UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

SCHEDULE 14A

SCHEDULE 14A INFORMATION
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Securities Exchange Act of 1934 (Amendment No. )

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SURMODICS, INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

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SURMODICS, INC.

 

 

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

 

The Annual Meeting of Shareholders of SurModics, Inc. (“SurModics”) will be held on Monday, February 8, 2010, at 4:00 p.m. (Minneapolis time), at the offices of Faegre & Benson LLP located at 90 South Seventh Street, Floor 21, in Minneapolis, Minnesota, for the following purposes:

 

1. To elect Class II directors;

 

2. To set the number of directors at nine (9);

 

3. To ratify the appointment of Deloitte & Touche LLP as SurModics’ independent registered public accounting firm for fiscal year 2010;

 

4. To approve the SurModics, Inc. 2009 Equity Incentive Plan;

 

5. To approve certain amendments to the SurModics, Inc. 1999 Employee Stock Purchase Plan; and

 

6. To consider and act upon such other matters as may properly come before the meeting or any adjournment or postponement of the meeting.

 

Only shareholders of record at the close of business on December 7, 2009 are entitled to notice of and to vote at the meeting or any adjournment of the meeting.

 

Your vote is important. We ask that you complete, sign, date and return the enclosed Proxy in the envelope provided. The prompt return of Proxies will save the Company the expense of further requests for Proxies.

 

BY ORDER OF THE BOARD OF DIRECTORS

 

 

Robert C. Buhrmaster

Chairman of the Board

 

Eden Prairie, Minnesota

December 23, 2009

 

Important Notice Regarding the Availability of Proxy Materials for the Annual
Meeting of Shareholders to Be Held on February 8, 2010

 

The Proxy Statement for the 2010 Annual Meeting of Shareholders and the annual report to shareholders for the fiscal year ended September 30, 2009 are available at
https://materials.proxyvote.com/868873

 

SURMODICS, INC.

Annual Meeting of Shareholders

February 8, 2010

 

 

PROXY STATEMENT

 

 

INTRODUCTION

 

Your Proxy is solicited by the Board of Directors of SurModics, Inc. (the “Company”) for use at the Annual Meeting of Shareholders to be held on Monday, February 8, 2010 (the “Annual Meeting”), at the location and for the purposes set forth in the notice of meeting, and at any adjournment or postponement of the meeting.

 

The cost of soliciting Proxies, including the preparation, assembly and mailing of the Proxies and soliciting material, as well as the cost of forwarding this material to beneficial owners of stock, will be borne by the Company. Directors, officers and regular employees of the Company may, without compensation other than their regular remuneration, solicit Proxies personally or by telephone.

 

Any shareholder giving a Proxy may revoke it at any time prior to its use at the meeting by giving written notice of the revocation to the Secretary of the Company, or by filing a new written Proxy with an officer of the Company. Personal attendance at the meeting is not, by itself, sufficient to revoke a Proxy unless written notice of the revocation or a subsequent Proxy is delivered to an officer before the revoked or superseded Proxy is used at the meeting. Proxies not revoked will be voted in accordance with the choices specified by shareholders by means of the ballot provided on the Proxy for that purpose. Proxies that are signed but which lack any such specification will, subject to the following, be voted FOR each director nominee and FOR each of the other proposals identified in this Proxy Statement. If a shareholder abstains from voting as to any matter, it will have the same effect as voting against the proposal. If a broker returns a “non-vote” Proxy, indicating a lack of voting instructions by the beneficial holder of the shares and a lack of discretionary authority on the part of the broker to vote on a particular matter, then the shares covered by the non-vote Proxy shall be deemed present at the meeting for purposes of determining a quorum but shall not be deemed to be represented at the meeting for purposes of calculating the vote required for approval of that matter.

 

The mailing address of the principal executive office of the Company is 9924 West 74th Street, Eden Prairie, Minnesota 55344. The Company expects that this Proxy Statement, the related Proxy and notice of meeting will first be mailed to shareholders on or about December 23, 2009.

 

OUTSTANDING SHARES AND VOTING RIGHTS

 

The Board of Directors of the Company has fixed December 7, 2009, as the record date for determining shareholders entitled to vote at the Annual Meeting. Persons who were not shareholders on such date will not be allowed to vote at the Annual Meeting. At the close of business on December 7, 2009, 17,471,760 shares of the Company’s common stock were issued and outstanding. Common stock is the only outstanding class of capital stock of the Company entitled to vote at the meeting. Each share of common stock is entitled to one vote on each matter to be voted upon at the meeting. Holders of common stock are not entitled to cumulative voting rights.

 

PRINCIPAL SHAREHOLDERS

 

The following table provides information concerning persons known to the Company to be the beneficial owners of more than 5% of the Company’s outstanding common stock as of December 7, 2009. Unless otherwise indicated, the shareholders listed in the table have sole voting and investment power with respect to the shares indicated.

 

 

 

 

MANAGEMENT SHAREHOLDINGS

 

The following table sets forth the number of shares of common stock beneficially owned as of December 7, 2009, by each executive officer of the Company named in the Summary Compensation table, by each current director of the Company and by all directors and executive officers (including the named executive officers) as a group. Unless otherwise indicated, the shareholders listed in the table have sole voting and investment power with respect to the shares indicated.

 

 

 

 

 

ELECTION OF DIRECTORS
(Proposals #1 and #2)

 

General Information

 

The Bylaws of the Company provide that the number of directors, which shall not be less than three, shall be determined annually by the shareholders. The Company’s Corporate Governance and Nominating Committee and Board of Directors have recommended that the number of directors be set at nine (9). The Bylaws also provide for the election of three classes of directors with terms staggered so as to require the election of only one class of directors each year, and further that each class be equal in number, or as nearly as possible. Only directors who are members of Class II will be elected at the Annual Meeting. Each Class II director will be elected to a three-year term and, therefore, will hold office until the Company’s 2013 annual meeting of shareholders and until his or her

successor has been duly elected and qualified, or until his or her resignation or removal from office. The terms of Class III and I directors continue until the 2011 and 2012 annual meetings, respectively.

 

The Corporate Governance and Nominating Committee has recommended, and the Board of Directors selected, John W. Benson, Mary K. Brainerd and Gerald B. Fischer as the Board’s nominees for election as Class II directors. Brief biographical profiles of Messrs. Benson and Fischer and Ms. Brainerd are provided below. Following the retirement of Kendrick B. Melrose from the Board in February 2009, the Board reassigned Ms. Brainerd to Class II so that each class would have an equal number of directors. Each Proxy will be voted for each of such nominees unless the Proxy withholds a vote for one or more nominees. If, prior to the meeting, it should become known that any of the nominees will be unable to serve as a director after the meeting by reason of death, incapacity or other unexpected occurrence, the Proxies will be voted for such substitute nominee as is recommended or selected by the Corporate Governance and Nominating Committee and the Board of Directors or, alternatively, not voted for any nominee. The Board of Directors has no reason to believe that any nominee will be unable to serve.

 

Under applicable Minnesota law, approval of the proposal to set the number of directors at nine (9), and ratification of the appointment of the Company’s independent registered public accounting firm each requires the affirmative vote of the holders of a majority of the voting power of the shares represented in person or by Proxy at the Annual Meeting with authority to vote on such matter, but not less than the affirmative vote of 4,367,941 shares. The election of each Class II director requires the affirmative vote by a plurality of the voting power of the shares present and entitled to vote on the election of directors at the Annual Meeting at which a quorum is present. Negative votes will not affect the outcome of the election of directors.

 

The following information is provided with respect to each director nominee as well as each director whose term continues after the Annual Meeting:

 

 

 

 

Robert C. Buhrmaster (Class III) has been a director of the Company since 2008. Mr. Buhrmaster has been a private investor since 2004. Prior to that, he served as the President and Chief Executive Officer of Jostens, Inc., from 1994 to 2004 and as Chairman from 1998 to 2004. Prior to joining Jostens, Mr. Buhrmaster spent 18 years at Corning, Inc., serving in various roles, including senior vice president and general manager of several businesses, corporate controller and director of strategic planning. Mr. Buhrmaster is also a director of The Toro Company.

 

Bruce J Barclay (Class I) joined the Company as its President and Chief Operating Officer in December 2003. He became a director of the Company in July 2004 and Chief Executive Officer of the Company in July 2005. Prior to joining SurModics, he served as President and Chief Executive Officer of Vascular Architects, Inc. from 2000 to 2003. Prior to Vascular Architects, he served at Guidant Corporation, most recently as an officer and Senior Vice President from 1998 to 2000. Previously, he was a Vice President of Guidant’s Interventional Cardiology division with responsibility for the law division, a new therapies technical development team and business development, charged with the acquisition of new products and technologies for the division. Mr. Barclay also has considerable

experience in the pharmaceutical area serving in several positions at Eli Lilly and Company. He is also a registered patent attorney.

 

José H. Bedoya (Class I) has been a director of the Company since 2002. Mr. Bedoya is President and Chief Executive Officer of Otologics, LLC, a Colorado-based technology company he founded in 1996 to develop implantable devices to assist the severely hearing-impaired. From 1986 to 1996, Mr. Bedoya held a number of positions at Storz Instrument Company, then a division of American Cyanamid and later a division of American Home Products, including Director of Operations, Director of Research and Director of Commercial Development. Prior to that, he served as Vice President of Research and Development for Bausch & Lomb’s surgical division.

 

John W. Benson (Class II) has been a director of the Company since 2003. Mr. Benson retired from 3M Company in February 2003 where he served in various capacities for 35 years. Prior to his retirement, he served as Executive Vice President, Health Care Markets. Mr. Benson currently serves on the Board of Regents at St. Olaf College.

 

Mary K. Brainerd (Class II) has been a director of the Company since February 2009. Ms. Brainerd is President and Chief Executive Officer of HealthPartners, Inc., a family of non-profit Minnesota health care organizations headquartered in Minneapolis, Minnesota. She has been with HealthPartners since 1992 and has served as President and Chief Executive Officer since 2002. Prior to joining HealthPartners, Ms. Brainerd held senior level positions with Blue Cross and Blue Shield of Minnesota. Ms. Brainerd also serves on the boards of Minnesota Life/Securian, The St. Paul Foundation, Capital City Partnership, Minnesota Council of Health Plans, Alliance of Community Health Plans, and the Federal Reserve Bank of Minneapolis.

 

Gerald B. Fischer (Class II) has been a director of the Company since 2002. Mr. Fischer is Vice President, Senior Philanthropy Advisor of the University of Minnesota Foundation and served as its President and Chief Executive Officer from 1990 through August 2008. From 1985 to 1989, Mr. Fischer was with First Bank System, now U.S. Bancorp, serving as Executive Vice President, Chief Financial Officer and Treasurer. Previous to that he spent 18 years in various finance positions at Ford Motor Company and its affiliates.

 

Kenneth H. Keller, Ph.D.  (Class III) has been a director of the Company since 1997. Dr. Keller is President Emeritus of the University of Minnesota. Since August 2006, he has served as the Director of the Johns Hopkins School of Advanced International Studies’ Bologna Center in Bologna, Italy. Previously, he was Professor of Science and Technology Policy in the Humphrey Institute of Public Affairs at the University of Minnesota as well as Professor of Chemical Engineering and Materials Science. Dr. Keller joined the faculty of the University of Minnesota in 1964, and through the years assumed increasing administrative responsibilities. He was Academic Vice President from 1980 to 1985 and President from 1985 to 1988. Dr. Keller was a Senior Fellow at the Council on Foreign Relations from 1989 to 1996, serving as Senior Vice President of the Council from 1993 to 1995.

 

Susan E. Knight (Class III) has been a director of the Company since 2008. Since 2001, Ms. Knight has served as Vice President and Chief Financial Officer of MTS Systems Corporation, a leading global supplier of test systems and industrial position sensors. Prior to her position with MTS Systems, from 1977 to 2001, Ms. Knight served in various executive and management positions with Honeywell Inc., last serving as the Chief Financial Officer of the global Home and Building Controls division. Ms. Knight also serves on the boards of Plato Learning, Inc., and the Greater Metropolitan Housing Corporation.

 

John A. Meslow (Class I) has been a director of the Company since 2000. Mr. Meslow served as Corporate Senior Vice President and President of the Neurological Business of Medtronic, Inc., from 1985 until his retirement in 2000. Mr. Meslow also serves on the Board of Regents of Concordia College and the Board of Directors of the Minnesota Research Foundation, and he is a founder and Program Director of the Mayo Scholars Program.

 

DIRECTOR COMPENSATION DURING FISCAL 2009

 

The Director Compensation table below reflects all compensation awarded to, earned by or paid to the Company’s non-employee directors during fiscal 2009. Compensation for Bruce J Barclay, our President and Chief Executive Officer, is set forth below under the heading “Executive Compensation and Other Information.”

 

 

 

 

Summary of Director Compensation

 

The Company’s Board Compensation Policy provides compensation to our directors for their service on the Board in the form of annual retainers, fees for meeting attendance, and stock options. In addition, all directors are reimbursed for their reasonable travel-related expenses incurred in attending meetings of the Board of Directors and committee meetings. With respect to retainers and fees, each non-employee director (other than the Chairman) receives $10,000 as an annual retainer and $1,000 for each Board meeting attended. The chairman of each Board committee receives an additional $2,000 as an annual retainer. Further, each committee member receives $500 for each committee meeting attended. The Chairman receives an annual retainer of $100,000, but is not paid additional fees to attend Board or committee meetings. Mr. Buhrmaster’s annual retainer for fiscal 2009 was prorated for the portion of fiscal 2009 for which he served as Chairman.

 

With respect to stock options, each non-employee director is granted an option to purchase 10,000 shares of the Company’s common stock upon his or her first election to the Board of Directors. In November 2008, the Board amended the Company’s Board Compensation Policy, increasing the size of the stock options granted to each non-employee director (other than the Chairman) on an annual basis from 5,000 to 10,000 shares of the Company’s common stock (prorated during a director’s first year of service). Also at that time, the Board amended the policy to provide that all stock options granted to non-employee directors will have a term of 7 years and will become exercisable in increments of twenty-five percent (25%) per year beginning on the first anniversary of the date of

grant. All stock options granted to non-employee directors under the Board Compensation Policy in fiscal 2009 were granted pursuant to the Amended and Restated 2003 Equity Incentive Plan and have an exercise price equal to the fair market value of a share of common stock on the date of grant.

 

The Board of Directors established equity ownership guidelines for all non-employee directors in 2007. Under these guidelines, all non-employee directors are encouraged to own shares of common stock equal in value to at least five times each director’s annual cash retainer. For purposes of these guidelines, “stock ownership” is defined to include shares of common stock directly owned by the non-employee director, but excludes (i) unexercised stock options, (ii) stock with restrictions that have not lapsed, and (iii) performance shares that have not vested. Each director is expected to satisfy his or her obligation related to equity ownership within five years of the later of approval of the guidelines or joining the Board.

 

CORPORATE GOVERNANCE

 

The Company’s business affairs are conducted under the direction of the Board of Directors in accordance with the Minnesota Business Corporation Act and the Company’s Articles of Incorporation and Bylaws. Members of the Board of Directors are informed of the Company’s business through discussions with management, by reviewing materials provided to them and by participating in meetings of the Board of Directors and its committees. Certain corporate governance practices that the Company follows are summarized below.

 

Code of Ethics and Business Conduct

 

We have adopted the SurModics Code of Ethics and Business Conduct (the “Code of Conduct”), which applies to our directors, officers and employees. The Code of Conduct is publicly available on our website at www.surmodics.com under the caption Investors/Corporate Governance. If we make any substantive amendments to the Code of Conduct or grant any waiver, including any implicit waiver from a provision of the Code of Conduct, to our directors or executive officers, we will disclose the nature of such amendment or waiver on a Current Report on Form 8-K.

 

Related Person Transaction Approval Policy

 

Our Board of Directors has adopted a written policy for transactions with related persons, as defined in Item 404 of Securities and Exchange Commission Regulation S-K, which sets forth our policies and procedures for the review, approval or ratification of transactions with related persons which are subject to the policy. Our policy applies to any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships in which we are a participant and a related person has a direct or indirect interest. Our policy, however, exempts the following:

 

 

We consider the following persons to be related persons under the policy:

 

 

The Audit Committee of our Board of Directors must approve any related person transaction subject to this policy before commencement of the related person transaction. The Audit Committee will analyze the following factors, in addition to any other factors the Audit Committee deems appropriate, in determining whether to approve a related person transaction:

 

 

The Audit Committee may, in its sole discretion, approve or deny any related person transaction. Approval of a related person transaction may be conditioned upon the Company and the related person taking any actions that the Audit Committee deems appropriate.

 

If one of our executive officers becomes aware of a related person transaction that has not previously been approved under the policy:

 

 

Transactions With Related Persons

 

In January 2008, prior to Ms. Brainerd’s appointment to the Board, the Company entered into a transaction with HealthPartners, Inc., a nonprofit corporation of which Ms. Brainerd serves as the President and Chief Executive Officer. In particular, the Company entered into a Master Group Contract for HealthPartners to provide HMO benefits to employees of the Company and their dependents, which automatically renewed pursuant to its terms in January 2009. At the time the contract was signed, there were no relationships between HealthPartners and the Company or any related person of the Company. Therefore, this transaction was not reviewed under the Company’s related party transaction approval policy. Prior the renewal of the HealthPartners contract in January 2010, the Audit Committee reviewed the terms of the contract with HealthPartners. The Audit Committee determined that the amounts paid to HealthPartners were not material to the Company, that the terms of the contract were fair to the Company, that Ms. Brainerd did not play any role in the negotiation of the contract, and that the contract was in the best interests of the Company. Accordingly, the Audit Committee approved the January 2010 renewal of the HealthPartners contract. Future transactions between the Company and HealthPartners will continue be reviewed under the terms of the Company’s related party transaction approval policy.

 

Equity Ownership Guidelines for Executive Officers

 

In 2007, our Board of Directors approved equity ownership guidelines for all our executive officers. Under these guidelines, (a) our Chief Executive Officer is encouraged to own Company common stock equal in value to at least five times his annual base salary, (b) executive officers at the Senior Vice President level are encouraged to own Company common stock equal in value to at least three times their annual base salary, and (c) executive officers at the Vice President level or below are encouraged to own Company common stock equal in value to at least two times their annual base salary. For purposes of these guidelines, “stock ownership” is defined to include shares of common stock directly owned by the officer, but excludes (i) unexercised stock options, (ii) stock with restrictions that have not lapsed, and (iii) performance shares that have not vested. Each officer is expected to satisfy his or her obligation

related to equity ownership within five years of the later of approval of the guidelines or his or her appointment to the relevant position.

 

Majority of Independent Directors; Committees of Independent Directors

 

Our Board of Directors has determined that Mss. Brainerd and Knight and Messrs. Bedoya, Benson, Buhrmaster, Fischer, Keller and Meslow, constituting a majority of the Board of Directors, are independent directors in accordance with rules of The NASDAQ Stock Market since none of them is believed to have any relationships that, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Mr. Barclay is not considered independent under the applicable rules of The NASDAQ Stock Market since he currently serves as an executive officer of the Company.

 

Each member of the Company’s Audit Committee, Organization and Compensation Committee and Corporate Governance and Nominating Committee has been determined, in the opinion of the Board of Directors, to be independent in accordance with the applicable rules of The NASDAQ Stock Market.

 

Committee and Board Meetings

 

The Company’s Board of Directors has four standing committees: the Audit Committee, the Organization and Compensation Committee, the Corporate Governance and Nominating Committee and the Business Development Committee, which was established by the Board of Directors in September, 2009 to review certain business development transactions. During fiscal 2009, the Board of Directors held seven meetings and the standing committees had the number of meetings noted below. The newly-created Business Development Committee did not meet in fiscal 2009. Each incumbent director attended (in person or by telephone) 75% or more of the total number of meetings of the Board and of the Committee(s) of which he or she was a member in fiscal year 2009, except that Ms. Brainerd was unable to attend 75% of the aggregate total meetings of the Board and the Committees of which she was a member as a result of scheduling conflicts with the Board’s meeting calendar, which was created prior to her appointment to the Board. Each of the standing committees of the Board of Directors is governed by a charter, except the newly-formed Business Development Committee. The Audit Committee Charter, the Organization and Compensation Committee Charter and the Corporate Governance and Nominating Committee Charter are publicly available on our website at www.surmodics.com under the caption Investors/Corporate Governance.

 

Audit Committee

 

The Audit Committee is responsible for reviewing the quality and integrity of the Company’s financial reports, the Company’s compliance with legal and regulatory requirements, the independence, qualifications and performance of the Company’s independent auditor, and the performance of the Company’s internal audit function and its accounting and reporting processes. The Audit Committee held five meetings during fiscal 2009.

 

Pursuant to its written charter, the Audit Committee is required to pre-approve the audit and non-audit services performed by the Company’s independent auditors in order to ensure that the provision of such services does not impair the auditor’s independence. The Audit Committee also has a pre-approval policy which requires that unless a particular service to be performed by the Company’s independent auditors has received general pre-approval by the Audit Committee, each service provided must be specifically pre-approved. Any proposed services exceeding pre-approved cost levels will require specific pre-approval by the Audit Committee. In addition, the Audit Committee may delegate pre-approval authority to the Chairman of the Audit Committee, who will then report any pre-approval decisions to the Audit Committee at its next scheduled meeting.

 

Organization and Compensation Committee

 

The Organization and Compensation Committee is responsible for matters relating to executive compensation programs, key employee compensation programs, director compensation programs, corporate culture programs, organizational planning and personnel changes at the executive level. The Organization and Compensation Committee held five meetings during fiscal 2009.

Under the terms of its charter, the Organization and Compensation Committee has the authority to engage the services of outside advisors and experts to assist the Committee. During fiscal 2009, the Committee engaged an external independent compensation consultant, Mr. David A. Ness, to advise the Company on all matters related to executive and director compensation. Mr. Ness has over 35 years of experience designing and administering executive and director compensation programs and during the fiscal year served as Corporate Vice President of Global Rewards and HR Operations for Medtronic, Inc. Despite Mr. Ness’ employment at Medtronic, the Committee determined that he could function independently and it further implemented appropriate safeguards to protect sensitive Company information. Mr. Ness took his direction solely from the Committee, and all of the services he provided related to the Company’s executive and director compensation programs.

 

Corporate Governance and Nominating Committee; Procedures and Policy

 

The Corporate Governance and Nominating Committee is responsible for identifying individuals qualified to become Board members, recommending to the Board the director nominees for election to the Board, recommending to the Board corporate governance guidelines applicable to the Company, and leading the Board and its committees in their annual performance review process. The Corporate Governance and Nominating Committee held two meetings during fiscal 2009. The Corporate Governance and Nominating Committee’s nominating policy provides for the consideration of candidates recommended by shareholders, directors, third parties, search firms and others. In evaluating director nominees, the Corporate Governance and Nominating Committee considers the following factors and qualifications:

 

 

The Corporate Governance and Nominating Committee will consider the attributes of the candidates and the needs of the Board and will review all candidates in the same manner, regardless of the source of the recommendation. A shareholder who wishes to recommend one or more directors must provide a written recommendation to the Corporate Secretary at the address below. Notice of a recommendation must include:

 

with respect to the shareholder:

 

 

with respect to the nominee:

 

 

 

 

 

 

 

The recommendation must be accompanied by a written consent of the nominee to stand for election if nominated by the Board of Directors and to serve if elected by the shareholders. The Company may require any nominee to furnish additional information that may be needed to determine the qualifications of the nominee. Such recommendation must be submitted to the Corporate Secretary no later than 90 days prior to the first anniversary of mailing of this proxy statement.

 

The Corporate Governance and Nominating Committee believes that candidates for directors should have certain minimum qualifications, including being able to read and understand basic financial statements, having familiarity with the Company’s business and industry, having high moral character and mature judgment, being able to work collegially with others, and not currently serving on more than three boards of directors of public companies. The Corporate Governance and Nominating Committee may modify these minimum qualifications from time to time.

 

It is also a policy of the Board that each director be required to retire from the Board effective at the conclusion of the annual meeting following his or her seventy-second birthday, unless special circumstances exist as determined by the Board. The Board believes, however, that any such exceptions should be rare. Under this policy, Kenneth H. Keller, Ph.D., 75, would normally have retired at the conclusion of the Company’s 2008 Annual Meeting of Shareholders. Given Dr. Keller’s substantial experience and familiarity with the Company and its business, the Board, based upon the recommendation of the Corporate Governance and Nominating Committee, determined it to be appropriate for Dr. Keller to continue his service on the Board. Accordingly, prior to the Company’s 2008 Annual Meeting of Shareholders, Dr. Keller agreed to continue to serve on the Board as a Class III director.

 

It is also the policy of the Board that every director should notify the Chairman of his or her retirement, of any change in employer, and of any other significant change in the director’s principal professional occupation, and in connection with any such change, offer to submit his or her resignation from the Board for consideration by the Corporate Governance and Nominating Committee. The Board, upon recommendation from the Corporate Governance and Nominating Committee, then may consider the continued appropriateness of board membership of such director under the new circumstances and the action, if any, to be taken with respect to the offer to submit his or her resignation.

 

Procedures for Shareholder Communications to Directors

 

Shareholders may communicate directly with the Board of Directors. All communications should be directed to our Corporate Secretary at the address below and should prominently indicate on the outside of the envelope that it is intended for the Board of Directors or for non-management directors. If no director is specified, the communication will be forwarded to the entire Board. Shareholder communications to the Board should be sent to:

 

Corporate Secretary
Attention: Board of Directors
SurModics, Inc.
9924 West 74th Street
Eden Prairie, MN 55344-3523

 

Director Attendance Policy

 

Directors’ attendance at our annual meetings of shareholders can provide our shareholders with an opportunity to communicate with directors about issues affecting the Company. Accordingly, all directors are expected to attend annual meetings of shareholders. All of the Company’s directors attended the last annual meeting of shareholders, which was held on February 2, 2009.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Overview

 

The following compensation discussion and analysis describes the material elements of the compensation of our Chief Executive Officer, Chief Financial Officer, and three other most highly compensated executive officers, whom we refer to as our named executive officers, during fiscal 2009. The compensation of the named executive officers is determined by the Organization and Compensation Committee of the Board of Directors (the “Committee”) and is based on the same compensation philosophy and objectives that apply to all of our executive officers. It is important to note that while this discussion relates primarily to the compensation of our named executive officers, we are committed to providing competitive and equitable compensation programs for all of our employees, which includes many of the elements discussed below.

 

We compete for executive management talent on a national level with other companies in the drug delivery market, as well as companies within the medical device and pharmaceutical markets. Competition for executive management talent in these markets is intense. In addition, as a result of our strategic initiatives to expand and diversify our business, our business prospects are highly dependent on our ability to effectively recruit and retain experienced executive management personnel. Accordingly, we have designed our executive compensation system to provide competitive compensation and in order to be consistent with our compensation philosophy, to also include performance-based compensation.

 

Compensation Philosophy and Objectives

 

Our compensation policies are designed to enhance our financial performance, and thus shareholder value, by aligning the financial interests of executive officers and employees with those of shareholders. Our executive compensation program is viewed in total, considering all of the elements of compensation. Generally, we strive to set non-incentive-based elements of our compensation program (i.e., base salaries) at levels that are conservative with respect to comparable companies. We design incentive-based elements of our compensation program so that if objectives are achieved and incentives are earned, total compensation to our executive officers will be competitive with the total compensation provided by comparable companies. This approach underscores our pay-for-performance philosophy, which places a substantial portion of our executive officers’ total compensation “at risk,” while providing compensation opportunities that are comparable to market levels. In addition, we believe that equity compensation emphasizes longer-term elements in our compensation programs and further aligns the interests of our executives with those of our shareholders.

 

Establishing Executive Compensation

 

Consistent with the objectives and philosophies set forth above, the Committee evaluates compensation of our executive officers annually by considering both the individual elements and the total amount of potential compensation available under our compensation programs. The committee also considers a variety of additional factors when establishing an individual executive’s compensation, including:

 

 

In addition to the factors listed above, the Committee reviews and adjusts the compensation of our executive officers. When establishing our fiscal 2009 compensation programs, the compensation consultant engaged by the

Committee, Mr. David A. Ness, used data compiled from professional surveys for executive officers in similar positions at similar sized companies, specific to the industries in which we compete as well as general industry. Data was collected using third-party survey information available from the following:

 

Radford, Biotechnology Compensation Survey — The Radford survey included over 300 public and private companies that operate primarily in the medical device, pharmaceutical, and biotechnology markets. We considered data only from those companies that had revenues during the survey period of between $40 and $200 million. The effective date of the Radford survey was April 2007.

 

Top Five Data Services, MEDIC (Medical Device Industry Compensation) Executive Compensation Survey — The MEDIC survey included data from over 75 public and private companies that operate primarily in the medical device market. We considered data only from those companies that had revenues of less than $500 million. The effective date of the MEDIC survey was July 2006.

 

Watson Wyatt, ECS Industry Report on Top Management — The Watson Wyatt survey included data from over 2000 public and private manufacturing companies. We considered data only from those companies included in the survey that had revenue of less than $200 million. The effective date of the Watson Wyatt survey was April 2006.

 

These sources of data were utilized and supplemented by other data obtained by Mr. Ness. From this data, Mr. Ness determined the 50th percentile data for each of our executive officers. These data are presented in this Compensation Discussion and Analysis as the 50th percentile for comparable companies. We adjusted the above survey data for the time difference between the periods covered by the surveys and the beginning of fiscal 2009 by assuming an annualized market based salary adjustment.

 

In addition to the process outlined above, the Committee solicited the views of our Chief Executive Officer who attended all of the committee’s meetings by invitation. The Chief Executive Officer was not present during the executive session portions of those meetings, and he did not make specific recommendations to the Committee concerning his own compensation.

 

Elements of Executive Compensation

 

The principal elements of our executive compensation programs for fiscal 2009 consisted of cash elements and equity elements, both of which are described in greater detail below. Additionally, our executive compensation programs included employment and change of control benefits for some of our executive officers, and other benefits made generally available to our employees. The following is an illustration of the major components of the Company’s executive compensation programs:

 

 

The Committee sought to maintain an appropriate allocation between the various elements of compensation, including cash and equity elements, when determining each executive’s compensation. However, the Committee

did not have firm targets for the appropriate allocation between the various elements. Instead, the Committee’s determinations were made consistent with our pay-for-performance philosophy, which places a substantial portion of each executive’s total compensation “at risk” by tying it to the performance of our company.

 

Cash Elements of Compensation

 

Cash elements of compensation include base salary and cash incentive compensation. All of our cash compensation represents short-term compensation that is earned within a single fiscal year and paid in that year or shortly thereafter.

 

Base Salary — Base salary is the fixed cash component of annual compensation. Base salaries for our named executive officers are reviewed annually by the Committee prior to the start of each new fiscal year. The Committee considers adjustments to better align an executive’s base salary with comparative market base salaries, to provide merit-based increases based upon individual or company performance, or to account for changes in roles and responsibilities. Consistent with our compensation philosophy and objectives, the Committee seeks to set base salaries at conservative levels relative to the market for executives in similar positions at comparable companies included in the comparative surveys. By “conservative,” we mean that we generally set base salaries for our executive officers below the 50th percentile of base salary levels for executives in similar positions at comparable companies.

 

The fiscal 2009 base salary for each of our named executive officers, except Mr. Lopez and Dr. Tipton, was below the amount representing the 50th percentile of base salaries for executives at comparable companies. The CEO presented recommendations for adjustments to base salaries for all of our executive officers, excluding himself, to the Committee at its meeting in September 2008. The CEO’s recommendations were based, in large part, on performance feedback gathered during our annual performance review process, and included a review of the executive’s contributions and performance during the previous fiscal year relative to corporate and business objectives. The CEO’s recommendations also considered the executive’s current salary relative to the market and prior years’ salary adjustments. Salary adjustments for the CEO were made by the Committee based upon the Board’s evaluation of his performance considering financial and non-financial measures of our performance during fiscal 2008.

 

In March 2009, management recommended to the Committee that Mr. Barclay’s 2009 salary be reduced by 10%, and the salaries of all of our other executive officers be reduced by 5%, to help emphasize the Company’s commitment to reducing costs given the challenging economic environment and the Company’s performance. Although the Company determined that each such officer met or exceeded expectations for fiscal 2008, the Committee agreed with the recommendations and the 2009 salaries were so reduced effective April 1, 2009.

 

The following table shows the base salaries approved for our named executive officers for fiscal 2009, as well as a comparison of approved base salaries relative to the 50th percentile of base salary levels for executives at comparable companies.

 

 

 

 

 

Cash Incentive Compensation — Cash incentive compensation (labeled as Non-Equity Incentive Plan Compensation in the Summary Compensation Table below) is cash compensation that may be earned in a fiscal year based on the achievement of pre-established performance objectives for that year. The Committee considers the total annual cash compensation available to our executive officers relative to market levels when setting target cash incentive compensation. Consistent with our compensation philosophy and objectives, the Committee seeks to provide target total annual cash compensation available to our executive officers at competitive levels. By “competitive,” we mean that we generally seek to set target cash incentive compensation at levels such that if the target cash incentive compensation is earned, the executive officer’s total cash compensation for the fiscal year will be at or near the 50th percentile of total annual cash compensation levels for executives at comparable companies.

 

For fiscal 2009, cash incentive compensation for all of our employees, including our named executive officers, was provided through a cash-based annual incentive plan. Performance under the annual incentive plan was determined based upon the achievement of corporate performance objectives, and business unit or department performance objectives. The corporate objectives under the annual incentive plan were set at specified levels of pro forma (non-GAAP) revenue and pro forma earnings per share. The Committee determined that these measurements were an appropriate method of evaluating the Company’s financial performance because of the accounting treatment associated with revenue recognition of certain payments received by the Company, and because excluding certain charges is appropriate under certain circumstances. The ranges of the corporate performance objectives may vary from year to year depending on our business strategies or other conditions affecting our business. The target payout levels for the corporate performance objectives corresponded to our fiscal 2009 operating plan. As a result of the challenging year the Company faced, the target and threshold payout percentages were set at 50% of fiscal 2008 target payout levels for all of our executive officers, including our named executive officers.

 

The business objectives under the annual incentive plan generally related to both financial performance, such as business unit revenue, and non-financial performance, such as project development milestones, licensing objectives, or product quality measures. The Committee considers these objectives to be difficult to achieve, but, as reflected in the achievement rates below, attainable. Furthermore, the Committee believes the combination of these corporate and business objectives, if achieved, would have the potential to significantly enhance shareholder value. In order to provide investors with a general sense for the business objectives included in our 2008 annual incentive plan, we have listed the more significant business objectives, or groups of business objectives, for each of our named executive officers below. We have undertaken to describe these business objectives without disclosing the specific identity of particular customers or providing specific product or clinical development details.

 

For Mr. Barclay, the business objectives related to execution of new licenses with major medical device/pharmaceutical/biotech companies (30% weight); surpassing corporate goal for new license agreements by at least 20% (10%); achievement of at least 80% of corporate goals communicated to investors (25%); achievement of at least 80% of department goals by executives (20%); and achievement of pro forma EPS goals (15%). Because the corporate objectives were not achieved, Mr. Barclay was not eligible to receive any cash incentive payment based on achievement of business goals in fiscal 2009.

 

For Mr. Ankeny, the business objectives related to achievement of financial objectives and support of strategic planning (25% weight); achievement of investor relations initiatives related to increasing company exposure (20%); development and implementation of improved budgeting, forecasting and reporting processes (20%); achievement of business development objectives (20%); and achievement of certain goals related to Information Systems (15%). Because the corporate objectives were not achieved, Mr. Ankeny was not eligible to receive any cash incentive payment based on achievement of business goals in fiscal 2009.

 

For Mr. Lopez, the business objectives related to achievement of the Ophthalmology business unit pro forma revenue target (20% weight); achievement of the Ophthalmology business unit licensing and development agreement objectives (45%); achievement of the Ophthalmology business unit product development objectives (25%); and achievement of the Ophthalmology business unit intellectual property objectives (10%). Because the corporate objectives were not achieved, Mr. Lopez was not eligible to receive any cash incentive payment based on achievement of business goals in fiscal 2009.

 

For Mr. Olson, the business objectives related to achievement of the Cardiovascular business unit licensing objectives (40% weight); achievement of the Cardiovascular business unit revenue and expense objectives (35%); achievement of strategic relationship and project goals (20%); and achievement of quality-related goals (5%). Because the corporate objectives were not achieved, Mr. Olson was not eligible to receive any cash incentive payment based on achievement of business goals in fiscal 2009.

 

For Dr. Tipton, the business objectives related to achievement of revenue and operating income targets for the SurModics Pharmaceuticals business unit (32% weight); achievement of intellectual property and licensing objectives (24%); achievement of clinical trial manufacturing, quality and facilities-related objectives (26%); and achievement of business development objectives (18%). Because the corporate objectives were not achieved, Dr. Tipton was not eligible to receive any cash incentive payment based on achievement of business goals in fiscal 2009.

 

Potential incentive compensation available to our executive officers under the annual incentive plan was weighted between achievement of the corporate and business objectives. In particular, for all of our named executive officers, including our CEO, total maximum payout for business objectives would be equal to one-third of the payout received for corporate objectives. No payout would be made on business objectives unless at least the threshold level of corporate objectives was realized, and the level of corporate objectives achieved dictated the maximum potential payout for business objectives. The Committee believes that this weighting between corporate and business objectives promotes a cohesive, performance-focused culture among our executive team, while appropriately rewarding achievement of business objectives. In fiscal 2009, because corporate objectives were not realized, executive officers were not eligible to receive any cash incentive payments based on achievement of business goals.

 

Payouts, if any, under the annual incentive plan for our named executive officers (excluding the CEO), as determined by the Committee, could range between a threshold amount of 7.5%, a target amount of 15.0%, and a maximum amount of 60.0%, of each such officer’s base salary. For our CEO, payouts under the annual incentive plan could range between a threshold amount of 12.5%, a target amount of 25.0%, and a maximum amount of 100.0% of his base salary. The potential incentive compensation available to our CEO was higher relative to our other executive officers because of the scope of his responsibilities, his ability to influence our performance, the Committee’s desire to place a more substantial portion of his total compensation “at risk” and compensation practices at comparable companies. The Committee established the potential incentive compensation available under the annual incentive plan at levels it considered, based on data from comparable companies and the business judgment of its members, appropriate to reward our executive officers, including the CEO, for the achievement of performance objectives reflecting the financial performance for our company that would have the potential to enhance shareholder value.

 

At its first regularly scheduled meeting after our results for fiscal 2009 were released, the Committee determined the level of achievement of the corporate and business objectives. Based on the Committee’s review of our achievement of the corporate objectives, the Committee determined that the threshold levels of the corporate objectives were not achieved. Accordingly, our named executives were not eligible for cash incentive compensation, regardless of the achievement of business objectives. The following table sets forth the actual payouts under the annual incentive plan and the potential payouts under the annual incentive plan for different levels of achievement of the corporate objectives.

 

 

 

 

The target total cash compensation is determined by combining an executive’s base salary with the target level of incentive compensation available for that executive. As stated above, the Committee’s philosophy is to provide total annual cash compensation to executive officers at competitive levels (i.e., at or near the 50th percentile of comparable companies) if the targeted performance objectives are achieved. For fiscal 2009, the target amount of total cash compensation available to each of our named executive officers was set below the amount representing the 50th percentile of total cash compensation listed for similar positions at comparable companies. The following table sets forth the target total cash compensation available and actual total cash compensation paid to our named executive officers compared with the 50th percentile of total cash compensation for executives at comparable companies.

 

 

 

 

We do not have a policy regarding the adjustment or recovery of incentive compensation awards or payments if the relevant performance measures upon which the awards are based are restated or otherwise adjusted in a manner that would increase or reduce the size of an award or payments. The Board will consider adoption of such a policy in the future. Before such time as any policy is adopted, if such an event were to occur, the Board would address it based on the facts and circumstances of the event.

 

Equity Elements of Compensation

 

Equity elements of compensation represent all forms of compensation that are paid in, or based on the performance of, our stock. Historically, we have used stock option grants, restricted stock awards and performance share awards as the forms of equity compensation available to our executive officers. Equity compensation can provide long-term incentives, such as using performance share awards with multi-year performance periods, or stock options or restricted stock awards that vest over multiple years. We use equity compensation to further align the interests of our executive officers with those of our shareholders.

 

We have historically granted, from time to time, the following types of equity compensation awards:

 

Stock Option Grants — Stock option grants are equity awards that allow the recipient to purchase shares of our common stock at a fixed price over a period of time until the option expires. Stock options typically are not exercisable when granted and become exercisable, or vest, over a number of years. Historically, we have granted stock options to executive officers as part of long-term compensation, to retain executives over the vesting period of the options, and to align the interests of our executive officers with those of our shareholders by creating a mechanism for executive officers to realize the benefits of increases in our stock price.

 

Restricted Stock Awards — Restricted stock awards are stock grants that, at the time of the grant, are subject to a risk of forfeiture by the recipient if the recipient’s employment with us terminates prior to the time the risk of forfeiture lapses. The risk of forfeiture for restricted stock awards generally lapses, or the shares vest, over a number of years, although some awards may vest in a single “cliff” vesting. We use restricted stock awards as part of long-term compensation, to retain executives over the vesting period of the shares, and to

align the interests of our executive officers with those of our shareholders by providing a compensation element that increases or decreases with the performance of our stock.

 

Performance Share Awards — A recipient of a performance share award is eligible to receive a grant of shares of our common stock to the extent that certain predefined performance objectives are achieved during the specified performance period. We use performance share awards as either short-term or long-term compensation depending on the duration of the performance period. These awards also assist us in retaining executives over the performance period, and in aligning the interests of our executive officers with those of our shareholders by providing a compensation element that increases or decreases in value with the performance of our stock.

 

The Committee selects the type of equity compensation awards to be made available to our named executive officers based on its assessment of the incentives provided by each award, and the potential impact to our financial results. The Committee also considers the forms and amounts of outstanding equity awards held by our named executive officers, the financial accounting and tax treatment on our company, and the tax treatment to our named executive officers, in determining the form and amount of equity compensation to award. Consistent with our compensation philosophy and objectives, the Committee sought to provide target total compensation, including cash and equity elements, available to our named executive officers at competitive levels. By “competitive,” we mean that if the target total cash and equity incentive compensation were earned by an executive officer, that executive officer’s total compensation for the fiscal year generally would be at or near the 50th percentile of total annual compensation levels for executives at comparable companies.

 

For fiscal 2009, the Committee approved a grant of stock options, and a grant of performance shares under our officer performance share plan (“PSP”). The Committee determined that the granting of a combination of stock option awards and performance share awards would support the Company’s pay-for-performance philosophy described above, as well as provide long-term compensation for retention of the Company’s executive officers. Once the value of the equity compensation to be made available to each of our executive officers was determined (as a fraction of total compensation as discussed below), that amount was allocated among the stock options and performance shares awarded.

 

Because the Committee believed that it was important to provide incentive compensation for longer than one-year time periods, the PSP for fiscal 2009 included performance share awards that may vest based on three-year performance objectives. The performance objectives under the PSP were set as a combination of specified levels of pro forma revenue and pro forma earnings per share. To protect competitively sensitive information with respect to future periods, we do not disclose those specific pro forma earnings per share and pro forma revenue targets, but the Committee considers these objectives to be difficult to achieve, but attainable. Minimum payouts (at the threshold level of performance) are 20% of the target amount, and maximum payouts (at or above the maximum level of performance) are 200% of the target amount. In recognition of the lag between the Company’s practices prior to fiscal 2008 and the eventual issuance of shares under the 2009-2011 phase of the PSP, the PSP for fiscal 2009 also included a transitional award of performance shares that would vest based on one-year performance objectives. The entire number of shares of the one-year awards would vest if the Company achieved specified threshold levels of both pro forma revenue and pro forma earnings per share during fiscal 2009 equal to the threshold levels under the cash-based annual incentive plan. If these threshold levels were not met, none of these shares would vest.

 

For the 2009-2011 component of the PSP, the target levels for the performance objectives were set at or close to the long-term financial objectives included in our strategic plan with each of the performance objectives being weighted equally. Following the end of the 2009-2011 performance period, the achievement percentage will be calculated by determining actual performance relative to the performance range for each of the performance objectives. These achievement percentages will then be weighted equally, and summed to arrive at an overall achievement percentage. The actual payouts to each of the named executives will be determined by multiplying each executive’s grant target number of shares by the plan’s overall achievement percentage.

 

At its first regularly scheduled meeting after our results for fiscal 2009 were released, the Committee determined the level of achievement of the corporate objectives and the corresponding vesting of the one-year performance share awards granted under the PSP. Based on the Committee’s determination with respect to our achievement of the corporate objectives, none of the fiscal 2009 performance shares awarded to our named executive officers under the one-year award portion of the PSP vested and, as a result, were all forfeited.

 

As stated above, the Committee’s philosophy is to provide target total annual compensation available to executive officers at competitive levels. Considering cash and equity elements, the target total compensation available to each of our named executive officers in fiscal 2009 was between 66.2% and 100.9% of the amounts representing the 50th percentile of total compensation for executives at comparable companies. The following table illustrates the total compensation actually paid to our named executive officers in fiscal 2009. Each of these amounts is compared with the 50th percentile of total compensation for executives in similar positions at comparable companies.

 

 

 

 

 

 

 

The table above further illustrates our pay-for-performance philosophy. As is shown, the total compensation for each of our named executive officers is heavily tied to our overall performance. Thus, in years in which our performance is below target levels established for the corporate and business objectives, we expect that the total compensation paid to our named executive officers will also be lower than the 50th percentile of total compensation paid to executives in similar positions at comparable companies. Conversely, in years in which our performance is at or above target levels established for the corporate and business objectives, we expect that the total compensation paid to our named executive officers will generally be near to, or higher than, the 50th percentile of total compensation for executives in similar positions at comparable companies. This approach places a significant portion of each executive’s total compensation “at risk,” with upside and downside potential depending upon our performance, the achievement of specific performance objectives, and long-term equity value creation for our shareholders. We believe that this philosophy benefits our shareholders by properly aligning the interests of management with those of our shareholders.

 

Other Equity Compensation — In addition to the equity compensation awards discussed above, the Committee may grant other equity awards as incentive compensation to our employees, including our named executive officers, at any time during a fiscal year. Such equity awards are typically granted on an individual basis, taking into

consideration factors such as the need to recruit or retain experienced individuals, or to reward performance that has the potential to result in long-term equity value creation for our shareholders. Such awards further support our pay-for-performance philosophy discussed above.

 

Mr. Lopez has been granted performance share awards that may vest to the extent that predefined performance objectives are achieved during the specified performance period. The Committee determined that these additional performance share awards were appropriate as a means to recruit and retain Mr. Lopez, and further to reward performance that has the potential to result in long-term equity value creation for our shareholders. The table below summarizes the performance share awards granted to Mr. Lopez, including the performance period and the total number of performance shares that may vest as a result of the attainment of each of the corresponding non-financial objectives:

 

 

 

 

During fiscal 2009, Mr. Lopez had 1,400 performance shares vest as a result of fiscal 2008 performance. Otherwise, there were no vestings of performance shares listed above, except that following the conclusion of fiscal 2009, based on the recommendation of the CEO, the Committee approved achievement of fiscal 2009 business objectives such that 60% (i.e., 1,200 shares) of the performance shares awarded to Mr. Lopez for fiscal 2009 performance vested, with the remaining 800 of the potential 2,000 shares being forfeited.

 

Adjustments for Significant Events

 

The Company’s performance-based compensation plans require that when special charges (such as, significant one-time revenue events, charges for expenses, or other adjustments) significantly impact operating results, this impact will be reviewed and evaluated by the Committee when determining the level of achievement of the corporate performance objectives. Committee review is required if the impact represents an amount that is five percent or greater of the Company’s prior year results for the corporate performance objectives. Consistent with these principles, in fiscal 2009, the Committee excluded all revenue from Merck & Co., Inc. which had previously been deferred, and which was recognized as a result of the termination of their agreements with the Company. In

addition, the Committee excluded charges associated with the restructuring announced in November 2008 as well as in-process R&D charges related to acquisition of assets from PR Pharmaceuticals, Inc.

 

As a result, despite achieving record revenue and earnings per share on a GAAP basis, the Company’s performance on a non-GAAP basis (which is the basis on which the Committee determines performance against objectives) was not sufficient to award any cash incentive compensation or other performance-based compensation in fiscal 2009.

 

Change of Control Agreements

 

We entered into change of control agreements with Bruce J Barclay, President and Chief Executive Officer, and Philip D. Ankeny, Senior Vice President and Chief Financial Officer, in April 2006 (which were amended in April 2009), with Paul A. Lopez, Vice President and President, Ophthalmology business unit, in November 2006, and with Arthur J. Tipton, Ph.D., President, SurModics Pharmaceuticals business unit, in July 2007. Mr. Lopez’s change of control agreement expired on November 15, 2009. The Committee of the Board of Directors feels that change of control agreements are appropriate to induce particular executives to remain with our company in the event of a proposed or anticipated change of control, or through a change of control, to facilitate an orderly transition to new ownership. In addition, the Committee feels that change of control agreements assist us in retaining executive officers by providing the executives with appropriate economic security against changes in our ownership. Because our executive officers would suffer economic hardship following a change of control only if their employment with us is terminated by us, or by the executive officer for good reason, following a change of control, we have selected such termination as the trigger for change of control payments. The majority of comparable companies in the comparative surveys provide some form of change of control benefits to at least some of their executive officers.

 

Other Compensation

 

We provide medical and insurance benefits, which are generally available to all of our full-time employees, to the named executive officers. We also maintain a 401(k) savings plan in which all qualified employees, including the named executive officers, may participate. Until April 1, 2009, we provided matching contributions to the savings plan for all participating employees, allowing such employees to receive up to an additional 3% of their annual base salary. Effective as of April 1, 2009, we suspended this matching program for all employees. In addition, we maintain an Employee Stock Purchase Plan that permits qualified employees, including the named executive officers, to purchase our stock at discounted prices in accordance with the terms of the plan. The amount of perquisites provided to the named executive officers, as determined in accordance with the rules of the Securities and Exchange Commission, did not exceed $10,000 for any named executive officer in fiscal 2009. We do not have a defined benefit retirement plan or any other compensation programs other than those disclosed.

 

ORGANIZATION AND COMPENSATION COMMITTEE REPORT

 

The Organization and Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K for the year ended September 30, 2009 with management. Based on the foregoing reviews and discussions, the committee recommended to the Board, and the Board has approved, that the Compensation Discussion and Analysis be included in the proxy statement for the 2010 Annual Meeting of Stockholders to be held on February 8, 2010.

 

Members of the Organization and
Compensation Committee:

 

John A. Meslow, Chairman
John W. Benson
Mary K. Brainerd
Kenneth H. Keller, Ph.D.

 

EXECUTIVE COMPENSATION AND OTHER INFORMATION

 

Summary Compensation Table

 

The following table shows the compensation awarded to, earned by or paid to our named executive officers during the last three fiscal years. You should refer to Compensation Discussion and Analysis above to understand the elements used in setting the compensation for our named executive officers.

 

 

 

 

 

 

 

 

GRANTS OF PLAN-BASED AWARDS IN FISCAL 2009

 

The following table sets forth certain information concerning grants of plan-based awards to each of our named executive officers during fiscal 2009. You should refer to the sections of Compensation Discussion and Analysis above relating to the annual incentive plan and the officer performance share program to understand how plan-based awards are determined.

 

 

 

 

OUTSTANDING EQUITY AWARDS AT 2009 FISCAL YEAR-END

 

The table below reflects all outstanding equity awards made to each of the named executive officers that are outstanding at the end of fiscal 2009. The market or payout value of unearned shares, units or other rights that have not vested equals $24.60 per share, which was the closing price of the Company’s common stock as listed on The NASDAQ Global Select Market on September 30, 2009. Because there was no payout on performance shares with respect to fiscal 2009 performance, the market or payout value for performance share plan awards presumes that the performance goals are met at the threshold level for the outstanding performance shares.

 

 

 

 

 

Mr. Ankeny has received the following restricted stock grant:

 

 

Mr. Lopez has received the following restricted stock grant:

 

 

Mr. Olson has received the following restricted stock grant:

 

 

Dr. Tipton has received the following restricted stock grant:

 

 

 

2009 OPTION EXERCISES AND STOCK VESTED

 

The table below includes information related to options exercised by each of the named executive officers during fiscal 2009 and restricted stock awards that vested during fiscal 2009. The value realized for such options and restricted stock awards is also provided. For options, the value realized on exercise is equal to the difference between the market price of the underlying shares at exercise and the exercise price of the options. For stock awards, the value realized on vesting is equal to the market price of the underlying shares at vesting.

 

 

 

 

Potential Payouts Upon Termination or Change of Control

 

The Company entered into Change of Control Agreements with Bruce J Barclay, President and Chief Executive Officer, and Philip D. Ankeny, Senior Vice President and Chief Financial Officer, in April 2006 (which were amended in April 2009), with Paul A. Lopez, Vice President and President, Ophthalmology business unit, in November 2006, and with Arthur J. Tipton, Ph.D., President, SurModics Pharmaceuticals business unit, in July 2007. All of the agreements were approved by the Organization and Compensation Committee of the Board of Directors. Mr. Lopez’s Change of Control Agreement expired on November 15, 2009.

The agreements will be in effect for a term of three years unless a “change of control” (as such term is defined in the agreements) occurs within such three-year period, in which case the agreements will terminate twelve months following the occurrence of such a change of control. Following their amendment, the agreements with Mr. Barclay and Mr. Ankeny will now expire in 2012. Each agreement provides that the Company may terminate the employment of the executive, for any reason or no reason, at any time prior to the earlier of a change of control or the third anniversary of the agreement without obligation for severance benefits.

 

If within twelve months following the occurrence of a change of control, the executive’s employment with the Company is terminated either by the Company without cause or by the executive for good reason, then the executive is entitled to receive a severance payment equal to two and one-half times (in the case of Mr. Barclay), two times (in the case of Mr. Ankeny) or one times (in the case of Mr. Lopez and Dr. Tipton) the average cash compensation paid to the executive during the three most recent taxable years and to continue coverage under life, health, dental and disability benefit plans for up to eighteen months, except that following the amendment of the agreements with Messrs. Barclay and Ankeny, there is no continuing disability coverage. In addition, any unvested portions of the executive’s outstanding options or stock appreciation rights will immediately vest and become exercisable, any remaining forfeiture provisions on his outstanding restricted stock awards will immediately lapse, and a portion of the shares subject to his outstanding performance awards (excluding those awards not subject to the achievement of corporate or business objectives) will immediately vest and become payable. If any change of control benefit payable to the executive would constitute an excess parachute payment under Section 280G of the Internal Revenue Code, the executive will receive a tax gross-up payment sufficient to pay the initial excise tax applicable to such excess parachute payment.

 

In addition, Dr. Tipton entered into an Employment Agreement with the Company in July 2007. In the event that Dr. Tipton is terminated other than for Cause (as defined in the Employment Agreement), or if Dr. Tipton terminates his employment for Good Reason (as defined in the Employment Agreement), the Company is obligated to pay an amount equal to Dr. Tipton’s then-current base salary. Such amount is to be paid over the twelve months following termination, in accordance with the Company’s regular payroll schedule. The amounts due under Dr. Tipton’s Employment Agreement are in addition to any which would be payable under Dr. Tipton’s Change of Control Agreement after a termination following a change of control, and are conditioned upon Dr. Tipton’s satisfying the terms of the Employment Agreement, including refraining from disparaging the Company.

 

In addition, Mr. Lopez’s offer letter provides that in the event of a termination by the Company without cause at any time, Mr. Lopez will receive a payment equal to twelve months of base salary. In the event that such a termination comes after a change of control, only the payment due Mr. Lopez under the Change of Control Agreement (set forth in the table below) would be payable to Mr. Lopez.

 

The table below reflects estimated benefits for our named executive officers under the existing Change of Control Agreements and Dr. Tipton’s Employment Agreement, assuming that the change of control occurred on September 30, 2009.

 

 

 

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers, directors and persons who own more than 10% of the Company’s common stock to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than 10% shareholders (“Insiders”) are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.

 

To the Company’s knowledge, based on a review of the copies of such reports furnished to the Company, for the fiscal year ended September 30, 2009, all Section 16(a) filing requirements applicable to Insiders were complied with, except that a Form 4 for Mr. Barclay indicating a forfeiture of shares filed on December 4, 2008 was one day late.

 

AUDIT COMMITTEE REPORT

 

The Board of Directors maintains an Audit Committee comprised of five of the Company’s outside directors listed below. The Board of Directors and the Audit Committee believe that the Audit Committee’s current member composition satisfies the rules of The NASDAQ Stock Market that governs audit committee composition, including the requirement that audit committee members all be “independent directors” as that term is defined by the rules of The NASDAQ Stock Market. Additionally, the Board of Directors has determined that Mr. Gerald B. Fischer qualifies as an “audit committee financial expert” under federal securities laws.

 

In accordance with the written charter adopted by the Board of Directors, the Audit Committee assists the Board of Directors with fulfilling its oversight responsibility regarding the quality and integrity of the accounting, auditing and financial reporting practices of the Company. In discharging its oversight responsibilities regarding the audit process, the Audit Committee:

 

(1) reviewed and discussed the audited financial statements with management;

 

(2) discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T; and

 

(3) received the written disclosures and the letter from the independent accountant required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the audit committee concerning independence, and has discussed with the independent accountant the independent accountant’s independence.

Based upon the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2009, as filed with the Securities and Exchange Commission.

 

Members of the Audit Committee:

 

Gerald B. Fischer, Chairman
José H. Bedoya
Mary K. Brainerd
Susan E. Knight
John A. Meslow

 

Audit Fees.  The aggregate fees billed by Deloitte & Touche LLP for professional services rendered in connection with the audit of the Company’s annual financial statements and reviews of the financial statements included in the Company’s Forms 10-Q for the fiscal years ended September 30, 2009 and September 28, 2008 were $350,000, and $395,798, respectively.

 

Audit-Related Fees.  The aggregate fees billed by Deloitte & Touche LLP for audit-related services rendered to the Company during fiscal 2009 and 2008 were $40,052 and $134,120, respectively. The audit-related fees in fiscal 2009 were related to consultation on the Company’s SEC comment letter and the PR Pharmaceuticals acquisition. The fees in fiscal 2008 were related to consultation on the Company’s SEC comment letter, review of financial reporting associated with the implementation of FIN 48, the Company’s acquisitions of Brookwood Pharmaceuticals, Inc. and BioFX Laboratories, Inc., as well as consultations regarding the Company’s collaborative research and license agreement with Merck & Co., Inc.

 

Tax Fees.  The aggregate fees billed by Deloitte & Touche LLP for tax-related services (tax compliance, tax planning, and tax advice) in fiscal 2009 and 2008 were $25,000 and $0, respectively. The tax-related services in fiscal 2009 related to analysis of the termination of the the Company’s collaborative research and license agreement with Merck & Co., Inc.

 

All Other Fees.  Deloitte & Touche Products Company LLC, an affiliate of Deloitte & Touche LLP billed $2,000 for training materials in each of fiscal 2009 and fiscal 2008.

 

The Company’s Audit Committee pre-approved all of the services described in each of the items above. In addition, the Audit Committee considered whether provision of the above non-audit services was compatible with maintaining Deloitte & Touche LLP’s independence and determined that such services did not adversely affect Deloitte & Touche LLP’s independence.

 

RATIFICATION OF APPOINTMENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
(Proposal #3)

 

The Audit Committee of the Board of Directors of the Company has appointed the firm of Deloitte & Touche LLP to serve as independent auditors of the Company for the fiscal year ending September 30, 2010, subject to ratification of this appointment by the stockholders of the Company. Deloitte & Touche LLP has acted as the Company’s independent auditors since fiscal 2002, and it is expected that at an Audit Committee meeting to be held prior to the Annual Meeting, such firm will be formally selected by the Audit Committee to serve as the Company’s independent auditors for the current fiscal year ending September 30, 2010. In the event that shareholders do not ratify the selection of Deloitte & Touche LLP, the Audit Committee will reevaluate their selection as the Company’s independent auditors for fiscal 2010.

 

Representatives of Deloitte & Touche LLP are expected to be present at the Annual Meeting, will be given an opportunity to make a statement regarding financial and accounting matters of the Company if they so desire, and will be available to respond to appropriate questions from the Company’s shareholders.

 

The Board of Directors recommends that the stockholders vote FOR the ratification of the appointment of Deloitte & Touche LLP as the independent auditors of the Company for the fiscal year ending September 30, 2010.

 

APPROVAL OF THE SURMODICS, INC. 2009 EQUITY INCENTIVE PLAN
(Proposal #4)

 

Background

 

On September 21, 2009, the Company’s Board of Directors authorized the adoption of the SurModics, Inc. 2009 Equity Incentive Plan (the “2009 Plan”) effective as of September 21, 2009, subject to the approval of the 2009 Plan by the Company’s stockholders. The Board believes that the adoption of the 2009 Plan would be in the best interests of the Company. The purpose of the 2009 Plan is to provide employees, directors and consultants with an incentive to put forth maximum efforts for the Company’s success and to provide a valuable means of attracting, retaining and aligning the interests of management, personnel and members of the Board with those of the Company’s shareholders, as well as attracting new management personnel when needed for future operations and growth. Under applicable Minnesota law, approval of the proposal requires the affirmative vote of the holders of a majority of the total votes cast on the proposal, provided that the total number of votes cast on the proposal represents over 50% in interest of all shares entitled to vote on the proposal.

 

Summary of the Plan

 

The text of the 2009 Plan is included as Appendix A to this proxy statement. The following description of the 2009 Plan is only a summary of certain provisions thereof and is qualified in its entirety by reference to the full text of the 2009 Plan.

 

Our 2003 Equity Incentive Compensation Plan (the “2003 Plan”) had approximately 341 shares available for issuance as of December 11, 2009. If the 2009 Plan is approved by the Company’s stockholders, no further awards will be made under the 2003 Plan. The number of shares of common stock of the Company available for awards under the 2009 Plan will be 1,500,000 plus the number of shares that have not yet been made subject to awards under the 2003 Plan as of the effective date of the 2009 Plan. In addition, to the extent that any award under the 2003 Plan is forfeited or terminates without vesting, expires or lapses without being exercised, the shares subject to such award shall be available for awards under the 2009 Plan. Including these amounts, as of the effective date of the 2009 Plan the total number of shares available for awards under the 2009 Plan will be approximately 1,500,341, not including shares added by virtue of subsequent forfeiture of awards previously made under the 2003 Plan. The 2009 Plan is very similar to the 2003 Plan, with the following principal changes:

 

 

The 2009 Plan has been designed to meet the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), regarding deductibility of executive compensation, discussed below.

 

The basic features of the 2009 Plan are as follows:

 

Administration

 

The 2009 Plan will be administered by the Board, or a committee of the Board of Directors (the “Board”), which shall consist of two or more directors who are “non-employee directors” within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, “outside directors” for purposes of Section 162(m) of the Code, and “independent directors” under the regulations of the NASDAQ Stock Market. Subject to the provisions of the 2009 Plan, the Board will have the power to make awards under the 2009 Plan and to determine when and to whom awards will be granted, and the form, amount, and other terms and conditions of each award. The Board will have

the authority to interpret the 2009 Plan and any award or agreement made under the 2009 Plan; to establish, amend, waive, and rescind any rules and regulations relating to the administration of the 2009 Plan; to determine the terms and provisions of any agreements entered into under the 2009 Plan; and to make all other determinations necessary or advisable for the administration of the 2009 Plan. In addition, the Board of the Company may delegate authority to officers of the Company to grant and administer option grants under the 2009 Plan to participants (other than themselves) who are not officers or directors of the Company subject to the requirements of Section 16 of the Securities Exchange Act of 1934. With respect to participants outside the United States, the Board also has the authority under the 2009 Plan to modify the terms of awards held by such participants and take other actions in order to comply with the laws of other countries or the requirements of foreign securities exchanges.

 

Eligibility and Number of Shares

 

All non-employee directors of the Company and all employees of and qualified consultants and advisers to the Company and its affiliates will be eligible to receive awards under the 2009 Plan at the discretion of the Board. The Company currently has eight non-employee directors and the Company and its subsidiaries currently have approximately 248 employees eligible to participate in the 2009 Plan.

 

The total number of shares of common stock of the Company available for distribution under the 2009 Plan is 1,500,000 plus (i) the number of shares remaining available for grant under the 2003 Plan on the effective date of the 2009 Plan (subject to adjustment for future stock splits, stock dividends, and similar changes in the capitalization of the Company), and (ii) the number of shares subject to any awards under the 2003 Plan that are forfeited or terminate without vesting, expire or lapse without being exercised. Any shares subject to an award under the 2009 Plan, or to an award under the 2003 Plan that remains outstanding on the effective date of the 2009 Plan, that is forfeited, cancelled, or otherwise terminated will, to the extent of such forfeiture, cancellation or termination, again be available for award under the 2009 Plan. Shares used to satisfy the purchase price of an option or tax withholding obligations in connection with any form of award, and shares subject to a stock appreciation right that are not issued in connection with the stock settlement of the stock appreciation right will not be available for grant again under the 2009 Plan.

 

No participant may receive more than 200,000 shares subject to stock options or stock appreciation rights in any fiscal year of the Company under the 2009 Plan.

 

Awards under the 2009 Plan are to be evidenced by written or electronic agreements containing the terms and conditions of the awards. Such agreements may be amended unilaterally by the Company (with the approval of the Board) unless any such amendment would materially impair the rights of participants, in which case the consent of the participants would be required. In addition, no option or stock appreciation right award agreement may be amended to decrease the applicable option price or base price, nor may any other action be taken that would constitute a “repricing” of an option or stock appreciation right for accounting purposes, without the prior consent of the Company’s stockholders.

 

Types of Awards

 

The types of awards that may be granted under the 2009 Plan include incentive and nonqualified stock options, stock appreciation rights, restricted stock and restricted stock units, performance shares and other stock-based awards.

 

Subject to certain restrictions applicable to incentive stock options, awards granted under the 2009 Plan will be exercisable by the participants at such times as are determined by the Board, but in no event may the term of an award be longer than seven years after the date of grant. In addition to the general characteristics of all of the awards described in this Proxy Statement, the basic characteristics of awards that may be granted under the 2009 Plan are as follows:

 

Incentive and Nonqualified Stock Options.  Both incentive and nonqualified stock options may be granted to participants at such exercise prices as the Board, or the officers delegated authority to grant and administer options by the Board, may determine, but the exercise price for any option may not be less than 100% of the fair market value (as defined in the 2009 Plan) of a share of common stock of the Company as of the date the option is granted.

Stock options may be granted and exercised at such times as the Board, or the officers delegated authority to grant and administer options by the Board, may determine, except that (a) incentive stock options may be granted only to employees, (b) no incentive stock options may be granted more than ten years after the effective date of the 2009 Plan, (c) an option shall not be exercisable more than seven years after the date of grant, and (d) the aggregate fair market value of the shares of common stock of the Company with respect to which incentive stock options granted under the 2009 Plan and any other plan of the Company first become exercisable in any calendar year for any employee may not exceed $100,000, or such other limit as may be allowed by the Code. Additional restrictions apply to an incentive stock option granted to an individual who beneficially owns more than 10% of the combined voting power of all classes of stock of the Company.

 

The purchase price payable upon exercise of options may be paid in cash, or, if the Board permits, (i) payment under a broker-assisted sale and remittance program acceptable to the Board, (ii) by withholding shares otherwise issuable to the participant upon exercise of the option, or (iii) by delivery of shares of common stock already owned by the participant (in each case, such shares having a fair market value as of the date the option is exercised equal to the purchase price of the shares being purchased), or a combination thereof, unless otherwise provided in the participant’s option agreement.

 

Upon the termination of a participant’s employment, the unvested portions of all of the participant’s options will be forfeited, and a limited period of time after termination will generally be provided during which the vested portions of the options may be exercised. This period will generally be six months after termination if employment ends because of the participant’s death or disability, and three months after termination if employment ends for any other reason. These periods may not, in any case, extend beyond the expiration date of an option, and may be varied by the terms of the applicable award agreements.

 

Stock Appreciation Rights.  A stock appreciation right granted to a participant entitles the recipient to receive the excess of (i) the fair market value of a specified number of shares of common stock on the date of exercise, over (ii) a specified exercise price which shall not be less than the fair market value of a share of common stock of the Company on the date of the grant, subject to any limitations upon the amount or percentage of total appreciation that the Board may determine at the time the right is granted. A stock appreciation right may be paid in cash, shares of common stock of the Company or a combination of cash and shares as determined by the Board. No stock appreciation right may be exercised more than ten years after its date of grant. Stock appreciation rights may be exercised after a termination of employment in accordance with the same rules applicable to options.

 

Performance Shares.  Performance share awards entitle the participant to future payments of shares of common stock of the Company based upon the achievement of specified levels of one or more performance measures over the course of a performance period determined by the Board. Performance periods of awards can vary (e.g. one year or three year performance periods) and will be specified in a recipient’s award agreement. Such performance goals will be based on one or any combination of the following criteria: (i) revenue; (ii) net income; (iii) shareholders equity; (iv) earnings per share; (v) return on equity; (vi) return on assets; (vii) total shareholder return; (viii) net operating income; (ix) cost controls; (x) cash flow; (xi) operating cash flow; (xii) increase in revenue; (xiii) economic value added; (xiv) increase in share price or earnings; (xv) return on investment; (xvi) return on invested capital; (xvii) department or business unit performance goals; (xviii) client contracting goals; (xix) technological and business development milestones and contracting goals; (xx) increase in market share; (xxi) regulatory, clinical or commercial milestones; and (xxii) quality control, and may relate to performance by the Company or any subsidiary, affiliate, division or business unit of the Company. The Board may define the manner of calculating the performance criteria it chooses to use in any performance period, including the use of “non-GAAP” adjustments to such criteria. Each performance share has an initial value equal to the fair market value of a share of common stock of the Company on the date of grant. Unless otherwise provided in an applicable award agreement, a participant will forfeit all such awards if employment ends during the performance period.

 

Restricted Stock Awards and Restricted Stock Units.  The Board may grant participants shares of common stock of the Company that are subject to such transfer and other restrictions as the Board may determine, along with a risk of forfeiture. The Board may also grant participants restricted stock units, each of which provides a participant the right to receive a share of common stock of the Company after satisfaction of vesting conditions, and which are also subject to restrictions and a risk of forfeiture. Awards of restricted stock provide the participant with dividends

and voting rights prior to vesting, but the dividends shall be subject to the same restrictions and risk of forfeiture as the underlying shares.

 

Other Stock-Based Awards.  The Board may also grant other awards that are valued in whole or in part by reference to, or are otherwise based on and/or payable in, shares of common stock of the Company. The Board has the discretion to determine the terms and conditions of these other stock-based awards so long as they are consistent with the vesting requirements and other provisions and purposes of the 2009 Plan.

 

Transferability

 

During the lifetime of a participant to whom an award is granted, only such participant (or, if so provided in the applicable agreement in the case of a nonqualified stock option or a stock appreciation right, a permitted transferee as hereafter described) may exercise an option or stock appreciation right or receive payment with respect to performance shares or any other award. No award (other than an award of stock without restrictions) may be sold, assigned, transferred, exchanged, or otherwise encumbered, and any attempt to do so will not be effective, except that (a) an award may be transferable to a successor in the event of a participant’s death, (b) a nonqualified stock option may be transferable pursuant to a qualified domestic relations order, and (c) an award agreement may provide that a nonqualified stock option or a stock appreciation right may be transferable to members of the participant’s immediate family or to one or more trusts for the benefit of such family members or partnerships in which such family members are the only partners, so long as the participant receives no consideration for the transfer.

 

Duration, Adjustments, Modifications, Terminations

 

The 2009 Plan will remain in effect until all shares of common stock of the Company subject to the 2009 Plan are distributed, the tenth anniversary of the date of shareholder approval of the 2009 Plan, or the 2009 Plan is terminated as described below.

 

In the event of a stock dividend, stock split, or other recapitalization that is considered an “equity restructuring” for accounting purposes, the Board shall cause there to be made an equitable adjustment to the number and type of securities reserved for issuance under the 2009 Plan, and to outstanding awards (including without limitation the number and kind of securities to which such awards are subject, and the exercise or strike price of such awards) to the extent such awards would not otherwise automatically adjust in the equity restructuring. The Board has the discretion to make similar adjustments in connection with other changes in the Company’s capitalization, including due to a merger or consolidation.

 

The 2009 Plan also gives the Board the right to amend, terminate or suspend the 2009 Plan, except that no amendment shall be effective without stockholder approval if such approval is required by applicable laws or regulations or the rules of the principal securities exchange on which the Company’s common stock is listed. No amendment or modification of the 2009 Plan shall materially impair the rights of any participant under any previously granted award without the consent of the participant, unless the amendment or modification is made to comply with applicable law.

 

In the event of a dissolution or liquidation of the Company, a sale of substantially all of the assets of the Company, a merger or consolidation of the Company with or into any other corporation, or a statutory share exchange involving capital stock of the Company, the Board has the discretion, but not the obligation, to take certain actions in accordance with the terms of the 2009 Plan.

 

Federal Tax Considerations

 

Certain federal income tax consequences applicable to awards under the 2009 Plan are summarized below.

 

Incentive Stock Options.  No federal income tax is payable by a participant upon the grant of an incentive stock option and we are not entitled to claim a tax deduction at the time of grant. When an optionee exercises an incentive stock option while employed by us or within the three-month (six months for disability) period after termination of employment, no ordinary income will be recognized by the optionee at that time. If the shares acquired upon exercise are not disposed of until more than one year after the date of exercise and more than two

years after the date of grant, the excess of the sale proceeds over the aggregate exercise price of such shares will be a long-term capital gain to the optionee, and we will not be entitled to a tax deduction under such circumstances. Except in the event of death, if the shares are disposed of before the end of the one- or two-year holding periods (a “disqualifying disposition”), the excess of the fair market value of such shares at the time of exercise over the aggregate exercise price (but generally not more than the amount of gain realized on the disposition) will be ordinary income to the optionee at the time of such disqualifying disposition. We generally will be entitled to a federal tax deduction equal to the amount of ordinary income recognized by the optionee. If the optionee pays the option price with shares that were originally acquired pursuant to the exercise of an incentive stock option and the statutory holding periods for the shares have not been met, the optionee will be treated as having made a disqualifying disposition of the shares, and the tax consequences of this disqualifying disposition will be as described for nonqualified stock options.

 

For alternative minimum tax purposes, an incentive stock option will be treated as if it were a nonqualified stock option, the tax consequences of which are discussed below.

 

Nonqualified Stock Options.  A participant will have no taxable income, and the Company will not be entitled to any related deduction, at the time a nonqualified stock option is granted under the 2009 Plan. At the time of exercise of a nonqualified stock option, the participant will realize ordinary income, and the Company will be entitled to a deduction equal to the excess of the fair market value of the stock on the date of exercise over the option exercise price. Upon disposition of the shares, any additional gain or loss realized by the participant after exercise will be taxed as a capital gain or loss.

 

Stock Appreciation Rights and Performance Awards.  Generally, (a) the participant will not realize income upon the grant of a stock appreciation right or performance share, (b) the participant will realize ordinary income, and the Company will be entitled to a corresponding deduction, in the year cash or shares of common stock are delivered to the participant upon exercise of a stock appreciation right or in payment of the performance award, and (c) the amount of such ordinary income and deduction will be the amount of cash received plus the fair market value of the shares of common stock received on the date of issuance. Upon disposition of shares received by a participant upon exercise of a stock appreciation right or in payment of a performance or cash-based award, the participant will recognize capital gain or loss equal to the difference between the amount received upon such disposition and the fair market value of the shares on the date they were originally received by the participant.

 

Restricted Stock.  Unless the participant files an election to be taxed under Section 83(b) of the Code, (a) the participant will not realize income upon the grant of restricted stock, (b) the participant will realize ordinary income, and the Company will be entitled to a corresponding deduction, when the restrictions lapse, and (c) the amount of such ordinary income and deduction will be the fair market value of the restricted stock on the date the restrictions lapse. If the participant files an election to be taxed under Section 83(b) of the Code, the tax consequences to the participant and the Company will be determined as of the date of the grant of the restricted stock rather than as of the date of the lapse of the restrictions.

 

When the participant disposes of restricted stock, the difference between the amount received upon such disposition and the fair market value of such shares on the date the participant realizes ordinary income will be treated as a capital gain or loss.

 

Restricted Stock Units.  A recipient of restricted stock units will not recognize taxable income upon the making of the grant and the Company will not be entitled to a deduction at such time. Upon payment or settlement of a restricted stock unit award, the participant will recognize ordinary income equal to the value of the shares received and the Company will be entitled to a corresponding deduction.

 

Section 162(m).  Compensation of the Company’s Chief Executive Officer, Chief Financial Officer and three other most highly compensated executive officers is subject to the tax deduction limits of Section 162(m) of the Code. Awards that qualify as “performance-based compensation” will be exempt from Section 162(m), thus allowing the Company the full tax deduction otherwise permitted for such awards. If approved by the Company’s stockholders, the 2009 Plan will enable the Board to grant awards that will be exempt from the deduction limits of Section 162(m) of the Code.

New Plan Benefits

 

Following approval by the Board of the 2009 Plan, certain awards were made to executive officers which are contingent on approval of the 2009 Plan. When and if this proposal is approved, it is anticipated that initial awards under the 2009 Plan will result in the benefits described in the table below. The awards will become exercisable with respect to 25% on each of the first four anniversaries following the date of their contingent grant. In the event that the 2009 Plan is not approved, all awards granted under it will be forfeited.

 

SurModics, Inc. 2009 Equity Incentive Plan

 

 

 

 

Equity Compensation Plan Information

 

The following table provides information related to the Company’s equity compensation plans in effect as of September 30, 2009:

 

 

 

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE SURMODICS, INC. 2009 EQUITY INCENTIVE PLAN.

 

APPROVAL OF AN AMENDMENT TO THE SURMODICS, INC.

1999 EMPLOYEE STOCK PURCHASE PLAN

(Proposal #5)

 

Background

 

On November 30, 2009, the Board of Directors approved an increase in the number of shares of common stock available for issuance under the SurModics, Inc. 1999 Employee Stock Purchase Plan (the “ESPP”) from 200,000 to 400,000 shares, subject to shareholder approval. The ESPP is a stock-plan that generally allows employees of SurModics and its subsidiaries to purchase shares of SurModics stock at a discount. As of September 30, 2009, 22,672 shares of common stock were available for issuance under the ESPP.

 

The Board of Directors believes that the ESPP has played an important role in retaining employees and giving employees a sense that they have an important stake in the Company’s success. In 1999 the Board of Directors adopted the ESPP, subject to shareholder approval, which was granted at the Company’s 2000 annual meeting of shareholders. The ESPP is designed to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1986, as amended (the “Code”). Under applicable Minnesota law, approval of the proposal requires the affirmative vote of the holders of a majority of the total votes cast on the proposal, provided that the total number of votes cast on the proposal represents over 50% in interest of all shares entitled to vote on the proposal. Our Board of Directors recommends that shareholders approve the amendment to increase by 200,000 the number of shares available for purchase under the ESPP. A vote against this proposal will mean that the number of shares reserved for issuance under the ESPP will remain at 200,000.

 

Summary of the Plan

 

The text of the existing ESPP, as amended and restated by the Board to incorporate the proposed amendment (the “Amended ESPP”), is included as Appendix B to this proxy statement. The following description of the ESPP is only a summary of certain provisions thereof and is qualified in its entirety by reference to the full text of the Amended ESPP.

 

Description of the ESPP

 

Administration.  The administration of the ESPP is vested in the Board of Directors (the “Board”) or such Committee as the Board of Directors shall appoint. Subject to the express provisions of the ESPP, the Board has authority, in its discretion, to interpret and construe any and all provisions of the ESPP, adopt rules and regulations for administering the ESPP and make all other determinations deemed necessary or advisable for administering the ESPP.

 

Eligibility and Participation.  All employees of SurModics and all of its subsidiaries are eligible to participate in the ESPP. To be eligible to participate in the ESPP, an employee must customarily work more than twenty hours per week. No employee is permitted to purchase more than $25,000 of SurModics common stock in any calendar year (based upon the fair market value of the stock as determined at the beginning of each purchase phase under the ESPP). In addition, no employee shall be eligible if after the purchases under the ESPP the employee would possess more than 5% of the outstanding voting power of SurModics. Currently, approximately 237 employees are eligible to participate in the ESPP.

 

Participation in the ESPP is voluntary. An eligible employee may elect to participate in the ESPP for any purchase phase by completing the requisite payroll deduction form and delivering it to Human Resources no later than the date specified by the Company’s Vice President, Human Resources, which shall be prior to the beginning date of the purchase phase. An employee may also change his or her participation for any subsequent purchase phase by submitting a new payroll deduction form during the enrollment period prior to that purchase phase. An employee who elects to participate in the ESPP for any purchase phase will be deemed to have elected to participate in the ESPP for each subsequent consecutive purchase phase unless he or she elects to discontinue payroll deductions during a purchase phase or exercises his or her right to withdraw all amounts previously withheld. In this event, the employee must submit a change of election form or a new payroll deduction form, as applicable, to participate in the ESPP for any subsequent purchase phase.

Duration and Purchase Phases.  The ESPP began on November 15, 1999, and will terminate on February 28, 2010, unless this amendment is approved by shareholders. The ESPP is carried out in a series of consecutive phases, which are one year in duration, however if the Amended ESPP is approved by shareholders, the Board will have the discretion to change the duration of the phases. The purchases are made annually at the end of a phase, and each phase commences immediately after the previous phase has ended.

 

Before the commencement of each phase, employees may elect to have from 1% to 10% of their cash compensation withheld each pay period. An employee may not increase his or her elected percentage for a phase after the delivery deadline, but an employee may reduce or discontinue entirely his or her elected percentage for the phase one time during a phase by filing an amended election form. At the end of the phase, each employee’s contributions shall be used to purchase whole shares of SurModics common stock using all of the funds the employee has had withheld during the phase. The purchase price per share is the lesser of (i) 85% of the fair market value of a share of SurModics common stock as of the commencement date of the phase; or (ii) 85% of the fair market value of such stock as of the termination date of the phase. The fair market value of SurModics common stock on September 30, 2009 was $24.60 per share.

 

Withdrawal and Termination of Employment.  An employee may, preceding the termination date of a phase, withdraw all payroll deductions then credited to his or her account by giving written notice to the Company. Upon receipt of the notice of withdrawal, all payroll deductions credited to the employee’s account will be paid to him or her, with interest at the Federal Discount Rate as quoted in the Wall Street Journal as of the commencement date of the purchase phase, compounded monthly, from the commencement date of the purchase phase through the date of payment, and no further payroll deductions will be made for such employee during that phase. Partial withdrawals of payroll deductions are not permitted.

 

If an employee’s employment is terminated for any reason prior to the termination date of any phase in which he or she is participating, whether voluntarily or involuntarily, no purchases will be made under the ESPP for the employee and the payroll deductions credited to his or her account will be returned to the employee without interest.

 

Adjustments, Amendments and Termination.  Under the ESPP, if the issued and outstanding shares of SurModics common stock are changed into or exchanged for a different number or kind of shares or securities of SurModics or of another issuer through a reorganization, merger, consolidation, divestiture (including a spin-off), liquidation, recapitalization, reclassification, stock dividend, stock split, combination of shares, rights offering or any other change in the corporate structure, the Board shall, in its sole discretion, subject to any required shareholder approval, adjust the number and kind of securities subject to, and reserved under, the ESPP, and adjust the number and kind of securities subject to such outstanding options and, where applicable, the exercise price per share for such securities.

 

In the event of the sale by the Company of substantially all of its assets and the consequent discontinuance of its business, or in the event of a merger, exchange, consolidation, reorganization, divestiture (including a spin-off), liquidation, reclassification or extraordinary dividend, after which the Company is not the surviving corporation, the Board may, in its sole discretion, at the time of adoption of the plan for such transaction, provide for one or more of the following: (i) the acceleration of the exercisability of outstanding options granted at the commencement of the phase then in effect, to the extent of the accumulated payroll deductions made as of the date of such acceleration; (ii) the complete termination of the ESPP and a refund of amounts credited to the employees’ accounts; or (iii) the continuance of the ESPP only with respect to completion of the then current phase and the exercise of options thereunder.

 

The ESPP may be terminated at any time by the Board of Directors provided that (except as set forth above in the event of certain corporate transactions) no termination will take effect with respect to any completed phase. Also, the Board of Directors may amend the ESPP as it may deem proper and in the best interests of the Company or as may be necessary to comply with Section 423 of the Code or other applicable laws or regulations, provided that no such amendment shall, without prior approval of shareholders:

 

 

Plan Benefits

 

Participation in the ESPP is voluntary and is dependent on each eligible employee’s election to participate and his or her determination as to the level of payroll deduction. Accordingly, future purchases under the ESPP are not determinable. The table below sets forth certain information regarding benefits under the ESPP since its adoption.