e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2005
OR
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o |
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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 0-23837
SurModics, Inc.
(Exact name of registrant as specified in its Charter)
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MINNESOTA |
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41-1356149 |
(State of incorporation)
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(I.R.S. Employer Identification No.) |
9924 West 74th Street
Eden Prairie, Minnesota 55344
(Address of principal executive offices)
Registrants telephone number, including area code: (952) 829-2700
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer þ
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Non-accelerated
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Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2).
Yes o No þ
The number of shares of the registrants Common Stock, $.05 par value per share, outstanding as of
January 30, 2006 was 18,553,421.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
SURMODICS, INC.
Condensed Balance Sheets
(In thousands, except share data)
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December 31 |
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September 30, |
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2005 |
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2005 |
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(unaudited) |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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$ |
1,804 |
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$ |
3,921 |
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Short-term investments |
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31,834 |
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20,524 |
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Accounts receivable, net |
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11,307 |
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10,996 |
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Income taxes receivable |
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207 |
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3,640 |
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Inventories |
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1,153 |
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1,091 |
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Deferred tax asset |
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353 |
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353 |
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Prepaids and other |
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975 |
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1,079 |
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Total current assets |
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47,633 |
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41,604 |
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Property and equipment, net |
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16,658 |
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14,832 |
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Long-term investments |
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46,898 |
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48,874 |
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Deferred tax asset |
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3,164 |
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2,868 |
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Other assets, net |
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16,270 |
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16,047 |
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$ |
130,623 |
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$ |
124,225 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities |
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Accounts payable |
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$ |
757 |
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$ |
1,163 |
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Accrued liabilities |
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2,773 |
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3,546 |
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Deferred revenue |
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255 |
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414 |
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Total current liabilities |
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3,785 |
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5,123 |
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Deferred revenue, less current portion |
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1,428 |
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1,521 |
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Other long-term liabilities |
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2,000 |
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2,000 |
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Total liabilities |
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7,213 |
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8,644 |
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Commitments and contingencies
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Stockholders Equity
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Series A Preferred stock-
$.05 par value, 450,000 shares authorized; no shares issued and outstanding |
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Common stock-$.05 par
value, 45,000,000 shares authorized; 18,551,821 and 18,535,761 shares issued and outstanding |
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928 |
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927 |
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Additional paid-in capital |
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88,661 |
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89,721 |
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Unearned compensation |
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(2,621 |
) |
Accumulated other comprehensive loss |
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(336 |
) |
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(360 |
) |
Retained earnings |
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34,157 |
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27,914 |
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Total stockholders equity |
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123,410 |
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115,581 |
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$ |
130,623 |
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$ |
124,225 |
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The accompanying notes are an integral part of these unaudited condensed financial statements.
2
Item 1. Financial Statements
SURMODICS, INC.
Condensed Statements of Operations
(In thousands, except per share data)
(unaudited)
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Three Months Ended |
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December 31 |
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2005 |
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2004 |
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Revenue |
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Royalties and license fees |
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$ |
12,275 |
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$ |
10,091 |
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Product sales |
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2,347 |
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2,000 |
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Research and development |
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1,843 |
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1,978 |
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Total revenue |
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16,465 |
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14,069 |
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Operating costs and expenses |
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Product |
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681 |
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620 |
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Research and development |
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4,593 |
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3,355 |
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Sales and marketing |
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324 |
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262 |
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General and administrative |
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2,287 |
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1,194 |
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Total operating costs and expenses |
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7,885 |
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5,431 |
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Income from operations |
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8,580 |
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8,638 |
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Other income (loss) |
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Investment income |
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820 |
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417 |
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Other loss |
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(92 |
) |
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(445 |
) |
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Other income (loss) |
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728 |
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(28 |
) |
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Income before income taxes |
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9,308 |
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8,610 |
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Income tax provision |
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(3,090 |
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(3,373 |
) |
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Net income |
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$ |
6,218 |
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$ |
5,237 |
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Basic net income per share |
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$ |
0.34 |
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$ |
0.30 |
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Diluted net income per share |
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$ |
0.33 |
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$ |
0.29 |
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Weighted average shares outstanding |
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Basic |
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18,436 |
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17,574 |
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Dilutive effect of outstanding stock options |
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207 |
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376 |
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Diluted |
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18,643 |
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17,950 |
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The accompanying notes are an integral part of these unaudited condensed financial statements.
3
SURMODICS, INC.
Condensed Statements of Cash Flows
(In thousands)
(unaudited)
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Three months ended |
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December 31, |
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2005 |
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2004 |
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Operating Activities |
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Net income |
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$ |
6,218 |
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$ |
5,237 |
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Adjustments to reconcile net income to net cash provided by
operating activities- |
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Depreciation and amortization |
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878 |
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996 |
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Loss on equity method investment and sales of investments |
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92 |
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|
445 |
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Stock compensation |
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1,162 |
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94 |
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Deferred taxes |
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(296 |
) |
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(75 |
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Other |
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24 |
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Gain on disposals of property and equipment |
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(195 |
) |
Change in operating assets and liabilities: |
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Accounts receivable |
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(311 |
) |
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(1,367 |
) |
Inventories |
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(62 |
) |
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(65 |
) |
Accounts payable and accrued liabilities |
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(635 |
) |
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(79 |
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Income taxes |
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3,390 |
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|
666 |
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Deferred revenue |
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(252 |
) |
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(311 |
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Prepaids and other |
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147 |
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Net cash provided by operating activities |
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10,355 |
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5,346 |
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Investing Activities |
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Purchases of property and equipment |
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(2,823 |
) |
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(390 |
) |
Proceeds from sales of property and equipment |
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|
254 |
|
Purchases of available-for-sale investments |
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(42,337 |
) |
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(26,472 |
) |
Sales/maturities of available-for-sale investments |
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|
32,935 |
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27,161 |
|
Purchase of licenses and patents |
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(649 |
) |
|
|
(5,170 |
) |
Investment in InnoRx |
|
|
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(1,592 |
) |
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Net cash used in investing activities |
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(12,874 |
) |
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(6,209 |
) |
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|
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Financing Activities |
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Tax benefit from exercise of stock options |
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43 |
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Issuance of common stock |
|
|
359 |
|
|
|
210 |
|
|
|
|
|
|
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|
Net cash provided by financing activities |
|
|
402 |
|
|
|
210 |
|
|
|
|
|
|
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|
Net change in cash and cash equivalents |
|
|
(2,117 |
) |
|
|
(653 |
) |
|
|
|
|
|
|
|
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|
Cash and Cash Equivalents |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
3,921 |
|
|
|
2,709 |
|
|
|
|
|
|
|
|
End of period |
|
$ |
1,804 |
|
|
$ |
2,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cash paid for income taxes |
|
$ |
33 |
|
|
$ |
2,723 |
|
Noncash transaction-acquisition of property, plant, and equipment on account |
|
$ |
544 |
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|
$ |
196 |
|
The accompanying notes are an integral part of these unaudited condensed financial statements.
4
SURMODICS, INC.
Notes to Condensed Financial Statements
Period Ended December 31, 2005
(Unaudited)
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited condensed financial statements have
been prepared in accordance with accounting principles generally accepted in the United States and
reflect all adjustments, consisting solely of normal recurring adjustments, needed to fairly
present the financial results for the interim periods presented. These financial statements
include some amounts that are based on managements best estimates and judgments. These estimates
may be adjusted as more information becomes available, and any adjustment could be significant.
The impact of any change in estimates is included in the determination of earnings in the period in
which the change in estimate is identified. The results of operations for the first quarter ended
December 31, 2005, are not necessarily indicative of the results that may be expected for the
entire 2006 fiscal year.
In accordance with the rules and regulations of the United States Securities and Exchange
Commission, the Company has omitted footnote disclosures that would substantially duplicate the
disclosures contained in the audited financial statements of the Company. These unaudited
condensed financial statements should be read together with the financial statements for the year
ended September 30, 2005, and footnotes thereto included in the Companys Form 10-K as filed with
the United States Securities and Exchange Commission on
December 14, 2005. In January 2005, we acquired all of the assets of InnoRx, Inc. by paying cash and issuing
shares of SurModics common stock to InnoRx shareholders. Prior to the acquisition, SurModics held
an ownership interest in InnoRx of less than 20 percent and accounted for the investment under the
cost method. Upon the completion of the InnoRx acquisition, we retroactively adjusted our
previously reported results to show the impact of accounting for InnoRx under the equity method.
The net impact was an approximate $445,000 reduction of net income for the quarter ended December
31, 2004 from previously reported results.
(2) New Accounting Pronouncements
In May 2005, FASB issued Statement of Financial Accounting Standards No. 154, Accounting
Changes and Error Corrections a replacement of Accounting Principles Board (APB) Opinion No. 20
and FASB Statement No. 3 (SFAS 154). This statement applies to all voluntary changes in
accounting principle and changes required by an accounting pronouncement where no specific
transition provisions are included. SFAS 154 requires retrospective application to prior periods
financial statements of changes in accounting principle, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change. The provisions of SFAS
154 are effective for the Company for accounting changes and correction of errors made in fiscal
year 2007. The Company does not anticipate that the implementation of this standard will have a
material impact on its financial position, results of operations or cash flows.
In December 2004, the Financial Accounting Standards Board issued a revision to Statement of
Financial Accounting Standards 123 (SFAS 123(R)), Share-Based Payment. The revision requires all
entities to recognize compensation expense in an amount equal to the fair value of share-based
payments granted to employees. The statement eliminates the alternative method of accounting for
employee share-based payments previously available under APB Opinion No. 25. The Statement became
effective for the Company in the current quarter and is further discussed in note 6.
In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. 107 (SAB 107), which provides guidance on the interaction between SFAS 123(R) and certain SEC
rules and regulations. SAB 107 was issued to assist issuers in their initial implementation of SFAS
123(R) and enhance the information received by investors and other users of the financial
statements. See note 6 for further discussion.
In December 2004, the FASB staff issued FASB Staff Position (FSP) FASB 109-1 that provides
guidance on the application of FASB Statement No. 109, Accounting for Income Taxes, to
5
the provision within the American Jobs Creations Act of 2004 that provides a tax deduction on qualified
production activities. This FSP is effective upon issuance. The adoption of this FSP did not have a
material impact on our results of operations or financial position for the three months ended
December 31, 2005
In March 2004, the Emerging Issues Task Force (EITF) released Issue No. 03-1, The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1)
regarding disclosures about unrealized losses on available-for-sale debt and equity securities
accounted for under the FASB Statements No. 115, Accounting for Certain Investments in Debt and
Equity Securities, (FAS 115). The effective date for evaluating whether an investment is
other-than-temporarily impaired was delayed by FSP EITF Issue 03-1-1. In November 2005, the FASB
issued FSP FAS 115-1 to clarify these rules. Effectively, the FSP issued in November 2005 reverts
to the other-than-temporary guidance that predated the original effective date of EITF 03-1;
however, it maintains certain guidance in EITF 03-1 relative to testing of cost-method equity
securities and the disclosure requirements which have been effective since 2003. The FSP issued in
November 2005 is effective for reporting periods beginning after December 15, 2005. The adoption of
the FSP issued in November 2005 is not anticipated to have a material effect on our financial
position.
(3) Other assets
Other assets consist principally of investments and acquired patents. The balance in other
assets increased primarily due to the purchase of a patent in the first quarter of fiscal 2006 less
accumulated amortization on patents and other intangibles.
(4) Inventories (dollars in thousands)
Inventories are stated at the lower of cost or market using the specific identification method
and include direct labor, materials and overhead. Inventories consisted of the following
components:
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December 31, |
|
|
September 30, |
|
|
|
2005 |
|
|
2005 |
|
Raw materials |
|
$ |
516 |
|
|
$ |
512 |
|
Finished goods |
|
|
637 |
|
|
|
579 |
|
|
|
|
|
|
|
|
|
|
$ |
1,153 |
|
|
$ |
1,091 |
|
|
|
|
|
|
|
|
(5) Operating Segments (dollars in thousands)
Operating segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief operating decision
maker, or decision making group, in deciding how to allocate resources and in assessing
performance.
SurModics manages its business on the basis of the operating segments noted in the table
below, which are composed of the Companys six business units. The three operating segments are
aggregated into one reportable segment. The Drug Delivery operating segment contains: (1) the
Drug Delivery business unit and (2) the Ophthalmology division. The Hydrophilic and Other
operating segment consists of three business units: (1) Hydrophilic Technologies, (2) Regenerative
Technologies, and (3) Orthopedics. The Diagnostics operating segment contains the Diagnostics
and Drug Discovery business unit. Each operating segment has similar economic characteristics,
technology, manufacturing processes, customers, regulatory environments, and shared
infrastructures. The Company manages its expenses on a company-wide basis, as many costs and activities are shared among the business
units and a majority of the Companys employees reside in shared resource units. The focus of the
business units is
6
providing solutions to customers and maximizing revenue over the long-term. The
accounting policies for segment reporting are the same as for the Company as a whole. The table
below presents revenue from the three operating segments.
|
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|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Operating segment: |
|
|
|
|
|
|
|
|
Drug Delivery |
|
$ |
8,287 |
|
|
$ |
7,121 |
|
Hydrophilic and Other |
|
|
5,165 |
|
|
|
4,233 |
|
Diagnostics |
|
|
3,013 |
|
|
|
2,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
16,465 |
|
|
$ |
14,069 |
|
|
|
|
|
|
|
|
(6) Stock-based Compensation (in thousands, except per share data)
Commencing October 1, 2005, the Company adopted Statement of Financial Accounting Standards
No. 123(R), Share Based Payment (SFAS 123(R)), which requires all share-based payments,
including grants of stock options, to be recognized in the income statement as an operating
expense, based on their fair values, over the requisite service period. The Company recorded $1.2
million of related compensation expense, before taxes, for the three-months ended December 31,
2005. The compensation expense reduced both basic and diluted earnings per share by $0.04.
As of December 31, 2005, $17.9 million of total unrecognized compensation costs related to
non-vested awards is expected to be recognized over a weighted average period of approximately 3.91
years.
Prior to adopting SFAS 123(R), the Company accounted for stock-based compensation under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The Company
has applied the modified prospective method in adopting SFAS 123(R). Accordingly, periods prior to
adoption have not been restated. The following table illustrates the effect on net income and
earnings per share if the fair value based method had been applied to the prior year period.
|
|
|
|
|
|
|
Three months ended |
|
|
|
December 31, 2004 |
|
Reported net income |
|
$ |
5,237 |
|
Restricted stock expense previously recorded under APB 25,
net of tax |
|
|
58 |
|
Stock-based compensation determined under the fair value based
method, net of related tax effects |
|
|
(642 |
) |
|
|
|
|
Proforma net income |
|
$ |
4,653 |
|
|
|
|
|
|
|
|
|
|
Income per common equivalent share: |
|
|
|
|
Basic as reported |
|
$ |
0.30 |
|
Diluted as reported |
|
$ |
0.29 |
|
|
|
|
|
|
Basic proforma |
|
$ |
0.26 |
|
Diluted proforma |
|
$ |
0.25 |
|
7
The Company uses the Black-Scholes option pricing model to determine the weighted average fair
value of options. The weighted average fair value of options granted during the three month periods
ended December 31, 2005 and 2004 were $19.30 and $18.74, respectively. The fair market value of
each option is estimated on the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions for the three months ended December 31, 2005 and December
31, 2004, respectively: risk-free interest rates of 4.55% and 3.52%; expected lives of 5.1 years
and 7 years; and expected volatility of 50% and 62%.
The Companys Incentive Stock Options (ISO) are granted at a price of at least 100% of the
fair market value of the Common Stock on the date of the grant or 110% with respect to optionees
who own more than 10% of the total combined voting power of all classes of stock. Options expire in
seven years or upon termination of employment and are exercisable at a rate of 20% per year from
the date of grant or 20% per year commencing one year after the date of grant. Nonqualified stock
options are granted at fair market value on the date of grant. Options expire in 7 to 10 years and
are exercisable at a rate of 20% per year from the date of grant or 20% per year commencing two
years after the date of grant. The Company has authorized 2,400,000 shares for grant under the
2003 Plan. As of December 31, 2005, the aggregate intrinsic value of the option shares outstanding
and the option shares exercisable was $16.0 million and $7.8 million, respectively. Option
transactions under the prior plans and the 2003 Plan during the first quarter ended December 31,
2005 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Weighted Average |
|
|
shares |
|
Exercise Price |
Outstanding at September 30, 2005 |
|
|
1,529,935 |
|
|
$ |
26.60 |
|
Granted |
|
|
133,000 |
|
|
|
39.13 |
|
Exercised |
|
|
(16,060 |
) |
|
|
25.88 |
|
Canceled |
|
|
(3,700 |
) |
|
|
35.78 |
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005 |
|
|
1,643,175 |
|
|
$ |
27.60 |
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2005 |
|
|
495,243 |
|
|
$ |
21.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
Shares |
|
|
|
|
Shares Outstanding |
|
Average |
|
Remaining |
|
Exercisable at |
|
|
Exercise Price |
|
at December 31, |
|
Exercise |
|
Contractual |
|
December 31, |
|
Weighted Average |
Range |
|
2005 |
|
Price |
|
Life (in years) |
|
2005 |
|
Exercise Price |
$2.50-$8.44 |
|
|
150,115 |
|
|
$ |
6.99 |
|
|
|
1.44 |
|
|
|
150,115 |
|
|
$ |
6.99 |
|
$10.25-$21.82 |
|
|
308,940 |
|
|
|
21.21 |
|
|
|
5.46 |
|
|
|
89,100 |
|
|
|
20.39 |
|
$22.46-$25.09 |
|
|
111,400 |
|
|
|
24.94 |
|
|
|
2.36 |
|
|
|
98,828 |
|
|
|
25.06 |
|
$27.00-$29.89 |
|
|
667,340 |
|
|
|
29.38 |
|
|
|
5.79 |
|
|
|
64,540 |
|
|
|
29.38 |
|
$30.59-$53.00 |
|
|
405,380 |
|
|
|
37.89 |
|
|
|
6.02 |
|
|
|
92,660 |
|
|
|
36.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,643,175 |
|
|
$ |
27.60 |
|
|
|
5.15 |
|
|
|
495,243 |
|
|
$ |
21.37 |
|
Restricted Stock Awards
The Company has entered into restricted stock agreements with certain key employees,
covering the issuance of Common Stock (Restricted Stock). The Restricted Stock will be released to the key employees if they are employed by the Company at the end of
the vesting period. Unearned
8
compensation has been recognized for the estimated fair value of the 108,000 common shares and
is being charged to income over the five-year vesting term. Stock compensation expense recognized
related to these awards totaled $203,000 and $94,000 during the three month periods ended December
31, 2005 and 2004, respectively.
1999 Employee Stock Purchase Plan
Under the 1999 Employee Stock Purchase Plan (Stock Purchase Plan) the Company is authorized
to issue up to 200,000 shares of Common Stock. All full-time and part-time employees can choose to
have up to 10% of their annual compensation withheld to purchase the Companys Common Stock at
purchase prices defined within the provisions of the Stock Purchase Plan. As of December 31, 2005
there was approximately $339,000 of employee contributions included in accrued liabilities in the
accompanying balance sheets. Stock compensation expense recognized related to Stock Purchase Plan
totaled $42,000 and $0 during the three month periods ended December 31, 2005 and 2004,
respectively.
(7) Comprehensive Income (dollars in thousands)
The components of comprehensive income for the three-month periods are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Net income |
|
$ |
6,218 |
|
|
$ |
5,237 |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
Unrealized holding losses on
available-for-sale securities arising
during the period, net of tax |
|
|
(37 |
) |
|
|
(128 |
) |
Less reclassification adjustment
for realized gains included in net
income, net of tax |
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
24 |
|
|
|
(128 |
) |
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
6,242 |
|
|
$ |
5,109 |
|
|
|
|
|
|
|
|
(8) Property and Equipment
In September 2005, the Company entered an agreement to sell a building and 27 acres of land
located in Bloomington, Minnesota. Management intends to occupy portions of the building until
modifications to the Companys Eden Prairie, Minnesota facility are complete, at which time the
Company will consolidate operations at its Eden Prairie headquarters. The approximate $6.6 million
carrying value of the property is recorded in Property and Equipment at December 31, 2005 and the
Company will continue to record depreciation expense on the facility until completion of the sale.
The Company expects to vacate the Bloomington facility by the end of the third quarter of fiscal
2006.
9
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
SurModics is a leading provider of surface modification and drug delivery technologies to the
healthcare industry. The Company is organized into three operating segments composed of six
technology-centered and industry-focused business units. The Drug Delivery operating segment
contains: (1) the Drug Delivery business unit, which is responsible for technologies dedicated to
site specific delivery of drugs, and (2) the Ophthalmology division, which is dedicated to the
advancement of treatments for eye diseases, such as age-related macular degeneration (AMD) and
diabetic macular edema (DME), two of the leading causes of blindness. The Hydrophilic and Other
operating segment consists of three business units: (1) Hydrophilic Technologies business unit,
which focuses on enhancing medical devices with advanced lubricious coatings that facilitate their
placement and maneuverability in the body; (2) Regenerative Technologies business unit, which is
developing platforms intended to augment or replace tissue/organ function (e.g., cell encapsulation
applications), or to modify medical devices to facilitate tissue/organ recovery through natural
repair mechanisms (e.g., hemo/biocompatible coatings); and (3) Orthopedics business unit, which is
committed to innovative solutions for orthopedics patients using proven SurModics technologies, and
creating new technology solutions to existing patient care gaps in the orthopedics field. The
Diagnostics operating segment contains the Diagnostics and Drug Discovery business unit, which
includes our genomics slide technologies, our stabilization products for immunoassay diagnostics
tests, our in vitro diagnostic format technology and the work being performed to develop synthetic
cell culture products.
Revenue in each of our operating segments is derived from three primary sources: (1) royalties
and license fees from licensing our patented surface modification and drug delivery technologies
and in vitro diagnostic formats to customers; (2) the sale of reagent chemicals to licensees of our
technologies, stabilization products to the diagnostics industry and coated glass slides to the
genomics market; and (3) research and development fees generated on customer projects. Revenue
should be expected to fluctuate from quarter to quarter depending on, among other factors: our
customers success in selling products incorporating our technologies; the timing of introductions
of coated products by customers; the timing of introductions of products that compete with our
customers products; the number and size of development projects that are entered into; the number
and terms of new license agreements that are finalized; the value of reagent chemicals and other
products sold to licensees; and the timing of future acquisitions we complete, if any.
For financial accounting and reporting purposes, we treat our three operating segments as one
reportable segment. We made this determination because our operating segments currently share the
same facilities; a significant percentage of our employees provide support services (including
research and development) to each operating segment; technology and products from each operating
segment are marketed to the same or similar customers; each operating segment uses the same sales
and marketing resources; and each operating segment operates in the same regulatory environment.
Critical Accounting Policies
Critical accounting policies are those policies that require the application of managements
most challenging subjective or complex judgment, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in subsequent periods.
Critical accounting policies involve judgments and uncertainties that are sufficiently sensitive to
result in materially different results under different assumptions and conditions. For a detailed
description of our critical accounting policies, see the notes to the financial statements included
in our Annual Report on Form 10-K for the
10
year ended September 30, 2005. There have been no changes in critical accounting policies
subsequent to September 30, 2005 other than the adoption of Statement of Financial Accounting
Standards No. 123(R), Share Based Payment (SFAS 123(R)) as discussed in note 6.
Results of Operations
Three Months Ended December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Fiscal 2006 |
|
|
Fiscal 2005 |
|
|
Increase |
|
|
% Increase |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drug Delivery |
|
$ |
8,287 |
|
|
$ |
7,121 |
|
|
$ |
1,166 |
|
|
|
16 |
% |
Hydrophilic and Other |
|
|
5,165 |
|
|
|
4,233 |
|
|
|
932 |
|
|
|
22 |
% |
Diagnostics |
|
|
3,013 |
|
|
|
2,715 |
|
|
|
298 |
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
16,465 |
|
|
$ |
14,069 |
|
|
$ |
2,396 |
|
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Fiscal 2006 first quarter revenue was $16.5 million, an increase of $2.4 million or
17% compared with the same period in fiscal 2005. We experienced growth in all three of our
operating segments as detailed in the table above and further explained in the narrative in the
paragraphs that follow.
Drug Delivery. Drug Delivery revenue increased 16% to $8.3 million for the three-month period
ended December 31, 2005 compared with $7.1 million for the prior year period. The growth in total
revenue reflects an increase in royalties and license fees, partially offset by a decrease in sales
of reagent chemicals (chemicals that we manufacture and sell to licensees for coating their medical
devices).
Drug Delivery derives a substantial majority of its revenue from royalties and license fees
and product sales attributable to Cordis Corporation, a Johnson & Johnson company, on its Cypher
Sirolimus-eluting Coronary Stent. The Cypher stent incorporates a proprietary SurModics coating
that delivers a therapeutic drug designed to reduce the occurrence of restenosis in coronary artery
lesions.
Revenue from sales of reagents to Cordis decreased as a result of contractually lower unit
prices compared with the prior year quarter. Management does not anticipate further reductions in
reagent prices to Cordis, but the unit volume of reagents sold to Cordis will likely be directly
impacted by anticipated continued improvements in manufacturing efficiencies by Cordis in addition
to relative market share positions of drug-eluting stent players.
Future royalty revenue could decrease because of lower Cypher stent sales as a result of
continuing competition from Boston Scientific Corporations Taxus drug-eluting stent, which is sold
within and outside the U.S., and Medtronics Endeavor drug eluting stent sold outside the U.S.
These stents compete directly with the Cypher stent. We anticipate that quarterly royalty revenue
from the Cypher stent may be volatile as the various marketers of drug-eluting stents continue
competing in the marketplace and as others enter the marketplace. Management expects royalties from
the Cypher stent to constitute a significant portion of our revenue for the remainder of fiscal
year 2006. However, whether and the extent to which royalties from the Cypher stent continue to
constitute a significant source of revenue is subject to a number of risks, including intellectual
property litigation generally and specifically the damages, settlements and mutual agreements that
may result from various infringement suits between Boston Scientific and Cordis in which each has
reported to have been found to have violated certain intellectual property rights of the other.
11
Hydrophilic and Other. Hydrophilic and Other revenue increased 22% to $5.2 million compared
with the first quarter of fiscal 2005 because of higher royalties and license fees in addition to
increased reagent chemical sales. In contrast to our Drug Delivery segment, where a significant
percentage of revenue is attributable to Cordis, there are several dozen licensees and an even
larger number of coated products generating royalties in our Hydrophilic and Other segment.
Diagnostics. Diagnostics revenue increased 11% to $3.0 million compared with the prior year
period. A majority of the increase was attributable to higher royalties on our diagnostic related
patents from Abbott Laboratories and increased minimum royalties from our license with GE
Healthcare. The Diagnostics segment derives a significant percentage of its revenue from Abbott
Laboratories and GE Healthcare. Revenue from product sales also increased as a result of higher
sales of our stabilization products (used by diagnostic kit manufacturers in immunoassay diagnostic
tests), partially offset by lower sales of genomic slides to GE Healthcare. Effective February
2005, we terminated our stabilization product distribution agreement with SeraCare and began
selling directly to the U.S. diagnostics industry. We believe revenue from stabilization products
will continue to increase when compared to prior year comparable periods because of the impact of
selling directly to the U.S. diagnostics industry, rather than through a distributor.
Product costs. Product costs were $681,000 for the first quarter of fiscal 2006, a 10%
increase from $620,000 in the first quarter of fiscal 2005. Overall product margins averaged 71%
compared with 69% for the comparable period last year. The increase in product margins reflects
higher average selling prices of stabilization products (reflecting in part selling directly to the
U.S. diagnostics industry), partially offset by reduced reagent margins attributable to a
contractual reduction in reagent pricing from Cordis. We do not expect further reduction in
reagent pricing from Cordis. We anticipate that product margins will decrease in the fourth
quarter of fiscal 2006 and into fiscal 2007 as we shift a portion of our manufacturing activities
to newly constructed space at our Eden Prairie facility.
Research and development expenses. Research and development expenses were $4.6 million for
the first quarter of fiscal 2006, an increase of 37% compared with the same period in fiscal 2005.
Approximately $452,000 of the $1.2 million increase was related to stock based compensation
following the adoption of SFAS No. 123(R). Research and development expenses included no such
costs in the first quarter of fiscal 2005. The remaining $786,000 of the increase reflects higher
patent related legal costs, costs associated with the clinical trial on our I-vation intravitreal
implant, and increased personnel costs related to establishing our new Ophthalmology division. We
expect research and development expenses to increase throughout the balance of the fiscal year in
support of the clinical trial of our intravitreal implant. In addition, expenses will increase as
we move development activities into the recently constructed clean room and drug coating suites at
our Eden Prairie headquarters. While research and development expenses will increase, the cost of
operating the Bloomington facility (reported in general and administrative expenses) will eventually be
eliminated. We expect to complete the move from Bloomington to the newly constructed space by the
end of our third fiscal quarter of 2006.
Sales and marketing expenses. Sales and marketing expenses were $324,000 for the first
quarter of fiscal 2006, a 24% increase from the prior year period. Approximately $38,000 of the
increase was related to stock based compensation. Sales and marketing expenses included no such
costs in the first quarter of fiscal 2005. We expect sales and marketing expenses to increase modestly throughout fiscal 2006.
General and administrative expenses. General and administrative expenses were $2.3 million
for the first quarter of fiscal 2006, a 92% increase compared with the same period in fiscal 2005.
We recorded approximately $650,000 in expense related to stock based compensation compared to
$94,000 in the first quarter of fiscal 2005. The balance of the increase reflects increased
compensation and
12
professional service fees when compared to the same period last year and a gain on the sale of
a piece of equipment in the first quarter of fiscal 2005. We expect general and administrative
expenses will decrease on a sequential basis once we exit our facility in Bloomington, expected
sometime in our third fiscal quarter. Currently, the majority of the
operating costs of the
Bloomington property are reported in general and administrative
expenses.
Other income, net. Other income was $728,000 in the first quarter of fiscal 2006, an increase
of $756,000, compared with a net loss of $28,000 for the same period of fiscal 2005. Prior year
results included a $445,000 loss related to the impact of accounting for the InnoRx acquisition
under the equity method. We recorded no such comparable transaction in the current quarter. The
remainder of the increase from last years first quarter reflects higher levels of investable cash
and higher yields generated from our investment portfolio.
Income tax expense. The Companys income tax provision was $3.1 million for the first quarter
of fiscal 2006 compared with $3.4 million in the same period of fiscal 2005. Tax expense in the
current period included a $465,000 benefit related to the reversal of a tax reserve resulting from
a refund on a states prior years tax returns. Excluding the impact of this accrual reversal, the
effective tax rate was 38.4% for the first quarter of fiscal 2006, compared with 37.2% for the
first quarter of fiscal 2005. The increase in the effective tax rate principally reflects the
treatment of incentive stock options upon the adoption of SFAS 123(R).
Liquidity and Capital Resources
As of December 31, 2005, the Company had working capital of $43.8 million and cash, cash
equivalents and investments totaling $80.5 million. The Companys investments principally consist
of U.S. government and government agency obligations and investment grade, interest-bearing
corporate debt securities with varying maturity dates, the majority of which are five years or
less. The Companys policy requires that no more than 5% of investments be held in any one credit
issue, excluding U.S. government and government agency obligations. The primary investment
objective of the portfolio is to provide for the safety of principal and appropriate liquidity
while generating an above benchmark (Lehman Brothers 1-3 Year Government Index) total rate of
return. Management plans to continue to direct its investment advisors to manage the Companys
investments primarily for the safety of principal for the foreseeable future as it assesses other
investment opportunities and uses of its investments. The Company had positive cash flows from
operating activities of approximately $10.4 million in the first three months of fiscal 2006,
compared with $5.3 million in the first three months of fiscal 2005.
We conduct a significant majority of our operations at our Eden Prairie, Minnesota
headquarters. In addition, we own a facility in Bloomington, Minnesota. We believe we have adequate
office space and manufacturing capacity in our Eden Prairie headquarters to support our business
and strategic plan. As such, in September 2005, we entered into an agreement to sell the
Bloomington facility and plan to consolidate operations in Eden Prairie. During our third quarter
of fiscal year 2005, construction began to improve the research and development capabilities at the
Eden Prairie facility. Management estimates expending a total of approximately $8 million. The
capital improvements are expected to be completed during the second quarter of fiscal year 2006 and
we project an estimated $1 million savings in annual operating expenses from exiting our
Bloomington facility to commence in the third quarter of fiscal year 2006.
In February 2004, we invested $2.1 million in InnoRx, Inc., an Alabama-based, early-stage
company developing drug delivery devices and therapies for the ophthalmology market. We made an
additional investment of approximately $1.6 million in the first quarter of fiscal year 2005. In
January 2005, we entered into a merger agreement whereby SurModics acquired all of the assets of
InnoRx, Inc. by paying approximately $4.1 million in cash and issuing 600,064 shares of SurModics
common stock to
13
InnoRx stockholders. In July 2005, we issued 60,002 shares of SurModics common stock to the
shareholders of InnoRx upon the successful completion of the first milestone involving the InnoRx
technology acquired in the purchase of InnoRx. Upon the successful completion of the remaining
development and commercial milestones involving InnoRx technology acquired in the transaction, we
will be required to issue up to an aggregate 540,062 additional shares of our common stock to the
stockholders of InnoRx.
In January 2005, we made an equity investment of approximately $3.9 million in OctoPlus, a
privately-owned company based in the Netherlands active in the development of pharmaceutical
formulations incorporating novel biodegradable polymers. The $3.9 million investment, which is
accounted for under the cost method, represents an ownership interest of less than 20%.
We have invested a total of $5.2 million in Novocell, Inc., a privately-held Irvine,
California-based biotech firm that is developing a unique treatment for diabetes. Working with
Novocell, our researchers have created a coating that encapsulates pancreatic islet cells, the
cells that produce insulin in the human body. If successful, this treatment using coated islet
cells could dramatically change the treatment of diabetes. While we anticipate that our investment
in Novocell will help facilitate the commercialization of our technology and result in revenue for
the Company in the future, there can be no assurance that this will occur. Novocells primary
technology is in its development stage, and we anticipate that it will be years before
commercialization may be realized. The $5.2 million investment, which is accounted for under the
cost method, is included in other assets and represents an ownership interest of less than 5%.
In May 2005, we invested $1.0 million in ThermopeutiX, an early stage company developing novel
medical devices for the treatment of vascular and neurovascular diseases, including stroke. In
addition to the investment, we have licensed our hydrophilic and hemocompatible coating
technologies to ThermopeutiX for use with its devices. The $1.0 million investment, which is
accounted for under the cost method, represents an ownership interest of less than 20%.
Risks and uncertainties surrounding a development-stage companys ability to obtain on a
timely and frequent basis financing needed to continue its development activities currently affect,
and will continually affect, the prospects of our investments in Novocell, OctoPlus and
ThermopeutiX and the revenue they may ultimately generate. There is no assurance that the
development stage companies listed above will successfully meet their immediate or future financing
needs or that their financing needs will be met when required. If adverse results occur in the
development of their respective technology, or if their respective financing needs are not
continually met, the viability of such companies, the value of our investment and their ability to
be future sources of revenue for the Company will be in jeopardy, and our investment in such
companies would likely be considered impaired and charged against earnings at such time.
In September 2004, we made a commitment to purchase for $7 million certain additional
sublicense rights and the accompanying future royalty revenue streams under certain sublicenses
through an amendment to our diagnostic format patent license with Abbott Laboratories. Prior to
such amendment, we were receiving only a portion of the royalties under such sublicenses. The first
$5 million installment was paid in November 2004. The remaining installments are reflected in other
long-term liabilities.
As of December 31, 2005, we had no debt, nor did we have any credit agreements. We believe
that our existing capital resources will be adequate to fund our operations into the foreseeable
future.
14
New Accounting Pronouncements
In May 2005, FASB issued Statement of Financial Accounting Standards No. 154, Accounting
Changes and Error Corrections a replacement of Accounting Principles Board (APB) Opinion No. 20
and FASB Statement No. 3 (SFAS 154). This statement applies to all voluntary changes in
accounting principle and changes required by an accounting pronouncement where no specific
transition provisions are included. SFAS 154 requires retrospective application to prior periods
financial statements of changes in accounting principle, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change. The provisions of SFAS
154 are effective for the Company for accounting changes and correction of errors made in fiscal
year 2007. The Company does not anticipate that the implementation of this standard will have a
material impact on its financial position, results of operations or cash flows.
In December 2004, the Financial Accounting Standards Board issued a revision to Statement of
Financial Accounting Standards 123 (SFAS 123(R)), Share-Based Payment. The revision requires all
entities to recognize compensation expense in an amount equal to the fair value of share-based
payments granted to employees. The statement eliminates the alternative method of accounting for
employee share-based payments previously available under APB Opinion No. 25. The Statement became
effective for the Company in the current quarter and is further discussed in note 6.
In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. 107 (SAB 107), which provides guidance on the interaction between SFAS 123(R) and certain SEC
rules and regulations. SAB 107 was issued to assist issuers in their initial implementation of SFAS
123(R) and enhance the information received by investors and other users of the financial
statements. See note 6 for further discussion.
In December 2004, the FASB staff issued FASB Staff Position (FSP) FASB 109-1 that provides
guidance on the application of FASB Statement No. 109, Accounting for Income Taxes, to the
provision within the American Jobs Creations Act of 2004 that provides a tax deduction on qualified
production activities. This FSP is effective upon issuance. The adoption of this FSP did not have a
material impact on our results of operations or financial position for the three months ended
December 31, 2005
In March 2004, the Emerging Issues Task Force (EITF) released Issue No. 03-1, The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1)
regarding disclosures about unrealized losses on available-for-sale debt and equity securities
accounted for under the FASB Statements No. 115, Accounting for Certain Investments in Debt and
Equity Securities, (FAS 115). The effective date for evaluating whether an investment is
other-than-temporarily impaired was delayed by FSP EITF Issue 03-1-1. In November 2005, the FASB
issued FSP FAS 115-1 to clarify these rules. Effectively, the FSP issued in November 2005 reverts
to the other-than-temporary guidance that predated the original effective date of EITF 03-1;
however, it maintains certain guidance in EITF 03-1 relative to testing of cost-method equity
securities and the disclosure requirements which have been effective since 2003. The FSP issued in
November 2005 is effective for reporting periods beginning after December 15, 2005. The adoption of
the FSP issued in November 2005 is not anticipated to have a material effect on our financial
position.
Forward-Looking Statements
Certain statements contained in this report and other written and oral statements made from
time to time by the Company do not relate strictly to historical or current facts. As such, they
are considered forward-looking statements that provide current expectations or forecasts of
future events. These forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use
of terminology such as anticipate, believe, could, estimate, expect, forecast,
intend,
15
may, plan, possible, project, will and similar words or expressions. Any statement that is
not an historical fact, including estimates, projections, future trends and the outcome of events
that have not yet occurred, are forward-looking statements. The Companys forward-looking
statements generally relate to its growth strategy, financial results, product development
programs, sales efforts, and the impact of the Cordis agreement and other significant customer
agreements. You should carefully consider forward-looking statements and understand that such
statements involve a variety of risks and uncertainties, known and unknown, and may be affected by
inaccurate assumptions. Consequently, no forward-looking statement can be guaranteed and actual
results may vary materially. The Company undertakes no obligation to update any forward-looking
statement.
Although it is not possible to create a comprehensive list of all factors that may cause
actual results to differ from the Companys forward-looking statements, such factors include, among
others: (i) the Companys significant dependence upon Cordis, which causes our financial results
and stock price to be subject to factors affecting Cordis and its Cypher stent program, including
among others, the rate of market penetration by Cordis, the timing of market introduction of
competing products, product safety or efficacy concerns and intellectual property litigation
generally and specifically the litigation involving Boston Scientific Scimed, Inc. and Cordis in
the U.S. District Court for the District of Delaware in which each was reported in June and July
2005 to have infringed the patent rights of the other; (ii) frequent intellectual property
litigation in the medical device industry that may directly or indirectly adversely affect our
customers ability to market their products incorporating our technologies; (iii) our ability to
protect our own intellectual property; (iv) healthcare reform efforts and reimbursement rates for
medical device products that may adversely affect our customers ability to cost effectively market
and sell devices incorporating our technologies; (v) the Companys ability to attract new licensees
and to enter into agreements for additional product applications with existing licensees, the
willingness of potential licensees to sign license agreements under the terms offered by the
Company, and the Companys ability to maintain satisfactory relationships with its licensees; (vi)
the Companys ability to increase the number of market segments and applications that use its
coating technologies through its sales and marketing and research and development efforts; (vii)
the Companys ability to facilitate through strategic investment and research and development
support the creation of new medical device market segments and applications that incorporate its
coating technologies; (viii) market acceptance of products sold by customers incorporating our
technologies and the timing of new product introductions by licensees; (ix) market acceptance of
products sold by customers competitors and the timing and pricing of new product introductions by
customers competitors; (x) the difficulties and uncertainties associated with the lengthy and
costly new product development and foreign and domestic regulatory approval processes, such as
delays, difficulties or failures in achieving acceptable clinical results or obtaining foreign or
FDA marketing clearances, which may result in lost market opportunities or postpone or preclude
product commercialization by licensees; (xi) efficacy or safety concerns with respect to products
marketed by us and our licensees, whether scientifically justified or not, that may lead to product
recalls, withdrawals or declining sales; (xii) the ability to secure raw materials for reagents the
Company sells; (xiii) the Companys ability to manage successfully clinical trials and related
foreign and domestic regulatory processes for the I-vation intravitreal implant or other acquired
products from InnoRx under development by the Companys ophthalmology division, whether delays,
difficulties or failures in achieving acceptable clinical results or obtaining foreign or FDA
marketing clearances postpone or preclude product commercialization of the intravitreal implant or
other acquired products, and whether the intravitreal implant and any other acquired products
remain viable commercial prospects; (xiv) product liability claims not covered by insurance; (xv)
the development of new products or technologies by competitors, technological obsolescence and
other changes in competitive factors; (xvi) the trend of consolidation in the medical device
industry, resulting in more significant, complex and long term contracts than in the past and
potentially greater pricing pressures; (xvii) the Companys ability to identify suitable businesses
to acquire or with whom to form strategic relationships to expand its technology development and
commercialization, its ability to successfully integrate the operations of
16
companies it may acquire from time to time and its ability to create synergies from
acquisitions and other strategic relationships; (xviii) the Companys ability to successfully
internally perform certain product development activities and governmental and regulatory
compliance activities with respect to acquired technology, including InnoRx technology, which
activities the Company has not previously undertaken in any significant manner; (xix) economic and
other factors over which the Company has no control, including changes in inflation and consumer
confidence; (xx) acts of God or terrorism which impact the Companys personnel or facilities; and
(xxi) other factors described in the Risk Factors and other sections of SurModics filings with
the Securities and Exchange Commission which are incorporated by reference. Many of these factors
are outside the control and knowledge of the Company and could result in increased volatility in
period-to-period results. Investors are advised not to place undue reliance upon the Companys
forward-looking information and to consult any further disclosures by the Company on this subject
in its filings with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Companys investment policy requires investments with high credit quality issuers and
limits the amount of credit exposure to any one issuer. The Companys investments principally
consist of U.S. government and government agency obligations and investment-grade, interest-bearing
corporate debt securities with varying maturity dates, the majority of which are five years or
less. Because of the credit criteria of the Companys investment policies, the primary market risk
associated with these investments is interest rate risk. SurModics does not use derivative
financial instruments to manage interest rate risk or to speculate on future changes in interest
rates. A one percentage point increase in interest rates would result in an approximate $1,180,000
decrease in the fair value of the Companys available-for-sale securities as of December 31, 2005,
but no material impact on the results of operations or cash flows. Management believes that a
reasonable change in raw material prices would not have a material impact on future earnings or
cash flows because the Companys inventory exposure is not material.
Although we conduct business in foreign countries, our international operations consist
primarily of sales of reagent and stabilization chemicals. Additionally, all sales transactions are
denominated in U.S. dollars. Accordingly, we do not expect to be subject to material foreign
currency risk with respect to future costs or cash flows from our foreign sales. To date, we have
not entered into any foreign currency forward exchange contracts or other derivative financial
instruments to hedge the effects of adverse fluctuations in foreign currency exchange.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company conducted an evaluation under
the supervision and with the participation of the Companys management, including the Companys
Chief Executive Officer and Chief Financial Officer regarding the effectiveness of the design and
operation of the Companys disclosure controls and procedures pursuant to Rule 13a-15(b) of the
Securities Exchange Act of 1934 (the Exchange Act). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and
procedures are effective to ensure that information that is required to be disclosed by the Company
in reports that it files under the Exchange Act is recorded, processed, summarized and reported
within the time period specified in the rules of the Securities Exchange Commission.
17
Changes in Internal Controls
There were no changes in the Companys internal control over financial reporting that occurred
during the period covered by this report that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
18
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Companys security holders during the period
covered by this Report on Form 10-Q; however, set forth below is information concerning matters
submitted to a vote of the Companys security holders at the recent annual meeting of shareholders:
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(a) |
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The Company held its Annual Meeting of Shareholders on January 30, 2006. |
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(b) |
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Proxies were solicited pursuant to Regulation 14A under the Securities Act of
1934. The shareholders voted on three matters: (i) to set the number of directors at
nine (9), (ii) to elect Class I directors, and (iii) to approve amendment and
restatement of the Companys 2003 Equity Incentive Plan to provide for additional forms
of awards under the Plan. The shareholders approved all matters by the following votes: |
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Votes |
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Votes |
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Broker |
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Votes For |
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Against |
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Abstained |
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Non-Votes |
(i) Set the number of directors at nine (9) |
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15,848,144 |
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445,573 |
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Votes |
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Broker |
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Votes For |
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Withheld |
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Non-Votes |
(ii) Elect Class I directors |
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Bruce J Barclay |
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16,086,565 |
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141,610 |
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José H. Bedoya |
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15,874,738 |
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353,437 |
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John A. Meslow |
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16,017,304 |
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210,871 |
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Votes |
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Votes |
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Broker |
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Votes For |
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Against |
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Abstained |
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Non-Votes |
(iii) To approve amendment and restatement
of the Companys 2003 Equity Incentive Plan
to provide for additional forms of awards
under the Plan |
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10,489,090 |
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1,441,036 |
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29,426 |
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4,334,165 |
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19
Item 5. Other Information.
None.
Item 6. Exhibits.
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Exhibits
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31.1
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Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
31.2
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Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
32.1
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Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
32.2
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Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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SurModics, Inc. |
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February 9, 2006 |
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By:
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/s/ Philip D. Ankeny
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Philip D. Ankeny |
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Chief Financial Officer |
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21
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT INDEX TO FORM 10-Q
For the Quarter Ended December 31, 2005
SURMODICS, INC.
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Exhibit |
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Description |
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31.1
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Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
31.2
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Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
32.1
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Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
32.2
|
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Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
22
exv31w1
EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302
OF SARBANES-OXLEY ACT OF 2002
I, Bruce J Barclay, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SurModics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d- 15(f)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation;
and
d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control over
financial reporting.
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
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Dated: February 9, 2006
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Signature:
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/s/ Bruce J Barclay
Bruce J Barclay
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Chief Executive Officer |
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23
exv31w2
EXHIBIT 31.2
CERTIFICATION PURSUANT TO SECTION 302
OF SARBANES-OXLEY ACT OF 2002
I, Philip D. Ankeny, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SurModics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d- 15(f)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation;
and
d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control over
financial reporting.
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
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Dated: February 9, 2006
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Signature:
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/s/ Philip D. Ankeny
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Philip D. Ankeny |
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Chief Financial Officer |
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24
exv32w1
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of SurModics, Inc. (the Company) on Form 10-Q for
the quarter ended December 31, 2005, as filed with the Securities and Exchange Commission (the
Report), I, Bruce J Barclay, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Dated: February 9, 2006
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/s/ Bruce J Barclay
|
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Bruce J Barclay |
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Chief Executive Officer |
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25
exv32w2
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of SurModics, Inc. (the Company) on Form 10-Q for
the quarter ended December 31, 2005, as filed with the Securities and Exchange Commission (the
Report), I, Philip D. Ankeny, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Dated: February 9, 2006
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/s/ Philip D. Ankeny
|
|
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Philip D. Ankeny |
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Chief Financial Officer |
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26