SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended March 31, 1998
OR
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
Commission file number 0-23837
SurModics, Inc.
(Exact Name of Small Business Issuer as Specified in Its Charter)
MINNESOTA 41-1356149
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
9924 West 74th Street
Eden Prairie, Minnesota 55344
(Address of Principal Executive Offices)
(612) 829-2700
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 No X
As of April 30, 1998, there were 7,216,420 shares of Common Stock
outstanding.
Traditional Small Business Disclosure Format (check one): Yes No X
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SURMODICS, INC.
Condensed Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
-------- ---------
ASSETS (Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash & cash equivalents $ 17,052 $ 492
Short-term investments 1,567 1,456
Accounts receivable, net 910 922
Inventories 307 264
Prepaids and other 259 74
-------- --------
Total current assets 20,095 3,208
-------- --------
PROPERTY AND EQUIPMENT, net 1,271 1,065
LONG-TERM INVESTMENTS 948 1,874
OTHER ASSETS, net 188 303
-------- --------
$ 22,502 $ 6,450
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 106 $ 280
Accrued liabilities 755 493
Deferred revenues 242 308
-------- --------
Total current liabilities 1,103 1,081
DEFERRED REVENUES AND OTHER, less current portion 197 267
-------- --------
Total liabilities 1,300 1,348
-------- --------
COMMITMENT AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock-
$.05 par value, 450,000 shares authorized;
none and 376,828 shares issued and outstanding -- 19
Voting common stock-
$.05 par value, 15,000,000 shares authorized;
7,216,420 and 3,400,868 shares issued and outstanding 361 170
Additional paid-in capital 28,901 13,492
Unearned compensation (241) (259)
Stock purchase notes receivable (186) (160)
Accumulated deficit (7,633) (8,160)
-------- --------
Total stockholders' equity 21,202 5,102
-------- --------
$ 22,502 $ 6,450
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed balance sheets.
2
<PAGE>
SURMODICS, INC.
Condensed Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------ -------------------
1998 1997 1998 1997
------ ------ ------- ------
REVENUES:
<S> <C> <C> <C> <C>
Royalties $1,265 $ 807 $2,207 $1,410
License fees 60 25 60 257
Product sales 735 437 1,232 926
Research and development 519 597 989 928
------ ------ ------ ------
Total revenues 2,579 1,866 4,488 3,521
------ ------ ------ ------
OPERATING COSTS AND EXPENSES:
Product 318 257 568 586
Research and development 1,102 1,010 2,060 1,822
Sales and marketing 441 266 744 488
General and administrative 430 316 727 621
------ ------ ------ ------
Total operating costs and expenses 2,291 1,849 4,099 3,517
------ ------ ------ ------
INCOME FROM OPERATIONS 288 17 389 4
OTHER INCOME, net 98 51 151 92
------ ------ ------ ------
INCOME BEFORE PROVISION FOR INCOME TAXES 386 68 540 96
PROVISION FOR INCOME TAXES 10 -- 13 2
------ ------ ------ ------
NET INCOME $ 376 $ 68 $ 527 $ 94
====== ====== ====== ======
NET INCOME PER SHARE:
Basic $ 0.07 $ 0.01 $ 0.10 $ 0.02
Diluted $ 0.06 $ 0.01 $ 0.09 $ 0.02
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic weighted average common shares outstanding 5,573 4,863 5,236 4,841
Dilutive effect of outstanding stock options 495 511 475 482
------ ------ ------ ------
Diluted weighted average common shares outstanding 6,068 5,374 5,711 5,323
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
3
<PAGE>
SURMODICS, INC.
Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 527 $ 94
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 283 231
Amortization of unearned compensation, net 37 46
Change in deferred rent (8) (1)
Change in assets and liabilities:
Accounts receivable 12 (74)
Inventories (43) (26)
Accounts payable and accrued liabilities 88 (4)
Deferred revenues (129) (174)
Prepaids and other (184) 28
-------- --------
Net cash provided by operating activities 583 120
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (481) (83)
Purchases of short-term investments (911) (1,482)
Sales of short-term investments 800 725
Purchases of long-term investments -- (905)
Sales of long-term investments 926 --
Other 107 (100)
-------- --------
Net cash provided by (used in) investing activities 441 (1,845)
-------- --------
FINANCING ACTIVITIES:
Issuance of common stock, net of offering costs 15,536 --
-------- --------
Net increase (decrease) in cash and cash equivalents 16,560 (1,725)
CASH AND CASH EQUIVALENTS:
Beginning of period 492 2,013
-------- --------
End of period $ 17,052 $ 288
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
4
<PAGE>
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 and six months ended March 31, 1998
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, 1997 and footnotes thereto
included in the Company's Registration Statement on Form SB-2 as filed with the
Securities and Exchange Commission on March 4, 1998.
(2) New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income
and its components in financial statements. The Company will adopt the
provisions of SFAS No. 130 in fiscal 1999 and is currently assessing its impact.
The FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes a new model for segment
reporting, called the "management approach" and requires certain disclosures for
each segment. The management approach is based on the way the chief operating
decision maker organizes segments within a company for making operating
decisions and assessing performance. The Company will adopt the provisions of
SFAS No. 131 in fiscal 1999 and is currently assessing its impact.
(3) Initial Public Offering
On March 9, 1998, the Company completed an initial public offering of
2.0 million shares of Common Stock. Subsequently, on March 25, 1998, the
underwriters purchased an additional 300,000 shares of Common Stock pursuant to
the exercise of an overallotment option. In total, the offering generated net
proceeds to the Company of approximately $15.5 million after deducting all
offering expenses.
(4) Preferred Stock Conversion
Each share of the Series A Convertible Preferred Stock was
automatically converted into four shares of voting Common Stock upon the closing
of the initial public offering. The authorized shares of Series A Convertible
Preferred Stock were eliminated and this class of stock was canceled.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
General
The Company is a leading provider of surface modification solutions to
medical device manufacturers. The Company's revenues have come from four primary
sources: licensing of its patented technology to customers; royalties received
from licensees based on their sales of products incorporating SurModics'
technology; the sale of photo-reactive chemical compounds to licensees and
stabilization products to the diagnostics industry; and research and development
fees generated on projects for commercial customers and pursuant to government
grants. In March 1998, the Company completed an initial public offering of 2.3
million shares of Common Stock with proceeds of approximately $15.5 million, net
of related offering costs.
Results of Operations
Three Months Ended March 31, 1998 and 1997
Revenues. The Company's revenues were $2.6 million for the second
quarter of fiscal 1998, an increase of $713,000, or 38.2%, over the same period
of fiscal 1997. The revenue increase was primarily due to an increase in royalty
revenue received from licensed customers of $458,000 or 56.8%. Within this
total, royalties generated from PhotoLink(R) licenses increased 47.3% and
royalties from diagnostic licensing increased 65.1%. Management expects to
report a similar rate of overall, year-to-year royalty growth for the remainder
of the fiscal year. However, the total royalty dollars generated in the next two
quarters is not expected to increase over that generated in the second quarter
due to seasonal fluctuations effecting the sales of certain of our licensees'
products and the timing of the minimum royalty increases. In addition, sales of
the Company's stabilization products increased $241,000 or 83.3% between
periods. Much of this increase was attributable to additional shipments to an
existing customer.
Product costs. The Company's product costs were $318,000 for the second
quarter of fiscal 1998, an increase of $61,000, or 23.5%, over the same period
of fiscal 1997. Overall product margins increased to 56.7% in the second quarter
of fiscal 1998 from 41.0% in the same period of fiscal 1997. These improvements
were primarily due to the continued impact of a formulation change in certain of
the stabilization products, offset by an increase in the cost of manufacturing
reagent chemicals.
Research and development expenses. Research and development expenses
were $1,102,000 for the second quarter of fiscal 1998, an increase of $92,000,
or 9.1%, over the same period of fiscal 1997. The change was primarily due to
the added compensation and benefit costs associated with additional technical
personnel added by the Company over the last year; increased depreciation
expense associated with the build-out of some additional laboratory space; and
offset by lower costs incurred on research studies performed by external
laboratories.
Sales and marketing expenses. Sales and marketing expenses were
$441,000 for the second quarter of fiscal 1998, an increase of $175,000, or
66.0%, over the same period of fiscal 1997. This increase was primarily due to
the expense of additional marketing personnel, a related increase in recruitment
costs, and the costs associated with a market research study recently completed
by an external consulting firm.
General and administrative expenses. General and administrative
expenses were $430,000 for the second quarter of fiscal 1998, an increase of
$114,000, or 36.2%, over the same period of fiscal 1997. The increase was due to
higher compensation costs, legal fees and other general business expenses
incurred as a result of the Company's overall business growth.
<PAGE>
Other income, net. The Company's net other income was $98,000 for the
second quarter of fiscal 1998, an increase of $47,000, or 92.2%, over the same
period of fiscal 1997 due primarily to increased interest income from the
additional cash available for investment due to the proceeds received from the
recent public stock offering.
Six Months Ended March 31, 1998 and 1997
Revenues. The Company's revenues were $4.5 million for the first six
months of fiscal 1998, an increase of $967,000, or 27.5%, over the same period
of fiscal 1997. The revenue increases were primarily due to an increase in
royalty revenue of $797,000 or 56.5%; an increase in sales of the Company's
stabilization products of $252,000 or 37.7%; and an increase in customer-funded
research and development revenue of $174,000 or 56.0% between periods. Royalties
generated from PhotoLink licenses increased 40.2% and royalties from diagnostic
licensing increased 72.4%. Much of the increase in sales of stabilization
products was due to additional shipments to an existing customer. The increase
in customer-funded research and development was due to greater customer
development activity, especially related to work on drug delivery from coatings.
Offsetting these revenue increases was a reduction in license fees from $257,000
in the first six months of fiscal 1997 to $60,000 in the same period of fiscal
1998. The fiscal 1997 results included the receipt of one large license fee with
no similar transaction in fiscal 1998.
Product costs. The Company's product costs were $568,000 for the first
six months of fiscal 1998, a decrease of $18,000, or 3.2%, over the same period
of fiscal 1997. Product margins increased to 53.9% in 1998 from 36.7% in 1997.
These improvements were primarily due to the continued impact of a formulation
change in certain of the stabilization products combined with increases in the
efficiencies of manufacturing reagent chemicals.
Research and development expenses. Research and development expenses
were $2,060,000 for the first six months of fiscal 1998, an increase of
$238,000, or 13.1%, over the same period of fiscal 1997. The change was
primarily due to the added compensation and benefit costs associated with
additional technical personnel added by the Company over the last year;
increased depreciation expense associated with the build-out of some additional
laboratory space; and offset by lower costs incurred on research studies
performed by external laboratories.
Sales and marketing expenses. Sales and marketing expenses were
$744,000 for the first six months of fiscal 1998, an increase of $256,000, or
52.5%, over the same period of fiscal 1997. This increase was primarily due to
the expense of additional marketing personnel, a related increase in recruitment
costs, and the costs associated with a market research study recently completed
by an external consulting firm.
General and administrative expenses. General and administrative
expenses were $727,000 for the first six months of fiscal 1998, an increase of
$106,000, or 17.0%, over the same period of fiscal 1997. The increase was
primarily due to higher compensation and benefit costs.
Other income, net. The Company's net other income was $151,000 for the
first six months of fiscal 1998, an increase of $59,000, or 64.1%, over the same
period of fiscal 1997 due primarily to increased interest income from the
additional cash available for investment due to the proceeds received from the
recent public stock offering.
Year 2000 Compliance
The Company has evaluated its information technology infrastructure for
Year 2000 compliance and does not expect that the cost to modify its information
technology infrastructure to be Year 2000 compliant will be material to its
financial condition or results of operations. The Company does not anticipate
any material disruption in its operations as a result of any failure by the
Company, or its suppliers or customers to be in compliance.
<PAGE>
Liquidity and Capital Resources
On March 9, 1998, the Company completed an initial public offering of
2.0 million shares of Common Stock. Subsequently, on March 25, 1998, the
underwriters purchased an additional 300,000 shares of Common Stock pursuant to
the exercise of an overallotment option. In total, the offering generated net
proceeds to the Company of approximately $15.5 million after deducting all
offering expenses.
As of March 31, 1998, the Company had working capital of approximately
$19.0 million. For the last three fiscal years and for the first six months of
fiscal 1998, the Company has generated positive cash flow from operations.
As of March 31, 1998, the Company had cash, cash equivalents and
investments totaling approximately $19.6 million. The Company's funds are
currently invested in money market funds and investment grade, interest-bearing
securities with maturity dates of less than two years. As of March 31, 1998, the
Company had no debt, nor did it have any credit agreements.
Forward Looking Statements
The statements contained in this quarterly report relating to royalty
revenue growth 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
(a) On March 2, 1998, the Company issued 6,320 shares of common stock
to a former employee at a price of $5.00 per share pursuant to the exercise of
stock options. The Company relied on the exemption from registration available
under section 3(b) of the Securities Act of 1933, as amended, and Rule 701
thereunder.
(b) Use of Proceeds for the period ending March 31, 1998.
(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 $ 5,600
Sales and marketing $ 97,900
Equipment upgrades $ 22,802
Patent protection $ --
Working capital and general corporate
purposes $ 20,800
Money market funds $15,374,000
All the above items represented direct or indirect
payments to others.
<PAGE>
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 on January 26, 1998, prior
to the Company becoming a publicly held company.
(b) The following individuals were elected as directors at the
meeting: Dale R. Olseth, Donald S. Fredrickson, James J.
Grierson, Patrick E. Guire, Kenneth H. Keller, David A. Koch,
and Kendrick B. Melrose.
(c) The shareholders voted on four matters: (i) to set the number
of directors at seven, (ii) to elect the Board of Directors to
serve until the next annual meeting of shareholders, (iii) to
amend the Company's Restated Articles of Incorporation to
decrease the number of authorized shares of Series A
Convertible Preferred Stock, and (iv) to amend the Company's
Restated Articles of Incorporation to provide for the
cancellation of the Series A Convertible Preferred Stock upon
the completion of the Company's initial public offering. The
shareholders approved all four matters by the following votes:
<TABLE>
<CAPTION>
Votes For Votes Against Votes Abstained
<S> <C> <C> <C>
(i) Set number of directors at seven ............ 4,265,108 -- 559,072
(ii) Elect Directors
Dale R. Olseth............................ 4,265,108 -- 559,072
Donald S. Fredrickson..................... 4,265,108 -- 559,072
James J. Grierson......................... 4,265,108 -- 559,072
Patrick E. Guire.......................... 4,265,108 -- 559,072
Kenneth H. Keller......................... 4,265,108 -- 559,072
David A. Koch............................. 4,265,108 -- 559,072
Kendrick B. Melrose....................... 4,265,108 -- 559,072
(iii) Amend Articles to decrease
authorized Preferred Stock .................. 4,265,108 -- 559,072
(iv) Amend Articles to provide for the
cancellation of Preferred Stock
upon completion of IPO ...................... 4,265,108 -- 559,072
</TABLE>
<PAGE>
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - 3.1 Restated Articles of Incorporation of the Company,
as amended
27.1 Financial Data Schedule
(b) Reports on Form 8-K - None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SurModics, Inc.
May 14, 1998 By: /s/ Stephen C. Hathaway
Stephen C. Hathaway
Vice President & CFO
Principal Financial Officer
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX TO FORM 10-Q
SURMODICS, INC.
Commission File No.: 0-23837
For the quarter ended
March 31, 1998
- -------------------------------------------------------------------------------
Exhibit
Number Description
3.1 Restated Articles of Incorporation of the Company, as amended
27.1 Financial Data Schedule (filed with electronic version only)
STATEMENT OF CANCELLATION OF PREFERRED SHARES
OF
SURMODICS, INC. (f/k/a BSI CORPORATION)
SurModics, Inc. (f/k/a BSI Corporation) hereby cancels 376,828 shares
of its authorized Series A Convertible Preferred Stock, $0.05 par value. After
giving effect to the cancellation, the aggregate number of shares which the
corporation shall have the authority to issue shall be 20,000,000, 15.0 million
of which shall be designated Voting Common Stock, $.05 Par Value, and 5.0
million of which shall be undesignated.
This statement is pursuant to Section 302A.553 Subdivision 2. of the
Minnesota Business Corporation Act.
The undersigned swears that the foregoing is true and accurate and that
the undersigned has the authority to sign this document on behalf of the
corporation.
Dated: April 16, 1998
/s/ David R. Busch
David R. Busch, Its Corporate Secretary
<PAGE>
ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION
OF
BSI CORPORATION
Pursuant to the provisions of Minnesota Statutes, Section 302A.135, the
following amendment of Section 1.1 of Article 1 of the Articles of Incorporation
of BSI Corporation was adopted on June 4, 1997, by the shareholders of the
corporation:
Section 1.1 of Article 1 is amended in its entirety to read as follows:
"1.1 The name of the corporation shall be SurModics, Inc."
The undersigned swears that the foregoing is true and accurate and that
the undersigned has the authority to sign this document on behalf of the
corporation.
Dated: June 4, 1997.
/s/ David R. Busch
David R. Busch, Its Corporate Secretary
<PAGE>
ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION
OF
BSI CORPORATION (f/k/a BIO-METRIC SYSTEMS, INC.)
Pursuant to the provisions of Minnesota Statutes, Section 302A.135, the
following amendment of Section 3.1 of Article 3 of the Articles of Incorporation
of BSI Corporation (f/k/a Bio-Metric Systems, Inc.) was adopted on January 27,
1997, by the shareholders of the corporation:
Section 3.1 of Article 3 is amended in its entirety to read as follows:
"3.1 Authorized Shares. The aggregate number of
shares which the corporation shall have the authority to issue
shall be 20,450,000, 15.0 million of which shall be designated
Voting Common Stock, $.05 Par Value; 5.0 million of which
shall be undesignated shares and 450,000 of which shall be
designated Series A Convertible Preferred Stock, $.05 Par
Value (hereinafter referred to as the "Preferred Stock"). (The
Voting Common Stock, any shares issued from the undesignated
shares, and the Preferred Stock are hereinafter referred to
collectively as the "Capital Stock".) The Board of Directors
of the corporation is authorized to establish from the
undesignated shares, by resolution adopted and filed in the
manner provided by law, one or more classes or series of
shares, to designate each such class or series (which may
include but is not limited to designation as additional common
shares), and to fix the relative rights and preferences of
each such class or series."
The undersigned swears that the foregoing is true and accurate and that
the undersigned has the authority to sign this document on behalf of the
corporation.
Dated: January 29, 1997.
/s/ David R. Busch
David R. Busch, Its Corporate Secretary
<PAGE>
ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION
OF
BIO-METRIC SYSTEMS, INC.
Pursuant to the provisions of Minnesota Statutes, Section 302A.135, the
following amendments of Section 1.1 of Article 1 and Section 2.1 of Article 2 of
the Articles of Incorporation of Bio-Metric Systems, Inc. were adopted on
January 17, 1994, by the shareholders of the corporation:
"ARTICLE 1 - NAME
1.1) The name of the corporation shall be BSI Corporation.
ARTICLE 2 - REGISTERED OFFICE
2.1) The registered office of the corporation is located at
9924 West 74th Street, Eden Prairie, Minnesota 55344."
The undersigned swears that the foregoing is true and accurate and that
the undersigned has the authority to sign this document on behalf of the
corporation.
Dated: January 17, 1994.
/s/ David R. Busch
David R. Busch, Its Corporate Secretary
<PAGE>
RESTATED ARTICLES OF INCORPORATION
OF
BIO-METRIC SYSTEMS, INC.
We, the undersigned, DALE R. OLSETH and DAVID R. BUSCH, the
Chairman/President/Chief Executive officer and Secretary, respectively, of
Bio-Metric Systems, Inc., a Minnesota corporation, do hereby certify that at a
special meeting of the shareholders of Bio-Metric Systems, Inc. held on April
10, 1989, notice of such meeting having been mailed to each shareholder entitled
to vote thereon at least ten (10) days prior to such meeting, the shareholders,
by at least a majority of the voting power of the shares of Voting Common Stock,
present in person or by proxy, adopted resolutions to restate the Articles of
Incorporation of Bio-Metric Systems, Inc. as set forth below.
ARTICLE 1 - NAME
1.1) The name of the corporation shall be BIO-METRIC SYSTEMS, INC.
ARTICLE 2 - REGISTERED OFFICE
2.1) The registered office of the corporation is located at 9942 West
74th Street, Eden Prairie, Minnesota 55344.
ARTICLE 3 - CAPITAL STOCK
3.1) Authorized Shares; Establishment of Classes and Series. The
aggregate number of shares which the corporation shall have the authority to
issue shall be 5,500,000 shares, 5,000,000 of which shall be designated Voting
Common Stock, $.05 par value; 50,000 of which shall be designated Nonvoting
Common Stock, $.05 par value; and 450,000 of which shall be designated Series A
Convertible Preferred Stock, $.05 par value, (hereinafter referred to as the
"Preferred Stock"). The Common Stock and Preferred Stock are hereinafter
referred to collectively as the "Capital Stock".
3.2) Issuance of Shares. The Board of Directors of the corporation is
authorized from time to time to accept subscriptions for, issue, sell and
deliver shares of Capital Stock of the corporation to such persons, at such
times and upon such terms and conditions as the Board shall determine, valuing
all nonmonetary consideration and establishing a price in money or other
consideration, or a minimum price, or a general formula or method by which the
price will be determined.
3.3) Issuance of Rights to Purchase Shares. The Board of Directors is
further authorized from time to time to grant and issue rights to subscribe for,
purchase, exchange securities for, or convert securities into, shares of Capital
Stock, and to fix the terms, provisions and conditions of such rights, including
the exchange or conversion basis or the price at which such shares may be
purchased or subscribed for.
<PAGE>
3.4) Issuance of Shares to Holders of Another Class or Series. The
Board is further authorized to issue shares of one class or series of Capital
Stock to holders of that class or series of Capital Stock or to holders of
another class or series of Capital Stock to effect share dividends or splits.
ARTICLE 4 - RIGHTS AND PRIVILEGES OF
SHARES AND OF SHAREHOLDERS
The rights, preferences, privileges and restrictions granted to or
imposed upon the Capital Stock or the holders thereof are set forth below.
4.1) Voting Privileges. Each holder of Voting Common Stock shall have
one vote on all matters submitted to the shareholders for each share of Voting
Common Stock standing in the name of such holder on the books of the
corporation. Each holder of Preferred Stock shall have one vote on all matters
submitted to the shareholders for each share of Voting Common Stock which such
holder of Preferred Stock would be entitled to receive upon the conversion of
his Preferred Stock as provided in subsection 4.5(c). In addition, each holder
of Preferred Stock shall have the special voting rights which are described in
subsection 4.5(b). Except as may be required by the Minnesota Business
Corporation Act, the holders of Nonvoting Common Stock shall have no voting
rights with respect to any matter submitted to a vote of the shareholders of the
corporation.
4.2) Preemptive Rights. No holder of shares of any class or series of
Capital Stock shall be entitled as such, as a matter of right, to subscribe for
or purchase additional shares of that class or series or any other class or
series of Capital Stock of the corporation now or hereafter authorized or
issued.
4.3) No Cumulative Voting. There shall be no cumulative voting by the
shareholders of the corporation.
4.4) Distributions. Except as provided in subsection 4.5(a) on the
liquidation, dissolution or winding up of the corporation, shares of Capital
Stock shall share ratably in any dividends or distributions of the corporation,
whether paid in cash, property or stock.
4.5) Series A Convertible Preferred Stock.
(a) Liquidation Preference. In the event of the liquidation,
dissolution or winding up of the corporation, whether voluntary or
involuntary, the holders of the Preferred Stock shall be entitled to
receive out of assets of the corporation, an amount equal to $13.50
(hereinafter referred to as the "Liquidation Preference") for each
outstanding share of Preferred Stock before any payment shall be made
or any assets distributed to the holders of Voting Common Stock or
Nonvoting Common Stock or any other class of stock of this corporation
ranking junior to the Preferred Stock upon liquidation or dissolution
of the corporation. If, upon any liquidation, dissolution, or winding
up of the corporation, the assets of the corporation are insufficient
to pay the Liquidation Preference for each outstanding share of
Preferred Stock, the holders of Preferred Stock shall share pro rata in
any such distribution in proportion to the full amounts to which they
would otherwise be entitled. If, upon any liquidation, dissolution or
<PAGE>
winding up of the corporation, the holders of Preferred Stock would be
entitled to receive in excess of the Liquidation Preference for each
outstanding share of Preferred Stock in any such distribution if all
such shares of Preferred Stock had been converted to shares of Voting
Common Stock pursuant to subsection 4.5(c), instead of receiving the
Liquidation Preference, each holder of Preferred Stock shall receive an
amount equal to the distribution such holder would receive if all his
outstanding shares of Preferred Stock had been converted to shares of
Voting Common Stock pursuant to subsection 4.5(c) on the day preceding
the date of such liquidation, dissolution or winding up. The
Liquidation Preference shall be appropriately adjusted to reflect stock
splits and reverse stock splits of the Preferred Stock or dividends or
distributions payable in shares of Preferred Stock.
Nothing hereinabove set forth shall affect in any way the
right or obligation of each holder of shares of Preferred Stock to
convert such shares into shares of Voting Common Stock, at any time and
from time to time, in accordance with subsection 4.5(c) below.
(b) Special Voting Rights. Without the affirmative vote of the
holders (acting together as a class) of at least a majority of the
Preferred Stock at the time outstanding given in person or by proxy at
any annual meeting, or at such special meeting called for that purpose,
or, if permitted by law, in writing without a meeting, the corporation
shall not:
(1) authorize or issue any shares of stock having
priority over the Preferred Stock as to the payment of
dividends or the payment or distribution of assets upon the
liquidation or dissolution, voluntary or involuntary, of the
corporation; or
(2) amend the Articles of Incorporation of the
corporation so as to alter this Article 4 in any respect.
(c) Conversion Rights; Mandatory Conversion.
(1) At the option of the holder thereof, each share
of Preferred Stock shall be convertible, at the offices of the
corporation (or at such other office or offices, if any, as
the Board of Directors may designate), into one (1) share of
Voting Common Stock of the corporation, subject to adjustment
as provided in subsection 4.5(c)(2) below. In order to convert
shares of Preferred Stock into shares of Voting Common Stock,
the holder thereof, shall surrender at the principal executive
offices of the corporation the certificate or certificates
therefor, duly endorsed to the corporation or in blank, and
<PAGE>
give written notice to the corporation at such office that
such holder elects to convert a specified portion or all of
such shares of Preferred Stock into shares of Voting Common
Stock. Shares of Preferred Stock shall be deemed to have been
converted on the day of surrender of the certificate
representing such shares for conversion in accordance with the
foregoing provisions (the "Conversion Date"), and the person
entitled to receive the shares of Voting Common Stock of the
corporation issuable upon such conversion shall be treated for
all purposes as the record holder of such shares of Voting
Common Stock at that time. As promptly as practicable on or
after the Conversion Date, the corporation shall issue and
mail or deliver or cause to be issued and mailed or delivered
to such holder a certificate or certificates for the number of
shares of Voting Common Stock issuable upon conversion and a
certificate or certificates for the balance of the Preferred
Stock surrendered, if any, not so converted into shares of
Voting Common Stock.
(2) The number of shares of Voting Common Stock
issuable in exchange for shares of Preferred Stock upon the
exercise of these conversion rights (the "Conversion Ratio"),
which shall initially be one share of Voting Common Stock for
one share of Preferred Stock, shall be subject to adjustment
from time to time as hereinafter provided:
(i) In case the corporation shall at any
time subdivide or split its outstanding Common Stock
into a greater number of shares, the Conversion Ratio
in effect immediately prior to such subdivision or
split shall be proportionately increased; and,
conversely, in case the outstanding Common Stock of
the corporation shall be combined into a smaller
number of shares the Conversion Ratio in effect
immediately prior to such combination shall be
proportionately reduced.
(ii) If any capital reorganization or
reclassification of the Capital Stock of the
corporation or consolidation or merger of the
corporation with another corporation or the sale of
all or substantially all of its assets to another
corporation shall be affected in such a way that
holders of Common Stock shall be entitled to receive
stock, securities or assets with respect to or in
exchange for Common Stock, then, as a condition of
such reorganization, reclassification, consolidation,
merger or sale, lawful and adequate provision shall
be made whereby the holders of Preferred Stock shall
thereafter have the right to receive, in lieu of the
Voting Common Stock of the corporation immediately
theretofore receivable upon the conversion of any
such Preferred Stock, such shares of stock,
securities or assets as may be issued or payable with
respect to or in exchange for a number of outstanding
shares of Voting Common Stock equal to the number of
shares of Voting Common Stock immediately theretofore
receivable upon the conversion of such Preferred
Stock had such reorganization, reclassification,
consolidation, merger or sale not taken place; and,
in any such case, appropriate provision shall be made
with respect to the rights and interests of the
<PAGE>
holders of the Preferred Stock to the end that the
provisions hereof (including without limitation
provisions for adjustments of the Conversion Ratio
and of the number of shares receivable upon the
conversion of such Preferred Stock) shall thereafter
be applicable as nearly as may be, in relation to any
shares of stock, securities or assets hereafter
receivable upon the conversion of such Preferred
Stock. The corporation shall not effect any such
consolidation, merger or sale, unless prior to the
consummation thereof the surviving corporation (if
other than the corporation), the corporation
resulting from such consolidation or the corporation
purchasing such assets shall assume by written
instrument executed and ma i led to the registered
holders of the Preferred Stock at the last address of
such holders appearing on the books of the
corporation, the obligation to deliver to such
holders such shares of stock, securities or assets
as, in accordance with the foregoing provisions, such
holders may be entitled to receive.
(iii) If and whenever the corporation shall
issue or sell any Common Stock for a consideration
per share less than the Liquidation Preference
(except for the issuance or sale of up to 50,000
shares of Nonvoting Common Stock pursuant to the
corporation's 1984 Stock Option Plan, up to 200,000
shares of Voting Common Stock pursuant to the
corporation's 1987 Stock Option Plan and up to 50,000
shares of Voting Common Stock to Simplot Development
Corporation (hereinafter referred to as the "Excluded
Stock Issuances")) or shall issue any options,
warrants or other rights for the purchase of shares
of Common Stock at a consideration per share of less
than the Liquidation Preference, forthwith upon such
issuance or sale of such shares, options, warrants or
other rights for purchase, the Conversion Ratio in
effect immediately prior to such issuance or sale for
the Preferred Stock shall be adjusted so that each
share of Preferred Stock shall thereafter be
convertible into that number of shares of Voting
Common Stock as is equal to the number determined by
multiplying the Conversion Ratio by a fraction, the
numerator of which shall be the amount determined by
multiplying (aa) the number of shares of Common Stock
outstanding immediately after such issuance or sale
plus the number of shares of Common Stock issuable
upon the exercise of any purchase rights thus issued,
by (bb) the Liquidation Preference, and the
denominator of which shall be an amount equal to the
sum of (aa) the number of shares of Common Stock
outstanding immediately prior to such issuance or
sale multiplied by the Liquidation Preference, and
(bb) the total consideration payable to the
corporation upon such issuance or sale of such shares
and such purchase rights and upon the exercise of
such purchase rights. If any options or purchase
rights taken into account in any such adjustment of
the Conversion Ratio subsequently expire without
exercise, the Conversion Ratio shall be recomputed by
deleting such options or purchase rights. For
purposes of this subsection 4.5(c)(2), the number of
shares of Voting Common Stock or Nonvoting Common
Stock which may be issued as Excluded Stock Issuances
shall be appropriately adjusted to reflect stock
splits, stock dividends, reorganizations,
consolidations and similar changes.
<PAGE>
(iv) The anti-dilution provisions of this
subsection 4.5(c)(2) may be waived by the affirmative
vote of the holders (acting together as a class) of
at least a majority of the then outstanding shares of
Preferred Stock,
(3) Upon receipt of a written notice to the
corporation from a holder of shares of Preferred Stock
delivered to the corporation's principal executive offices
requesting a computation of the then current Conversion Ratio,
the corporation shall promptly give written notice by
first-class mail, postage prepaid, addressed to the holder of
the Preferred Stock making such request at the address of such
holder as shown on the books of the corporation which notice
shall state the then current Conversion Ratio, setting forth
in reasonable detail the method of calculation and the facts
upon which such calculation is based.
(4) In case any time:
(i) the corporation shall pay any dividend
payable in stock upon its Common Stock or make any
distribution (other than regular cash dividends) to
the holders of its Common Stock; or
(ii) the corporation shall offer for
subscription pro rata to the holders of its Common
Stock any additional shares of stock of any class or
other rights; or
(iii) there shall be any capital
reorganization, reclassification of the Capital Stock
of the corporation or consolidation or merger of the
corporation with or sale of all or substantially all
of its assets to another corporation; or
(iv) there shall be a voluntary or
involuntary dissolution, liquidation or winding up of
the corporation;
then in any one or more of said cases the corporation shall
give written notice, by first-class mail, postage prepaid,
addressed to the holders of the Preferred Stock at the
addresses of such holders as shown on the books of this
corporation, of the date on which (aa) the books of the
corporation shall close or a record shall be taken for such
dividend, distribution or subscription rights or (bb) such
reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up shall take place, as
the case may be. Such notice shall also specify the date as of
which the holders of Common Stock of record shall participate
in such dividend, distribution or subscription rights or shall
be entitled to exchange their Common Stock for securities or
other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, as the case may be. Such written
notice shall be given at least 20 days prior to the action in
question and not less than 20 days prior to the record date or
the date on which this corporation's transfer books are closed
in respect thereto.
<PAGE>
(5) As used in this subsection 4.5(c), the term
Common Stock shall mean and include the corporation's
presently authorized Voting Common Stock and Nonvoting Common
Stock and shall also include any capital stock of any class of
the corporation hereafter authorized which shall have the
right to vote on all matters submitted to the shareholders of
the corporation and shall not be limited to a fixed sum or
percentage in respect of the rights of the holders thereof to
participate in dividends or in the distribution of assets upon
the voluntary or involuntary liquidation, dissolution or
winding up of the corporation; provided that the shares
receivable pursuant to conversion of the Preferred Stock shall
include shares designated as Voting Common Stock of the
corporation as of the date of issuance of such Preferred Stock
or, in the case of any reclassification of the outstanding
shares thereof, the stock, securities or assets provided for
in subsection 4.5(c)(2)(ii) above.
(6) The number of shares of Voting Common Stock
issuable upon conversion of shares of Preferred Stock shall be
computed to the nearest one hundredth of a full share;
however, no fractional shares of Voting Common Stock shall be
issued upon conversion. The corporation shall pay a cash
adjustment in respect of any fraction of a share in an
amount-equal to the same fraction of the market price per
share of Voting Common Stock as of the close of business on
the day of conversion. "Market price" shall mean the average
of the high and low prices of the Voting Common Stock sales on
all exchanges on which the Voting Common Stock may at the time
be listed or as reported by the National Association of
Securities Dealers, Inc. Automated Quotation System National
Market System ("NASDAQ-NMS"), or, if there shall have been no
sales on any such exchange or as reported by NASDAQ-NMS on any
such day, the average of the bid and asked prices at the end
of such day, or, if the Voting Common Stock shall not be so
listed or transactions so reported, the average of the bid and
asked prices at the end of the day in the over-the-counter
market, in each case averaged over a period of 20 consecutive
business days prior to the date as of which I, market price"
is being determined. If at any time the Voting Common Stock is
not listed on any exchange, reported by NASDAQ-NMS or quote in
the over-the-counter market, the "market price" shall be
deemed to be the higher of (a) the book value thereof as
determined by any firm of independent public accountants of
recognized standing selected by the Board of Directors of the
Corporation as of the last day of any month ending within 60
days preceding the date as of which the determination is to be
made, or (b) the fair value thereof determined in good faith
by the Board of Directors of the Corporation as of a date
which is within 15 days of the date as of which the
determination is to be made.
<PAGE>
(7) Notwithstanding the foregoing right to convert at
the option of the holder, each share of Preferred Stock shall
automatically be converted into the appropriate number of
shares of Voting Common Stock of the corporation in the manner
and upon the terms set forth herein, without any act by the
corporation or the holders of Preferred Stock, concurrently
with the closing of:
(i) the sale by the corporation of shares of
Voting Common Stock in a public offering which was
registered under the Securities Act of 1933, as
amended, was underwritten by an investment banking
firm on a firm commitment basis and results in the
Voting Common Stock being of the corporation being
quoted on the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ")
or listed on the New York Stock Exchange, American
Stock Exchange or other national stock exchange; or
(ii) a merger of the corporation with or the
acquisition of the corporation by another entity in
which the surviving entity is a corporation with a
class of securities which are quoted on NASDAQ or
listed on the New York Stock Exchange, the American
Stock Exchange or other national stock exchange.
ARTICLE 5 - MERGER, EXCHANGE,
SALE OF ASSETS AND DISSOLUTION
5.1) Where approval of shareholders is required by law, the affirmative
vote of the holders of at least a majority of the voting power of all shares
entitled to vote shall be required to authorize the corporation (i) to merge
into or with one or more other corporations, (ii) to exchange its shares for
shares of one or more other corporations, (iii) to sell, lease, transfer or
otherwise dispose of all or substantially all of its property and assets,
including its goodwill, or (iv) to commence voluntary dissolution.
ARTICLE 6 - AMENDMENT OF ARTICLES OF INCORPORATION
6.1) Subject to the special voting rights of the holders of Preferred
Stock set forth in subsection 4.5(b), any provision contained in these Articles
of Incorporation may be amended, altered, changed or repealed by the affirmative
vote of the holders of at least majority of the voting power of the shares
present and entitled to vote at a duly held meeting or such greater percentage
as may be otherwise prescribed by the laws of the State of Minnesota.
<PAGE>
ARTICLE 7 - INCORPORATORS
7.1) The name and mailing address of the original incorporator was as
follows:
Stephen A. A. Goddard
1645 Hennepin Avenue South
Suite 212
Minneapolis, Minnesota 55403
ARTICLE 8 - DIRECTOR LIABILITY
8.1) Limitation on Director Liability. To the fullest extent permitted
by the Minnesota Business Corporation Act, as the same exists or may hereafter
be amended, a director of this corporation shall not be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director.
IN WITNESS WHEREOF, we have hereunto set our hands this 10th day
of April, 1989.
/s/ Dale R. Olseth
Dale R. Olseth, Chairman, President,
and Chief Executive Officer
/s/ David R. Busch
David R. Busch, Secretary
STATE OF MINNESOTA )
)ss.
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 10th day
of April, 1989, by Dale R. Olseth and David R. Busch, Chairman/President/Chief
Executive Officer and Secretary, respectively, of Bio-Metric Systems, Inc., a
Minnesota corporation, on behalf of the corporation.
/s/ Walter H. Diers
Notary Public
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