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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-23837
SURMODICS, INC.
(Exact name of registrant as specified in its Charter)
MINNESOTA 41-1356149
(State of incorporation) (I.R.S. Employer Identification No.)
9924 West 74th Street
Eden Prairie, Minnesota 55344
(Address of principal executive offices)
Registrant's telephone number, including area code: (952) 829-2700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares of the registrant's Common Stock, $.05 par value per share,
outstanding as of January 31, 2001 was 16,684,686.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SURMODICS, INC.
Condensed Balance Sheets
(In thousands, except share data)
December 31, September 30,
2000 2000
------------ --------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash & cash equivalents $ 1,461 $ 1,510
Short-term investments 16,531 15,847
Accounts receivable, net 1,735 1,406
Inventories 573 500
Deferred tax asset 232 912
Prepaids and other 1,015 911
-------- --------
Total current assets 21,547 21,086
-------- --------
PROPERTY AND EQUIPMENT, net 7,280 7,166
LONG-TERM INVESTMENTS 22,999 22,293
OTHER ASSETS, net 222 204
-------- --------
$ 52,048 $ 50,749
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 224 $ 379
Accrued liabilities 1,243 1,584
Deferred revenues 456 433
-------- --------
Total current liabilities 1,923 2,396
DEFERRED REVENUES, less current portion -- 50
-------- --------
Total liabilities 1,923 2,446
-------- --------
COMMITMENTS AND CONTINGENCIES
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;
16,620,986 and 16,556,002 shares issued and outstanding 831 828
Additional paid-in capital 45,942 45,740
Unearned compensation (262) (289)
Stock purchase notes receivable (7) (7)
Accumulated other comprehensive income (loss) 179 (46)
Retained earnings 3,442 2,077
-------- --------
Total stockholders' equity 50,125 48,303
-------- --------
$ 52,048 $ 50,749
======== ========
The accompanying notes are an integral part of these condensed balance sheets.
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SURMODICS, INC.
Condensed Statements of Income
(In thousands, except per share data)
(Unaudited)
Three Months Ended
December 31,
---------------------------
2000 1999
-------- --------
REVENUES:
Royalties $ 2,058 $ 2,350
License fees 435 100
Product sales 1,557 1,234
Research and development 782 465
-------- --------
Total revenues 4,832 4,149
-------- --------
OPERATING COSTS AND EXPENSES:
Product 608 396
Research and development 1,775 1,608
Sales and marketing 414 377
General and administrative 713 562
-------- --------
Total operating costs and expenses 3,510 2,943
-------- --------
INCOME FROM OPERATIONS 1,322 1,206
-------- --------
OTHER INCOME:
Investment income, net 631 293
Gain on sale of investments 150 1
-------- --------
Other income, net 781 294
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,103 1,500
INCOME TAX PROVISION (737) (556)
-------- --------
NET INCOME $ 1,366 $ 944
======== ========
NET INCOME PER SHARE:
Basic $ 0.08 $ 0.06
Diluted $ 0.08 $ 0.06
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic weighted average common shares outstanding 16,590 15,436
Dilutive effect of outstanding stock options 1,106 1,046
-------- --------
Diluted weighted average common shares outstanding 17,696 16,482
The accompanying notes are an integral part of these condensed financial
statements.
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SURMODICS, INC.
Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
December 31,
-----------------------------
2000 1999
-------- --------
OPERATING ACTIVITIES:
Net income $ 1,366 $ 944
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 361 210
Amortization of unearned compensation, net 27 22
Change in deferred tax 680 555
Change in assets and liabilities:
Accounts receivable (329) 222
Inventories (73) (14)
Prepaids and other (128) (150)
Accounts payable and accrued liabilities (496) (765)
Deferred revenues (27) (13)
-------- --------
Net cash provided by operating activities 1,381 1,011
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (470) (1,313)
Purchases of available-for-sale investments (14,046) (3,943)
Sales/maturities available-for-sale investments 12,881 3,843
Repayment of stock purchase notes receivable -- 20
-------- --------
Net cash used in investing activities (1,635) (1,393)
-------- --------
FINANCING ACTIVITIES:
Issuance of common stock 205 184
-------- --------
Net decrease in cash and cash equivalents (49) (198)
CASH AND CASH EQUIVALENTS:
Beginning of period 1,510 1,975
-------- --------
End of period $ 1,461 $ 1,777
======== ========
The accompanying notes are an integral part of these condensed financial
statements.
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SURMODICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited condensed
financial statements have been prepared in accordance with generally accepted
accounting principles and reflect all adjustments, consisting solely of normal
recurring adjustments, needed to fairly present the financial results for these
interim periods. These financial statements include some amounts that are based
on management's best estimates and judgments. These estimates may be adjusted as
more information becomes available, and any adjustment could be significant. The
results of operations for the three months ended December 31, 2000 are not
necessarily indicative of the results that may be expected for the entire fiscal
year.
According to the rules and regulations of the Securities and Exchange
Commission, the Company has omitted footnote disclosures that would
substantially duplicate the disclosures contained in the audited financial
statements of the Company. Read together with the disclosures below, management
believes the interim financial statements are presented fairly. However, these
unaudited condensed financial statements should be read together with the
financial statements for the year ended September 30, 2000 and footnotes thereto
included in the Company's form 10-K as filed with the Securities and Exchange
Commission.
(2) NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 requires that license and other up-front fees be recognized
over the term of the agreement unless the fee is in exchange for products
delivered or services performed that represent the culmination of a separate
earnings process. The Company will adopt SAB 101 when required, which is
currently expected to be in the fourth quarter of fiscal 2001. The Company is
currently evaluating SAB 101 to determine whether its implementation will have
any material impact on the Company's financial position or results of operations
with respect to the license fees earned by SurModics. Any adjustment would
result in a charge to earnings for the cumulative effect of the change. This
amount would then be deferred and be recognized as revenue in future periods.
(3) COMPREHENSIVE INCOME
The components of comprehensive income for the three-month periods are
as follows:
Three months ended December 31,
2000 1999
-------------- -------------
(dollars in thousands)
Net income $ 1,366 $ 944
Other comprehensive income:
Change in unrealized gain (loss)
on available-for-sale securities 225 (96)
-------- --------
Total comprehensive income $ 1,591 $ 848
======== ========
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(4) OPERATING SEGMENTS
(dollars in thousands)
Research &
Licensing Manufacturing Development Corporate Consolidated
----------- ---------------- ------------- ----------- --------------
Three Months Ended December 31, 2000
Revenues:
PhotoLink $ 1,861 $ 723 $ 709 $ -- $ 3,293
Diagnostic 632 -- -- -- 632
Stabilization & other -- 834 -- -- 834
Government -- -- 73 -- 73
------- ------- ------- ------- -------
Total Revenues 2,493 1,557 782 -- 4,832
Expenses -- 608 1,775 1,127 3,510
------- ------- ------- ------- -------
Operating income (loss) 2,493 949 (993) (1,127) 1,322
Other income
781 781
Income tax provision
(737) (737)
-------
Net income $ 1,366
=======
Three Months Ended December 31, 1999
Revenues:
PhotoLink $ 1,744 $ 605 $ 272 $ -- $ 2,621
Diagnostic 705 -- -- -- 705
Stabilization & other -- 630 -- -- 630
Government -- -- 193 -- 193
------- ------- ------- ------- -------
Total Revenues 2,449 1,235 465 -- 4,149
Expenses -- 396 1,608 939 2,943
------- ------- ------- ------- -------
Operating income (loss) 2,449 839 (1,143) (939) 1,206
Other income 294 294
Income tax provision (556) (556)
-------
Net income $ 944
=======
(5) 2-FOR-1 STOCK SPLIT
On November 13, 2000, the Board of Directors declared a 2-for-1 stock
split of the Company's Common Stock, payable on December 6, 2000, to
shareholders of record on November 27, 2000. All share, per share and weighted
average share information has been restated to reflect the split.
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(6) STOCKHOLDERS' EQUITY
On November 13, 2000, the Board of Directors adopted a resolution that
designated an additional 300,000 of the then 4,850,000 undesignated shares as
Series A Preferred Stock. The total number of authorized shares of the Company
are now 50,000,000 consisting of 45,000,000 shares of Common Stock, $0.05 par
value per share, 450,000 of Series A Preferred Stock, $.05 par value per share,
and 4,550,000 undesignated shares.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
SurModics is a leading provider of surface modification solutions to
medical device manufacturers. The Company's revenues are derived from four
primary sources: fees from licensing its patented technology to customers;
royalties received from licensees; the sale of photoreactive chemical compounds
to licensees, stabilization products to the diagnostics industry, and coated
slides to the genomics market; and research and development fees generated on
projects for commercial customers and pursuant to government grants.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999
Revenues. The Company's revenues were $4.8 million for the first
quarter of fiscal 2001, an increase of $683,000, or 16%, over the same period of
fiscal 2000. The revenue components were as follows (in thousands):
$ Increase % Increase
2000 1999 (Decrease) (Decrease)
---- ---- ----------- -----------
PhotoLink(R)revenue:
Royalties $1,426 $1,644 $ (218) (13%)
License fees 435 100 335 335%
Reagent chemical sales 723 605 118 20%
Commercial development 709 272 437 161%
------ ------ ------
Total PhotoLink revenue 3,293 2,621 672 26%
Other revenue:
Diagnostic royalties 632 705 (73) (10%)
Stabilization & other products 834 630 204 32%
Government research 73 193 (120) (62%)
------ ------ ------
Total revenues $4,832 $4,149 $ 683 16%
====== ====== ======
First quarter revenue growth of 16% was primarily due to a 26% increase
in PhotoLink-related revenue. Commercial development revenue increased 161% to
$709,000. Much of this increase was due to a high level of effort on two
projects: genomics work with Motorola and the continued development of a drug
delivery stent with Johnson & Johnson's Cordis division. PhotoLink royalties
fell $218,000 to $1.4 million. The bulk of the difference was due to a one-time
royalty payment of $225,000 recorded in last year's first quarter. Excluding
this one-time payment, PhotoLink royalty growth was essentially flat with last
year.
Reagent chemical sales (those chemicals used by licensees in the
PhotoLink coating process) increased 20% to $723,000. A single client purchased
a little more than half of the reagents sold during the quarter. Reagent sales
to all other clients more than doubled between years.
SurModics signed two new PhotoLink license agreements during the first
quarter. Fees from the two new licenses and milestone payments on several
previously executed licenses combined for total license revenue of $435,000, a
significant increase over last year. The Company now has license agreements with
49 companies covering over 100 different product applications. A 32% increase in
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stabilization and other product (DNA slides) sales contributed to the bulk of
revenue growth outside of PhotoLink.
Product costs. The Company's product costs were $608,000 for the first
quarter of fiscal 2001, an increase of $212,000, or 54%, over the same period of
fiscal 2000. Overall product margins decreased to 61% in the first quarter of
fiscal 2001 from 68% in the same period of fiscal 2000. While the margin is down
from last year, margins have been consistently running at 61% for the last four
quarters.
Research and development expenses. Research and development expenses
were $1.8 million for the first quarter of fiscal 2001, an increase of $167,000,
or 10%, over the same period of fiscal 2000. The change was primarily due to
compensation and benefits associated with technical personnel added by the
Company over the last year, foreign patent filing fees and increased
depreciation and facilities costs due to last year's construction of additional
laboratory facilities.
Sales and marketing expenses. Sales and marketing expenses were
$414,000 for the first quarter of fiscal 2001, a $37,000 or 10% increase from
the same period of fiscal 2000. Increased compensation and benefits costs and
additional business travel offset a decrease in promotional expenses.
General and administrative expenses. General and administrative
expenses were $713,000 for the first quarter of fiscal 2001, an increase of
$151,000, or 27%, over the same period of fiscal 2000. The increase was the
result of additional facilities costs related to building additions added in the
previous year, and rising compensation and benefit costs.
Income from operations. The Company's income from operations was $1.3
million for the first quarter of fiscal 2001, an increase of $116,000, or 10%,
over the same period of fiscal 2000.
Other income, net. The Company's other income was $781,000 for the
first quarter of fiscal 2001, an increase of $487,000, or 166%, over the same
period of fiscal 2000. The increase in investment income was a direct result of
the 90% increase in investment balances from last year's first quarter. In
addition, the Company sold a portion of its bond portfolio to take advantage of
a tax capital loss carryforward, generating a realized gain of $150,000.
Income tax expense. The Company's income tax provision was $737,000 for
the first quarter of fiscal 2001 versus a $556,000 in the same period of fiscal
2000.
Other comprehensive income. The Company had $225,000 of other
comprehensive income for the first quarter of fiscal 2001. This income was
generated by an increase in the fair value of the Company's long-term
available-for-sale investments. As of December 31, 2000, the Company had a net
$179,000 unrealized gain related to those investments.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, the Company had working capital of $19.6
million and cash, cash equivalents and investments totaling approximately $41.0
million. The Company's investments principally consist of U.S. government agency
obligations and investment grade, interest-bearing corporate debt securities
with varying maturity dates, the majority of which are five years or less. The
Company generated positive cash flows from operating activities of $1.4 million
in the first quarter, which was an increase of 37% for the same period of last
year, primarily due to the increase in net income and the change in the deferred
tax asset.
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As of December 31, 2000, the Company had no debt, nor did it have any
credit agreements. The Company believes that its existing capital resources will
be adequate to fund the Company's operations into the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains an investment portfolio in accordance with its
investment policy. The primary objectives of the Company's investment policy are
to preserve principal, maintain proper liquidity to meet operating needs and
maximize yields. The Company's investment policy requires investments with
high-credit-quality issuers and limits the amount of credit exposure to any one
issuer.
The Company's investments principally consist of U.S. government and
government agency obligations and investment grade, interest-bearing corporate
debt securities with varying maturity dates, the majority of which are five
years or less. All of the Company's cash equivalents and marketable securities
are classified as available-for-sale securities.
The securities held in the Company's investment portfolio are subject to
interest rate risk. Changes in interest rates affect the fair value of the
available-for-sale securities. The Company has determined that a hypothetical
ten percent increase in interest rates would result in an approximate $400,000
decrease in the fair value of the Company's available-for-sale securities as of
December 31, 2000, but no material impact on the results of operations or cash
flows.
FORWARD LOOKING STATEMENTS
The statements contained in this quarterly report relating to future
revenue growth and expense levels are based on current expectations and involve
a number of risks and uncertainties. These statements are forward looking and
are made pursuant to the safe harbor provisions of the Private Securities Reform
Act of 1995. The following factors could cause royalty revenue to materially and
adversely differ from that anticipated: the ability of the Company's licensees
to successfully gain regulatory approval for, market and sell products
incorporating the Company's technology; the amount and timing of resources
devoted by the Company's licensees to market and sell products incorporating the
Company's technology; the Company's ability to attract new licensees and to
enter into agreements for additional applications with existing licensees; the
Company's ability to maintain a competitive position in the development of
technologies and products in its areas of focus; and business and general
economic conditions. Investors should consider these risks and other risks
identified in the Company's filings with the SEC when making investment
decisions. Shareholders and other readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date on
which they are made. SurModics undertakes no obligation to update publicly or
revise any forward-looking statements.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Use of Proceeds through the period ending December 31, 2000.
(1) Effective Date: March 3, 1998
SEC File Number: 333-43217
(2) Offering Date: March 3, 1998
(4)(i) The offering has terminated; all securities registered were sold.
(4)(ii) Managing Underwriter: John G. Kinnard and Company,
Incorporated
(4)(iii) Title of Securities: Common Stock
(4)(iv) Amount Registered: 2,300,000
Aggregate Offering Price: $17,250,000
Amount Sold: 2,300,000
Aggregate Offering Price Sold: $17,250,000
(4)(v) Underwriting Discount and Commissions $ 1,293,750
Other Expenses $ 435,148
Total Expenses $ 1,728,898
All the above items represented direct or indirect payments to others.
(4)(vi) Net Offering Proceeds $15,521,102
(4)(vii) Use of Net Offering Proceeds:
Research and development $ 3,110,000
Sales and marketing $ 1,728,000
Property and equipment upgrades $ 8,565,000
Patent protection $ 334,000
Working capital and general corporate purposes $ 1,150,000
Administration $ 240,000
Money market funds $ 394,102
All the above items represented direct or indirect payments to others.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held its Annual Meeting of shareholders on January 22,
2001.
(b) Proxies were solicited pursuant to Regulation 14A under the
Securities Act of 1934. The shareholders voted on two matters: (i)
to set the number of directors at eight (8) and (ii) to elect Class
II directors. The shareholders approved both matters by the
following votes:
Votes Votes Broker
Votes For Against Abstained Non-Votes
------------- ------------ ------------ ------------
(i) Set the number of directors at eight (8) 13,512,880 5,780 22,210 0
Votes Broker
Votes For Withheld Non-Votes
------------- ------------ -----------
(ii) Elect Class II directors
James J. Grierson 13,469,070 71,800 0
Kendrick B. Melrose 13,471,270 69,600 0
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits - 3.1 Articles of Incorporation, as amended to date
(b) Reports on Form 8-K - None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SURMODICS, INC.
February 12, 2001
By: /s/ Stephen C. Hathaway
--------------------------------
Stephen C. Hathaway
Vice President & CFO
(Principal Financial Officer)
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EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
3.1 Articles of Incorporation, as
amended to date
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