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 March 31, 2006
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
(State of incorporation)
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41-1356149
(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 filer o |
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, $.05 par value per share, outstanding as of
April 28, 2006 was 18,714,767.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
SURMODICS, INC.
Condensed Balance Sheets
(In thousands, except share data)
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March 31, |
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September 30, |
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2006 |
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2005 |
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(unaudited) |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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$ |
1,580 |
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$ |
3,921 |
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Short-term investments |
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39,472 |
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20,524 |
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Accounts receivable, net |
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12,148 |
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10,996 |
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Income taxes receivable |
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3,640 |
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Inventories |
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1,144 |
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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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1,102 |
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1,079 |
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Total current assets |
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55,799 |
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41,604 |
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Property and equipment, net |
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18,278 |
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14,832 |
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Long-term investments |
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46,670 |
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48,874 |
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Deferred tax asset |
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3,768 |
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2,868 |
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Other assets, net |
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11,388 |
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16,047 |
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Total Assets |
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$ |
135,903 |
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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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$ |
721 |
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$ |
1,163 |
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Accrued liabilities |
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3,715 |
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3,546 |
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Accrued income taxes payable |
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465 |
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Deferred revenue |
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803 |
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414 |
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Total current liabilities |
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5,704 |
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5,123 |
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Deferred revenue, less current portion |
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1,352 |
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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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9,056 |
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8,644 |
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Stockholders Equity |
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Series A Preferred stock-
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$.05 par value, 450,000 shares authorized;
no shares issued and outstanding |
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Common stock-
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$.05 par value, 45,000,000 shares authorized;
18,712,267 and 18,535,761 shares issued and outstanding |
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936 |
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927 |
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Additional paid-in capital |
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90,857 |
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89,721 |
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Unearned compensation |
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(2,621 |
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Accumulated other comprehensive loss |
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(566 |
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(360 |
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Retained earnings |
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35,620 |
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27,914 |
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Total stockholders equity |
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126,847 |
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115,581 |
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Total Liabilities and Stockholders Equity |
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$ |
135,903 |
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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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Six Months Ended |
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March 31, |
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March 31, |
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2006 |
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2005 |
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2006 |
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2005 |
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Revenue |
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Royalties and license fees |
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$ |
13,291 |
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$ |
12,268 |
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$ |
25,566 |
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$ |
22,359 |
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Product sales |
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2,908 |
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2,321 |
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5,255 |
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4,321 |
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Research and development |
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1,508 |
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1,116 |
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3,351 |
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3,094 |
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Total revenue |
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17,707 |
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15,705 |
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34,172 |
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29,774 |
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Operating costs and expenses |
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Product |
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869 |
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730 |
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1,550 |
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1,349 |
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Research and development |
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5,060 |
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3,890 |
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9,654 |
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7,246 |
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Sales and marketing |
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380 |
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307 |
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704 |
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569 |
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General and administrative |
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2,445 |
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1,649 |
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4,731 |
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2,843 |
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Purchased in-process research & development |
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30,277 |
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30,277 |
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Total operating costs and expenses |
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8,754 |
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36,853 |
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16,639 |
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42,284 |
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Income (loss) from operations |
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8,953 |
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(21,148 |
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17,533 |
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(12,510 |
) |
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Other income (loss) |
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Investment income |
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961 |
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434 |
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1,781 |
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851 |
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Impairment loss |
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(4,651 |
) |
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(4,651 |
) |
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Loss on sales of investments |
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(9 |
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(64 |
) |
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(101 |
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(64 |
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Loss on equity method investment in InnoRx |
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(55 |
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(500 |
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Other income |
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(3,699 |
) |
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315 |
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(2,971 |
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287 |
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Income (loss) before income taxes |
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5,254 |
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(20,833 |
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14,562 |
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(12,223 |
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Income tax provision |
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(3,789 |
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(3,538 |
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(6,880 |
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(6,911 |
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Net income (loss) |
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$ |
1,465 |
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($ |
24,371 |
) |
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$ |
7,682 |
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($ |
19,134 |
) |
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Basic net income (loss) per share |
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$ |
0.08 |
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($ |
1.34 |
) |
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$ |
0.42 |
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($ |
1.07 |
) |
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Diluted net income (loss) per share |
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$ |
0.08 |
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($ |
1.34 |
) |
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$ |
0.41 |
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($ |
1.07 |
) |
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Weighted average shares outstanding |
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Basic |
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18,481 |
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18,135 |
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18,458 |
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17,851 |
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Dilutive effect of outstanding stock options |
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168 |
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194 |
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Diluted |
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18,649 |
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18,135 |
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18,652 |
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17,851 |
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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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Six months ended |
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March 31, |
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2006 |
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2005 |
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Operating Activities |
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Net income (loss) |
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$ |
7,682 |
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($ |
19,134 |
) |
Adjustments to reconcile net income (loss) to net cash provided by
operating activities- |
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Depreciation and amortization |
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1,758 |
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1,934 |
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Loss on equity method investment and sales of investments |
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101 |
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|
564 |
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Noncash compensation |
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2,752 |
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|
244 |
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Purchased in-process research & development |
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|
30,277 |
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Impairment loss |
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|
4,651 |
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Deferred taxes |
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(900 |
) |
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(219 |
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Other |
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24 |
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(Gain)/loss on disposals of property and equipment |
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44 |
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(193 |
) |
Change in operating assets and liabilities: |
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Accounts receivable |
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(1,152 |
) |
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(3,147 |
) |
Inventories |
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(53 |
) |
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|
48 |
|
Accounts payable and accrued liabilities |
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(541 |
) |
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(439 |
) |
Income taxes |
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4,063 |
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(1,732 |
) |
Deferred revenue |
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220 |
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(6 |
) |
Prepaids and other |
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20 |
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(255 |
) |
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Net cash provided by operating activities |
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18,669 |
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7,942 |
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Investing Activities |
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Purchases of property and equipment |
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(4,120 |
) |
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(354 |
) |
Purchases of available-for-sale investments |
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(86,239 |
) |
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(44,514 |
) |
Sales/maturities of available-for-sale investments |
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69,186 |
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48,473 |
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Investments in OctoPlus and other |
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(81 |
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(3,910 |
) |
Purchase of licenses and patents |
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(771 |
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(5,223 |
) |
Investment in InnoRx |
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(5,180 |
) |
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Net cash used in investing activities |
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(22,025 |
) |
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(10,708 |
) |
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Financing Activities |
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Tax benefit from exercise of stock options |
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77 |
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Issuance of common stock |
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|
938 |
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|
1,031 |
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Net cash provided by financing activities |
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|
1,015 |
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|
1,031 |
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Net change in cash and cash equivalents |
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(2,341 |
) |
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(1,735 |
) |
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Cash and Cash Equivalents |
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|
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|
Beginning of period |
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3,921 |
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|
2,709 |
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|
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End of period |
|
$ |
1,580 |
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|
$ |
974 |
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|
|
|
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|
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|
|
|
|
|
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Cash paid for income taxes |
|
$ |
3,586 |
|
|
$ |
8,655 |
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|
|
|
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|
|
|
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Noncash transaction-acquisition of property, plant, and equipment on account |
|
$ |
1,535 |
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|
$ |
118 |
|
The accompanying notes are an integral part of these unaudited condensed financial statements.
4
SURMODICS, INC.
Notes to Condensed Financial Statements
Period Ended March 31, 2006
(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 three and six month
periods ended March 31, 2006, 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.
(2) New Accounting Pronouncements
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 became effective in our quarter ended March 31, 2006. See note 9 for additional
discussion.
In May 2005, the Financial Accounting Standards Board (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.
5
In December 2004, FASB 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 first quarter of fiscal 2006 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 and six
months ended March 31, 2006.
(3) Other assets
Other assets consist principally of investments and acquired patents. The balance in other
assets decreased primarily as a result of the $4.7 million impairment loss we recorded on our
investment in Novocell (see note 9) and accumulated amortization on patents and other intangibles
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Abbott license |
|
|
7,037 |
|
|
$ |
7,037 |
|
Investment in Novocell |
|
|
559 |
|
|
|
5,210 |
|
Investment in OctoPlus |
|
|
3,935 |
|
|
|
3,935 |
|
Investment in ThermopeutiX |
|
|
1,000 |
|
|
|
1,000 |
|
Patents and other |
|
|
1,585 |
|
|
|
732 |
|
Less-accumulated amortization |
|
|
(2,728 |
) |
|
|
(1,867 |
) |
|
|
|
|
|
|
|
Other assets, net |
|
$ |
11,388 |
|
|
$ |
16,047 |
|
|
|
|
|
|
|
|
(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:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Raw materials |
|
$ |
605 |
|
|
$ |
512 |
|
Finished goods |
|
|
539 |
|
|
|
579 |
|
|
|
|
|
|
|
|
|
|
$ |
1,144 |
|
|
$ |
1,091 |
|
|
|
|
|
|
|
|
6
(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 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Operating segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drug Delivery |
|
$ |
8,645 |
|
|
$ |
7,266 |
|
|
$ |
16,932 |
|
|
$ |
14,387 |
|
Hydrophilic and Other |
|
|
5,302 |
|
|
|
4,761 |
|
|
|
10,467 |
|
|
|
8,994 |
|
Diagnostics |
|
|
3,760 |
|
|
|
3,678 |
|
|
|
6,773 |
|
|
|
6,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
17,707 |
|
|
$ |
15,705 |
|
|
$ |
34,172 |
|
|
$ |
29,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $1.6
million and $2.8 million of related compensation expense, before taxes, for the three and six
months ended March 31, 2006, respectively. The compensation expense reduced basic earnings per by
$.05 and diluted earnings per share by $.05 for the three month period ended March 31, 2006. Stock
based compensation expense reduced basic earnings per share by $.10 and diluted earnings per share
by $.09 for the six month period ended March 31, 2006.
As of March 31, 2006, $21.1 million of total unrecognized compensation costs related to
non-vested awards is expected to be recognized over a weighted average period of approximately 3.73
years.
7
Prior to adopting SFAS 123(R), the Company accounted for stock-based compensation under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The Company
has applied the modified prospective method in adopting SFAS 123(R). Accordingly, periods prior to
adoption have not been restated. The Company did not amend or alter outstanding stock-based awards
in anticipation of adopting SFAS 123(R). The following table illustrates the effect on net income
and earnings per share if the fair value based method had been applied to the three and six
months ended March 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
|
Six months |
|
|
|
ended |
|
|
ended |
|
|
|
March 31, 2005 |
|
Reported net loss |
|
($ |
24,371 |
) |
|
($ |
19,134 |
) |
Restricted stock expense previously recorded under APB 25,
net of tax |
|
|
90 |
|
|
|
147 |
|
Stock-based compensation determined under the fair value based
method, net of related tax effects |
|
|
(849 |
) |
|
|
(1,490 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proforma net loss |
|
($ |
25,130 |
) |
|
($ |
20,477 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common equivalent share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
($ |
1.34 |
) |
|
($ |
1.07 |
) |
Diluted as reported |
|
($ |
1.34 |
) |
|
($ |
1.07 |
) |
|
|
|
|
|
|
|
|
|
Basic proforma |
|
($ |
1.38 |
) |
|
($ |
1.15 |
) |
Diluted proforma |
|
($ |
1.38 |
) |
|
($ |
1.15 |
) |
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 March 31, 2006 and 2005 were $15.93 and $18.91, 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 March 31, 2006 and March 31,
2005, respectively: risk-free interest rates of 4.67% and 3.71%; expected lives of 4.6 years and 7
years; and expected volatility of 45% and 62%. The weighted average fair value of options granted
during the six month periods ended March 31, 2006 and 2005 were $18.35 and $18.90, respectively.
The following weighted-average assumptions were used for the six months ended March 31, 2006 and
March 31, 2005, respectively: risk-free interest rates of 4.58% and 3.70%; expected lives of 5
years and 7 years; and expected volatility of 49% and 63%.
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, of which approximately 1,059,000 remain available for future awards. As of March 31,
2006, the aggregate intrinsic value of the option shares outstanding and the option shares
exercisable was $12.8 million and $7.2 million, respectively. Option transactions under the prior
plans and the 2003 Equity Incentive Plan during the six-month period ended March 31, 2006 are
summarized as follows:
8
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Weighted |
|
|
shares |
|
Exercise Price |
Outstanding at September 30, 2005 |
|
|
1,529,935 |
|
|
$ |
26.60 |
|
Granted |
|
|
185,100 |
|
|
|
38.36 |
|
Exercised |
|
|
(49,760 |
) |
|
|
15.44 |
|
Canceled |
|
|
(29,600 |
) |
|
|
27.97 |
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006 |
|
|
1,635,675 |
|
|
$ |
28.24 |
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2006 |
|
|
610,533 |
|
|
$ |
23.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Shares |
|
|
Exercise Price |
|
Shares Outstanding |
|
Exercise |
|
Contractual |
|
Exercisable at |
|
Weighted Average |
Range |
|
at March 31, 2006 |
|
Price |
|
Life (in years) |
|
March 31, 2006 |
|
Exercise Price |
$2.50-$8.44 |
|
|
120,115 |
|
|
$ |
6.71 |
|
|
|
1.37 |
|
|
|
120,115 |
|
|
$ |
6.71 |
|
$10.25-$21.82 |
|
|
302,040 |
|
|
|
21.20 |
|
|
|
5.22 |
|
|
|
108,600 |
|
|
|
20.56 |
|
$22.46-$25.09 |
|
|
110,800 |
|
|
|
24.94 |
|
|
|
2.11 |
|
|
|
98,228 |
|
|
|
25.06 |
|
$27.00-$29.89 |
|
|
646,040 |
|
|
|
29.38 |
|
|
|
5.54 |
|
|
|
190,860 |
|
|
|
29.36 |
|
$30.59-$53.00 |
|
|
456,680 |
|
|
|
37.73 |
|
|
|
5.91 |
|
|
|
92,730 |
|
|
|
36.08 |
|
|
|
|
1,635,675 |
|
|
$ |
28.24 |
|
|
|
5.15 |
|
|
|
610,533 |
|
|
$ |
23.67 |
|
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. Compensation has
been recognized for the estimated fair value of the 165,000 common shares and is being charged to
income over the vesting term. Stock compensation expense recognized related to these awards
totaled $162,000 and $150,000 during the three month periods ended March 31, 2006 and 2005,
respectively. Stock compensation expense recognized related to these awards totaled $324,000 and
$244,000 during the six month periods ended March 31, 2006 and 2005, respectively.
Performance Share Awards
The Company has entered into Performance Share agreements with certain key employees, covering
the issuance of Common Stock (Performance Shares). The Performance Shares will vest upon the
achievement of all or a portion of certain performance objectives which must be achieved during the
performance period. Compensation has been recognized for the estimated fair value of the
42,000 shares awarded in March 2006 that are estimated to vest
during fiscal year 2006. Stock compensation expense
related to the Performance Share awards expected to vest totaled $380,000 and $0 during the three
month periods ended March 31, 2006 and 2005, respectively. Stock compensation expense related to
these awards totaled $380,000 and $0 during the six month periods ended March 31, 2006 and 2005,
respectively.
9
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 March 31, 2006,
there was approximately $45,000 of employee contributions included in accrued liabilities in the
accompanying balance sheets. Stock compensation expense recognized related to Stock Purchase Plan
totaled $41,000 and $0 during the three month periods ended March 31, 2006 and 2005, respectively
and totaled $83,000 and $0 during the six month periods ended March 31, 2006 and 2005,
respectively.
(7) Comprehensive Income (dollars in thousands)
The components of comprehensive income for the three-month and six-month periods are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net income (loss) |
|
$ |
1,465 |
|
|
|
($24,371 |
) |
|
$ |
7,682 |
|
|
|
($19,134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) on
available-for-sale securities arising
during the period, net of tax |
|
|
(236 |
) |
|
|
(282 |
) |
|
|
(271 |
) |
|
|
(410 |
) |
Less reclassification adjustment
for realized gains included in net
income, net of tax |
|
|
6 |
|
|
|
40 |
|
|
|
65 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
income (loss) |
|
|
(230 |
) |
|
|
(242 |
) |
|
|
(206 |
) |
|
|
(370 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
1,235 |
|
|
|
($24,613 |
) |
|
$ |
7,476 |
|
|
|
($19,504 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. The approximate $6.6 million carrying value of the property is
recorded in Property and Equipment at March 31, 2006. The Company vacated the Bloomington facility
at the end of the second quarter of fiscal 2006 and consolidated operations at its headquarters in
Eden Prairie, Minnesota.
(9) Impairment Loss
The Company has 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. The investment,
which is accounted for under the cost method, is included in other assets and represents an
ownership interest of less than 5%. During the quarter ended March 31, 2006, utilizing the recent
guidance provided by FASB Staff Position 115-1 (FSP 115-1), The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments, combined with Novocell valuation information
gathered in conjunction with a prospective round of financing, the Company determined its
investment in Novocell was impaired and that the impairment was other-than-temporary. During the
three months ended March 31, 2006, the Company recorded an impairment loss approximately $4.7
million. Since its not currently tax deductible, no tax benefit has been recorded in connection with this impairment loss.
10
|
|
|
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
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.
11
Results of Operations
Three Months Ended March 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
Increase |
|
|
% Increase |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drug Delivery |
|
$ |
8,645 |
|
|
$ |
7,266 |
|
|
$ |
1,379 |
|
|
|
19 |
% |
Hydrophilic and Other |
|
|
5,302 |
|
|
|
4,761 |
|
|
|
541 |
|
|
|
11 |
% |
Diagnostics |
|
|
3,760 |
|
|
|
3,678 |
|
|
|
82 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
17,707 |
|
|
$ |
15,705 |
|
|
$ |
2,002 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Fiscal 2006 second quarter revenue was $17.7 million, an increase of $2.0 million or
13% compared with the same period in fiscal 2005 as detailed in the table above and further
explained in the narrative that follows.
Drug Delivery. Drug Delivery revenue increased 19% to $8.6 million for the three-month period
ended March 31, 2006 compared with $7.3 million for the prior year period. The growth in total
revenue reflects increases in all three revenue sources: royalties and license fees, product sales,
and research and development revenue.
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 polymer
coating that delivers a therapeutic drug designed to reduce the occurrence of restenosis in
coronary artery lesions.
A majority of the overall increase in drug delivery revenue reflects increased royalty revenue
from Cordis as a result of higher Cypher sales. The growth in sales of reagent chemicals
(chemicals that we manufacture and sell to licensees for coating their medical devices) to Cordis
reflects higher unit sales volumes compared with the prior year quarter. 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 and reagent sales 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. In addition, a drug-eluting stent from Guidant Corporation (whose vascular intervention
unit was recently acquired by Abbott Laboratories) and one from Connor Medsystems received approval
in the European Union and others are expected to be approved in the next two years. 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.
12
Hydrophilic and Other. Hydrophilic and Other revenue increased 11% to $5.3 million compared
with the second quarter of fiscal 2005 as a result of growth in all three revenue components.
Approximately one-half of the increase was a result of higher sales of reagents. Reagent sales are
subject to materials planning and production schedules of our licensees which can result in
variability of order patterns. Because of this potential variability we believe it is unlikely
that growth in reagent sales will continue at this level for the remainder of the fiscal year. The
remainder of the increase in Hydrophilic and Other was principally a result of royalty revenue
growth. We believe the growth in royalty revenue is likely to continue for the balance of the
fiscal year. 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 2% to $3.8 million compared with the prior year
period. A majority of the increase was attributable to growth in product sales as a result of
higher sales of our stabilization products (used by diagnostic kit manufacturers in immunoassay
diagnostic tests), partially offset by modestly 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. The Diagnostics segment
derives a significant percentage of its revenue from Abbott Laboratories and GE Healthcare.
Product costs. Product costs were $869,000 for the second quarter of fiscal 2006, a 19%
increase from $730,000 in the second quarter of fiscal 2005. Overall product margins averaged 70%
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 reductions in
reagent pricing from Cordis. We anticipate that product margins will decrease as we approach the
end of fiscal 2006 and continuing into fiscal 2007 as result of higher depreciation costs once 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 $5.1 million for
the second quarter of fiscal 2006, an increase of 30% compared with the same period in fiscal 2005.
Approximately $771,000 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
charge in the second quarter of fiscal 2005. Excluding stock based compensation, research and
development expenses increased 10%. The remaining $400,000 of the increase reflects higher costs
associated with the clinical trial on our I-vation intravitreal implant and increased personnel
costs in 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 now that we have transferred certain 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 be eliminated.
Sales and marketing expenses. Sales and marketing expenses were $380,000 for the second
quarter of fiscal 2006, a 24% increase from the prior year period. Approximately $40,000 of the
increase was related to stock based compensation. Sales and marketing expenses included no such
costs in the second quarter of fiscal 2005. We expect sales and marketing expenses to increase at
a rate less than the current period for the balance of fiscal 2006.
13
General and administrative expenses. General and administrative expenses were $2.4 million
for the second quarter of fiscal 2006, a 48% increase compared with the same period in fiscal 2005.
We recorded approximately $750,000 in expense related to stock based compensation compared with
$150,000 in the second quarter of fiscal 2005. The increase in general and administrative expenses
also reflects increased compensation and professional service fees when compared with the same
period last year. Excluding the impact of stock based compensation, general and administrative
expenses increased 13%. We expect general and administrative expenses will decrease on a
sequential basis reflecting the cost savings since we completed the exit from our facility in
Bloomington. Currently, the majority of the operating costs of the Bloomington property are
reported in general and administrative expenses.
Purchased in-process research and development. On January 18, 2005, the Company acquired all
of the assets of InnoRx, Inc. by paying cash and issuing shares of SurModics common stock to InnoRx
stockholders. Results in the second quarter of fiscal 2005 include a non-cash in-process research
and development charge of $30.3 million. The fair value of the in-process research and development
was determined by an outside valuation consultant.
Other income, net. Other income resulted in a net loss of $3.7 million as a result of the
$4.7 million non-cash impairment loss on our investment in Novocell, Inc. Prior year other income
results also include a $55,000 loss related to the impact of accounting for the InnoRx acquisition
under the equity method. Income from investments was $961,000 in the second quarter of fiscal
2006, an increase of $527,000, compared with $434,000 for the same period of fiscal 2005 reflecting
higher levels of investable cash and higher yields generated from our investment portfolio.
Income
tax expense. The Companys income tax provision was $3.8 million for the second quarter
of fiscal 2006 compared with $3.5 million in the same period of fiscal 2005. Excluding the impact
of the $4.7 million impairment loss, which is not currently tax deductible, the effective tax rate was 38.3%
for the second quarter of fiscal 2006, compared with 37.5% for the
same period last year (when the impact of non tax deductible
purchased in-process research and development is excluded). The
increase in the effective tax rate principally reflects the treatment of incentive stock options
upon the adoption of SFAS 123(R).
Six Months Ended March 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Fiscal 2006 |
|
|
Fiscal 2005 |
|
|
Increase |
|
|
% Increase |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drug Delivery |
|
$ |
16,932 |
|
|
$ |
14,387 |
|
|
$ |
2,545 |
|
|
|
18 |
% |
Hydrophilic and Other |
|
|
10,467 |
|
|
|
8,994 |
|
|
|
1,473 |
|
|
|
16 |
% |
Diagnostics |
|
|
6,773 |
|
|
|
6,393 |
|
|
|
380 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
34,172 |
|
|
$ |
29,774 |
|
|
$ |
4,398 |
|
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. The Companys revenue was $34.2 million for the first six months of fiscal 2006, an
increase of $4.4 million, or 15%, compared with the same period of fiscal 2005. We provide a
narrative of revenue for each of our three operating segments in the paragraphs that follow.
Drug Delivery. Drug Delivery revenue increased 18% to $16.9 million for the first half of
fiscal 2006 compared with $14.4 million for the same period last year. While the increase reflects
growth in all three revenue sources: royalties and license fees, product sales, and research and
development revenue, approximately $2.1 million of the increase results from growth in royalties
and license fees. Sequential quarterly 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
14
outside the U.S., and Medtronics Endeavor drug eluting stent sold outside the U.S. In
addition, a drug-eluting stent from Guidant Corporation, (whose vascular intervention unit was
recently acquired by Abbott Laboratories) and one from Connor Medsystems received approval in the
European Union and others are expected to be approved in the next two years.
Hydrophilic and Other. Hydrophilic and Other revenue increased 16% to $10.5 million for the
first six months of fiscal 2006, driven principally by increased
royalties and reagent sales. Slightly more than one half of the increase is attributed to higher
royalties and license fees.
Diagnostics. Diagnostics revenue increased 6% to $6.8 million. A substantial majority of the
growth resulted from increased stabilization product sales. The balance of the increase reflects
higher minimum royalty revenue from GE Healthcare offset partially by reduced royalties from
Abbott.
Product costs. Product costs were $1.6 million for the six months ended March 31, 2006, a 15%
increase from $1.3 million last year. Overall product margins averaged 71% compared with 69% for
the comparable period last year. The margin increase is primarily attributable to increased
stabilization product sales and non-Cordis reagent sales which carry higher margins. We anticipate
that product margins will decrease as we approach the end of fiscal 2006 and continuing 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 $9.7 million for
the first six months of fiscal 2006, an increase of 33% compared with the same period in fiscal
2005. Approximately $1.2 million of the increase reflects higher costs associated with the
clinical trial on our I-vation intravitreal implant and increased personnel costs in our new
Ophthalmology division. The remaining $1.2 million of the $2.4 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 half of fiscal 2005. Excluding the impact of stock
based compensation, research and development expenses increased 16% for the comparable period last
year.
Sales and marketing expenses. Sales and marketing expenses were $704,000 for the six months
ending March 31, 2006, a 24% increase from prior year period. Approximately $77,000 of the increase
was related to stock based compensation. Sales and marketing expenses included no such costs in the
first half of fiscal 2005.
General and administrative expenses. General and administrative expenses were $4.7 million
for the first six months of fiscal 2006, a 66% increase compared with the same period in fiscal
2005. We recorded approximately $1.4 million in expense related to stock based compensation,
compared with $244,000 in fiscal 2005. The balance of the increase reflects increased compensation
and professional service fees when compared to the same period last year and a gain on the sale of
equipment in the first quarter of fiscal 2005. Excluding the impact of stock based compensation,
general and administrative expenses increased 28% for the comparable period last year.
Purchased in-process research and development. On January 18, 2005, the Company acquired all
of the assets of InnoRx, Inc. by paying cash and issuing shares of SurModics common stock to InnoRx
stockholders. Results in the second quarter of fiscal 2005 include a non-cash in-process research
and development charge of $30.3 million. The fair value of the in-process research and development
was determined by an outside valuation consultant.
Other income, net. Other income resulted in a loss of $3.0 million for the first six months
of fiscal 2006 compared with income of $287,000 in the same period of fiscal 2005, primarily as a
result of the $4.7 million impairment loss on our investment in Novocell. Income from investments
was $1.8 million through the first half of fiscal 2006, an increase of $930,000, compared with
$851,000 for the
15
same period of fiscal 2005, reflecting higher levels of investable cash and higher yields
generated from our investment portfolio. Prior year other income results also include a $500,000
loss related to the impact of accounting for the InnoRx acquisition under the equity method. We
recorded no such comparable transaction in the first half of fiscal 2006.
Income tax expense. The Companys income tax provision was $6.9 million for the first six
months of fiscal 2006 compared with $6.9 million in the same period of fiscal 2005. Excluding the
impact of the $4.7 million impairment loss, which is not
currently tax deductible, the effective tax rate was
35.8% for the first six months of fiscal 2006, compared with 38.3%
for the same period last year (when the impact of non tax deductible
purchased in-process research and development is excluded).
The decrease in the effective tax rate principally reflects the $465,000 benefit related to the
reversal of a tax reserve we recorded in our first fiscal quarter, partially offset by the
treatment of incentive stock options upon the adoption of SFAS 123(R).
Liquidity and Capital Resources
As of March 31, 2006, the Company had working capital of $50.1 million and cash, cash
equivalents and investments totaling $87.7 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 $18.7 million in the first six months of fiscal 2006,
compared with $8.0 million in the first six 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 formulated plans 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, of which approximately $ 5.8 million has been incurred through March 31, 2006. The
capital improvements were sufficiently complete by the end of second quarter of fiscal year 2006,
allowing us to consolidate operations at our Eden Prairie headquarters.
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 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. In March 2006, we issued an
additional 60,007 shares as a result of completion of the second milestone. 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 480,060 additional
shares of our common stock to the stockholders of InnoRx.
16
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. During the quarter ended March 31,
2006, we recorded an impairment loss of approximately $4.7 million (see note 9). The balance of
our $560,000 investment, which is accounted for under the cost method, is included in other assets
and represents an ownership interest of less than 5%. Novocells primary technology is in its
development stage, and we anticipate that it will be years before commercialization may be
realized, if ever.
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 March 31, 2006, 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.
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, 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
17
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 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
18
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 Annual Report on Form 10-K, which you are
encouraged to read carefully. 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 $1,300,000
decrease in the fair value of the Companys available-for-sale securities as of March 31, 2006, 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.
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.
19
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table presents information with respect to purchases of common stock of the
Company made during the three months ended March 31, 2006, by the Company or on behalf of the
Company or any affiliated purchaser of the Company, as defined in Rule 10b-18(a)(3) under the
Exchange Act.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
(d) |
|
|
|
|
|
|
|
|
|
|
Total Number |
|
Maximum |
|
|
|
|
|
|
|
|
|
|
of Shares |
|
Number of |
|
|
|
|
|
|
|
|
|
|
Purchased |
|
Shares that |
|
|
|
|
|
|
|
|
|
|
as Part of |
|
May Yet Be |
|
|
(a) |
|
(b) |
|
Publicly |
|
Purchased |
|
|
Total Number |
|
Average |
|
Announced |
|
Under the |
|
|
of Shares |
|
Price Paid |
|
Plans or |
|
Plans or |
Period |
|
Purchased(1) |
|
Per Share |
|
Programs |
|
Programs |
|
January 1, 2006- March 31, 2006 |
|
|
5,082 |
|
|
$ |
37.34 |
|
|
|
N/A |
|
|
|
N/A |
|
|
Total |
|
|
5,082 |
|
|
$ |
37.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All of the Shares were repurchased by the Company to pay the exercise price and/or
to satisfy tax withholding obligations in connection with so-called stock swap exercises of
employee stock options issued to three employees. |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
Information regarding matters submitted to a vote of the Companys security holders during the
period cover by this report was previously reported in the Companys Form 10-Q for the quarterly
period ended December 31, 2005.
Item 5. Other Information.
None.
20
Item 6. Exhibits.
Exhibits
|
|
|
10.1*
|
|
Form of SurModics, Inc. 2003 Equity Incentive Plan Nonqualified Stock Option Agreement(1) |
|
|
|
10.2*
|
|
Form of SurModics, Inc. 2003 Equity Incentive Plan Incentive Stock Option Agreement(1) |
|
|
|
10.3*
|
|
Form of SurModics, Inc. 2003 Equity Incentive Plan Restricted Stock Agreement(1) |
|
|
|
10.4*
|
|
Form of SurModics, Inc. 2003 Equity Incentive Plan Performance Share Award Agreement(1) |
|
|
|
10.5*
|
|
Form of SurModics, Inc. 2003 Equity Incentive Plan Performance Unit Award (cash settled)
Agreement(1) |
|
|
|
10.6*
|
|
Form of SurModics, Inc. 2003 Equity Incentive Plan Restricted Stock Unit Agreement(1) |
|
|
|
10.7*
|
|
Form of SurModics, Inc. 2003 Equity Incentive Plan Stock Appreciation Rights (cash settled)
Agreement(1) |
|
|
|
10.8*
|
|
Form of SurModics, Inc. 2003 Equity Incentive Plan Stock Appreciation Rights (stock settled)
Agreement(1) |
|
|
|
10.9*
|
|
SurModics, Inc. 2003 Equity
Incentive Plan (as Amended and Restated December 13, 2005) |
|
|
|
31.1**
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of
2002 |
|
|
|
31.2**
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of
2002 |
|
|
|
32.1**
|
|
Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of
2002 |
|
|
|
32.2**
|
|
Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of
2002 |
|
|
|
* |
|
Management contract or compensatory plan or arrangement. |
|
** |
|
Filed herewith. |
|
(1) |
|
Incorporated by reference to the Companys Form 8-K/A filed March 20, 2006. |
|
(2) |
|
Incorporated by reference to the Companys Form 8-K
filed on February 3, 2006. |
21
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.
|
|
|
|
|
|
SurModics, Inc.
|
|
May 10, 2006 |
By: |
/s/ Philip D. Ankeny
|
|
|
|
Philip D. Ankeny |
|
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Chief Financial Officer |
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22
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT INDEX TO FORM 10-Q
For the Quarter Ended March 31, 2006
SURMODICS, INC.
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Exhibit |
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Description |
10.1*
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Form of SurModics, Inc. 2003 Equity Incentive Plan Nonqualified Stock Option Agreement(1) |
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10.2*
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Form of SurModics, Inc. 2003 Equity Incentive Plan Incentive Stock Option Agreement(1) |
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10.3*
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Form of SurModics, Inc. 2003 Equity Incentive Plan Restricted Stock Agreement(1) |
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10.4*
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Form of SurModics, Inc. 2003 Equity Incentive Plan Performance Share Award Agreement(1) |
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10.5*
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Form of SurModics, Inc. 2003 Equity Incentive Plan Performance Unit Award (cash settled)
Agreement(1) |
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10.6*
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Form of SurModics, Inc. 2003 Equity Incentive Plan Restricted Stock Unit Agreement(1) |
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10.7*
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Form of SurModics, Inc. 2003 Equity Incentive Plan Stock Appreciation Rights (cash settled)
Agreement(1) |
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10.8*
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Form of SurModics, Inc. 2003 Equity Incentive Plan Stock Appreciation Rights (stock settled)
Agreement(1) |
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10.9*
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SurModics, Inc. 2003 Equity
Incentive Plan (as Amended and Restated December 13, 2005) |
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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 |
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31.2**
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Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of
2002 |
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32.1**
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Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of
2002 |
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32.2**
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Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of
2002 |
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* |
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Management contract or compensatory plan or arrangement. |
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** |
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Filed herewith. |
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(1) |
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Incorporated by reference to the Companys Form 8-K/A filed March 20, 2006. |
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(2) |
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Incorporated by reference to the Companys Form 8-K
filed on February 3, 2006. |
23
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: May 10, 2006 |
Signature: |
/s/ Bruce J Barclay
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Bruce J Barclay |
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Chief Executive Officer |
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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: May 10, 2006 |
Signature: |
/s/ Philip D. Ankeny
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Philip D. Ankeny |
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Chief Financial Officer |
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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 March 31, 2006, 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.
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Dated: May 10, 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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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 March 31, 2006, 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.
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Dated: May 10, 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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