intellectual property would be costly and result in significant diversion of the efforts of our management and technical personnel, regardless of outcome, and could have a material adverse effect on our business, financial condition and results of operations.
We rely significantly upon proprietary technology, information, processes and know-how that are not subject to patent protection. We seek to protect this information through trade secret or confidentiality agreements with our employees, consultants, potential licensees, or other parties as well as through other security measures. There can be no assurance that these agreements or any security measure will provide meaningful protection for our unpatented proprietary information. In addition, our trade secrets may otherwise become known or be independently developed by competitors.
We are a party to various agreements through which we have in-licensed or otherwise acquired from third parties rights to certain technologies that are important to our business. In exchange for the rights granted to us under these agreements, we agree to meet certain research, development, commercialization, sublicensing, royalty, indemnification, insurance, and other obligations. If we or one of our licensees fails to comply with these obligations set forth in the relevant agreement through which we have acquired rights, we may be unable to effectively use, license, or otherwise exploit the relevant intellectual property rights and may be deprived of current or future revenues that are associated with such intellectual property.
Healthcare costs have risen significantly over the past decade. There have been and continue to be proposals by legislators, regulators, and third-party payors to keep these costs down. Certain proposals, if implemented, would impose limitations on the prices our customers will be able to charge for theirour products, or the amounts of reimbursement available for their products from governmental agencies or third-party payors. Because a portion of our revenue is typically derived from royalties on products which constitute a percentage of the selling price, these limitations could have an adverse effect on our revenue.
Our revenue is derived from three primary sources: (1) royalties and license fees from licensing our proprietary drug delivery and surface modification technologies andin vitrodiagnostic formats to customers; the vast majority (typically in excess of 90%) of revenue in the “royalties and license fees” category is in the form of royalties; (2) the sale of polymers and reagent chemicals, stabilization products, antigens, substrates and microarray slides to the diagnostics and biomedical research industry; and (3) research and development fees generated on customer projects. Revenue fluctuates from quarter to quarter depending on, among other factors: our customers’ success in selling products incorporating our technologies; the timing of introductions of licensed products by customers; the timing of introductions of products that compete with our customers’ products; the number and activity level associated with customer development projects; the number and terms of new license agreements that are finalized; the value of reagent chemicals and other products sold to customers; and the timing of future acquisitions we complete, if any.
For financial accounting and reporting purposes, we report our results in one reportable segment. We made this determination because each business unit has similar economic characteristics;we manage our sales and marketing efforts and our expenses on a company-wide basis. In addition, a significant percentage of our employees provide support services (including research and development) to each business unit; technologya variety of customers, and our technologies and products from each business unit are marketed to the same or similar customers; each business unit uses the same sales and marketing resources; and each business unit operates in the same regulatory environment.customers.
In June 2007, we entered into a License and Research Collaboration Agreement and separate Supply Agreement with Merck & Co., Inc. (“Merck”) related to our I-vationtm TA (triamcinolone acetonide) intravitreal implant. Under the terms of the Merck agreements, we received an up frontupfront license fee of $20 million and were eligible to receive up to an additional $288 million in fees and development milestones associated with the successful product development and attainment of appropriate U.S. and EU regulatory approvals, as well as payment for our research and development activities. In September 2008, following a strategic review of its business and product development portfolio, Merck gave notice that it was terminating the collaborative research and license agreement, as well as the supply agreement entered into in June 2007. This decision was not based on any concerns about the safety or efficacy of the I-vation system. The termination was effective in December 2008, and we have recognized revenue related to the termination of approximately $45 million in fiscal 2009, principally from amounts that previously had been deferred and amortized under the accounting treatment required by accounting guidance for revenue arrangements with multiple deliverables. The $45 million includes a $9 million milestone payment associated with the termination of the triamcinolone acetonide development program.
In November 2008, we acquired a portfolio of intellectual property and collaborative drug delivery projects from PR Pharmaceuticals, Inc., a drug delivery company specializing in injectable, biodegradable sustained release formulations. Total consideration paid through September 30, 20092010 was $5.6 million and PR Pharmaceuticals, Inc. is eligible to receive up to an additional $3.6 million in cash upon successful achievement of specified milestones. The proprietary technologies we acquired complement and enhance our existing portfolio of drug delivery capabilities by providing a broader toolkit for protein delivery and the ability to use smaller gauge needles for microparticle injections. In addition, the multiple customer development programs we assumed complement the diversified portfolio of customer projects at SurModics Pharmaceuticals, and we believe will further leverage the investment we are making in cGMP manufacturing.
On October 5, 2009, we entered into a License and Development Agreement with F. Hoffmann-La Roche, Ltd. (“Roche”) and Genentech, Inc., a wholly-owned member of the Roche Group (“Genentech”). Under the terms of the License Agreement, Roche and Genentech will have an exclusive license to develop and commercialize a sustained drug delivery formulation of Lucentis® (ranibizumab injection) utilizing SurModics’ proprietary biodegradable microparticles drug delivery system. Under the terms of the agreement, we received an up frontupfront licensing fee of $3.5 million and are eligible to receive potential payments of up to approximately $200 million in fees and milestone payments in the event of the successful development and commercialization of multiple products, as well as payment for development work done on these products. Roche and Genentech will have the right to obtain manufacturing services from SurModics. In the event a commercial product is developed, we will also receive royalties on sales of such products.product.
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Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the
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United States of America. The preparation of these financial statements is based in part on the application of significant accounting policies, many of which require management to make estimates and assumptions (see Note 2 to the consolidated financial statements). Actual results may differ from these estimates under different assumptions or conditions and could materially impact our results of operations. We believe the following are critical areas in the application of our accounting policies that currently affect our financial condition and results of operations.
Revenue recognition. In accordance with accounting guidance, revenue is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) shipment has occurred or delivery has occurred if the terms specify destination; (3) the sales price is fixed or determinable; and (4) collectability is reasonably assured. However, when there are additional performance requirements, revenue is recognized when such requirements have been satisfied. The Company licenses technology to third parties and collects royalties. Royalty revenue is generated when a licensed customer sells products incorporating ourthe Company’s licensed technologies. Royalty revenue is recognized as our licensees report it to us, and payment is typically submitted concurrently with a quarterly report. This revenue recognition model is similar to usage fee accounting. Minimum royalty fees are recognized in the period earned, provided that collectability is reasonably assured. For stand-alone license agreements, up-front license fees are recognized over the economic life of the technology.
Revenue related to a performance milestone is recognized upon achievement of the milestone and meeting specific revenue recognition criteria. We recognize initial license fees over the term of the related agreement. Minimum royalty fees are recognized in the period earned. Product sales to third parties are recognized at the time of shipment, provided that an order has been received, the price is fixed or determinable, collectability of the resulting receivable is reasonably assured and returns can be reasonably estimated. Our sales terms provide no right of return outside of our standard warranty policy. Payment terms are generally set at30-45 days. Generally, revenue for research and development is recorded as performance progresses under the applicable contract. When we have revenue
Revenue arrangements with multiple deliverables we comply with currenthave been accounted for based on accounting guidance in existence at the time the arrangement commences. Prior to October 1, 2009, arrangements such as license and recognizedevelopment agreements were analyzed to determine whether the deliverables, which often include a license and performance obligations such as research and development, could be separated, or whether they must be accounted for as a single unit of accounting in accordance with accounting guidance. If the fair value of the undelivered performance obligations could be determined, such obligations would then be accounted for separately. If the license was considered to either (i) not have stand-alone value or (ii) have stand-alone value but the fair value of any of the undelivered performance obligations could not be determined, the arrangement would then be accounted for as a single unit of accounting, and the license payments and payments for performance obligations would be recognized as revenue over the estimated period of when the performance obligations are performed, or the economic life of the technology licensed to the customer. When we determined that an arrangement should be accounted for as a single unit of accounting, we recognized the related revenue on a time-based accounting model.
The Company had one significant multiple element arrangement prior to October 1, 2009 that was accounted for as a single unit of accounting resulting in deferral and recognition of all related payments received for license and research and development activities using a time-based model. This arrangement was terminated during the first quarter of fiscal 2009.
In October 2009, the accounting standards for multiple deliverable revenue arrangements were amended to:
(i) provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;
(ii) require an entity to allocate revenue in an arrangement using estimated selling prices (ESP) of deliverables if a vendor does not have vendor-specific objective evidence of selling price (VSOE) or third-party evidence of selling price (TPE); and
(iii) eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.
We elected to early adopt this accounting guidance at the beginning of our first quarter of fiscal 2010, on a prospective basis, for applicable transactions originating or materially modified after October 1, 2009. In connection with the adoption of the amended accounting standard we also changed our policy prospectively
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for multiple element arrangements, whereby we account for revenue using a multiple attribution model in which consideration allocated to research and development activities is recognized as performed, and milestone payments are recognized when the milestone events are achieved, when such activities and milestones are deemed substantive. Accordingly, in situations where a unit of accounting includes both a license and research and development activities, and when a license does not have stand-alone value, the Company applies a multiple attribution model in which consideration allocated to the license is recognized ratably, consideration allocated to research and development activities is recognized as performed and milestone payments are recognized when the milestone events are achieved, when such activities and milestones are deemed substantive.
The Company enters into license and development arrangements that may consist of multiple deliverables which could include a license(s) to SurModics’ technology, research and development activities, manufacturing services, and product sales based on the needs of its customers. For example, a customer may enter into an arrangement to obtain a license to SurModics’ intellectual property which may also include research and development activities, and supply of products manufactured by SurModics. For these services provided, SurModics could receive upfront license fees upon signing of an agreement and granting the license, fees for research and development activities as such activities are performed, milestone payments contingent upon advancement of the product through development and clinical stages to successful commercialization, fees for manufacturing services and supply of product, and royalty payments based on customer sales of product incorporating SurModics’ technology. Our license and development arrangements generally do not have refund provisions if the customer cancels or terminates the agreement. Typically all payments made are non-refundable.
We evaluate each deliverable in a multiple element arrangement for separability. We are then required to allocate revenue to each separate deliverable using a hierarchy of VSOE, TPE, or ESP. In certain instances, we are not able to establish VSOE for all deliverables in an arrangement with multiple elements which may be a result of SurModics infrequently selling each element as itseparately. When VSOE cannot be established, SurModics establishes a selling price of each element based on TPE. TPE is earned.determined based on competitor prices for similar deliverables when sold separately.
When we are unable to establish a selling price using VSOE or TPE, we use ESP in our allocation of arrangement consideration. The objective of ESP is to determine the price at which SurModics would transact a sale if the product or service were sold on a stand-alone basis. ESP is generally used for highly customized offerings.
SurModics determines ESP for undelivered elements by considering multiple factors including, but not limited to, market conditions, competitive landscape and past pricing arrangements with similar characteristics.
Costs related to products delivered are recognized in the period revenue is recognized except for services related to the Merck agreement, which have been recognized as incurred. Customer advances are accounted for as a liability until all criteria for revenue recognition have been met.
Valuation of long-lived assets. WeAccounting guidance requires us to periodically evaluate whether events and circumstances have occurred that may affect the estimated useful life or the recoverability of the remaining balance of long-lived assets, such as property and equipment.equipment and intangibles. If such events or circumstances were to indicate that the carrying amount of these assets would not be recoverable, we would estimate the future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) or other measure of fair value were less than the carrying amount of the assets, we would recognize an impairment charge.
In fiscal 2010, we recognized asset impairment charges totaling $4.9 million. We wrote down facility-related assets in Alabama by $1.9 million to their fair value based on a decision to sell the assets, however based on further analysis of various factors associated with the consolidation of facilities we later decided not to sell the facility. The carrying value of the facility is $2.1 million at September 30, 2010, which is based on a real estate appraisal obtained during our negotiations. We also wrote down certain project- and technology-related assets totaling $1.7 million, as there were very limited business opportunities expected in light of current market conditions and general economic environment. SurModics also incurred a charge of $1.3 million associated with certain fixed assets in Minnesota given the current level of business activity and overall economic conditions. Each of these events included analysis of expected future cash flows or real estate market data which was compared to the carrying values of the assets to
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determine the impairment charges that were recognized. The assets associated with these charges had limited remaining value and as such were written down to zero value at September 30, 2010.
Goodwill. Goodwill represents the excessWe record all assets and liabilities acquired in purchase acquisitions, including goodwill, at fair value as required by accounting guidance for business combinations. The initial recognition of the costgoodwill requires management to make subjective judgments concerning estimates of how the acquired entities overassets will perform in the fair value assigned to the assets purchased and liabilities assumed in connection with the Company’s acquisitions. future using valuation methods including discounted cash flow analysis.
Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment in accordance with accounting guidance.guidance for goodwill. Under certain situations, interim impairment tests may be required if events occur or circumstances change indicating that would more likely than not reduce the fair value of a reporting unit below its carrying amount of goodwill may be impaired.amount.
Evaluating goodwill for impairment involves the determination of the fair value of our reporting units in which we have recorded goodwill. A reporting unit is a component of our resultsan operating segment for which discrete financial information is available and reviewed by management on a regular basis. SurModics has
We have determined that itsour reporting units are itsour SurModics Pharmaceuticals, business unit, a component within Therapeutics, andInc. (SurModics Pharma) subsidiary, the In Vitro TechnologiesDiagnostics operations and the SurModics drug delivery and hydrophilic coatings operations. The Company reorganized in March 2010 which resulted in the elimination of the Company’s business unit.units. The reporting units with goodwill resulted from the acquisitions of SurModics Pharma and BioFX Laboratories, Inc. in fiscal 2007. Inherent in the determination of fair value of our reporting units are certain estimates and judgments, including the interpretation of current economic indicators and market valuations as well as our strategic plans with regard to our operations.
We performed our annual impairment test of goodwill in the fourth quarter of fiscal 20092010 and recognized a non-cash goodwill impairment charge of $13.8 million, which represented a full impairment of the goodwill associated with our SurModics Pharma reporting unit. Prior to testing goodwill for impairment we tested our definite-lived assets, property, plant and equipment as well as intangible assets, under the provisions of the accounting guidance for impairment or disposal of long-lived assets, and determined that there were no impairments of these assets. We did not record any goodwill impairment charges during fiscal 2009 or 2008.
The goodwill impairment in fiscal 2010 reflected a significant decline in the estimated fair value of our reporting units, which resulted from a slowdown in business activity which was most pronounced in the fourth quarter of fiscal 2010, higher operating costs with our recently placed in-service cGMP manufacturing facility, and a significant decrease in our stock price during the year. Our stock price declined from $24.13 per share at October 1, 2009 to $12.03 per share at the date of our annual impairment test, which was August 31, 2010. While we continually evaluate whether any indications of impairment are present that would require an impairment charge. analysis on an interim basis, no such indicators were considered present prior to the fourth quarter of fiscal 2010. Prior to the fourth quarter, based on our outlook for future results and the fact that our market capitalization exceeded our book value by a margin of 64% at June 30, 2010, we did not believe that the events and circumstances in existence at our interim reporting dates indicated that it was more likely than not that the fair value of any of our reporting units would be less than its carrying amount.
In evaluating whether goodwill was impaired, we compared the fair value of the reporting units to which goodwill is assigned to their carrying value (step onevalues (Step 1 of the impairment test). In calculating fair value, we used the income approach as our primary indicator of fair value, with the market approach used as a test of reasonableness. The income approach is a valuation technique based on multiples of revenue and bookunder which we estimate future cash flows using the reporting units’ financial forecasts. Future estimated cash flows are discounted to their present value for comparable companies since the technique is consistent with the objective of measuringto calculate fair value. The comparisonmarket approach establishes fair value by comparing our company to other publicly traded guideline companies selected haveor by analysis of actual transactions of similar businesses or assets sold. The income approach is tailored to the circumstances of our business, and the market approach is completed as a secondary test to ensure that the results of the income approach are reasonable and in line with comparable companies in the industry. The summation of our reporting units’ fair values was compared and reconciled to our market capitalization as of the date of our impairment test.
In the situation where a reporting unit’s carrying amount exceeds its fair value, the amount of the impairment loss must be measured. The measurement of the impairment (Step 2 of the impairment test) is calculated by determining the implied fair value of a reporting unit’s goodwill. In calculating the implied fair value of goodwill,
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operations comparable to eachthe fair value of the reporting unit is allocated to all other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. The goodwill impairment is measured as the excess of the carrying amount of goodwill over its implied fair value.
In determining the fair value of our SurModics Pharma reporting unit under the income approach, our expected cash flows are affected by various assumptions. Fair value on a discounted cash flow basis used forecasts over a ten year period with an estimation of residual growth rates thereafter. We use our business plans and projections as the basis for expected future cash flows. The most significant assumptions incorporated in these forecasts for the most recent goodwill impairment tests included annual revenue changes based on current customer programs and expected progression of programs into different phases of development. A discount rate of 15 percent was used in the 2010 analysis to reflect the relevant risks of the higher growth assumed for this reporting unit. Given the significant difference between the reporting unit’s fair value and carrying value, any change in the discount rate would not have changed the evaluation of impairment.
In estimating the fair value of our company under the market approach, we considered the relative merits of commonly applied market capitalization multiples based on the availability of data. Based on our analysis, we utilized the guideline public company method to support the valuation of the reporting units.
Based on the goodwill analysis performed as of August 31, 2010, the $13.8 million of goodwill in the SurModics Pharma reporting unit failed Step 1 of the impairment test, and Step 2 of the impairment test indicated that goodwill was fully impaired. We also anticipate that this reporting unit may achieve additional milestone obligations of $5.7 million in fiscal 2011 and we may record a goodwill impairment charge for this amount in fiscal 2011. The indicated excess in fair value over carrying value of the Company’s In Vitro Diagnostics reporting unit in Step 1 of the impairment test at August 31, 2010 was approximately 82% and as such the $8.0 million of goodwill related to this reporting unit is not impaired. To the extent that actual results or other assumptions about future economic conditions or potential for our growth and profitability in this business changes, it is possible that our conclusion regarding the goodwill could change, which could have a material effect on our financial position and results of operations. The SurModics drug delivery and hydrophilic coatings operations does not have any goodwill and was included in the analysis to assist in reconciling the fair value of all reporting units to the Company’s market capitalization at August 31, 2010. See Note 2 to the consolidated financial statements for which indefinite-lived assets were being evaluated.further information.
Investments. Investments consist principally of U.S. government and government agency obligations and mortgage-backed securities and are classified asavailable-for-sale orheld-to-maturity at September 30, 2009.2010. Our investment policy calls for no more than 5% of investments be held in any one credit issue, excluding U.S. government and government agency obligations, net of tax.obligations.Available-for-sale investments are reported at fair value with unrealized gains and losses excluded from operations and reported as a separate component of stockholders’ equity, except forother-than-temporary impairments, which are reported as a charge to current operations and result in a new cost basis for the investment in accordance with accounting guidance.investment. Our evaluation of theavailable-for-sale investments resulted in no loss recognition in fiscal 20092010 and loss recognition of $4.3 million related to our investment in OctoPlus N.V. (included in Other Assets in the consolidated balance sheets) in fiscal 2008, as we determined the loss to be another-than-temporary impairment based on a significant decline in the stock price as of September 30, 2008. The impairment of the OctoPlus N.V. investment resulted in a new cost basis.2009. Investments for which management has the intent and ability to hold to maturity are classified asheld-to-maturity and reported at amortized cost. If there iswas another-than-temporary impairment in the fair value of any individual security classified asheld-to-maturity, the Company willwould write down the security to fair value with a corresponding adjustment to other income (loss). Interest on debt securities, including amortization of premiums and accretion of discounts, is included in other income (loss). Realized gains and losses from the sales of debt securities, which are included in other income (loss), are determined using the specific identification method. See Notes 2 and 3 to the consolidated financial statements for further information.
Income tax accruals and valuation allowances. When preparing the consolidated financial statements, we are required to estimate the income taxestax obligations in each of the jurisdictions in which we operate. This process involves estimating the actual current tax obligations based on expected income, statutory tax rates and tax planning opportunities in the various jurisdictions. In the event there is a significant unusual or one-time item recognized in the results of operations, the tax attributable to that item would be separately calculated and recorded in the period the unusual or one-time item occurred. Tax law requires certain items to be included in our tax return at different times than the items are reflected in our results of operations. As a result, the annual effective tax rate reflected in
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our results of operations is different than that reported on our tax return (i.e., our cash tax rate). Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some are temporary differences that will reverse over time, such as depreciation expense on capital assets. These temporary differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax returnreturns in future years, for which we have already recorded the expense in our consolidated statements of income.operations. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance against those deferred tax assets. Deferred tax liabilities generally represent items for which we have already taken a deduction in our tax return, but we have not yet recognized the items as expense in our results of operations. Significant judgment is required in evaluating our tax positions, and in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our deferred tax assets. We had total deferred tax assets in excess of total deferred tax liabilities of $2.9 million as of September 30, 2010 and 2009, and $12.2including valuation allowances of $6.5 million as of September 30, 2008, including valuation allowances of2010 and $3.3 million as of September 30, 2009 and $3.4 million as of September 30, 2008.2009. The valuation allowances related to impairment losses on investments and were recorded because the Company does not currently foresee future capital gains within the allowable carry-forward and carry-back periods to offset these capital losses when they are recognized. As such, no tax benefit has been recorded in the consolidated statements of income. In addition, we recorded a valuation allowance related to state net operating losses based on the uncertainty regarding the realization of the net operating losses in the carryforward periods.
The Company adopted accounting provisions on October 1, 2007 which defined new standards for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authorities based solely on the technical merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized as the largest amount of tax benefit that, in our judgment, is greater than 50 percent likely to be realized. The total gross amount of unrecognized tax benefits as of September 30, 2010, 2009 and 2008 was $1.9 million, $2.0 million and $1.5 million, respectively, excluding accrued interest and penalties. Of these unrecognized tax benefits, $1.9 million, $2.0 million of these tax benefitsand $1.5 million would affect our effective tax rate if recognized.for fiscal years 2010, 2009 and 2008, respectively. Interest and penalties recorded for uncertain tax positions
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are included in our income tax provision. As of September 30, 2010, 2009 and 2008, $0.7 million, $0.6 million and $0.4 million, respectively, of interest and penalties were accrued, excluding the tax benefits of deductible interest. The Internal Revenue Service has commenced an examination of our United States income tax return for fiscal 2009 in the first quarter of fiscal 2011. Fiscal years 2006, 2007 and 2008 remain subject to examination by federal tax authorities. Tax returns for state and local jurisdictions for fiscal years 2003 through 20082009 remain subject to examination by state and local tax authorities. In the event that we have determined not to file tax returns with a particular state or local jurisdiction, all years remain subject to examination by the tax authorities. The ultimate outcome of tax matters may differ from our estimates and assumptions. Unfavorable settlement of any particular issue would require the use of cash and could result in increased income tax expense. Favorable resolution could result in reduced income tax expense. Within the next 12 months, we do not expect that our unrecognized tax benefits will change significantly. See Note 8 to the consolidated financial statements for further information regarding the impact of adopting this new standard as well as changes in unrecognized tax benefits during fiscal 2010, 2009 and 2008.
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Results of Operations
Years Ended September 30, 2010 and 2009
| | | | | | | | | | | | | | | | |
| | Fiscal
| | | Fiscal
| | | Increase/
| | | | |
(Dollars in thousands) | | 2010 | | | 2009 | | | (Decrease) | | | % Change | |
|
Revenue: | | | | | | | | | | | | | | | | |
Therapeutic | | | | | | | | | | | | | | | | |
Cardiovascular | | $ | 40,155 | | | $ | 39,841 | | | $ | 314 | | | | 1 | % |
Ophthalmology | | | 7,617 | | | | 52,102 | | | | (44,485 | ) | | | (85 | )% |
Other Markets | | | 10,932 | | | | 13,114 | | | | (2,182 | ) | | | (17 | )% |
| | | | | | | | | | | | | | | | |
Total Therapeutic | | | 58,704 | | | | 105,057 | | | | (46,353 | ) | | | (44 | )% |
Diagnostic | | | 11,194 | | | | 16,477 | | | | (5,283 | ) | | | (32 | )% |
| | | | | | | | | | | | | | | | |
Total revenue | | $ | 69,898 | | | $ | 121,534 | | | $ | (51,636 | ) | | | (42 | )% |
| | | | | | | | | | | | | | | | |
Revenue. Fiscal 2010 revenue was $69.9 million, a decrease of $51.6 million, or 42%, from fiscal 2009. The decreases in Therapeutic and Diagnostic revenue, as detailed in the table above, are further explained in the narrative below.
Therapeutic. Revenue in Therapeutic was $58.7 million in fiscal 2010, a 44% decrease compared with $105.1 million in the prior-year period. The decrease in total revenue principally reflects the recognition in fiscal 2009 of revenue of approximately $45 million associated with the Merck collaborative research and license agreement, which was terminated effective in the first quarter of fiscal 2009. Excluding this significant event-specific item in fiscal 2009, Therapeutic revenue decreased $1.4 million, or 2%.
Cardiovascular derives a substantial amount of 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. The CYPHER® stent faces continuing competition from Boston Scientific, Medtronic, and Abbott Laboratories. Stents from these companies compete directly with the CYPHER® stent both domestically and internationally. For the last several years, royalty and reagent product sales have decreased due to lower CYPHER stent sales. We anticipate that royalty revenue from the CYPHER® stent are likely to descrease in fiscal 2011 and beyond as the various marketers of drug-eluting stents compete, and as others enter the marketplace. We also receive a royalty on sales of delivery systems used to deliver the Medtronic Endeavor® and Endeavor® Resolute drug-eluting stents. These stent delivery systems incorporate our proprietary hydrophilic technology and are sold in the United States and internationally.
Cardiovascular revenue increased $0.3 million, or 1%, in fiscal 2010, compared with the prior-year principally as a result of higher license fees which included recognition of fees of $1.25 million associated with a terminated agreement, and higher reagent product sales, partially offset by lower research and development revenue. Cordis CYPHER® stent sales decreased approximately 26% during fiscal 2010 which resulted in lower royalty revenue from this agreement.
Ophthalmology revenue decreased $44.5 million, or 85%, in fiscal 2010, compared with the prior-year. The significant decrease relates to the recognition of previously deferred revenue associated with the terminated collaborative research and license agreement with Merck in fiscal 2009. In September 2008, following a strategic review of Merck’s business and product development portfolio, Merck gave notice that it was terminating the collaborative research and license agreement as well as the supply agreement entered into in June 2007. The termination became effective in December 2008. We recognized the revenue previously deferred totaling $34.8 million, and we received and recognized a $9 million milestone payment from Merck associated with the termination of the triamcinolone acetonide development program.
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rates. A one percentage point increase in interest rates would result in an approximate $591,000$0.7 million decrease in the fair value of the Company’savailable-for-sale andheld-to-maturity securities as of September 30, 2009,2010, 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 Company’s inventory exposure is not material.
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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.
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
The consolidated balance sheets as of September 30, 20092010 and 20082009 and the consolidated statements of income,operations, stockholders’ equity and cash flows for each of the three years in the period ended September 30, 2009,2010, together with Report of Independent Registered Public Accounting Firm and related footnotes (including selected unaudited quarterly financial data) begin onpage F-1 of thisForm 10-K.
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ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
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ITEM 9A. | CONTROLS AND PROCEDURES. |
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1. | 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 Company’s management, including the Company’s interim Chief Executive Officer and Chief Financial Officer regarding the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant toRule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the interim Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information 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 Securities Exchange Commission rules and forms, and to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.
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2. | Internal Control over Financial Reporting. |
(a)a. Management’s Report on Internal Control Over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework inInternal Control —Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of September 30, 2009.2010. Deloitte & Touche LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report onForm 10-K, has issued the attestation report below regarding the Company’s internal control over financial reporting.
(b)b. Attestation Report of the Independent Registered Public Accounting Firm.
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
SurModics, Inc.
Eden Prairie, Minnesota
We have audited the internal control over financial reporting of SurModics, Inc. and subsidiaries (the “Company”) as of September 30, 2009,2010, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2009,2010, based on the criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended September 30, 20092010 of the Company and our report dated December 11, 2009,14, 2010, expressed an unqualified opinion on those financial statements.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
December 11, 200914, 2010
46
| |
3. | Changes in Internal Controls. |
There was no change in our internal control over financial reporting that occurred during the fourth quarter of the year covered by thisForm 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| |
ITEM 9B. | OTHER INFORMATION. |
None.
PART III
| |
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
The information required by Item 10 relating to directors, our audit committee, the nature of changes, if any, to procedures by which our shareholders may recommend nominees for directors, codesour code of ethics and compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the sections entitled “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance — Code of Ethics and Business Conduct”Conduct,” “Corporate Governance — Corporate Governance and Nominating Committee; Procedures & Policies” and “Audit Committee Report,” which appear in the Company’s definitive Proxy Statement for its 20102011 Annual Meeting of Shareholders. The information required by Item 10 relating to executive officers appears in Part I of thisForm 10-K.
| |
ITEM 11. | EXECUTIVE COMPENSATION. |
The information required by Item 11 is incorporated herein by reference to the sections entitled “Executive Compensation and Other Information,” “Compensation Discussion and Analysis,” “Director Compensation forDuring Fiscal 2009”2010” and “Compensation Committee Report,” which appear in the Company’s definitive Proxy Statement for its 20102011 Annual Meeting of Shareholders.
| |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The information required by Item 12 is incorporated herein by reference to the sections entitled “Principal Shareholders,” and “Management Shareholdings” and “Equity Compensation Plan Information” which appear in the Company’s definitive Proxy Statement for its 20102011 Annual Meeting of Shareholders.
Equity Compensation Plan Information
The following table provides information related to the Company’s equity compensation plans in effect as of September 30, 2010:
| | | | | | | | | | | | |
| | | | | | | | (c)
| |
| | | | | | | | Number of Securities
| |
| | (a)
| | | (b)
| | | Remaining Available for
| |
| | Number of Securities to
| | | Weighted-Average
| | | Future Issuance Under
| |
| | be Issued Upon Exercise
| | | Exercise Price of
| | | Equity Compensation
| |
| | of Outstanding Options,
| | | Outstanding Options,
| | | Plans (Excluding Securities
| |
Plan Category | | Warrants and Rights | | | Warrants and Rights | | | Reflected in Column (a)) | |
|
Equity compensation plans approved by shareholders | | | 1,611,333 | (1) | | $ | 31.02 | (1) | | | 2,001,609 | (2) |
Equity compensation plans not approved by shareholders | | | 0 | | | | N/A | | | | 0 | |
| | | | | | | | | | | | |
Total | | | 1,611,333 | | | $ | 31.02 | | | | 2,001,609 | |
| | |
(1) | | Excludes shares that may be issued under the Company’s amended and restated 1999 Employee Stock Purchase Plan, but includes amounts reserved for previously-granted restricted stock and performance share awards under the 2009 Equity Incentive Plan. |
|
(2) | | Includes 1,818,801 shares available for future issuance under the 2009 Equity Incentive Plan. There are 182,808 shares available under the amended and restated 1999 Employee Stock Purchase Plan. |
47
| |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The information required by Item 13 is incorporated herein by reference to the sections entitled “Corporate Governance — Related Person Transaction Approval Policy,” “Corporate Governance — Transactions With Related Parties” and “Corporate Governance — Majority of Independent Directors; Committees of Independent Directors,” which appear in the Company’s definitive Proxy Statement for its 20102011 Annual Meeting of Shareholders.
| |
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The information required by Item 14 is incorporated herein by reference to the section entitled “Independent Registered Public Accounting Firm,” which appears in the Company’s definitive Proxy Statement for its 20102011 Annual Meeting of Shareholders.
4748
PART IV
| |
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a) 1. Financial Statements
The following statements are included in this report on the pages indicated:
| | |
| | Page (s) |
|
| | F-1 |
| | F-2 |
| | F-3 |
| | F-4 |
| | F-5 |
| | F-6 to F-27F-32 |
2. Financial Statement Schedules.See Schedule II — “Valuation and Qualifying Accounts” in this section of thisForm 10-K. All other schedules are omitted because they are inapplicable, not required, or the information is in the consolidated financial statements or related notes.
3. Listing of Exhibits.The exhibits which are filed with this report or which are incorporated herein by reference are set forth in the Exhibit Index following the signature page.
SurModics, Inc.
Schedule II
Valuation and Qualifying Accounts
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Column B | | Column C | | Column D | | Column E | | | Column B | | Column C | | Column D | | Column E | |
| | Balance at
| | Additions
| | Deductions
| | Balance at
| | | Balance at
| | Additions
| | Deductions
| | Balance at
| |
Column A | | Beginning of
| | Charged to
| | From
| | End of
| | | Beginning of
| | Charged to
| | From
| | End of
| |
Description | | Period | | Expenses | | Reserves | | Period | | | Period | | Expenses | | Reserves | | Period | |
| |
Year Ended September 30, 2007 | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 40 | | | $ | 7 | | | $ | 7 | (a) | | $ | 40 | | |
| | | | | | | | | |
Year Ended September 30, 2008 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 40 | | | $ | 228 | | | $ | 133 | (a) | | $ | 135 | | | $ | 40 | | | $ | 228 | | | $ | 133 | (a) | | $ | 135 | |
| | | | | | | | | | | | | | | | | | |
Year Ended September 30, 2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 135 | | | $ | (34 | ) | | $ | 19 | (a) | | $ | 82 | | | $ | 135 | | | $ | (34 | ) | | $ | 19 | (a) | | $ | 82 | |
| | | | | | | | | | | | | | | | | | |
Restructuring accrual | | $ | — | | | $ | 1,763 | | | $ | 808 | (b) | | $ | 955 | | | $ | — | | | $ | 1,763 | | | $ | 808 | (b) | | $ | 955 | |
| | | | | | | | | | | | | | | | | | |
Year Ended September 30, 2010 | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | | $ | 82 | | | $ | 367 | | | $ | (12 | )(a) | | $ | 461 | |
| | | | | | | | | | |
Restructuring accrual | | | $ | 955 | | | $ | 1,306 | | | $ | 1,078 | (b) | | $ | 1,183 | |
| | | | | | | | | | |
| | |
(a) | | Uncollectible accounts written off and adjustments to the allowance. |
|
(b) | | Adjustments to the accrual account reflect payments or non-cash charges associated with the accrual. |
4849
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SURMODICS, INC.
| | |
| By: | /s/ Bruce J BarclayPhilip D. Ankeny |
Bruce J BarclayPhilip D. Ankeny
Interim Chief Executive Officer, Senior Vice
President and Chief Financial Officer
Dated: December 11, 200914, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant, in the capacities, and on the dates indicated.
(Power of Attorney)
Each person whose signature appears below authorizes BRUCE J BARCLAY and PHILIP D. ANKENY, and constitutes and appoints said personsperson as his or her true and lawful attorneys-in-factattorney-in-fact and agents, each acting alone,agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report onForm 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, authorizing said personsperson and granting unto said attorneys-in-factattorney-in-fact and agents, each acting alone,agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all said attorneys-in-factattorney-in-fact and agents, each acting alone,agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.
| | | | | | |
Signature | | Title | | Date |
|
| | | | |
/s/ Bruce J Barclay
Bruce J Barclay | | President and Chief Executive Officer (principal executive officer) | | December 11, 2009 |
| | | | |
/s/ Philip D. Ankeny
Philip D. Ankeny | | Interim Chief Executive Officer, Senior Vice President and Chief Financial Officer (principal executive and financial officer) | | December 11, 200914, 2010 |
| | | | |
/s/ Mark A. Lehman Mark A. Lehman | | Corporate Controller (principal accounting officer) | | December 11, 200914, 2010 |
| | | | |
/s/ José H. Bedoya José H. Bedoya | | Director | | December 11, 200914, 2010 |
| | | | |
/s/ John W. Benson John W. Benson | | Director | | December 11, 200914, 2010 |
| | | | |
/s/ Mary K. Brainerd Mary K. Brainerd | | Director | | December 11, 200914, 2010 |
| | | | |
/s/ Robert C. Buhrmaster Robert C. Buhrmaster | | Director | | December 14, 2010 |
4950
| | | | | | |
Signature | | Title | | Date |
|
| | | | |
/s/ Robert C. BuhrmasterGerald B. Fischer Robert C. BuhrmasterGerald B. Fischer | | Director | | December 11, 200914, 2010 |
| | | | |
/s/ Gerald B. FischerGerald B. FischerKenneth H. Keller | | Director | | December 11, 2009 |
| | | | |
/s/ Kenneth H. KellerSusan E. Knight Kenneth H. KellerSusan E. Knight | | Director | | December 11, 200914, 2010 |
| | | | |
/s/ Susan E. KnightJohn A. Meslow Susan E. KnightJohn A. Meslow | | Director | | December 11, 200914, 2010 |
| | | | |
/s/ John A. MeslowScott R. Ward John A. MeslowScott R. Ward | | Director | | December 11, 200914, 2010 |
5051
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT INDEX TOFORM 10-K
For the Fiscal Year Ended September 30, 20092010
SURMODICS, INC.
| | | | |
Exhibit | | |
|
| 2 | .1 | | Agreement of Merger, dated January 18, 2005, with InnoRx, Inc. — incorporated by reference to Exhibit 2.1 to the Company’s Current Report onForm 8-K dated January 18, 2005, SEC FileNo. 0-23837. |
| 2 | .2 | | Stock Purchase Agreement, dated July 31, 2007, between SurModics, Inc. and Southern Research Institute. — incorporated by reference to Exhibit 2.1 to the Company’s Current Report onForm 8-K dated July 31, 2007, SEC FileNo. 0-23837. |
| 3 | .1 | | Restated Articles of Incorporation, as amended — incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report onForm 10-QSB for the quarter ended December 31, 1999,SEC File No. 0-23837. |
| 3 | .2 | | Restated Bylaws of the Company, as amended.** |
| 10 | .1* | | Company’s Incentive 1997 Stock Option Plan, including specimen of Incentive Stock Option Agreement — incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement onform SB-2, Reg.No. 333-43217. |
| 10 | .2* | | Form of Restricted Stock Agreement under 1997 Plan — incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement onform SB-2, Reg.No. 333-43217. |
| 10 | .3* | | Form of Non-qualified Stock Option Agreement under 1997 Plan — incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement onform SB-2, Reg.No. 333-43217. |
| 10 | .4 | | Adjusted License Agreement by and between the Company and Cordis Corporation effective as of January 1, 2003 — incorporated by reference to Exhibit 10.11 to the Company’s Annual Report onForm 10-K for the fiscal year ended September 30, 2002, SEC FileNo. 0-23837. |
| 10 | .5 | | Reagent Supply Agreement by and between the Company and Cordis Corporation effective as of January 1, 2003 — incorporated by reference to Exhibit 10.12 to the Company’s Annual Report onForm 10-K for the fiscal year ended September 30, 2002, SEC FileNo. 0-23837. |
| 10 | .6* | | Form of officer acceptance regarding employment/compensation — incorporated by reference to Exhibit 10.9 to the Company’s Annual Report onForm 10-K for the fiscal year ended September 30, 2005, SEC FileNo. 0-23837. |
| 10 | .7* | | 2003 Equity Incentive Plan (as amended and restated December 13, 2005) (adopted December 13, 2005 by the board of directors and approved by the shareholders on January 30, 2006) — incorporated by reference to Exhibit 10.1 to the Company’sForm 8-K filed February 3, 2006, SEC FileNo. 0-23837. |
| 10 | .8* | | Form of SurModics, Inc. 2003 Equity Incentive Plan Nonqualified Stock Option Agreement — incorporated by reference to Exhibit 99.1 to the Company’s8-K filed March 20, 2006,SEC File No. 0-23837. |
| 10 | .9* | | Form of SurModics, Inc. 2003 Equity Incentive Plan Incentive Stock Option Agreement — incorporated by reference to Exhibit 99.2 to the Company’s8-K filed March 20, 2006, SEC FileNo. 0-23837. |
| 10 | .10* | | Form of SurModics, Inc. 2003 Equity Incentive Plan Restricted Stock Agreement — incorporated by reference to Exhibit 99.3 to the Company’s8-K filed March 20, 2006, SEC FileNo. 0-23837. |
| 10 | .11* | | Form of SurModics, Inc. 2003 Equity Incentive Plan Performance Share Award Agreement — incorporated by reference to Exhibit 99.4 to the Company’s8-K filed March 20, 2006,SEC File No. 0-23837. |
| 10 | .12* | | Form of SurModics, Inc. 2003 Equity Incentive Plan Performance Unit Award (cash settled) Agreement — incorporated by reference to Exhibit 99.5 to the Company’s8-K filed March 20, 2006, SEC FileNo. 0-23837. |
| 10 | .13* | | Form of SurModics, Inc. 2003 Equity Incentive Plan Restricted Stock Unit Agreement — incorporated by reference to Exhibit 99.6 to the Company’s8-K filed March 20, 2006, SEC FileNo. 0-23837. |
| 10 | .14* | | Form of SurModics, Inc. 2003 Equity Incentive Plan Stock Appreciation Rights (cash settled) Agreement — incorporated by reference to Exhibit 99.7 to the Company’s8-K filed March 20, 2006, SEC FileNo. 0-23837. |
| | | | |
Exhibit | | |
|
| 2 | .1 | | Agreement of Merger, dated January 18, 2005, with InnoRx, Inc. — incorporated by reference to Exhibit 2.1 to the Company’s Current Report onForm 8-K dated January 18, 2005, SEC FileNo. 0-23837. |
| 2 | .2 | | Stock Purchase Agreement, dated July 31, 2007, between SurModics, Inc. and Southern Research Institute. — incorporated by reference to Exhibit 2.1 to the Company’s Current Report onForm 8-K dated July 31, 2007, SEC FileNo. 0-23837. |
| 3 | .1 | | Restated Articles of Incorporation, as amended — incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report onForm 10-QSB for the quarter ended December 31, 1999,SEC File No. 0-23837. |
| 3 | .2 | | Restated Bylaws of the Company, as amended — incorporated by reference to Exhibit 3.2 to the Company’s Annual Report onForm 10-K for the fiscal year ended September 30, 2009,SEC File No. 0-23837. |
| 10 | .1* | | Company’s Incentive 1997 Stock Option Plan, including specimen of Incentive Stock Option Agreement — incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement onform SB-2, Reg.No. 333-43217. |
| 10 | .2* | | Form of Restricted Stock Agreement under 1997 Plan — incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement onform SB-2, Reg.No. 333-43217. |
| 10 | .3* | | Form of Non-qualified Stock Option Agreement under 1997 Plan — incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement onform SB-2, Reg.No. 333-43217. |
| 10 | .4+ | | Adjusted License Agreement by and between the Company and Cordis Corporation effective as of January 1, 2003 — incorporated by reference to Exhibit 10.11 to the Company’s Annual Report onForm 10-K for the fiscal year ended September 30, 2002, SEC FileNo. 0-23837. |
| 10 | .5+ | | Reagent Supply Agreement by and between the Company and Cordis Corporation effective as of January 1, 2003 — incorporated by reference to Exhibit 10.12 to the Company’s Annual Report onForm 10-K for the fiscal year ended September 30, 2002, SEC FileNo. 0-23837. |
| 10 | .6* | | Form of officer acceptance regarding employment/compensation — incorporated by reference to Exhibit 10.9 to the Company’s Annual Report onForm 10-K for the fiscal year ended September 30, 2005, SEC FileNo. 0-23837. |
| 10 | .7* | | 2003 Equity Incentive Plan (as amended and restated December 13, 2005) (adopted December 13, 2005 by the board of directors and approved by the shareholders on January 30, 2006) — incorporated by reference to Exhibit 10.1 to the Company’sForm 8-K filed February 3, 2006, SEC FileNo. 0-23837. |
| 10 | .8* | | Form of SurModics, Inc. 2003 Equity Incentive Plan Nonqualified Stock Option Agreement — incorporated by reference to Exhibit 99.1 to the Company’s8-K filed March 20, 2006,SEC File No. 0-23837. |
| 10 | .9* | | Form of SurModics, Inc. 2003 Equity Incentive Plan Incentive Stock Option Agreement — incorporated by reference to Exhibit 99.2 to the Company’s8-K filed March 20, 2006, SEC FileNo. 0-23837. |
| 10 | .10* | | Form of SurModics, Inc. 2003 Equity Incentive Plan Restricted Stock Agreement — incorporated by reference to Exhibit 99.3 to the Company’s8-K filed March 20, 2006, SEC FileNo. 0-23837. |
| 10 | .11* | | Form of SurModics, Inc. 2003 Equity Incentive Plan Performance Share Award Agreement — incorporated by reference to Exhibit 99.4 to the Company’s8-K filed March 20, 2006,SEC File No. 0-23837. |
| 10 | .12* | | Form of SurModics, Inc. 2003 Equity Incentive Plan Performance Unit Award (cash settled) Agreement — incorporated by reference to Exhibit 99.5 to the Company’s8-K filed March 20, 2006, SEC FileNo. 0-23837. |
| 10 | .13* | | Form of SurModics, Inc. 2003 Equity Incentive Plan Restricted Stock Unit Agreement — incorporated by reference to Exhibit 99.6 to the Company’s8-K filed March 20, 2006, SEC FileNo. 0-23837. |
| 10 | .14* | | Form of SurModics, Inc. 2003 Equity Incentive Plan Stock Appreciation Rights (cash settled) Agreement — incorporated by reference to Exhibit 99.7 to the Company’s8-K filed March 20, 2006, SEC FileNo. 0-23837. |
5152
| | | | |
Exhibit | | |
|
| 10 | .15* | | Form of SurModics, Inc. 2003 Equity Incentive Plan Stock Appreciation Rights (stock settled) Agreement — incorporated by reference to Exhibit 99.8 to the Company’s8-K filed March 20, 2006, SEC FileNo. 0-23837. |
| 10 | .16* | | Change in Control Agreement with Bruce J Barclay, dated April 19, 2006 — incorporated by reference to Exhibit 99.1 to the Company’sForm 8-K filed April 25, 2006, SEC FileNo. 0-23837. |
| 10 | .17* | | Change in Control Agreement with Philip D. Ankeny, dated April 19, 2006 — incorporated by reference to Exhibit 99.2 to the Company’sForm 8-K filed April 25, 2006, SEC FileNo. 0-23837. |
| 10 | .18 | | The Company’s Board Compensation Policy, Amended as of November 17, 2008.** |
| 10 | .19* | | Change in Control Agreement with Paul A. Lopez, dated November 15, 2006 — incorporated by reference to Exhibit 10.27 to the Company’s Annual Report onForm 10-K for the fiscal year ended September 30, 2006, SEC FileNo. 0-23837. |
| 10 | .20* | | Description of certain retirement benefits for Dale R. Olseth — incorporated by reference to Exhibit 10.28 to the Company’s Annual Report onForm 10-K for the fiscal year ended September 30, 2006, SEC FileNo. 0-23837. |
| 10 | .21+ | | Exclusive License and Research Collaboration Agreement with Merck & Co., Inc. dated June 26, 2007 — incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2007, SEC FileNo. 0-23837. |
| 10 | .22+ | | Supply Agreement with Merck & Co., Inc. dated June 26, 2007 — incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2007, SEC FileNo. 0-23837. |
| 10 | .23* | | Employment Agreement of Arthur J. Tipton, Ph.D., dated July 31, 2007 — incorporated by reference to Exhibit 10.27 to the Company’s Annual Report onForm 10-K for the fiscal year ended September 30, 2007. |
| 10 | .24 | | Purchase Agreement with Vest Mykyng LLC, dated August 24, 2007 — incorporated by reference to Exhibit 10.28 to the Company’s Annual Report onForm 10-K for the fiscal year ended September 30, 2007. |
| 10 | .25 | | Real Estate Purchase and Sale Agreement dated March 11, 2008 by and between Belk, Inc. and SurModics Pharmaceuticals, Inc. — incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2008, SEC FileNo. 0-23837. |
| 10 | .26 | | Credit Agreement dated as of February 27, 2009, by and between SurModics, Inc. and Wells Fargo Bank, National Association as Sole Lead Arranger and Administrative Agent — incorporated by reference to Exhibit 10.1 to the Company’sForm 8-K filed March 4, 2009, SEC FileNo. 0-23837. |
| 10 | .27* | | Amendment to Change of Control Agreement, dated as of December 23, 2008, between SurModics, Inc. and Bruce J Barclay.** |
| 10 | .28* | | Amendment to Change of Control Agreement, dated as of December 23, 2008, between SurModics, Inc. and Philip D. Ankeny.** |
| 10 | .29* | | Second Amendment to Change of Control Agreement, dated as of April 19, 2009, between SurModics, Inc. and Bruce J Barclay.** |
| 10 | .30* | | Second Amendment to Change of Control Agreement, dated as of April 19, 2009, between SurModics, Inc. and Philip D. Ankeny.** |
| 21 | | | Subsidiaries of the Registrant.** |
| 23 | | | Consent of Deloitte & Touche LLP.** |
| 24 | | | Power of Attorney (included on signature page of thisForm 10-K).** |
| 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.** |
| | | | |
Exhibit | | |
|
| 10 | .15* | | Form of SurModics, Inc. 2003 Equity Incentive Plan Stock Appreciation Rights (stock settled) Agreement — incorporated by reference to Exhibit 99.8 to the Company’s8-K filed March 20, 2006, SEC FileNo. 0-23837. |
| 10 | .16* | | Change in Control Agreement with Philip D. Ankeny, dated April 19, 2006 — incorporated by reference to Exhibit 99.2 to the Company’sForm 8-K filed April 25, 2006, SEC FileNo. 0-23837. |
| 10 | .17 | | The Company’s Board Compensation Policy, Amended and Restated as of February 8, 2010.** |
| 10 | .18 | | Credit Agreement dated as of February 27, 2009, by and between SurModics, Inc. and Wells Fargo Bank, National Association as Sole Lead Arranger and Administrative Agent — incorporated by reference to Exhibit 10.1 to the Company’sForm 8-K filed March 4, 2009, SEC FileNo. 0-23837. |
| 10 | .19* | | Amendment to Change of Control Agreement, dated as of December 23, 2008, between SurModics, Inc. and Philip D. Ankeny. — incorporated by reference to Exhibit 10.28 to the Company’s Annual Report onForm 10-K for the fiscal year ended September 30, 2009, SEC FileNo. 0-23837. |
| 10 | .20* | | Second Amendment to Change of Control Agreement, dated as of April 19, 2009, between SurModics, Inc. and Philip D. Ankeny. — incorporated by reference to Exhibit 10.30 to the Company’s Annual Report onForm 10-K for the fiscal year ended September 30, 2009, SEC FileNo. 0-23837. |
| 10 | .21+ | | License and Development Agreement between Genentech, Inc., F. Hoffmann-La Roche, Ltd., and SurModics, Inc., dated October 5, 2009 — incorporated by reference to Exhibit 10.1 to the Company’sForm 10-Q filed February 5, 2010, SEC FileNo. 0-23837. |
| 10 | .22+ | | Master Services Agreement by and between Genentech, Inc., F. Hoffmann-La Roche, Ltd. and SurModics, Inc., dated October 5, 2009 — incorporated by reference to Exhibit 10.2 to the Company’sForm 10-Q filed February 5, 2010, SEC FileNo. 0-23837. |
| 10 | .23* | | SurModics, Inc. 2009 Equity Incentive Plan. — incorporated by reference to Exhibit 10.3 to the Company’sForm 10-Q filed May 7, 2010, SEC FileNo. 0-23837. |
| 10 | .24* | | SurModics, Inc. 1999 Employee Stock Purchase Plan (as amended and restated November 30, 2009). — incorporated by reference to Exhibit 10.2 to the Company’sForm 10-Q filed May 7, 2010,SEC File No. 0-23837. |
| 10 | .25* | | Form of Incentive Stock Option Agreement for the SurModics, Inc. 2009 Equity Incentive Plan — incorporated by reference to Exhibit 10.4 to the Company’sForm 10-Q filed May 7, 2010, SEC FileNo. 0- 23837. |
| 10 | .26* | | Form of Non-Statutory Stock Option Agreement for the SurModics, Inc. 2009 Equity Incentive Plan — incorporated by reference to Exhibit 10.5 to the Company’sForm 10-Q filed May 7, 2010,SEC File No. 0-23837. |
| 10 | .27* | | Form of Performance Share Agreement for the SurModics, Inc. 2009 Equity Incentive Plan — incorporated by reference to Exhibit 10.6 to the Company’sForm 10-Q filed May 7, 2010,SEC File No. 0-23837. |
| 10 | .28* | | Form of Restricted Stock Agreement for the SurModics, Inc. 2009 Equity Incentive Plan — incorporated by reference to Exhibit 10.7 to the Company’sForm 10-Q filed May 7, 2010, SEC FileNo. 0-23837. |
| 21 | | | Subsidiaries of the Registrant.** |
| 23 | | | Consent of Deloitte & Touche LLP.** |
| 24 | | | Power of Attorney (included on signature page of thisForm 10-K).** |
| 31 | .1 | | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.** |
| 32 | .1 | | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.** |
| | |
* | | Management contract or compensatory plan or arrangement |
| | |
** | | Filed herewith |
|
+ | | Confidential treatment requested as to portions of the exhibit. Confidential portions omitted and provided separately to the Securities and Exchange Commission. |
5253
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
SurModics, Inc.
Eden Prairie, Minnesota
We have audited the accompanying consolidated balance sheets of SurModics, Inc. and subsidiaries (the “Company”) as of September 30, 20092010 and 2008,2009, and the related consolidated statements of income,operations, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2009.2010. Our audits also includeincluded the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of SurModics, Inc. and subsidiaries as of September 30, 20092010 and 2008,2009, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2009,2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of September 30, 2009,2010, based on the criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 11, 200914, 2010, expressed an unqualified opinion on the Company’s internal control over financial reporting.
As discussed in Note 8 to the consolidated financial statements, on October 1, 2007, the Company adopted new accounting guidance on the accounting for uncertainty in income taxes./s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
December 11, 200914, 2010
F-1
SurModics, Inc. and Subsidiaries
As of September 30
| | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (In thousands, except share data) | | | (In thousands, except share data) | |
|
ASSETS | ASSETS | ASSETS |
Current Assets | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 11,636 | | | $ | 15,376 | | | $ | 11,391 | | | $ | 11,636 | |
Short-term investments | | | 8,932 | | | | 9,251 | | | | 9,105 | | | | 8,932 | |
Accounts receivable, net of allowance for doubtful accounts of $82 and $135 as of | | | | | | | | | |
September 30, 2009 and 2008, respectively | | | 11,320 | | | | 14,589 | | |
Accounts receivable, net of allowance for doubtful accounts of $461 and $82 as of September 30, 2010 and 2009, respectively | | | | 8,987 | | | | 11,320 | |
Inventories | | | 3,330 | | | | 2,651 | | | | 3,047 | | | | 3,330 | |
Deferred tax asset | | | 353 | | | | 1,058 | | | | 247 | | | | 353 | |
Prepaids and other | | | 1,443 | | | | 3,584 | | | | 4,701 | | | | 1,443 | |
| | | | | | | | | | |
Total Current Assets | | | 37,014 | | | | 46,509 | | | | 37,478 | | | | 37,014 | |
| | | | | | | | | | |
Property and equipment, net | | | 66,915 | | | | 41,897 | | | | 65,395 | | | | 66,915 | |
Long-term investments | | | 27,300 | | | | 47,351 | | | | 36,290 | | | | 27,300 | |
Deferred tax asset | | | 2,548 | | | | 11,099 | | | | 2,606 | | | | 2,548 | |
Intangible assets, net | | | 17,458 | | | | 16,870 | | | | 15,257 | | | | 17,458 | |
Goodwill | | | 21,070 | | | | 18,001 | | | | 8,010 | | | | 21,070 | |
Other assets, net | | | 13,257 | | | | 9,301 | | | | 5,243 | | | | 13,257 | |
| | | | | | | | | | |
Total Assets | | $ | 185,562 | | | $ | 191,028 | | | $ | 170,279 | | | $ | 185,562 | |
| | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | Current Liabilities | | | | | | | | | | | | | | | | |
Accounts payable | | $ | 3,468 | | | $ | 3,466 | | | $ | 3,341 | | | $ | 3,468 | |
Accrued liabilities: | | | | | | | | | | | | | | | | |
Compensation | | | 926 | | | | 3,015 | | | | 930 | | | | 926 | |
Accrued income taxes payable | | | 186 | | | | — | | | | — | | | | 186 | |
Accrued other | | | 1,637 | | | | 1,407 | | | | 1,753 | | | | 1,637 | |
Deferred revenue | | | 905 | | | | 4,335 | | | | 562 | | | | 905 | |
Other current liabilities | | | 862 | | | | 303 | | | | 1,061 | | | | 862 | |
| | | | | | | | | | |
Total Current Liabilities | | | 7,984 | | | | 12,526 | | | | 7,647 | | | | 7,984 | |
Deferred revenue, less current portion | | | 623 | | | | 33,243 | | | | 3,598 | | | | 623 | |
Other long-term liabilities | | | 4,583 | | | | 3,453 | | | | 4,675 | | | | 4,583 | |
| | | | | | | | | | |
Total Liabilities | | | 13,190 | | | | 49,222 | | | | 15,920 | | | | 13,190 | |
| | | | | | | | | | |
Commitments and Contingencies (Note 9) | | | | | | | | | | | | | | | | |
Stockholders’ Equity | | | | | | | | | | | | | | | | |
Series A preferred stock — $.05 par value, 450,000 shares authorized; | | | | | | | | | | | | | | | | |
no shares issued and outstanding | | | — | | | | — | | | | — | | | | — | |
Common stock — $.05 par value, 45,000,000 shares authorized; 17,471,472 | | | | | | | | | |
and 18,030,270 shares issued and outstanding | | | 874 | | | | 901 | | |
Common stock — $.05 par value, 45,000,000 shares authorized; 17,423,601 and 17,471,472 shares issued and outstanding | | | | 871 | | | | 874 | |
Additional paid-in capital | | | 66,005 | | | | 74,573 | | | | 69,702 | | | | 66,005 | |
Accumulated other comprehensive income (loss) | | | 1,504 | | | | (107 | ) | |
Accumulated other comprehensive income | | | | 886 | | | | 1,504 | |
Retained earnings | | | 103,989 | | | | 66,439 | | | | 82,900 | | | | 103,989 | |
| | | | | | | | | | |
Total Stockholders’ Equity | | | 172,372 | | | | 141,806 | | | | 154,359 | | | | 172,372 | |
| | | | | | | | | | |
Total Liabilities and Stockholders’ Equity | | $ | 185,562 | | | $ | 191,028 | | | $ | 170,279 | | | $ | 185,562 | |
| | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-2
SurModics, Inc. and Subsidiaries
For the Years Ended September 30
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | (In thousands, except net
| | | (In thousands, except net
| |
| | income per share) | | | income (loss) per share) | |
|
Revenue | | | | | | | | | | | | | | | | | | | | | | | | |
Royalties and license fees | | $ | 75,464 | | | $ | 51,788 | | | $ | 52,679 | | | $ | 34,277 | | | $ | 75,464 | | | $ | 51,788 | |
Product sales | | | 19,333 | | | | 20,052 | | | | 13,543 | | | | 20,184 | | | | 19,333 | | | | 20,052 | |
Research and development | | | 26,737 | | | | 25,211 | | | | 6,942 | | | | 15,437 | | | | 26,737 | | | | 25,211 | |
| | | | | | | | | | | | | | |
Total revenue | | | 121,534 | | | | 97,051 | | | | 73,164 | | | | 69,898 | | | | 121,534 | | | | 97,051 | |
| | | | | | | | | | | | | | |
Operating Costs and Expenses | | | | | | | | | | | | | |
Operating costs and expenses | | | | | | | | | | | | | |
Product | | | 7,508 | | | | 8,476 | | | | 5,584 | | | | 9,425 | | | | 7,508 | | | | 8,476 | |
Customer research and development | | | 13,183 | | | | 19,187 | | | | 5,840 | | | | 18,147 | | | | 13,183 | | | | 19,187 | |
Other research and development | | | 21,179 | | | | 21,311 | | | | 22,625 | | | | 17,916 | | | | 21,179 | | | | 21,311 | |
Selling, general and administrative | | | 17,200 | | | | 20,816 | | | | 13,643 | | | | 18,451 | | | | 17,200 | | | | 20,816 | |
Purchased in-process research and development | | | 3,200 | | | | — | | | | 15,573 | | | | — | | | | 3,200 | | | | — | |
Restructuring charges | | | 1,763 | | | | — | | | | — | | | | 1,306 | | | | 1,763 | | | | — | |
Asset impairment charges | | | | 4,896 | | | | — | | | | — | |
Goodwill impairment charge | | | | 13,810 | | | | — | | | | — | |
| | | | | | | | | | | | | | |
Total operating costs and expenses | | | 64,033 | | | | 69,790 | | | | 63,265 | | | | 83,951 | | | | 64,033 | | | | 69,790 | |
| | | | | | | | | | | | | | |
Income from Operations | | | 57,501 | | | | 27,261 | | | | 9,899 | | |
(Loss) income from operations | | | | (14,053 | ) | | | 57,501 | | | | 27,261 | |
| | | | | | | | | | | | | | |
Other Income (Loss) | | | | | | | | | | | | | |
Other (loss) income | | | | | | | | | | | | | |
Investment income, net | | | 1,839 | | | | 3,329 | | | | 4,844 | | | | 1,023 | | | | 1,839 | | | | 3,329 | |
Impairment loss on investment | | | — | | | | (4,314 | ) | | | — | | |
Other income (loss), net | | | 184 | | | | 616 | | | | (75 | ) | |
Impairment loss on investments | | | | (7,943 | ) | | | — | | | | (4,314 | ) |
Other income, net | | | | 314 | | | | 184 | | | | 616 | |
| | | | | | | | | | | | | | |
Other income (loss), net | | | 2,023 | | | | (369 | ) | | | 4,769 | | |
Other (loss) income, net | | | | (6,606 | ) | | | 2,023 | | | | (369 | ) |
| | | | | | | | | | | | | | |
Income Before Income Taxes | | | 59,524 | | | | 26,892 | | | | 14,668 | | |
Income Tax Provision | | | (21,974 | ) | | | (12,153 | ) | | | (11,321 | ) | |
(Loss) income before income taxes | | | | (20,659 | ) | | | 59,524 | | | | 26,892 | |
Income tax provision | | | | (430 | ) | | | (21,974 | ) | | | (12,153 | ) |
| | | | | | | | | | | | | | |
Net Income | | $ | 37,550 | | | $ | 14,739 | | | $ | 3,347 | | |
Net (loss) income | | | $ | (21,089 | ) | | $ | 37,550 | | | $ | 14,739 | |
| | | | | | | | | | | | | | |
Basic net income per share | | $ | 2.15 | | | $ | 0.82 | | | $ | 0.19 | | |
Diluted net income per share | | $ | 2.15 | | | $ | 0.80 | | | $ | 0.18 | | |
Weighted Average Shares Outstanding | | | | | | | | | | | | | |
Basic net (loss) income per share | | | $ | (1.21 | ) | | $ | 2.15 | | | $ | 0.82 | |
Diluted net (loss) income per share | | | $ | (1.21 | ) | | $ | 2.15 | | | $ | 0.80 | |
Weighted average shares outstanding | | | | | | | | | | | | | |
Basic | | | 17,435 | | | | 18,026 | | | | 18,033 | | | | 17,372 | | | | 17,435 | | | | 18,026 | |
Dilutive effect of outstanding stock options | | | 34 | | | | 304 | | | | 184 | | |
Dilutive effect of outstanding stock options and non-vested stock | | | | — | | | | 34 | | | | 304 | |
| | | | | | | | | | | | | | |
Diluted | | | 17,469 | | | | 18,330 | | | | 18,217 | | | | 17,372 | | | | 17,469 | | | | 18,330 | |
The accompanying notes are an integral part of these consolidated financial statements.
F-3
SurModics, Inc. and Subsidiaries
For the Years Ended September 30, 2010, 2009 2008 and 20072008
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Accumulated
| | | | | | | | | | | | | Accumulated
| | | | | |
| | | | | | Additional
| | Other
| | | | Total
| | | | | | | Additional
| | Other
| | | | Total
| |
| | Common Stock | | Paid-in
| | Comprehensive
| | Retained
| | Stockholders’
| | | Common Stock | | Paid-In
| | Comprehensive
| | Retained
| | Stockholders’
| |
| | Shares | | Amount | | Capital | | Income (Loss) | | Earnings | | Equity | | | Shares | | Amount | | Capital | | Income (Loss) | | Earnings | | Equity | |
| | (In thousands) | | | (In thousands) | |
| |
Balance September 30, 2006 | | | 18,830 | | | $ | 942 | | | $ | 96,281 | | | $ | (293 | ) | | $ | 48,273 | | | $ | 145,203 | | |
Components of comprehensive income, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | | — | | | | — | | | | — | | | | 3,347 | | | | 3,347 | | |
Unrealized holding gains on available-for-sale securities arising during the period | | | — | | | | — | | | | — | | | | 1,999 | | | | — | | | | 1,999 | | |
Add reclassification for losses included in net income, net of tax benefit of $10 | | | — | | | | — | | | | — | | | | 17 | | | | — | | | | 17 | | |
| | | | |
Comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5,363 | | |
| | | | |
Issuance of common stock | | | 14 | | | | 1 | | | | 457 | | | | — | | | | — | | | | 458 | | |
Common stock repurchased | | | (1,008 | ) | | | (50 | ) | | | (34,980 | ) | | | — | | | | — | | | | (35,030 | ) | |
Common stock options exercised, net | | | 217 | | | | 11 | | | | 4,778 | | | | — | | | | — | | | | 4,789 | | |
Purchase of common stock to pay employee taxes | | | 112 | | | | 5 | | | | (379 | ) | | | — | | | | — | | | | (374 | ) | |
Excess tax benefit from exercise of stock options | | | — | | | | — | | | | 466 | | | | — | | | | — | | | | 466 | | |
Stock-based compensation | | | — | | | | — | | | | 10,312 | | | | — | | | | — | | | | 10,312 | | |
Other | | | — | | | | — | | | | (265 | ) | | | — | | | | — | | | | (265 | ) | |
| | | | | | | | | | | | | |
Balance September 30, 2007 | | | 18,165 | | | | 909 | | | | 76,670 | | | | 1,723 | | | | 51,620 | | | | 130,922 | | | | 18,165 | | | $ | 909 | | | $ | 76,670 | | | $ | 1,723 | | | $ | 51,620 | | | $ | 130,922 | |
Components of comprehensive income, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | | — | | | | — | | | | — | | | | 14,739 | | | | 14,739 | | | | — | | | | — | | | | — | | | | — | | | | 14,739 | | | | 14,739 | |
Unrealized holding losses on available-for-sale securities arising during the period | | | — | | | | — | | | | — | | | | (5,882 | ) | | | — | | | | (5,882 | ) | | | — | | | | — | | | | — | | | | (5,882 | ) | | | — | | | | (5,882 | ) |
Add reclassification for losses included in net income, net of tax provision of $167 | | | — | | | | — | | | | — | | | | 4,052 | | | | — | | | | 4,052 | | | | — | | | | — | | | | — | | | | 4,052 | | | | — | | | | 4,052 | |
| | | | | | |
Comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 12,909 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 12,909 | |
| | | | | | |
Issuance of common stock | | | 16 | | | | 1 | | | | 516 | | | | — | | | | — | | | | 517 | | | | 16 | | | | 1 | | | | 516 | | | | — | | | | — | | | | 517 | |
Common stock repurchased | | | (342 | ) | | | (17 | ) | | | (13,954 | ) | | | — | | | | — | | | | (13,971 | ) | | | (342 | ) | | | (17 | ) | | | (13,954 | ) | | | — | | | | — | | | | (13,971 | ) |
Common stock options exercised, net | | | 114 | | | | 4 | | | | 2,514 | | | | — | | | | — | | | | 2,518 | | | | 114 | | | | 4 | | | | 2,514 | | | | — | | | | — | | | | 2,518 | |
Purchase of common stock to pay employee taxes | | | 77 | | | | 4 | | | | (1,678 | ) | | | — | | | | — | | | | (1,674 | ) | | | 77 | | | | 4 | | | | (1,678 | ) | | | — | | | | — | | | | (1,674 | ) |
Excess tax benefit from exercise of stock options | | | — | | | | — | | | | 1,081 | | | | — | | | | — | | | | 1,081 | | |
Excess tax benefit from stock-based compensation plans | | | | — | | | | — | | | | 1,081 | | | | — | | | | — | | | | 1,081 | |
Stock-based compensation | | | — | | | | — | | | | 9,652 | | | | — | | | | — | | | | 9,652 | | | | — | | | | — | | | | 9,652 | | | | — | | | | — | | | | 9,652 | |
Other | | | — | | | | — | | | | (228 | ) | | | — | | | | — | | | | (228 | ) | | | — | | | | — | | | | (228 | ) | | | — | | | | — | | | | (228 | ) |
Accounting change for income taxes | | | — | | | | — | | | | — | | | | — | | | | 80 | | | | 80 | | | | — | | | | — | | | | — | | | | — | | | | 80 | | | | 80 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance September 30, 2008 | | | 18,030 | | | | 901 | | | | 74,573 | | | | (107 | ) | | | 66,439 | | | | 141,806 | | | | 18,030 | | | | 901 | | | | 74,573 | | | | (107 | ) | | | 66,439 | | | | 141,806 | |
Components of comprehensive income, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | | |
Components of comprehensive income, | | | | | | | | | | | | | | | | | | | | | | | | | |
net of tax: | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | | — | | | | — | | | | — | | | | 37,550 | | | | 37,550 | | | | — | | | | — | | | | — | | | | — | | | | 37,550 | | | | 37,550 | |
Unrealized holding gains on available-for-sale securities arising during the period | | | — | | | | — | | | | — | | | | 2,123 | | | | — | | | | 2,123 | | | | — | | | | — | | | | — | | | | 2,123 | | | | — | | | | 2,123 | |
Add reclassification for gains included in net income, net of tax provision of $299 | | | — | | | | — | | | | — | | | | (512 | ) | | | — | | | | (512 | ) | | | — | | | | — | | | | — | | | | (512 | ) | | | — | | | | (512 | ) |
| | | | | | |
Comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 39,161 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 39,161 | |
| | | | | | |
Issuance of common stock | | | 40 | | | | 2 | | | | 611 | | | | — | | | | — | | | | 613 | | | | 40 | | | | 2 | | | | 611 | | | | — | | | | — | | | | 613 | |
Common stock repurchased | | | (624 | ) | | | (31 | ) | | | (14,967 | ) | | | — | | | | — | | | | (14,998 | ) | | | (624 | ) | | | (31 | ) | | | (14,967 | ) | | | — | | | | — | | | | (14,998 | ) |
Common stock options exercised, net | | | 15 | | | | 1 | | | | 65 | | | | — | | | | — | | | | 66 | | | | 15 | | | | 1 | | | | 65 | | | | — | | | | — | | | | 66 | |
Purchase of common stock to pay employee taxes | | | 10 | | | | 1 | | | | (569 | ) | | | — | | | | — | | | | (568 | ) | | | 10 | | | | 1 | | | | (569 | ) | | | — | | | | — | | | | (568 | ) |
Excess tax benefit from exercise of stock options | | | — | | | | — | | | | (366 | ) | | | — | | | | — | | | | (366 | ) | |
Excess tax benefit from stock-based compensation plans | | | | — | | | | — | | | | (366 | ) | | | — | | | | — | | | | (366 | ) |
Stock-based compensation | | | — | | | | — | | | | 6,853 | | | | — | | | | — | | | | 6,853 | | | | — | | | | — | | | | 6,853 | | | | — | | | | — | | | | 6,853 | |
Other | | | — | | | | — | | | | (195 | ) | | | — | | | | — | | | | (195 | ) | | | — | | | | — | | | | (195 | ) | | | — | | | | — | | | | (195 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance September 30, 2009 | | | 17,471 | | | $ | 874 | | | $ | 66,005 | | | $ | 1,504 | | | $ | 103,989 | | | $ | 172,372 | | | | 17,471 | | | | 874 | | | | 66,005 | | | | 1,504 | | | | 103,989 | | | | 172,372 | |
Components of comprehensive loss, | | | | | | | | | | | | | | | | | | | | | | | | | |
net of tax: | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | — | | | | — | | | | — | | | | — | | | | (21,089 | ) | | | (21,089 | ) |
Unrealized holding losses on available-for-sale securities arising during the period | | | | — | | | | — | | | | — | | | | (437 | ) | | | — | | | | (437 | ) |
Add reclassification for gains included in net loss, net of tax benefit of $118 | | | | — | | | | — | | | | — | | | | (181 | ) | | | — | | | | (181 | ) |
| | | | | | | | | | | | | | | | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | (21,707 | ) |
| | | | |
Issuance of common stock | | | | 40 | | | | 2 | | | | 608 | | | | — | | | | — | | | | 610 | |
Common stock repurchased | | | | (102 | ) | | | (6 | ) | | | (2,026 | ) | | | — | | | | — | | | | (2,032 | ) |
Common stock options exercised, net | | | | 14 | | | | 1 | | | | 281 | | | | — | | | | — | | | | 282 | |
Purchase of common stock to pay employee taxes | | | | 1 | | | | — | | | | (545 | ) | | | | | | | | | | | (545 | ) |
Excess tax benefit from stock-based compensation plans | | | | — | | | | — | | | | (496 | ) | | | — | | | | — | | | | (496 | ) |
Stock-based compensation | | | | — | | | | — | | | | 5,875 | | | | — | | | | — | | | | 5,875 | |
| | | | | | | | | | | | | | |
Balance September 30, 2010 | | | | 17,424 | | | $ | 871 | | | $ | 69,702 | | | $ | 886 | | | $ | 82,900 | | | $ | 154,359 | |
| | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
SurModics, Inc. and Subsidiaries
For the Years Ended September 30
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | (In thousands) | | | (In thousands) | |
|
Operating Activities | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 37,550 | | | $ | 14,739 | | | $ | 3,347 | | |
Adjustments to reconcile net income to net cash provided by | | | | | | | | | | | | | |
operating activities | | | | | | | | | | | | | |
Net (loss) income | | | $ | (21,089 | ) | | $ | 37,550 | | | $ | 14,739 | |
Adjustments to reconcile net (loss) income to net cash provided by | | | | | | | | | | | | | |
operating activities: | | | | | | | | | | | | | |
Depreciation and amortization | | | 5,912 | | | | 6,071 | | | | 4,214 | | | | 7,818 | | | | 5,912 | | | | 6,071 | |
(Gain) loss on equity method investments and sales of investments | | | (103 | ) | | | 415 | | | | 75 | | | | (299 | ) | | | (103 | ) | | | 415 | |
Amortization of premium (discount) on investments | | | 139 | | | | 70 | | | | (1,388 | ) | |
Impairment loss on investment | | | — | | | | 4,314 | | | | — | | |
Amortization of premium on investments | | | | 128 | | | | 139 | | | | 70 | |
Impairment loss on investments | | | | 7,943 | | | | — | | | | 4,314 | |
Stock-based compensation | | | 6,853 | | | | 9,652 | | | | 10,312 | | | | 5,875 | | | | 6,853 | | | | 9,652 | |
Purchased in-process research & development | | | 3,200 | | | | — | | | | 15,573 | | | | — | | | | 3,200 | | | | — | |
Restructuring charges | | | 1,763 | | | | — | | | | — | | |
Asset impairment charges | | | | 4,896 | | | | — | | | | — | |
Goodwill impairment charge | | | | 13,810 | | | | — | | | | — | |
Deferred tax | | | 8,229 | | | | (3,428 | ) | | | (9,434 | ) | | | 446 | | | | 8,229 | | | | (3,428 | ) |
Excess tax benefit from exercise of stock options | | | 366 | | | | (1,081 | ) | | | (466 | ) | |
Excess tax benefit from stock-based compensation plans | | | | 496 | | | | 366 | | | | (1,081 | ) |
Loss on disposals of property and equipment | | | 291 | | | | 78 | | | | 379 | | | | 3 | | | | 291 | | | | 78 | |
Other | | | (250 | ) | | | — | | | | — | | | | — | | | | (250 | ) | | | — | |
Change in operating assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Accounts receivable | | | 3,269 | | | | 1,548 | | | | 1,940 | | | | 2,333 | | | | 3,269 | | | | 1,548 | |
Inventories | | | (679 | ) | | | (154 | ) | | | (850 | ) | | | 284 | | | | (679 | ) | | | (154 | ) |
Accounts payable and accrued liabilities | | | (2,387 | ) | | | (264 | ) | | | 2,594 | | | | 1,135 | | | | (624 | ) | | | (264 | ) |
Income taxes | | | 2,656 | | | | (5,003 | ) | | | 5,501 | | | | (4,121 | ) | | | 2,656 | | | | (5,003 | ) |
Deferred revenue | | | (36,050 | ) | | | 11,452 | | | | 19,166 | | | | 2,632 | | | | (36,050 | ) | | | 11,452 | |
Prepaids and other | | | 562 | | | | 1,413 | | | | (248 | ) | | | (282 | ) | | | 562 | | | | 1,413 | |
| | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 31,321 | | | | 39,822 | | | | 50,715 | | | | 22,008 | | | | 31,321 | | | | 39,822 | |
| | | | | | | | | | | | | | |
Investing Activities | | | | | | | | | | | | | | | | | | | | | | | | |
Purchases of property and equipment | | | (29,364 | ) | | | (23,866 | ) | | | (3,626 | ) | | | (9,679 | ) | | | (29,364 | ) | | | (23,866 | ) |
Sales of property and equipment | | | — | | | | 32 | | | | 37 | | | | — | | | | — | | | | 32 | |
Purchases ofavailable-for-sale investments | | | (33,568 | ) | | | (22,857 | ) | | | (136,498 | ) | | | (34,919 | ) | | | (33,568 | ) | | | (22,857 | ) |
Sales/maturities ofavailable-for-sale investments | | | 55,263 | | | | 29,258 | | | | 185,075 | | |
Sales/maturities of investments | | | | 25,986 | | | | 55,263 | | | | 29,258 | |
Purchases ofheld-to-maturity investments | | | — | | | | (6,485 | ) | | | — | | | | — | | | | — | | | | (6,485 | ) |
Investment in other strategic assets | | | (2,500 | ) | | | (2,562 | ) | | | (5,749 | ) | | | (500 | ) | | | (2,500 | ) | | | (2,562 | ) |
Purchase of licenses and patents | | | (631 | ) | | | (2,452 | ) | | | (1,355 | ) | | | (210 | ) | | | (631 | ) | | | (2,452 | ) |
Acquisitions, net of cash acquired | | | (8,585 | ) | | | (3,219 | ) | | | (49,112 | ) | | | (750 | ) | | | (8,585 | ) | | | (3,219 | ) |
Repayment of notes receivable | | | — | | | | 5,870 | | | | 530 | | | | — | | | | — | | | | 5,870 | |
Other investing activities | | | (187 | ) | | | (228 | ) | | | (265 | ) | | | — | | | | (187 | ) | | | (228 | ) |
| | | | | | | | | | | | | | |
Net cash used in investing activities | | | (19,572 | ) | | | (26,509 | ) | | | (10,963 | ) | | | (20,072 | ) | | | (19,572 | ) | | | (26,509 | ) |
| | | | | | | | | | | | | | |
Financing Activities | | | | | | | | | | | | | | | | | | | | | | | | |
Excess tax benefit from exercise of stock options | | | (366 | ) | | | 1,081 | | | | 466 | | |
Excess tax benefit from stock-based compensation plans | | | | (496 | ) | | | (366 | ) | | | 1,081 | |
Issuance of common stock | | | 679 | | | | 3,037 | | | | 5,247 | | | | 892 | | | | 679 | | | | 3,037 | |
Repurchase of common stock | | | (14,998 | ) | | | (13,971 | ) | | | (35,030 | ) | | | (2,032 | ) | | | (14,998 | ) | | | (13,971 | ) |
Purchase of common stock to pay employee taxes | | | (568 | ) | | | (1,674 | ) | | | (374 | ) | | | (545 | ) | | | (568 | ) | | | (1,674 | ) |
Repayment of notes payable | | | (236 | ) | | | (222 | ) | | | — | | | | — | | | | (236 | ) | | | (222 | ) |
| | | | | | | | | | | | | | |
Net cash used in financing activities | | | (15,489 | ) | | | (11,749 | ) | | | (29,691 | ) | | | (2,181 | ) | | | (15,489 | ) | | | (11,749 | ) |
| | | | | | | | | | | | | | |
Net change in cash and cash equivalents | | | (3,740 | ) | | | 1,564 | | | | 10,061 | | | | (245 | ) | | | (3,740 | ) | | | 1,564 | |
Cash and Cash Equivalents | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning of year | | | 15,376 | | | | 13,812 | | | | 3,751 | | | | 11,636 | | | | 15,376 | | | | 13,812 | |
| | | | | | | | | | | | | | |
End of year | | $ | 11,636 | | | $ | 15,376 | | | $ | 13,812 | | | $ | 11,391 | | | $ | 11,636 | | | $ | 15,376 | |
| | | | | | | | | | | | | | |
Supplemental Information | | | | | | | | | | | | | | | | | | | | | | | | |
Cash paid for income taxes | | $ | 11,285 | | | $ | 21,058 | | | $ | 14,930 | | | $ | 4,105 | | | $ | 11,285 | | | $ | 21,058 | |
Noncash transaction — acquisition of property, | | | | | | | | | | | | | | | | | | | | | | | | |
plant, and equipment on account | | $ | 1,247 | | | $ | 1,745 | | | $ | 252 | | | $ | 565 | | | $ | 1,247 | | | $ | 1,745 | |
Noncash transaction — acquisition of intangibles on account | | $ | 210 | | | $ | — | | | $ | — | | | $ | — | | | $ | 210 | | | $ | — | |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
SurModics, Inc. and Subsidiaries
September 30, 20092010 and 20082009
SurModics, Inc. and subsidiaries (the “Company”) develops, manufactures and markets innovative drug delivery and surface modification technologies for the healthcare industry. The Company’s revenue is derived from three primary sources: (1) royalties and license fees from licensing its patented drug delivery and surface modification technologies andin vitrodiagnostic formats to customers; (2) the sale of polymers and reagent chemicals to licensees; substrates, antigens and stabilization products to the diagnostics industry; microarray slides to the diagnostic and biomedical research markets; and (3) research and development fees generated on projects for customers.
Basis of Presentation
The consolidated financial statements include all accounts and wholly owned subsidiaries, and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). All significant inter-company transactions have been eliminated.
Subsequent Events
Subsequent events have been evaluated through December 11, 2009, the date the financial statements were issued.
On October 5, 2009,14, 2010 the Company enteredannounced an organizational change to reduce its cost structure and renew its focus on business units. The Company reorganized into three market-focused business units: Medical Device, Pharmaceuticals and In Vitro Diagnostics (IVD). Previously the Company operated under a licensefunctional expertise alignment. As a result of these organizational changes, which included a 13% reduction in total workforce, the Company will incur a one-time restructuring charge of approximately $1.3 million to $1.7 million in the first quarter of fiscal 2011. Beginning with the first quarter of fiscal 2011, the Company will describe its business under the new reporting structure.
The Company has incurred a $0.8 million milestone payment obligation related to the SurModics Pharmaceuticals, Inc. (SurModics Pharmaceuticals) acquisition in the first quarter of fiscal 2011.
In November 2010, the Company received notice from the Internal Revenue Service that it was awarded approximately $1.3 million of federal grants for qualified investments made in qualified therapeutic discovery projects. These grants will be recognized in fiscal 2011 as a reduction to the Company’s Other Research and development agreementDevelopment expenses.
In addition, in December 2010, we announced that the Board of Directors of the Company had authorized the Company to explore strategic alternatives for the Company’s Pharmaceuticals business, including a potential sale of that business. This decision by the Board reflects our focus on returning the Company to profitable growth, and our renewed commitment to pursuing growth opportunities and investments in our Medical Device and In Vitro Diagnostics businesses. We have retained Piper Jaffray & Co. as our financial adviser in connection with F. Hoffmann-La Roche, Ltd. (“Roche”)this process. The Company has made no decision to enter into any transaction regarding the Pharmaceuticals business, and Genentech, Inc.,there can be no assurance that we will enter into such a wholly ownedtransaction in the future. Additional details concerning this announcement can be found in the Company’s Current Report onForm 8-K expected to be filed with the Securities and Exchange Commission on or before December 20, 2010.
In December 2010, we also announced that Gary R. Maharaj has been named President and Chief Executive Officer of the Company, with such appointment to be effective December 27, 2010. Mr. Maharaj will also serve as a member of the Roche Group (“Genentech”)Company’s Board of Directors. Mr. Maharaj previously served as President and Chief Executive Officer of Arizant Inc., associateda provider of patient temperature management in hospital operating rooms. Additional details concerning this announcement can be found in the Company’s Current Report onForm 8-K expected to be filed with the Company’s proprietary biodegradable microparticles drug delivery system. Securities and Exchange Commission on or before December 20, 2010.
F-6
SurModics, received an up front licensing fee of $3.5 million, could be eligibleInc. and Subsidiaries
Notes to receive up to approximately $200 million in fees and milestone payments in the event of the successful development and commercialization of multiple products, and will be paid for development work done on these products. Roche and Genentech will have the right to obtain manufacturing services from SurModics. In the event a commercial product is developed, the Company will also receive royalties on sales of such products.Consolidated Financial Statements — (Continued)
| |
2. | Summary of Significant Accounting Policies and Select Balance Sheet Information |
Cash and Cash Equivalents
Cash and cash equivalents consist of financial instruments with original maturities of three months or less and are stated at cost which approximates fair value.
Investments
Investments consist principally of U.S. government and government agency obligations and mortgage-backed securities and are classified asavailable-for-sale orheld-to-maturity at September 30, 20092010 and 2008.2009.Available-for-sale investments are reported at fair value with unrealized gains and losses net of tax excluded from operations and reported as a separate component of stockholders’ equity, except forother-than-temporary impairments, which are reported as a charge to current operations. A loss would be recognized when there is another-than-temporary impairment in the fair value of any individual security classified asavailable-for-sale, with the associated net unrealized loss reclassified out of accumulated other comprehensive income with a corresponding adjustment to other income (loss). This adjustment results in a new cost basis for the investment. Investments that management has the intent and ability to hold to maturity are classified asheld-to-maturity and reported at amortized cost. If there is another-than-temporary impairment in the fair value of any individual security classified asheld-to-maturity, the Company will write down the security to fair value with a corresponding adjustment to other income (loss). Interest on debt securities, including amortization of premiums and accretion of discounts, is
F-6
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
included in other income (loss). Realized gains and losses from the sales of debt securities, which are included in other income (loss), are determined using the specific identification method.
The original cost, unrealized holding gains and losses, and fair value ofavailable-for-sale investments as of September 30 were as follows(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | | 2010 | |
| | Original Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | | Original Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | |
|
U.S. government obligations | | $ | 10,837 | | | $ | 253 | | | $ | — | | | $ | 11,090 | | | $ | 25,968 | | | $ | 395 | | | $ | (34 | ) | | $ | 26,329 | |
Mortgage-backed securities | | | 7,938 | | | | 177 | | | | (106 | ) | | | 8,009 | | | | 4,711 | | | | 164 | | | | (48 | ) | | | 4,827 | |
Municipal bonds | | | 7,210 | | | | 232 | | | | — | | | | 7,442 | | | | 3,079 | | | | 72 | | | | — | | | | 3,151 | |
Asset-backed securities | | | 2,334 | | | | 65 | | | | (143 | ) | | | 2,256 | | | | 1,146 | | | | 8 | | | | (42 | ) | | | 1,112 | |
Corporate bonds | | | 1,181 | | | | 3 | | | | — | | | | 1,184 | | | | 5,828 | | | | 24 | | | | — | | | | 5,852 | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 29,500 | | | $ | 730 | | | $ | (249 | ) | | $ | 29,981 | | | $ | 40,732 | | | $ | 663 | | | $ | (124 | ) | | $ | 41,271 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2008 | | | 2009 | |
| | Original Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | | Original Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | |
|
U.S. government obligations | | $ | 18,440 | | | $ | 91 | | | $ | (87 | ) | | $ | 18,444 | | | $ | 10,837 | | | $ | 253 | | | $ | — | | | $ | 11,090 | |
Mortgage-backed securities | | | 10,147 | | | | 46 | | | | (179 | ) | | | 10,014 | | | | 7,938 | | | | 177 | | | | (106 | ) | | | 8,009 | |
Municipal bonds | | | 11,022 | | | | 153 | | | | (3 | ) | | | 11,172 | | | | 7,210 | | | | 232 | | | | — | | | | 7,442 | |
Asset-backed securities | | | 6,193 | | | | 2 | | | | (171 | ) | | | 6,024 | | | | 2,334 | | | | 65 | | | | (143 | ) | | | 2,256 | |
Corporate bonds | | | 4,582 | | | | 8 | | | | (33 | ) | | | 4,557 | | | | 1,181 | | | | 3 | | | | — | | | | 1,184 | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 50,384 | | | $ | 300 | | | $ | (473 | ) | | $ | 50,211 | | | $ | 29,500 | | | $ | 730 | | | $ | (249 | ) | | $ | 29,981 | |
| | | | | | | | | | | | | | | | | | |
F-7
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The original cost and fair value of investments by contractual maturity at September 30, 20092010 were as follows(in thousands):
| | | | | | | | | | | | | | | | |
| | Original Cost | | Fair Value | | | Amortized Cost | | Fair Value | |
|
Debt securities due within: | | | | | | | | | | | | | | | | |
One year | | $ | 6,830 | | | $ | 6,911 | | | $ | 8,075 | | | $ | 8,092 | |
One to five years | | | 14,297 | | | | 14,749 | | | | 27,046 | | | | 27,541 | |
Five years or more | | | 8,373 | | | | 8,321 | | | | 5,611 | | | | 5,638 | |
| | | | | | | | | | |
Total | | $ | 29,500 | | | $ | 29,981 | | | $ | 40,732 | | | $ | 41,271 | |
| | | | | | | | | | |
The following table summarizes sales ofavailable-for-sale securities for the years ended September 30, 2010, 2009 2008 and 20072008(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 |
|
Proceeds from sales | | $ | 55,263 | | | $ | 29,258 | | | $ | 185,075 | | | $ | 23,986 | | | $ | 55,263 | | | $ | 29,258 | |
Gross realized gains | | $ | 823 | | | $ | 454 | | | $ | 7 | | | $ | 302 | | | $ | 823 | | | $ | 454 | |
Gross realized losses | | $ | (12 | ) | | $ | (26 | ) | | $ | (34 | ) | | $ | (3 | ) | | $ | (12 | ) | | $ | (26 | ) |
At September 30, 2009,2010, the amortized cost and fair market value ofheld-to-maturity debt securities were $6.3$4.1 million and $6.4$4.3 million, respectively. Investments in securities designated asheld-to-maturity consist of tax-exempt municipal bonds and have maturity dates ranging between three months and three years from September 30, 2009.2010. At September 30, 2008,2009, the amortized cost and fair market value ofheld-to-maturity debt securities were $6.3 million and $6.4 million, and $6.3 million, respectively.
F-7
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Inventories
Inventories are principally 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 as of September 30(in thousands):
| | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
|
Raw materials | | $ | 1,287 | | | $ | 1,308 | | | $ | 1,140 | | | $ | 1,287 | |
Finished products | | | 2,043 | | | | 1,343 | | | | 1,907 | | | | 2,043 | |
| | | | | | | | | | |
Total | | $ | 3,330 | | | $ | 2,651 | | | $ | 3,047 | | | $ | 3,330 | |
| | | | | | | | | | |
Property and Equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over 1 to 32 years, the estimated useful lives of the assets. The Company recorded depreciation expense of $6.2 million, $3.8 million $3.1 million and $2.2$3.1 million for the years ended September 30, 2010, 2009 2008 and 2007,2008, respectively.
The September 30, 20092010 and 20082009 balances inconstruction-in-progress include the cost of enhancing the capabilities of the Company’s Eden Prairie, Minnesota and Birmingham, Alabama facilities. As assets are placed in service,construction-in-progress is transferred to the specific property and equipment categories and depreciated over the estimated useful lives of the assets.
In April 2008,fiscal 2010, the Company acquiredrecorded a 286,000 square foot$1.9 million asset impairment charge associated with writing down one of our facilities in Alabama to fair value based on a decision to sell the facility, situated on 42 acreswhich decision was reversed later in Birmingham, Alabama for $12.2 million.fiscal 2010 ($0.5 million related to Land, $1.2 million related to Building and improvements and $0.2 million related to Laboratory fixtures and equipment). The Company has been renovating the existing facility to accommodate research and development, clinical manufacturing and commercial manufacturing of drug delivery products for pharmaceutical and biotechnology customers. The building is currently classified asconstruction-in-progress until renovation and remodeling is completed. The value of the landalso recognized a $0.8 million asset impairment charge associated with the purchase is classified as part of the total land carrying value.
In August 2008, the Company acquired approximately five acres of undeveloped land adjacent to its headquarterscertain long-lived assets included in Eden Prairie, Minnesota for $3.6 million. The value of the land purchase is classified as part of the total land carrying value.
PropertyLaboratory fixtures and equipment consisted of the following components as of September 30(in thousands):
| | | | | | | | | | | | |
| | Useful Life | | | 2009 | | | 2008 | |
| | (In years) | | | | | | | |
|
Land | | | | | | $ | 7,409 | | | $ | 7,409 | |
Laboratory fixtures and equipment | | | 3 to 12 | | | | 19,549 | | | | 15,767 | |
Building and improvements | | | 1 to 32 | | | | 15,911 | | | | 15,025 | |
Office furniture and equipment | | | 3 to 10 | | | | 4,550 | | | | 4,156 | |
Construction-in-progress | | | | | | | 40,210 | | | | 16,931 | |
Less accumulated depreciation | | | | | | | (20,714 | ) | | | (17,391 | ) |
| | | | | | | | | | | | |
Property and equipment, net | | | | | | $ | 66,915 | | | $ | 41,897 | |
| | | | | | | | | | | | |
Other Assets
Other assets consist principally of strategic investments. In fiscal 2009, the balance in other assets increased primarily as a result of an investment in a medical technology company and an increase in the value of the Company’s investment in OctoPlus N.V. (“OctoPlus”).where very limited
F-8
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
business is expected in the near term based on current market conditions. In addition, the Company recorded a $1.3 million asset impairment charge associated with certain fixed asset costs located in Minnesota that were included inConstruction-in-progress at September 30, 2009.
Property and equipment consisted of the following components as of September 30(in thousands):
| | | | | | | | | | | | |
| | Useful Life | | | 2010 | | | 2009 | |
| | (In years) | | | | | | | |
|
Land | | | | | | $ | 6,886 | | | $ | 7,409 | |
Laboratory fixtures and equipment | | | 3 to 12 | | | | 25,958 | | | | 19,549 | |
Building and improvements | | | 1 to 39 | | | | 47,084 | | | | 15,911 | |
Office furniture and equipment | | | 3 to 10 | | | | 5,879 | | | | 4,550 | |
Construction-in-progress | | | | | | | 4,386 | | | | 40,210 | |
Less accumulated depreciation | | | | | | | (24,798 | ) | | | (20,714 | ) |
| | | | | | | | | | | | |
Property and equipment, net | | | | | | $ | 65,395 | | | $ | 66,915 | |
| | | | | | | | | | | | |
Other Assets
Other assets consist principally of strategic investments. In fiscal 2010, the balance in other assets decreased primarily as a result of impairments of three investments.
Other assets consisted of the following components as of September 30(in thousands):
| | | | | | | | |
| | 2010 | | | 2009 | |
|
Investment in OctoPlus | | $ | 2,624 | | | $ | 3,700 | |
Investment in Nexeon MedSystems | | | 285 | | | | 5,651 | |
Investment in ThermopeutiX | | | 1,185 | | | | 1,185 | |
Investment in ViaCyte (formerly Novocell) | | | 559 | | | | 559 | |
Other | | | 590 | | | | 2,162 | |
| | | | | | | | |
Other assets, net | | $ | 5,243 | | | $ | 13,257 | |
| | | | | | | | |
In January 2005, the Company made an initial equity investment of approximately $3.9 million in OctoPlus N.V. (OctoPlus), a company based in the Netherlands active in the development of pharmaceutical formulations incorporating novel biodegradable polymers. Subsequent investments brought the Company’s total investment to $6.0 million. In October 2006, OctoPlus common stock began trading on an international exchange following an initial public offering of its common stock. With a readily determinable fair market value, the Company now treats the investment in OctoPlus as anavailable-for-sale investment rather than a cost method investment.Available-for-sale investments are reported at fair value with unrealized gains and losses reported as a separate component of stockholders’ equity, except forother-than-temporary impairments, which are reported as a charge to current operations, recorded in the other income (loss) section of the consolidated statements of income, and result in a new cost basis for the investment. As of September 30, 2009,2010, the investment in OctoPlus represented an ownership interest of less than 10%. The Company recorded no realized gain or loss related to this investment in fiscal 2010 and 2009. The Company recognized an impairment loss on the investment totaling $4.3 million in fiscal 2008 based on a significant decline in the stock price of OctoPlus as a result of market conditions. The cost basis in the Company’s investment in OctoPlus is $1.7 million.
Beginning in May 2005, the Company has invested $1.2 million in ThermopeutiX, Inc. (“ThermopeutiX”)(ThermopeutiX), a California-based early stage company developing novel medical devices for the treatment of vascular and neurovascular diseases. In addition to the investment, SurModics has licensed its hydrophilic and hemocompatible
F-9
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
coating technologies to ThermopeutiX for use with its devices. The Company’s investment in ThermopeutiX, which is accounted for under the cost method, represents an ownership interest of less than 20%.
The Company has invested a total of $5.2 million in ViaCyte, Inc., (ViaCyte), formerly Novocell, Inc. (“Novocell”), a privately-held California-based biotechnology firm that is developing a unique treatment for diabetes using coated islet cells, the cells that produce insulin in the human body. In fiscal 2006, the Company determined its investment in NovocellViaCyte was impaired and that the impairment wasother-than-temporary. Accordingly, the Company recorded an impairment loss of $4.7 million. The balance of the investment, $559,000, which is accounted for under the cost method, represents less than a 5% ownership interest.
In July 2007, the Company made equity investments in Paragon Intellectual Properties, LLC (“Paragon”)(Paragon) and Apollo Therapeutics, LLC (“Apollo”)(Apollo), a Paragon subsidiary, totaling $3.5 million. SurModics made an additional equity investment in fiscal 2008 totaling $2.5 million, based upon successful completion of specified development milestones. In addition to the investments, the Company has licensed its Finaletm prohealing coating technology and provides development services on a time and materials basis to Apollo. In October 2008, Paragon announced that it had restructured, moving from a limited liability company with seven subsidiaries to a single C-corporation named Nexeon MedSystems, Inc. (“Nexeon”)(Nexeon). SurModics continued to account for the investments in Paragon and Apollo under the equity method in the first quarter of fiscal 2009, as both entities reportreported results to us on a one-quarter lag. Commencing with the second quarter of fiscal 2009, SurModics accounted for the investment in Nexeon under the cost method as the Company’s ownership level is less than 20%., and the Company did not exert significant influence over Nexeon’s operating or financial activities. The Company made an additional investment of $500,000 in Nexeon in fiscal 2009. In the fourth quarter of fiscal 2010 the Company held discussions with Nexeon management to understand the business status and outlook, valuations associated with potential new rounds of financing, operating metrics and other industry factors which impacted the Company’s assessment of the carrying value of this investment. As a result of its assessment, the Company recognized a $5.3 million impairment loss on this investment as it was determined the investment wasother-than-temporarily impaired.
In August 2009, the Company invested $2.0 million in a medical technology company and made a follow-on investment of $0.5 million in March 2010. The Company recognized an impairment loss on this investment totaling $2.4 million in fiscal 2010, based on market valuations and a pending financing round for this company. The Company’s investment in the medical technology company is accounted for under the cost method, as the Company’s ownership interest is less than 20%. This and the Company did not exert significant influence over the medical technology company’s operating or financial activities. Another entity in which the Company had a strategic investment issold the majority of its assets in fiscal 2010, resulting in an impairment loss of $0.2 million to the Company. These investments are included in the category titled “Other” in the table below.
F-9
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Other assets consisted of the following components as of September 30(in thousands):
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Investment in OctoPlus | | $ | 3,700 | | | $ | 1,714 | |
Investment in Nexeon MedSystems | | | 5,651 | | | | 5,388 | |
Investment in ThermopeutiX | | | 1,185 | | | | 1,185 | |
Investment in Novocell | | | 559 | | | | 559 | |
Other | | | 2,162 | | | | 455 | |
| | | | | | | | |
Other assets, net | | $ | 13,257 | | | $ | 9,301 | |
| | | | | | | | |
above.
In the years ended September 30, 2010, 2009 2008 and 2007,2008, the Company recognized revenue of $1.5 million, $1.4 million and $4.1 million, and $909,000, respectively, from activity with companies in which it had a strategic investment.
Intangible Assets
Intangible assets consist principally of acquired patents and technology, customer relationships, licenses, and trademarks. The Company recorded amortization expense of $1.6 million, $2.1 million, $3.0 million, and $2.0$3.0 million for the years ended September 30, 2010, 2009 2008 and 2007,2008, respectively.
In fiscal 2009,2010, the Company acquiredrecognized an asset impairment charge of $0.7 million associated with certain patent rights. Management applied the accounting guidance associated with long-lived assets of PR Pharmaceuticals,and determined an impairment occurred for these assets as very limited business is expected in the near term based on current market conditions.
F-10
SurModics, Inc., which resulted in an increase and Subsidiaries
Notes to intangible assets. See Note 4 for further information regarding the acquisition.Consolidated Financial Statements — (Continued)
Intangible assets consisted of the following as of September 30(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Useful Life | | 2009 | | 2008 | | | Useful Life | | 2010 | | 2009 | |
| | (In years) | | | | | | | (In years) | | | | | |
|
Customer lists | | | 9-11 | | | $ | 8,657 | | | $ | 7,340 | | | | 9-11 | | | $ | 8,657 | | | $ | 8,657 | |
Abbott license | | | 4 | | | | — | | | | 7,037 | | |
Core technology | | | 8-18 | | | | 8,330 | | | | 6,930 | | | | 8-18 | | | | 8,330 | | | | 8,330 | |
Patents and other | | | 2-20 | | | | 3,076 | | | | 3,398 | | | | 2-20 | | | | 2,376 | | | | 3,076 | |
Trademarks | �� | | | | | | 600 | | | | 580 | | | | | | | | 600 | | | | 600 | |
Less accumulated amortization | | | | | | | (3,205 | ) | | | (8,415 | ) | | | | | | | (4,706 | ) | | | (3,205 | ) |
| | | | | | | | | | |
Intangible assets, net | | | | | | $ | 17,458 | | | $ | 16,870 | | | | | | | $ | 15,257 | | | $ | 17,458 | |
| | | | | | | | | | |
The Abbott license was fully amortized as of September 30, 2009 and the original cost and accumulated amortization have been removed from the 2009 amounts presented. Based on the intangible assets in service as of September 30, 2009,2010, estimated amortization expense for the next five fiscal years is as follows (in thousands):
| | | | | | | | |
2010 | | $ | 1,627 | | |
2011 | | | 1,604 | | | $ | 1,546 | |
2012 | | | 1,602 | | | | 1,544 | |
2013 | | | 1,602 | | | | 1,544 | |
2014 | | | 1,602 | | | | 1,544 | |
2015 | | | | 1,533 | |
Goodwill
The following table summarizes the changes in the carrying amount of goodwill(in thousands):
| | | | |
Balance at October 1, 2008 | | $ | 18,001 | |
Acquisitions | | | 3,016 | |
Adjustment | | | 53 | |
| | | | |
Balance at September 30, 2009 | | | 21,070 | |
Acquisitions | | | 750 | |
Goodwill Impairment | | | (13,810 | ) |
| | | | |
Balance at September 30, 2010 | | $ | 8,010 | |
| | | | |
Goodwill represents the excess of the cost of the acquired entities over the fair value assigned to the assets purchased and liabilities assumed in connection with the Company’s acquisitions (see Note 4 for further information).acquisitions. The carrying amount of goodwill is evaluated annually, and between annual evaluations if events occur or circumstances change indicating that the carrying amount of goodwill may be impaired.
The Company has determined that the reporting units are the SurModics Pharmaceuticals, Inc. subsidiary, the In Vitro Diagnostics operations and the SurModics drug delivery and hydrophilic coatings operations. The reporting units with goodwill resulted from the acquisitions of SurModics Pharma and BioFX Laboratories, Inc. in fiscal 2007. Inherent in the determination of fair value of the reporting units are certain estimates and judgments, including the interpretation of current economic indicators and market valuations as well as the Company’s strategic plans with regard to its operations.
The Company performed its annual impairment test of goodwill in the fourth quarter of fiscal 2010 and recognized a goodwill impairment charge of $13.8 million, which represented a full impairment of the goodwill associated with the SurModics Pharma reporting unit. Prior to testing goodwill for impairment the Company tested its definite-lived assets, property, plant and equipment as well as intangible assets, under the provisions of the accounting guidance for impairment or disposal of long-lived assets, and determined that there were no impairments of these assets. The Company did not record any goodwill impairment charges during fiscal 2009 or 2008.
F-10F-11
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
InThe goodwill impairment in fiscal 20092010 reflected a milestonesignificant decline in the estimated fair value of the Company’s reporting units, which resulted from a slowdown in business activity which was achieved associatedmost pronounced in the fourth quarter of fiscal 2010, higher operating costs with the July 2007 acquisitionrecently placed in-service current Good Manufacturing Practices (cGMP) manufacturing facility, and a significant decrease in the Company’s stock price during the year. The stock price declined from $24.13 per share at October 1, 2009 to $12.03 at the date of the annual impairment test, which was August 31, 2010. While the Company continually evaluates whether any indications of impairment are present which would require an impairment analysis on an interim basis, no such indicators were considered present prior to the fourth quarter of fiscal 2010. Prior to the fourth quarter, based on the Company’s outlook for future results and the fact that the market capitalization exceeded the Company’s book value by a margin of 64% at June 30, 2010, Company management did not believe that the events and circumstances in existence at interim reporting dates indicated it was more likely than not that the fair value of any of the Company’s reporting units would be less than its carrying amount.
In evaluating whether goodwill was impaired, the Company compared the fair value of the reporting units to which goodwill is assigned to their respective carrying values (Step 1 of the impairment test). In calculating fair value, the Company used the income approach as the primary indicator of fair value with the market approach used as a test of reasonableness. The income approach is a valuation technique under which the Company estimates future cash flows using the reporting units’ financial forecasts. Future estimated cash flows are discounted to their present value to calculate fair value. The market approach establishes fair value by comparing SurModics Pharmaceuticals,to other publicly traded guideline companies or by analysis of actual transactions of similar businesses or assets sold. The income approach is tailored to the circumstances of the Company’s business, and $3the market approach is completed as a secondary test to ensure that the results of the income approach are reasonable and in line with comparable companies in the industry. The summation of the reporting units’ fair values were compared and reconciled to the Company’s market capitalization as of the date of the impairment test.
In the situation where a reporting unit’s carrying amount exceeds its fair value, the amount of the impairment loss must be measured. The measurement of the impairment (Step 2 of the impairment test) is calculated by determining the implied fair value of a reporting unit’s goodwill. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. The goodwill impairment is measured as the excess of the carrying amount of goodwill over its implied fair value.
In determining the fair value of the SurModics Pharma reporting unit under the income approach, the SurModics Pharma expected cash flows are affected by various assumptions. Fair value on a discounted cash flow basis used forecasts over a ten year period with an estimation of residual growth rates thereafter. The Company uses its business plans and projections as the basis for expected future cash flows. The most significant assumptions incorporated in these forecasts for the most recent goodwill impairment tests included annual revenue changes based on current customer programs and expected progression of programs into different phases of development. A discount rate of 15 percent was used in the 2010 analysis to reflect the relevant risks of the higher growth assumed for this reporting unit. Given the significant difference between the reporting unit’s fair value and carrying value any change in the discount rate would not have changed the evaluation of impairment.
In estimating the fair value of the Company under the market approach, management considered the relative merits of commonly applied market capitalization multiples based on the availability of data. Based on the analysis, the Company utilized the guideline public company method to support the valuation of the reporting units.
Based on the goodwill analysis performed as of August 31, 2010, goodwill in the SurModics Pharma reporting unit failed Step 1 of the impairment test and Step 2 of the impairment test indicated that goodwill was fully impaired. The indicated excess in fair value over carrying value of the Company’s In Vitro Diagnostics reporting unit in Step 1 of the impairment test at August 31 2010 was approximately 82% and as such the $8.0 million of additional purchase price was recorded as an increasegoodwill related to goodwill.this reporting unit is not impaired. The SurModics drug delivery and hydrophilic coatings
F-12
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
operations does not have any goodwill and was included in the analysis to assist in reconciling the fair value of all reporting units to the Company’s market capitalization at August 31, 2010.
Impairment of Long-Lived Assets
The Company periodically evaluates whether events and circumstances have occurred that may affect the estimated useful life or the recoverability of the remaining balance of long-lived assets, such as property and equipment, intangible assets and investments. If such events or circumstances were to indicate that the carrying amount of these assets would not be recoverable, the Company would estimate the future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) or other measure of fair value were less than the carrying amount of the assets, the Company would recognize an impairment loss reducing the carrying value to fair market value. See the Property and Equipment, Other Assets and Intangible Assets sections in Note 2 for further information on impairments that were recognized in fiscal 2010.
Revenue Recognition
In accordance with Securities and Exchange Commission (SEC) guidance,The Company recognizes revenue is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) shipment has occurred or delivery has occurred if the terms specify destination; (3) the sales price is fixed or determinable; and (4) collectability is reasonably assured. However, whenWhen there are additional performance requirements, revenue is recognized when all such requirements have been satisfied. Under revenue arrangements with multiple deliverables, the Company recognizes each separable deliverable as it is earned.
The Company’s revenue is derived from three primary sources: (1) royalties and license fees from licensing patentedits proprietary drug delivery and surface modification technologies andin vitrodiagnostic formats to customers; (2) the sale of polymers and reagent chemicals, stabilization products, antigens, substrates and microarray slides to the diagnostics and biomedical research industries; and (3) research and development fees generated on customer projects.
Taxes collected from customers and remitted to governmental authorities are excluded from revenue and amounted to $187,000, $309,000$0.1 million, $0.2 million and $170,000$0.3 million for the years ended September 30, 2010, 2009 2008 and 2007,2008, respectively.
Royalties & License Fees.and licenses fees. The Company licenses technology to third parties and collects royalties. Royalty revenue is generated when a customer sells products incorporating the Company’s licensed technologies. Royalty revenue is recognized as licensees report it to the Company, and payment is typically submitted concurrently with the report. Generally, licenseThis revenue recognition model is similar to usage fee accounting. Minimum royalty fees are recognized as revenue whenin the Company receives payment and the contract priceperiod earned, provided that collectability is fixed or determinable.reasonably assured. For stand-alone license agreements, up-front license fees are recognized over the termeconomic life of the related licensing agreement. Minimum royalty fees are recognized in the period earned.technology.
Milestone payments.Revenue related to a performance milestone is recognized based upon the achievement of the milestone, as defined in the respective agreements and provided the following conditions have been met:
| | |
| • | The milestone payment is non-refundable.non-refundable; |
|
| • | The milestone is achieved, involvesinvolved a significant degree of risk, and was not reasonably assured at the inception of the arrangement.arrangement; |
|
| • | Accomplishment of the milestone involvesinvolved substantial effort.past effort/performance; |
|
| • | The amount of the milestone payment is commensurate with the related effort and risk.risk; |
|
| • | The milestone payment is reasonable in comparison to all of the deliverables and payment terms in the arrangement; and |
|
| • | A reasonable amount of time passespassed between the initial license payment and the first and subsequent milestone payments. |
F-11F-13
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
If these conditions have not been met, the milestone payment is deferred and recognized over the termeconomic life of the agreement.technology.
Product Sales.sales. Product sales to third parties are recognized at the time of shipment, provided that an order has been received, the price is fixed or determinable, collectability of the resulting receivable is reasonably assured and returns can be reasonably estimated. The Company’s sales terms provide no right of return outside of the standard warranty policy. Payment terms are generally set at30-45 days.
Research and Development.development. The Company performs third party research and development activities, which are typically provided on a time and materials basis. Generally, revenue for research and development is recorded as performance progresses under the applicable contract.agreement.
Arrangements with multiple deliverables. ArrangementsPrior to October 1, 2009, arrangements such as license and development agreements arewere analyzed to determine whether the deliverables, which often include a license and performance obligations such as research and development, cancould be separated, or whether they must be accounted for as a single unit of accounting in accordance with accounting guidance. The Company recognizes up-front license payments under these agreements over the economic life of the technology licensed. If the fair value of the undelivered performance obligations cancould be determined, such obligations would then be accounted for separately. If the license iswas considered to either (i) not have stand-alone value or (ii) have stand-alone value but the fair value of any of the undelivered performance obligations cannotcould not be determined, the arrangement would then be accounted for as a single unit of accounting, and the license payments and payments for performance obligations would be recognized as revenue over the estimated period of when the performance obligations are performed, or the economic life of the technology licensed to the customer. When the Company determinesdetermined that an arrangement should be accounted for as a single unit of accounting, it recognizesrecognized the related revenue based on a time-based accounting model. Revenue
The Company had one significant multiple element arrangement prior to October 1, 2009 that was accounted for as a single unit of accounting resulting in deferral and recognition of all related payments received for license and research and development activities using a time-based model. This arrangement was terminated during the first quarter of fiscal 2009 as described in Note 1 above.
In October 2009, the accounting standards for multiple deliverable revenue arrangements were amended to:
(i) provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;
(ii) require an entity to allocate revenue in an arrangement using estimated selling prices (ESP) of deliverables if a vendor does not have vendor-specific objective evidence of selling price (VSOE) or third-party evidence of selling price (TPE); and
(iii) eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.
The Company elected to early adopt this accounting guidance at the beginning of its first quarter of fiscal 2010, on a prospective basis, for applicable transactions originating or materially modified after October 1, 2009. In connection with the adoption of the amended accounting standard the Company also changed its policy prospectively for multiple element arrangements, whereby the Company accounts for revenue using a multiple attribution model in which consideration allocated to research and development activities is recognized as performed, and milestone payments are recognized when the milestone events are achieved, when such activities and milestones are deemed substantive. Accordingly, in situations where a unit of accounting includes both a license and research and development activities, and when a license does not have stand-alone value, the Company applies a multiple attribution model in which consideration allocated to the license is recognized ratably, consideration allocated to research and development activities is recognized as performed and milestone payments are recognized when the milestone events are achieved, when such activities and milestones are deemed substantive.
F-14
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The Company enters into license and development arrangements that may consist of multiple deliverables which could include a license(s) to SurModics technology, research and development activities, manufacturing services, and product sales based on the needs of its customers. For example, a customer may enter into an arrangement to obtain a license to SurModics’ intellectual property which may also include research and development activities, and supply of products manufactured by SurModics. For these services provided, SurModics could receive upfront license fees upon signing of an agreement and granting the license, fees for research and development activities as such activities are performed, milestone payments contingent upon advancement of the product through development and clinical stages to successful commercialization, fees for manufacturing services and supply of product, and royalty payments based on customer sales of product incorporating SurModics’ technology. The Company’s license and development arrangements generally do not have refund provisions if the customer cancels or terminates the agreement. Typically all payments made are non-refundable.
The Company evaluates each deliverable in a multiple element arrangement for separability. The Company is then required to allocate revenue to each separate deliverable using a hierarchy of VSOE, TPE, or ESP. In certain instances, the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements which may be a result of the Company infrequently selling each element separately. When VSOE cannot be established, the Company establishes a selling price of each element based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately.
When the Company is unable to establish a selling price using VSOE or TPE, the Company uses ESP in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. ESP is generally used for highly customized offerings.
The Company determines ESP for undelivered elements by considering multiple factors including, but not limited to, market conditions, competitive landscape and past pricing arrangements with similar characteristics.
Net sales as reported and pro forma net sales that would have been reported for the year ended September 30, 2010, if the transactions entered into or materially modified after September 30, 2009 were subject to the Company’s accounting policies under the previous accounting guidance, are shown in the following table (in thousands):
| | | | | | | | |
| | | | | Pro Forma Basis as if the
| |
| | | | | Previous Accounting
| |
| | As Reported | | | Guidance Were in Effect | |
|
Total multiple element arrangement revenue | | $ | 4,232 | | | $ | 378 | |
| | | | | | | | |
The impact to revenue for the fiscal year ended September 30, 2010 associated with arrangements with multiple deliverables totaled $45.3 million, $4.2 millionadoption of the new accounting guidance was primarily related to research and $0.3 milliondevelopment activities. The Company’s accounting policies under the previous accounting guidance would have resulted in fiscal 2009, 2008 and 2007, respectively. The fiscal 2009 revenue associated with multiple deliverable arrangements is reflected in royalties and license fees revenue ($37.6 million) and inpartial recognition of the research and development revenue ($7.7 million) in the current periods with the remainder deferred and recognized over the economic life of the technology. Under the new accounting guidance, the Company is recognizing research and development revenue as the activities are performed. The Company notes that this new accounting guidance will result in current revenue recognition of research and development activities in the period the activities are performed with the revenue generated changing from period to period based on the stage of project development. The amount of revenue that is recognized could be material in any reporting period.
In April 2010, the FASB issued updated authoritative accounting guidance which provides a consistent framework for applying the milestone method of revenue recognition in arrangements that include research or development deliverables. The amendments are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010 with early adoption permitted. The Company is evaluating the guidance and does not expect the adoption to have a material impact on the Company’s consolidated statements of income.financial statements.
F-15
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Merck Agreement. On June 27, 2007 the Company announced a license and research collaboration agreement with Merck & Co., Inc. (“Merck”)(Merck). The agreement called for SurModics and Merck to pursue the joint development and commercialization of SurModics’ I-vation sustained drug delivery system with TA (triamcinolone acetonide), and other products combining certain of Merck’s proprietary drug compounds and the I-vation system for the treatment of serious retinal diseases. Under the terms of the agreement, Merck led and funded development and commercialization activities. SurModics received an up-front license fee of $20 million in fiscal 2007 and additional license fees totaling $11 million in fiscal 2008. In addition, the Company was paid for its activities in researching and developing the combination products. Research and development fees totaling $5.8 million were billed in fiscal 2008. The Company recognizedout-of-pocket reimbursements, totaling $1.6 million in fiscal 2008, as revenue in the period since the related costs were incurred when commensurate value was transferred to Merck in exchange for the reimbursement received.
The Company recognized revenue from the up-front license fee, additional license fees and research and development fees over the economic life of the technology licensed to Merck, which was 16 years.
In September 2008, following a strategic review of Merck’s business and product development portfolio, Merck gave notice to SurModics of its intent to terminate the collaborative research and license agreement as well as the supply agreement entered into in June 2007. The termination was effective December 2008. The Company recognized all remaining deferred revenue related to the Merck agreement, totaling $34.8 million, as revenue in fiscal 2009. The Company also recognized a $9 million milestone payment from Merck associated with the termination of the triamcinolone acetonide development program in fiscal 2009. As of September 30, 2009, there were no deferred
The Company recognized revenue amounts from Merck, compared with $34.8 million ofthe up-front license fee, additional license fees and research and development fees in deferred revenue asover the economic life of September 30, 2008.
F-12
SurModics, Inc. and Subsidiaries
the technology licensed to Merck, which was 16 years, prior to termination of the contract.
Notes to Consolidated Financial Statements — (Continued)
Deferred Revenue
Amounts received prior to satisfying the above revenue recognition criteria are recorded as deferred revenue in the accompanying consolidated balance sheets, with deferred revenue to be recognized beyond one year being classified as non-current deferred revenue. As of September 30, 20092010 and 2008,2009, the Company had deferred revenue of $1.5$4.2 million and $37.6$1.5 million, respectively.
Costs related to products and services delivered are recognized in the period revenue is recognized except for services related to the Merck agreement, which were recognized as incurred. Customer advances are accounted for as a liability until all criteria for revenue recognition have been met.
Research and Development Costs
Research and development costs are expensed as incurred. Some research and development costs are related to third party contracts, and the related revenue is recognized as described in “Revenue Recognition” above. The research and development costs are presented in the consolidated statements of incomeoperations in two categories; those associated with customer relatedcustomer-related projects and those associated with other research and development costs.
Costs associated with customer relatedcustomer-related research and development include specific project direct labor costs and material expenses as well as an allocation of overhead costs based on direct labor dollars.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Ultimate results could differ from those estimates.
New Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (FASB) issued an update to authoritative accounting guidance to address the accounting for multiple-deliverable arrangements. This accounting update enables vendors to account for products and services (deliverables) separately rather than as a combined unit. This authoritative guidance establishes the accounting and reporting for arrangements under which the vendor will perform multiple revenue-generating activities. The amendments to the authoritative guidance establish a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The authoritative guidance also expands the disclosures related to multiple-deliverable revenue arrangements and in the year of adoption requires additional disclosures following previous authoritative guidance. The authoritative guidance is effective for the Company beginning in fiscal 2011 with early adoption permitted. The Company expects to early adopt this authoritative guidance in the first quarter of fiscal 2010 and is currently evaluating the impact on the consolidated financial statements.
In June 2009, the FASB issued authoritative guidance to eliminate the historical GAAP hierarchy and establish only two levels of GAAP, authoritative and nonauthoritative. When launched on July 1, 2009, the FASB Accounting Standards Codification (ASC) became the single source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (SEC), which are sources of authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC accounting literature not included in the ASC became nonauthoritative. The subsequent issuances of new standards will be in the form of Accounting Standards Updates that will be included in the ASC. This authoritative guidance was effective for financial statements for interim or annual reporting periods ended after September 15, 2009. The Company adopted the new codification in
F-13F-16
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
the fourth quarter of fiscal 2009. As the codification was not intended to change or alter existing GAAP, it did not have any impact on the Company’s consolidated financial statements.
In April 2008, the FASB issued authoritative accounting guidance which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under goodwill and other intangible asset accounting. The authoritative guidance is intended to improve the consistency between the useful life of a recognized intangible asset under goodwill and intangible asset accounting and the period of the expected cash flows used to measure the fair value of the asset under business combination accounting and other GAAP. The authoritative guidance is effective for the Company in fiscal 2010, with early adoption prohibited. The Company does not expect the adoption of the authoritative guidance to have a material impact on its consolidated financial statements.
In December 2007, the FASB issued authoritative accounting guidance which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. The authoritative guidance is effective for the Company in fiscal 2010 and once adopted will impact recognition and measurement of future business combinations.
In September 2006, the FASB issued authoritative accounting guidance associated with fair value measurements. This guidance defines fair value, establishes a consistent framework for measuring fair value, gives guidance regarding methods used for measuring fair value and expands disclosures about fair value measurements. These provisions were implemented in fiscal 2009. See Note 3 for additional information regarding fair value measurements. However, in February 2008, the FASB issued guidance which delayed the effective date from fiscal 2009 to fiscal 2010 for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is currently evaluating the potential impact of the authoritative guidance for which the effective date was delayed until fiscal 2010 on its consolidated financial statements.New Accounting Pronouncements
No other new accounting pronouncement issued or effective has had, or is expected to have, a material impact on the Company’s consolidated financial statements.
| |
3. | Fair Value Measurements |
Effective October 1, 2008, the Company adopted newThe accounting guidance on fair value measurements. The new guidancemeasurements defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. The guidance is applicable for all financial assets and liabilities and for all nonfinancial assets and liabilities recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Fair value is defined as the exchange price that would be received from selling an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and also considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance.
Fair Value Hierarchy
New accountingAccounting guidance on fair value measurements requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1 — Quoted (unadjusted) prices in active markets for identical assets or liabilities.
F-14
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The Company’s Level 1 asset consists of its investment in OctoPlus (see Note 2 for further information). The fair market value of this investment is based on the quoted price of OctoPlus shares as traded on the Amsterdam Stock Exchange.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
The Company’s Level 2 assets consist of money market funds, U.S. Treasury securities, corporate bonds, municipal bonds, U.S. agency securities, agency and municipal securities and certain asset-backed securities and mortgage-backed securities. Fair market values for these assets are based on quoted vendor prices and broker pricing where all significant inputs are observable.
Level 3 — Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.
The Company’s Level 3 assets include a U.S. government agency security and certain asset-backed and mortgage-backed securities. The fair market values of these investments were determined by broker pricing where not all significant inputs were observable.
In valuing assets and liabilities, the Company is required to maximize the use of quoted market prices and minimize the use of unobservable inputs.
We did not significantly change our valuation techniques from prior periods.
F-17
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability. The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 20092010(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quoted Prices
| | | | | | | | | Quoted Prices
| | | | | | | |
| | in Active
| | Significant
| | | | | | | in Active
| | Significant
| | | | | |
| | Markets for
| | Other
| | Significant
| | Total Fair
| | | Markets for
| | Other
| | Significant
| | Total Fair
| |
| | Identical
| | Observable
| | Unobservable
| | Value as of
| | | Identical
| | Observable
| | Unobservable
| | Value as of
| |
| | Instruments
| | Inputs
| | Inputs
| | September 30,
| | | Instruments
| | Inputs
| | Inputs
| | September 30,
| |
| | (Level 1) | | (Level 2) | | (Level 3) | | 2009 | | | (Level 1) | | (Level 2) | | (Level 3) | | 2010 | |
|
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash equivalents | | $ | — | | | $ | 9,108 | | | $ | — | | | $ | 9,108 | | | $ | — | | | $ | 10,128 | | | $ | — | | | $ | 10,128 | |
Short-term investments | | | — | | | | 6,911 | | | | — | | | | 6,911 | | |
Long-term investments | | | — | | | | 21,867 | | | | 1,203 | | | | 23,070 | | |
Available for sale debt securities | | | | | | | | | | | | | | | | | |
US government obligations | | | | — | | | | 25,626 | | | | 704 | | | | 26,330 | |
Mortgage backed securities | | | | — | | | | 4,757 | | | | 69 | | | | 4,826 | |
Municipal bonds | | | | — | | | | 3,150 | | | | — | | | | 3,150 | |
Asset backed securities | | | | — | | | | 1,113 | | | | — | | | | 1,113 | |
Corporate bonds | | | | — | | | | 5,852 | | | | — | | | | 5,852 | |
Other assets | | | 3,700 | | | | — | | | | — | | | | 3,700 | | | | 2,624 | | | | — | | | | — | | | | 2,624 | |
| | | | | | | | | | | | | | | | | | |
Total assets measured at fair value | | $ | 3,700 | | | $ | 37,886 | | | $ | 1,203 | | | $ | 42,789 | | | $ | 2,624 | | | $ | 50,626 | | | $ | 773 | | | $ | 54,023 | |
| | | | | | | | | | | | | | | | | | |
Short-term and long-term investments disclosed in the consolidated balance sheets includeheld-to-maturity investments totaling $6.3$4.1 million as of September 30, 2009 and 2008.2010.Held-to-maturity investments are carried at an amortized cost.
The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2009(in thousands):
| | | | | | | | | | | | | | | | |
| | Quoted Prices
| | | | | | | | | | |
| | in Active
| | | Significant
| | | | | | | |
| | Markets for
| | | Other
| | | Significant
| | | Total Fair
| |
| | Identical
| | | Observable
| | | Unobservable
| | | Value as of
| |
| | Instruments
| | | Inputs
| | | Inputs
| | | September 30,
| |
| | (Level 1) | | | (Level 2) | | | (Level 3) | | | 2009 | |
|
Assets: | | | | | | | | | | | | | | | | |
Cash equivalents | | $ | — | | | $ | 9,108 | | | $ | — | | | $ | 9,108 | |
Available for sale debt securities | | | | | | | | | | | | | | | | |
US government obligations | | | — | | | | 9,960 | | | | 1,130 | | | | 11,090 | |
Mortgage backed securities | | | — | | | | 7,935 | | | | 73 | | | | 8,008 | |
Municipal bonds | | | — | | | | 7,443 | | | | — | | | | 7,443 | |
Asset backed securities | | | — | | | | 2,256 | | | | — | | | | 2,256 | |
Corporate bonds | | | — | | | | 1,184 | | | | — | | | | 1,184 | |
Other assets | | | 3,700 | | | | — | | | | — | | | | 3,700 | |
| | | | | | | | | | | | | | | | |
Total assets measured at fair value | | $ | 3,700 | | | $ | 37,886 | | | $ | 1,203 | | | $ | 42,789 | |
| | | | | | | | | | | | | | | | |
F-15F-18
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Changes in Level 3 Instruments Measured at Fair Value on a Recurring Basis
The following table istables (in thousands) provide a reconciliation of fiscal 2010 and 2009 financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3)(in thousands):. Transfers of instruments into and out of Level 3 are based on beginning of year values.
| | | | |
| | 2009 | |
|
Balance, beginning of year | | $ | 264 | |
Total realized and unrealized gains included in other comprehensive income | | | 25 | |
Purchases, sales and maturities, net | | | 339 | |
Transfer in (out) of Level 3 | | | 575 | |
| | | | |
Balance, end of year | | $ | 1,203 | |
| | | | |
| | | | | | | | | | | | |
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
| |
| | For the Year Ended September 30, 2010
| |
| | Available-for-Sale Debt Securities | |
| | U.S. Government
| | | Mortgage
| | | | |
| | Obligations | | | Backed | | | Total | |
|
Balance, September 30, 2009 | | $ | 1,130 | | | $ | 73 | | | $ | 1,203 | |
Transfers into Level 3 | | | — | | | | 148 | | | | 148 | |
Transfers out of Level 3 | | | (36 | ) | | | (145 | ) | | | (181 | ) |
Total realized and unrealized gains (losses): | | | | | | | | | | | | |
Included in other comprehensive (loss) income | | | (33 | ) | | | 3 | | | | (30 | ) |
Purchases, issuances, sales and settlements, net | | | (357 | ) | | | (10 | ) | | | (367 | ) |
| | | | | | | | | | | | |
Balance, September 30, 2010 | | $ | 704 | | | $ | 69 | | | $ | 773 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using Significant
| |
| | Unobservable Inputs (Level 3)
| |
| | For the Year Ended September 30, 2009
| |
| | Available-for-Sale Debt Securities | |
| | U.S. Government
| | | | | | Mortgage
| | | | |
| | Obligations | | | Corporate | | | Backed | | | Total | |
|
Balance, September 30, 2008 | | $ | 74 | | | $ | 190 | | | $ | — | | | $ | 264 | |
Transfers into Level 3 | | | 1,273 | | | | — | | | | 79 | | | | 1,352 | |
Transfers out of Level 3 | | | (581 | ) | | | (199 | ) | | | — | | | | (780 | ) |
Total realized and unrealized gains (losses): | | | | | | | | | | | | | | | | |
Included in other comprehensive income (loss) | | | 15 | | | | 9 | | | | 1 | | | | 25 | |
Purchases, issuances, sales and settlements, net | | | 349 | | | | — | | | | (7 | ) | | | 342 | |
| | | | | | | | | | | | | | | | |
Balance, September 30, 2009 | | $ | 1,130 | | | $ | — | | | $ | 73 | | | $ | 1,203 | |
| | | | | | | | | | | | | | | | |
As of September 30, 2009,2010, marketable securities measured at fair value using Level 3 inputs waswere comprised of $36,000$0.7 million of aan Other U.S. government agency security $73,000and $0.1 million of a mortgage-backed security and $1,094,000 of asset-backed securities within the Company’savailable-for-sale investment portfolio. These securities were measured using observable market data and Level 3 inputs as a result of the lack of market activity and liquidity. The fair value of these securities was based on the Company’s assessment of the underlying collateral and the creditworthiness of the issuer of the securities.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company’s investments in non-marketable securities of private companies are accounted for using the cost method as the Company does not exert significant influence over the investees’ operating or equity method.financial activities. These investments, as well asheld-to-maturity securities, are measured at fair value on a non-recurring basis when they are deemed to beother-than-temporarily impaired. In determining whether a decline in value of non-marketable equity investments in private companies has occurred and isother-than-temporary, an assessment is made by considering available evidence, including the general market conditions in the investee’s industry, the investee’s product development status and subsequent rounds of financing and the related valuationand/or the Company’s participation in such financings. The Company also assesses the investee’s ability to meet business milestones and the financial condition and near-term prospects of the individual investee, including the rate at
F-19
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
which the investee is using its cash and the investee’s potential need for possible additional funding at a possiblypotentially lower valuation. The valuation methodology for determining the decline in value of non-marketable equity securities is based on inputs that require management judgment and are Level 3 inputs. The Company wrote down three investments totaling $7.9 million in the year ended September 30, 2010, as the investments were deemed to beother-than-temporarily impaired. A pending round of financing at a substantially lower valuation at one of the private companies resulted in impairment loss of $2.4 million. Another company sold off assets in light of current market conditions and this action resulted in impairment loss of $0.2 million. In addition, an impairment loss of $5.3 million was recognized related to a third company, which continues to face operational and financing difficulties and potential rounds of financing at lower valuations. Management utilized Level 3 inputs which included information about pending financings as well as market input to determine the fair value of these investments.
The Company also incurred long-lived asset impairment charges totaling $4.9 million in fiscal 2010. Fair value measurements used in the impairment reviews of property and equipment and intangible assets are Level 3 measurements that require management judgment. The Company recorded a $1.9 million asset impairment charge associated with writing down one of its facilities in Alabama to fair value based on a decision to sell the facility, which decision was reversed later in fiscal 2010. The $2.1 million carrying value of this facility is based on a real estate market appraisal obtained during the Company’s negotiations.
The Company also recorded a $1.3 million asset impairment charge associated with certain long-lived assets where very limited business is expected in the near term based on current market conditions. Furthermore, a $1.3 million asset impairment charge associated with certain fixed asset costs located in Minnesota and a $0.4 million asset impairment charge associated with prototypes and other equipment related to a development project for which very limited business is expected in the near term in light of current market conditions were also recognized. The assets associated with these charges had limited remaining value and as such were written down to zero value.
See Note 2 for additional information related to these impairments
PR Pharmaceuticals, Inc. On November 4, 2008, the Company’s SurModics Pharmaceuticals, Inc. (formerly known as Brookwood Pharmaceuticals, Inc.) subsidiary entered into an asset purchase agreement with PR Pharmaceuticals, Inc. (“PR Pharma”)(PR Pharma), whereby it acquired certain contracts and assets of PR Pharma for $5.6 million consisting of $2.9 million in cash on the closing date, additional consideration of $2.4 million upon successful achievement of specified milestones and $0.3 million in transaction costs. PR Pharma is eligible to receive up to an additional $3.6 million in cash upon the successful achievement of milestones for contract signing and invoicing, successful patent issuances and product development. Management believes this acquisition strengthens the Company’s portfolio of drug delivery technologies for the pharmaceutical and biotechnology industries. The purchase price was allocated as follows as of November 4, 2008(in thousands):
| | | | |
Core technology | | $ | 1,400 | |
Customer relationships | | | 900 | |
In-process research and development | | | 3,200 | |
Trade names | | | 20 | |
Non-compete agreements | | | 50 | |
| | | | |
Total purchase price | | $ | 5,570 | |
| | | | |
| | | | |
Core technology | | $ | 1,400 | |
Customer relationships | | | 900 | |
In-process research and development | | | 3,200 | |
Trade names | | | 20 | |
Non-compete agreements | | | 50 | |
| | | | |
Total purchase price | | $ | 5,570 | |
| | | | |
F-16
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The acquired developed technology is being amortized on a straight-line basis over 18 years, customer relationships are being amortized over 9 years, and non-compete agreements are being amortized over 2 years. The trade names havehad a life of less than one year and were fully amortized in fiscal 2009. As part of the acquisition, the
F-20
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Company recognized fair value associated with in-process research and development (IPR&D) of $3.2 million. The IPR&D was expensed on the date of acquisition and relates to polymer-based drug delivery systems. The value assigned to IPR&D is related to projects for which the related products have not achieved commercial feasibility and have no future alternative use. The amount of purchase price allocated to IPR&D was based on estimating the future cash flows of each project and discounting the net cash flows back to their present values. The discount rate used was determined at the time of acquisition in accordance with accepted valuation methods. These methodologies include consideration of the risk of the project not achieving commercial feasibility. The research efforts ranged from 5% to 50% complete at the date of acquisition. The Company used the Relief from Royalty valuation method to assess the fair value of the projects with a risk-adjusted discount rate of 25%. The Company determined the method was appropriate based on the nature of the projects and future cash flow streams. The research and development work performed is billed to customers, in most cases, using standard commercial billing rates which include a reasonable markup. Accordingly, the Company has no fixed cost obligations to carry projects forward. There have been no significant changes to the development plans for the acquired incomplete projects. Significant net cash inflows would commence with the commercial launch of customer products that are covered by the intellectual property rights and related agreements acquired from PR Pharma.
SurModics Pharmaceuticals, Inc. On July 31, 2007, the Company entered into a stock purchase agreement with Southern Research Institute (“SRI”) whereby it acquired 100% of the capital stock of SurModics Pharmaceuticals, Inc. (formerly Brookwood Pharmaceuticals, Inc.) (“SurModics Pharmaceuticals”) held by SRI for $42.3 million consisting of $40 million in cash on the closing date and $2.3 million in transaction costs. SRI could receive up to an additional $22 million in cash upon the successful achievement of specified milestones. In fiscal 2009, a milestone was achieved and $3 million of additional purchase price was recorded as an increase to goodwill. In fiscal 2008, a milestone was achieved and $2 million of additional purchase price was recorded as an increase to goodwill. SurModics Pharmaceuticals is a drug delivery company based in Birmingham, Alabama that provides proprietary polymer-based technologies to companies developing pharmaceutical products. SurModics Pharmaceuticals, a wholly owned subsidiary of SurModics, operates as a separate business unit. Management believes this acquisition strengthens SurModics’ portfolio of drug delivery technologies for the pharmaceutical and biotechnology industries in particular. Operating results of SurModics Pharmaceuticals have been included in the Company’s consolidated financial statements since August 1, 2007.
As part of the acquisition, the Company recognized IPR&D of $15.6 million. The IPR&D was expensed on the date of acquisition and relates to polymer-based drug delivery systems. The value assigned to IPR&D is related to projects for which the related products have not received commercial feasibility and have no future alternative use. The amount of purchase price allocated to IPR&D was based on estimating the future cash flows of each project and discounting the net cash flows back to their present values.
BioFX Laboratories, Inc. On August 13, 2007, the Company acquired 100% of the capital stock of BioFX Laboratories, Inc. (“BioFX”), a provider of substrates to thein vitrodiagnostics industry, for $11.6 million, $11.3 million of which was in cash paid to the sellers and $300,000 in transaction costs. The Company is also required to pay up to an additional $11.4 million in cash upon the successful achievement of specified revenue targets. In fiscal 2008, a milestone was achieved and $1.1 million of additional purchase price was recorded as an increase to goodwill. The sellers are still eligible to receive up to $7.6 million in additional consideration. BioFX is a wholly owned subsidiary of SurModics, and operates within the In Vitro Technologies business unit. Management believes the acquisition enhances the Company’s technological position in thein vitrodiagnostics market. Operating results of BioFX have been included in the Company’s consolidated financial statements since August 14, 2007.
F-17
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The followingpro formaconsolidated condensed financial results of operations for the 2007 fiscal year, are presented as if the SurModics Pharmaceuticals and BioFX acquisitions had been completed at the beginning of fiscal 2007 (in thousands).
| | | | |
Pro forma revenue | | $ | 89,708 | |
Pro forma income from operations | | $ | 28,034 | |
Pro forma net income | | $ | 17,735 | |
Pro forma basic earnings per share | | $ | 0.98 | |
Pro forma diluted earnings per shares | | $ | 0.98 | |
| |
5. | Revolving Credit Facility |
In February 2009, the Company entered into a two-year $25.0 million unsecured revolving credit facility. Borrowings under the credit facility, if any, will bear interest at a benchmark rate plus an applicable margin based upon the Company’s funded debt to EBITDA ratio. In connection with the credit facility, the Company is required to maintain certain financial and nonfinancial covenants. As of September 30, 2009,2010, the Company had no debt outstanding under this credit facility and was not in compliance with allcertain covenants. The Company is working with the bank to obtain waivers and expects to complete these activities by the end of the second quarter of fiscal 2011. The Company believes that noncompliance will not cause liquidity issues given the Company’s investment holdings and cash flow generated by operations.
The Company has stock-based compensation plans under which it grants stock options, and restricted stock awards and performance share awards. Accounting guidance requires all share-based payments to be recognized as an operating expense, based on their fair values, over the requisite service period. The Company’s stock-based compensation expenses for the years ended September 30 were allocated as followsto the following expense categories(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
|
Product | | $ | 87 | | | $ | 161 | | | $ | 96 | | | $ | 139 | | | $ | 87 | | | $ | 161 | |
Research and development | | | 3,621 | | | | 3,793 | | | | 5,188 | | |
Customer research and development | | | | 772 | | | | 815 | | | | 1,794 | |
Other research and development | | | | 2,399 | | | | 2,806 | | | | 1,999 | |
Selling, general and administrative | | | 3,145 | | | | 5,698 | | | | 5,028 | | | | 2,565 | | | | 3,145 | | | | 5,698 | |
| | | | | | | | | | | | | | |
Total | | $ | 6,853 | | | $ | 9,652 | | | $ | 10,312 | | | $ | 5,875 | | | $ | 6,853 | | | $ | 9,652 | |
| | | | | | | | | | | | | | |
As of September 30, 2009,2010, approximately $8.7$4.8 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of approximately 2.62.4 years. The unrecognized compensation costs include $2.8above exclude $1.2 million associated with performance share awards that are currently not anticipated to be fully expensed because the performance conditions are not expected to be met.
F-21
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Stock Option Plans
The Company uses the Black-Scholes option pricing model to determine the weighted average grant date fair value of stock options granted. The weighted average per share fair value of stock options granted during fiscal 2010, 2009, and 2008 was $6.78, $8.95, and 2007 was $8.95, $14.85, and $17.42, respectively. The assumptions used as inputs in the model for the years ended September 30 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | | 2010 | | 2009 | | 2008 |
|
Risk-free interest rates | | | 2.30 | % | | | 2.80 | % | | | 4.50 | % | | | 1.95 | % | | | 2.30 | % | | | 2.80 | % |
Expected life | | | 4.8 years | | | | 4.6 years | | | | 5.4 years | | | | 4.8 years | | | | 4.8 years | | | | 4.6 years | |
Expected volatility | | | 40 | % | | | 37 | % | | | 45 | % | | | 41 | % | | | 40 | % | | | 37 | % |
Dividend yield | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % |
The risk-free interest rate assumption was based on the U.S. Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award. The expected life of options granted is
F-18
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
determined based on the Company’s experience. Expected volatility is based on the Company’s stock price movement.movement over a period approximating the expected term. Based on management’s judgment, dividend rates are expected to be zero for the expected life of the options. The Company also estimates forfeitures of options granted, which are based on historical experience.
The Company’s Incentive Stock Options (ISO) are granted at a price of at least 100% of the fair market value of the Common Stockcommon stock of the Company 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. ISOs generally expire in seven years or upon termination of employment and generally are exercisable at a rate of 20% per year commencing one year after the date of grant. NonqualifiedNon-qualified stock options are granted at fair market value on the date of grant. NonqualifiedNon-qualified stock options expire in 7 to 10 years or upon termination of employment or service as a Board member. NonqualifiedNon-qualified stock options granted prior to May 2008 generally become exercisable with respect to 20% of the shares on each of the first five anniversaries following the grant date, such that the entire option is fully vested five years after date of grant, and nonqualified stock options granted subsequent to May 2008 generally become exercisable with respect to 25% on each of the first four anniversaries following the grant date suchdate. Shareholders approved the 2009 Equity Incentive Plan (2009 Plan) at the February 8, 2010 Annual Meeting of Shareholders. The 2009 Plan has 1,500,000 shares authorized, plus the number of shares that the entire option is fully vested four years after the grant date. The Company has authorized 2,400,000 shares for granthave not yet been awarded under the 2003 Equity Incentive Plan, or were awarded and subsequently returned to the pool of which 51,000 remain available for future awards. In September 2009, the Company granted 29,066 performance share awards to officersshares under the 2003 Equity Incentive Plan and 229,552 stock optionspursuant to officers under the 2009 Equity Incentive Plan. The 2009 Equity Incentive Plan is subject to shareholder approval at the Februaryits terms. At September 30, 2010, Annual Meeting of Shareholders.there were 1,819,000 shares available for future awards. As of September 30, 2009,2010, the aggregate intrinsic value of the option shares outstanding and option shares exercisable was $0.7 millionnot meaningful, as the Company’s stock price of $11.92 per share on September 30, 2010 was below the value of option shares outstanding and $0.6 million, respectively.exercisable. At September 30, 2009,2010, the average remaining contractual life of options outstanding and options exercisable was 4.3 and 3.23.3 years, respectively. There was no intrinsic value associated with options exercised during fiscal 2010 as the Company’s stock price of $11.92 per share on September 30, 2010 was below the value of options exercised. The intrinsic value of options exercised during fiscal 2009 and 2008 and 2007 was $235,000, $2.9$0.2 million and $4.4$2.9 million, respectively.
| | | | | | | | |
| | | | | Weighted
| |
| | Number of
| | | Average
| |
| | Shares | | | Exercise Price | |
|
Outstanding at September 30, 2006 | | | 1,510,780 | | | $ | 29.69 | |
Granted | | | 166,400 | | | | 37.85 | |
Exercised | | | (253,060 | ) | | | 25.82 | |
Forfeited | | | (22,700 | ) | | | 33.71 | |
| | | | | | | | |
Outstanding at September 30, 2007 | | | 1,401,420 | | | | 31.29 | |
Granted | | | 392,917 | | | | 41.86 | |
Exercised | | | (163,297 | ) | | | 27.45 | |
Forfeited | | | (108,250 | ) | | | 33.59 | |
| | | | | | | | |
Outstanding at September 30, 2008 | | | 1,522,790 | | | | 34.26 | |
Granted | | | 268,700 | | | | 24.06 | |
Exercised | | | (17,600 | ) | | | 8.82 | |
Forfeited | | | (104,320 | ) | | | 35.33 | |
| | | | | | | | |
Outstanding at September 30, 2009 | | | 1,669,570 | | | $ | 32.82 | |
Exercisable at September 30, 2009 | | | 902,589 | | | $ | 32.07 | |
F-22
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | | | | | | | |
| | | | | Weighted
| |
| | Number of
| | | Average
| |
| | Shares | | | Exercise Price | |
|
Outstanding at September 30, 2007 | | | 1,401,420 | | | $ | 31.29 | |
Granted | | | 392,917 | | | | 41.86 | |
Exercised | | | (163,297 | ) | | | 27.45 | |
Forfeited | | | (108,250 | ) | | | 33.59 | |
| | | | | | | | |
Outstanding at September 30, 2008 | | | 1,522,790 | | | $ | 34.26 | |
Granted | | | 268,700 | | | | 24.06 | |
Exercised | | | (17,600 | ) | | | 8.82 | |
Forfeited | | | (104,320 | ) | | | 35.33 | |
| | | | | | | | |
Outstanding at September 30, 2009 | | | 1,669,570 | | | $ | 32.82 | |
Granted | | | 388,635 | | | | 22.88 | |
Exercised | | | (20,350 | ) | | | 20.74 | |
Forfeited | | | (545,534 | ) | | | 30.58 | |
| | | | | | | | |
Outstanding at September 30, 2010 | | | 1,492,321 | | | $ | 31.22 | |
Exercisable at September 30, 2010 | | | 843,112 | | | $ | 33.10 | |
Restricted Stock Awards
The Company has entered into restricted stock agreements with certain key employees, covering the issuance of Common Stockcommon stock (Restricted Stock). Under accounting guidance these shares are considered to be non-vested shares. 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 100,89541,072 common shares awarded and is being charged to income over the vesting term. The stock-based compensation table includes the Restricted Stock expenses recognized related to these awards, which totaled $1.0 million, $1.8 million and $2.2 million during fiscal 2010, 2009 and 2008, respectively.
| | | | | | | | |
| | | | | Weighted
| |
| | Number of
| | | Average
| |
| | Shares | | | Grant Price | |
|
Balance at September 30, 2007 | | | 206,191 | | | $ | 35.89 | |
Granted | | | 12,383 | | | | 42.18 | |
Vested | | | (40,336 | ) | | | 38.76 | |
Forfeited | | | (21,109 | ) | | | 32.83 | |
| | | | | | | | |
Balance at September 30, 2008 | | | 157,129 | | | $ | 36.06 | |
Granted | | | 7,700 | | | | 23.93 | |
Vested | | | (59,047 | ) | | | 34.44 | |
Forfeited | | | (4,887 | ) | | | 41.91 | |
| | | | | | | | |
Balance at September 30, 2009 | | | 100,895 | | | $ | 35.80 | |
Granted | | | 30,440 | | | | 18.49 | |
Vested | | | (83,195 | ) | | | 36.32 | |
Forfeited | | | (7,068 | ) | | | 33.39 | |
| | | | | | | | |
Balance at September 30, 2010 | | | 41,072 | | | $ | 22.33 | |
F-19F-23
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Restricted Stock expenses recognized related to these awards, which totaled $1.8 million, $2.2 million and $1.2 million during fiscal 2009, 2008 and 2007, respectively.
| | | | | | | | |
| | | | | Weighted
| |
| | Number of
| | | Average
| |
| | Shares | | | Grant Price | |
|
Balance at September 30, 2006 | | | 153,000 | | | $ | 32.14 | |
Granted | | | 83,027 | | | | 42.07 | |
Vested | | | (24,836 | ) | | | 37.87 | |
Forfeited | | | (5,000 | ) | | | 34.56 | |
| | | | | | | | |
Balance at September 30, 2007 | | | 206,191 | | | | 35.89 | |
Granted | | | 12,383 | | | | 42.18 | |
Vested | | | (40,336 | ) | | | 38.76 | |
Forfeited | | | (21,109 | ) | | | 32.83 | |
| | | | | | | | |
Balance at September 30, 2008 | | | 157,129 | | | | 36.06 | |
Granted | | | 7,700 | | | | 23.93 | |
Vested | | | (59,047 | ) | | | 34.44 | |
Forfeited | | | (4,887 | ) | | | 41.91 | |
| | | | | | | | |
Balance at September 30, 2009 | | | 100,895 | | | $ | 35.80 | |
Performance Share Awards
The Company has entered into Performance Share agreements with certain key employees, covering the issuance of Common Stockcommon stock (Performance Shares). The Performance Shares vest upon the achievement of all or a portion of certain performance objectives, which must be achieved during the performance period. Compensation is recognized in each period based on management’s best estimate of the achievement level of the grants’ specified performance objectives and the resulting vesting amounts. In fiscal 2010, the Company recognized expense of $32,000 related to specific performance objectives achieved by certain individuals. In fiscal 2009, the Company reversed expenses previously recognized of $207,000 relating to three-year Performance Shares awarded in May 2008 and one-year Performance Shares awarded in September 2008, which was partially offset by an expense of $164,000 related to the estimated value of Performance Shares awarded to individuals based on likely achievement of specific performance objectives. The Company recorded compensation expense of $1.9 million in fiscal 2008 related to 30,552 one-year Performance Shares and 30,552 three-year Performance Shares awarded in May 2008 and 7,600 Performance Shares that vested for certain individuals that met various specific performance objectives. The Company recorded compensation expense of $4.8 million in fiscal 2007 related to 132,375 Performance Shares. The stock-based compensation table includes the Performance Shares expenses.
1999 Employee Stock Purchase Plan
Under the 1999 Employee Stock Purchase Plan (Stock Purchase Plan), the Company is authorized to issue up to 200,000400,000 shares of Common Stock.common stock. The number of authorized shares was increased by 200,000 effective with shareholder approval at the February 8, 2010 Annual Meeting. All full-time and part-time employees can choose to have up to 10% of their annual compensation withheld, with a limit of $25,000, to purchase the Company’s Common Stockcommon stock at purchase prices defined within the provisionsprovision of the Stock Purchase Plan. As of September 30, 20092010 and 2008,2009, there were $276,000$321,000 and $355,000$376,000 of employee contributions, respectively, included in accrued liabilities in the accompanying consolidated balance sheets. Stock compensation expense recognized related to the Stock Purchase Plan totaled $250,000, $265,000, $199,000 and $156,000$199,000 during fiscal 2010, 2009, 2008 and 2007,2008, respectively. The stock-based compensation table includes the Stock Purchase Plan expenses.
F-20
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
In March 2010, the Company announced an organizational change designed to support future growth by better meeting customer needs, leveraging its multiple competencies across the organization, and building on its pharmaceutical industry experience. As a result of the reorganization, the Company eliminated 11 positions, or approximately 4% of the Company’s workforce. These employee terminations occurred across various functions and the reorganization plan was completed by the end of the third quarter of fiscal 2010. The Company also announced that it was vacating its leased sales office in Irvine, California and a leased warehouse in Birmingham, Alabama, as part of the reorganization plan. Both leased spaces were vacated by March 31, 2010.
The Company recorded total restructuring charges of approximately $1.3 million in connection with the fiscal 2010 reorganization. These pre-tax charges consisted of $0.8 million of severance pay and benefits expenses and $0.5 million of facility-related costs.
In November 2008, the Company announced a functional reorganization to allow the Company to better serve its customers and improve its operating performance. As a result of the reorganization, the Company eliminated 15 positions, or approximately five percent of the Company’s workforce. These employee terminations occurred across various functions and the reorganization plan was completed by the end of the first quarter of fiscal 2009. The Company also vacated a leased facility in Eden Prairie, Minnesota, consolidating into its owned office and research facility also in Eden Prairie, as part of the reorganization plan.
The Company recorded total restructuring charges of approximately $1.8 million in connection with the reorganization. These pre-tax charges consisted of $0.5 million of severance pay and benefits expenses and $1.3
F-24
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
$1.3 million of facility-related costs which were recorded in fiscal 2009. The restructuring iswas expected to result in approximately $2.0 million in annualized cost savings.
Cash payments related to both restructuring events totaled $1.1 million in fiscal 2010, resulting in a balance of $1.2 million at September 30, 2010.
The following table summarizes the restructuring accrual activity for fiscal 20092010(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Employee
| | Facility-
| | | | | Employee
| | Facility-
| | | |
| | Severance
| | Related
| | | | | Severance
| | Related
| | | |
| | and Benefits | | Costs | | Total | | | and Benefits | | Costs | | Total | |
|
Balance at September 30, 2008 | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Accruals during the year | | | 513 | | | | 1,250 | | | | 1,763 | | | | 513 | | | | 1,250 | | | | 1,763 | |
Cash Payments | | | (513 | ) | | | (295 | ) | | | (808 | ) | |
Cash payments | | | | (513 | ) | | | (295 | ) | | | (808 | ) |
| | | | | | | | | | | | | | |
Balance at September 30, 2009 | | $ | — | | | $ | 955 | | | $ | 955 | | | $ | — | | | $ | 955 | | | $ | 955 | |
Accruals during the year | | | | 818 | | | | 488 | | | | 1,306 | |
Cash payments | | | | (814 | ) | | | (264 | ) | | | (1,078 | ) |
| | | | | | | | | | | | | | |
Balance at September 30, 2010 | | | $ | 4 | | | $ | 1,179 | | | $ | 1,183 | |
| | | | | | | | |
The charges above have been shown separately as restructuring charges on the consolidated statements of income.operations. The remaining accrual as of September 30,for both the fiscal 2010 and 2009 relates to facility-related costs that arerestructurings is expected to be paid within the next 1539 months. As such, the current portion totaling $0.9$1.0 million is recorded as a current liability within other accrued liabilities and the long-term portion totaling $0.1$0.2 million is recorded as a long-term liability within other long-term liabilities on the consolidated balance sheets.
F-25
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The Company accounts for income taxes under the asset and liability method prescribed in accounting guidance. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the period in which related temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in this assessment. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of such change.
F-21
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Income taxes in the accompanying consolidated statements of incomeoperations for the fiscal years ended September 30 are as follows(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
|
Current provision: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal | | $ | 12,257 | | | $ | 13,534 | | | $ | 19,069 | | | $ | (331 | ) | | $ | 12,257 | | | $ | 13,534 | |
State and foreign | | | 1,362 | | | | 1,516 | | | | 1,732 | | | | 277 | | | | 1,362 | | | | 1,516 | |
| | | | | | | | | | | | | | |
Total current provision | | | 13,619 | | | | 15,050 | | | | 20,801 | | | | (54 | ) | | | 13,619 | | | | 15,050 | |
Deferred provision (benefit): | | | | | | | | | | | | | | | | | | | | | | | | |
Federal | | | 7,483 | | | | (2,832 | ) | | | (8,573 | ) | | | 1,019 | | | | 7,483 | | | | (2,832 | ) |
State | | | 872 | | | | (65 | ) | | | (907 | ) | | | (535 | ) | | | 872 | | | | (65 | ) |
| | | | | | | | | | | | | | |
Total deferred provision (benefit) | | | 8,355 | | | | (2,897 | ) | | | (9,480 | ) | | | 484 | | | | 8,355 | | | | (2,897 | ) |
| | | | | | | | | | | | | | |
Total provision | | $ | 21,974 | | | $ | 12,153 | | | $ | 11,321 | | | $ | 430 | | | $ | 21,974 | | | $ | 12,153 | |
| | | | | | | | | | | | | | |
The reconciliation of the difference between amounts calculated at the statutory federal tax rate for the fiscal years ended September 30 and the Company’s effective tax rate is as follows(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
|
Amount at statutory federal income tax rate | | $ | 20,833 | | | $ | 9,387 | | | $ | 5,067 | | | $ | (7,231 | ) | | $ | 20,833 | | | $ | 9,387 | |
Change because of the following items: | | | | | | | | | | | | | | | | | | | | | | | | |
State taxes | | | 1,206 | | | | 715 | | | | 736 | | | | (209 | ) | | | 1,206 | | | | 715 | |
Other | | | (481 | ) | | | 223 | | | | (241 | ) | | | (20 | ) | | | (481 | ) | | | 223 | |
Stock-based compensation | | | 416 | | | | 239 | | | | 262 | | | | 276 | | | | 416 | | | | 239 | |
Valuation allowance | | | — | | | | 1,589 | | | | — | | | | 2,780 | | | | — | | | | 1,589 | |
Write-off of in-process research and development | | | — | | | | — | | | | 5,497 | | |
Goodwill impairment | | | | 4,834 | | | | — | | | | — | |
| | | | | | | | | | | | | | |
Income tax provision | | $ | 21,974 | | | $ | 12,153 | | | $ | 11,321 | | | $ | 430 | | | $ | 21,974 | | | $ | 12,153 | |
| | | | | | | | | | | | | | |
F-26
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The components of deferred income taxes consisted of the following as of September 30 and result from differences in the recognition of transactions for income tax and financial reporting purposes(in thousands):
| | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
|
Depreciable assets | | $ | (2,951 | ) | | $ | (4,325 | ) | | $ | (5,795 | ) | | $ | (2,951 | ) |
Deferred revenue | | | 261 | | | | 11,005 | | | | 1,666 | | | | 261 | |
Accruals and reserves | | | 526 | | | | 523 | | | | 780 | | | | 526 | |
Stock options | | | 5,258 | | | | 4,397 | | | | 5,947 | | | | 5,258 | |
Impaired asset | | | 3,264 | | | | 3,318 | | |
Unrealized (losses) gains on investments | | | (962 | ) | | | 66 | | |
Impaired investments | | | | 6,130 | | | | 3,264 | |
Unrealized losses on investments | | | | (563 | ) | | | (962 | ) |
Other | | | 844 | | | | 571 | | | | 1,211 | | | | 844 | |
Valuation allowance | | | (3,339 | ) | | | (3,398 | ) | | | (6,523 | ) | | | (3,339 | ) |
| | | | | | | | | | |
Total deferred tax asset | | | 2,901 | | | | 12,157 | | | | 2,853 | | | | 2,901 | |
Less current deferred tax asset | | | (353 | ) | | | (1,058 | ) | | | (247 | ) | | | (353 | ) |
| | | | | | | | | | |
Noncurrent deferred tax asset | | $ | 2,548 | | | $ | 11,099 | | | $ | 2,606 | | | $ | 2,548 | |
| | | | | | | | | | |
In fiscal 2008,2010, the Company recorded a $1.6$3.1 million valuation allowance against thewhich primarily relates to potential capital losslosses created by the impairment of the Company’s investmentinvestments in OctoPlusNexeon and two additional medical technology companies (see Note 23 for further information). The valuation allowance was recorded because the Company does not currently foresee future capital gains within the
F-22
SurModics, Inc. allowable carryforward and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
allowable carry forward and carry backcarryback periods to offset thisthese capital losslosses when it wasthey were recognized. As such, no tax benefit has been recorded in the consolidated statements of operations.
On October 1, 2007, the Company adopted new accounting guidance on the accounting for uncertainty in income taxes. The adoption of the new guidance resulted in an increase to retained earnings as of October 1, 2007, of $80,000, which was reflected as a cumulative effect of a change in accounting principle, with a corresponding decrease to the net liability for unrecognized tax expenses. Unrecognized tax benefits are the differences between a tax position taken, or expected to be taken in a tax return, and the benefit recognized for accounting purposes pursuant to accounting guidance. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows(in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | | 2010 | | 2009 | | 2008 | |
|
Beginning of fiscal year | | $ | 1,540 | | | $ | 1,120 | | | $ | 2,042 | | | $ | 1,540 | | | $ | 1,120 | |
Increases in tax positions for prior years | | | 273 | | | | 194 | | |
Increase in tax positions for prior years | | | | — | | | | 280 | | | | 194 | |
Decrease in tax positions for prior years | | | | (104 | ) | | | (7 | ) | | | — | |
Increases in tax positions for current year | | | 260 | | | | 237 | | | | 92 | | | | 260 | | | | 237 | |
Settlements with taxing authorities | | | — | | | | — | | | | — | | | | — | | | | — | |
Lapse of the statute of limitations | | | (31 | ) | | | (11 | ) | | | (82 | ) | | | (31 | ) | | | (11 | ) |
| | | | | | | | | | | | |
End of fiscal year | | $ | 2,042 | | | $ | 1,540 | | | $ | 1,948 | | | $ | 2,042 | | | $ | 1,540 | |
| | | | | | | | | | | | |
The total amount of unrecognized tax benefits including interest and penalties that, if recognized, would affect the effective tax rate as of September 30, 2010, 2009 and 2008, respectively, are $1.9 million, $2.0 million and $1.3$1.5 million. Currently, the Company does not expect the liability for unrecognized tax benefits to change significantly in the next twelve months with the above balances classified on the consolidated balance sheets as a part of long-term liabilities. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense. As of September 30, 2010, 2009 and 2008, a gross balance of $605,000$0.7 million, $0.6 million and $397,000,$0.4 million, respectively, has been accrued related to the unrecognized tax benefits balance for interest and penalties.
The Company files tax returns, including returns for its subsidiaries, in the United States (U.S.) federal jurisdiction and in various state jurisdictions. Uncertain tax positions are related to tax years that remain subject to examination. The Internal Revenue Service has commenced an examination of the Company’s U.S. income tax returnsreturn for fiscal 2009 in the first quarter of fiscal 2011. Fiscal years ended September 30, 2006, 2007 and 2008 remain subject to examination by
F-27
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
federal tax authorities. Tax returns for state and local jurisdictions for fiscal years ended September 30, 2003 through 20082009 remain subject to examination by state and local tax authorities.
| |
9. | Commitments and Contingencies |
Litigation. From time to time, the Company has been, and may become, involved in various legal actions involving its operations, products and technologies, including intellectual property and employment disputes. The outcomes of these legal actions are not within the Company’s complete control and may not be known for prolonged periods of time. In some actions, the claimants seek damages, as well as other relief, including injunctions barring the sale of products that are the subject of the lawsuit, which, if granted, could require significant expenditures or result in lost revenues. The Company records a liability in the consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate, the minimum amount of the range is accrued. If a loss is possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded.
InnoRx, Inc. In January 2005, the Company entered into a merger agreement whereby SurModics acquired all of the assets of InnoRx, Inc. (“InnoRx”), an early stage company developing drug delivery devices and therapies for the ophthalmology market. SurModics will be required to issue up to approximately 480,059 additional shares of its common stock to the stockholders of InnoRx upon the successful completion of the remaining development and commercial milestones involving InnoRx technology acquired in the transaction.
F-23
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Alabama Jobs Commitment. In April 2008, the Company purchased a 286,000 square foot facility to support Current Good Manufacturing Practices manufacturing needs of customers and the anticipated growth of the SurModics Pharmaceuticals business. At the same time, SurModics Pharmaceuticals entered into an agreement with various governmental authorities to obtain financial incentives associated with creation of jobs in Alabama. Some of the governmental agencies have recapture rights in connection with the financial incentives if the number of full-time employees are not hired by June 2012, with an extension to June 2013 if circumstances or events occur that are beyond the control of SurModics Pharmaceuticals or could not have been reasonably anticipated by SurModics Pharmaceuticals. As of September 30, 2009, SurModics Pharmaceuticals has received $1.7 million in connection with the agreement, and the Company has recorded the payment in other long-term liabilities.
SRI Litigation. On July 31, 2009, the Company’s SurModics Pharmaceuticals business unitsubsidiary was named as a defendant in litigation pending in the circuit court of Jefferson County, Alabama, between SRI and two of SRI’s former employees (the “Plaintiffs”)Plaintiffs). In the litigation, the Plaintiffs allege that they contributed to or invented certain intellectual property while they were employed at SRI, and pursuant to SRI’s policies then in effect, they are entitled to, among other things, a portion of the purchase price consideration paid by the Company to SRI as part the Company’s acquisition of Brookwood Pharmaceuticals, Inc., pursuant to a stock purchase agreement made effective on July 31, 2007 (the “StockStock Purchase Agreement”)Agreement). A trial has not yet been scheduled. Pursuant to the Stock Purchase Agreement, the Company has certain rights of indemnification against losses (including without limitation, damages, expenses and costs) incurred as a result of the litigation. The Company’s consolidated financial statements do not include any expenses or liabilities related to the above litigation as the probability of the outcome is currently not determinable and any potential loss is not estimable. The Company believes that it has meritorious defenses to the Plaintiffs’Plaintiff’s claims and will vigorously defend and prosecute this matter.
InnoRx, Inc. In January 2005, the Company entered into a merger agreement whereby SurModics acquired all of the assets of InnoRx, Inc. (InnoRx), an early stage company developing drug delivery devices and therapies for the ophthalmology market. SurModics will be required to issue up to approximately 480,059 additional shares of its common stock to the stockholders of InnoRx upon the successful completion of the remaining development and commercial milestones involving InnoRx technology acquired in the transaction.
BioFX Laboratories, Inc. In August 2007, the Company acquired 100% of the capital stock of BioFX Laboratories, Inc. (BioFX), a provider of substrates to thein vitrodiagnostics industry. The sellers of BioFX are still eligible to receive up to $3.5 million in additional consideration based on specific revenue targets through calendar 2011.
SurModics Pharmaceuticals, Inc. In July 2007, the Company acquired 100% of the capital stock of Brookwood Pharmaceuticals Inc. (now known as SurModics Pharmaceuticals, Inc.) (SurModics Pharmaceuticals), a drug delivery company that provides proprietary polymer-based technologies to companies developing pharmaceutical products. The sellers of SurModics Pharmaceuticals are still eligible to receive up to $16.3 million in additional consideration based on successful achievement of specific milestones through calendar 2011. A project milestone event was achieved in the first quarter of fiscal 2011 and as such an obligation of $0.8 million was recognized.
Alabama Jobs Commitment. In April 2008, the Company purchased a 286,000 square foot office and warehouse facility to support cGMP manufacturing needs of customers. At the same time, SurModics Pharmaceuticals entered into an agreement with various governmental authorities to obtain financial incentives associated with creation of jobs in Alabama. Some of the governmental agencies have recapture rights in connection with the financial incentives if the number of full-time employees are not hired by June 2012, with an extension to June 2013
F-28
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
if circumstances or events occur that are beyond the control of SurModics Pharmaceuticals or could not have been reasonably anticipated by SurModics Pharmaceuticals. As of September 30, 2010, SurModics Pharmaceuticals has received $1.7 million in connection with the agreement, and the Company has recorded the payment in other long-term liabilities.
Operating Leases. The Company leases certain facilities under noncancelable operating lease agreements. Rent expense for the years ended September 30, 2010, 2009, and 2008 was $0.3 million, $1.0 million, and 2007 was $994,000, $773,000 and $140,000,$0.8 million, respectively. Annual commitments pursuant to operating lease agreements are as follows:
| | | | | | | | |
Year Ended September 30, | | | | | | |
|
2010 | | $ | 422,000 | | |
2011 | | | 177,000 | | | $ | 258,000 | |
2012 | | | 126,000 | | | | 57,000 | |
2013 | | | 131,000 | | | | 60,000 | |
2014 | | | 33,000 | | | | 62,000 | |
2015 | | | | 62,000 | |
Thereafter | | | — | | | | 16,000 | |
| | | | | | |
Total minimum lease payments | | $ | 889,000 | | | $ | 515,000 | |
| | | | | | |
| |
10. | Defined Contribution Plans |
The Company has a 401(k) retirement and savings plan for the benefit of qualifying employees. The Company has matchedmatches 50% of each dollar ofemployee contributions on the first 6% of the tax deferral elected by each employee.eligible compensation. Effective April 1, 2009, the Company changed its matching contribution to a discretionary approach and the Company ceased matching contributions. Effective April 1, 2010, the Company re-instated its matching contribution at the previous level. Company contributions totaling $243,000, $539,000$0.2 million, $0.2 million, and $356,000$0.5 million have been expensed for the years ended September 30, 2010, 2009, and 2008, and 2007, respectively. The expense increase in fiscal 2008 principally reflects the addition of employees eligible for this benefit as a result of the SurModics Pharmaceuticals acquisition.
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
F-24
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
how to allocate resources and in assessing performance. In November 2008,October 2010, the Company announced it was changing its operational structure to renew focus on business units and the Company will now be organized into three business units: Medical Device, Pharmaceuticals and In Vitro Diagnostics (IVD). Beginning in the first quarter of fiscal 2011, the Company will describe its business under the new reporting structure.
In March 2010, prior to the fiscal 2011 change noted above, the Company announced it changed its operationalorganizational structure so thatto better align functional expertise, which also resulted in the Company is now organized into four clinically and market focusedelimination of the company’s business units: Cardiovascular, Ophthalmology, SurModics Pharmaceuticals, and In Vitro Technologies.units. The Company believes that this structure will improve the visibility, marketingevaluates revenue results and adoption of the Company’s broad array of technologies within specific markets and help its customers in the medical device, pharmaceutical and life science industries solve unmet clinical needs. In addition, a new centralized research and development function has been formed to serve the needs of the Company’s clinically and market focused business units, other than the SurModics Pharmaceuticals business unit, which continues to maintain certain R&D operations.
The Company manages its businessopportunities on the basis of the marketsclinical market areas in which the Company’s customers participate as noted in the table below, which are comprised of the Company’s four business units.below. The “Therapeutic” contains:market includes revenue from: (1) the Cardiovascular, business unit, which provides drug delivery and surface modification technologies to customers in the cardiovascular market; (2) the Ophthalmology, business unit, which is currently focused on 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; and (3) Other Markets, which is focused on a variety of clinical markets principally in the SurModics Pharmaceuticals business unit, which provides proprietary polymer-based drug delivery technologies to companies developing improved pharmaceutical products in cardiovascular, ophthalmology and other clinical markets. Revenue results in Therapeutic are presented below by the clinicalbiotechnology industries. The “Diagnostic” market areas in which the Company’s customers participate (Cardiovascular, Ophthalmology and Other Markets). “Diagnostic” contains the In Vitro Technologies business unit, which includes revenue from the Company’s microarray slide technologies, stabilization products, antigens and substrates for immunoassay diagnostics tests, and itsin vitrodiagnostic format technology.
For fiscal years ended September 30, 2010, 2009, 2008 and 2007,2008, the Company’s results are aggregated into one reportable segment, as each business unit has similar economic characteristics, technology, manufacturing processes, customers, regulatory environments, and shared infrastructures. Thethe Company manages its expenses on a company-wide basis, as many costswell as its sales and activities are shared among the business units. The focus of the business units is providing solutionsmarketing efforts.
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SurModics, Inc. and Subsidiaries
Notes to customers and maximizing financial performance over the long term.Consolidated Financial Statements — (Continued)
The table below presents revenue from the markets identified above, with Therapeutic broken out further by focus area, for the years ended September 30, as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
|
Therapeutic | | | | | | | | | | | | | | | | | | | | | | | | |
Cardiovascular | | $ | 39,841 | | | $ | 47,675 | | | $ | 46,487 | | | $ | 40,155 | | | $ | 39,841 | | | $ | 47,675 | |
Ophthalmology | | | 52,102 | | | | 10,252 | | | | 2,453 | | | | 7,617 | | | | 52,102 | | | | 10,252 | |
Other Markets | | | 13,114 | | | | 17,875 | | | | 4,041 | | | | 10,932 | | | | 13,114 | | | | 17,875 | |
| | | | | | | | | | | | | | |
Total Therapeutic | | | 105,057 | | | | 75,802 | | | | 52,981 | | | | 58,704 | | | | 105,057 | | | | 75,802 | |
Diagnostic | | | 16,477 | | | | 21,249 | | | | 20,183 | | | | 11,194 | | | | 16,477 | | | | 21,249 | |
| | | | | | | | | | | | | | |
Total revenue | | $ | 121,534 | | | $ | 97,051 | | | $ | 73,164 | | | $ | 69,898 | | | $ | 121,534 | | | $ | 97,051 | |
| | | | | | | | | | | | | | |
Major Customers
Revenue from customers that equaled or exceeded 10% of total revenue was as follows for the years ended September 30:
| | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | | 2010 | | 2009 | | 2008 | |
|
Johnson & Johnson | | | | 17 | % | | | 11 | % | | | 20 | % |
Medtronic, Inc. | | | | 14 | % | | | ** | | | | ** | |
Merck & Company | | | 37 | % | | | <10 | % | | | ** | | | | ** | | | | 37 | % | | | ** | |
Johnson & Johnson | | | 11 | % | | | 20 | % | | | 33 | % | |
Abbott Laboratories | | | <10 | % | | | 10 | % | | | 16 | % | | | ** | | | | ** | | | | 10 | % |
| | |
** | | - less than oneten percent |
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SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The revenue from the customers listed is derived from all three primary sources: royalties and license fees,licensing, product sales, and research and development fees.development.
Geographic Revenue
Geographic revenue was as follows for the years ended September 30:
| | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | | 2010 | | 2009 | | 2008 |
|
Domestic | | | 84 | % | | | 79 | % | | | 81 | % | | | 78 | % | | | 84 | % | | | 79 | % |
Foreign | | | 16 | % | | | 21 | % | | | 19 | % | | | 22 | % | | | 16 | % | | | 21 | % |
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SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| |
12. | Quarterly Financial Data (Unaudited) |
The following is a summary of the unaudited quarterly results for the years ended September 30, 2010, 2009, 2008 and 20072008(in thousands, except per share data).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | First
| | Second
| | Third
| | Fourth
| | | First
| | Second
| | Third
| | Fourth
| |
| | Quarter | | Quarter | | Quarter | | Quarter | | | Quarter | | Quarter | | Quarter | | Quarter | |
|
Fiscal 2010 | | | | | | | | | | | | | | | | | |
Revenue | | | $ | 17,381 | | | $ | 18,360 | | | $ | 18,608 | | | $ | 15,549 | |
Income (loss) from operations | | | | 2,768 | | | | (952 | ) | | | 2,220 | | | | (18,089 | ) |
Net income (loss) | | | | 1,917 | | | | (427 | ) | | | (916 | ) | | | (21,663 | ) |
Net income (loss) per share(1): | | | | | | | | | | | | | | | | | |
Basic | | | | 0.11 | | | | (0.02 | ) | | | (0.05 | ) | | | (1.25 | ) |
Diluted | | | | 0.11 | | | | (0.02 | ) | | | (0.05 | ) | | | (1.25 | ) |
Fiscal 2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 63,216 | | | $ | 20,925 | | | $ | 18,186 | | | $ | 19,207 | | | $ | 63,216 | | | $ | 20,925 | | | $ | 18,186 | | | $ | 19,207 | |
Income from operations | | | 42,667 | | | | 6,200 | | | | 4,661 | | | | 3,973 | | | | 42,667 | | | | 6,200 | | | | 4,661 | | | | 3,973 | |
Net income | | | 27,085 | | | | 4,216 | | | | 3,539 | | | | 2,710 | | | | 27,085 | | | | 4,216 | | | | 3,539 | | | | 2,710 | |
Net income per share(1): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 1.53 | | | | 0.24 | | | | 0.20 | | | | 0.16 | | | | 1.53 | | | | 0.24 | | | | 0.20 | | | | 0.16 | |
Diluted | | | 1.53 | | | | 0.24 | | | | 0.20 | | | | 0.16 | | | | 1.53 | | | | 0.24 | | | | 0.20 | | | | 0.16 | |
Fiscal 2008 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 23,829 | | | $ | 25,707 | | | $ | 24,276 | | | $ | 23,239 | | | $ | 23,829 | | | $ | 25,707 | | | $ | 24,276 | | | $ | 23,239 | |
Income from operations | | | 7,571 | | | | 7,181 | | | | 7,184 | | | | 5,325 | | | | 7,571 | | | | 7,181 | | | | 7,184 | | | | 5,325 | |
Net income (loss) | | | 5,646 | | | | 5,107 | | | | 4,800 | | | | (814 | ) | | | 5,646 | | | | 5,107 | | | | 4,800 | | | | (814 | ) |
Net income (loss) per share(1): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 0.31 | | | | 0.28 | | | | 0.27 | | | | (0.05 | ) | | | 0.31 | | | | 0.28 | | | | 0.27 | | | | (0.05 | ) |
Diluted | | | 0.31 | | | | 0.28 | | | | 0.26 | | | | (0.05 | ) | | | 0.31 | | | | 0.28 | | | | 0.26 | | | | (0.05 | ) |
Fiscal 2007 | | | | | | | | | | | | | | | | | |
Revenue | | $ | 16,740 | | | $ | 17,362 | | | $ | 17,762 | | | $ | 21,300 | | |
Income (loss) from operations | | | 8,109 | | | | 8,085 | | | | 7,518 | | | | (13,813 | ) | |
Net income (loss) | | | 5,992 | | | | 5,675 | | | | 5,587 | | | | (13,907 | ) | |
Net income (loss) per share(1): | | | | | | | | | | | | | | | | | |
Basic | | | 0.32 | | | | 0.31 | | | | 0.31 | | | | (0.78 | ) | |
Diluted | | | 0.32 | | | | 0.31 | | | | 0.31 | | | | (0.78 | ) | |
| | |
(1) | | The sum of the quarterly earnings per share may not equal the annual earnings per share because of changes in the average shares outstanding. |
In the second quarter of fiscal 2010, the Company recorded a restructuring charge of $1.3 million, associated with a functional reorganization and an asset impairment charge of $2.1 million, associated with consolidation of the Company’s multiple facilities in Birmingham, Alabama.
In the third quarter of fiscal 2010, the Company recorded a $2.6 million non-cash impairment loss on its investment in two private medical technology companies and adjusted the asset impairment charge associated with the Birmingham, Alabama facilities by $0.2 million
In the fourth quarter of fiscal 2010, the Company recorded a $0.4 million non-cash inventory impairment charge, a $1.3 million in non-cash asset impairment charge associated with long-lived assets, a $1.3 million non-cash asset impairment loss associated with certain fixed assets costs in Minnesota, a $13.8 million non-cash goodwill impairment charge associated with the Company’s SurModics Pharmaceuticals reporting unit, and a $5.3 million non-cash impairment loss on its investment in Nexeon MedSystems.
F-26F-31
SurModics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
In the first quarter of fiscal 2009, the Company recorded income that had previously been deferred of $34.8 million associated with the Merck contract termination, a $9 million milestone payment from Merck associated with the termination of the triamcinolone acetonide development program, a $3.2 million charge for in-process research and development acquired in connection with the purchase of certain contracts and assets of PR Pharma, as well as a $1.8 million restructuring charge associated with a functional reorganization.
In the fourth quarter of fiscal 2009, the Company recorded $1.3 million in royalty income in connection with the settlement of previously disclosed litigation involving Abbott Laboratories and Church & Dwight Co, Inc.
In the fourth quarter of fiscal 2008, the Company recorded a $4.3 million non-cash impairment loss on its investment in OctoPlus.
In the fourth quarter of fiscal 2007, the Company recorded a $15.6 million charge for in-process research and development acquired in connection with the purchase of SurModics Pharmaceuticals, Inc.
F-27F-32