $ -- $ 3,012,547
============ ============ ============ ========== ===========
See notes to financial statements
37
SOMANETICS CORPORATION
STATEMENTS OF CASH FLOWS
For the Years Ended November 30,
---------------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $ (2,330,911) $ (3,622,087) $ (4,665,291)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization.................... 497,640 446,962 295,598
Realized losses on sales of marketable securities -- 210,724 --
Compensation expense for consultant stock options 4,984 -- --
Changes in assets and liabilities:
Accounts receivable (increase) decrease....... 86,687 (585,573) (148,471)
Inventory (increase) decrease................. (179,827) (2,598) 49,632
Prepaid expenses decrease..................... 8,845 6,602 2,348
Other assets (increase)....................... (12,078) (46,789) --
Accounts payable increase (decrease).......... (26,510) 10,639 235,076
Accrued liabilities increase (decrease)....... (174,755) 3,289 (102,327)
--------------- ---------------- ---------------
Net cash (used in) operating activities.......... (2,125,925) (3,578,831) (4,333,435)
--------------- ---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities.......... -- 789,282 4,013,198
Acquisition of property and equipment (net).......... (167,338) (117,956) (233,169)
--------------- ---------------- ---------------
Net cash provided by (used in) investing
activities.................................... (167,338) 671,326 3,780,029
--------------- ---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Common Shares.............. 2,338,837 1,606,381 --
--------------- --------------- ---------------
Net cash provided by financing activities........ 2,338,837 1,606,381 --
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS..................................... 45,574 (1,301,124) (533,406)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD.................................. 122,299 1,423,423 1,976,829
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD........................................ $ 167,873 $ 122,299 $ 1,423,423
=============== =============== ===============
Supplemental Disclosure of Non cash investing activities:
Issuance of warrants and stock options in connection
with license acquisition (Note 4)................ $ 116,472 $ 1,050,107
See notes to financial statements
38
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
We are a Michigan corporation that was formed in 1982. We develop,
manufacture and market the INVOS(R) Cerebral Oximeter, the only non-invasive
patient monitoring system commercially available in the United States that
continuously measures changes in the blood oxygen level in the brain. The
principal markets for our products are the United States, Europe, and Japan. The
Cerebral Oximeter is based on our proprietary In Vivo Optical Spectroscopy, or
INVOS, technology. INVOS analyzes various characteristics of human blood and
tissue by measuring and analyzing low-intensity visible and near-infrared light
transmitted into portions of the body.
We are also developing the CorRestore(TM) System for use in cardiac
repair and reconstruction, including heart surgeries called surgical ventricular
restoration, or SVR. We entered into a License Agreement as of June 2, 2000 with
the inventors and their company, CorRestore LLC. The license grants us
worldwide, royalty-bearing licenses to specified rights relating to the
CorRestore System and related products and accessories for SVR, subject to the
terms and conditions of the license agreement (Note 4). In November 2001 we
received clearance from the FDA to market the CorRestore patch in the United
States.
2. FINANCIAL STATEMENT PRESENTATION
We have incurred an accumulated deficit of $52,454,657 through November
30, 2001. We had working capital of $1,724,358, cash and cash equivalents of
$167,873, total current liabilities of $574,566 and shareholders' equity of
$3,012,547, as of November 30, 2001.
On June 6, 1996, we received clearance from the FDA to market our model
3100A Cerebral Oximeter in the United States, and on October 13, 1997, we
received clearance from the FDA to market enhancements to our Cerebral Oximeter
in the United States. On September 15, 2000, we received FDA clearance to market
our model 5100 Cerebral Oximeter in the United States. The model 5100 has the
added capability of being able to monitor pediatric patients. In November 2001,
we received clearance from the FDA to market the CorRestore patch in the United
States. Our current financial condition and results of operations and the status
of our product marketing efforts and sales have been affected by the process of
obtaining such clearances.
As of February 5, 2002, we had six international distributors for the
model 4100 Cerebral Oximeter, four international distributors for the model 5100
Cerebral Oximeter, eight direct sales personnel, one clinical specialist, one
international sales consultant, and 11 independent sales representatives. During
fiscal 2001, we devoted most of our marketing to continuing to introduce
cerebral oximetry patient monitoring into the operating rooms of hospitals.
There can be no assurance that we will be successful or profitable in marketing
the Cerebral Oximeter, the related SomaSensor and the CorRestore System.
We believe that markets exist for the products we have developed and
are developing; however, whether our products will be successful is uncertain.
The following factors could impact the likelihood of our success: our limited
resources and current financial condition, the problems and expenses frequently
encountered by companies forming a new business, our ability to develop, apply
and market new technology, and our industry and competitive environment.
We believe that the cash and cash equivalents on hand at November 30,
2001, together with the net proceeds of approximately $3,725,000 from our public
offering of 1,000,000 common shares on January 16, 2002 (Note 12) and the
estimated net borrowings available under the Crestmark Bank Loan and Security
Agreement (Note 11), will be adequate to satisfy our operating and capital
requirements for more than the next twelve months.
The estimated length of time current cash and cash equivalents will
sustain our operations is based on estimates and assumptions we have made. These
estimates and assumptions are subject to change as a result of actual
experience. Actual capital requirements necessary to market the Cerebral
Oximeter and SomaSensor, to develop and market the CorRestore System, to
undertake other product development activities, and for working capital might be
substantially greater than current estimates.
39
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
3. STOCK OFFERINGS AND COMMON SHARES
The underwriter of the June 1997 public offering and its transferees
received warrants to purchase 200,000 common shares exercisable at $4.80 per
share until May 29, 2002. In addition, Kingsbridge Capital Limited has warrants
to purchase 203,108 common shares exercisable at $4.29 per share until September
3, 2005 pursuant to the Private Equity Line Agreement described below. Also,
CorRestore, LLC and its agent, Wolfe & Company, received warrants to purchase
400,000 common shares exercisable at $3.00 per share until June 2, 2005 pursuant
to the CorRestore license agreement, and received warrants to purchase an
additional 2,100,000 common shares exercisable at $3.00 per share until November
21, 2006 pursuant to the CorRestore license agreement. Also, as described below,
the placement agent in the April 9, 2001 private placement received warrants to
purchase 25,000 common shares exercisable at $2.10 per share until April 9,
2006.
On March 6, 2000, we entered into the Private Equity Line Agreement
with Kingsbridge Capital Limited, a private institutional investor. In
consideration for Kingsbridge's commitment under the Private Equity Line
Agreement, we issued a warrant to Kingsbridge on March 6, 2000. The warrant
entitles the holder to purchase 203,108 common shares, after adjustment for the
April 2001 private placement, at a purchase price of $4.29 per share. The
warrant is exercisable at any time until September 3, 2005. The warrant contains
standard provisions that protect the holder against dilution by adjustment of
the exercise price and the number of shares issuable pursuant to the warrant if
various events occur. The exercise price of the warrant is payable either in
cash or by a cashless exercise.
Pursuant to the Private Equity Line Agreement, we completed the sales
of 714,484 common shares under the Private Equity Line Agreement, for gross
proceeds of $2,000,000. Our net proceeds, after deducting the commissions and
the estimated expenses of the offerings, were approximately $1,793,000.
Effective March 5, 2001, we de-registered the remaining shares originally
registered for resale by Kingsbridge under the Private Equity Line Agreement,
because we no longer intend to sell any more shares to Kingsbridge, except upon
any exercise of its warrant, and Kingsbridge is no longer publicly offering for
resale the shares subject to the warrant we granted to them. On April 10, 2001,
we mutually agreed with Kingsbridge to terminate the Private Equity Line
Agreement, the related Registration Rights Agreement, and Kingsbridge's right to
the discount on any unsold shares, in exchange for our payment of $200,000 to
Kingsbridge.
On April 9, 2001, we completed the private placement of 1,325,000
newly-issued common shares at a price of $1.75 per share, for gross proceeds of
$2,318,750. Our net proceeds, after deducting the placement agent's commission
and the expenses of the offering, were approximately $2,152,000. Brean Murray &
Co., Inc. was our exclusive placement agent for the offering and received for
its services (1) $104,363 as a placement agent fee, and (2) warrants to purchase
25,000 common shares at $2.10 per share exercisable during the four-year period
beginning April 9, 2002. A. Brean Murray, one of our directors, and his wife
control Brean Murray & Co., Inc. In addition, the Brean Murray & Co., Inc.
Profit Sharing Plan purchased 32,285 common shares in the offering, and Robert
R. Henry, one of our directors, purchased 100,000 common shares in the offering.
Common shares reserved for future issuance upon exercise of stock
options and warrants as discussed above at November 30, 2001, are as follows:
1991 Incentive Stock Option Plan...................... 88,089
1993 Director Stock Option Plan....................... 2,498
1997 Stock Option Plan................................ 1,659,800
Options Granted Independent of Option Plans........... 158,678
Underwriter Warrants.................................. 200,000
Kingsbridge Capital Limited Warrants.................. 203,108
Placement Agent Warrants.............................. 25,000
License Acquisition Warrants.......................... 2,500,000
-----------
Total reserved for future issuance........... 4,837,173
===========
40
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents consist of short-term, interest-bearing investments
maturing within three months of our acquisition of them.
Inventory is stated at the lower of cost or market on a first-in,
first-out (FIFO) basis. Inventory consists of:
NOVEMBER 30,
------------------------------------
2001 2000
----------- -----------
Finished goods..................................... $ 50,314 $ 36,374
Work in process.................................... 215,313 124,127
Purchased components............................... 528,130 453,429
----------- -----------
Total....................................... $ 793,757 $ 613,930
=========== ===========
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 two to five years.
Intangible Assets consist of patents and trademarks, and license
acquisition costs. Patents and trademarks are recorded at cost and are being
amortized on the straight-line method over 17 years. License acquisition costs
are related to our acquisition of worldwide, royalty-bearing licenses to
specified rights relating to the CorRestore System and related products and
accessories.
We entered into a License Agreement as of June 2, 2000 with the
inventors and their company, CorRestore LLC. The license grants us worldwide,
royalty-bearing licenses to specified rights relating to the CorRestore System
and related products and accessories for SVR, subject to the terms and
conditions of the license agreement. Pursuant to the license agreement,
CorRestore LLC has agreed to provide various consulting services to us. We have
agreed to pay all of the expenses of such consultation, of clinical testing of
the CorRestore System, training doctors in SVR and training our personnel and
customers in the use of the CorRestore System.
In exchange for the licenses and consulting services, we agreed to the
following compensation for CorRestore LLC and its agent, Wolfe & Company: (1) a
royalty of 10% of our "net sales" of products subject to the licenses, (2)
five-year warrants to purchase up to 400,000 common shares at $3.00 a share,
exercisable to purchase 300,000 shares immediately and to purchase an additional
50,000 shares upon our receipt of clearance or approval from the FDA to market
the CorRestore patch in the United States and another 50,000 shares upon our
receipt of CE certification for the CorRestore System, (3) additional five-year
warrants to purchase up to 2,100,000 common shares at $3.00 a share, granted
when we received clearance from the FDA to market the CorRestore patch in the
United States, exercisable based on our cumulative net sales of the CorRestore
System products, and (4) a consulting fee of $25,000 a year to each of the
inventors until we sell 1,000 CorRestore patches.
License acquisition costs consist of professional service fees recorded
at cost, our estimate of the fair value of the ten-year vested stock options to
purchase 50,000 common shares at $3.00 a share granted to one of our directors
in connection with negotiating and assisting us in completing the transaction,
and our estimate of the fair value of the 350,000 common share vested portion of
the five-year warrants to purchase up to 400,000 common shares at $3.00 a share
issued in the transaction.
We estimated the value of the stock options to purchase 50,000 common
shares using the Black-Scholes valuation model with the following assumptions:
expected volatility (the measure by which the stock price has fluctuated or is
expected to fluctuate during the period) 111.16%, risk-free interest rate of
7.5%, expected life of 4 years and dividend yield of 0%. We estimated the value
of the warrants to purchase 300,000 common shares that vested immediately in
this transaction using the Black-Scholes valuation model with the following
assumptions: expected volatility (the measure by which the stock price has
fluctuated or is expected to fluctuate during the period) 111.16%, risk-free
interest rate of 7.5%, expected life of 5 years and dividend yield of 0%. We
estimated the value
41
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
of the warrants to purchase 50,000 common shares that vested upon receipt of FDA
clearance in November 2001 using the Black-Scholes valuation model with the
following assumptions: expected volatility (the measure by which the stock price
has fluctuated or is expected to fluctuate during the period) 100.68%, risk-free
interest rate of 4.0%, expected life of 42 months and dividend yield of 0%.
These costs are being amortized on the straight-line method over 5
years. Intangible assets consist of:
NOVEMBER 30,
----------------------------------
2001 2000
----------- -----------
License acquisition costs.......................... $ 1,213,370 $ 1,096,898
Patents and trademarks............................. 111,733 111,733
----------- -----------
Sub-total..................................... 1,325,103 1,208,631
Less accumulated amortization...................... (396,233) (169,943)
----------- -----------
Total......................................... $ 928,870 $ 1,038,688
=========== ===========
Amortization expense was $226,290 for the fiscal year ended November 30, 2001,
$116,602 for the fiscal year ended November 30, 2000, and $6,912 for the fiscal
year ended November 30, 1999.
Intangible assets are reviewed periodically for impairment whenever
events or changes in circumstances indicate that the carrying value of the asset
may not be recovered.
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets." This Statement is effective for fiscal years beginning after December
15, 2001, and establishes accounting and reporting standards for goodwill and
other intangible assets. This Statement is effective for our financial
statements for the fiscal year ending November 30, 2003. We expect to early
adopt this Statement for our first quarter of fiscal 2002. The effect of
adopting this Statement will be to discontinue amortizing our license
acquisition costs related to our acquisition of worldwide, royalty-bearing
licenses to specified rights relating to the CorRestore System and related
products and accessories described above because we believe these licenses have
an indefinite life. Amortization expense related to these licenses was
approximately $219,000 for the year ended November 30, 2001.
Revenue Recognition occurs when there is persuasive evidence of an
arrangement with the customer, the product has been delivered, the sales price
is fixed or determinable, and collectibility is reasonably assured. The product
is considered delivered to the customer once we have shipped it, as this is when
title and risk of loss have transferred.
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. Common
shares issuable under stock options and warrants have not been included in the
computation of net loss per common share - diluted, because such inclusion would
be antidilutive. As of November 30, 2001, we had outstanding 4,774,228 warrants
and options to purchase common shares, and as of November 30, 2000, we had
outstanding 2,261,081 warrants and options to purchase common shares.
Accounting Pronouncements Effective December 1, 2000, we adopted
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
statement had no impact on our financial statements.
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets." This Statement is discussed above. See Intangible
Assets.
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting
42
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." This Statement is effective for fiscal years beginning after December
15, 2001, and replaces Statement No. 121 and provisions of APB Opinion No. 30
for the disposal of segments of a business. The statement creates one accounting
model, based on the framework established in Statement No. 121, to be applied to
all long-lived assets including discontinued operations. This Statement is
effective for our financial statements for the fiscal year ending November 30,
2003. We have not yet determined the impact of this Statement on our financial
statements.
Use Of Estimates The preparation of financial statements in conformity
with generally accepted accounting principles requires us 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.
Reclassifications - Certain reclassifications have been made to the
financial statements for 2000 and 1999 to conform to the 2001 presentation.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
NOVEMBER 30,
--------------------------------
2001 2000
-------------- --------------
Accrued Sales Commissions.......................... $ 60,109 $ 117,045
Professional Fees.................................. -- 94,000
Accrued Insurance.................................. 24,570 24,361
Accrued Warranty................................... 7,750 7,000
Accrued Incentive.................................. -- 17,500
Other.............................................. -- 7,278
----------- -----------
Total......................................... $ 92,429 $ 267,184
=========== ===========
6. INCOME TAX
Deferred income taxes reflect the estimated future tax effect of (1)
temporary differences between the amount of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and regulations and
(2) net operating loss and tax credit carryforwards. Our deferred tax assets
primarily represent the tax benefit of net operating loss carryforwards and
research and general business tax credit carryforwards. We had deferred tax
assets of approximately $17,100,000 and $16,734,000 for the years ended November
30, 2001 and 2000, 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, 2001 and 2000 were as follows:
NOVEMBER 30,
------------------------------
2001 2000
-------------- ------------
(IN THOUSANDS)
Net operating loss carryforwards................... $ 16,557 $ 16,401
Other.............................................. 79 36
Basis difference of fixed assets and intangibles... 55 (90)
Research and general business tax credit
carryforwards.................................. 409 387
----------- -----------
Subtotal..................................... 17,100 16,734
Valuation allowance................................ (17,100) (16,734)
----------- -----------
Deferred tax asset........................... $ -- $ --
=========== ===========
As of November 30, 2001, net operating loss carryforwards of
approximately $48.7 million were available for Federal income tax purposes. Our
ability to use the net operating loss carryforwards incurred on or before
43
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
March 27, 1991 (the date we completed our initial public offering) is limited to
approximately $296,000 per year. Research and business general tax credits of
$408,973 are also available to offset future taxes. These losses and credits
expire, if unused, at various dates from 2001 through 2021.
Use of our net operating loss carryforwards, tax credit carryforwards
and certain future deductions could be restricted, in the event of future
changes in our equity structure, by provisions contained in the Tax Reform Act
of 1986.
7. COMMITMENTS AND CONTINGENCIES
We have a lease agreement for a 23,392 square foot, stand-alone office,
assembly and warehouse facility. The current lease, as amended, expires December
31, 2003.
Operating lease expense for the years ended November 30, 2001, 2000 and
1999 was approximately $196,000, $182,000, and $184,000, respectively.
Approximate future minimum lease commitments are as follows:
YEAR ENDED NOVEMBER 30,
-----------------------
2002.................................... $ 197,700
2003.................................... $ 201,700
2004.................................... 16,800
------------
Total................................... $ 416,200
============
In December 1991, we amended and restated our 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. At the discretion of our Board of Directors, we may contribute
matching contributions or make other annual discretionary contributions to the
plan, all of which, together with the participants' contributions, cannot exceed
15% of the total compensation we pay to eligible employees. We did not make any
matching or discretionary contributions to the plan for the years ended November
30, 2001, 2000 or 1999.
As of November 30, 2001, we had an employment agreement with Bruce J.
Barrett, our President and Chief Executive Officer. Mr. Barrett's employment
agreement, as amended, expires April 30, 2003 unless earlier terminated as
provided in the agreement. Mr. Barrett is entitled to receive an annual base
salary, plus potential discretionary bonuses. Mr. Barrett has agreed not to
compete with us during specified periods.
We may become subject to products liability claims by patients or
physicians, and may become a defendant in products liability or malpractice
litigation. We have obtained products liability insurance and an umbrella
policy; however, we might not be able to maintain such insurance or such
insurance might not be sufficient to protect us against products liability.
8. STOCK OPTION PLANS
In February 1991 and January 1997, we adopted stock option plans for
our key management employees, directors, consultants and advisors. The plans
provide for our issuance of options to purchase a maximum of 115,000 common
shares under the 1991 plan and 1,660,000 common shares under the 1997 plan. In
addition, we granted options to employees independent of the plans. Options
granted generally have a 10-year life, and vest over a three-year period. Awards
and expirations under the 1991 plan, 1997 plan, and independent of the plans
during the years ended November 30, 2001, 2000 and 1999 are listed below.
At November 30, 2001, no additional options may be granted under the
1991 plan, and 62,945 common shares were available for options to be granted
under the 1997 plan.
In January 1993, we adopted the Somanetics Corporation 1993 Director
Stock Option Plan. The directors plan provided up to 24,000 common shares for
the grant of options to each director who was not one of our officers or
employees. In January 1998, our 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.
44
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation," was
issued. We have chosen to continue to account for stock-based compensation of
employees 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 granted to
employees are measured as the excess, if any, of the market price of our 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 to employees. Stock-based compensation of consultants and advisors is
determined based on the fair value of the options or warrants on the grant date
pursuant to the methodology of SFAS No. 123, estimated using the Black-Scholes
model with the assumptions described in the next paragraph. The resulting amount
is recognized as compensation expense and an increase in additional paid-in
capital over the vesting period of the option or warrant. As a result, we
recorded $4,984 of compensation expense, and an equal increase in additional
paid in capital, for stock options issued to a consultant in fiscal 2001.
Had compensation expense for our stock options granted to employees
been determined based on the fair value of the options on the grant date
pursuant to the methodology of SFAS No. 123, our net loss on a pro forma basis
would have
- increased by approximately $752,000 to $(3,083,000),or $(.41) per
common share, for fiscal 2001,
- increased by approximately $495,000 to $(4,117,000), or $(.65) per
common share, for fiscal 2000, and
- increased by approximately $571,000 to $(5,236,000), or $(.87) per
common share, for fiscal 1999.
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 2001, 2000 and 1999: expected volatility (the measure by
which the stock price has fluctuated or is expected to fluctuate during the
period) 100.68% for 2001 (109.94% for 2000 and 95.05% for 1999), risk-free
interest rate of 4.0% for 2001 (6.0% for 2000 and 6.5% for 1999), expected lives
of 4 years and dividend yield of 0%.
A summary of our stock option activity and related information for
years ended November 30, 2001, 2000 and 1999 is as follows:
2001 2000 1999
-------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
COMMON EXERCISE COMMON EXERCISE COMMON EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ----------- ----------- ----------- ----------- -----------
Options outstanding
December 1,............ 1,394,537 $ 5.74 1,226,537 $ 6.16 998,737 $ 6.81
Options granted........ 529,800 2.00 236,000 3.24 242,900 3.38
Options exercised...... -- -- -- -- -- --
Options canceled....... (78,217) 9.25 (68,000) 4.65 (15,100) 4.62
----------- --------- ------------ --------- ----------- --------
Options outstanding
November 30, (1) (2)... 1,846,120 4.52 1,394,537 5.74 1,226,537 6.16
========== ========= =========== ========= =========== ========
Options exercisable
November 30,........... 1,267,849 $ 5.63 958,152 $ 6.66 585,952 $ 8.03
========== ========= =========== ========= =========== ========
---------------------------
(1) Exercise dates range from May 4, 1992 to November 19, 2011.
(2) As of November 30, 2001, options outstanding have exercise prices
between $1.44 and $32.50, and a weighted-average remaining contractual
life of 6.98 years.
45
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
9. RELATED PARTY TRANSACTIONS
We received legal services from certain shareholders. Services from
such parties amounted to approximately $197,000 during the year ended November
30, 2001, $211,600 during the year ended November 30, 2000, and $160,400 during
the year ended November 30, 1999.
We paid a non-refundable fee of $50,000 to Brean Murray & Co., Inc.
during fiscal 1999 for financial advisory services. A. Brean Murray, one of our
directors, and his wife control Brean Murray & Co., Inc.
Pursuant to an engagement letter between us and Brean Murray & Co.,
Inc., dated March 1, 2000, we agreed to pay Brean Murray & Co., Inc. a
commission of 3.5% on proceeds of specified securities sales, including sales
pursuant to the Kingsbridge Capital Limited Private Equity Line Agreement.
During fiscal 2000, we paid Brean Murray & Co., Inc. $63,000 in commissions
pursuant to this engagement letter. During fiscal 2001, we paid Brean Murray &
Co., Inc. $7,000 in commissions pursuant to this engagement letter.
Also, during fiscal 2000, we granted A. Brean Murray (1) a 10-year
option to purchase 50,000 common shares on May 31, 2000, exercisable at $3.00 a
share, which was more than the fair market value of the common shares on the
date of grant, in connection with negotiating and assisting us in completing our
CorRestore licenses, and (2) a 10-year option to purchase 50,000 common shares
on May 31, 2000, exercisable at $4.36 a share, which was more than the fair
market value of the common shares on the date of grant, in connection with the
Kingsbridge Capital Limited Private Equity Line Agreement.
In connection with our April 2001 private placement of common shares,
Brean Murray & Co., Inc. was our exclusive placement agent and received for its
services (1) $104,363 as a placement agent fee, and (2) warrants to purchase
25,000 common shares at $2.10 per share exercisable during the four-year period
beginning April 9, 2002. In addition, the Brean Murray & Co., Inc. Profit
Sharing Plan purchased 32,285 common shares in the offering, and Robert R.
Henry, one of our directors, purchased 100,000 common shares in the offering.
In connection with our CorRestore license, effective June 2, 2000, we
granted Wolfe & Company a five-year warrant to purchase 20,000 common shares,
exercisable at $3.00 a share. These warrants were granted before Mr. Joe B.
Wolfe became one of our directors. Also, in connection with our CorRestore
license, effective November 21, 2001, we granted Wolfe & Company a five-year
warrant to purchase 180,000 common shares, exercisable at $3.00 a share.
10. MAJOR CUSTOMERS AND FOREIGN SALES
One international distributor accounted for approximately 17% (Europe)
of net revenues for the fiscal year ended November 30, 2001, two international
distributors accounted for approximately 23% (Europe) and 11% (Japan),
respectively, of net revenues for the fiscal year ended November 30, 2000, and
one international distributor accounted for approximately 23% (Japan) of net
revenues for the fiscal year ended November 30, 1999.
Additionally, net revenues from foreign customers for the fiscal year
ended November 30, 2001 were approximately $1,595,000, for the fiscal year ended
November 30, 2000 were approximately $2,265,000, and for the fiscal year ended
November 30, 1999 were approximately $1,632,000.
11. NOTES PAYABLE - BANK LINE OF CREDIT
On February 13, 2001, we entered into a Loan and Security Agreement
with Crestmark Bank for a working capital line of credit for up to $750,000,
collateralized by all of our assets. Under the Agreement, Crestmark Bank may,
but is not obligated to, lend us amounts we request from time to time, up to
$750,000, if no default exists. The loans are limited by a borrowing base based
on qualifying accounts receivable and lender reserves. The loan is payable on
demand, and collections of our receivables are directed to Crestmark Bank in
payment of any outstanding balance of the loan.
46
SOMANETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The principal amount outstanding bears interest, payable monthly, at
the prime rate (5.00% at November 30, 2001) plus 2% plus a 2.4% service fee, and
we paid a $45,000 commitment fee for the loan. Through November 30, 2001, we
have borrowed an aggregate of $920,050 under the agreement and repaid $920,050
in principal amount through Crestmark's collection of our receivables and by
using some of the proceeds from our April 9, 2001 offering. As of November 30,
2001, $750,000 was available for borrowing, at Crestmark's discretion, under the
facility. We have agreed to use the proceeds of the loans solely as working
capital. The line of credit requires us to maintain minimum tangible net worth
of $500,000 and a ratio of total liabilities to tangible net worth not to exceed
3:1. The line of credit terminates upon Crestmark's demand.
12. SUBSEQUENT EVENTS
On January 16, 2002, we completed a public offering of 1,000,000
newly-issued common shares at a price of $4.25 per share, for gross proceeds of
$4,250,000. Our estimated net proceeds, after deducting the placement agent's
commission and the estimated expenses of the offering, were approximately
$3,725,000. Brean Murray & Co., Inc. was our exclusive placement agent for the
offering and received for its services (1) $340,000 as a placement agent fee,
and (2) warrants to purchase 100,000 common shares at $5.10 per share
exercisable during the four-year period beginning January 11, 2003. A. Brean
Murray, one of our directors, and his wife control Brean Murray & Co., Inc. As a
result of this offering, Kingsbridge Capital Limited's warrant has been
adjusted, and Kingsbridge is now entitled to purchase 205,097 common shares at a
purchase price of $4.25 per share.
47
QUARTERLY INFORMATION (UNAUDITED)
The following is a summary of our quarterly operating results for the
fiscal years ended November 30, 2001 and 2000:
QUARTER
--------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
-------------- ---------------- ---------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED NOVEMBER 30, 2001
----------------------------
Net revenues............... $1,437,492 $1,261,513 $1,110,721 $1,845,806
Gross margin............... 837,333 843,834 720,106 1,159,787
Net income (loss).......... (711,156) (849,775) (820,475) 50,495
Net income (loss) per
common share -
basic and diluted...... $(0.11) $(0.11) $(0.10) $ 0.01
YEAR ENDED NOVEMBER 30, 2000
----------------------------
Net revenues............... $1,037,615 $1,430,066 $1,006,408 $1,629,009
Gross margin............... 544,256 711,597 584,929 892,111
Net loss................... (885,928) (922,885) (995,187) (818,087)
Net loss per common
share -basic and
diluted................ $(0.15) $(0.15) $(0.15) $(0.12)
48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
---------------------------------------------------------------
NONE
49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 regarding our executive officers
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 our directors will be set forth under the caption "Election of
Directors" in our Proxy Statement in connection with the 2002 Annual Meeting of
Shareholders scheduled to be held April 17, 2002, 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 our Proxy Statement in connection with the 2002 Annual Meeting of
Shareholders scheduled to be held April 17, 2002, 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 our Proxy
Statement in connection with the 2002 Annual Meeting of Shareholders scheduled
to be held April 17, 2002, 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 our
Proxy Statement in connection with the 2002 Annual Meeting of Shareholders
scheduled to be held April 17, 2002, 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 our Proxy Statement in connection with the 2002 Annual Meeting of
Shareholders scheduled to be held April 17, 2002, and is incorporated in this
Item 13 by reference.
50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
Our financial statements for the following years are included in response
to Item 8 of this Report:
Independent Auditors' Report
Balance Sheets - November 30, 2001 and 2000
Statements of Operations - For Each of the Three Years in the
Period Ended November 30, 2001
Statements of Shareholders' Equity - For Each of the Three Years
in the Period Ended November 30, 2001
Statements of Cash Flows - For Each of the Three Years in the
Period Ended November 30, 2001
Notes to Financial Statements
(2) Financial Statement Schedule
The following financial statement schedule is included in response to
Item 8 of this Report:
Schedule II - Valuation and Qualifying Accounts and Reserves for
the Years Ended November 30, 2001, 2000 and 1999.
(3) Exhibits
The Exhibits to this Report are as set forth in the "Index to
Exhibits" on pages 54 to 57 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 us during the fourth quarter of
the fiscal year ended November 30, 2001.
51
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
COLUMN B COLUMN C COLUMN D COLUMN E
-------- ----------------------- -------- --------
ADDITIONS
-----------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER (1)(2) BALANCE AT
BEGINNING COSTS AND ACCOUNTS, DEDUCTIONS, END OF
OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
-----------------------------------------------------------------------------
Allowance for doubtful accounts:
Year ended November 30, 2001 $ -- $ -- -- $ -- $--
Year ended November 30, 2000 -- -- -- -- --
Year ended November 30, 1999 152,602 -- -- 152,602 --
Note: (1) Write-off uncollectible accounts, net of recoveries
Inventory reserve for obsolescence:
Year ended November 30, 2001 $ -- $ -- -- $ -- $--
Year ended November 30, 2000 -- -- -- -- --
Year ended November 30, 1999 138,224 1,199 -- 139,423 --
Note: (2) Write-off obsolete, excess inventory, net of recoveries
52
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 12, 2002 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.
Signature Title Date
--------- ----- ----
/s/ Bruce J. Barrett President and Chief Executive Officer February 12, 2002
---------------------- and a Director (Principal Executive
Bruce J. Barrett Officer)
----------------------- Chairman of the Board of Directors February __, 2002
H. Raymond Wallace
/s/ William M. Iacona Vice President, Finance, Controller, February 12, 2002
----------------------- and Treasurer (Principal Financial
William M. Iacona Officer and Principal Accounting
Officer)
/s/ Daniel S. Follis Director February 8, 2002
----------------------
Daniel S. Follis
/s/ James I. Ausman Director February 11, 2002
---------------------
James I. Ausman, M.D., Ph.D.
/s/ Robert R. Henry Director February 11, 2002
---------------------
Robert R. Henry
/s/ A. Brean Murray Director February 11, 2002
---------------------
A. Brean Murray
/s/ Joe B. Wolfe Director February 12, 2002
------------------
Joe B. Wolfe
53
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 Fourth Amendment, between Somanetics Corporation and
First Industrial Mortgage Partnership, L.P., dated April
13, 2000, incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 2000.
*10.7 Somanetics Corporation Amended and Restated 1991
Incentive Stock Option Plan, incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K
for the fiscal year ended November 30, 1991.
*10.8 Fourth Amendment to Somanetics Corporation 1991 Incentive
Stock Option Plan, incorporated by reference to Exhibit
10.7 to the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 1992.
*10.9 Amended and Restated Fifth Amendment to Somanetics
Corporation 1991 Incentive Stock Option Plan,
incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the fiscal year
ended November 30, 1995.
*10.10 Somanetics Corporation 1993 Director Stock Option Plan,
incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the fiscal year
ended November 30, 1992.
*10.11 Somanetics Corporation 1997 Stock Option Plan,
incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the fiscal year
ended November 30, 1996.
*10.12 First Amendment to Somanetics Corporation 1997 Stock
Option Plan, incorporated by reference to Exhibit 10.11
to the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 1997.
*10.13 Second Amendment to Somanetics Corporation 1997 Stock
Option Plan, incorporated by reference to Exhibit 10.12
to the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 1998.
*10.14 Third Amendment to Somanetics Corporation 1997 Stock
Option Plan, incorporated by reference to Exhibit 10.14
to the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 1999.
*10.15 Fourth Amendment to Somanetics Corporation 1997 Stock
Option Plan, incorporated by referenced to Exhibit 10.16
to the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 2000.
54
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
*10.16 Restated Somanetics Corporation 2001 Employee Incentive
Compensation Plan, dated as of March 5, 2001,
incorporated by referenced to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended February 28, 2001.
*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 Amendment to Employment Agreement, dated as of April 18,
2000, between Somanetics Corporation and Bruce J.
Barrett, incorporated by reference to Exhibit 10.3 to the
Company's Quarterly report on Form 10-Q for the quarter
ended May 31, 2000.
*10.27 Amendment to Employment Agreement, dated as of March 5,
2001, between Somanetics Corporation and Bruce J.
Barrett, incorporated by reference to Exhibit 10.2 to the
Company's Quarterly report on Form 10-Q for the quarter
ended February 28, 2001.
*10.28 Change in Control, Invention, Confidentiality,
Non-Compete and Non-Solicitation Agreement, dated January
11, 2002, between Somanetics Corporation and Richard S.
Scheuing.
*10.29 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.
*10.30 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.
*10.31 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.
*10.32 Stock Option Agreement, dated July 21, 1994, between
Somanetics Corporation and Raymond W. Gunn, incorporated
by reference to Exhibit 10.6 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31,
1994.
*10.33 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.
55
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
*10.34 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.
*10.35 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.
*10.36 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.
*10.37 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.
*10.38 Form of Stock Option Agreement, dated as of April 24,
1997, between Somanetics Corporation and twenty-three
employees, incorporated by reference to Exhibit 10.32 to
Amendment No. 1 to the Registration Statement on Form S-1
(file no. 333-25275), filed with the Securities and
Exchange Commission on May 30, 1997.
*10.39 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.
*10.40 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.
10.41 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.
10.42 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.
10.43 Assignments, dated October 6, 1983, January 23, 1986,
February 11, 1986 and February 11, 1986, from Gary D.
Lewis to Somanetics Corporation in connection with the
Company's INVOS technology, incorporated by reference to
Exhibit 10.17 to the Company's Registration Statement on
Form S-1 (file no. 33-38438).
10.44 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).
10.45 Private Equity Line Agreement, dated as of March 6, 2000,
between Somanetics Corporation and Kingsbridge Capital
Limited, incorporated by reference to Exhibit 10.42 to
the Company's Registration Statement on Form S-1 (file
no. 333-33262) filed on March 24, 2000 and effective
March 31, 2000.
10.46 Warrant, dated as of March 6, 2000, from Somanetics
Corporation to Kingsbridge Capital Limited, incorporated
by reference to Exhibit 10.43 to the Company's
Registration Statement on Form S-1 (file no. 333-33262)
filed on March 24, 2000 and effective March 31, 2000.
10.47 Registration Rights Agreement, dated as of March 6, 2000,
between Somanetics Corporation and Kingsbridge Capital
Limited, incorporated by reference to Exhibit 10.44 to
the Company's Registration Statement on Form S-1 (file
no. 333-33262) filed on March 24, 2000 and effective
March 31, 2000.
56
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
10.48 Termination Agreement, dated as of March 29, 2001,
between Somanetics Corporation and Kingsbridge Capital
Limited, incorporated by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended February 28, 2001.
10.49 Form of Warrant Agreement and Warrant, dated June 4,
1997, between Somanetics Corporation and Brean Murray &
Co., Inc., incorporated by reference to Exhibit 10.60 to
Amendment No. 1 to the Registration Statement on Form S-1
(file no. 333-25275), filed with the Securities and
Exchange Commission on May 30, 1997.
10.50 Engagement Letter, dated as of March 29, 2001, between
Somanetics Corporation and Brean Murray & Co., Inc.,
incorporated by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended February 28, 2001.
10.51 Registration Rights Agreement, dated as of April 9, 2001,
among Somanetics Corporation and the selling
shareholders, incorporated by reference to Exhibit 4.3 to
the Somanetics Corporation Registration Statement on Form
S-3 (file no. 333-59376) filed April 23, 2001 and
effective May 3, 2001.
10.52 Form of Warrant Agreement, dated April 9, 2001, between
Somanetics Corporation and Brean Murray & Co., Inc.,
incorporated by reference to Exhibit 4.4 to the
Somanetics Corporation Registration Statement on Form S-3
(file no. 333-59376) filed April 23, 2001 and effective
May 3, 2001.
10.53 Amendment to Warrant Agreement, dated December 6, 2001,
between Somanetics Corporation and Brean Murray & Co.,
Inc., incorporated by reference to Exhibit 10.53 to the
Somanetics Corporation Registration Statement on Form S-1
(file no. 333-74788) filed December 7, 2001 and effective
January 11, 2002.
10.54 Form of Placement Agency Agreement, dated as of January
11, 2002, between Somanetics Corporation and Brean Murray
& Co., Inc., incorporated by reference to Exhibit 1.1 to
the Somanetics Corporation Registration Statement on Form
S-1 (file no. 333-74788) filed December 7, 2001 and
effective January 11, 2002.
10.55 Form of Warrant Agreement and Warrant, dated January 16,
2002, between Brean Murray & Co., Inc. and Somanetics
Corporation, incorporated by reference to Exhibit 1.3 to
the Somanetics Corporation Registration Statement on Form
S-1 (file no. 333-74788) filed December 7, 2001 and
effective January 11, 2002.
10.56 Loan and Security Agreement, dated as of February 13,
2001, between Somanetics Corporation and Crestmark Bank,
incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended February 28, 2001.
10.57 License Agreement, dated as of June 2, 2000, among
Somanetics Corporation, CorRestore LLC, Constantine L.
Athanasuleas, M.D. and Gerald D. Buckberg, M.D.,
including forms of warrants from Somanetics Corporation
to CorRestore LLC and Wolfe & Company, incorporated by
reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended May 31, 2000.
23.1 Consent of Deloitte & Touche LLP.
57