UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 0-23837
SurModics, Inc.
(Exact name of registrant as specified in its Charter)
MINNESOTA 41-1356149
(State of incorporation) (I.R.S. Employer Identification No.)
9924 West 74th Street
Eden Prairie, Minnesota 55344
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 829-2700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
The number of shares of the registrant's Common Stock, $.05 par value per share,
outstanding as of January 31, 2000 was 7,778,295.
<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,
1999 1999
-------- --------
ASSETS (Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash & cash equivalents $ 1,777 $ 1,975
Short-term investments 4,390 3,947
Accounts receivable, net 1,211 1,433
Inventories 473 459
Prepaids and other 410 260
-------- --------
Total current assets 8,261 8,074
-------- --------
PROPERTY AND EQUIPMENT, net 6,384 5,275
LONG-TERM INVESTMENTS 15,478 15,917
DEFERRED TAX ASSETS 1,910 2,465
OTHER ASSETS, net 221 227
-------- --------
$ 32,254 $ 31,958
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 307 $ 710
Accrued liabilities 899 1,261
Deferred revenues 255 268
-------- --------
Total liabilities 1,461 2,239
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A Preferred stock-
$.05 par value, 150,000 shares authorized;
no shares issued or outstanding -- --
Common stock-
$.05 par value, 15,000,000 shares authorized;
7,746,236 and 7,701,921 shares issued and outstanding 387 385
Additional paid-in capital 32,191 32,009
Unearned compensation (245) (267)
Stock purchase notes receivable (38) (58)
Accumulated other comprehensive income (283) (187)
Accumulated deficit (1,219) (2,163)
-------- --------
Total stockholders' equity 30,793 29,719
-------- --------
$ 32,254 $ 31,958
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed balance sheets.
<PAGE>
SURMODICS, INC.
Condensed Statements of Income
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1999 1998
------- -------
REVENUES:
<S> <C> <C>
Royalties $ 2,350 $ 1,306
License fees 100 265
Product sales 1,234 630
Research and development 465 438
------- -------
Total revenues 4,149 2,639
------- -------
OPERATING COSTS AND EXPENSES:
Product 396 283
Research and development 1,608 1,165
Sales and marketing 377 398
General and administrative 562 528
------- -------
Total operating costs and expenses 2,943 2,374
------- -------
INCOME FROM OPERATIONS 1,206 265
------- -------
OTHER INCOME:
Investment income, net 293 269
Gain on sale of investments 1 99
------- -------
Other income, net 294 368
------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,500 633
INCOME TAX BENEFIT (PROVISION) (556) 292
------- -------
NET INCOME $ 944 $ 925
======= =======
NET INCOME PER SHARE:
Basic $ 0.12 $ 0.13
Diluted $ 0.11 $ 0.12
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic weighted average common shares outstanding 7,718 7,230
Dilutive effect of outstanding stock options 523 602
------- -------
Diluted weighted average common shares outstanding 8,241 7,832
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
<PAGE>
SURMODICS, INC.
Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
---------------------
1999 1998
------- -------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 944 $ 925
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 210 176
Amortization of unearned compensation, net 22 15
Change in deferred rent -- (6)
Change in deferred tax 555 (292)
Change in assets and liabilities:
Accounts receivable 222 111
Inventories (14) (51)
Prepaids and other (150) (99)
Accounts payable and accrued liabilities (765) (492)
Deferred revenues (13) (31)
------- -------
Net cash provided by operating activities 1,011 256
------- -------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (1,313) (361)
Purchases of available-for-sale investments (3,943) (8,972)
Sales/maturities available-for-sale investments 3,843 8,556
Repayment of stock purchase notes receivable 20 65
------- -------
Net cash used in investing activities (1,393) (712)
------- -------
FINANCING ACTIVITIES:
Issuance of common stock 184 131
------- -------
Net decrease in cash and cash equivalents (198) (325)
CASH AND CASH EQUIVALENTS:
Beginning of period 1,975 1,344
======= =======
End of period $ 1,777 $ 1,019
======= =======
</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, 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, 1999 and footnotes thereto
included in the Company's form 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. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. Based on
current operations, the Company anticipates that the adoption of SFAS No. 133 in
fiscal 2002 will not have a significant impact on its results of operations.
(3) Comprehensive Income
The components of comprehensive income for the three-month periods are as
follows:
<TABLE>
<CAPTION>
Three months ended December 31,
1999 1998
-------------- -------------
(dollars in thousands)
<S> <C> <C>
Net income $944 $925
Other comprehensive income:
Change in unrealized loss on
available-for-sale securities (96) (196)
-------------- -------------
Total comprehensive income $848 $729
============== =============
</TABLE>
<PAGE>
(4) Operating Segments
<TABLE>
<CAPTION>
Research &
(dollars in thousands) Licensing Manufacturing Development Corporate Consolidated
--------- ------------- ----------- --------- ------------
Three Months Ended December 31, 1999
<S> <C> <C> <C> <C> <C>
Revenues:
PhotoLink $ 1,744 $ 605 $ 272 $ -- $ 2,621
Diagnostic 705 -- -- -- 705
Stabilization & other -- 630 -- -- 630
Government -- -- 193 -- 193
------- ------- ------- ------- -------
Total Revenues 2,449 1,235 465 -- 4,149
Expenses -- 396 1,608 939 2,943
------- ------- ------- ------- -------
Operating income (loss) 2,449 839 (1,143) (939) 1,206
Other income 294 294
Income tax provision (556) (556)
-------
Net income $ 944
=======
<CAPTION>
Three Months Ended December 31, 1998
Revenues:
<S> <C> <C> <C> <C> <C>
PhotoLink $ 960 $ 245 $ 209 $ -- $ 1,414
Diagnostic 611 -- -- -- 611
Stabilization & other -- 385 -- -- 385
Government -- -- 229 -- 229
------- ------- ------- ------- -------
Total Revenues 1,571 630 438 -- 2,639
Expenses -- 283 1,165 926 2,374
------- ------- ------- ------- -------
Operating income (loss) 1,571 347 (727) (926) 265
Other income 368 368
Income tax benefit 292 292
-------
Net income $ 925
=======
</TABLE>
(5) 1999 Employee Stock Purchase Plan
On November 15, 1999 the Board of Directors adopted, and on January 24,
2000 shareholders approved, the Company's 1999 Employee Stock Purchase Plan (the
"Stock Purchase Plan"). The Stock Purchase Plan permits all full-time and
part-time employees (including officers) of the Company to purchase stock of the
Company. The Stock Purchase Plan does not allow an employee to purchase stock
through the Stock Purchase Plan if immediately after the grant of an option, he
or she would own stock representing 5% or more of the total combined voting
power or value of all classes of the stock of the Company. The Stock Purchase
Plan will terminate on February 28, 2010, unless the Board of Directors extends
the term of the Plan.
<PAGE>
(6) Stockholders' Equity
On January 24, 2000 shareholders approved an amendment to the Articles of
Incorporation to eliminate all references in the Articles to a class of
Convertible Preferred Stock, shares of which were automatically converted as
part of the Company's initial public offering in 1998.
Additionally, the Amendment increased the total number of authorized shares
of the Company to 50,000,000 consisting of 45,000,000 shares of Common Stock,
$0.05 par value per share, 150,000 of Series A Preferred Stock, $.05 par value
per share, and 4,850,000 undesignated shares.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
General
SurModics is a leading provider of surface modification solutions to
medical device manufacturers. The Company's revenues are derived from four
primary sources: fees from licensing its patented technology to customers;
royalties received from licensees; the sale of photoreactive chemical compounds
to licensees and stabilization products to the diagnostics industry; and
research and development fees generated on projects for commercial customers and
pursuant to government grants.
Results of Operations
Three Months Ended December 31, 1999 and 1998
Revenues. The Company's revenues were $4.1 million for the first
quarter of fiscal 2000, an increase of $1.5 million, or 57%, over the same
period of fiscal 1999. The revenue components were as follows (in thousands):
<TABLE>
<CAPTION>
$ Increase % Increase
1999 1998 (Decrease) (Decrease)
<S> <C> <C> <C> <C>
PhotoLink(R) revenue:
Royalties $1,644 $695 $949 137%
License fees 100 265 (165) (62%)
Reagent chemical sales 605 245 360 147%
Commercial development 272 209 63 30%
--- --- --
Total PhotoLink revenue 2,621 1,414 1,207 85%
Other revenue:
Diagnostic royalties 705 611 94 15%
Stabilization products 630 385 245 64%
Government research 193 229 (36) (16%)
--- --- ----
Total revenues $4,149 $2,639 $1,510 57%
====== ====== =====
</TABLE>
First quarter revenue growth of 57% was distributed across several
operating segments but resulted primarily from an 85% increase in
PhotoLink-related revenue. The 137% growth in PhotoLink royalties was due
primarily to increased sales of coated products sold by the Company's licensees.
In addition, the first quarter royalties included a one-time royalty payment of
$225,000 from a client as the result of a license renegotiation. Several
products have been bundled in this contract and the client will pay a tiered
royalty based on sales volume. If this one-time payment were excluded, royalties
would still have more than doubled between years. During the quarter,
approximately 86% of the PhotoLink royalties received were earned royalties
based on the clients' sale of coated products. The remaining royalties were
minimum payments made to SurModics prior to a medical device reaching the
market.
The 147% 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. While a single client purchased
more than half of the reagents sold during the quarter, reagents purchased by
this customer are expected to decrease in the last half of the year as a result
of collaborative efforts to improve processing efficiencies.
<PAGE>
SurModics signed five new PhotoLink license agreements during the first
quarter, which resulted in license fee revenue of $100,000. The Company has
license agreements with 46 companies covering over 100 different products. A 64%
increase in stabilization sales contributed to the bulk of revenue growth
outside of PhotoLink. This rate of growth is not expected to continue during the
rest of the year since the level of stabilization sales has been fairly flat
over the last four quarters.
Product costs. The Company's product costs were $396,000 for the first
quarter of fiscal 2000, an increase of $113,000, or 40%, over the same period of
fiscal 1999. Overall product margins increased to 68% in the first quarter of
fiscal 2000 from 55% in the same period of fiscal 1999. The continued margin
improvement was the result of efficiencies achieved in manufacturing reagent
chemicals and stabilization products based on increased production volumes.
Research and development expenses. Research and development expenses were
$1.6 million for the first quarter of fiscal 2000, an increase of $443,000, or
38%, over the same period of fiscal 1999. The change was primarily due to
compensation and benefits associated with technical personnel added by the
Company over the last year, increased patent and legal fees, and supplies cost
to equip the newly completed laboratory space.
Sales and marketing expenses. Sales and marketing expenses were $377,000
for the first quarter of fiscal 2000, a $21,000 or 5% decrease from the same
period of fiscal 1999. Increased promotional expenses were more than offset by
decreased compensation and benefit costs due to open positions. It is expected
that these positions will be filled in the second quarter.
General and administrative expenses. General and administrative expenses
were $562,000 for the first quarter of fiscal 2000, an increase of $34,000, or
6%, over the same period of fiscal 1999. The increase was the result of
compensation and benefit costs of employees hired in the last half of the
previous fiscal year.
Income from operations. The Company's income from operations was $1.2
million for the first quarter of fiscal 2000, an increase of $941,000, or 355%,
over the same period of fiscal 1999.
Other income, net. The Company's other income was $294,000 for the first
quarter of fiscal 2000, a decrease of $74,000, or 20%, over the same period of
fiscal 1999. An increase in investment income in the current period was offset
by a decrease in realized gains on the sale of investments. The first quarter of
fiscal 1999 included a $99,000 realized gain from the sale of investments.
Income tax expense. The Company's income tax provision was $556,000 for the
first quarter of fiscal 2000 versus a $292,000 income tax benefit recorded in
the same period of fiscal 1999. Net income for the first quarter of fiscal 1999
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. Excluding the effect of the reversal of income tax valuation reserves,
the Company's net income and diluted income per share would have been as follows
on a proforma basis:
Proforma
Three Months Ended December 31,
1999 1998
---- ----
Net income before provision for
income taxes $ 1,500,000 $ 633,000
Income tax provision (556,000) (231,000)
----------- -----------
Net income $ 944,000 $ 402,000
=========== ===========
Diluted net income per share $ 0.11 $ 0.05
=========== ===========
<PAGE>
Other comprehensive loss. The Company's other comprehensive loss was
$96,000 for the first quarter of fiscal 2000. This loss was due to a reduction
in the market value of the Company's long-term investments available for sale
due to continued increases in interest rates. As of December 31, 1999, the
Company had a net $283,000 unrealized loss related to those investments.
Liquidity and Capital Resources
As of December 31, 1999, the Company had working capital of approximately
$6.8 million and cash, cash equivalents and investments totaling approximately
$21.6 million. The Company's investments principally consist of U.S. government
agency obligations and investment grade, interest-bearing corporate debt
securities with varying maturity dates, the majority of which are three years or
less. The Company generated positive cash flows from operating activities of
$1.0 million in the first three months, which was an increase of 295% for the
same period of last year, primarily due to the change in the deferred tax asset
as described above. Approximately $1.4 million of cash was used for investing
activities during the first three months compared to $712,000 last year. The
significant change in investing activities between years was due to
approximately $600,000 in progress payments made on the construction of
additional laboratory and office space. The Company gained occupancy of the
additional space in early December 1999. The total cost of the additional space
is approximately $1.0 million. Finally, $184,000 of cash was generated from
financing activities due to the exercise of stock options during the first three
months of the year.
As of December 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains an investment portfolio in accordance with its
investment policy. The primary objectives of the Company's investment policy are
to preserve principal, maintain proper liquidity to meet operating needs and
maximize yields. The Company's investment policy requires investments with
high-credit-quality issuers and limits the amount of credit exposure to any one
issuer.
The Company's investments principally consist of U.S. government and
government agency obligations and investment grade, interest-bearing corporate
debt securities with varying maturity dates, the majority of which are three
years or less. All of the Company's cash equivalents and marketable securities
are classified as available-for-sale securities.
The securities held in the company's investment portfolio are subject to
interest rate risk. Changes in interest rates affect the fair market value of
the available-for-sale securities. The Company has determined that a
hypothetical ten percent increase in interest rates would result in an
approximate $150,000 decrease in the fair value of the Company's
available-for-sale securities as of December 31, 1999, but no material impact on
the results of operations or cash flows. SurModics does not use derivative
instruments in its investment portfolio.
<PAGE>
Forward Looking Statements
The statements contained in this quarterly report relating to future
revenue growth and expense levels are based on current expectations and involve
a number of risks and uncertainties. These statements are forward looking and
are made pursuant to the safe harbor provisions of the Private Securities Reform
Act of 1995. The following factors could cause royalty revenue to materially and
adversely differ from that anticipated: the ability of the Company's licensees
to successfully gain regulatory approval for, market and sell products
incorporating the Company's technology; the amount and timing of resources
devoted by the Company's licensees to market and sell products incorporating the
Company's technology; the Company's ability to attract new licensees and to
enter into agreements for additional applications with existing licensees; the
Company's ability to maintain a competitive position in the development of
technologies and products in its areas of focus; and business and general
economic conditions.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
<TABLE>
<S> <C>
Use of Proceeds for the period ending December 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 $ 1,372,000
Sales and marketing $ 998,000
Property and equipment upgrades $ 6,416,000
Patent protection $ 123,000
Working capital and general corporate purposes $ 773,000
Administration $ 93,000
Money market funds $ 5,746,102
All the above items represented direct or indirect payments
to others.
</TABLE>
<PAGE>
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Company held its Annual Meeting of shareholders on January 24,
2000.
(b) Proxies were solicited pursuant to Regulation 14A under the Securities
Act of 1934. The shareholders voted on four matters: (i) to set the
number of directors at seven (7), (ii) to approve the Company's 1999
Employee Stock Purchase Plan, (iii) to amend the Articles of
Incorporation to increase of the authorized Common Stock from
15,000,000 to 45,000,000, (iv) to elect Class I directors. The
shareholders approved all four matters by the following votes:
<TABLE>
<CAPTION>
Votes Votes Broker
Votes For Against Abstained Non-Votes
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
(i) Set the number of directors at seven (7) 6,663,811 1,650 7,012 316,708
(ii) Approve the Company's 1999 Employee
Stock Purchase Plan 6,618,086 25,895 28,492 316,708
(iii) Amend the Articles of Incorporation, including
an increase of the authorized Common
Stock form 15,000,000 to 45,000,000 shares 6,341,549 311,004 19,920 316,708
<CAPTION>
Votes Broker
Votes For Withheld Non-Votes
--------------- -------------- ---------------
<S> <C> <C> <C>
(iv) Elect Class I directors
Patrick E. Guire 6,656,555 15,918 316,708
Donald S. Fredrickson 6,649,555 22,918 316,708
</TABLE>
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - 3.1 Articles of Incorporation, as amended to date
27 Financial Data Schedule
(b) Reports on Form 8-K - None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SurModics, Inc.
February 14, 2000
By: /s/ Stephen C. Hathaway
Stephen C. Hathaway
Vice President & CFO
(Principal Financial Officer)
<PAGE>
Exhibit Index
Exhibit Number Description
3.1 Articles of Incorporation, as amended to date
27 Financial Data Schedule
ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION
OF
SURMODICS, INC.
Pursuant to the provisions of Minnesota Statutes, Section 302A.135, the
following amendments to the Articles of Incorporation of SurModics, Inc., were
adopted on January 24, 2000, by the shareholders of the corporation:
Section 3.1 of Article 3 is amended to read as follows:
3.1) Authorized Shares. The aggregate number of shares which the
corporation shall have the authority to issue shall be 50.0 million, 45.0
million of which shall be designated Common Stock, $.05 Par Value; 4.85 million
of which shall be undesignated shares and 150,000 of which shall be designated
Series A Preferred Stock, $.05 Par Value (hereinafter referred to as the "Series
A Preferred Stock"). (The Common Stock, any shares issued from the undesignated
shares, and the Series A Preferred Stock are hereinafter referred to
collectively as the "Capital Stock.") The Board of Directors of the corporation
is authorized to establish from the undesignated shares, by resolution adopted
and filed in the manner provided by law, one or more classes or series of
shares, to designate each such class or series (which may include but is not
limited to designation as additional shares of Common Stock or Series A
Preferred Stock), and to fix the relative rights and preferences of each such
class or series.
Section 4.1 of Article 4 is amended to read as follows:
4.1) Voting Privileges. Unless otherwise provided in these Articles of
Incorporation, each holder of Common Stock shall have one vote on all matters
submitted to the shareholders for each share of Common Stock standing in the
name of such holder on the books of the corporation.
Section 4.4 of Article 4 is amended to read as follows:
4.4) Distributions. Except as otherwise provided in these Articles of
Incorporation, on the liquidation, dissolution or winding up of the corporation,
shares of Capital Stock shall share ratably in any dividends or distributions of
the corporation, whether paid in cash, property or stock.
Section 4.5 of Article 4, entitled "Series A Convertible Preferred Stock," is
deleted in its entirety.
Section 6.1 of Article 6 is amended to read as follows:
6.1) Any provision contained in these Articles of Incorporation may be
amended, altered, changed or repealed by the affirmative vote of the holders of
at least majority of the voting power of the shares present and entitled to vote
at a duly held meeting or such greater percentage as may be otherwise prescribed
by the laws of the State of Minnesota.
Article 7, entitled "Incorporators," is deleted in its entirety.
The undersigned swears that the foregoing is true and accurate and that
the undersigned has the authority to sign this document on behalf of the
corporation.
Dated: February 9, 2000.
/s/ David R. Busch
David R. Busch, Its Corporate Secretary
<PAGE>
STATEMENT OF DESIGNATION
OF
SERIES A PREFERRED STOCK
OF
SURMODICS, INC.
(Pursuant to Chapter 302A of the
Minnesota Business Corporation Act)
SurModics, Inc., a corporation organized and existing under the
Minnesota Business Corporation Act (hereinafter called the "Company"), hereby
certifies that the following resolution was adopted by the Board of Directors of
the Company at a meeting duly called and held on March 22, 1999:
RESOLVED, that, pursuant to the authority granted to and vested in the
Board of Directors of the Company (hereinafter called the "Board of Directors"
or the "Board") in accordance with the provisions of Section 3.1 of the Articles
of Incorporation, as amended to date (hereinafter called the "Articles of
Incorporation"), the Board of Directors hereby creates a series of Preferred
Stock, par value $.05 per share (the "Preferred Stock"), of the Company and
hereby states the designation and number of shares, and fixes the relative
rights, preferences, and limitations thereof as follows:
Series A Preferred Stock:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series A Preferred Stock" (the "Series A Preferred Stock"), and
the number of shares constituting the Series A Preferred Stock shall be One
Hundred Fifty Thousand (150,000). Such number of shares may be increased or
decreased by resolution of the Board of Directors; provided, that, no decrease
shall reduce the number of shares of Series A Preferred Stock to a number less
than the number of shares then outstanding plus the number of shares reserved
for issuance upon the exercise of outstanding options, rights or warrants or
upon the conversion of any outstanding securities issued by the Company
convertible into Series A Preferred Stock.
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any series of
Preferred Stock, par value $.05 per share (the "Preferred Stock"), of the
Company or Preferred Stock (or any similar stock) ranking prior and superior to
the Series A Preferred Stock with respect to dividends, the holders of shares of
<PAGE>
Series A Preferred Stock, in preference to the holders of Common Stock, par
value $.05 per share (the "Common Stock"), of the Company, and of any other
junior stock, shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the first day of March, June, September and
December in each year (each such date being referred to herein as a "Quarterly
Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date
after the first issuance of a share or fraction of a share of Series A Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to the greater
of (a) $1 or (b) subject to the provision for adjustment hereinafter set forth,
100 times (as adjusted, the "Dividend Multiple") the aggregate per share amount
of all cash dividends, and 100 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions, other than a dividend
payable in shares of Common Stock or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on the Common Stock
since the immediately preceding Quarterly Dividend Payment Date or, with respect
to the first Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series A Preferred Stock. In the event the
Company shall at any time declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise) into a greater or lesser number of shares of Common Stock, then in
each such case the Dividend Multiple shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(B) The Company shall declare a dividend or distribution on the Series
A Preferred Stock as provided in paragraph (A) of this Section immediately after
it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided, that, in the event no
dividend or distribution shall have been declared on the Common Stock during the
period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $1 per share on the Series A
Preferred Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares, unless the date of issue of such
shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue from the date
of issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of holders
of shares of Series A Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
<PAGE>
of holders of shares of Series A Preferred Stock entitled to receive payment of
a dividend or distribution declared thereon, which record date shall be not more
than sixty (60) days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Preferred Stock shall entitle the holder
thereof to 100 votes (as adjusted, the "Vote Multiple") on all matters
submitted to a vote of the stockholders of the Company. In the event
the Company shall at any time declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock
(by reclassification or otherwise) into a greater or lesser number of
shares of Common Stock, then in each such case the Vote Multiple shall
be adjusted by multiplying such number by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares
of Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided in Section 10 hereof, in any
other Statement of Designation creating a series of Preferred Stock or
any similar stock, or by law, the holders of shares of Series A
Preferred Stock and the holders of shares of Common Stock and any other
capital stock of the Company having general voting rights shall vote
together as one class on all matters submitted to a vote of
stockholders of the Company.
(C) Except as set forth herein, or as otherwise provided by
law, holders of Series A Preferred Stock shall have no special voting
rights and their consent shall not be required (except to the extent
they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of
Series A Preferred Stock outstanding shall have been paid in full, the
Company shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either
as to dividends or upon liquidation, dissolution or winding
up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, except
dividends paid ratably on the Series A Preferred Stock and all
such parity stock on which dividends are payable or in arrears
in proportion to the total amounts to which the holders of all
such shares are then entitled;
<PAGE>
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to
the Series A Preferred Stock, provided that the Company may at
any time redeem, purchase or otherwise acquire shares of any
such junior stock in exchange for shares of any stock of the
Company ranking junior (as to dividends and upon dissolution,
liquidation and winding up) to the Series A Preferred Stock;
or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series A Preferred Stock, or any
shares of stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board)
to all holders of such shares upon such terms as the Board,
after consideration of the respective annual dividend rates
and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result
in fair and equitable treatment among the respective series or
classes.
(B) The Company shall not permit any subsidiary of the Company
to purchase or otherwise acquire for consideration any shares of stock
of the Company unless the Company could, under paragraph (A) of this
Section 4, purchase or otherwise acquire such shares at such time and
in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Company in any manner whatsoever shall be
retired and cancelled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of Preferred
Stock and may be reissued as part of a new series of Preferred Stock subject to
the conditions and restrictions on issuance set forth herein, in the Articles of
Incorporation, or in any other Statement of Designation creating a series of
Preferred Stock or any similar stock or as otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Company, no distribution shall be
made (A) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received the greater of (i) $100 per share, plus an
amount equal to accrued and unpaid dividends and distributions thereon, whether
or not declared, to the date of such payment, or (ii) subject to the provision
for adjustment hereinafter set forth, 100 times (as adjusted, the "Liquidation
Preference Multiple") the aggregate amount to be distributed per share to
holders of shares of Common Stock, or (B) to the holders of shares of stock
ranking on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, except distributions made ratably
on the Series A Preferred Stock and all such parity stock in proportion to the
total amounts to which the holders of all such shares are entitled upon such
<PAGE>
liquidation, dissolution or winding up. In the event the Company shall at any
time declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise) into a
greater or lesser number of shares of Common Stock, then in each such case the
Liquidation Preference Multiple shall be adjusted by multiplying such amount by
a fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
Section 7. Consolidation, Merger, Etc. In case the Company shall enter
into any consolidation, merger, statutory exchange combination or other
transaction in which the shares of Common Stock are exchanged for or changed
into other stock or securities, cash and/or any other property, then in any such
case each share of Series A Preferred Stock shall at the same time be similarly
exchanged or changed into an amount per share, subject to the provision for
adjustment hereinafter set forth, equal to 100 times (as adjusted, the "Exchange
Multiple") the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is changed or exchanged. In the event the Company shall at
any time declare or pay any dividend on the Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise) into a
greater or lesser number of shares of Common Stock, then in each such case the
Exchange Multiple shall be adjusted by multiplying such amount by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Preferred Stock shall
not be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank, with respect
to the payment of dividends and the distribution of assets, junior to all series
of any other class of Preferred Stock hereafter issued that specifically provide
that they shall rank senior to the Series A Preferred Stock.
Section 10. Amendment. If any proposed amendment to the Articles of
Incorporation or this Statement of Designation would alter or change the
preferences, special rights or powers given to the Series A Preferred Stock so
as to affect the Series A Preferred Stock adversely, or would authorize the
issuance of a class or classes of stock having preferences or rights with
respect to dividends or dissolutions or the distribution of assets that would be
superior to the preferences or rights of the Series A Preferred Stock, then the
holders of the Series A Preferred Stock shall be entitled to vote as a series
upon such amendment, and the affirmative vote of two-thirds of the outstanding
shares of Series A Preferred Stock shall be necessary to the adoption thereof,
in addition to such other vote as may be required by the Minnesota Business
Corporation Act.
<PAGE>
Section 11. Fractional Shares. Series A Preferred Stock may be issued
in fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series A Preferred Stock.
I certify that I am authorized to execute this Statement of
Designation, and I further certify that I understand that by signing this
Statement of Designation I am subject to the penalties of perjury as set forth
in Minnesota Statutes, Section 609.48, as if I had signed this Statement of
Designation under oath.
Dated: April 5, 1999
/s/ Dale R. Olseth
Dale R. Olseth, Chief Executive Officer
<PAGE>
STATEMENT OF CANCELLATION OF PREFERRED SHARES
OF
SURMODICS, INC. (f/k/a BSI CORPORATION)
SurModics, Inc. (f/k/a BSI Corporation) hereby cancels 376,828 shares
of its authorized Series A Convertible Preferred Stock, $0.05 par value. After
giving effect to the cancellation, the aggregate number of shares which the
corporation shall have the authority to issue shall be 20,000,000, 15.0 million
of which shall be designated Voting Common Stock, $.05 Par Value, and 5.0
million of which shall be undesignated.
This statement is pursuant to Section 302A.553 Subdivision 2. of the
Minnesota Business Corporation Act.
The undersigned swears that the foregoing is true and accurate and that
the undersigned has the authority to sign this document on behalf of the
corporation.
Dated: April 16, 1998
/s/ David R. Busch
David R. Busch, Its Corporate Secretary
<PAGE>
ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION
OF
SURMODICS, INC. (f/k/a BSI CORPORATION)
Pursuant to the provisions of Minnesota Statutes, Section 302A.135, the
following amendments of Section 3.1 of Article 3 and Section 4.5 of Article 4 of
the Articles of Incorporation of SurModics, Inc. (f/k/a BSI Corporation) were
adopted on January 26, 1998, by the shareholders of the corporation:
Section 3.1 of Article 3 is amended in its entirety to read as follows:
"3.1 Authorized Shares. The aggregate number of
shares which the corporation shall have the authority to issue
shall be 20,376,828, 15.0 million of which shall be designated
Voting Common Stock, $.05 Par Value; 5.0 million of which
shall be undesignated shares and 376,828 of which shall be
designated Series A Convertible Preferred Stock, $.05 Par
Value (hereinafter referred to as the "Preferred Stock"). (The
Voting Common Stock, any shares issued from the undesignated
shares, and the Preferred Stock are hereinafter referred to
collectively as the "Capital Stock".) The Board of Directors
of the corporation is authorized to establish from the
undesignated shares, by resolution adopted and filed in the
manner provided by law, one or more classes or series of
shares, to designate each such class or series (which may
include but is not limited to designation as additional common
shares), and to fix the relative rights and preferences of
each such class or series."
Section 4.5 of Article 4 is amended to add the following to the end of
such section:
"(d) If and when all outstanding shares of
Preferred Stock have been converted pursuant to this
Section 4.5, such shares shall be deemed canceled and
shall not be reissuable by the corporation, this
Section 4.5 shall be null and void and any
restatement of these Articles of Incorporation may
exclude this Section 4.5 and the reference to Series
A Convertible Preferred Stock contained in Section
3.1 of Article 3."
The undersigned swears that the foregoing is true and accurate and that
the undersigned has the authority to sign this document on behalf of the
corporation.
Dated: January 26, 1998.
/s/ David R. Busch
David R. Busch, Its Corporate Secretary
<PAGE>
ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION
OF
BSI CORPORATION
Pursuant to the provisions of Minnesota Statutes, Section 302A.135, the
following amendment of Section 1.1 of Article 1 of the Articles of Incorporation
of BSI Corporation was adopted on June 4, 1997, by the shareholders of the
corporation:
Section 1.1 of Article 1 is amended in its entirety to read as follows:
"1.1 The name of the corporation shall be SurModics, Inc."
The undersigned swears that the foregoing is true and accurate and that
the undersigned has the authority to sign this document on behalf of the
corporation.
Dated: June 4, 1997.
/s/ David R. Busch
David R. Busch, Its Corporate Secretary
<PAGE>
ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION
OF
BSI CORPORATION (f/k/a BIO-METRIC SYSTEMS, INC.)
Pursuant to the provisions of Minnesota Statutes, Section 302A.135, the
following amendment of Section 3.1 of Article 3 of the Articles of Incorporation
of BSI Corporation (f/k/a Bio-Metric Systems, Inc.) was adopted on January 27,
1997, by the shareholders of the corporation:
Section 3.1 of Article 3 is amended in its entirety to read as follows:
"3.1 Authorized Shares. The aggregate number of
shares which the corporation shall have the authority to issue
shall be 20,450,000, 15.0 million of which shall be designated
Voting Common Stock, $.05 Par Value; 5.0 million of which
shall be undesignated shares and 450,000 of which shall be
designated Series A Convertible Preferred Stock, $.05 Par
Value (hereinafter referred to as the "Preferred Stock"). (The
Voting Common Stock, any shares issued from the undesignated
shares, and the Preferred Stock are hereinafter referred to
collectively as the "Capital Stock".) The Board of Directors
of the corporation is authorized to establish from the
undesignated shares, by resolution adopted and filed in the
manner provided by law, one or more classes or series of
shares, to designate each such class or series (which may
include but is not limited to designation as additional common
shares), and to fix the relative rights and preferences of
each such class or series."
The undersigned swears that the foregoing is true and accurate and that
the undersigned has the authority to sign this document on behalf of the
corporation.
Dated: January 29, 1997.
/s/ David R. Busch
David R. Busch, Its Corporate Secretary
<PAGE>
ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION
OF
BIO-METRIC SYSTEMS, INC.
Pursuant to the provisions of Minnesota Statutes, Section 302A.135, the
following amendments of Section 1.1 of Article 1 and Section 2.1 of Article 2 of
the Articles of Incorporation of Bio-Metric Systems, Inc. were adopted on
January 17, 1994, by the shareholders of the corporation:
"ARTICLE 1 - NAME
1.1) The name of the corporation shall be BSI Corporation.
ARTICLE 2 - REGISTERED OFFICE
2.1) The registered office of the corporation is located at
9924 West 74th Street, Eden Prairie, Minnesota 55344."
The undersigned swears that the foregoing is true and accurate and that
the undersigned has the authority to sign this document on behalf of the
corporation.
Dated: January 17, 1994.
/s/ David R. Busch
David R. Busch, Its Corporate Secretary
<PAGE>
RESTATED ARTICLES OF INCORPORATION
OF
BIO-METRIC SYSTEMS, INC.
We, the undersigned, DALE R. OLSETH and DAVID R. BUSCH, the
Chairman/President/Chief Executive officer and Secretary, respectively, of
Bio-Metric Systems, Inc., a Minnesota corporation, do hereby certify that at a
special meeting of the shareholders of Bio-Metric Systems, Inc. held on April10,
1989, notice of such meeting having been mailed to each shareholder entitled to
vote thereon at least ten (10) days prior to such meeting, the shareholders, by
at least a majority of the voting power of the shares of Voting Common Stock,
present in person or by proxy, adopted resolutions to restate the Articles of
Incorporation of Bio-Metric Systems, Inc. as set forth below.
ARTICLE 1 - NAME
1.1) The name of the corporation shall be BIO-METRIC SYSTEMS, INC.
ARTICLE 2 - REGISTERED OFFICE
2.1) The registered office of the corporation is located at 9942 West
74th Street, Eden Prairie, Minnesota 55344.
ARTICLE 3 - CAPITAL STOCK
3.1) Authorized Shares; Establishment of Classes and Series. The
aggregate number of shares which the corporation shall have the authority to
issue shall be 5,500,000 shares, 5,000,000 of which shall be designated Voting
Common Stock, $.05 par value; 50,000 of which shall be designated Nonvoting
Common Stock, $.05 par value; and 450,000 of which shall be designated Series A
Convertible Preferred Stock, $.05 par value, (hereinafter referred to as the
"Preferred Stock"). The Common Stock and Preferred Stock are hereinafter
referred to collectively as the "Capital Stock".
3.2) Issuance of Shares. The Board of Directors of the corporation is
authorized from time to time to accept subscriptions for, issue, sell and
deliver shares of Capital Stock of the corporation to such persons, at such
times and upon such terms and conditions as the Board shall determine, valuing
all nonmonetary consideration and establishing a price in money or other
consideration, or a minimum price, or a general formula or method by which the
price will be determined.
3.3) Issuance of Rights to Purchase Shares. The Board of Directors is
further authorized from time to time to grant and issue rights to subscribe for,
purchase, exchange securities for, or convert securities into, shares of Capital
Stock, and to fix the terms, provisions and conditions of such rights, including
the exchange or conversion basis or the price at which such shares may be
purchased or subscribed for.
<PAGE>
3.4) Issuance of Shares to Holders of Another Class or Series. The
Board is further authorized to issue shares of one class or series of Capital
Stock to holders of that class or series of Capital Stock or to holders of
another class or series of Capital Stock to effect share dividends or splits.
ARTICLE 4 - RIGHTS AND PRIVILEGES OF SHARES AND OF SHAREHOLDERS
The rights, preferences, privileges and restrictions granted to or
imposed upon the Capital Stock or the holders thereof are set forth below.
4.1) Voting Privileges. Each holder of Voting Common Stock shall have
one vote on all matters submitted to the shareholders for each share of Voting
Common Stock standing in the name of such holder on the books of the
corporation. Each holder of Preferred Stock shall have one vote on all matters
submitted to the shareholders for each share of Voting Common Stock which such
holder of Preferred Stock would be entitled to receive upon the conversion of
his Preferred Stock as provided in subsection 4.5(c). In addition, each holder
of Preferred Stock shall have the special voting rights which are described in
subsection 4.5(b). Except as may be required by the Minnesota Business
Corporation Act, the holders of Nonvoting Common Stock shall have no voting
rights with respect to any matter submitted to a vote of the shareholders of the
corporation.
4.2) Preemptive Rights. No holder of shares of any class or series of
Capital Stock shall be entitled as such, as a matter of right, to subscribe for
or purchase additional shares of that class or series or any other class or
series of Capital Stock of the corporation now or hereafter authorized or
issued.
4.3) No Cumulative Voting. There shall be no cumulative voting by the
shareholders of the corporation.
4.4) Distributions. Except as provided in subsection 4.5(a) on the
liquidation, dissolution or winding up of the corporation, shares of Capital
Stock shall share ratably in any dividends or distributions of the corporation,
whether paid in cash, property or stock.
4.5) Series A Convertible Preferred Stock.
(a) Liquidation Preference. In the event of the liquidation,
dissolution or winding up of the corporation, whether voluntary or
involuntary, the holders of the Preferred Stock shall be entitled to
receive out of assets of the corporation, an amount equal to $13.50
(hereinafter referred to as the "Liquidation Preference") for each
outstanding share of Preferred Stock before any payment shall be made
or any assets distributed to the holders of Voting Common Stock or
Nonvoting Common Stock or any other class of stock of this corporation
ranking junior to the Preferred Stock upon liquidation or dissolution
of the corporation. If, upon any liquidation, dissolution, or winding
up of the corporation, the assets of the corporation are insufficient
<PAGE>
to pay the Liquidation Preference for each outstanding share of
Preferred Stock, the holders of Preferred Stock shall share pro rata in
any such distribution in proportion to the full amounts to which they
would otherwise be entitled. If, upon any liquidation, dissolution or
winding up of the corporation, the holders of Preferred Stock would be
entitled to receive in excess of the Liquidation Preference for each
outstanding share of Preferred Stock in any such distribution if all
such shares of Preferred Stock had been converted to shares of Voting
Common Stock pursuant to subsection 4.5(c), instead of receiving the
Liquidation Preference, each holder of Preferred Stock shall receive an
amount equal to the distribution such holder would receive if all his
outstanding shares of Preferred Stock had been converted to shares of
Voting Common Stock pursuant to subsection 4.5(c) on the day preceding
the date of such liquidation, dissolution or winding up. The
Liquidation Preference shall be appropriately adjusted to reflect stock
splits and reverse stock splits of the Preferred Stock or dividends or
distributions payable in shares of Preferred Stock. Nothing hereinabove
set forth shall affect in any way the right or obligation of each
holder of shares of Preferred Stock to convert such shares into shares
of Voting Common Stock, at any time and from time to time, in
accordance with subsection 4.5(c) below.
(b) Special Voting Rights. Without the affirmative vote of the
holders (acting together as a class) of at least a majority of the
Preferred Stock at the time outstanding given in person or by proxy at
any annual meeting, or at such special meeting called for that purpose,
or, if permitted by law, in writing without a meeting, the corporation
shall not:
(1) authorize or issue any shares of stock having
priority over the Preferred Stock as to the payment of
dividends or the payment or distribution of assets upon the
liquidation or dissolution, voluntary or involuntary, of the
corporation; or
(2) amend the Articles of Incorporation of the
corporation so as to alter this Article 4 in any respect.
(c) Conversion Rights; Mandatory Conversion.
(1) At the option of the holder thereof, each share
of Preferred Stock shall be convertible, at the offices of the
corporation (or at such other office or offices, if any, as
the Board of Directors may designate), into one (1) share of
Voting Common Stock of the corporation, subject to adjustment
as provided in subsection 4.5(c)(2) below. In order to convert
shares of Preferred Stock into shares of Voting Common Stock,
the holder thereof, shall surrender at the principal executive
offices of the corporation the certificate or certificates
therefor, duly endorsed to the corporation or in blank, and
give written notice to the corporation at such office that
such holder elects to convert a specified portion or all of
such shares of Preferred Stock into shares of Voting Common
Stock. Shares of Preferred Stock shall be deemed to have been
converted on the day of surrender of the certificate
representing such shares for conversion in accordance with the
foregoing provisions (the "Conversion Date"), and the person
entitled to receive the shares of Voting Common Stock of the
corporation issuable upon such conversion shall be treated for
all purposes as the record holder of such shares of Voting
<PAGE>
Common Stock at that time. As promptly as practicable on or
after the Conversion Date, the corporation shall issue and
mail or deliver or cause to be issued and mailed or delivered
to such holder a certificate or certificates for the number of
shares of Voting Common Stock issuable upon conversion and a
certificate or certificates for the balance of the Preferred
Stock surrendered, if any, not so converted into shares of
Voting Common Stock.
(2) The number of shares of Voting Common Stock
issuable in exchange for shares of Preferred Stock upon the
exercise of these conversion rights (the "Conversion Ratio"),
which shall initially be one share of Voting Common Stock for
one share of Preferred Stock, shall be subject to adjustment
from time to time as hereinafter provided:
(i) In case the corporation shall at any
time subdivide or split its outstanding Common Stock
into a greater number of shares, the Conversion Ratio
in effect immediately prior to such subdivision or
split shall be proportionately increased; and,
conversely, in case the outstanding Common Stock of
the corporation shall be combined into a smaller
number of shares the Conversion Ratio in effect
immediately prior to such combination shall be
proportionately reduced.
(ii) If any capital reorganization or
reclassification of the Capital Stock of the
corporation or consolidation or merger of the
corporation with another corporation or the sale of
all or substantially all of its assets to another
corporation shall be affected in such a way that
holders of Common Stock shall be entitled to receive
stock, securities or assets with respect to or in
exchange for Common Stock, then, as a condition of
such reorganization, reclassification, consolidation,
merger or sale, lawful and adequate provision shall
be made whereby the holders of Preferred Stock shall
thereafter have the right to receive, in lieu of the
Voting Common Stock of the corporation immediately
theretofore receivable upon the conversion of any
such Preferred Stock, such shares of stock,
securities or assets as may be issued or payable with
respect to or in exchange for a number of outstanding
shares of Voting Common Stock equal to the number of
shares of Voting Common Stock immediately theretofore
receivable upon the conversion of such Preferred
Stock had such reorganization, reclassification,
consolidation, merger or sale not taken place; and,
in any such case, appropriate provision shall be made
with respect to the rights and interests of the
holders of the Preferred Stock to the end that the
provisions hereof (including without limitation
provisions for adjustments of the Conversion Ratio
and of the number of shares receivable upon the
conversion of such Preferred Stock) shall thereafter
be applicable as nearly as may be, in relation to any
shares of stock, securities or assets hereafter
receivable upon the conversion of such Preferred
Stock. The corporation shall not effect any such
consolidation, merger or sale, unless prior to the
consummation thereof the surviving corporation (if
other than the corporation), the corporation
<PAGE>
resulting from such consolidation or the corporation
purchasing such assets shall assume by written
instrument executed and ma i led to the registered
holders of the Preferred Stock at the last address of
such holders appearing on the books of the
corporation, the obligation to deliver to such
holders such shares of stock, securities or assets
as, in accordance with the foregoing provisions, such
holders may be entitled to receive.
(iii) If and whenever the corporation shall
issue or sell any Common Stock for a consideration
per share less than the Liquidation Preference
(except for the issuance or sale of up to 50,000
shares of Nonvoting Common Stock pursuant to the
corporation's 1984 Stock Option Plan, up to 200,000
shares of Voting Common Stock pursuant to the
corporation's 1987 Stock Option Plan and up to 50,000
shares of Voting Common Stock to Simplot Development
Corporation (hereinafter referred to as the "Excluded
Stock Issuances")) or shall issue any options,
warrants or other rights for the purchase of shares
of Common Stock at a consideration per share of less
than the Liquidation Preference, forthwith upon such
issuance or sale of such shares, options, warrants or
other rights for purchase, the Conversion Ratio in
effect immediately prior to such issuance or sale for
the Preferred Stock shall be adjusted so that each
share of Preferred Stock shall thereafter be
convertible into that number of shares of Voting
Common Stock as is equal to the number determined by
multiplying the Conversion Ratio by a fraction, the
numerator of which shall be the amount determined by
multiplying (aa) the number of shares of Common Stock
outstanding immediately after such issuance or sale
plus the number of shares of Common Stock issuable
upon the exercise of any purchase rights thus issued,
by (bb) the Liquidation Preference, and the
denominator of which shall be an amount equal to the
sum of (aa) the number of shares of Common Stock
outstanding immediately prior to such issuance or
sale multiplied by the Liquidation Preference, and
(bb) the total consideration payable to the
corporation upon such issuance or sale of such shares
and such purchase rights and upon the exercise of
such purchase rights. If any options or purchase
rights taken into account in any such adjustment of
the Conversion Ratio subsequently expire without
exercise, the Conversion Ratio shall be recomputed by
deleting such options or purchase rights. For
purposes of this subsection 4.5(c)(2), the number of
shares of Voting Common Stock or Nonvoting Common
Stock which may be issued as Excluded Stock Issuances
shall be appropriately adjusted to reflect stock
splits, stock dividends, reorganizations,
consolidations and similar changes.
(iv) The anti-dilution provisions of this
subsection 4.5(c)(2) may be waived by the affirmative
vote of the holders (acting together as a class) of
at least a majority of the then outstanding shares of
Preferred Stock.
<PAGE>
(3) Upon receipt of a written notice to the
corporation from a holder of shares of Preferred Stock
delivered to the corporation's principal executive offices
requesting a computation of the then current Conversion Ratio,
the corporation shall promptly give written notice by
first-class mail, postage prepaid, addressed to the holder of
the Preferred Stock making such request at the address of such
holder as shown on the books of the corporation which notice
shall state the then current Conversion Ratio, setting forth
in reasonable detail the method of calculation and the facts
upon which such calculation is based.
(4) In case any time:
(i) the corporation shall pay any dividend
payable in stock upon its Common Stock or make any
distribution (other than regular cash dividends) to
the holders of its Common Stock; or
(ii) the corporation shall offer for
subscription pro rata to the holders of its Common
Stock any additional shares of stock of any class or
other rights; or
(iii) there shall be any capital
reorganization, reclassification of the Capital Stock
of the corporation or consolidation or merger of the
corporation with or sale of all or substantially all
of its assets to another corporation; or
(iv) there shall be a voluntary or
involuntary dissolution, liquidation or winding up of
the corporation; then in any one or more of said
cases the corporation shall give written notice, by
first-class mail, postage prepaid, addressed to the
holders of the Preferred Stock at the addresses of
such holders as shown on the books of this
corporation, of the date on which (aa) the books of
the corporation shall close or a record shall be
taken for such dividend, distribution or subscription
rights or (bb) such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation
or winding up shall take place, as the case may be.
Such notice shall also specify the date as of which
the holders of Common Stock of record shall
participate in such dividend, distribution or
subscription rights or shall be entitled to exchange
their Common Stock for securities or other property
deliverable upon such reorganization,
reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, as the case
may be. Such written notice shall be given at least
20 days prior to the action in question and not less
than 20 days prior to the record date or the date on
which this corporation's transfer books are closed in
respect thereto.
<PAGE>
(5) As used in this subsection 4.5(c), the term
Common Stock shall mean and include the corporation's
presently authorized Voting Common Stock and Nonvoting Common
Stock and shall also include any capital stock of any class of
the corporation hereafter authorized which shall have the
right to vote on all matters submitted to the shareholders of
the corporation and shall not be limited to a fixed sum or
percentage in respect of the rights of the holders thereof to
participate in dividends or in the distribution of assets upon
the voluntary or involuntary liquidation, dissolution or
winding up of the corporation; provided that the shares
receivable pursuant to conversion of the Preferred Stock shall
include shares designated as Voting Common Stock of the
corporation as of the date of issuance of such Preferred Stock
or, in the case of any reclassification of the outstanding
shares thereof, the stock, securities or assets provided for
in subsection 4.5(c)(2)(ii) above.
(6) The number of shares of Voting Common Stock
issuable upon conversion of shares of Preferred Stock shall be
computed to the nearest one hundredth of a full share;
however, no fractional shares of Voting Common Stock shall be
issued upon conversion. The corporation shall pay a cash
adjustment in respect of any fraction of a share in an
amount-equal to the same fraction of the market price per
share of Voting Common Stock as of the close of business on
the day of conversion. "Market price" shall mean the average
of the high and low prices of the Voting Common Stock sales on
all exchanges on which the Voting Common Stock may at the time
be listed or as reported by the National Association of
Securities Dealers, Inc. Automated Quotation System National
Market System ("NASDAQ-NMS"), or, if there shall have been no
sales on any such exchange or as reported by NASDAQ-NMS on any
such day, the average of the bid and asked prices at the end
of such day, or, if the Voting Common Stock shall not be so
listed or transactions so reported, the average of the bid and
asked prices at the end of the day in the over-the-counter
market, in each case averaged over a period of 20 consecutive
business days prior to the date as of which I, market price"
is being determined. If at any time the Voting Common Stock is
not listed on any exchange, reported by NASDAQ-NMS or quote in
the over-the-counter market, the "market price" shall be
deemed to be the higher of (a) the book value thereof as
determined by any firm of independent public accountants of
recognized standing selected by the Board of Directors of the
Corporation as of the last day of any month ending within 60
days preceding the date as of which the determination is to be
made, or (b) the fair value thereof determined in good faith
by the Board of Directors of the Corporation as of a date
which is within 15 days of the date as of which the
determination is to be made.
(7) Notwithstanding the foregoing right to convert at
the option of the holder, each share of Preferred Stock shall
automatically be converted into the appropriate number of
shares of Voting Common Stock of the corporation in the manner
and upon the terms set forth herein, without any act by the
corporation or the holders of Preferred Stock, concurrently
with the closing of:
<PAGE>
(i) the sale by the corporation of shares of
Voting Common Stock in a public offering which was
registered under the Securities Act of 1933, as
amended, was underwritten by an investment banking
firm on a firm commitment basis and results in the
Voting Common Stock being of the corporation being
quoted on the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ")
or listed on the New York Stock Exchange, American
Stock Exchange or other national stock exchange; or
(ii) a merger of the corporation with or the
acquisition of the corporation by another entity in
which the surviving entity is a corporation with a
class of securities which are quoted on NASDAQ or
listed on the New York Stock Exchange, the American
Stock Exchange or other national stock exchange.
ARTICLE 5 - MERGER, EXCHANGE, SALE OF ASSETS AND DISSOLUTION
5.1) Where approval of shareholders is required by law, the affirmative
vote of the holders of at least a majority of the voting power of all shares
entitled to vote shall be required to authorize the corporation (i) to merge
into or with one or more other corporations, (ii) to exchange its shares for
shares of one or more other corporations, (iii) to sell, lease, transfer or
otherwise dispose of all or substantially all of its property and assets,
including its goodwill, or (iv) to commence voluntary dissolution.
ARTICLE 6 - AMENDMENT OF ARTICLES OF INCORPORATION
6.1) Subject to the special voting rights of the holders of Preferred
Stock set forth in subsection 4.5(b), any provision contained in these Articles
of Incorporation may be amended, altered, changed or repealed by the affirmative
vote of the holders of at least majority of the voting power of the shares
present and entitled to vote at a duly held meeting or such greater percentage
as may be otherwise prescribed by the laws of the State of Minnesota.
ARTICLE 7 - INCORPORATORS
7.1) The name and mailing address of the original incorporator was as
follows: Stephen A. A. Goddard 1645 Hennepin Avenue South Suite 212 Minneapolis,
Minnesota 55403.
ARTICLE 8 - DIRECTOR LIABILITY
8.1) Limitation on Director Liability. To the fullest extent permitted
by the Minnesota Business Corporation Act, as the same exists or may hereafter
be amended, a director of this corporation shall not be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director.
IN WITNESS WHEREOF, we have hereunto set our hands this 10th day of
April, 1989.
/s/ Dale R. Olseth
Dale R. Olseth, Chairman, President, and Chief
Executive Officer
/s/ David R. Busch
David R. Busch, Secretary
STATE OF MINNESOTA )
)ss.
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 10th
day of April, 1989, by Dale R. Olseth and David R. Busch,
Chairman/President/Chief Executive Officer and Secretary, respectively, of
Bio-Metric Systems, Inc., a Minnesota corporation, on behalf of the corporation.
/s/ Walter H. Diers
Notary Public
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