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 December 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 X No
As of January 31, 1999, there were 7,245,305 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>
December 31, September 30,
1998 1998
------------------ -----------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash & cash equivalents $1,019 $1,344
Short-term investments 3,934 3,526
Accounts receivable, net 946 1,057
Inventories 431 380
Prepaids and other 354 255
------------------ -----------------
Total current assets 6,684 6,562
------------------ -----------------
PROPERTY AND EQUIPMENT, net 1,430 1,240
LONG-TERM INVESTMENTS 16,061 16,249
OTHER ASSETS, net 540 254
------------------ -----------------
$24,715 $24,305
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $134 $305
Accrued liabilities 629 950
Deferred revenues 228 228
------------------ -----------------
Total current liabilities 991 1,483
DEFERRED REVENUES AND OTHER, less current portion 87 124
------------------ -----------------
Total liabilities 1,078 1,607
------------------ -----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock-
$.05 par value, 15,000,000 shares authorized;
7,245,305 and 7,214,085 shares issued and outstanding 362 361
Additional paid-in capital 29,064 28,934
Unearned compensation (155) (170)
Stock purchase notes receivable (118) (182)
Accumulated other comprehensive income 82 278
Accumulated deficit (5,598) (6,523)
------------------ -----------------
Total stockholders' equity 23,637 22,698
------------------ -----------------
$24,715 $24,305
================== =================
</TABLE>
The accompanying notes are an integral part of these condensed balance sheets.
<PAGE>
SURMODICS, INC.
Condensed Statements of Income and Comprehensive Income
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
REVENUES:
Royalties $1,306 $942
License fees 265 --
Product sales 630 497
Research and development 438 470
-------------- -------------
Total revenues 2,639 1,909
-------------- -------------
OPERATING COSTS AND EXPENSES:
Product 283 250
Research and development 1,165 958
Sales and marketing 398 303
General and administrative 528 297
-------------- -------------
Total operating costs and expenses 2,374 1,808
-------------- -------------
INCOME FROM OPERATIONS 265 101
-------------- -------------
OTHER INCOME:
Interest income, net 269 50
Gain on sale of investments 99 --
-------------- -------------
Other income, net 368 50
-------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES 633 151
INCOME TAX BENEFIT (Note 3) 292 --
-------------- -------------
NET INCOME 925 151
-------------- -------------
OTHER COMPREHENSIVE INCOME (LOSS), net of tax
Unrealized losses on securities:
Unrealized holding losses arising during the period (196) --
Less: reclassification adjustment for gains included in net income 99 --
-------------- -------------
Other comprehensive income (loss) (97) --
-------------- -------------
COMPREHENSIVE INCOME $828 $151
============== =============
NET INCOME PER SHARE:
Basic $0.13 $0.03
Diluted $0.12 $0.03
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic weighted average common shares outstanding 7,230 4,904
Dilutive effect of outstanding stock options 602 509
-------------- -------------
Diluted weighted average common shares outstanding 7,832 5,413
The accompanying notes are an integral part of these condensed
financial statements.
</TABLE>
<PAGE>
SURMODICS, INC.
Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $925 $151
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 176 116
Amortization of unearned compensation, net 15 15
Deferred rent (6) (4)
Deferred taxes (292) -
Change in assets and liabilities:
Accounts receivable 111 210
Inventories (51) 5
Prepaids and other (99) (93)
Accounts payable and accrued liabilities (492) (204)
Deferred revenues (31) (67)
------------- -------------
Net cash provided by operating activities 256 129
------------- -------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (361) (301)
Purchases of investments available for sale (8,972) -
Sales of investments available for sale 8,556 250
Collections on stock purchase notes receivable 65 -
Other - (3)
------------- -------------
Net cash used in investing activities (712) (54)
------------- -------------
FINANCING ACTIVITIES:
Issuance of common stock 131 -
------------- -------------
Net increase (decrease) in cash and cash equivalents (325) 75
CASH AND CASH EQUIVALENTS:
Beginning of period 1,344 491
============= =============
End of period $1,019 $566
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
<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 ended December 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, 1998 and footnotes thereto
included in the Company's 10-KSB as filed with the Securities and Exchange
Commission.
(2) New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (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 the fourth quarter of fiscal 1999 by providing additional
footnote disclosures.
(3) Income Taxes
Current accounting standards require that future tax benefits, such as
net operating loss carryforwards ("NOLs"), be recognized to the extent that
realization of such benefits is more likely than not. Through September 30,
1998, management had established a valuation allowance of $2.6 million to offset
tax benefits that did not meet the more likely than not criteria.
Based upon recent operating performance and other considerations,
management concluded during the quarter ended December 31, 1998, that the
Company will generate sufficient future taxable income to realize the deferred
tax asset prior to the expiration of any NOLs. Therefore, the realization of the
$2.6 million net deferred tax asset is more likely than not. As a result, during
the quarter, net income included the reversal of income tax valuation reserves
of approximately $525,000 reducing the Company's tax provision at statutory
rates to a net credit of $292,000 based upon the Company's estimated tax benefit
rate for the full fiscal year.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
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 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 ("IPO") of 2.3 million shares of Common Stock which generated
proceeds of approximately $15.5 million, net of related offering costs.
Results of Operations
Three Months Ended December 31, 1998 and 1997
Revenues. The Company's revenues were $2.6 million for the first
quarter of fiscal 1999, an increase of $730,000, or 38.2%, over the same period
of fiscal 1998. The revenue components were as follows:
<TABLE>
<CAPTION>
1998 1997 $ Increase % Increase
---- ---- (Decrease) (Decrease)
---------- ----------
<S> <C> <C> <C> <C>
Royalties:
Diagnostic $611 $522 $89 17.0%
PhotoLink(R) 695 420 275 65.4%
--- --- ---
Total royalties 1,306 942 364 38.6%
License fees 265 - 265 N/A
Product sales:
Reagents 245 107 138 129.0%
Stabilization 385 389 (4) (1.0%)
--- --- ---
Total product sales 630 496 134 27.0%
Research and development:
Commercial 209 246 (37) (15.0%)
Government 229 225 4 1.8%
--- --- -
Total research and development 438 471 (33) (7.0%)
--- --- ----
Total revenues $2,639 $1,909 $730 38.2%
</TABLE>
The first quarter revenue growth was primarily due to an 82.9% increase
in PhotoLink-related revenue. This included a 65.4% increase in PhotoLink
royalties and a 129.0% increase in the sales of reagent chemicals (those
chemicals used by licensees in the PhotoLink coating process). The growth in
PhotoLink royalties was due to increases in the minimum royalty payments from
certain clients, the introduction of additional licensed products by the
Company's clients, and increased earned royalties from greater market
penetration of coated products sold by licensees. The increase in reagent
chemical sales was due to growing production of PhotoLink-coated devices by
SurModics' clients. In addition, PhotoLink license fee revenue totaled $265,000
during the first quarter of fiscal 1999, which included the completion of three
new license agreements.
Product costs. The Company's product costs were $283,000 for the first
quarter of fiscal 1999, an increase of $33,000, or 13.2%, over the same period
of fiscal 1998. Overall product margins increased to 55.1% in the first quarter
of fiscal 1999 from 49.7% in the same period of fiscal 1998. The margin
improvement was primarily due to production efficiencies achieved in
manufacturing reagent chemicals due to increased volumes.
<PAGE>
Research and development expenses. Research and development expenses
were $1,165,000 for the first quarter of fiscal 1999, an increase of $203,000,
or 21.1%, over the same period of fiscal 1998. The change was primarily due to
the added compensation and benefits, travel, laboratory supplies and general
business expenses associated with additional technical personnel added by the
Company over the last year; increased patent fees associated with the filing and
maintaining of the patent portfolio, especially international patents; and
increased depreciation expense associated with the build-out of additional
laboratory space.
Sales and marketing expenses. Sales and marketing expenses were
$398,000 for the first quarter of fiscal 1999, an increase of $95,000, or 31.5%,
over the same period of fiscal 1998. This increase was primarily due to the
additional compensation and benefit expenses associated with additional
marketing personnel and higher spending for advertising and promotions.
General and administrative expenses. General and administrative
expenses were $528,000 for the first quarter of fiscal 1999, an increase of
$234,000, or 79.8%, over the same period of fiscal 1998. The increase was
primarily due to the cost of maintaining a directors' and officers' liability
insurance policy added after the IPO; new expenses associated with being a
public company (such as investor relations costs, and other external reporting
expenses); and costs associated with the recently appointed company President.
Income from operations. The Company's income from operations was
$265,000 for the first quarter of fiscal 1999, an increase of $164,000, or
162.4%, over the same period of fiscal 1998.
Other income, net. The Company's other income was $368,000 for the
first quarter of fiscal 1999, an increase of $318,000, or 636.0%, over the same
period of fiscal 1998. The majority of this increase was due to additional
interest income realized on the investments purchased with the proceeds of the
public stock offering. In addition, the Company sold certain investments
available for sale resulting in a gain of $99,000, which can be offset in full
by the Company's capital loss carryforwards for tax purposes.
Income tax benefit. The Company ended fiscal 1998 with $2.6 million of
deferred tax assets, which were offset in full by a valuation allowance. Based
upon recent operating performance and other considerations, management concluded
that the Company will generate sufficient future taxable income to realize the
deferred tax asset prior to the expiration of any NOLs. As a result, during the
quarter, net income included the reversal of income tax valuation reserves of
approximately $525,000 reducing the Company's tax provision at statutory rates
to a net credit of $292,000 based upon the Company's estimated tax benefit rate
for the full fiscal year. It is anticipated that similar amounts will be
recorded each quarter during the rest of the year in order to fully recognize
the deferred tax asset by the end of the fiscal year. Excluding the effect of
the reversal of income tax valuation reserves, the Company's net income and
diluted net income per share would have been as follows on a proforma basis:
<TABLE>
<CAPTION>
Proforma
Three Months Ended December 31,
1998 1997
---- ----
<S> <C> <C>
Net income before provision for income taxes $633,000 $151,000
Income tax provision (231,000) (55,000)
--------- --------
Net income $402,000 $96,000
Diluted net income per share $0.05 $0.02
</TABLE>
<PAGE>
Other comprehensive income (loss). During the quarter ended December
31, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income
and its components in financial statements. The Company's other comprehensive
loss was $97,000 for the first quarter of fiscal 1999. This loss was due to a
reduction in the market value of the Company's long-term investments available
for sale. As of December 31, 1998, the Company still had a net $82,000
unrealized gain related to those investments.
Year 2000 Compliance
The Company has evaluated its information technology infrastructure for
Year 2000 compliance. The Company does not utilize any mainframe technology, but
instead has an internal technical infrastructure comprised of client server
networks and desktop microcomputers. The applications which run on these
computers are primarily purchased software without any significant customized
programming. Over the last two years, the Company has routinely upgraded most of
its computer hardware, software and telecommunications systems. As a result of
its internal reviews, the Company does not anticipate any problems related to
Year 2000 compliance with its information technology infrastructure.
The Company is in the process of evaluating its non-information
technology systems with regard to Year 2000 compliance. This is especially
important related to embedded technology such as microcontrollers contained in
various lab equipment, and raw material suppliers who support the Company's
manufacturing process. Based upon information currently available, the Company
does not anticipate any material disruption in its operations as a result of any
failure by either non-information technology equipment or one of its suppliers
to be in compliance. Compliance should not be an issue with the Company's
products, since they are not date-sensitive.
Costs associated with Year 2000 compliance are expensed as incurred. To
date, those costs have not been material. Based upon currently available
information, the Company does not expect that the costs of addressing potential
Year 2000 problems will have a material impact on the Company's financial
condition or results of operations. The Company plans to devote the necessary
resources to resolve any significant Year 2000 issues by no later than the end
of fiscal year 1999.
Although the Company is committed to addressing any issues well in
advance of the Year 2000, there are risks if the Company's objectives are not
met. The most severe risk is business interruption. Specific examples of
situations that could cause business interruption include, among others, (i)
computer hardware or application software processing errors or failures; (ii)
failure of lab or manufacturing equipment; (iii) outside suppliers who may not
be Year 2000 compliant. Depending on the extent and duration of the business
interruption resulting from non-compliant Year 2000 systems, such interruption
could have a material adverse effect on the Company's financial condition and
results of operations.
Liquidity and Capital Resources
As of December 31, 1998, the Company had working capital of
approximately $5.7 million and cash, cash equivalents and investments totaling
approximately $21.0 million. The Company generated positive cash flows from
operating activities of $256,000 in the first quarter, which was almost double
the amount for the same period of last year, primarily due to the increased net
income. A net of $712,000 of cash was used for investing activities during the
first quarter. The significant increase in investing activities between years
was due to the repositioning of the public offering proceeds within an
investment portfolio managed by an external investment manager. The investment
manager is guided by an investment policy adopted by the Company. 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 three years or less. Finally, $131,000
of cash was generated from financing activities due to the issuance of common
stock related to the exercise of stock options.
As of December 31, 1998, 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.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
Use of Proceeds for the period ending December 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 $ 305,000
Sales and marketing $ 364,000
Equipment upgrades $ 753,000
Patent protection $ 75,000
Working capital and general corporate purposes $ 353,000
Money market funds $13,671,102
All the above items represented direct or indirect payments
to others.
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
25, 1999.
(b) Proxies were solicited pursuant to Regulation 14A under the
Securities Act of 1934. The shareholders voted on three
matters: (i) to amend the Bylaws to provide for the staggered
election of directors and to restrict the removal of
directors, (ii) to set the number of directors at seven, and
(iii) to elect the Board of Directors. The shareholders
approved all three matters by the following votes:
<PAGE>
<TABLE>
<CAPTION>
Votes For Votes Against Votes Broker
Abstained Non-Votes
--------- ------------- --------- ---------
<S> <C> <C> <C> <C>
(i) Amend the Bylaws to provide for the
staggered election of directors and to
restrict the removal of directors ....... 3,955,340 677,930 20,792 1,351,285
(ii) Set number of directors at seven ........ 5,696,667 292,180 16,500 N/A
(iii) Elect Directors
Dale R. Olseth........................ 6,000,447 -- 4,900 N/A
Donald S. Fredrickson................. 6,000,447 -- 4,900 N/A
James J. Grierson..................... 6,000,447 -- 4,900 N/A
Patrick E. Guire...................... 6,000,447 -- 4,900 N/A
Kenneth H. Keller..................... 6,000,447 -- 4,900 N/A
David A. Koch......................... 6,000,447 -- 4,900 N/A
Kendrick B. Melrose................... 6,000,447 -- 4,900 N/A
</TABLE>
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - 3.1 Bylaws, as amended to date
27 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.
February 12, 1999
By: /s/ Stephen C. Hathaway
Stephen C. Hathaway
Vice President & CFO
(Principal Financial Officer)
<PAGE>
Exhibit Index
Exhibit Number Description
3.1 Bylaws, as amended to date
27 Financial Data Schedule
BYLAWS
OF
SURMODICS, INC.
(As Amended Through January 31, 1999)
ARTICLE 1.
OFFICES
1.1) Offices. The principal office of the corporation shall be 9924
West 74th Street, Eden Prairie, Minnesota, and the corporation may have offices
at such other places within or without the State of Minnesota as the Board of
Directors shall from time to time determine or the business of the corporation
requires.
ARTICLE 2.
MEETING OF SHAREHOLDERS
2.1) Annual Meeting. The annual meeting of the shareholders of the
corporation entitled to vote shall be held at the principal office of the
corporation or at such other place, within or without the State of Minnesota, as
is designated by the Board of Directors, or by written consent of all the
shareholders entitled to vote thereat, at such time on such day of each year as
shall be determined by the Board of Directors or by the President. At the annual
meeting, the shareholders, voting as provided in the Articles of Incorporation,
shall elect directors and shall transact such other business as shall properly
come before the meeting.
2.2) Special Meetings. Special meetings of the shareholders entitled to
vote shall be called by the Secretary at anytime upon request of the Chairman of
the Board, the President or the Board of Directors (acting upon majority vote),
or upon request by shareholders holding ten percent (10%) or more of the voting
power of the shareholders.
2.3) Notice of Meetings. There shall be mailed to each shareholder
entitled to vote, at his address as shown by the books of the corporation, a
notice setting out the place, date and hour of the annual meeting or any special
meeting, which notice shall be mailed at least five (5) days prior to the date
of the meeting; provided, that (i) notice of a meeting at which an agreement of
merger or consolidation is to be considered shall be mailed to all shareholders
of record, whether or not entitled to vote, at least two (2) weeks prior
thereto, (ii) notice of a meeting at which a proposal to dispose of all, or
substantially all, of the property and assets of the corporation is to be
considered shall be mailed to all shareholders of record, whether or not
entitled to vote, at least ten (10) days prior thereto, and (iii) notice of a
meeting at which a proposal to dissolve the corporation or to amend the Articles
of Incorporation is to be considered shall be mailed to all shareholders of
record, whether or not entitled to vote, at least ten (10) days prior thereto.
Notice of any special meeting shall state the purpose or purposes of the
<PAGE>
proposed meeting, and the business transacted at all special meetings shall be
confined to purposes stated in the notice. Attendance at a meeting by any
shareholder, without objection in writing by him, shall constitute his waiver of
notice of the meeting.
2.4) Quorum and Adjourned Meeting. The holders of a majority of all
shares outstanding and entitled to vote, represented either in person or by
proxy, shall constitute a quorum for the transaction of business at any annual
or special meeting of the shareholders. In case a quorum is not present at any
meeting, those present shall have the power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until the requisite
number of voting shares shall be represented. At such adjourned meetings at
which the required amount of voting shares shall be represented, any business
may be transacted which might have been transacted at the original meeting.
2.5) Voting. At each meeting of the shareholders, every shareholder
having the right to vote shall be entitled to vote in person or by proxy duly
appointed by an instrument in writing subscribed by such shareholder. Each
shareholder shall have one (1) vote for each share having voting power standing
in his name on the books of the corporation except as may be otherwise required
to provide for cumulative voting (if not denied by the Articles). Upon the
demand of any shareholder, the vote for directors or the vote upon any question
before the meeting shall be by ballot. All elections shall be determined and all
questions decided by a majority vote of the number of shares entitled to vote
and represented at any meeting at which there is a quorum except in such cases
as shall otherwise be required by statute, the Articles of Incorporation or
these Bylaws. Except as may otherwise be required to conform to cumulative
voting procedures, directors shall be elected by a plurality of the votes cast
by holders of shares entitled to vote thereon.
2.6) Record Date. The Board of Directors may fix a time, not exceeding
sixty (60) days preceding the date of any meeting of shareholders, as a record
date for the determination of the shareholders entitled to notice of and to vote
at such meeting, notwithstanding any transfer of any shares on the books of the
corporation after any record date so fixed. The Board of Directors may close the
books of the corporation against transfer of shares during the whole or any part
of such period. In the absence of action by the Board, only shareholders of
record twenty (20) days prior to a meeting may vote at such meeting.
2.7) Order of Business. The suggested order of business at the annual
meeting and, to the extent appropriate, at all other meetings of the
shareholders shall, unless modified by the presiding chairman be:
(a) Call of roll
(b) Proof of due notice of meeting or waiver of notice
(c) Determination of existence of quorum
(d) Reading and disposal of any unapproved minutes
(e) Annual reports of officers and committees
(f) Election of directors
(g) Unfinished business
(h) New business
(i) Adjournment.
<PAGE>
ARTICLE 3.
DIRECTORS
3.1) General Powers. The property, affairs and business of the
corporation shall be managed by a Board of Directors.
3.2) Number, Term, Election and Qualifications. At each annual meeting
the shareholders shall determine the number of directors, which shall be not
less than three; provided, that between annual meetings the authorized number of
directors may be increased by the shareholders or Board of Directors or
decreased by the shareholders. However, notwithstanding the foregoing no
increase or decrease in the number of directors may be effected except according
to the further provisions contained in this Section 3.2. The directors shall be
divided into three classes, designated Class I, Class II and Class III. Each
class shall consist, as nearly as possible, of one-third of the total number of
directors constituting the entire Board of Directors. At the 1999 Annual Meeting
of Shareholders, Class I directors shall be elected for a one-year term, Class
II directors for a two-year term and Class III directors for a three-year term.
At each succeeding annual meeting of the shareholders beginning in 2000,
successors to the class of directors whose term expires at that annual meeting
shall be elected for a three-year term. A director shall hold office until the
annual meeting for the year in which his or her term expires and until his or
her successor shall be elected and shall qualify, or until his or her
resignation or removal from office. If the number of directors is changed, any
increase or decrease shall be apportioned among the classes so as to maintain,
as nearly as possible, an equal number of directors in each class. In the event
an increase or decrease makes it impossible to maintain an equal number of
directors in each class, increases shall be allocated to the class or classes
with the longest remaining term, and decreases shall be allocated to the class
with the shortest remaining term. Any director elected to fill a vacancy
resulting from an increase in such class shall hold office for a term that shall
coincide with the remaining term of that class. In no event will a decrease in
the number of directors result in the elimination of an entire class of
directors, cause any class to contain a number of directors two or more greater
than any other class, or shorten the term of any incumbent director. Any
director elected to fill a vacancy not resulting from an increase in the number
of directors shall have the same remaining term as that of his or her
predecessor. No amendment to these Bylaws shall alter, change or repeal any of
the provisions of this Section 3.2 unless the amendment effecting such
alteration, change or repeal shall receive the affirmative vote of the holders
of two-thirds (2/3) of all shares of stock of the corporation entitled to vote
on all matters that may come before each meeting of shareholders.
3.3) Vacancies. Vacancies on the Board of Directors shall be filled by
the remaining members of the Board, though less than a quorum; provided that
newly created directorships resulting from an increase in the authorized number
of directors shall be filled by two-thirds (2/3) of the directors serving at the
time of such increase. Persons so elected shall be directors until their
successors are elected by the shareholders, who may make such election at their
next annual meeting or at any special meeting duly called for that purpose.
<PAGE>
3.4) Quorum and Voting. A majority of the whole Board of Directors
shall constitute a quorum for the transaction of business except that when a
vacancy or vacancies exist, a majority of the remaining directors (provided such
majority consists of not less than two directors) shall constitute a quorum.
Except as otherwise provided in the Articles of Incorporation or these Bylaws,
the acts of a majority of the directors present at a meeting at which a quorum
is present be the acts of the Board of Directors.
3.5) First Meeting. As soon as practicable after each annual election
of directors, the Board of Directors shall meet for the purpose of organization,
electing or appointing officers of the corporation, and transaction of other
business, at the place where the shareholders' meeting is held or at the place
where regular meetings of the Board of Directors are held. No notice of such
meeting need be given. Such first meeting may be held at any other time and
place specified in a notice given as hereinafter provided for special meetings
or in a waiver of notice signed by all the directors.
3.6) Regular Meetings. Regular meetings of the Board of Directors shall
be held from time to time at such time and place as may from time to time be
fixed by resolution adopted by a majority of the entire Board of Directors. No
notice need be given of any regular meeting.
3.7) Special Meetings. Special meetings of the Board of Directors may
be held at such time and place as may be designated in the notice or the waiver
of notice of the meeting. Special meetings of the Board of Directors may be
called by the Chairman of the Board, the President or by any two (2) directors.
Unless notice shall be waived by all directors, notice, of such special meeting
(including a statement of the purposes thereof) shall be given to each director
at least twenty-four (24) hours in advance of the meeting if oral or two (2)
days in advance of the meeting if by mail, telegraph or other written
communication; provided, however, that meetings may be held without waiver of
notice from or giving notice to any director while he is in the armed forces of
the United States or outside the continental limits of the United States.
Attendance at a meeting by any director, without objection in writing by him,
shall constitute a waiver of notice of such meeting.
3.8) Compensation. Directors who are not salaried officers of the
corporation shall receive such fixed sum per meeting attended or such fixed
annual sum as shall be determined from time to time by resolution of the Board
of Directors. Nothing herein contained shall be construed to preclude any
director from serving this corporation in any other capacity and receiving
proper compensation therefor.
3.9) Executive Committee. The Board of Directors may, by unanimous
affirmative action of the entire Board, designate two or more of its number to
constitute an Executive Committee, which, to the extent determined by unanimous
affirmative action of the entire Board, shall have and exercise authority of the
Board in the management of the business of the corporation. Any such Executive
Committee shall act only in the interval between meetings of the Board and shall
be subject at all times to the control and direction of the Board.
<PAGE>
3.10) Order of Business. The suggested order of business at any meeting
of the Board of Directors shall, to the extent appropriate and unless modified
by the presiding chairman, be:
(a) Roll call
(b) Proof of due notice of meeting or waiver of notice,
or unanimous presence and declaration by president
(c) Determination of existence of quorum
(d) Reading and disposal of any unapproved minutes
(e) Reports of officers and committee
(f) Election of officers
(g) Unfinished business
(h) New business
(i) Adjournment.
3.11) Removal. Directors may be removed only for cause by vote of the
shareholders or for cause by vote of a majority of the entire Board of
Directors. No amendment to these Bylaws shall alter, change or repeal any of the
provisions of this Section 3.2 unless the amendment effecting such alteration,
change or repeal shall receive the affirmative vote of the holders of two-thirds
(2/3) of all shares of stock of the corporation entitled to vote on all matters
that may come before each meeting of shareholders.
ARTICLE 4.
OFFICERS
4.1) Number and Designation. The Board of Directors shall elect a
President, a Secretary and a Treasurer, and may elect or appoint a Chairman of
the Board, one or more Vice Presidents, and such other officers and agents as it
may from time to time determine. Any two of the offices except those of
President and Vice President may be held by one person.
4.2) Election, Term of Office and Qualifications. At each annual
meeting of the Board of Directors, the Board shall elect the officers provided
for in Section 4.1 and such officers shall hold office until the next annual
meeting of the Board or until their successors are elected or appointed and
qualify; provided, however, that any officer may be removed with or without case
by the affirmative vote of a majority of the entire Board of Directors (without
prejudice, however, to any contract rights of such officer).
4.3) Resignations. Any officer may resign at any time by giving written
notice to the Board of Directors or to the Chairman, President or Secretary. The
resignation shall take effect at the time specified in the notice and, unless
otherwise specified therein, acceptance of the resignation shall not be
necessary to make it effective.
<PAGE>
4.4) Vacancies in Office. If there be a vacancy in any office of the
corporation, by reason of death, resignation, removal or otherwise, such vacancy
shall be filled for the unexpired term by the Board of Directors at any regular
or special meeting.
4.5) Chairman of the Board. The Board of Directors may, in its
discretion elect one of its number as Chairman of the Board. The Chairman shall
preside at all meetings of the shareholders and of the Board and shall exercise
general supervision and direction over the more significant matters of policy
affecting the affairs of the corporation, including particularly its financial
and fiscal affairs. The Chairman of the Board may call a meeting of the Board
whenever he deems it advisable.
4.6) President. The President shall have general active management of
the business of the corporation. In the absence of the Chairman of the Board, he
shall preside at all meetings of the shareholders and Board of Directors. He
shall be the chief executive officer of the corporation and shall see that all
orders and resolutions are carried into effect. He shall be ex-officio a member
of all standing committees and shall perform all duties usually incident to the
office of President and such other duties as may from time to time be assigned
to him by the Board.
4.7) Vice President. Each Vice President shall have such powers and
shall perform such duties as may be specified in these Bylaws or prescribed by
the Board of Directors. In the event of absence or disability of the President,
the Board of Directors may designate a Vice President or Vice Presidents to
succeed to the powers and duties of the President.
4.8) Secretary. The Secretary shall be secretary and shall attend all
meetings of the shareholders and Board of Directors. He shall act as clerk
thereof and shall record all the proceedings of such meetings in the minute book
of the corporation. He shall give proper notice of meetings of shareholders and
directors. He may, with the Chairman of the Board, President or Vice President,
sign all certificates representing shares of the corporation and shall perform
the duties usually incident to his office and such other duties as may be
prescribed by the Board of Directors from time to time.
4.9) Treasurer. The Treasurer shall keep accurate accounts of all
monies of the corporation received or disbursed, and shall deposit all monies,
drafts and checks in the name of and to the credit of the corporation in such
banks and depositories as the Board of Directors shall designate from time to
time . He shall have power to endorse for deposit the funds of the corporation
as authorized by the Board of Directors. He shall render to the Chairman of the
Board, President and the Board of Directors, whenever required, an account of
all of his transactions as Treasurer and statements of the financial condition
of the corporation, and shall perform the duties usually incident to his officer
and such other duties as may be prescribed by the Board of Directors from time
to time.
<PAGE>
4.10) Other Officers. The Board of Directors may appoint one or more
Assistant Secretaries, one or more Assistant Treasurers, and such other
officers, agents and employees as the Board may deem advisable. Each officer,
agent or employee so appointed shall hold office at the pleasure of the Board
and shall perform such duties as may be assigned to him by the Board, Chairman
of the Board or President.
ARTICLE 5.
INDEMNIFICATION
5.1) Indemnification of Directors and Officers. To the full extent
permitted by Minnesota Statutes, Section 301.095, as amended from time to time,
or by other provisions of law, each person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, wherever brought, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a director or
officer of the corporation or by reason of the fact that such person is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise at the request of the corporation, shall be indemnified by the
corporation against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually reasonably incurred by such person in
connection with such action, suit or proceeding; provided, however, that the
indemnification with respect to a person who is or was service as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise shall apply only to the extent such person is not
indemnified by such other corporation, partnership, joint venture, trust or
other enterprise. The indemnification provided by this section shall continue as
to a person who has ceased to be a director or officer of the corporation and
shall inure the benefit of the heirs, executors and administrators of such
person.
5.2) Indemnification of Employees and Agents. Each person who is not
eligible for indemnification pursuant to Section 5.1 above and who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, wherever brought, whether civil, criminal,
administrative or investigative, by reason of the fact that such person is or
was an employee or agent of the corporation or by reason of the fact that such
person is or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, may be indemnified by the corporation by action of
the Board of Directors to the extent permitted and in accordance with the
procedures described by Minnesota Statutes, Chapter 30.1, as amended from time
to time, against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement, actually and reasonably incurred by such person in
connection with such action, suit or proceeding; provided, however, that the
indemnification with respect to a person who is or was serving as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise shall apply only to the extent such person is not
indemnified by such other corporation, partnership, joint venture, trust or
other enterprise. The indemnification provided by this section shall continue as
to a person who has ceased to be an employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such person.
<PAGE>
5.3) Nonexclusivity. The foregoing right of indemnification in the case
of a director or officer and permissive indemnification in the case of an agent
or employee shall not be exclusive of other rights to which a director, officer,
employee or agent may be entitled as a matter of law.
5.4) Insurance. To the full extent permitted by Minnesota Statutes,
Section 301.095, as amended from time to time, or by other provisions of law,
the corporation may purchase and maintain insurance on behalf of any indemnified
party against any liability asserted against such person and incurred by such
person in such capacity.
ARTICLE 6.
SHARES AND THEIR TRANSFER
6.1) Certificates of Stock. Every owner of stock of the corporation
shall be entitled to a certificate, in such form as the Board of Directors may
prescribe, certifying the number of shares of stock of the corporation owned by
him. The certificates for such stock shall be numbered (separately for each
class) in the order in which they shall be issued and shall be signed in the
name of the corporation by the Chairman of the Board, President or a Vice
President, and by the Secretary, Assistant Secretary, Treasurer, Assistant
Treasurer, or any other proper officer of the corporation thereunto authorized
by the Board of Directors. Signatures of the officers upon a certificate may be
facsimiles if the certificate is countersigned by a transfer agent or registered
by a registrar other than the corporation. Certificates on which a facsimile
signature of a former officer appears may be issued with the same effect as if
he were such officer on the date of issue.
6.2) Stock Record. As used in these Bylaws, the term "shareholder"
shall mean, the person, firm or corporation in whose name outstanding shares of
capital stock of the corporation a re currently registered on the stock record
books of the corporation. A record shall be kept of the name of the person, firm
or corporation owning the stock represented by such certificates respectively,
the respective dates of cancellation. Every certificate surrendered to the
corporation for exchange or transfer shall be cancelled and no new certificate
or certificates shall be issued in exchange for any existing certificate until
such existing certificate shall have been so cancelled (except as provided for
in Section 6.4 of this Article 6).
6.3) Transfer of Shares. Transfer of shares on the books of the
corporation may be authorized only by the shareholder named in the certificate
(or his legal representative or duly authorized attorney-in-fact) and upon
surrender for cancellation of the certificate or certificates for such shares.
The shareholder in whose name shares of stock stand on the books of the
corporation shall be deemed the owner thereof for all purposes as regards the
corporation ;provided, that when any transfer of shares shall be made as
collateral security and not absolutely, such fact, if known to the Secretary of
the corporation or the transfer agent, shall be so expressed in the entry of
transfer.
<PAGE>
6.4) Lost Certificates. Any shareholder claiming a certificate of stock
to be lost or destroyed shall make an affidavit or affirmation of that fact in
such form as the Board of Directors may require, and shall, if the directors so
require, give the corporation a bond of indemnity in form and with one or more
sureties satisfactory to the Board of at least double the value, as determined
by the Board, of the stock represented by such certificate in order to indemnify
the corporation against any claim that may be made against it on account of the
alleged loss or destruction of such certificate, whereupon a new certificate may
be issued in the same tenor and for the same number of shares as the one alleged
to have been destroyed or lost.
6.5) Treasury Stock. Treasury stock shall be held by the corporation
subject to disposal by the Board of Directors in accordance with the Articles
and these Bylaws, and shall not have voting rights nor participate in dividends.
6.6) Inspection of Books by Shareholders. Shareholders shall be
permitted to inspect the books of the corporation for a proper purpose at all
reasonable times.
ARTICLE 7
GENERAL PROVISIONS
7.1 Dividends. Subject to the provisions of the Articles of
Incorporation and of these Bylaws, the Board of Directors may declare dividends
from the net earnings or net assets of the corporation available for dividends
whenever and in such amounts as , in its opinion, the condition of the affairs
of the corporation shall render it advisable.
7.2) Surplus and Reserves. Subject to the provisions of the Articles of
Incorporation and of these Bylaws, the Board of Directors in its discretion may
use and apply any of the net earnings or net assets of the corporation available
for such purpose to purchase or acquire any of the shares of the capital stock
of the corporation in accordance with law, or any of its bonds, debentures,
notes, scrip or other securities or evidences of indebtedness, or from time to
time may set aside from its net assets or net earnings such sums as it, in its
absolute discretion may think proper as a reserve fund to meet contingencies,
for the purpose of maintaining or increasing the property or business of the
corporation, or for any other purpose it may think conducive to the best
interests of the corporation.
7.3) Fiscal Year. The fiscal year of the corporation shall be
established by the Board of Directors.
7.4) Seal. The corporation shall have such corporate seal or no
corporate seal as the Board of Directors shall from time to time determine.
7.5) Securities of Other Corporations.
(a) Voting Securities Held by the Corporation. Unless
otherwise ordered by the Board of Directors, the President shall have full power
and authority on behalf of the corporation (i) to attend and to vote at any
meeting of security holders of any other companies in which the corporation may
hold securities; (ii) to execute any proxy for such meeting on behalf of the
corporation and (iii) to execute a written action in lieu of a meeting of such
<PAGE>
other company on behalf of this corporation. At such meeting, by such proxy or
by such writing in lieu of meeting, the President shall possess and may exercise
any and all rights and powers incident to the ownership of such securities that
the corporation might have possessed and exercised if it had been present. The
Board of Directors may, from time to time, confer like powers upon any other
person or persons.
(b) Purchase and Sale of Securities. Unless otherwise ordered
by the Board of Directors, the President shall have full power and authority on
behalf of the corporation to purchase, sell, transfer or encumber any and all
securities of any other company owned by the corporation and may execute and
deliver such documents as may be necessary to effectuate such purchase, sale,
transfer or encumbrance. The Board of Directors may, from time to time, confer
like powers upon any other person or persons.
ARTICLE 8.
MEETINGS
8.1) Waiver of Notice. Whenever any notice whatsoever is required to be
given by these Bylaws, the Articles of Incorporation or any of the laws of the
State of Minnesota, a waiver thereof in writing, signed by the person or persons
entitled to such notice, whether before, at or after the time stated therein,
shall be deemed equivalent to the actual required notice.
8.2) Participation by Conference Telephone. Members of the Board of
Directors, or any committee designated by the Board, may participate in a
meeting of the Board of Directors or of such committee by means of conference
telephone or similar communications equipment whereby all persons participating
in the meeting can hear and communicate with each other, and participation in a
meeting pursuant to this Section shall constitute presence in person at such
meeting. The place of the meeting shall be deemed to be the place of origination
of the conference telephone call or similar communication technique.
8.3) Authorization Without Meeting. Any action of the shareholders, the
Board of Directors, or any lawfully constituted Executive Committee of the
corporation which may be taken at a meeting thereof, may be taken without a
meeting if authorized by a writing signed by all of the holders of shares who
would be entitled to notice of a meeting for such purpose, by all of the
directors, or by all of the members of such Executive Committee, as the case may
be.
ARTICLE 9
AMENDMENTS OF BYLAWS
9.1) Amendments. Except as otherwise provided in specific provisions of
these Bylaws, these Bylaws may be altered, amended, added to or repealed by the
affirmative vote of a majority of the members of the Board of Directors at any
regular meeting of the Board or at any special meeting of the Board called for
that purpose, subject to the power of the shareholders to change or repeal such
Bylaws and subject to any other limitations on such authority of the Board
provided by the Minnesota Business Corporation Act.
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