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, 1999
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 April 30, 1999, there were 7,343,605 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,
1999 1998
--------- ------------
ASSETS (Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash & cash equivalents $ 1,165 $ 1,344
Short-term investments 3,954 3,526
Accounts receivable, net 1,428 1,057
Inventories 432 380
Prepaids and other 268 255
-------- --------
Total current assets 7,247 6,562
-------- --------
PROPERTY AND EQUIPMENT, net 1,663 1,240
LONG-TERM INVESTMENTS 16,312 16,249
OTHER ASSETS, net 795 254
-------- --------
$ 26,017 $ 24,305
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 190 $ 305
Accrued liabilities 631 950
Deferred revenues 224 228
-------- --------
Total current liabilities 1,045 1,483
DEFERRED REVENUES AND OTHER, less current portion 50 124
-------- --------
Total liabilities 1,095 1,607
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock-
$.05 par value, 15,000,000 shares authorized;
7,303,105 and 7,214,085 shares issued and outstanding 365 361
Additional paid-in capital 29,338 28,934
Unearned compensation (140) (170)
Stock purchase notes receivable (114) (182)
Accumulated other comprehensive income (34) 278
Accumulated deficit (4,493) (6,523)
-------- --------
Total stockholders' equity 24,922 22,698
-------- --------
$ 26,017 $ 24,305
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed balance sheets.
2
<PAGE>
SURMODICS, INC.
Condensed Statements of Income and Comprehensive Income
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Royalties $ 1,530 $ 1,265 $ 2,836 $ 2,207
License fees 60 60 325 60
Product sales 1,160 735 1,790 1,232
Research and development 558 519 996 989
------- ------- ------- -------
Total revenues 3,308 2,579 5,947 4,488
------- ------- ------- -------
OPERATING COSTS AND EXPENSES:
Product 397 318 679 568
Research and development 1,213 1,102 2,379 2,060
Sales and marketing 437 441 835 744
General and administrative 670 430 1,198 727
------- ------- ------- -------
Total operating costs and expenses 2,717 2,291 5,091 4,099
------- ------- ------- -------
INCOME FROM OPERATIONS 591 288 856 389
------- ------- ------- -------
OTHER INCOME:
Interest income, net 260 98 530 151
Gain (loss) on sale of investments (3) -- 95 --
------- ------- ------- -------
Other income, net 257 98 625 151
------- ------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES 848 386 1,481 540
INCOME TAX BENEFIT (PROVISION) (Note 3) 257 (10) 549 (13)
------- ------- ------- -------
NET INCOME 1,105 376 2,030 527
------- ------- ------- -------
OTHER COMPREHENSIVE INCOME (LOSS), net of tax
Unrealized losses on securities:
Unrealized holding losses arising during the period (117) -- (312) --
Less: reclassification adjustment for gains/(losses)
included in net income (3) -- 95 --
------- ------- ------- -------
Other comprehensive loss (120) -- (217) --
------- ------- ------- -------
COMPREHENSIVE INCOME $ 985 $ 376 $ 1,813 $ 527
======= ======= ======= =======
NET INCOME PER SHARE:
Basic $ 0.15 $ 0.07 $ 0.28 $ 0.10
Diluted $ 0.14 $ 0.06 $ 0.26 $ 0.09
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic weighted average common shares outstanding 7,270 5,573 7,250 5,236
Dilutive effect of outstanding stock options 722 495 670 475
------- ------- ------- -------
Diluted weighted average common shares outstanding 7,992 6,068 7,920 5,711
</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,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,030 $ 527
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 346 283
Amortization of unearned compensation, net 30 37
Deferred rent (12) (8)
Deferred taxes (552) --
Change in assets and liabilities:
Accounts receivable (371) 12
Inventories (52) (43)
Prepaids and other (13) 88
Accounts payable and accrued liabilities (434) (129)
Deferred revenues (66) (184)
-------- --------
Net cash provided by operating activities 906 583
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (758) (481)
Purchases of investments available for sale (15,434) (911)
Sales of investments available for sale 14,631 1,726
Collections on stock purchase notes receivable 68 --
Other -- 107
-------- --------
Net cash provided by (used in) investing activities (1,493) 441
-------- --------
FINANCING ACTIVITIES:
Issuance of common stock 408 15,536
-------- --------
Net increase (decrease) in cash and cash equivalents (179) 16,560
CASH AND CASH EQUIVALENTS:
Beginning of period 1,344 492
-------- --------
End of period $ 1,165 $ 17,052
======== ========
</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, 1999
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 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 subsequently concluded that the Company will generate sufficient
future taxable income to meet the more-likely-than-not criteria. Therefore, the
realization of the $2.6 million net deferred tax asset is more likely than not.
As a result, net income included the reversal of income tax valuation reserves
of approximately $571,000 and $1,062,000 for the three months and six months
ended March 31, 1999, respectively, reducing the Company's tax provision to a
net credit of $257,000 and $549,000 for the three months and six months ended
March 31, 1999, respectively, based upon the Company's estimated tax rate for
the full fiscal year.
<PAGE>
(4) Shareholder Rights Plan
In April 1999, the Company adopted a Shareholder Rights Plan (the
"Rights Plan"). Under the Rights Plan, the Board of Directors declared a
dividend to shareholders of record of one preferred stock purchase right (the
"Rights") for each outstanding share of common stock. The Rights issued under
the plan will only become exercisable by shareholders, other than a potential
acquiror, following an acquisition by the acquiror (without prior approval of
the Company's Board of Directors) of 15% or more of the Company's common stock,
or the announcement of a tender offer for 15% or more of the common stock. The
Rights will expire in April 2009.
(5) Commitments and Contingencies
In late March 1999, the Company signed an agreement to purchase the
land and building in which their offices are located for approximately $3.2
million. All of the Company's operations are currently housed in this facility.
It leases approximately 35,000 square feet out of the 64,000 square foot
building. The purchase is expected to close in May 1999.
<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 March 31, 1999 and 1998
Revenues. The Company's revenues were $3.3 million for the second
quarter of fiscal 1999, an increase of $729,000, or 28.3%, over the same period
of fiscal 1998. The revenue components were as follows (in thousands):
<TABLE>
<CAPTION>
$ Increase % Increase
1999 1998 (Decrease) (Decrease)
------- ------- ---------- ----------
<S> <C> <C> <C> <C>
PhotoLink(R) commercial revenue:
Royalties $814 $557 $257 46.1%
License fees 60 60 0 0%
Reagent chemical sales 530 205 325 158.5%
Commercial development 283 242 41 16.9%
------ ------ ------
Total PhotoLink revenue 1,687 1,064 623 58.6%
Other revenue:
Diagnostic royalties 716 708 8 1.1%
Stabilization product sales 630 530 100 18.9%
Government research 275 277 (2) (0.7%)
------ ------ ------
Total other revenue 1,621 1,515 106 7.0%
------ ------ ------
Total revenues $3,308 $2,579 $729 28.3%
====== ====== ======
</TABLE>
The second quarter revenue growth was primarily a result of a 58.6%
increase in PhotoLink-related revenue, due to higher royalties and reagent
sales. The 46.1% growth in PhotoLink royalties resulted from increases in earned
royalties from greater market penetration of coated products sold by licensees.
The 158.5% increase in reagent chemical sales (those chemicals used by licensees
in the PhotoLink coating process) was due to growing production of
PhotoLink-coated devices by SurModics' clients. A single client purchased 65% of
the reagents sold during the quarter in order to build inventory in anticipation
of a product launch. Now that the client's product has been launched, it is
anticipated that their purchases in future quarters will be less than the
current quarter. SurModics signed four new PhotoLink license agreements during
the second quarter which resulted in license fee revenue of $60,000.
Product costs. The Company's product costs were $397,000 for the second
quarter of fiscal 1999, an increase of $79,000, or 24.8%, over the same period
of fiscal 1998. Overall product margins increased to 65.8% in the second quarter
of fiscal 1999 from 56.7% in the same period of fiscal 1998. The margin
improvement was the result of efficiencies achieved in manufacturing reagent
chemicals due to increased production volumes.
<PAGE>
Research and development expenses. Research and development expenses
were $1,213,000 for the second quarter of fiscal 1999, an increase of $111,000,
or 10.1%, over the same period of fiscal 1998. The change was primarily due to
the added compensation, benefit, and general business expenses associated with
additional technical personnel added by the Company over the last year, and
offset by lower external project charges on government grants.
Sales and marketing expenses. Sales and marketing expenses were
$437,000 for the second quarter of fiscal 1999, a decrease of $4,000, or 0.9%,
from the same period of fiscal 1998. This decrease was due to a reduction in
external consulting expenses related to a market research study performed last
year that was not repeated this year, and offset by added compensation, benefit,
and general business expenses associated with additional marketing personnel
added by the Company over the last year.
General and administrative expenses. General and administrative
expenses were $670,000 for the second quarter of fiscal 1999, an increase of
$240,000, or 55.8%, over the same period of fiscal 1998. The increase was the
result of several factors including: the cost of maintaining a directors' and
officers' liability insurance policy which was added in March 1998; new expenses
associated with being a public company (such as investor relations costs, and
other external reporting expenses); costs associated with the recently adopted
shareholder rights plan; and costs associated with the Company President, who
was appointed late last summer.
Income from operations. The Company's income from operations was
$591,000 for the second quarter of fiscal 1999, an increase of $303,000, or
105.2%, over the same period of fiscal 1998.
Other income, net. The Company's other income was $257,000 for the
second quarter of fiscal 1999, an increase of $159,000, or 162.2%, over the same
period of fiscal 1998. The increase was due to additional interest income
realized on the investments purchased with the proceeds of the public stock
offering that occurred in March 1998.
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 $571,000 reducing the Company's tax provision at statutory rates
to a net credit of $257,000 based upon the Company's estimated tax 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:
Proforma
Three Months Ended March 31,
1999 1998
---- ----
Net income before provision for income taxes $848,000 $386,000
Income tax provision (314,000) (143,000)
-------- --------
Net income $534,000 $243,000
======== ========
Diluted net income per share $0.07 $0.04
===== =====
<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 $120,000 for the second 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 March 31, 1999, the Company had a net $34,000 unrealized loss
related to those investments.
Six Months Ended March 31, 1999 and 1998
Revenues. The Company's revenues were $5.9 million for the first six
months of fiscal 1999, an increase of $1.5 million, or 32.5%, over the same
period of fiscal 1998. The revenue components were as follows (in thousands):
<TABLE>
<CAPTION>
$ Increase % Increase
1999 1998 (Decrease) (Decrease)
------- ------ ---------- ----------
<S> <C> <C> <C> <C>
PhotoLink commercial revenue:
Royalties $1,509 $977 $532 54.5%
License fees 325 60 265 441.7%
Reagent chemical sales 775 313 462 147.6%
Commercial development 492 488 4 0.8%
------ ------ ------
Total PhotoLink revenue 3,101 1,838 1,263 68.7%
Other revenue:
Diagnostic royalties 1,327 1,230 97 7.9%
Stabilization product sales 1,015 919 96 10.4%
Government research 504 501 3 0.6%
------ ------ ------
Total other revenue 2,846 2,650 196 7.4%
------ ------ ------
Total revenues $5,947 $4,488 $1,459 32.5%
====== ====== ======
</TABLE>
The six-month revenue growth was primarily a result of a 68.7% increase
in PhotoLink-related revenue, due to higher royalties, reagent sales and license
fees. The 54.5% growth in PhotoLink royalties was the result of 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 147.6%
increase in reagent chemical sales was due to growing production of
PhotoLink-coated devices by SurModics' clients. In addition, PhotoLink license
fee revenue totaled $325,000 during the first six months of fiscal 1999. Seven
new license agreements have been signed during the first six months of this year
compared to two new agreements last year.
Product costs. The Company's product costs were $679,000 for the first
six months of fiscal 1999, an increase of $111,000, or 19.5%, over the same
period of fiscal 1998. Overall product margins increased to 62.0% in the first
six months of fiscal 1999 from 53.9% in the same period of fiscal 1998. The
margin improvement was primarily the result of efficiencies achieved in
manufacturing reagent chemicals due to increased production volumes.
Research and development expenses. Research and development expenses
were $2,379,000 for the first six months of fiscal 1999, an increase of
$319,000, or 15.5%, over the same period of fiscal 1998. The change was
primarily due to the added compensation, benefit, laboratory supplies and
general business expenses associated with additional technical personnel added
by the Company over the last year; increased depreciation expense associated
with the build-out of additional laboratory space; and offset by lower external
project charges on government grants.
<PAGE>
Sales and marketing expenses. Sales and marketing expenses were
$835,000 for the first six months of fiscal 1999, an increase of $91,000, or
12.2%, over the same period of fiscal 1998. This increase was primarily the
result of additional compensation, benefit and general business expenses
associated with additional marketing personnel; higher spending for advertising
and promotions; and offset by a reduction in external consulting expenses
associated with a market research study performed last year.
General and administrative expenses. General and administrative
expenses were $1,198,000 for the first six months of fiscal 1999, an increase of
$471,000, or 64.8%, over the same period of fiscal 1998. The increase was due to
several factors including: the cost of maintaining a directors' and officers'
liability insurance policy which was added in March 1998; new expenses
associated with being a public company (such as investor relations costs, and
other external reporting expenses); costs associated with the recently adopted
shareholder rights plan; and costs associated with the Company President, who
was appointed late last summer.
Income from operations. The Company's income from operations was
$856,000 for the first six months of fiscal 1999, an increase of $467,000, or
120.1%, over the same period of fiscal 1998.
Other income, net. The Company's other income was $625,000 for the
first six months of fiscal 1999, an increase of $474,000, or 313.9%, over the
same period of fiscal 1998. The 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 net gain of $95,000, which can be offset in full by the Company's
capital loss carryforwards for tax purposes.
Income tax benefit. During the first six months, net income included
the reversal of income tax valuation reserves of $1,062,000 reducing the
Company's tax provision at statutory rates to a net credit of $549,000 based
upon the Company's estimated tax rate for the full fiscal year. It is
anticipated that similar amounts will be recorded in the second half 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:
Proforma
Six Months Ended March 31,
1999 1998
--------- --------
Net income before provision for income taxes $1,481,000 $540,000
Income tax provision (513,000) (200,000)
--------- --------
Net income $ 968,000 $340,000
========= ========
Diluted net income per share $0.12 $0.06
===== =====
Other comprehensive income (loss). The Company's other comprehensive
loss was $217,000 for the first six months 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 March 31, 1999, the Company had a net $34,000 unrealized loss
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
<PAGE>
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. Based on 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
certain 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 March 31, 1999, the Company had working capital of approximately
$6.2 million and cash, cash equivalents and investments totaling approximately
$21.4 million. The Company generated positive cash flows from operating
activities of $906,000 in the first six months, which was an increase of 55.4%
for the same period of last year, primarily due to the increased net income.
Approximately $1.5 million of cash was used for investing activities during the
first six months. 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, $408,000
of cash was generated from financing activities due to the issuance of common
stock related to the exercise of stock options during the first six months of
the year. Last year, a net of $15.5 million of cash was generated in the
Company's initial public offering of 2.3 million shares of Common Stock.
The Company has entered into an agreement to purchase the land and
building containing its current operating facilities and headquarters. The
purchase price of approximately $3.2 million will be funded out of available
cash, cash equivalents and short-term investments. The purchase is expected to
close in May 1999.
As of March 31, 1999, 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>
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.
Use of Proceeds for the period ending March 31, 1999.
(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 $ 503,000
Sales and marketing $ 501,000
Equipment upgrades $ 1,083,000
Patent protection $ 75,000
Working capital and general corporate purposes $ 466,000
Money market funds $12,893,102
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.
The Company held its Annual Meeting of shareholders on January 25,
1999. The information required by this Item 4 is incorporated by reference to
Item 4 of Part II of the Company's Form 10-QSB for the quarterly period ended
December 31, 1998.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - 27 Financial Data Schedule
10.1 Purchase and Sale Agreement, dated March 30, 1999, relating to the
purchase of the Company's facility located at 9924 West 74th
Street, Eden Prairie, Minnesota
(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, 1999 By: /s/ Stephen C. Hathaway
Stephen C. Hathaway
Vice President & CFO
(Principal Financial Officer)
<PAGE>
Exhibit Index
Exhibit Number Description
10.1 Purchase and Sale Agreement
27 Financial Data Schedule
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (the "Agreement"), is made and entered
into as of the 30th day of March, 1999 by and between Prairie View
Jack, Ltd., a Minnesota limited partnership (hereinafter called "Seller"), and
SurModics, Inc., a Minnesota corporation, or its assigns (hereinafter called
"Purchaser," whether one [1] or more).
In consideration of the covenants, conditions and agreements
hereinafter set forth, and of One Dollar ($1) and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, it
is hereby agreed by and between the parties hereto as follows:
1. Sale of Property. Seller agrees to sell, assign, transfer and convey
to Purchaser, and Purchaser agrees to pay the purchase price (hereinafter
defined) and to purchase, acquire and take from Seller, subject to the terms and
conditions herein contained the land located at 9910-9960 West 74th Street, Eden
Prairie, County of Hennepin, State of Minnesota, legally described on Exhibit A
attached hereto and hereby made a part hereof (hereinafter called "Land"),
together with all buildings and improvements located thereon, (hereinafter
collectively called "Building," whether one [1] or more), and all appurtenances,
hereditaments, privileges and easements belonging thereto, and together with all
fixtures, equipment, furnishings, appliances and personal property which are
owned by Seller including lease goodwill are located in the Building or on the
Land on the date hereof, and are used in connection with the maintenance or
operation thereof, all commonly known as the (hereinafter all collectively
called "Property").
2. Purchase Price. The purchase price to be paid by Purchaser to Seller
for the Property is Three Million One Hundred Ninety-five Thousand Dollars and
No/100 ($3,195,000.00) ("Purchase Price"), which shall be paid as follows:
A. $100,000 in cash, earnest money (hereinafter called "Earnest
Money"), herewith paid by Purchaser, the receipt of
which is hereby acknowledged, which sum, upon the
execution hereof by Seller, shall be delivered to
Seller; and
B. $3,095,000 by wire transfer of immediately available, good
federal funds to a bank account designated by Seller
on the Closing Date (as that term is hereinafter
defined).
3. Conditions to Performance by Purchaser. Purchaser's obligation to
perform under this Agreement is hereby made expressly contingent and conditional
upon the occurrence, fulfillment, satisfaction or performance of each of the
following conditions (hereinafter called "Purchaser's Conditions") on or before
a date thirty (30) days after the date of this Agreement (herein called
"Purchaser's Contingency Expiration Date"):
A. Title. Seller obtaining, within twenty (20) days after the
date of this Agreement, and at Seller's sole cost and expense,
a current commitment
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(hereinafter called "Title Commitment") for an ALTA Form B
Owner's Policy of Title Insurance (hereinafter called "Title
Policy"), in the amount of the Purchase Price, covering the
Land and Building, from Old Republic Title Insurance Company,
or from any other reputable, national title insurance company
licensed to do business in the State of Minnesota (hereinafter
called "Title Company"), together with a copy of each recorded
document referred to in the Title Commitment. Seller shall, as
soon as reasonably possible, provide to Purchaser a copy of
the most recent policy(ies) of title insurance covering the
Property which Seller has, if any, if Seller has not already
done so. Seller agrees to make a diligent, good faith effort
to obtain the Title Commitment and said document copies.
Purchaser acknowledges that the Title Commitment will show
that the Property is subject to (a) the standard printed
exceptions which will appear in the Title Policy; (b) real
estate taxes and special assessments which are not yet
delinquent; and (c) the Leases. Purchaser shall have ten
business (10) days after receiving the Title Commitment to
raise, by written notice to Seller, any objections to the
title to the Property which Purchaser may have. All objections
not so raised shall be deemed waived, and Purchaser agrees to
take title to the Property subject to all liens, charges,
encumbrances, restrictions, conditions, reservations,
easements and other matters described in the Title Commitment
and not so objected to or which are otherwise hereafter
approved by Purchaser (hereinafter all collectively called
"Permitted Encumbrances"). If Purchaser so raises any such
objections, Seller shall have the right, but not the
obligation, to cure the same within ten (10) business days of
its receipt of such written notice of title objections by
Purchaser; provided, however, that Seller shall not have any
obligation to take any action or to incur any cost or expense
in connection with the cure of any thereof. If Seller does
cure such objection on or before the Closing Date, Purchaser
shall purchase the Property in accordance with the provisions
hereof. If Seller fails to cure such objections within such
ten (10) business day period it shall notify Purchaser in
writing of its inability to cure such objections, and,
Purchaser may elect within five (5) business days of its
receipt of such written notice by written notice to Seller,
either (i) to purchase the Property anyway, in accordance with
the provisions hereof, and without any reduction in or
abatement of the Purchase Price, subject to the matters
objected to, and without any continuing obligation upon Seller
to cure the same, or (ii) to terminate this Agreement, in
which event all Earnest Money (and all interest earned
thereon) shall be paid to Purchaser, and this Agreement shall
be deemed to be null, void, terminated and of no further force
or effect, except as herein to the contrary expressly
provided. If Purchaser fails to so elect either said option
(i) or said option (ii), Purchaser shall be deemed to have
elected said option (i).
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B. Survey. Seller providing to Purchase within twenty (20) days
of the execution of this Agreement, and at Seller's sole cost
and expense, a current as-built plat of survey of the Land and
Building prepared and certified by a duly licensed land
surveyor acceptable to Purchaser and otherwise in form and
substance acceptable, in their sole discretion, to Purchaser,
its attorneys and the Title Company, so that the Title Company
will delete its standard, and all other, survey exceptions
from the Title Policy.
Seller agrees to cooperate with Purchaser in Purchaser's efforts to fulfill,
satisfy and/or perform Purchaser's Conditions. All of the Purchaser's Conditions
are for the benefit of Purchaser and may be waived by Purchaser at any time
prior to the termination of this Agreement. If any of the Purchaser's Conditions
has not occurred or has not been fulfilled, satisfied or performed prior to the
Purchaser's Contingency Expiration Date (or such other date as may be provided
therefor above), Purchaser may so notify Seller, in writing, on or before the
Purchaser's Contingency Expiration Date (or such other date), in which event all
Earnest Money (and all interest earned thereon) shall be paid to Purchaser, and
this Agreement shall be deemed to be null, void, terminated and of no further
force or effect, except as herein to the contrary expressly provided. If such
notice is not so given on or prior to the Purchaser's Contingency Expiration
Date (or such other date) with respect to any of the Purchaser's Conditions,
said Purchaser's Conditions shall be deemed to be waived. Purchaser agrees to
keep all information relating to the Property provided to it by Seller or
obtained by Purchaser in the course of its review and inspection provided for
herein confidential until the Closing has occurred, and to return to Seller all
copies and information relating to the Property provided to it by Seller or made
by it in the course of said review and inspection, if the Sale does not close
for any reason other than a default by Seller. Purchaser also agrees to provide
Seller with copies of all reports obtained by it from third parties with respect
to the Property, including but not limited to engineering reports, environmental
assessments, the Title Commitment, title documents and plats of survey, if the
Sale does not close for any reason other than a default by Seller. The
obligations of Purchaser under the two (2) immediately preceding sentences
hereof shall survive any termination of this Agreement.
4. Seller Warranties. Seller shall represent and warrant to Purchaser
on the Closing Date that the Leases, Service Contracts, Rent Roll and Operating
Statements delivered by it to Purchaser are, to the best of Seller's knowledge,
correct and complete, and that this Agreement and the documents listed in
Paragraph 8 hereof and signed by Seller have been duly authorized, executed and
delivered by Seller, are the valid and binding obligations of Seller and do not
violate any agreement to which Seller is a party.
When any statement, certification, representation or warranty is made
herein, or in any of the documents executed and delivered by Seller pursuant
hereto, "to the best of Seller's knowledge," said phrase shall be deemed to mean
only that, to the actual, present knowledge (rather than the implied, imputed or
constructive knowledge or notice) of officers and/or employees of Seller, who
have been actively involved in the management, operation and/or sale of the
Property, said statement, certifications, representation or warranty is not
untrue, rather than that said officers or employees of Seller have any
affirmative knowledge that the same are true, and neither Seller, nor said
officers or
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employees, shall have any duty or obligation to make any inspection, inquiry or
investigation with respect thereto. For all purposes hereof, "Seller's
knowledge" shall not include the knowledge, actual, implied, imputed or
constructive, of any other director, officer, employee, member, agent, attorney,
contractor, consultant, representative, successor or assign of Seller or of any
other person, party or entity. If Purchaser knows that any such statement,
certification, representation or warranty is untrue on the date hereof, Seller
shall have no liability, of any kind, to Purchaser for the untruth,
incorrectness or breach thereof, and the same shall be deemed to be deleted
herefrom for all purposes. If Purchaser discovers that any such statement,
certification, representation or warranty is untrue or incorrect in any material
respect between the date of this Agreement and the Closing Date, Purchaser shall
immediately notify Seller thereof in writing. Seller shall have the right, but
not the obligation, to cure any such material untruth, incorrectness or breach
on or before the Closing Date. If Seller does cure the same on or before the
Closing Date, Purchaser shall purchase the Property in accordance with the terms
hereof. If Seller fails to cure the same on or before the Closing Date,
Purchaser may elect, by written notice to Seller, either (A) to purchase the
Property anyway, in accordance with the provision hereof, and without any
reduction in or abatement of the Purchase Price, notwithstanding such untruth,
incorrectness or breach, and without any continuing obligation of Seller to cure
the same or to pay any damages to Purchaser as a result thereof, the same being
deemed to be waived by Purchaser, or (B) to terminate this Agreement, as its
sole and exclusive remedy therefor, in which event all earnest Money (and all
interest deemed thereon) shall be paid to Purchaser, and this Agreement shall be
deemed to be null, void, terminated and of no further force or effect, except as
herein to the contrary expressly provided. If Purchaser fails to so elect either
said option (A) or said option (B), Purchaser shall be deemed to have elected
said option (A). If Purchaser has no knowledge of any untruth, incorrectness or
breach thereof on the Closing Date, all representations and warranties made by
Seller herein shall survive the Closing and shall remain in full force and
effect for a period of six (6) months thereafter; provided, however, that
Purchaser shall not have, and hereby waives, any claim or cause of action
against Seller resulting from any untruth, incorrectness or breach thereof
unless Purchaser actually commences an action thereon within six (6) months
after the Closing Date.
SELLER MAKES NO REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, WITH
RESPECT (A) TO THE DESIGN, CONSTRUCTION, LOCATION, SIZE, CHARACTER, PHYSICAL
CONDITION OR STATE OF REPAIR OF THE PROPERTY OR ANY PORTION THEREOF; (B) TO THE
TOPOGRAPHY, DRAINAGE OR CONDITION OF THE SURFACE AND SUBSURFACE SOILS OF OR ON
THE LAND; (C) TO THE PRESENCE OR ABSENCE OF HAZARDOUS WASTE OR HAZARDOUS
SUBSTANCES ON OR FROM THE PROPERTY; (D) TO THE MERCHANTABILITY, HABITABILITY OR
FITNESS FOR ANY PARTICULAR PURPOSE OF THE PROPERTY; (E) TO THE PAST OR FUTURE
TAXES OR ASSESSMENTS THEREON, INCOME THEREFROM OR EXPENSES THEREOF; OR (F) TO
THE COMPLIANCE THEREOF WITH ANY APPLICABLE GOVERNMENTAL REQUIREMENT, OR ANY
OTHER REPRESENTATION OR WARRANTY NOT HEREIN EXPRESSLY SET FORTH OR PROVIDED FOR,
AND ALL SUCH REPRESENTATIONS AND WARRANTIES ARE HEREBY DISCLAIMED BY SELLER. BY
EXECUTION HEREOF, PURCHASER REPRESENTS AND WARRANTS TO SELLER THAT PURCHASER IS
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AN EXPERIENCED, SOPHISTICATED PURCHASER OF COMMERCIAL REAL ESTATE, WITH
KNOWLEDGE AND EXPERIENCE SUFFICIENT TO ENABLE IT TO EVALUATE THE MERITS AND
RISKS OF THE SALE, AND THAT IT IS REPRESENTED BY KNOWLEDGEABLE AND EXPERIENCED
LEGAL COUNSEL OF ITS OWN CHOOSING, AND AGREES THAT NEITHER SELLER, NOR ITS
AGENTS OR REPRESENTATIVES, HAS MADE, AND THAT PURCHASER HAS NOT RELIED UPON, ANY
SUCH REPRESENTATION OR WARRANTY, OR ANY OTHER REPRESENTATION OR WARRANTY OF ANY
KIND WHICH IS NOT HEREIN EXPRESSLY SET FORTH OR PROVIDED FOR, IN CONNECTION WITH
THE SALE OF THE PROPERTY OR PURCHASER'S ACTUAL PURCHASE THEREOF PURSUANT HERETO,
PURCHASER HAVING ELECTED TO RELY INSTEAD ENTIRELY UPON ITS INSPECTION OF THE
PROPERTY PURSUANT TO SUBPARAGRAPHS 3(A) AND 3(B) HEREOF.
Purchaser acknowledges that Seller has not made any inspection,
investigation or inquiry with respect to the Property, and, unless Purchaser has
terminated this Purchase Agreement in accordance with the express provisions
hereof, Purchaser agrees to take title to the Property "AS IS, WHERE IS" in the
condition it is in on the Closing Date, subject only to the obligations of
Seller under Paragraphs 5 and 6 hereof.
5. Operation Prior to Closing. Between the date of this Agreement and
the Closing Date, Seller shall (a) manage and operate the Property in
Substantially the same manner as Seller has been managing and operating the same
on the date hereof, (b) keep and perform all of the covenants which it is
obligated to keep and perform under the Leases; and (c) maintain, or cause the
tenants to maintain, the Property in at least as good physical condition as it
is in on the date of this Agreement, ordinary wear and tear of normal use and
damage from casualty or condemnation excepted. Seller may not sign leases
covering space in the Property which is vacant on the date hereof, or which
become vacant prior to the Closing Date (hereinafter called "New Leases")
without the prior written consent of Purchaser. Seller may also permit or
consent to subleases of space in the Property (hereinafter called "Subleases")
and may enter into contracts or agreements relating to operation or maintenance
of the Property (hereinafter called "Operating Contracts"), so long as said
Operating Contracts may be terminated by the owner of the Property upon not more
than thirty (30) days' prior written notice to the contractor. Seller shall not
enter into any other Operating Contract without the prior written approval of
Purchaser. If Seller receives written notice from any governmental body, agency
or instrumentality between the date of this Agreement and the Closing Date that
the Property is in violation of any applicable Governmental Requirement, Seller
shall immediately provide a copy thereof to Purchaser. Seller shall have the
right, but not the obligation, to cure any such violation on or before the
Closing Date. If Seller fails to cure any such violation on or before the
Closing Date, Purchaser may elect, by written notice to Seller, either (A) to
purchase the Property anyway, in accordance with the provisions hereof, and
without any reduction in or abatement of the Purchase Price, subject to said
violation, and without any continuing obligation upon Seller to cure such
violation, or (B) to terminate this Agreement, in which event all Earnest Money
(and all interest earned thereon) shall be paid to Purchaser, and this Agreement
shall be deemed to be null, void, terminated and of no further force or effect,
except as herein to the contrary expressly provided. If
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Purchaser does not so elect either said option (A) or said option (B), Purchaser
shall be deemed to have elected said option (A).
6. Risk of Loss. The risk of loss or damage to the Property from fire,
the elements or other casualty, or from condemnation, prior to Closing, shall be
upon Seller; provided, however, that if any such loss or damage to the Property
does occur prior to Closing, Seller shall promptly give Purchaser written notice
thereof, and Seller may elect to repair the same, at Seller's sole cost and
expense, by giving written notice of said election to Purchaser within ten (10)
days after the occurrence of any such loss or damage, or on the Closing Date,
whichever is earlier. The Closing Date may be postponed by Seller by up to
ninety (90) days to give Seller the opportunity to complete such repair. All
insurance or condemnation proceeds resulting from any such loss or damage shall
belong to Seller. If Seller does not so elect to repair said loss or damage,
Purchaser may, within thirty (30) days after the occurrence of any such loss or
damage, or on the Closing Date, whichever is earlier, elect, by written notice
to Seller, either (a) to close the Sale, despite said unrepaired loss or damage,
in which event the Sale shall close without any reduction in or abatement of the
Purchase Price, and without any obligation upon Seller to repair the same, and
Seller shall assign all insurance or condemnation proceeds resulting from said
loss or damage to Purchaser; or (b) to terminate this Agreement, in which event
all Earnest Money (and all interest earned thereon) shall be paid to Purchaser,
and this Agreement shall be deemed to be null, void, terminated and of no
further force or effect, except as herein to the contrary expressly provided. If
Purchaser fails to so elect either said option (a) or said option (b), Purchaser
shall be deemed to have elected said option (a).
7. Tenant Estoppel Certificates. At least five (5) days prior to the
Closing Date, Seller shall cause tenants of one hundred percent (100%), by area,
of the leased space in the Property (with the exception of Purchaser) under
Leases and New Leases to furnish to Purchaser a signed estoppel certificate
(hereinafter called "Estoppel Certificate"), confirming the following
information with respect to its Lease: (a) the date, time, amount of rent
payable, and renewal options (if any) available under the Lease; (b) that the
tenant is in occupancy and that the Lease is in full force and effect and has
not been modified or amended, except as expressly noted therein; (c) that all
obligations of the lessor of an inducement nature under the Lease have been
performed to the tenant's satisfaction; (d) that, to the best of the tenant's
knowledge, no defaults exist under the terms of the Lease; and (e) that the
person signing said Estoppel Certificate has full power and authority to do so
and to bind the tenant thereby, or otherwise in the form, if any, which said
tenant is required to deliver by the provisions of its Lease. Seller agrees to
make a diligent, good faith effort to obtain said Estoppel Certificates. If
Seller is unable to obtain such an Estoppel Certificate from any tenant, Seller,
at its option, may, in lieu thereof, prepare such an Estoppel Certificate for
said tenant and certify to Purchaser that, to the best of Seller's knowledge,
the same is true, correct and complete in all respects. Such an Estoppel
Certificate, so certified by Seller, shall be equivalent to such an Estoppel
Certificate signed by the tenant for all purposes hereof, unless Purchaser
thereafter receives such an Estoppel Certificate from the tenant, in which event
said latter Estoppel Certificate shall supersede the former in all respects. If
any such Estoppel Certificate is inconsistent with the Rent Roll in any material
respect, or if it indicates that Seller is in default or has not performed some
duty of an
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inducement nature under the Lease described therein, Seller shall have the
right, but not the obligation, on or before the Closing Date, to resolve said
inconsistency, to cure said default and/or to perform said obligation. If Seller
does so resolve, cure or perform the same, Purchaser shall purchase this
Property in accordance with the terms hereof. If Seller fails to so obtain or
certify such Estoppel Certificates, to resolve any such inconsistency, to cure
any such default or to perform any such obligation, on or before the Closing
Date, Purchaser may, by written notice to Seller, elect either (i) to purchase
the Property anyway, in accordance with the provisions hereof, without any
reduction or abatement of the Purchase Price, notwithstanding said failure, and
without any continuing obligation upon Seller to obtain, certify, resolve, cure
or perform the same, or (ii) to, as its sole and exclusive remedy therefor,
terminate this Agreement by written notice to Seller, in which event all Earnest
Money (and all interest earned thereon) shall be paid to Purchaser, and this
Agreement shall be deemed to be null, void, terminated and of no further force
or effect, except as herein to the contrary expressly provided. If Purchaser
fails to so elect either said option (i) or said option (ii), Purchaser shall be
deemed to have elected said option (i).
8. Closing. The Closing shall take place within forty-five (45) days of
this Agreement or on such date as shall be mutually agreed to by Seller and
Purchaser (herein called "Closing Date"), at such place in the City of
Minneapolis, State of Minnesota, metropolitan area, as Seller may reasonably
designate. The Closing Date shall not be a Saturday, a Sunday or a legal
holiday. At the Closing, and if the parties hereto are not then in default
hereunder, the parties hereto shall execute and/or deliver the following
documents, which (except for those relating to Purchaser and described in
Subparagraph 8[H] hereof) shall be prepared by Seller, subject to approval by
Purchaser in its reasonable discretion (which approval shall not be withheld if
said documents conform with the terms hereof):
A. Warranty Deed. A Warranty Deed (herein called "Deed"), subject
to Permitted Encumbrances, executed by Seller, covering the
Land and the Building (wherein Seller warrants the title
thereto only against persons, parties and entities claiming
by, through or under Seller, other than those claiming under
Permitted Encumbrances).
B. Warranty Bill of Sale. A Warranty Bill of Sale, subject to
Permitted Encumbrances, executed by Seller, covering all
personal property included within the Property (wherein Seller
warrants the title thereto only against persons, parties and
entities claiming by, through or under Seller, other than
those claiming under Permitted Encumbrances).
C. Assignment of Leases. An Assignment of Leases covering the
Leases and any New Leases (hereinafter collectively called
"Assigned Leases"), subject to Permitted Encumbrances,
executed by Seller and joined in by Purchaser for the purpose
of assuming and agreeing to perform all of the duties and
obligation of the lessor under the Assigned Leases for the
period after the Closing Date and of agreeing to indemnify
Seller against and to hold Seller
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harmless from any claims, causes of action, damages and
expenses, including court costs and reasonable attorneys'
fees, resulting from any failure by Purchaser to do so.
Attached to the Assignment of Leases shall be a copy of a then
current Rent Roll for the Property, which Seller shall therein
warrant and represent to Purchaser to be correct and complete,
to the best of Seller's knowledge, as of the Closing Date.
Seller shall deliver the originals or whatever copies of the
Assigned Leases it has to Purchaser, together with copies of
whatever correspondence with tenants and tenant payment
records Purchaser may then request, at the Closing.
D. Assignment of Service Contracts, Operating Contracts,
Warranties, Guaranties, Certificates, Permits, Etc. An
Assignment covering the Service Contracts and Operating
Contracts, covering all of Seller's right, title and interest
in, to and under any unexpired, assignable warranties and
guaranties relating to any portion of the Property, and
covering any assignable certificates, licenses, permits
authorizations and approvals relating to the use or operation
of the Property, executed by Seller and joined in by Purchaser
for the purpose of assuming and agreeing to perform all of the
duties and obligations of the owner thereunder for the period
after the Closing Date and of agreeing to indemnify Seller
against and to hold Seller harmless from any claims, causes of
action, damages and expenses, including court costs and
reasonable attorneys' fees, resulting from any failure by
Purchaser to do so. Seller shall deliver originals or whatever
copies it has of all items covered by said Assignment to
Purchaser at the Closing.
E. Notices to Tenants. Written notices to all tenants of the
property of the assignment of their Assigned Leases, and any
deposits made thereunder, by Seller to Purchaser, which
conform with any applicable laws of the State of and/or which
are necessary or desirable to notify said tenants of such
assignment and to relieve Seller from, and to impose upon
Purchaser, liability for any deposits made by the tenants
thereunder, together with any other documents necessary or
desirable for said purpose, all signed by both Seller and
Purchaser. Said notices shall also instruct the tenants to pay
all future rent payable under their Assigned Leases to
Purchaser.
F. Seller's Affidavit. An Affidavit, signed by Seller, stating
that all labor and materials, if any, furnished to the
Property at Seller's request within one hundred twenty (120)
days prior to the Closing Date have been paid for, or will be
paid for by Seller.
G. Transferor's Certification. A Transferor's Certification
whereby Seller certifies that it is not a foreign person,
foreign corporation, foreign partnership, foreign trust or
foreign estate (as those terms are defined in the
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United States Internal Revenue Code and the Income Tax
Regulations promulgated thereunder [hereinafter called
"Code"]) and setting forth such other information as may be
required by Section 1445(b)(2) of the Code or any amendment or
replacement thereof.
H. Evidence of Authority. Evidence of the authority of Seller and
Purchaser, respectively, to consummate the Sale and to
execute, deliver and perform this Agreement and the documents
referred to in this Paragraph 8, in form and substance
reasonably acceptable to the other party hereto and to the
Title Company, including but not limited to copies of
corporate resolutions.
I. Closing Statement. A closing Statement, signed by Purchaser
and Seller, setting forth the source and disposition of the
Purchase Price and of all other funds transferred at the
Closing.
9. Closing Expenses. Seller and Purchaser shall each pay one-half (1/2)
of any reasonable closing fee charged by the Title Company. Purchaser shall pay
the following costs and expenses of the Sale: (a) all recording fees for
recording the Deed; (b) all fees of Purchaser's attorneys' and accountants; (c)
the premium for the Title Policy; Seller shall pay (a) all fees of Sellers
attorneys' and accountants and (b) the cost of the survey and the title
commitment; (c) the deed, real estate transfer or conveyance tax, if any.
10. Prorations and Adjustments. The following items shall be prorated,
adjusted or transferred at the Closing, as follows:
A. Ad Valorem Taxes. Ad Valorem real (and, if applicable,
personal) property taxes and installments of assessments
payable on the Property for and in the year in which the
Closing Date occurs shall be prorated as of the Closing Date
on a daily basis, with Seller being responsible for the
Closing Date.
B. Rents and Other Income. Collected rents and other collected
income, including but not limited to percentage rents, tenant
reimbursements of taxes, assessments, operating expenses and
common area charges, and vending machine receipts, if any,
from the Property shall be prorated on a daily basis as of the
Closing Date, with Seller being entitled to the Closing Date.
If any rents for a period prior to the Closing Date remain
uncollected on the Closing Date, Purchaser shall make a
diligent, good faith effort to collect the same after the
Closing. If any such rents are so collected by Purchaser, said
rents shall be paid over by Purchaser to Seller. For the
purposes of determining to which periods rents collected by
Purchaser after the Closing are applicable, (a) if any tenant
designates the period to which any rent payment is applicable,
the parties shall honor that designation, and (b) any
undesignated rent payments shall be applied in the following
order: (i) to unpaid rent for
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the month in which the Closing Date occurs; (ii) to unpaid
rent for any subsequent month which is due and payable when
said payment is received; (iii) to unpaid rent for any month
prior to the month in which the Closing Date occurs; and (iv)
to prepayment of any other subsequent month's rent. Seller
hereby retains the continuing right, which shall survive the
Closing, to bring an action against any tenant for unpaid rent
attributable to the period through the Closing Date.
C. Operating Expense. Operating expenses of the Property,
including but not limited to payments on Service Contracts and
Operating Contracts, water and sewer use charges, utility
bills and fuel costs, shall be prorated on a daily basis as of
the Closing Date, with Seller being responsible for the
Closing Date.
D. Security Deposits. All security and other deposits which
Seller has received from tenants and has not been applied in
accordance with Leases, or an amount, in cash, equal thereto,
plus an amount equal to all interest required by law to be
paid thereon if refunded to tenants on the Closing Date, if
any, shall be paid by Seller to Purchaser.
E. Insurance. Purchaser agrees to provide its own casualty and
liability insurance policies covering the Property on the
Closing Date, and Seller may cancel and terminate all of its
casualty and liability insurance coverage relating to the
Property upon completion of the Closing.
F. Utility Deposits. Seller shall assign to Purchaser, and
Purchaser shall purchase from Seller, all refundable utility
deposits posted by Seller with respect to the Property, if
any.
Any emptying of vending machines, any reading of utility meters, and any other
activities needed to precisely determine the amounts of income or expenses to
which Purchaser and Seller are entitled, or for which either is obligated, at
the Closing shall be accomplished, if possible, immediately prior to the Closing
in the presence of representatives of both Seller and Purchaser. If the actual
amounts of any of the foregoing, including but not limited to tax, assessment,
operating expense and common area charge reimbursements paid by tenants, are not
known and cannot reasonably be determined on the Closing Date, the parties
hereto agree that the same shall be prorated or adjusted based upon the best
available estimates of the amounts thereof, subject to readjustment between the
parties as soon after the Closing Date as the actual amounts thereof are known
to them. The agreements set forth in the preceding sentence shall survive and
remain enforceable after the Closing and the execution and delivery of the Deed.
10
<PAGE>
11. Possession. Legal possession of the Property shall be delivered to
Purchaser by Seller on the Closing Date, subject to the rights of tenants under
Assigned Leases set forth on the Rent Roll attached to the Assignment of Leases,
and subject to Permitted Encumbrances.
12. Brokers. Seller has agreed to pay a brokerage commission to Welsh
Companies, Inc. (hereinafter called "Broker") upon, but only upon, completion of
the Closing in accordance with the terms hereof. Each of the parties hereto
represents that it has not incurred and is not paying any brokerage commission,
finder's fee or fee or commission of any kind to any third party as the result
hereof or of the Sale, other than said brokerage commission which Seller has
agreed to so pay to Broker, and each party hereto hereby agrees to indemnify the
other against, and to hold the other harmless from, any claim for any such fee
or commission resulting form the acts or agreements of the indemnifying party,
including but not limited to reasonable attorneys' fees and court costs incurred
in connection with defending against any such claim. The agreements set forth in
the preceding sentence shall survive and remain enforceable after the Closing
and the execution and delivery of the Deed or any other termination of this
Agreement.
13. Default. In the event Seller defaults in the performance of any of
its obligations set forth in this Agreement, the Earnest Money (and all interest
earned thereon) shall be paid to Purchaser. Purchaser may exercise Purchaser's
remedies at law for the recovery of Purchaser's actual damages from Seller's
breach, but Purchaser waives any right to specific performance and to
consequential, punitive, speculative and other damages. Purchaser and Seller
agree that for purposes of this Agreement, "actual damages" are Purchaser's
expenses in investigation of the Property only. Actual damages shall not include
Purchaser's lost opportunities or projected income from ownership of the
Property. In the event Purchaser defaults in the performance of any of its
obligations set forth in this Agreement, then the Earnest Money (and all
interest earned thereon) shall be paid to Seller as liquidated damages, and as
Seller's sole remedy for said default and not as a penalty, the parties hereto
hereby expressly agreeing that actual damages would be difficult or impossible
to measure.
14. Notices. Any notice or other communication required or permitted to
be given under this Agreement shall be in writing, shall be irrevocable, and
shall be deemed sufficiently given (a) when delivered to an overnight air
express company marked for next business day delivery, or (b) when actually
received by the addressee if deposited in the United States Mail, certified
mail, return receipt requested, postage prepaid, addressed as follows:
If to Seller: John P. Elterich, Esq.
Investment Counsel
State Farm Life Insurance Company
Corporate Law-Investments Department E-10
One State Farm Plaza
Bloomington, IL 61710
11
<PAGE>
with copies to: Timothy D. Fuller
Fuller, Seaver & Ramette, P.A.
101 West Burnsville Parkway, Suite 201
Burnsville, MN 55337
If to Purchaser: Stephen C. Hathaway
SurModics, Inc.
9924 West 74th Street
Eden Prairie, MN 55344
with copies to: David R. Busch, Esq.
Fredrikson & Byron, P.A.
1100 International Centre
900 Second Avenue South
Minneapolis, MN 55402-3397
or to either such party at such other address in the United States of America as
said party shall designate by notice given as herein provided at least ten (10)
days prior to the effective date of said change of address.
15. Assignment. Neither Seller nor Purchaser may assign its rights or
obligations hereunder without the prior written consent of the other.
16. Indemnity. As a condition to liability for indemnity under this
Agreement, the party claiming indemnification (hereinafter called "Indemnitee")
shall notify the party from whom indemnification is claimed (hereinafter called
"Indemnitor"), in writing, of any claim covered by any agreement to indemnify
set forth herein (hereinafter called "Claim") within a reasonable time after the
assertion thereof by a third party against the Indemnitee. In the event of such
notice by the Indemnitee to the Indemnitor of a third party Claim, the
Indemnitor shall have ten (10) days after receipt thereof in which to undertake
the defense of the Claim on behalf of itself and the Indemnitee. If the
Indemnitor so undertakes to defend said Claim on behalf of itself and the
Indemnitee, it shall retain and pay counsel to conduct such defense. Such
counsel shall be subject to the approval of the Indemnitee, which approval shall
not be unreasonably withheld or delayed. The Indemnitee may employ its own
counsel to work with the Indemnitor's counsel in connection with the defense of
said Claim, but the Indemnitee shall pay all fees and disbursements of said
counsel. The Indemnitor may settle the Claim, without the consent of the
Indemnitee, so long as the Indemnitor is solely liable for the payment and/or
performance of any settlement. If the Indemnitee would have any liability for
the payment and/or performance of any settlement, its written consent thereto
must be obtained by the Indemnitor, in order for said settlement to be binding
upon the Indemnitee. If the Indemnitor refuses or fails to so undertake to
defend the Claim, the Indemnitee may defend the same on its own behalf, may
retain and pay counsel to conduct such defense and may settle the Claim, without
12
<PAGE>
the consent of the Indemnitor. The Indemnitor shall then reimburse the
Indemnitee for all reasonable costs, including court costs and reasonable
attorneys' fees, incurred by the Indemnitee in connection with said defense
and/or any such settlement; for all sums paid by the Indemnitee in accordance
with any such settlement; and for all sums paid pursuant to any judgment entered
against the Indemnitee in connection therewith. The provisions of this Paragraph
shall survive and remain enforceable after the Closing and the execution and
delivery of the Deed or any other termination of this Agreement.
17. Parties. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective heirs, executors,
administrators, personal representatives, legal representatives, successors and
permitted assigns. As used herein, words in the singular include the plural, and
the masculine, feminine and neuter genders include all genders, as appropriate.
18. Limitation of Liability. No director, officer, partner, employee,
member, agent, attorney, contractor or representative of Seller shall have any
personal liability whatsoever under, in connection with, arising out of or in
any way related to this Agreement, and Purchaser hereby, for itself and its
heirs, executors, administrators, personal representatives, legal
representatives, successors and assigns, hereby waives any claim or cause of
action against any of said persons or entities and hereby agrees to look solely
to Seller for satisfaction of its obligations hereunder.
19. Survival. The terms, provisions, covenants and agreements hereof
shall be deemed to be merged into the documents executed and delivered in
accordance with the terms of Paragraph 8 hereof (hereinafter called "Closing
Documents") and shall not be deemed to survive the Closing and the execution and
delivery of the Closing Documents, unless to the contrary herein or in the
Closing Documents expressly provided. Delivery By Seller and acceptance by
Purchaser of the Closing Documents shall be deemed full performance hereof by
Seller, except to the extent expressly provided herein or in the Closing
Documents.
20. Entire Agreement. This Agreement contains the entire agreement of
the parties with respect to the Property and supersedes all prior negotiations,
agreements, understanding, representations, warranties and/or letters of intent
between the parties with respect to the Property, all of which are fully merged
herein. There are no agreements, understandings, representations, warranties,
inducements or other provisions by or between the parties relating to the
Property, oral or written, apart from those expressed in writing herein. All
waivers, changes, modifications, additions or deletions hereof, herein, hereto
or herefrom must be in writing and must be signed by both parties.
21. Captions. The captions of the Paragraphs hereof are for
identification purposes only and shall not be used in interpreting the same.
22. Severability. If any provisions of this Agreement is found to be
invalid, illegal or unenforceable for any reason or under any circumstance, said
provision shall be deemed to be severed herefrom, said finding shall have no
effect upon the remainder of this Agreement or upon
13
<PAGE>
said provision in any other circumstances, and this Agreement shall be
construed, interpreted and performed as if said invalid, illegal or
unenforceable provision were not included herein.
23. Governing Law. This Agreement shall be construed and interpreted in
accordance with, and shall be governed by, the laws of the State of Minnesota.
24. Counterparts. This Agreement shall become a binding contract when
signed by both Purchaser and Seller. This Agreement shall be signed in at least
two (2) counterparts, with at least two (2) signed counterparts being retained
by each party hereto.
25. Construction. The provisions of this Agreement have been carefully
and fully negotiated between and parties hereto, each of which is a
sophisticated commercial real estate investor and which have relatively equal
bargaining power, and each of which has been represented by experienced legal
counsel of its own choosing in connection herewith. Thus, the terms hereof shall
be construed in accordance with their fair meaning and intent and shall not be
construed against either party merely because said party or its counsel
initially drafted the same.
26. Recording. This Agreement shall not be recorded in any public
records relating to the Property. If this Agreement is so recorded in violation
of the provisions of the preceding sentence hereof, the Earnest Money (and all
interest earned thereon) shall be paid to the party which is not responsible for
said recording, and this Agreement shall be deemed to be null, void, terminated
and of no further force or effect, except as herein to the contrary expressly
provided.
27. Time of Essence. Time is of the essence with respect to the
Purchaser's Contingency Expiration Date, the Closing Date, and all other dates
set forth or provided for herein.
28. Additional Conditions. As a further inducement to Purchaser, Seller
agrees to the following additional conditions and agreements:
A. Purchase and Seller acknowledge that the roof to the
Building is in complete disrepair and in need of replacement, and that
Seller makes no representations or warranties in any regard with respect
to the condition of said roof.
B. At Purchaser's sole option, and subject to approval by
Seller's legal counsel, Purchaser may purchase Prairie View Jack, Ltd.
pursuant to the terms and conditions of this Purchase and Sale
Agreement.
14
<PAGE>
SELLER:
PRAIRIE VIEW JACK, LTD., a Minnesota Limited
partnership by AmberJack, Ltd., an Arizona
corporation as general partner
By: /s/ David C. Graves
Its: Assistant Secretary
Seller
and
By: /s/ John P. Elterich
Its: Assistant Secretary
Seller
15
<PAGE>
PURCHASER:
SURMODICS, INC.
By: /s/ Dale R. Olseth
Its: Chairman and Chief Executive Officer
16
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<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,165
<SECURITIES> 3,954
<RECEIVABLES> 1,428
<ALLOWANCES> 0
<INVENTORY> 432
<CURRENT-ASSETS> 7,247
<PP&E> 5,381
<DEPRECIATION> 3,718
<TOTAL-ASSETS> 26,017
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0
0
<COMMON> 365
<OTHER-SE> 24,557
<TOTAL-LIABILITY-AND-EQUITY> 26,017
<SALES> 1,790
<TOTAL-REVENUES> 5,947
<CGS> 679
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<INCOME-PRETAX> 1,481
<INCOME-TAX> (549)
<INCOME-CONTINUING> 2,030
<DISCONTINUED> 0
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