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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended May 31, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 0-19095
 SOMANETICS CORPORATION
  Michigan
(State or other jurisdiction of incorporation or organization)
    
    38-2394784
(I.R.S. Employer Identification No.)
 2600 Troy Center Drive
Troy, Michigan
48084-4771
 (248) 244-1400
 N/A
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller-reporting company o(Do not check if a smaller reporting company)
  o þ
 11,953,384




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TABLE OF CONTENTS  PART I FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 1A. RISK FACTORSITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSITEM 6. EXHIBITSSIGNATURESEXHIBIT INDEXEX-31.1EX-31.2EX-32.1    Table of Contents  
 PART I FINANCIAL INFORMATION
 SOMANETICS CORPORATION
 
 ITEM 1.
    
    FINANCIAL STATEMENTS
 BALANCE SHEETS
 May 31,
    
    
    November 30,2010
    
    
    2009(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    34,795,802
    
    
    $
    28,964,273Marketable securities
    
    
    8,749,471
    
    
    
    24,763,854Accounts receivable
    
    
    8,140,310
    
    
    
    8,878,942Inventory
    
    
    3,270,486
    
    
    
    3,622,531Prepaid expenses
    
    
    413,644
    
    
    
    1,087,450Accrued interest receivable
    
    
    50,598
    
    
    
    138,099Deferred tax asset  current
    
    
    51,060
    
    
    
    51,060Total current assets
    
    
    55,471,371
    
    
    
    67,506,209PROPERTY AND EQUIPMENT (at cost):Demonstration and no capital cost sales equipment at customers
    
    
    4,475,463
    
    
    
    4,285,163Machinery and equipment
    
    
    2,157,316
    
    
    
    1,886,582Furniture and fixtures
    
    
    1,055,489
    
    
    
    545,796Leasehold improvements
    
    
    468,877
    
    
    
    197,450Total
    
    
    8,157,145
    
    
    
    6,914,991Less accumulated depreciation and amortization
    
    
    (3,931,415
    )
    
    
    (3,966,645
    )Net property and equipment
    
    
    4,225,730
    
    
    
    2,948,346OTHER ASSETS:Long-term investments
    
    
    36,535,755
    
    
    
    26,004,995Deferred tax asset  non-current
    
    
    3,091,381
    
    
    
    2,795,963Intangible assets, net
    
    
    227,845
    
    
    
    234,003Goodwill
    
    
    1,783,712
    
    
    
    1,783,712Other
    
    
    15,000
    
    
    
    15,000Total other assets
    
    
    41,653,693
    
    
    
    30,833,673TOTAL ASSETS
    
    $
    101,350,794
    
    
    $
    101,288,228LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    1,228,344
    
    
    $
    1,466,497Accrued liabilities
    
    
    1,833,547
    
    
    
    1,788,552Total current liabilities
    
    
    3,061,891
    
    
    
    3,255,049OTHER LIABILITIES:Deferred rent
    
    
    106,705
    
    
    
    Total other liabilities
    
    
    106,705
    
    
    
    TOTAL LIABILITIES
    
    
    3,168,596
    
    
    
    3,255,049COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:Preferred shares; authorized, 1,000,000 shares of $.01 par value;
no shares issued or outstanding
    
    
    
    
    
    
    Common shares; authorized, 20,000,000 shares of $.01 par value;
issued and outstanding, 11,953,384 shares at May 31, 2010,
and 12,104,462 shares at November 30, 2009
    
    
    119,534
    
    
    
    121,045Additional paid-in capital
    
    
    94,294,835
    
    
    
    97,696,229Retained earnings
    
    
    3,767,829
    
    
    
    215,905Total shareholders equity
    
    
    98,182,198
    
    
    
    98,033,179TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    101,350,794
    
    
    $
    101,288,228
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SOMANETICS CORPORATION
 STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months
    
    
    Six MonthsEnded May 31,
    
    
    Ended May 31,2010
    
    
    2009
    
    
    2010
    
    
    2009NET REVENUES
    
    $
    13,884,777
    
    
    $
    11,831,560
    
    
    $
    27,024,461
    
    
    $
    22,986,914COST OF SALES
    
    
    1,676,771
    
    
    
    1,603,755
    
    
    
    3,422,225
    
    
    
    3,184,236Gross Margin
    
    
    12,208,006
    
    
    
    10,227,805
    
    
    
    23,602,236
    
    
    
    19,802,678OPERATING EXPENSES:Research, development and engineering
    
    
    738,600
    
    
    
    485,780
    
    
    
    1,351,754
    
    
    
    919,742Selling, general and administrative
    
    
    9,405,910
    
    
    
    7,184,010
    
    
    
    17,382,185
    
    
    
    14,487,908Total operating expenses
    
    
    10,144,510
    
    
    
    7,669,790
    
    
    
    18,733,939
    
    
    
    15,407,650OPERATING INCOME
    
    
    2,063,496
    
    
    
    2,558,015
    
    
    
    4,868,297
    
    
    
    4,395,028OTHER INCOME:Interest income
    
    
    356,421
    
    
    
    328,836
    
    
    
    608,889
    
    
    
    600,221Total other income
    
    
    356,421
    
    
    
    328,836
    
    
    
    608,889
    
    
    
    600,221INCOME BEFORE INCOME TAXES
    
    
    2,419,917
    
    
    
    2,886,851
    
    
    
    5,477,186
    
    
    
    4,995,249INCOME TAX EXPENSE
    
    
    (914,219
    )
    
    
    (1,109,286
    )
    
    
    (1,925,262
    )
    
    
    (1,915,505
    )NET INCOME
    
    $
    1,505,698
    
    
    $
    1,777,565
    
    
    $
    3,551,924
    
    
    $
    3,079,744NET INCOME PER COMMON
SHARE  BASIC
    
    $
    0.13
    
    
    $
    0.15
    
    
    $
    0.30
    
    
    $
    0.26NET INCOME PER COMMON
SHARE  DILUTED
    
    $
    0.12
    
    
    $
    0.14
    
    
    $
    0.28
    
    
    $
    0.24WEIGHTED AVERAGE SHARES
OUTSTANDING  BASIC
    
    
    11,943,665
    
    
    
    12,056,844
    
    
    
    11,985,978
    
    
    
    12,047,707WEIGHTED AVERAGE SHARES
OUTSTANDING  DILUTED
    
    
    12,890,899
    
    
    
    12,923,857
    
    
    
    12,889,541
    
    
    
    12,923,141
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SOMANETICS CORPORATION
 STATEMENTS OF CASH FLOWS
(Unaudited)
 For the Six-MonthPeriods EndedMay 31,
    
    
    May 31,2010
    
    

2009CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    3,551,924
    
    
    $
    3,079,744Adjustments to reconcile net income to net cash provided by operations:Income tax expense
    
    
    1,637,506
    
    
    
    1,698,384Depreciation and amortization
    
    
    595,072
    
    
    
    522,240Stock compensation expense
    
    
    935,488
    
    
    
    780,378Excess tax benefits from stock option exercises
    
    
    (1,800,327
    )
    
    
    Changes in assets and liabilities:Accounts receivable decrease
    
    
    738,632
    
    
    
    106,405Accrued interest income decrease (increase)
    
    
    87,501
    
    
    
    (158,450
    )Inventory decrease (increase)
    
    
    3,292
    
    
    
    (839,528
    )Deferred income tax benefit (increase)
    
    
    (132,597
    )
    
    
    (85,000
    )Prepaid expenses decrease
    
    
    673,806
    
    
    
    261,456Accounts payable (decrease)
    
    
    (238,153
    )
    
    
    (350,546
    )Accrued liabilities increase (decrease)
    
    
    44,995
    
    
    
    (852,304
    )Deferred rent increase
    
    
    106,705
    
    
    
    Net cash provided by operating activities
    
    
    6,203,844
    
    
    
    4,162,779CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of marketable securities and long-term investments
    
    
    (34,498,656
    )
    
    
    (56,462,735
    )Proceeds from maturities of marketable securities and
long-term investments
    
    
    39,982,279
    
    
    
    24,784,312Acquisition of property and equipment
    
    
    (1,517,545
    )
    
    
    (233,001
    )Net cash provided by (used in) investing activities
    
    
    3,966,078
    
    
    
    (31,911,424
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repurchase of common shares
    
    
    (6,449,210
    )
    
    
    Excess tax benefits from stock option exercises
    
    
    1,800,327
    
    
    
    Proceeds from issuance of common shares due to exercise of stock options
    
    
    310,490
    
    
    
    125,118Net cash (used in) provided by financing activities
    
    
    (4,338,393
    )
    
    
    125,118NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    5,831,529
    
    
    
    (27,623,527
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    28,964,273
    
    
    
    37,166,141CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    34,795,802
    
    
    $
    9,542,614Supplemental Disclosure of Non cash investing activities:Demonstration and no capital cost sales equipment capitalized
from inventory (Note 2)
    
    $
    348,753
    
    
    $
    356,536Supplemental Disclosure of Taxes paid:Federal and state income taxes (Note 3)
    
    $
    420,353
    
    
    $
    332,120
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SOMANETICS CORPORATION
 Notes to Financial Statements
(Unaudited)
 May 31, 2010
 1.
    
    FINANCIAL STATEMENT PRESENTATION
   2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Marketable Securities and Long-Term Investments
 Inventory
 May 31,
    
    
    November 30,2010
    
    
    2009Purchased components
    
    $
    2,124,918
    
    
    $
    2,358,037Finished goods
    
    
    843,634
    
    
    
    1,042,205Work in process
    
    
    301,934
    
    
    
    222,289Total
    
    $
    3,270,486
    
    
    $
    3,622,531
 Property and Equipment
 Intangible Assets and Goodwill
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SOMANETICS CORPORATION
 Notes
to Financial StatementsContinued
(Unaudited)
 May 31, 2010
 May 31,
    
    
    November 30,2010
    
    
    2009Technology acquisition costs
    
    $
    246,318
    
    
    $
    246,318Less: accumulated amortization
    
    
    (18,473
    )
    
    
    (12,315
    )Total
    
    $
    227,845
    
    
    $
    234,003
  Stock Compensation
  6




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SOMANETICS CORPORATION
 Notes to Financial StatementsContinued
(Unaudited)
 May 31, 2010
    Net Income Per Common Share  basic and diluted
 2010Three Months
    
    
    Six MonthsWeighted average shares  basic
    
    
    11,943,665
    
    
    
    11,985,978Add: effect of dilutive common
shares
    
    
    947,234
    
    
    
    903,563Weighted average shares  diluted
    
    
    12,890,899
    
    
    
    12,889,541
 2009Three Months
    
    
    Six MonthsWeighted average shares  basic
    
    
    12,056,844
    
    
    
    12,047,707Add: effect of dilutive common
shares
    
    
    867,013
    
    
    
    875,434Weighted average shares  diluted
    
    
    12,923,857
    
    
    
    12,923,141
  Common Share Repurchase Program
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SOMANETICS CORPORATION
 Notes to Financial StatementsContinued
(Unaudited)
 May 31, 2010
 3.
    
    INCOME TAXES
     4.
    
    ACCRUED LIABILITIES
  May 31,
    
    
    November 30,2010
    
    
    2009Incentive Compensation
    
    $
    840,796
    
    
    $
    1,185,225Sales Commissions
    
    
    504,340
    
    
    
    425,969Professional Fees
    
    
    419,312
    
    
    
    159,458Clinical Research
    
    
    48,074
    
    
    
    Warranty
    
    
    21,025
    
    
    
    17,900Total
    
    $
    1,833,547
    
    
    $
    1,788,552
 5.
    
    COMMITMENTS AND CONTINGENCIES
  8




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SOMANETICS CORPORATION
 Notes to Financial StatementsContinued
(Unaudited)
 May 31, 2010
 6.
    
    SEGMENT INFORMATION
  7.
    
    SUBSEQUENT EVENTS
      9




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SOMANETICS CORPORATION
 Notes to Financial StatementsContinued
(Unaudited)
 May 31, 2010
      Stanley Manne v. Somanetics Corporation, et al.
   10




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SOMANETICS CORPORATION
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 May 31, 2010
 
 ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Forward-Looking Statements
 You should read the following discussion and analysis of our financial condition and results
of operations together with our financial statements and the related notes and other financial data
included elsewhere in this report. Some of the information contained in this discussion and
analysis or set forth elsewhere in this report, including information with respect to our plans and
strategy for our business, includes forward-looking statements that involve risks and
uncertainties. You should review the Risk Factors section of our Annual Report on Form 10-K and
in Part II, Item 1A of this report for a discussion of important factors that could cause actual
results to differ materially from the results described in or implied by the forward-looking
statements contained in the following discussion and analysis. See also Forward-Looking
Statements in Item 1A of our Annual Report on Form 10-K.
 Forward-looking statements include statements regarding the intent, belief or current
expectations of us or our management, including statements preceded by, followed by or including
forward-looking terminology such as may, will, should, believe, expect, anticipate,
plan, intend, propose, estimate, continue, predict or similar expressions, with respect
to various matters. Such forward-looking statements include our decision to enter into an
agreement to be acquired by Covidien, our ability and the ability of Covidien to complete the
transaction contemplated by the definitive agreement, including the parties ability to satisfy the
conditions set forth in the Merger Agreement, and the possibility of any termination of the
definitive agreement. The forward-looking statements contained in this report are based on current
expectations, and those made at other times will be based on our expectations when the statements
are made. Some or all of the results anticipated by these forward-looking statements may not
occur. Factors that could cause or contribute to such differences include, but are not limited to,
the expected timetable for completing the proposed transaction, the risk and uncertainty in
connection with a strategic alternative process, economic conditions in general and in the
healthcare market, including the current global economic difficulties, the demand for and market
acceptance of our products in existing market segments and in new market segments we plan to
pursue, our current dependence on the INVOS Cerebral/Somatic Oximeter and disposable sensors, our
dependence on distributors for a substantial portion of our sales, our dependence on single-source
suppliers, potential competition, the effective management of our growth, our ability to attract
and retain key personnel, the potential for products liability claims, government regulation of our
business, future equity compensation expenses, the challenges associated with developing new
products and obtaining and maintaining regulatory approvals if necessary, research and development
activities, our ability to implement its business strategy, international economic, political and
other risks that could negatively affect our results of operations or financial position, the
fluctuation of our operating results from period to period, our assessment of our goodwill
valuation, the impact of foreign currency fluctuations, tax law changes in Europe, Japan or in
other foreign jurisdictions, the lengthy sales cycle for our products, sales employee turnover,
changes in our actual or estimated future taxable income, changes in accounting rules,
enforceability and the costs of enforcement of our patents, potential infringements of others
patents and the other factors set forth from time to time in our Securities and Exchange Commission
filings. Given these risks, uncertainties and other factors, you should not place undue reliance
on these forward-looking statements. Also, these forward-looking statements in this report are
based on information available to us on the date of this report. You should read this report and
the documents filed as exhibits and incorporated by reference into this report completely and with the
understanding that our actual future results may be materially different from what we expect. We
hereby qualify all forward-looking statements in this report by these cautionary statements. All
forward-looking statements in this report are based on information available to us on the date of
the 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.
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SOMANETICS CORPORATION
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 May 31, 2010
 Agreement and Plan of Merger
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SOMANETICS CORPORATION
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 May 31, 2010
  www.sec.gov
 Overview
   Net Revenues and Cost of Sales
  13




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SOMANETICS CORPORATION
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 May 31, 2010
   Operating Expenses
  
    
    salaries, wages and related expenses of our employees and consultants;
    
    sales and marketing expenses, such as employee sales commissions, commissions to
independent sales representatives, travel, entertainment, advertising, education and
training expenses, depreciation of demonstration monitors and attendance at selected
medical conferences;
    
    clinical research expenses, such as costs of supporting clinical trials; and
    
    general and administrative expenses, such as the cost of corporate operations,
professional services, stock compensation, insurance, warranty and royalty expenses,
investor relations, depreciation and amortization, facilities expenses and other general
operating expenses.
   
    
    salaries, wages and related expenses of our research and development personnel and
consultants;
    
    costs of various development projects; and
    
    costs of preparing and processing applications for FDA clearance of new products.
  14




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SOMANETICS CORPORATION
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 May 31, 2010
 Results of Operations
 Three Months Ended May 31, 2010 Compared to Three Months Ended May 31, 2009
 Net Revenues.
 
    
    an increase in U.S. sales of $1,350,442, or 15%, from $9,312,264 in the three month
period ended May 31, 2009 to $10,662,706 in the three month period ended May 31, 2010. The
increase in U.S. sales was primarily due to an increase in sales of disposable sensors of
$1,033,596, or 12%, primarily as a result of a 13% increase in sensor unit sales. In
addition, sales of the INVOS System monitor increased by $251,846, or 40%, primarily as a
result of increased purchases by hospitals; and
    
    an increase in international sales of $702,775, or 28%, from $2,519,296 in the three
month period ended May 31, 2009 to $3,222,071 in the three month period ended May 31, 2010.
The increase in international sales was primarily due to increased sales of our disposable
sensor of $772,784, or 65%, primarily as a result of increased purchases by Covidien in
Europe and higher prices negotiated as part of our distribution agreement extension with
Covidien effective February 2010, partially offset by decreased purchases from Edwards
Lifesciences. This increase in sensor revenues was partially offset by a decrease in sales
of the INVOS System monitor internationally of $70,009, or 5%, primarily due to decreased
purchases by Edwards Lifesciences of approximately $383,000 due to stocking purchases in
the first quarter of 2010 of product manufactured in our previous facility while they
awaited the required Japanese regulatory approval to purchase product from our new facility
which they received in the second quarter of fiscal 2010, partially offset by increased
INVOS System purchases by E-Wha Biomedics Co., Ltd. in Korea of approximately $306,000.
    Three Months Ended May 31,Product
    
    2010
    
    
    2009Sensors
    
    
    84
    %
    
    
    83
    %INVOS System Monitors
    
    
    16
    %
    
    
    17
    %Total
    
    
    100
    %
    
    
    100
    %
  15




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SOMANETICS CORPORATION
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 May 31, 2010
 Gross Margin.
 Research, Development and Engineering Expenses.
 Selling, General and Administrative Expenses.
 
    
    a $575,327 increase in legal costs primarily due to the patent infringement action that
we have filed against CAS Medical Systems, Inc. in 2009, and the Agreement and Plan of
Merger with Covidien;
    
    a $561,342 increase in salaries, wages and related expenses, primarily as a result of an
increase in the number of employees, principally in sales and marketing (from an average of
120 employees for the three months ended May 31, 2009 to an average of 142 employees for
the three months ended May 31, 2010) and an increase in employee insurance premiums and
salaries of existing employees;
    
    a $364,727 increase in sales commissions primarily due to fiscal 2010 year-to-date sales
performance;
    
    a $263,852 increase in accrued incentive compensation expense due to our year-to-date
2010 financial performance in accordance with the 2010 incentive compensation plans;
    
    a $179,735 increase in travel, marketing and selling-related expenses, primarily as a
result of increased sales training expenses as a result of the timing of our national sales
meeting which was held in the second quarter of fiscal 2010, compared to the first quarter
of fiscal 2009;
    
    a $154,478 increase in facility expenses, primarily due to the expenses associated with
the lease agreement that we have entered into for our new corporate headquarters and
assembly and storage facility; and
    
    a $121,390 increase in stock compensation expense primarily due to stock compensation
issued to our officers, employees, directors and one of our consultants in fiscal 2010.
  Other Income.
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SOMANETICS CORPORATION
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 May 31, 2010
 Income Taxes.
 Six Months Ended May 31, 2010 Compared to Six Months Ended May 31, 2009
 Net Revenues.
 
    
    an increase in U.S. sales of $3,068,074, or 17%, from $18,056,484 in the first six
months of fiscal 2009 to $21,124,558 in the first six months of fiscal 2010. The increase
in U.S. sales was primarily due to an increase in sales of disposable sensors of
$2,062,346, or 13%, primarily as a result of an 12% increase in sensor unit sales. In
addition, sales of the INVOS System monitor increased by $645,710, or 42%, primarily as a
result of increased purchases by hospitals and $320,000 of monitors sold in connection with
the compartment syndrome study in the first quarter, and sales of the Vital Sync System
increased $360,018, primarily as a result of monitors sold in connection with the
compartment syndrome study in the first quarter; and
    
    an increase in international sales of $969,473, or 20%, from $4,930,430 in the first six
months of fiscal 2009 to $5,899,903 in the first six months of fiscal 2010. The increase
in international sales was primarily due to increased sales of our disposable sensors of
$998,989, or 42%, primarily as a result of increased purchases by Covidien in Europe and
higher prices negotiated as part of our distribution agreement extension with Covidien
effective February 2010. This increase was partially offset by a decrease in sales of the
INVOS System monitor internationally of $29,516, or 1%, primarily due to reduced purchases
by Covidien in Europe of approximately $357,000, partially offset by increased purchases by
E-Wha Biomedics Co., Ltd. in Korea of approximately $258,000. In the first six months of
fiscal 2010, international sales represented 22% of our net revenues, compared to 21% of
our net revenues in the first six
months of fiscal 2009. Purchases by Covidien accounted for 13% of net revenues in the first
six months of fiscal 2010 and fiscal 2009.
   Six Months Ended May 31,Product
    
    2010
    
    
    2009Sensors
    
    
    81
    %
    
    
    82
    %INVOS System Monitors
    
    
    18
    %
    
    
    18
    %Vital Sync System
    
    
    1
    %
    
    
    Total
    
    
    100
    %
    
    
    100
    %
 Gross Margin.
 17




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##### Table of Contents



SOMANETICS CORPORATION
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 May 31, 2010
  Research, Development and Engineering Expenses.
 Selling, General and Administrative Expenses.
 
    
    a $1,222,216 increase in salaries, wages, and related expenses, primarily as a result of
an increase in the number of employees, principally in sales and marketing (from an average
of 117 employees for the six months ended May 31, 2009 to an average of 140 employees for
the six months ended May 31, 2010) and an increase in employee insurance premiums and
salaries of existing employees;
    
    a $786,967 increase in legal costs primarily due to the patent infringement action that
we have filed against CAS Medical Systems, Inc. in 2009, and the Agreement and Plan of
Merger with Covidien;
    
    a $394,060 increase in facility expenses, primarily due to the expenses associated with
the lease agreement that we have entered into for our new corporate headquarters and
assembly and storage facility;
    
    a $377,121 increase in sales commissions primarily due to fiscal 2010 year-to-date sales
performance;
    
    a $277,956 increase in accrued incentive compensation expense due to our year-to-date
2010 financial performance in accordance with the 2010 incentive compensation plans; and
    
    a $155,110 increase in stock compensation expense due to stock compensation issued to
our officers, employees, directors and one of our consultants in fiscal 2010.
  Other Income.
 Income Taxes.
 18




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##### Table of Contents



SOMANETICS CORPORATION
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 May 31, 2010
 Liquidity and Capital Resources
 General
    Cash Flows From Operating Activities
  
    
    $4,919,663 of income before income taxes and non-cash depreciation, amortization and
stock compensation expense and excess tax benefits from stock option exercises;
    
    a $673,806 decrease in prepaid expenses, primarily as a result of property and equipment
and leasehold improvements associated with our new facility that were capitalized as
machinery and equipment, furniture and fixtures and leasehold improvements during the first
six months of 2010, and the amortization of prepaid insurance payments paid at the end of
fiscal 2009;
    
    a $738,632 decrease in accounts receivable, primarily as a result of lower second
quarter sales in fiscal 2010 than in the fourth quarter of fiscal 2009 and more timely
collections in the second quarter of fiscal 2010;
    
    a $106,705 increase in deferred rent associated with the new lease agreement for our new
facility;
    
    an $87,501 decrease in accrued interest income, primarily due to the timing of interest
payments on our marketable securities and long-term investments;
    
    a $44,995 increase in accrued liabilities, primarily due to increased incentive
compensation and sales commission accruals as a result of year to date financial
performance, increased legal accruals associated with the patent infringement action that
we have filed against CAS Medical Systems, Inc. in 2009, and the Agreement and Plan of
Merger with Covidien, partially offset by the payment of year-end 2009 accruals, including
incentive compensation and sales commissions; and
    
    a $3,292 decrease in inventories, primarily due to higher than expected second quarter
2010 sales, partially offset by acquisitions of components due to anticipated sales;
inventories on our balance sheet decreased
more because we capitalized INVOS System monitors to property and equipment that are being
used as demonstration units and no capital cost sales equipment, as described below.
  
    
    a $238,153 decrease in accounts payable, primarily as a result of timing of payments
made to vendors, partially offset by increased operating expenses; and
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##### Table of Contents



SOMANETICS CORPORATION
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 May 31, 2010
 
    
    an $132,597 increase in deferred income tax benefits as a result of payments made for
estimated alternative minimum tax that we expect will result in future tax credits when we
use our net operating loss carryforwards.
      Cash Flows From Investing Activities
  20




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##### Table of Contents



SOMANETICS CORPORATION
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 May 31, 2010
 Cash Flows From Financing Activities
  Contractual Obligations
  Off-Balance Sheet Arrangements
  Critical Accounting Policies
  Stock Compensation
   21




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##### Table of Contents



SOMANETICS CORPORATION
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 May 31, 2010
   Income Taxes
    No Capital Cost Sales Revenue Recognition
  Technology Acquisition Costs Intangible Asset and Goodwill
  22




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##### Table of Contents



SOMANETICS CORPORATION
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 May 31, 2010
    23




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  May 31, 2010Expected Maturity Dates By Fiscal Year2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    Thereafter
    
    
    Total
    
    
    Fair ValueInvestments:Marketable Securities and Long-term Investments:Fixed Rate ($)
    
    
    4,571,255
    
    
    
    17,046,700
    
    
    
    12,122,298
    
    
    
    11,544,973
    
    
    
    
    
    
    
    
    
    
    
    45,285,226
    
    
    
    45,697,136Average interest rate
    
    
    3.54
    %
    
    
    2.57
    %
    
    
    3.03
    %
    
    
    3.84
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    3.11
    %
  24




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
    25




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##### Table of Contents



PART II OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Stanley Manne v. Somanetics Corporation, et al.
 
 ITEM 1A. RISK FACTORS
  If our acquisition by affiliates of Covidien plc is not completed as expected, our share
price, business and results of operations may suffer.
    26




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##### Table of Contents




    
    activities related to the Offer or the Merger and related uncertainties may lead to a
loss of revenue and market position that we may not be able to regain if the proposed
transactions are not consummated, and our relationship with affiliates of Covidien, our
exclusive distributor in Europe, Canada, the Middle East and South Africa and our largest
customer, could be irreparably damaged;
    
    the market price of our common shares could decline following an announcement that the
proposed transaction has been abandoned or delayed;
    
    if the Merger is delayed or otherwise not consummated within the contemplated time
periods or at all, shareholders, option holders and holders of restricted common shares
might be delayed in receiving the Offer Price for their common shares or options, and
because Sub would own a majority of our common shares, there may not be an active trading
market for our remaining common shares and we may not be able to sustain our Nasdaq
listing;
    
    depending on the reasons for terminating the Offer, we may be required to pay a $10.5
million termination fee;
    
    we would remain liable for our costs related to the proposed transaction, including
substantial legal, accounting and investment banking expenses; and
    
    we may not be able to take advantage of alternative business opportunities or
effectively respond to competitive pressures.
 A lawsuit has been filed and additional lawsuits may be filed against us and the members of our
Board of Directors arising out of our acquisition by affiliates of Covidien plc, which may delay
or prevent the proposed transaction.
 Stanley Manne v. Somanetics Corporation, et al.
 27




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28




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##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  TotalNumber of
    
    
    ApproximateShares
    
    
    Dollar ValuePurchased
    
    
    of SharesTotal
    
    
    
    
    
    
    as Part of
    
    
    That May YetNumber of
    
    
    Average
    
    
    Publicly
    
    
    Be PurchasedShares
    
    
    Price Paid
    
    
    Announced Plans
    
    
    Under the PlansPeriod
    
    Purchased
    
    
    Per Share
    
    
    or Programs
    
    
    or ProgramsMarch 1-31, 2010
    
    
    0
    
    
    
    
    
    
    
    0
    
    
    
    7,101,370April 1-30, 2010
    
    
    0
    
    
    
    
    
    
    
    0
    
    
    
    7,101,370May 1-31, 2010
    
    
    0
    
    
    
    
    
    
    
    0
    
    
    
    7,101,370Total
    
    
    0
    
    
    
    N/A
    
    
    
    0
  29




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##### Table of Contents



ITEM 6. EXHIBITS
 2.1
    
    Agreement and Plan of Merger, dated June 16, 2010, including
Form of Tender and Voting Agreement attached as Appendix II, incorporated by
reference to Exhibit 2.1 to the Companys Current Report on Form 8-K, dated
June 16, 2010 and filed June 16, 2010.3(ii)
    
    Amended and Restated Bylaws of Somanetics Corporation,
incorporated by reference to Exhibit 3(ii) to the Companys Current Report on
Form 8-K, dated June 15, 2010 and filed June 21, 2010.10.1
    
    Amendment to the 2010 Executive Officer Incentive Compensation
Plan, incorporated by reference to Exhibit 10.1 to the Companys Current Report
on Form 8-K, dated June 15, 2010 and filed June 18, 2010.31.1
    
    Certifications of Chief Executive Officer Pursuant to Rule
13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    Certifications of Chief Financial Officer Pursuant to Rule
13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
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##### Table of Contents



SIGNATURES
  Somanetics Corporation(Registrant)Date: July 9, 2010
    By:
    /s/ William M. IaconaWilliam M. IaconaVice President, Chief Financial Officer, Controller and
Treasurer (Duly Authorized and Principal Financial Officer) 31




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##### Table of Contents



EXHIBIT INDEX
 Exhibit
    
    Description2.1
    
    Agreement and Plan of Merger, dated June 16, 2010, including Form of Tender and Voting
Agreement attached as Appendix II, incorporated by reference to Exhibit 2.1 to the Companys
Current Report on Form 8-K, dated June 16, 2010 and filed June 16, 2010.3(ii)
    
    Amended and Restated Bylaws of Somanetics Corporation, incorporated by reference to
Exhibit 3(ii) to the Companys Current Report on Form 8-K, dated June 15, 2010 and filed
June 21, 2010.10.1
    
    Amendment to the 2010 Executive Officer Incentive Compensation Plan, incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K, dated June 15, 2010 and
filed June 18, 2010.31.1
    
    Certifications of Chief Executive Officer Pursuant to Rule 13a-14(a), as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certifications of Chief Financial Officer Pursuant to Rule 13a-14(a), as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 32