SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to __________
Commission File Number: 0-17272
TECHNE CORPORATION
(Exact name of Registrant as specified in its charter)
Minnesota 41-1427402
(State of Incorporation) (IRS Employer Identification No.)
614 McKinley Place N.E., Minneapolis, MN 55413
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (612) 379-8854
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value.
Indicate by check mark whether the Company (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: (X)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). (X)
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant, based upon the closing sale price on September 12, 2003 as
reported on The Nasdaq Stock Market was approximately $1,302,581,000. Shares
of Common Stock held by each officer and director and by each person who owns
5% or more of the outstanding Common Stock have been excluded.
Shares of $.01 par value Common Stock outstanding at September 12, 2003:
41,027,576
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for its 2003 Annual Meeting of
Shareholders are incorporated by reference into Part III.
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 14
Supplemental Item - Executive Officers of the Company 14
PART II
Item 5. Market for the Company's Common Equity 14
and Related Stockholder Matters
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of 16
Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures 23
about Market Risk
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants 37
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers 37
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial 38
Owners and Management
Item 13. Certain Relationships and Related Transactions 38
Item 14. Controls and Procedures 38
Item 15. Audit Committee Financial Expert 38
Item 16. Principal Accountant Fees and Services 38
PART IV
Item 17. Exhibits, Financial Statement Schedules, 39
and Reports on Form 8-K
SIGNATURES 41
2
PART I
ITEM 1. BUSINESS
OVERVIEW
Techne Corporation (the Company) is a holding company which has two wholly-
owned operating subsidiaries: Research and Diagnostic Systems, Inc. (R&D
Systems) located in Minneapolis, Minnesota and R&D Systems Europe Ltd. (R&D
Europe) located in Abingdon, England. R&D Systems is a specialty
manufacturer of biological products. Its two major operating segments are
hematology controls, which are used in hospital and clinical laboratories to
check the accuracy of blood analysis instruments, and biotechnology products,
including purified proteins (cytokines) and antibodies which are sold
exclusively to the research market and assay kits which are sold to the
research and clinical diagnostic markets. R&D Europe distributes R&D
Systems' biotechnology products in Europe. R&D Europe has a German sales
subsidiary, R&D Systems GmbH (R&D GmbH). The Company's foreign sales
corporation, Techne Export Inc., was dissolved in fiscal 2002.
R&D Systems was founded and incorporated in 1976 in Minneapolis, Minnesota
and was acquired by the Company in 1985. In 1977, R&D Systems introduced its
first product, a platelet-rich-plasma control. In 1981, R&D Systems was the
second manufacturer in the world to release a whole blood control with
platelets, thereby establishing itself as one of the leaders in the field of
hematology control products manufacturing. Subsequently, R&D Systems has
developed several types of hematology controls designed to keep pace with the
technology of the newest models of hematology instruments. These products
are sold throughout the United States directly by R&D Systems and in many
foreign countries through distributors.
In 1985, R&D Systems entered the research reagent market with its first
cytokine, TGF-beta. Cytokines are specialized protein molecules that
stimulate or suppress various cell functions in the body. Cytokines are in
demand by biomedical researchers who want to learn more about their diverse
effects. Encouraged by its success in the cytokine market, R&D Systems
formed a biotechnology division in 1986 with the goal of producing and
marketing a wide range of human cytokines through genetic engineering.
Recombinant DNA technology offers several advantages over extraction of these
proteins from natural sources, including lower production cost and
potentially unlimited supply.
In fiscal 1992, R&D Systems purchased Amgen Inc.'s research reagent and
diagnostic assay kit business. With this purchase, R&D Systems obtained
Amgen's Erythropoietin (EPO) kit, the Company's first enzyme-linked
immunosorbent assay kit for a cytokine that had been cleared by the U.S. Food
and Drug Administration (FDA) for clinical diagnostic use.
In fiscal 1994, the Company acquired its European biotechnology distributor,
British Bio-technology Products Ltd. (renamed R&D Systems Europe Ltd.) from
British Bio-technology Group plc. R&D Europe distributes biotechnology
products developed and manufactured by R&D Systems.
Between fiscal 1998 and 2000, the Company made equity investments in the
preferred stock of ChemoCentryx, Inc. (CCX), a technology and drug
development company. The Company currently holds approximately 26% of the
outstanding stock of CCX. In addition to the equity investment and joint
research efforts, the Company obtained research and diagnostic market rights
to all products discovered or developed by CCX.
In fiscal 1999, R&D Systems purchased Genzyme Corporation's research products
business. This acquisition established R&D Systems as the world's leading
supplier of research and diagnostic cytokine products. Included in cost of
sales for fiscal 2003, 2002 and 2001 were $2.3 million, $1.8 million and $1.1
million, respectively, of royalties paid to Genzyme under the purchase
agreement. The royalty agreement expired on June 30, 2003.
3
In fiscal 2002, the Company made an equity investment of $3 million and
entered into a research and license agreement with Discovery Genomics, Inc.
(DGI). DGI holds licenses from the University of Minnesota to develop
technologies used for functional genomics and the discovery of druggable
targets. The Company currently holds a 39% equity interest in DGI and also
received the rights to develop antibodies and immunoassay kits for proteins
discovered by DGI and the rights to sell such products to the research
market.
THE MARKET
The Company, through its two operating subsidiaries, manufactures and sells
products for the clinical diagnostics market (hematology controls and
calibrators) and the biotechnology research and clinical diagnostics market
(cytokines, assays and related products). In fiscal 2003, 2002 and 2001, R&D
Systems' Hematology Division revenues accounted for approximately 11%, 12%
and 13%, respectively, of consolidated revenues. Revenues from R&D Systems'
Biotechnology Division were 63%, 65% and 64% and revenues from R&D Europe
were 26%, 23% and 23% of consolidated revenues for fiscal 2003, 2002 and
2001, respectively.
Biotechnology Products
R&D Systems is the world's leading supplier of cytokines and cytokine-related
reagents to the biotechnology research community. These valuable proteins
exist in minute amounts in different types of cells and can be extracted from
these cells or made through recombinant DNA technology. In 1985, R&D Systems
introduced its first cytokine and continues to add to this product line. The
first cytokines were extracted from natural sources (human and porcine
platelets and bovine brain). Currently almost all of cytokines are produced
by recombinant DNA technology. R&D Systems also sells antibodies for
specific cytokines, cytokine assay kits, clinical diagnostic kits, kits for
cytokine receptor binding studies, and related research reagents.
The growing interest by researchers in cytokines exists because of the
profound effect a tiny amount of a cytokine can have on the cells and tissues
of the body. Cytokines are intercellular messengers. They act as signals by
interacting with specific receptors on the effected cells. They carry vital
signals to the cell's genetic machinery that can trigger events that can lead
to significant changes in a cell, tissue or organism. For example, cytokines
can signal a cell to differentiate, i.e., to acquire the features necessary
for it to take on a more specialized task. Another example of cytokine
action is the key role they play in stimulating cells surrounding a wound to
grow and divide and to attract migratory cells to the injury site.
R&D Systems' Biotechnology Division was formed in response to a growing need
for highly purified biologically active proteins. R&D Systems believes that
its cytokines are addressing the growing demand for these products within the
scientific research community.
During fiscal 1990, the Biotechnology Division released its first cytokine
assay kits under the tradename Quantikine(r). These kits are used by
researchers to quantify the level of a specific cytokine in a sample of
blood, serum, or other biological fluid. In fiscal 1996, the Biotechnology
Division expanded its Quantikine line by introducing a line of assay kits for
mouse cytokines and has subsequently released kits for other animal models,
including rat and pig. These kits are used extensively by research
scientists doing cytokine studies using animal models, such as those used in
pharmaceutical discovery and development programs.
R&D Systems currently manufactures and sells over 5,000 biotechnology
products.
4
Current Biotechnology Products
Cytokines and Related Antibodies. Cytokines, extracted from natural
sources or produced using recombinant DNA technology, are manufactured to
the highest purity. Polyclonal antibodies are produced in animals
(primarily goats and rabbits). The animals' immune systems recognize the
cytokines as foreign and develop antibodies to these cytokines. The
polyclonal antibodies are then purified from the animals' blood.
Monoclonal antibodies are produced by injecting purified cytokines into
mice. The B cells of a mouse's immune system are then isolated and fused
with immortalized mouse cells that will produce the desired antibody.
Purified cytokines and antibodies are made available both as research
reagents and as parts of assay kits (below).
Assay Kits. This product line includes R&D Systems' human, murine (mouse
and rat) and porcine (pig) Quantikine kits which allow research scientists
to quantify the amount of a specific cytokine in a sample of blood or
tissue. Also included in this product line are assay kits, developed by
R&D Europe, to quantify adhesion molecules. These kits are used by
research scientists to measure cellular adhesion molecules in serum,
plasma, or cell culture media. Cellular adhesion molecules facilitate the
movement of infection fighting cells out of the blood stream to the site
of infections.
Clinical Diagnostic Kits. The EPO kit, acquired from Amgen Inc. in fiscal
1992, was the first diagnostic assay for which R&D Systems had FDA
marketing clearance. R&D Systems also has received FDA marketing
clearance for its transferrin receptor (TfR) and Beta2-microglobulin kits.
Flow Cytometry Products. This product line includes R&D Systems'
Fluorokine kits which are used to measure the presence or absence of
receptors for specific cytokines on the surface of cells.
DNA and Related Products. This diverse product line includes: primer
pairs which are synthetic DNA used to amplify specific genes in the
laboratory, messenger RNA kits that allow researchers to quantitate the
amount of a specific cytokine messenger RNA, and reagents for the study of
DNA damage and repair mechanisms in the cell.
Hematology Controls and Calibrators
Hematology controls and calibrators, manufactured and marketed through the
Hematology Division of R&D Systems, are products made up of the various
cellular components of blood. Proper diagnosis of many illnesses requires a
thorough and accurate analysis of the patient's blood cells, which is usually
done with automatic or semiautomatic hematology instruments. Controls and
calibrators ensure that these instruments are performing accurately and
reliably.
Blood is composed of plasma, the fluid portion of which is mainly water, and
blood cells, which are suspended in the plasma. There are three basic types
of blood cells: red cells, white cells and platelets. Red cells transport
oxygen from the lungs throughout the body, which they do by being rich in
hemoglobin. White cells defend the body against foreign invaders. Platelets
serve as a "plug" to stem blood flow at the site of an injury by initiating a
complex series of biochemical reactions that lead to the formation of a clot.
The formed elements of blood (red cells, white cells and platelets) differ a
great deal in size and concentration. The white cells are the largest in
size and platelets the smallest. The red cells are the most numerous and
constitute 95 percent of all blood cells. The average adult has from 20 to
30 trillion red cells. For every 500 red cells there are approximately one
white cell and about 20 platelets. As noted above, hematology controls are
used in automatic and semiautomatic cell counting analyzers to make sure
these instruments are counting blood cells accurately. One of the most
frequently performed laboratory tests on a blood sample is called a complete
blood count, or CBC for short. Doctors use this test in disease screening
and diagnosis. More than a billion of these tests are done every year, the
great majority with cell counting instruments. In most laboratories the CBC
consists of the white cell count, the red cell count, the
5
hemoglobin reading, and the hematocrit reading or the percent of red cells in
a volume of whole blood after it has been centrifuged. Also included in a
CBC test is the differential which numbers and classifies the different types
of white cells.
These and other characteristics or "parameters" of a blood sample can be
measured by automatic or semiautomatic cell counters. Cell counters can read
the parameters of blood either by impedance, in which a cell interrupts an
electrical current and is counted, or by a laser, in which a cell interrupts
a laser beam and is counted. The number of parameters measurable in a blood
control product depends on the type and sophistication of the instrument for
which the control is designed. Ordinarily, a hematology control is used once
to several times a day to make sure the instrument is reading accurately.
Some instruments need to be calibrated periodically. Hematology calibrators
are similar to controls but go through additional processing and testing to
ensure that the calibration values assigned are extremely accurate and can be
used to adjust the instrument.
The Hematology Division of R&D Systems offers a complete line of hematology
controls and calibrators for both impedance and laser type cell counters.
R&D Systems believes its products have improved stability and versatility and
a longer shelf life than most of those of its competitors. The Hematology
Division supplies hematology control products for use as proficiency testing
materials by laboratory certifying authorities of a number of states and
countries. R&D Systems recognizes that developing technologies for cell
counting instruments will require increasingly sophisticated and high-quality
controls and is prepared to meet this challenge.
Current Retail Hematology Products
Impedance-Type Whole Blood Controls/Calibrators. The Hematology Division
of R&D Systems currently produces controls and calibrators for the
following impedance-type instruments: Abbott Cell-Dyn, ABX, Beckman
Coulter, CDC Technologies, Hycel, and Sysmex instruments.
Laser-Type Whole Blood Controls/Calibrators. Currently produced controls
and calibrators for laser-type instruments include products for the
following: Beckman Coulter MAXM, STKS and GENS; Abbott Cell-Dyn 3000,
3200, 3500 and 4000 instruments; ABX instruments; Bayer Technicon ADVIA
and H series instruments; and Sysmex SE, SF and XE type instruments.
Linearity Control. This product provides a means of assessing the
linearity of hematology analyzers for white blood cells, red blood cells,
hemoglobin, platelets and reticulocytes.
Whole Blood Reticulocyte Controls. These controls are designed for manual
and automated counting of reticulocytes (immature red blood cells).
Whole Blood Flow Cytometry Controls. These products are controls for flow
cytometry instruments. These instruments are used to identify and
quantify white blood cells by their surface antigens.
Whole Blood Glucose/Hemoglobin Control. This product is designed to
monitor instruments which measure glucose and hemoglobin in whole blood.
Erythrocyte Sedimentation Rate Control. This product is designed to
monitor erythrocyte sedimentation rate tests.
Multi-Purpose Platelet Reference Controls. These products, Platelet-Trol
II and Platelet-Trol extended, are designed for use by automatic and semi-
automatic impedance and laser instruments.
6
PRODUCTS UNDER DEVELOPMENT
R&D Systems is engaged in ongoing research and development in all of its
major product lines: hematology controls and calibrators, biotechnology
cytokines, antibodies, assays and related products. The Company believes
that its future success depends, to a large extent, on the ability to keep
pace with changing technologies and markets. At the same time, the Company
continues to examine its production processes to ensure high quality and
maximum economy.
R&D Systems' Biotechnology Division is planning to release new cytokines,
antibodies and cytokine assay kits in the coming year. All of these products
will be for research purposes only and therefore do not require FDA
clearance. R&D Systems' Hematology Division has developed several new
control products in fiscal 2003 and is continuously working on product
improvements and enhancements. However, there is no assurance that any of
the products in the research and development phase can be developed or, if
developed, can be successfully introduced into the marketplace.
Included in consolidated research and development expense are the Company's
share of losses by CCX and DGI, development stage companies in which the
Company has invested. Research and development expense was as follows:
Year ended June 30,
2003 2002 2001
----------- ----------- -----------
R&D Systems' expenses $17,393,441 $15,614,817 $14,022,546
CCX losses 2,580,023 1,350,435 499,687
DGI losses 607,879 505,015 --
----------- ----------- -----------
$20,581,343 $17,470,267 $14,522,233
=========== =========== ===========
Percent of revenue 14.2% 13.3% 12.6%
BUSINESS RELATIONSHIPS
Between fiscal 1998 and 2000, the Company purchased a total of $5 million of
convertible preferred stock of ChemoCentryx, Inc. (CCX), which gave the
Company a 49% interest in CCX through January 2001. In February 2001, CCX
obtained $23 million in financing through the issuance of 8,846,154 shares of
additional preferred stock. The Company currently holds approximately 26% of
the outstanding voting stock of CCX. CCX is a technology and drug
development company working in the area of chemokines. Chemokines are
cytokines which regulate the trafficking patterns of leukocytes, the effector
cells of the human immune system. In conjunction with the equity investment
and joint research efforts, the Company obtained exclusive worldwide research
and diagnostic marketing rights to chemokine proteins, antibodies and
receptors discovered or developed by CCX or R&D Systems. The Company
accounts for the investment under the equity method of accounting and,
through January 2001, recognized 100% of the losses of CCX due to the limited
amount of cash consideration provided by the holders of the common shares of
CCX. Subsequent to January 2001, the Company is including CCX operating
results in its consolidated financial statements based on its ownership
percentage. The Company's net investment in CCX was $2,511,023 and
$5,091,046 at June 30, 2003 and 2002, respectively.
On August 2, 2001, the Company made an equity investment of $3 million and
entered into a research and license agreement with Discovery Genomics, Inc.
(DGI) of Minneapolis, Minnesota. DGI holds licenses from the University of
Minnesota to develop technologies used for functional genomics and the
discovery of drugable targets. The Company acquired a 39% equity interest in
DGI and warrants to acquire additional equity. The Company also received the
rights to develop antibodies and immunoassay kits for proteins discovered by
DGI and an exclusive, royalty free license to sell such products in the
research market. The Company's investment is accounted for under the equity
method of accounting. The Company's net investment in DGI was $1,887,106 and
$2,494,985 at June 30, 2003 and 2002, respectively.
7
Original Equipment Manufacturer (OEM) agreements represent the largest market
for hematology controls and calibrators made by R&D Systems. In fiscal 2003,
2002 and 2001, OEM contracts accounted for $7,153,518, $7,609,425 and
$7,096,901, respectively, or 5%, 6% and 6% of total consolidated revenues.
GOVERNMENT REGULATION
All manufacturers of hematology controls and calibrators are regulated under
the Federal Food, Drug and Cosmetic Act, as amended. All of R&D Systems'
hematology control products are classified as "In Vitro Diagnostic Products"
by the FDA. The entire hematology control manufacturing process, from
receipt of raw materials to the monitoring of control products through their
expiration date, is strictly regulated and documented. FDA inspectors make
periodic site inspections of the Hematology Division's control operations and
facilities. Hematology control manufacturing must comply with Good
Manufacturing Practices (GMP) as set forth in the FDA's regulations governing
medical devices.
Three of R&D Systems' immunoassay kits, EPO, TfR and Beta2-microglobulin,
have FDA clearance to be sold for clinical diagnostic use. R&D Systems must
comply with GMP for the manufacture of these kits. Biotechnology products
manufactured in the United States and sold for use in the research market do
not require FDA clearance.
Some of R&D Systems' research groups use small amounts of radioactive
materials in the form of radioisotopes in their product development
activities. Thus, R&D Systems is subject to regulation by the US Nuclear
Regulatory Commission (NRC) and has been granted an NRC license due to expire
in April 2004. The license is renewable annually. R&D Systems is also
subject to regulation and inspection by the Department of Health of the State
of Minnesota for its use of radioactive materials. It has been granted a
certificate of registration, which is renewable annually, by the Minnesota
Department of Health. The current certificate expires April 1, 2004. R&D
Systems has had no difficulties in renewing these licenses in prior years and
has no reason to believe they will not be renewed in the future. If,
however, the licenses were not renewed, it would have minimal effect on R&D
Systems' business since there are other technologies the research groups
could use to replace radioisotopes.
AVAILABILITY OF RAW MATERIALS
The primary raw material for the Company's hematology controls is whole
blood. Human blood is purchased from commercial blood banks and porcine and
bovine blood is purchased from nearby meat processing plants. After raw
blood is received, it is separated into its components, processed and
stabilized. Although the cost of human blood has increased owing largely to
the requirement that it be tested for certain diseases, the higher cost of
these materials has not had a serious adverse effect on the Company's
business. R&D Systems does not perform its own testing as the supplier tests
all human blood purchased. R&D Systems' Biotechnology Division develops and
manufactures the majority of its cytokines from synthetic genes developed in-
house, thus significantly reducing its reliance on outside resources. R&D
Systems typically has several outside sources for all critical raw materials
necessary for the manufacture of products.
PATENTS AND TRADEMARKS
R&D Systems owns patent protection for certain hematology controls. R&D
Systems may seek patent protection for new or existing products it
manufactures. No assurance can be given that any such patent protection will
be obtained. No assurance can be given that R&D Systems' products do not
infringe upon patents or proprietary rights owned or claimed by others,
particularly for genetically engineered products.
8
R&D Systems has not conducted a patent infringement study for each of its
products. See Item 3 Legal Proceedings below.
R&D Systems and R&D Europe have a number of licensing agreements with patent
holders under which they have the non-exclusive right to patented technology
or the non-exclusive right to manufacture and sell certain patented cytokine
and cytokine related products to the research market. For fiscal 2003, 2002
and 2001, total royalties expensed under these licenses were approximately
$2,273,000, $2,143,000 and $1,563,000, respectively.
R&D Systems has obtained federal trademark registration for certain of its
hematology controls and biotechnology product groups. R&D Systems believes
it has common law trademark rights to certain marks in addition to those
which it has registered.
SEASONALITY OF BUSINESS
Sales of products by R&D Systems and R&D Europe, particularly R&D Europe,
historically experience a slowing of sales or of the rate of sales growth
during the summer months. R&D Systems also usually experiences a slowing of
sales during the Thanksgiving to New Year holiday period. The Company
believes this slowing is a result of vacation schedules in Europe and Japan
and of academic schedules in the United States.
SIGNIFICANT CUSTOMERS
No single customer accounted for more than 10% of total revenues during
fiscal 2003, 2002 or 2001.
BACKLOG
There was no significant backlog of orders for the Company's products as of
the date of this report or as of a comparable date for fiscal 2002. The
majority of the Company's biotechnology products are shipped within one day
of receipt of the customers' order. The majority of hematology products are
shipped based on a preset, recurring schedule.
COMPETITION
The worldwide market for cytokines and research diagnostic assay kits is
being supplied by a number of biotechnology companies, including BD
Biosciences, BioSource International, PeproTech, Inc., Sigma Chemical Co.,
Amersham Pharmacia and EMD Biosciences, Inc. R&D Systems believes that it is
the leading worldwide supplier of cytokine related products in the research
marketplace. R&D Systems believes that the expanding line of its products,
their recognized quality, and the growing demand for these rare and versatile
proteins, antibodies and assay kits, will allow the Company to remain
competitive in the growing biotechnology research and diagnostic market.
Competition is intense in the hematology control business. The first control
products were developed in response to the rapid advances in electronic
instrumentation used in hospital and clinical laboratories for blood cell
counting. Historically, most of the instrument manufacturing companies made
controls for use in their own instruments. With rapid expansion of the
instrument market, however, a need for more versatile controls enabled non-
instrument manufacturers to gain a foothold. Today the market is comprised
of manufacturers of laboratory reagents, chemicals and coagulation products
and independent control manufacturers in addition to instrument
manufacturers. The principal hematology control competitors of
9
R&D Systems' retail products are Beckman Coulter, Inc., TOA Sysmex, Streck
Laboratories, Abbott Diagnostics and Hematronix, Inc. R&D Systems believes
it is the third largest supplier of hematology controls in the marketplace
behind Beckman Coulter and Streck Laboratories.
EMPLOYEES
R&D Systems had 474 full-time and 40 part-time employees as of June 30, 2003.
R&D Europe had 51 full-time and 10 part-time employees as of June 30, 2003,
including 10 full-time and 1 part-time at R&D Europe's sales subsidiary in
Germany.
ENVIRONMENT
Compliance with federal, state and local environmental protection laws in the
United States, England and Germany had no material effect on R&D Systems or
R&D Europe in fiscal 2003.
FOREIGN AND DOMESTIC OPERATIONS
The following table represents certain financial information relating to
foreign and domestic operations for the fiscal years ended June 30 (all
amounts are in thousands of US dollars):
2003 2002 2001
-------- -------- --------
Net Sales to External Customers
Hematology Division:
US $ 14,119 $ 13,101 $ 12,357
Other 2,547 2,470 2,353
Biotechnology Division:
US 73,655 67,856 58,662
Other 17,310 16,798 14,995
R&D Europe:
Other 37,380 30,675 26,990
-------- -------- --------
$145,011 $130,900 $115,357
======== ======== ========
Gross Margin
R&D Systems (US) $ 93,991 $ 87,558 $ 76,578
R&D Europe (England) 13,151 9,178 8,731
R&D GmbH (Germany) 2,473 1,657 1,623
-------- -------- --------
$109,615 $ 98,393 $ 86,932
======== ======== ========
Net Earnings (Loss)
Parent and R&D Systems (US) $ 41,630 $ 24,436 $ 31,006
R&D Europe (England) 6,306 4,324 3,310
R&D GmbH (Germany) 648 225 229
ChemoCentryx (US) (2,580) (1,350) (500)
Discovery Genomics (US) (608) (505) --
-------- -------- --------
$ 45,396 $ 27,130 $ 34,045
======== ======== ========
Identifiable Assets
Parent and R&D Systems (US) $229,714 $214,606 $197,743
R&D Europe (England) 31,472 22,594 17,029
R&D GmbH (Germany) 2,091 1,047 753
-------- -------- --------
$263,277 $238,247 $215,525
======== ======== ========
10
CAUTIONARY STATEMENTS
The Company wishes to caution investors that the following important factors,
among others, in some cases have affected and in the future could affect the
Company's actual results of operations and cause such results to differ
materially from those anticipated in forward-looking statements made in this
document and elsewhere by or on behalf of the Company:
Technological Obsolescence and Competition
The biotechnology industry is subject to rapid and significant technological
change. While the hematology controls industry historically has been subject
to less rapid change, it too is evolving and is impacted significantly by
changes in the automated testing equipment offered by hardware manufacturers.
Competitors of the Company in the United States and abroad are numerous and
include, among others, specialized biotechnology firms, medical laboratory
instrument and equipment manufacturers and disposables suppliers, major
pharmaceutical companies, universities and other research institutions.
There can be no assurance that the Company's competitors will not succeed in
developing technologies and products that are more effective than any which
have been or are being developed by the Company or that would render the
Company's technologies and products obsolete or noncompetitive. Many of
these competitors have substantially greater resources and product
development, production and marketing capabilities than the Company. With
regard to diagnostic kits, which constitute a relatively minor portion of the
Company's business, many of the Company's competitors have significantly
greater experience than the Company in undertaking preclinical testing and
clinical trials of new or improved diagnostic kits and obtaining FDA and
other regulatory approvals of such products.
Research Spending
The Company's biotechnology products are sold primarily to research
scientists at pharmaceutical and biotechnology companies and at university
and government research institutions. Changes in spending on research by
such companies and in funding of such universities and institutions by
government, including the National Institutes of Health, affect the revenues
and earnings of the Company. The Company's Biotechnology Division carries
essentially no backlog of orders and changes in the level of orders received
and filled daily can cause fluctuations in quarterly revenues and earnings.
Foreign Currency Exchange Rates
Approximately one quarter of the Company's sales are made through its
European subsidiary, R&D Systems Europe, which makes its sales in foreign
currencies. The Company's revenues and earnings are, therefore, affected by
fluctuations in currency exchange rates.
Patents and Proprietary Rights
The Company's success will depend, in part, on its ability to obtain licenses
and patents, maintain trade secret protection and operate without infringing
the proprietary rights of others. The Company has filed a very limited
number of United States and foreign patent applications for products in which
it believes it has a proprietary interest. The Company has obtained and is
negotiating licenses to produce a number of cytokines and related products
claimed to be owned by others. The Company has not conducted a patent
infringement study for each of its products. It is possible that products of
the Company may unintentionally infringe patents of third parties or that the
Company may have to alter its products or processes, pay licensing fees or
cease certain activities because of patent rights of third parties, thereby
causing additional unexpected costs and delays which may have a material
adverse effect on the Company. The patenting of hematology and biotechnology
processes and products involves complex legal and factual questions and, to
date, there has emerged no consistent policy regarding the breadth of claims
in biotechnology patents.
11
Protracted and costly litigation may be necessary to enforce rights of the
Company and defend against claims of infringement of rights of others. See
Item 3 Legal Proceedings below.
Financial Impact of Expansion Strategy
The Company engages in an expansion strategy which includes internal
development of new products, collaboration with manufacturers of automated
instruments which may use the Company's products, investment in joint
ventures and companies developing new products related to the Company's
business and acquisition of companies for new products or additional customer
base. Each of the strategies carries risks that objectives will not be
achieved and future earnings will be adversely affected. During the early
development stage, under the equity method of accounting, a percentage of the
losses of certain companies in which the Company may invest will be reported
as losses of the Company, as is the case with ChemoCentryx, Inc. and
Discovery Genomics, Inc. The Company may not have control of the expense
levels of such companies and their losses may be greater than those
anticipated by the Company.
Government Regulation
Ongoing research and development activities, including preclinical and
clinical testing, and the production and marketing of certain of the
Company's products are subject to regulation by numerous governmental
authorities in the United States and other countries. Some of the Company's
products and manufacturing processes and facilities require governmental
approval prior to commercial use. The approval process applicable to
clinical diagnostic products of the type which may be developed by the
Company may take a year or more. Delays in obtaining regulatory approvals
would adversely affect the marketing of products developed by the Company and
the Company's ability to receive product revenues or royalties. There can be
no assurance that regulatory approvals for such products will be obtained
without lengthy delays, if at all.
Attraction and Retention of Key Employees
Recruiting and retaining qualified scientific and production personnel to
perform research and development work and product manufacturing is critical
to the Company's success. Although the Company believes it has been and will
be able to attract and retain such personnel, there can be no assurance that
the Company will be successful. In addition, the Company's anticipated
growth and expansion into areas and activities requiring additional
expertise, such as clinical testing, government approvals, production and
marketing, will require the addition of new management personnel and the
development of additional expertise by existing management personnel. The
failure to attract and retain such personnel or to develop such expertise
would adversely affect the Company's business.
INVESTOR INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"). Therefore, the Company files
periodic reports, proxy statements, and other information with the Securities
and Exchange Commission (the "SEC"). Such reports, proxy statements, and
other information may be obtained by visiting the Public Reference Room of
the SEC at 450 Fifth Street, NW, Washington, DC 20549 or by calling the SEC
at 1-800-SEC-0330. In addition, the SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information statements,
and other information regarding issuers that file electronically.
Financial and other information about the Company is available on its website
(http://www.techne-corp.com). The Company makes available on its website,
copies of its annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after filing such material electronically or otherwise
furnishing it to the SEC.
12
ITEM 2. PROPERTIES
The Company owns the facilities its R&D Systems subsidiary occupies in
Minneapolis, Minnesota. The R&D Systems complex currently includes 365,000
square feet of administrative, research and manufacturing space. The
Hematology Division manufacturing and shipping operations are located at 640
McKinley Place N.E. (47,000 square feet). Biotechnology Division
manufacturing and research operations are located at 600 McKinley Place NE
(85,000 square feet) and 2201 Kennedy Street (200,000 square feet).
Administrative, sales and marketing functions are also located at the 2201
Kennedy Street building. The Company also occupies an additional 20,000
square feet in space connecting the three buildings. This area houses a
lunchroom, a library and warehouse space. In addition, the Company
constructed a 13,000 square foot entrance to the facility.
In March 2002, the Company purchased property adjacent to its Minneapolis
facility for approximately $8.9 million. The Company has begun to renovate
this property and, when complete (planned for fiscal 2004), the building will
add approximately 176,000 square feet of space. The Company plans to lease
out approximately 70% of the building as retail and office space and use the
remainder as warehouse and storage space. The Company has begun construction
on an infill to connect this building to its current facility. The 78,000
square foot infill, planned to be completed in fiscal 2004, will be used
primarily for laboratory space.
The Company has entered into an option agreement for additional real estate
adjacent to the current facility. This option is exerciable through January
2005.
In December 2002, the Company purchased approximately 649 acres of farmland,
including buildings, in southeast Minnesota for $2.7 million. A portion of
the land and buildings are being leased to third parties as cropland and for
a dairy operation. Rental income from the property was $72,000 in fiscal
2003. The remaining property will be used by the Company to house goats used
for polyclonal antibody production. Building construction of approximately
$1.6 million is planned for this site in fiscal 2004.
R&D Europe leases approximately 17,000 square feet in a building in Abingdon,
England. Base rent was $405,000 in fiscal 2003.
R&D GmbH leases approximately 2,300 square feet as a sales office in
Wiesbaden-Nordenstadt, Germany. Base rent was $33,000 in fiscal 2003.
The Company believes the acquired property, purchase option and leased
property discussed above are adequate to meet its occupancy needs in the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On June 13, 2003, the Company submitted to the U.S. Patent and Trademark
Office ("PTO") a "Request for Interference" to initiate an action between the
Company and Streck Laboratories, Inc. regarding certain patents issued to
Streck. The Streck patents relate to the addition of reticulocytes to
hematology controls. The Company has reason to believe that it invented the
invention(s) claimed in the Streck patents before Streck and is seeking a
decision by the PTO that the Company is entitled to a patent covering the
invention(s) and that the Streck patent is invalid.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during
the fourth quarter of the Company's 2003 fiscal year.
EXECUTIVE OFFICERS OF THE COMPANY
(a) The names, ages and positions of each executive officer of the Company
are as follows:
Name Age Position Officer Since
- ---------------- --- ---------------------------------- -------------
Thomas E. Oland 62 Chairman of the Board, President, 1985
Treasurer, Chief Executive and
Chief Financial and Accounting
Officer and Director
Dr. Monica Tsang 58 Vice President, Research 1995
Marcel Veronneau 48 Vice President, Hematology 1995
Operations
The term of office of each executive officer is from one annual meeting of
directors until the next annual meeting of directors or until a successor is
elected. There are no arrangements or understandings among any of the
executive officers and any other person (not an officer or director acting as
such) pursuant to which any of the executive officers was selected as an
officer of the Company.
(b) The business experience of the executive officers during the past five
years is as follows:
Thomas E. Oland has been Chairman of the Board, President, Treasurer, Chief
Executive and Chief Financial and Accounting Officer of the Company since
December 1985.
Dr. Monica Tsang was elected a Vice President of the Company in March 1995.
Prior thereto, she served as Executive Director of Cell Biology for R&D
Systems' Biotechnology Division and has been an employee of R&D Systems since
1985.
Marcel Veronneau was elected a Vice President of the Company in March 1995.
Prior thereto, he served as Director of Operations for R&D Systems'
Hematology Division since joining the Company in 1993.
An additional officer, Dr. James A. Weatherbee, who served as Vice President
and Chief Scientific Officer since 1995, is on medical leave. Dr. Weatherbee
and Dr. Tsang are husband and wife.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's common stock trades on The NASDAQ Stock Exchange under the
symbol "TECH." The following table sets forth for the periods indicated the
range of the closing price per share for the Company as reported by NASDAQ.
FISCAL 2003 PRICE FISCAL 2002 PRICE
HIGH LOW HIGH LOW
----------- ----------- ----------- -----------
1st Quarter $32.79 $22.79 $35.49 $25.90
2nd Quarter 34.75 28.42 36.85 27.91
3rd Quarter 28.99 20.76 37.05 27.02
4th Quarter 31.02 18.95 32.72 25.30
As of September 12, 2003, there were approximately 325 shareholders of
record. As of September 12, 2003, there were over 20,000 beneficial
shareholders of the Company's common stock. TECHNE Corporation has never paid
cash dividends on its common stock. Payment of dividends is within the
discretion of TECHNE's Board of Directors, although the Board of Directors
plans to retain earnings for the foreseeable future for operating the
Company's business.
14
ITEM 6. SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUE, EARNINGS AND CASH
FLOW DATA FOR THE YEARS ENDED
JUNE 30 2003 2002 2001 2000 1999(1)
- ----------------------------- -------- -------- -------- -------- --------
Net sales $145,011 $130,900 $115,357 $103,838 $ 90,901
Gross margin 75.6% 75.2% 75.4% 74.2% 69.9%
Selling, general and
administrative expenses 13.4% 15.1% 15.1% 16.4% 18.6%
Research and development
expenses 14.2% 13.3% 12.6% 10.8% 13.2%
Interest expense $ 974 $ 1,320 $ 1,381 $ 1,441 $ --
Earnings before income
taxes(2) 69,555 37,736 47,808 39,412 26,054
Net earnings(2) 45,396 27,130 34,045 26,583 16,656
Diluted earnings per share(2) 1.08 0.64 0.80 0.63 0.40
Capital expenditures 15,194 22,276 6,815 30,368 5,564
Depreciation and
amortization(3) 6,353 12,688 12,737 12,651 11,890
Change in net working capital 24,259 6,148 34,560 36,352 (12,544)
Net cash provided by
operating activities(2) 54,089 27,667 46,372 38,739 28,422
Return on sales(2) 31.3% 20.7% 29.5% 25.6% 18.3%
Return on average equity(2) 20.5% 14.1% 21.4% 22.3% 20.7%
BALANCE SHEET, COMMON STOCK
AND EMPLOYEE DATA AS OF
JUNE 30 2003 2002 2001 2000 1999 (1)
- ----------------------------- -------- -------- -------- -------- ---------
Cash, cash equivalents and
short-term available-for-
sale investments $117,501 $ 97,064 $ 97,072 $ 59,824 $ 29,114
Receivables 20,440 19,414 18,322 15,601 13,520
Inventories 6,332 6,077 5,438 4,652 5,715
Working capital 138,707 114,448 108,300 73,740 37,388
Total assets 263,277 238,247 215,525 180,410 123,801
Long-term debt, less
current portion 15,852 17,101 18,050 18,935 --
Stockholders' equity 236,617 206,517 177,660 141,145 96,838
Average common and
common equivalent
shares (in thousands) 42,032 42,523 42,668 42,206 41,373
Book value per share(4) $ 5.78 $ 4.97 $ 4.29 $ 3.41 $ 2.41
Share price:
High 34.75 37.05 74.00 70.00 14.75
Low 18.95 25.30 22.50 12.38 6.13
Price to earnings ratio 28 44 41 103 31
Current ratio 13.86 8.82 7.81 6.87 3.78
Quick ratio 12.76 7.96 7.26 6.00 3.17
Full-time employees 525 509 494 440 402
(1) The Company acquired the research products business of Genzyme
Corporation on July 1, 1998.
(2) Fiscal 2002 results include a $17,500,000 before tax charge ($11,375,000
after tax and $.27 diluted earnings per share) for settlement of
litigation with Amgen, Inc.
(3) The fiscal 2003 decrease in depreciation and amortization was primarily
the result of adoption of Statement of Financial Accounting Standards
No. 142.
(4) Total stockholders' equity divided by total shares outstanding at
June 30.
The Company has not declared any cash dividends in the past, and it is not
anticipated that it will declare any dividends in the foreseeable future.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPANY STRUCTURE
TECHNE Corporation (the Company) has two operating subsidiaries: Research
and Diagnostic Systems, Inc. (R&D Systems) and R&D Systems Europe Ltd.
(R&D Europe). R&D Systems, located in Minneapolis, Minnesota, has two
operating segments: its Biotechnology Division and its Hematology Division.
The Biotechnology Division develops and manufactures purified cytokines
(proteins), antibodies and assay kits which are sold to biomedical researchers
and clinical research laboratories. The Hematology Division develops and
manufactures whole blood hematology controls and calibrators which are sold
to hospitals and clinical laboratories to check the performance of hematology
instruments to assure the accuracy of hematology test results. R&D Europe, the
Company's third operating segment, located in Abingdon, England, is the
European distributor of R&D Systems' biotechnology products. R&D Europe has a
German sales subsidiary, R&D Systems GmbH. The Company's foreign sales
corporation, Techne Export Inc., was dissolved in fiscal 2002.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of the Company's financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis,
management evaluates its estimates. Management bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company has identified the policies outlined below as critical to its
business operations and an understanding of results of operations. The
listing is not intended to be a comprehensive list of all accounting
policies.
Valuation of accounts receivable. The Company performs ongoing credit
evaluations of its customers and adjusts credit limits based upon payment
history and the customers' current creditworthiness, as determined by
management's review of their current credit information. The Company
continuously monitors collections and payments from its customers and
maintains a provision for estimated credit losses based upon the Company's
historical experience and any specific customer collection issues that have
been identified. While such credit losses have historically been within the
Company's established provisions, if the financial condition of the
Company's customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
Valuation of inventory. Inventories are valued at the lower of cost (first-in,
first-out method) or market. The Company regularly reviews inventories on hand
for slow-moving and obsolete inventory, inventory not meeting quality control
standards and inventory subject to expiration. The manufacturing process for
proteins and antibodies has and may continue to produce quantities in excess of
forecasted usage. Individual protein and antibody sales volumes can be volatile
and the Company believes that forecasting sales volumes for individual products
beyond a two-year period is highly
16
uncertain. As a result, the Company values its manufactured protein and
antibody inventory based on a two-year sales forecast. Any significant
unanticipated changes in product demand or market conditions could have an
impact on the value of inventories and the change in value would be reflected
in cost of sales in the period of the change.
Income taxes. The Company operates within multiple taxing jurisdictions and is
subject to audit in these jurisdictions. These audits can involve complex
issues, which may require an extended period of time to resolve. In management's
opinion, adequate provisions for income taxes have been made for all years
presented.
Assessment of claims or pending litigation. The Company is routinely subject to
claims and involved in legal actions which are incidental to the business of the
Company. Although it is difficult to predict the ultimate outcome of these
matters, management believes that any ultimate liability will not materially
affect the consolidated financial position or results of operations of the
Company. As additional information becomes available, the Company will assess
the potential liabilities related to claims or pending litigation and revise
estimates as needed. Such revisions could materially impact the Company's
consolidated financial position or results of operations.
RESULTS OF OPERATIONS
Net sales for fiscal 2003 were $145,010,900, an increase of $14,110,505 (11%)
from fiscal 2002. Net sales by R&D Systems' Biotechnology Division for the
period increased $6,309,833 (7%). Net sales by R&D Systems' Hematology Division
increased $1,095,382 (7%) and net sales by R&D Europe increased $6,705,290
(22%). R&D Europe's net sales for fiscal 2003 were affected by changes in
foreign currency exchange rates. In British pounds, R&D Europe's net sales
increased 11% from the prior year. The increase in consolidated net sales for
the fiscal year was due largely to increased sales of proteins and antibodies.
Net sales for fiscal 2002 were $130,900,395, an increase of $15,543,833 (13%)
from fiscal 2001. Net sales by R&D Systems' Biotechnology Division for the
period increased $10,998,256 (15%). Net sales by R&D Systems' Hematology
Division increased $860,192 (6%) and net sales by R&D Europe increased
$3,685,385 (14%). The increase in consolidated net sales for the fiscal year
was due largely to increased sales of proteins and antibodies.
Gross margins, as a percentage of net sales, increased slightly from 75.2% in
fiscal 2002 to 75.6% in fiscal 2003. Biotechnology Division gross margins
decreased slightly from 79.2% to 79.0%. Hematology Division gross margins
increased from 45.0% to 47.2% in fiscal 2003 as a result of lower raw material
costs. Blood costs increased significantly during the prior year as a result of
a decreased blood supply, but returned to a more normal level by the end of
fiscal 2002. R&D Europe gross margins increased from 36.1% to 41.8% in fiscal
2003 mainly as a result of favorable exchange rates due to the weakening of
the U.S. dollar to the British pound sterling.
Gross margins, as a percentage of net sales, decreased slightly from 75.4% in
fiscal 2001 to 75.2% in fiscal 2002. Biotechnology Division gross margins
increased from 78.6% to 79.2% in fiscal 2002 as a result of increased
manufacturing efficiencies. Hematology Division gross margins decreased from
46.7% to 45.0% in fiscal 2002 as a result of higher raw material costs as
discussed above. R&D Europe gross margins decreased from 38.3% to 36.1% in
fiscal 2002 mainly as a result of changes in exchange rates.
17
Included in cost of sales for fiscal 2003, 2002, and 2001 were $2.3 million,
$1.8 million and $1.1 million, respectively, of royalties paid under an
agreement which concluded on June 30, 2003.
Selling, general and administrative expenses decreased $422,683 (2%) in fiscal
2003 and increased $2,438,042 (14%) in fiscal 2002. The decrease in selling,
general and administrative expenses in fiscal 2003 was a direct result of a
$1.2 million decrease in profit sharing and stock bonus contributions from the
prior year due to sales and profit targets not being met. This decrease was
partially offset by a $751,000 increase in wages and benefits. The increase in
fiscal 2002 was due to increased wages and benefits ($903,000), profit sharing
and stock bonus contributions ($442,000) and legal expenses ($373,000) from
fiscal 2001.
Research and development expenses increased $3,111,076 and $2,948,034 in fiscal
2003 and 2002, respectively. Included in research and development expenses are
the Company's share of losses by ChemoCentryx (CCX) and Discovery Genomics, Inc.
(DGI), development stage companies in which the Company has invested. Research
and development expenses are composed of the following:
YEAR ENDED JUNE 30,
2003 2002 2001
----------- ----------- -----------
R&D Systems' expenses $17,393,441 $15,614,817 $14,022,546
ChemoCentryx, Inc. losses 2,580,023 1,350,435 499,687
Discovery Genomics, Inc. losses 607,879 505,015 --
----------- ----------- -----------
$20,581,343 $17,470,267 $14,522,233
=========== =========== ===========
Exclusive of CCX and DGI, research and development expenses by the Company
increased $1,778,624 and $1,592,271 in fiscal 2003 and 2002, respectively.
These increases were primarily the result of the development and release of
new cytokines, antibodies and assay kits by R&D Systems' Biotechnology
Division and the development and release of several new Hematology Division
control products.
Amortization of intangible assets. On July 1, 2002, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS, under which goodwill is no longer amortized. Goodwill
amortization expense was $6.27 million in both fiscal 2002 and 2001. As of
June 30, 2002 the Company had net unamortized goodwill of $12,540,000. The
Company assessed the recoverability of its goodwill and other intangible assets
as of July 1, 2002 (adoption) and determined that no impairment existed. The
Company completed its annual impairment testing of goodwill and concluded that
no impairment existed as of June 30, 2003. The Company used cash flow and fair
value methodologies to assess impairment.
The pro forma effects of implementation of SFAS No. 142 to prior periods
would be as follows:
YEAR ENDED JUNE 30,
2002 2001
----------- -----------
Reported net income $27,129,669 $34,045,376
Goodwill amortization, net of tax 4,076,000 4,076,000
----------- -----------
Adjusted net income $31,205,669 $38,121,376
=========== ===========
Reported basic earnings per share $ 0.65 $ 0.82
Goodwill amortization 0.10 0.10
----------- -----------
Adjusted basic earnings per share $ 0.75 $ 0.92
=========== ===========
Reported diluted earnings per share $ 0.64 $ 0.80
Goodwill amortization 0.09 0.09
----------- -----------
Adjusted diluted earnings per share $ 0.73 $ 0.89
=========== ===========
Litigation settlement. In fiscal 2002, the Company recorded a $17.5 million
charge as a result of a litigation settlement. In fiscal 2000, Amgen, Inc.
had presented invoices in the amount of $28 million for materials provided to
the Company over past years, allegedly pursuant to a contract under which no
accounting or invoices were rendered for nine years. In May 2002, the parties
agreed to a $17.5 million cash settlement of the dispute. The settlement was
paid in June 2002 with cash on hand and the liquidation of approximately $15
million of short-term available-for-sale investments. The after-tax amount of
the charge to the Company's fiscal 2002 results was approximately $11.4
million or $.27 per diluted share. Excluding the settlement, earnings per
diluted share would have been $.91 for fiscal 2002 compared to $.80 in the
prior year.
Other non-operating expense (income). Other non-operating expense (income)
consists mainly of foreign currency transaction gains and losses, rental income,
and real estate and utility expenses related to properties under
construction/renovation.
18
Earnings before taxes increased from $37,735,669 in fiscal 2002 to $69,555,293
in fiscal 2003. Excluding the litigation settlement discussed above from fiscal
2002 results, earnings before taxes increased $14.3 million in fiscal 2003. R&D
Systems' Biotechnology Division earnings increased $10,714,234, R&D Systems'
Hematology Division earnings increased $843,416 and R&D Europe earnings
increased $3,817,858. These increases in earnings were due mainly to increased
sales and decreased goodwill amortization of $6.27 million and were partially
offset by increased losses of $1,332,425 by CCX and DGI included in the
Company's results.
Earnings before taxes decreased from $47,808,376 in fiscal 2001 to $37,735,669
in fiscal 2002. The decrease was the result of the litigation settlement
discussed above. Excluding the settlement, the Company's earnings before taxes
for fiscal 2002 would have been approximately $55.2 million compared to $47.8
million in the prior year, an increase of $7.4 million. R&D Systems'
Biotechnology Division earnings increased $8,010,086, R&D Systems' Hematology
Division earnings increased $37,292 and R&D Europe earnings increased
$1,193,382. These increases in earnings were due mainly to increased sales
and were partially offset by increased losses of $1,355,763 by CCX and DGI
included in the Company's results.
Income taxes for fiscal 2003, 2002 and 2001 were provided at rates of
approximately 35%, 28% and 29%, respectively. The increased tax rate in fiscal
2003 was primarily the result of changes in Minnesota income tax regulations
which resulted in state tax expense of $666,000 ($1,552,000 expense offset by
$886,000 of tax credit carryforwards) in fiscal 2003 compared to a credit of
$1 million in fiscal 2002. The tax rate in fiscal 2001 includes the effect of
a one-time $1.2 million credit as a result of the close-out of pending issues
related to a state income tax examination for fiscal years 1996 through 1999.
U.S. federal and state taxes have been reduced as a result of tax-exempt
interest income, the benefit of extraterritorial income in fiscal 2003 and 2002,
the benefit of the foreign sales corporation in fiscal 2001, and the federal and
state credit for research and development expenditures. Foreign income taxes
have been provided at rates which approximate the tax rates in the countries in
which R&D Europe operates. Without significant business developments, the
Company expects income tax rates for fiscal 2004 to be from 35% to 36%.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL 2003 FISCAL 2002
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR.(1)
------- ------- ------- ------- ------- ------- ------- -------
Net sales $34,548 $33,300 $37,737 $39,426 $29,843 $31,137 $34,285 $35,636
Gross margin 25,858 24,929 28,980 29,847 22,295 23,109 25,893 27,096
Earnings
(loss) be-
fore taxes 15,907 14,988 19,118 19,543 12,256 12,407 15,350 (2,277)
Income taxes 5,462 5,107 6,724 6,866 3,831 3,972 4,776 (1,973)
Net earnings
(loss) 10,445 9,881 12,394 12,677 8,425 8,435 10,574 (304)
Basic earn-
ings (loss)
per share 0.25 0.24 0.30 0.31 0.20 0.20 0.25 (0.01)
Diluted earn-
ings (loss)
per share 0.25 0.23 0.30 0.31 0.20 0.20 0.25 (0.01)
(1) Results include a $17,500,000 before tax charge ($11,375,000 after tax)
for settlement of litigation with Amgen, Inc. Excluding the settlement basic and
diluted earnings per share would have been $.27 and $.26, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term available-for-sale investments at June 30,
2003 were $117,501,331 compared to $97,063,821 at June 30, 2002. At June 30,
2001, cash, equivalents and short-term available-for-sale investments were
$97,071,868. The Company has an unsecured line of credit of $750,000 available
at June 30, 2003. The line of credit expires on October 31, 2003. The interest
rate on the line of credit is at the prime rate (4.0% at June 30, 2003).
Management of the Company expects to be able to meet its future cash and working
capital requirements for operations, debt repayment, facility expansion and
capital additions through currently available funds, cash generated from
operations and maturities of short-term available-for-sale investments.
19
Cash flows from operating activities. The Company generated cash from
operations of $54,088,895, $27,667,227 and $46,371,711 in fiscal 2003, 2002 and
2001, respectively. The increase in cash generated from operating activities in
fiscal 2003 of approximately $26.4 million was the result of increased net
earnings, increased losses by equity method investees and increased income taxes
payable, partially offset by decreased goodwill amortization and decreased trade
and other accounts payable. Net earnings increased approximately $18.3 million
from fiscal 2002 to fiscal 2003 while losses by equity method investees, which
do not affect the Company's cash balances, increased $1.3 million from fiscal
2002. The increase in income taxes payable of $10.9 million was mainly the
result of higher U.S. taxable income in fiscal 2003 ($3.9 million increase in
U.S. income taxes payable compared to fiscal 2002) and lower income tax payments
made in fiscal 2003 ($5.1 less than made in fiscal 2002). Goodwill amortization
decreased $6.27 million in fiscal as a result of adoption of Statement of
Financial Accounting Standards No. 142. The decrease in trade and other accounts
payable was mainly the result of $3.8 million less in royalties payable to
Genzyme, Inc. stemming from the fiscal 1999 acquisition of Genzyme's research
product business under which royalties were due through fiscal 2003. The
decrease in cash generated from operating activities in fiscal 2002 of
approximately $6.9 million was mainly the result of decreased net earnings due
to the litigation settlement and increased income tax payments.
Cash flows from investing activities. Capital additions (excluding the land and
building purchases and construction discussed below) were $1,178,332, $2,645,977
and $4,920,832 in fiscal 2003, 2002 and 2001, respectively. Included in fiscal
2003, 2002 and 2001 capital additions are building improvements of $202,000,
$522,000 and $2.3 million related to R&D Systems' remodeling. The remaining
capital additions were for laboratory, manufacturing and computer equipment.
Capital additions for laboratory, manufacturing and computer equipment planned
for fiscal 2004 are expected to be approximately $1.5 million and are expected
to be financed through currently available cash and cash generated from
operations.
Included in fiscal 2003 capital additions was $11.1 million for renovation of
property purchased in fiscal 2002 and the construction of an infill connecting
the purchased property to R&D Systems' existing property, $202,000 for the
completion of a parking ramp and $2.7 million for the purchase of property in
southeastern Minnesota as described in Note C to the Consolidated Financial
Statements. Included in fiscal 2002 capital additions was $6 million for the
purchase of property adjacent to the Company's Minneapolis facility, $7.8
million for renovation of the property and the construction of the infill and
$5.9 million for the construction of the parking ramp. Included in fiscal 2001
capital additions was $1.9 million for the construction of the parking ramp. The
land and building purchases and construction were all financed through cash on
hand, cash generated from operations and maturities of short-term available-for-
sale investments.
Remaining construction costs for the Minneapolis property are estimated to be
approximately $7 million with the completion of the construction expected in
fiscal 2004. Construction costs for buildings planned at the property in
southeastern Minnesota are estimated at $1.6 million in fiscal 2004. All
construction is expected to be financed through cash on hand and cash generated
from operations.
The Company's net purchases of (proceeds from) short-term available-for-sale
investments in fiscal 2003, 2002 and 2001 was $6,514,928, ($5,132,736) and
$33,335,894, respectively. The Company's investment policy is to place excess
cash in municipal and corporate bonds with the objective of obtaining the
highest possible return with the lowest risk, while keeping funds accessible.
The Company paid $1,999,000 in March 2002 as a nonrefundable deposit on an
option, which expires in 2005, to purchase additional property adjacent to its
Minneapolis facility. In fiscal 2000, the Company had paid an original $1,000
deposit on this option.
In August 2001, the Company made an equity investment of $3 million in Discovery
Genomics, Inc. (DGI). DGI holds licenses from the University of Minnesota to
develop technologies used for functional genomics and the discovery of drug
targets. The Company holds a 39% equity interest in DGI and accounts for this
investment under the equity method of accounting. The Company's net investment
in DGI was $1,887,106 and $2,494,985 at June 30, 2003 and 2002, respectively.
20
Cash flows from financing activities. The Company received $2,442,471, $332,173
and $814,892 for the exercise of options for 264,898, 87,400 and 89,616 shares
of common stock in fiscal 2003, 2002 and 2001, respectively.
In fiscal 2003, 2002 and 2001, the Company purchased and retired 1,026,500,
30,000 and 40,000 shares of Company common stock at market values of
$22,512,572, $745,615 and $1,163,768, respectively. In May 1995, the Company
announced a plan to purchase and retire its common stock. Since May 1995, the
Board of Directors has authorized the purchase of $40 million of common stock.
Through June 30, 2003, $33,176,069 of common stock had been purchased under the
plan. Any additional purchases will be funded from currently available cash.
The Company has never paid cash dividends and currently has no plans to do so in
fiscal 2004. The Company's net earnings will be retained for reinvestment in the
business.
Contractual obligations. The following table summarizes the Company's
contractual obligations and commercial commitments as of June 30, 2003:
PAYMENTS DUE BY PERIOD ($000'S)
------------------------------------------
LESS THAN 1-3 4-5 AFTER
TOTAL 1 YEAR YEARS YEARS 5 YEARS
------- --------- ------ ------ -------
Long-term debt $17,086 $1,234 $2,626 $2,846 $10,380
Operating leases 5,660 491 939 853 3,377
Minimum royalty payments 119 119 -- -- --
------- ------ ------ ------ -------
$22,865 $1,844 $3,565 $3,699 $13,757
======= ====== ====== ====== =======
OFF-BALANCE SHEET ARRANGEMENTS
The Company is not a party to any off-balance sheet transactions, arrangements
or obligations that have, or are reasonably likely to have, a material effect
on the Company's financial condition, changes in the financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE, an amendment of SFAS No.123.
This statement provides alternative methods of transition for a voluntary change
to the fair value method of accounting for stock-based compensation. The
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosure in both annual and interim financial statements about the
method of accounting for stock-based compensation and the effect of the method
used on reported results. The Company accounts for stock-based compensation
arrangements in accordance with the provisions of Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and complies with the
disclosure provisions of SFAS No. 123. The transition provisions are effective
for fiscal years ending after December 15, 2002. The disclosure provisions are
effective for interim periods beginning after December 15, 2002. The Company
implemented the required disclosure provisions in Form 10-Q for the quarter
ended March 31, 2003.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), CONSOLIDATION
OF VARIABLE INTEREST ENTITIES. FIN 46 addresses the consolidation by businesses
of variable interest entities and requires businesses to consolidate a variable
interest entity if it has a variable interest that will absorb a majority of the
entity's expected losses if they occur, or receive a majority of the entity's
expected returns if they occur, or both. FIN 46 became effective for variable
interest entities created after January 31, 2003. For variable interest entities
created prior to January 31, 2003, the provisions of FIN 46 are applicable to
the Company for the quarter ended September 30, 2003. The Company is currently
assessing the impact of FIN 46 on its consolidated financial statements.
21
FORWARD-LOOKING INFORMATION
Statements in this Annual Report, and elsewhere, that are forward-looking
involve risks and uncertainties which may affect the Company's actual results of
operations. Certain of these risks and uncertainties which have affected and, in
the future, could affect the Company's actual results are discussed below.
The Company's biotechnology products are sold primarily to research scientists
at pharmaceutical and biotechnology companies and at university and government
research institutions. Changes in spending on research by such companies and in
funding of such universities and institutions by government, including the
National Institutes of Health, affects the revenues and earnings of the Company.
The Company carries essentially no backlog of orders and changes in the level of
orders received and filled daily can cause fluctuations in quarterly revenues
and earnings.
Approximately one quarter of the Company's sales are made through its European
subsidiary, R&D Systems Europe, which makes its sales in foreign currencies. The
Company's revenues and earnings are, therefore, affected by fluctuations in
currency exchange rates.
The biotechnology industry is subject to rapid and significant technological
change. While the hematology controls industry historically has been subject to
less rapid change, it too is evolving and is impacted significantly by changes
in the automated testing equipment offered by hardware manufacturers.
Competitors of the Company are numerous and include, among others, specialized
biotechnology firms, medical laboratory instrument and equipment manufacturers
and disposables suppliers, major pharmaceutical companies, universities and
other research institutions. There can be no assurance that the Company's
competitors will not succeed in developing technologies and products that are
more effective than any which have been or are being developed by the Company or
that would render the Company's technologies and products obsolete or
noncompetitive.
The Company's success will depend, in part, on its ability to obtain licenses
and patents, maintain trade secret protection and operate without infringing the
proprietary rights of others. The Company has obtained and is negotiating
licenses to produce a number of cytokines and related products claimed to be
owned by others. Since the Company has not conducted a patent infringement study
for each of its products, it is possible that products of the Company may
unintentionally infringe patents of third parties or that the Company may have
to alter its products or processes, pay licensing fees or cease certain
activities because of patent rights of third parties, thereby causing additional
unexpected costs and delays which may have a material adverse effect on the
Company.
The Company's expansion strategies, which include internal development of new
products, collaborations, investments in joint ventures and companies developing
new products related to the Company's business, and the acquisition of companies
for new products and additional customer base, carry risks that objectives will
not be achieved and future earnings will be adversely affected. During the early
development stage, under the equity method of accounting, a percentage of the
losses of certain companies in which the Company invests will be reported as
losses of the Company. The Company may not have control of the expense levels of
such companies and their losses may be greater than those anticipated by the
Company.
Ongoing research and development activities and the production and marketing of
certain of the Company's products are subject to regulation by numerous
governmental authorities in the United States and other countries. The approval
process applicable to clinical diagnostic products of the type that may be
developed by the Company may take a year or more. Delays in obtaining approvals
could adversely affect the marketing of new products developed by the Company.
Recruiting and retaining qualified scientific and production personnel to
perform research and development work and product manufacturing are critical to
the Company's success. The Company's anticipated growth and its expected
expansion into areas and activities requiring additional expertise will require
the addition of new personnel and the development of additional expertise by
existing personnel. The failure to attract and retain such personnel could
adversely affect the Company's business.
For additional information on risks and uncertainties, see the Company's
periodic reports filed with the Securities and Exchange Commission.
22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
At the end of fiscal 2003, the Company had a professionally managed
investment portfolio of fixed income securities, excluding those classified
as cash and cash equivalents, of $78,130,269 (see Note A of Notes to
Consolidated Financial Statements). These securities, like all fixed income
instruments, are subject to interest rate risk and will decline in value if
market interest rates increase.
The Company operates internationally, and thus is subject to potentially
adverse movements in foreign currency rate changes. The Company is exposed to
market risk from foreign exchange rate fluctuations of the euro and the
British pound to the U.S. dollar as the financial position and operating
results of the Company's U.K. and German subsidiaries are translated into
U.S. dollars for consolidation. The Company's exposure to foreign exchange
rate fluctuations also arises from transferring funds from the U.K.
subsidiary to the U.S. parent and from transferring funds from the German
subsidiary to the U.K. subsidiary. At June 30, 2003 and 2002, the Company had
$358,195 and $397,349 dollar denominated intercompany debt at its U.K.
subsidiary and the U.K. subsidiary had $295,242 and $37,291 dollar
denominated intercompany debt at its German subsidiary. These intercompany
balances are revolving in nature and are not deemed to be long-term balances.
The Company's U.K. subsidiary recognized net foreign currency gains of
223,938 pounds ($356,554) and 242,614 pounds ($351,548) for the years ended
June 30, 2003 and 2002, respectively. The currency gains were primarily the
result of a strong British pound compared to the euro. The Company does not
enter into foreign exchange forward contracts to reduce its exposure to
foreign currency rate changes on intercompany foreign currency denominated
balance sheet positions.
As of June 30, 2003, the Company's long-term debt consisted of a
mortgage note payable. The interest rate on the mortgage was fixed at 7%
through November 2002. The terms of the note payable were modified in
December 2002 to include a floating interest rate at the one month London
interbank offered rate (Libor) plus 2.5% with a floor of 4%. The floating
interest rate on the mortgage note payable was below the 4% floor as of June
30, 2003.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF EARNINGS
TECHNE CORPORATION AND SUBSIDIARIES
YEAR ENDED JUNE 30,
2003 2002 2001
------------ ------------ ------------
Net sales $145,010,900 $130,900,395 $115,356,562
Cost of sales 35,396,174 32,507,846 28,424,906
------------ ------------ ------------
Gross margin 109,614,726 98,392,549 86,931,656
Operating expenses:
Selling, general and administrative 19,376,538 19,799,221 17,361,179
Research and development 20,581,343 17,470,267 14,522,233
Amortization of intangible assets
(Note D) 1,939,250 8,549,246 8,889,254
Litigation settlement (Note F) -- 17,500,000 --
Interest expense 973,780 1,320,479 1,381,276
Interest income (2,933,348) (3,737,307) (3,383,698)
Other non-operating expense
(income), net 121,870 (245,026) 353,036
------------ ------------ ------------
40,059,433 60,656,880 39,123,280
------------ ------------ ------------
Earnings before income taxes 69,555,293 37,735,669 47,808,376
Income taxes (Note H) 24,159,000 10,606,000 13,763,000
------------ ------------ ------------
Net earnings $ 45,396,293 $ 27,129,669 $ 34,045,376
============ ============ ============
Earnings per share:
Basic $ 1.10 $ 0.65 $ 0.82
Diluted $ 1.08 $ 0.64 $ 0.80
Weighted average common
shares outstanding:
Basic 41,237,473 41,507,727 41,438,670
Diluted 42,031,510 42,522,664 42,668,236
See Notes to Consolidated Financial Statements.
24
CONSOLIDATED BALANCE SHEETS
TECHNE CORPORATION AND SUBSIDIARIES
JUNE 30,
2003 2002
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 39,371,062 $ 26,392,480
Short-term available-for-sale
investments (Note A) 78,130,269 70,671,341
Trade accounts receivable, less
allowance for doubtful accounts
of $268,000 and $263,000, respectively 18,386,603 16,913,002
Interest receivable 2,053,667 2,500,616
Inventories (Note B) 6,332,248 6,077,035
Deferred income taxes (Note H) 4,237,000 3,762,000
Prepaid expenses 1,003,888 915,854
Income taxes receivable -- 1,845,421
------------ ------------
Total current assets 149,514,737 129,077,749
Property and equipment, net (Note C) 81,166,311 70,312,602
Goodwill, net (Note D) 12,540,000 12,540,000
Intangible assets, net (Note D) 4,417,750 6,357,000
Deferred income taxes (Note H) 8,715,000 9,400,000
Other long-term assets (Notes A and F) 6,923,330 10,559,608
------------ ------------
$263,277,128 $238,246,959
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 2,215,928 $ 4,326,359
Salaries, wages and related accounts 1,780,607 2,873,505
Other accounts payable and accrued expenses 2,605,593 6,480,023
Income taxes payable 2,971,984 --
Current portion of long-term debt (Note E) 1,233,921 949,637
------------ ------------
Total current liabilities 10,808,033 14,629,524
Long-term debt, less current portion (Note E) 15,851,901 17,100,652
------------ ------------
Total liabilities 26,659,934 31,730,176
------------ ------------
Commitments and contingencies (Note F)
Stockholders' equity (Note G):
Undesignated capital stock, no par;
authorized 5,000,000 shares; none
issued or outstanding -- --
Common stock, par value $.01 a share;
authorized 100,000,000 shares;
issued and outstanding 40,913,226 and
41,562,136 shares, respectively 409,132 415,621
Additional paid-in capital 63,279,243 58,584,103
Retained earnings 169,808,690 147,369,149
Accumulated other comprehensive income 3,120,129 147,910
------------ ------------
Total stockholders' equity 236,617,194 206,516,783
------------ ------------
$263,277,128 $238,246,959
============ ============
See Notes to Consolidated Financial Statements.
25
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TECHNE CORPORATION AND SUBSIDIARIES
ACCUM.
OTHER
COMPRE-
ADDITIONAL
HENSIVE
COMMON STOCK PAID-IN RETAINED
INCOME
SHARES AMOUNT CAPITAL EARNINGS
(LOSS) TOTAL
---------- -------- ----------- ------------ --
- -------- ------------
Balances at June 30, 2000 41,381,998 $413,820 $52,857,444 $ 88,336,230 $
(462,116) $141,145,378
Comprehensive income:
Net earnings -- -- -- 34,045,376
- -- 34,045,376
Other comprehensive
loss, net of tax:
Foreign currency trans-
lation adjustments -- -- -- --
(884,262) (884,262)
- ------------
Comprehensive income
33,161,114
Common stock issued for
exercise of options
(Note G) 90,616 906 822,540 --
- -- 823,446
Surrender and retirement
of stock to exercise
options (Note L) (224) (2) -- (8,552)
- -- (8,554)
Repurchase and retirement
of common stock (40,000) (400) -- (1,163,368)
- -- (1,163,768)
Sale of stock by equity
method investee (Note A) -- -- 3,387,652 --
- -- 3,387,652
Tax benefit from exercise
of stock options -- -- 315,000 --
- -- 315,000
---------- -------- ----------- ------------ --
- -------- ------------
Balances at June 30, 2001 41,432,390 414,324 57,382,636 121,209,686
(1,346,378) 177,660,268
Comprehensive income:
Net earnings -- -- -- 27,129,669
- -- 27,129,669
Other comprehensive
income, net of tax:
Foreign currency trans-
lation adjustments -- -- -- --
1,494,288 1,494,288
- ------------
Comprehensive income
28,623,957
Common stock issued for
exercise of options
(Note G) 167,400 1,674 555,467 --
- -- 557,141
Surrender and retirement
of stock to exercise
options (Note L) (7,654) (77) -- (224,891)
- -- (224,968)
Repurchase and retirement
of common stock (30,000) (300) -- (745,315)
- -- (745,615)
Tax benefit from exercise
of stock options -- -- 646,000 --
- -- 646,000
---------- -------- ----------- ------------ --
- -------- ------------
Balances at June 30, 2002 41,562,136 415,621 58,584,103 147,369,149
147,910 206,516,783
Comprehensive income:
Net earnings -- -- -- 45,396,293
- -- 45,396,293
Other comprehensive
income, net of tax:
Foreign currency trans-
lation adjustments -- -- -- --
2,028,219 2,028,219
Unrealized gains on
available-for-sale
investments -- -- -- --
944,000 944,000
- ------------
Comprehensive income
48,369,512
Common stock issued for
exercise of options
(Note G) 391,682 3,917 2,893,140 --
- -- 2,897,057
Surrender and retirement
of stock to exercise
options (Note L) (14,092) (141) -- (454,445)
- -- (454,586)
Repurchase and retirement
of common stock (1,026,500) (10,265) -- (22,502,307)
- -- (22,512,572)
Tax benefit from exercise
of stock options -- -- 1,802,000 --
- -- 1,802,000
---------- -------- ----------- ------------ --
- -------- ------------
Balances at June 30, 2003 40,913,226 $409,132 $63,279,243 $169,808,690
$3,120,129 $236,617,194
========== ======== =========== ============
========== ============
See Notes to Consolidated Financial Statements.
26
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE L)
TECHNE CORPORATION AND SUBSIDIARIES
YEAR ENDED JUNE 30,
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Net earnings $ 45,396,293 $ 27,129,669 $ 34,045,376
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation and amortization 6,352,847 12,687,915 12,737,448
Deferred income taxes 232,000 (6,292,000) (508,000)
Losses by equity method investees 3,187,902 1,855,450 499,687
Other 538,999 589,782 420,035
Change in operating assets and
operating liabilities:
Trade accounts and
interest receivable (638,405) (855,339) (3,036,047)
Inventories (173,139) (560,517) (846,902)
Prepaid expenses (62,374) (210,042) (153,452)
Trade and other accounts payable (6,081,519) (2,829,566) (2,867,638)
Salaries, wages and related
accounts (1,116,295) 553,404 (680,839)
Income taxes payable/receivable 6,452,586 (4,401,529) 6,762,043
------------ ------------ ------------
Net cash provided by
operating activities 54,088,895 27,667,227 46,371,711
------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment (15,193,756) (22,276,262) (6,814,953)
Purchase of short-term available-
for-sale investments (64,560,000) (64,679,571) (57,177,268)
Proceeds from sale of short-term
available-for-sale investments 58,045,072 69,812,307 23,841,374
Real estate deposits -- (1,999,000) --
Increase in other long-term assets -- (3,259,103) (500,000)
------------ ------------ ------------
Net cash used in
investing activities (21,708,684) (22,401,629) (40,650,847)
------------ ------------ ------------
Cash flows from financing activities:
Issuance of common stock 2,442,471 332,173 814,892
Repurchase of common stock (22,512,572) (745,615) (1,163,768)
Payments on long-term debt (964,467) (884,760) (824,315)
------------ ------------ ------------
Net cash used in
financing activities (21,034,568) (1,298,202) (1,173,191)
------------ ------------ ------------
Effect of exchange rate changes on
cash and cash equivalents 1,632,939 1,157,293 (635,990)
------------ ------------ ------------
Net increase in cash and
cash equivalents 12,978,582 5,124,689 3,911,683
Cash and cash equivalents at
beginning of year 26,392,480 21,267,791 17,356,108
------------ ------------ ------------
Cash and cash equivalents at
end of year $ 39,371,062 $ 26,392,480 $ 21,267,791
============ ============ ============
See Notes to Consolidated Financial Statements.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TECHNE CORPORATION AND SUBSIDIARIES
Years Ended June 30, 2003, 2002 and 2001
A. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS: TECHNE Corporation and Subsidiaries (the Company) are
engaged domestically in the development and manufacture of biotechnology
products and hematology calibrators and controls. These activities are primarily
conducted through its wholly owned subsidiary, Research and Diagnostic (R&D)
Systems, Inc. Through its wholly owned U.K. subsidiary, R&D Systems Europe Ltd.,
the Company distributes biotechnology products throughout Europe. R&D Systems
Europe Ltd. has a sales subsidiary, R&D Systems GmbH, in Germany. The Company's
foreign sales corporation, Techne Export Inc., was dissolved in fiscal 2002.
ESTIMATES: The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
RISK AND UNCERTAINTIES: There are no concentrations of business transacted with
a particular customer or supplier nor concentrations of revenue from a
particular product or geographic area that would severely impact the Company
in the near term.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
TRANSLATION OF FOREIGN FINANCIAL STATEMENTS: Assets and liabilities of the
Company's foreign operations are translated at year-end rates of exchange and
the foreign statements of earnings are translated at the average rate of
exchange for the year. Gains and losses resulting from translating foreign
currency financial statements are not included in operations but are accumulated
in other comprehensive income. Foreign currency transaction gains and losses are
included in operations.
REVENUE RECOGNITION: The Company recognizes revenues upon shipment of products.
Payment terms for shipments to end-users are net 30 days. Payment terms for
distributor shipments may range from 30 to 90 days. Products are shipped FOB
shipping point. Freight charges billed to end-users are included in net sales
and freight costs are included in cost of sales. Freight charges on shipments
to distributors are paid directly by the distributor. Any claims for credit or
return of goods must be made within 10 days of receipt. Revenues are reduced to
reflect estimated credits and returns.
RESEARCH AND DEVELOPMENT: Research and development expenditures are expensed as
incurred. Development activities generally relate to creating new products,
improving or creating variations of existing products, or modifying existing
products to meet new applications. Included in research and development expense
is the Company's share of losses by development stage companies in which it has
invested due to the Company's obtaining research market rights to products
developed by the investee companies. (See INVESTMENTS below).
INCOME TAXES: The Company uses the asset and liability method of accounting for
income taxes. Deferred tax assets and liabilities are recognized to record the
income tax effect of temporary differences between the tax basis and financial
reporting basis of assets and liabilities. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
CASH AND EQUIVALENTS: Cash and cash equivalents include cash on hand and highly
liquid investments with original maturities of less than three months.
SHORT-TERM INVESTMENTS: Short-term investments consist of debt instruments with
original maturities of generally three months to three years. The Company
considers all of its marketable securities available-for-sale and reports them
at fair market value. Fair market values are based on quoted market prices.
Unrealized gains and losses on available-for-sale securities are excluded from
income, but are included in other comprehensive income.
28
At June 30, 2003 and 2002, the amortized cost and market value of the Company's
available-for-sale securities by major security type were as follows:
JUNE 30,
2003 2002
------------------------ ------------------------
Cost Market Cost Market
----------- ----------- ----------- -----------
State and municipal
securities $77,186,269 $78,130,269 $68,583,472 $68,583,472
Corporate securities -- -- 2,087,869 2,087,869
----------- ----------- ----------- -----------
77,186,269 78,130,269 70,671,341 70,671,341
Unrealized gains 944,000 -- -- --
----------- ----------- ----------- -----------
$78,130,269 $78,130,269 $70,671,341 $70,671,341
=========== =========== =========== ===========
Contractual maturities of available-for-sale securities are shown below.
Expected maturities may differ from contractual maturities because borrowers
may have the right to recall or prepay obligations with or without call or
prepayment penalties.
YEAR ENDING JUNE 30:
- --------------------
Due within one year $31,529,481
Due in one to three years 46,600,788
-----------
$78,130,269
===========
Proceeds from maturities and sales of available-for-sale securities were
$58,045,072, $69,812,307 and $23,841,374 during fiscal 2003, 2002 and 2001,
respectively. There were no material gross realized gains or losses on these
sales. Realized gains and losses are determined on the specific identification
method.
INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out
method) or market. The Company regularly reviews inventory on hand for
slow-moving and obsolete inventory, inventory not meeting quality control
standards and inventory subject to expiration. The manufacturing process for
proteins and antibodies has and may continue to produce quantities in excess of
forecasted usage. Individual protein and antibody sales volumes can be volatile
and the Company believes that forecasting sales volumes for individual products
beyond a two-year period is highly uncertain. As a result, the Company values
its manufactured protein and antibody inventory based on a two-year sales
forecast.
DEPRECIATION AND AMORTIZATION: Equipment is depreciated using the straight-
line method over an estimated useful life of five years. Buildings, building
improvements and leasehold improvements are amortized over estimated useful
lives of five to forty years.
GOODWILL AND INTANGIBLE ASSETS: On July 1, 2002, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS, under which goodwill is no longer amortized. (See Note D). As of June
30, 2002 the Company had net unamortized goodwill of $12,540,000. The Company
assessed the recoverability of its goodwill and other intangible assets and
determined that no impairment of goodwill existed at June 30, 2002. The Company
completed its annual impairment testing of goodwill and concluded that no
impairment existed as of June 30, 2003. The Company used cash flow and fair
value methodologies to assess impairment. Other intangible assets are being
amortized over their estimated useful lives.
IMPAIRMENT OF LONG-LIVED ASSETS: Management periodically reviews the carrying
value of long-term assets based on the estimated undiscounted future cash flows
expected to result from the use of these assets. Should the sum of the expected
future net cash flows be less than the carrying value, an impairment loss would
be recognized. An impairment loss would be measured by the amount by which the
carrying value of the asset exceeds the fair value of the asset based on
discounted estimated future cash flows. To date, management has determined that
no impairment exists.
INVESTMENTS: The Company's accounting policy is to recognize gains arising from
issuances of stock by subsidiaries or equity method investees as a component of
stockholders' equity for all issuances that meet the conditions of SEC Staff
Accounting Bulletin (SAB) No. 51, ACCOUNTING FOR THE SALE OF STOCK BY A
SUBSIDIARY.
29
The Company has invested in the Preferred Stock (Series A) of ChemoCentryx, Inc.
(CCX), a technology and drug development company. Through January 2001 the
Company had a 49% interest in CCX, accounted for this investment under the
equity method of accounting and included 100% of the operating results of CCX in
its consolidated financial statements due to the limited amount of cash
consideration provided by the holders of the common shares of CCX. In February
2001, CCX obtained $23 million in financing through the issuance of 8,846,154
shares of Series B Preferred Stock. After this financing and through June 30,
2003, the Company held 26% of the outstanding stock of CCX and included CCX
operating results in its consolidated financials statements based on its
ownership percentage. The Company's net investment in CCX, which is included in
other long-term assets, was $2,511,023 and $5,091,046 at June 30, 2003 and
2002, respectively. The Company has been issued warrants for 1,666,665 shares
of CCX Preferred Stock (Series A) which expire on December 31, 2005.
On August 2, 2001, the Company made an equity investment of $3 million in
Discovery Genomics, Inc. (DGI) Series A Preferred Stock. DGI holds licenses
from the University of Minnesota to develop technologies used for functional
genomics and the discovery of drug targets. The Company holds a 39% equity
interest in DGI and accounts for this investment under the equity method of
accounting. The Company's net investment in DGI, which is included in other
long-term assets, was $1,887,106 and $2,494,985 at June 30, 2003 and 2002,
respectively. The Company has been issued warrants for 1.5 million shares of
DGI Preferred Stock (Series A) which expire on August 2, 2008.
The Company has financial exposure to the losses of CCX and DGI to the extent
of its net investment in each of the companies. The Company does not provide
loans, guarantees or other financial assistance to either CCX or DGI and has no
obligation to provide additional funding.
STOCK OPTIONS: As permitted by Statement of Financial Accounting Standards
(SFAS) No. 123, the Company has elected to continue following the guidance of
Accounting Principles Board (APB) Opinion No. 25 for measurement and recognition
of stock-based transactions with employees. No compensation cost has been
recognized for stock options granted to employees under the plans because the
exercise price of all options granted was at least equal to the fair value of
the common stock at the date of grant.
If compensation cost for employee options granted under the Company's stock
option plans had been determined based on the fair value at the grant dates,
consistent with the methods provided in SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, the Company's net earnings and earnings per share
would have been as follows:
YEAR ENDED JUNE 30,
2003 2002 2001
----------- ----------- -----------
Net earnings:
As reported $45,396,293 $27,129,669 $34,045,376
Less employee stock-based
compensation, net of taxes 609,056 1,130,813 17,421,280
----------- ----------- -----------
Pro forma $44,787,237 $25,998,856 $16,624,096
=========== =========== ===========
Basic earnings per share:
As reported $ 1.10 $ 0.65 $ 0.82
Less employee stock-based
compensation, net of taxes 0.01 0.02 0.42
----------- ----------- -----------
Pro forma $ 1.09 $ 0.63 $ 0.40
=========== =========== ===========
Diluted earnings per share:
As reported $ 1.08 $ 0.64 $ 0.80
Less employee stock-based
compensation, net of taxes 0.01 0.03 0.41
----------- ----------- -----------
Pro forma $ 1.07 $ 0.61 $ 0.39
=========== =========== ===========
The fair value of options granted under the Company's stock option plans were
estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions used:
YEAR ENDED JUNE 30,
2003 2002 2001
----------- ----------- -----------
Dividend yield -- -- --
Expected volatility 48%-52% 56%-73% 96%-98%
Risk-free interest rates 4.2%-4.5% 4.6%-5.3% 5.8%-6.2%
Expected lives 7-10 years 7-10 years 7-10 years
30
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: The Company has determined that
it has no free-standing or embedded derivatives. All contracts that contain
provisions meeting the definition of a derivative also meet the requirements of,
and have been designated as, normal purchases or sales. The Company's policy is
to not use free-standing derivatives and to not enter into contracts with terms
that cannot be designated as normal purchases or sales.
NEW ACCOUNTING PRONOUNCEMENTS: In December 2002, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION AND
DISCLOSURE, an amendment of SFAS No. 123. This statement provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based compensation. The statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosure in both annual and
interim financial statements about the method of accounting for stock-based
compensation and the effect of the method used on reported results. The Company
accounts for stock-based compensation arrangements in accordance with the
provisions of Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, and complies with the disclosure provisions of SFAS No.
123. The transition provisions are effective for fiscal years ending after
December 15, 2002. The disclosure provisions are effective for interim periods
beginning after December 15, 2002. The Company implemented the required
disclosure provisions in Form 10-Q for the quarter ended March 31, 2003.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), CONSOLIDATION
OF VARIABLE INTEREST ENTITIES. FIN 46 addresses the consolidation by businesses
of variable interest entities and requires businesses to consolidate a variable
interest entity if it has a variable interest that will absorb a majority of
the entity's expected losses if they occur, or receive a majority of the
entity's expected returns if they occur, or both. FIN 46 became effective for
variable interest entities created after January 31, 2003. For variable
interest entities created prior to January 31, 2003, the provisions of FIN 46
are applicable to the Company for the quarter ended September 30, 2003. The
Company is currently assessing the impact of FIN 46 on its consolidated
financial statements.
RECLASSIFICATIONS: Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the current year presentation.
These reclassifications had no impact on net earnings or stockholders' equity
as previously reported.
B. INVENTORIES:
Inventories consist of:
JUNE 30,
2003 2002
---------- ----------
Raw materials $2,618,416 $2,785,949
Finished goods 3,595,307 3,172,191
Supplies 118,525 118,895
---------- ----------
$6,332,248 $6,077,035
========== ==========
C. PROPERTY AND EQUIPMENT:
Property and equipment consist of:
JUNE 30,
2003 2002
------------ ------------
Cost:
Land $ 2,998,800 $ 1,571,000
Buildings and improvements 64,929,703 63,541,408
Building construction in progress 18,310,549 7,728,660
Laboratory equipment 16,372,038 16,694,898
Office and computer equipment 3,105,906 4,263,512
Leasehold improvements 537,221 497,087
------------ ------------
106,254,217 94,296,565
Less accumulated depreciation and
amortization 25,087,906 23,983,963
------------ ------------
$ 81,166,311 $ 70,312,602
============ ============
In December 2002, the Company purchased approximately 649 acres of farmland,
including buildings, in southeast Minnesota for $2.7 million. The property was
purchased to house goats used in the Company's polyclonal antibody production.
31
D. GOODWILL AND INTANGIBLE ASSETS:
Goodwill and intangible assets consist of:
JUNE 30,
USEFUL LIFE 2003 2002
------------- ----------- -----------
Goodwill N/A $38,845,547 $38,845,547
Less accumulated amortization 26,305,547 26,305,547
----------- -----------
$12,540,000 $12,540,000
=========== ===========
Customer list 10 years $18,010,000 $18,010,000
Technology licensing agreements 16 years 500,000 500,000
Acquisition costs 6 years 273,923 273,923
----------- -----------
18,783,923 18,783,923
Less accumulated amortization 14,366,173 12,426,923
----------- -----------
$ 4,417,750 $ 6,357,000
=========== ===========
The pro forma effects of implementation of SFAS No. 142 to prior periods would
be as follows:
JUNE 30,
2003 2002
----------- ------------
Reported net earnings $27,129,669 $34,045,376
Goodwill amortization, net of tax 4,076,000 4,076,000
----------- -----------
Adjusted net earnings $31,205,669 $38,121,376
=========== ===========
Reported basic earnings per share $ 0.65 $ 0.82
Goodwill amortization 0.10 0.10
----------- -----------
Adjusted basic earnings per share $ 0.75 $ 0.92
=========== ===========
Reported diluted earnings per share $ 0.64 $ 0.80
Goodwill amortization 0.09 0.09
----------- -----------
Adjusted diluted earnings per share $ 0.73 $ 0.89
=========== ===========
The estimated future amortization expense for other intangible assets as of
June 30, 2003 is as follows:
YEAR ENDING JUNE 30:
- ---------------------
2004 $1,598,792
2005 1,221,250
2006 881,250
2007 541,250
2008 175,208
----------
$4,417,750
==========
E. DEBT:
The Company's short-term line of credit facility consists of an unsecured line
of credit of $750,000 at June 30, 2003. The line of credit expires on October
31, 2003. The interest rate charged on the line of credit is at the prime rate
(4.0% at June 30, 2003). There were no borrowings on the line outstanding as of
June 30, 2003 and 2002.
Long-term debt consists of:
JUNE 30,
2003 2002
----------- -----------
Mortgage note, payable in monthly
Installments through August 2014 $17,085,822 $18,050,289
Less current portion 1,233,921 949,637
----------- -----------
$15,851,901 $17,100,652
=========== ===========
The interest rate on the mortgage note was fixed at 7% through November 2002.
The terms of the original note were modified in December 2002 to include a
floating interest rate at the one month London interbank offered rate (Libor)
plus 2.5% with a floor of 4%. The floating interest rate on the mortgage note
payable was below the 4% floor as of June 30, 2003.
Scheduled principal maturities of long-term debt as of June 30, 2003 assuming a
4% interest rate are as follows:
YEAR ENDING JUNE 30:
- ---------------------
2004 $ 1,233,921
2005 1,286,283
2006 1,339,429
2007 1,394,772
2008 1,451,181
Thereafter 10,380,236
-----------
$17,085,822
===========
F. COMMITMENTS AND CONTINGENCIES:
The Company leases buildings, vehicles and various data processing, office and
laboratory equipment under operating leases. These leases provide for renewal
or purchase options during or at the end of the lease periods. At June 30,
2003, aggregate net minimum rental commitments under noncancelable leases
having an initial or remaining term of more than one year are payable as
follows:
32
YEAR ENDING JUNE 30:
- ---------------------
2004 $ 491,007
2005 474,789
2006 464,075
2007 430,858
2008 422,090
Thereafter 3,376,719
----------
$5,659,538
==========
Total rent expense was approximately $554,000, $406,000 and $337,000 for the
years ended June 30, 2003, 2002 and 2001, respectively.
In fiscal 1999, the Company entered into an option agreement for real estate
adjacent to its R&D Systems facility. The purchase price for the property under
the option is $7 million plus capital improvement costs. This option expires on
January 1, 2005 and required a nonrefundable deposit of $2 million. A deposit
of $1,000 was made on this option in fiscal 2000 with the remainder of the
deposit made in fiscal 2002. The deposit is included in other long-term
assets.
Portions of the Company's short-term available-for-sale investments were held
in brokerage accounts carried by a clearing firm which in September 2001 was
placed in bankruptcy. Through June 30, 2003, the trustee appointed pursuant to
the Securities Investor Protection Act released to the Company cash and
securities representing approximately 99% of the total value of the accounts
and has withheld securities and cash equivalents in the amount of approximately
$250,000 pending resolution of the bankruptcy proceeding. Management believes
that all of its securities and cash equivalents will be returned to the Company
as the trustee has available the assets of customers' accounts, SIPC insurance
and third-party insurance. Accordingly, no impairment loss has been recognized
at this time.
The Company is routinely subject to claims and involved in legal actions which
are incidental to the business of the Company. Although it is difficult to
predict the ultimate outcome of these matters, management believes that any
ultimate liability will not materially affect the consolidated financial
position or results of operations of the Company.
The litigation settlement in fiscal 2002 arose from a dispute between the
Company and Amgen, Inc. Amgen had presented invoices in fiscal 2000 in the
amount of $28 million for materials provided to the Company over past years for
which no accounting or invoices were rendered for nine years. The $17.5 million
payment in fiscal 2002 was a full, complete and final cash settlement of the
dispute.
G. STOCKHOLDERS' EQUITY:
STOCK OPTION PLANS: The Company has stock option plans which provide for the
granting of stock options to employees (the TECHNE Corporation 1997 and 1987
Incentive Stock Option Plans) and to employees, officers, directors and
consultants (the TECHNE Corporation 1998 and 1988 Nonqualified Stock Option
Plans). The plans are administered by the Board of Directors, or a committee
designated by the Board, which determines the persons who are to receive awards
under the plans, the number of shares subject to each award and the term and
exercise price of each option. The maximum term of options granted under all
plans is ten years. The number of shares of common stock authorized to be
issued is 3.2 million, 3.2 million, 1.6 million and 2.0 million under the 1997
Plan, the 1987 Plan, the 1998 Plan and the 1988 Plan, respectively. The number
of shares available for grant at June 30, 2003 under the 1997 and 1998 Plans
were 2.5 million and 1.1 million, respectively. No future grants will be made
under the 1987 and 1988 Plans.
Stock option activity during the three years ended June 30, 2003 consists of
the following:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------- -----------------
Outstanding at June 30, 2000 1,417,340 $ 7.02
Granted 593,098 38.23
Canceled (15,348) 37.44
Exercised (90,616) 9.09
---------
Outstanding at June 30, 2001 1,904,474 16.40
Granted 33,108 29.42
Canceled (24,104) 36.50
Exercised (167,400) 3.33
---------
Outstanding at June 30, 2002 1,746,078 17.62
Granted 33,460 30.40
Canceled (31,096) 36.50
Exercised (391,682) 7.40
---------
Outstanding at June 30, 2003 1,356,760 20.45
=========
Options exercisable at June 30:
2001 1,804,328 15.76
2002 1,684,860 17.22
2003 1,349,862 20.37
33
Currently outstanding and exercisable stock options at June 30, 2003 consist of
the following:
OPTIONS OUTSTANDING
------------------------------------------------
WEIGHTED AVG.
CONTRACTUAL WEIGHTED AVG.
EXERCISE PRICES OUTSTANDING LIFE (YRS.) EXERCISE PRICE
- ----------------- ------------- -------------- ---------------
$ 3.37-10.00 675,892 2.92 $ 5.94
10.01-20.00 99,098 6.00 19.50
20.01-36.50 520,340 4.67 35.66
50.00-65.00 61,430 7.25 52.94
---------
1,356,760 4.00 20.45
=========
OPTIONS EXERCISABLE
-------------------------------
WEIGHTED AVG.
EXERCISE PRICES EXERCISABLE EXERCISE PRICE
- ----------------- ------------- ---------------
$ 3.37-10.00 675,892 $ 5.94
10.01-20.00 99,098 19.50
20.01-36.50 513,442 35.65
50.00-65.00 61,430 52.94
---------
1,349,862 20.37
=========
WARRANTS: In fiscal 2000, the Company issued warrants to purchase 120,000
shares of the Company's common stock at $11.89 per share as a nonrefundable
deposit on an option to purchase property adjacent to its R&D Systems'
facility. The fair market value of the warrants at issuance was $858,000. The
warrants are outstanding as of June 30, 2003 and expire on June 30, 2006.
H. INCOME TAXES:
The provisions for income taxes consist of the following:
YEAR ENDED JUNE 30,
2003 2002 2001
----------- ----------- -----------
Earnings before income
taxes consist of:
Domestic $59,215,811 $31,214,045 $42,480,134
Foreign 10,339,482 6,521,624 5,328,242
----------- ----------- -----------
$69,555,293 $37,735,669 $47,808,376
=========== =========== ===========
Taxes (benefits) on income consist of:
Currently payable:
Federal $18,319,000 $14,408,000 $13,578,000
State 380,000 11,000 (1,173,000)
Foreign 3,448,000 1,855,000 1,513,000
Tax benefit from exercise of
stock options 1,802,000 646,000 315,000
Net deferred 210,000 (6,314,000) (470,000)
----------- ----------- -----------
$24,159,000 $10,606,000 $13,763,000
=========== =========== ===========
The following is a reconciliation of the federal tax calculated at the
statutory rate of 35% to the actual income taxes provided:
YEAR ENDED JUNE 30,
2003 2002 2001
----------- ----------- -----------
Computed expected federal income
tax expense $24,344,000 $13,207,000 $16,733,000
State income taxes, net of federal
benefit 494,000 8,000 (1,175,000)
Foreign sales corporation -- -- (697,000)
Extraterritorial income benefit (937,000) (892,000) --
Research and development credits (347,000) (373,000) (525,000)
Tax-exempt interest (735,000) (1,005,000) (887,000)
Losses by equity method investees 1,116,000 649,000 175,000
Other 224,000 (988,000) 140,000
----------- ----------- -----------
$24,159,000 $10,606,000 $13,763,000
=========== =========== ===========
State income taxes for the year ended June 30, 2001 were affected by a one-
time $1.2 million credit as a result of the close-out of pending issues related
to a state income tax examination for fiscal years 1996 through 1999.
Temporary differences comprising deferred taxes on the consolidated balance
sheets are as follows:
JUNE 30,
2003 2002
----------- -----------
Inventory $ 2,723,000 $ 2,334,000
Inventory costs capitalized 1,012,000 903,000
Unrealized profit on intercompany sales 351,000 346,000
Other 151,000 179,000
----------- -----------
Current asset 4,237,000 3,762,000
Excess of book over tax intangible
asset amortization 7,958,000 8,728,000
Excess of book over tax research expense 309,000 246,000
Excess of book over tax depreciation 551,000 603,000
Excess tax basis in equity investments 1,353,000 155,000
Valuation allowance (1,353,000) (155,000)
Other (103,000) (177,000)
----------- -----------
Noncurrent asset 8,715,000 9,400,000
----------- -----------
$12,952,000 $13,162,000
=========== ===========
Realization of the deferred tax asset is dependent on generating sufficient
taxable income. Although realization is not assured, management believes that
as a result of historical taxable income, it is more likely than not that the
recorded deferred tax asset, net of valuation allowance provided for the excess
tax basis in equity investments, will be realized.
34
The Company's tax returns are subject to audit by various governmental entities
in the normal course of business. The Company does not believe that such audits
will have a material impact on the Company's financial position or results of
operations.
I. EARNINGS PER SHARE:
The number of shares used to calculate earnings per share are as follows:
YEAR ENDED JUNE 30,
2003 2002 2001
----------- ----------- -----------
Net earnings used for basic and
diluted earnings per share $45,396,293 $27,129,669 $34,045,376
=========== =========== ===========
Weighted average shares used in
basic computation 41,237,473 41,507,727 41,438,670
Dilutive stock options and warrants 794,037 1,014,937 1,229,566
----------- ----------- -----------
Weighted average shares used for
diluted computation 42,031,510 42,522,664 42,668,236
=========== =========== ===========
Basic EPS $ 1.10 $ 0.65 $ 0.82
Diluted EPS $ 1.08 $ 0.64 $ 0.80
The dilutive effect of stock options and warrants in the above table excludes
all options for which the exercise price was higher than the average market
price for the period. The number of potentially dilutive option shares excluded
from the calculation were 581,770, 579,406 and 570,402 at June 30, 2003, 2002
and 2001, respectively.
J. SEGMENT INFORMATION:
The Company has three reportable operating segments based on the nature of
products and geographic location: Hematology Division, Biotechnology Division
and R&D Systems Europe. The Hematology Division develops and manufactures
hematology controls and calibrators for sale world-wide. The Biotechnology
Division develops and manufactures biotechnology research and diagnostic
products for sale world-wide. R&D Systems Europe distributes Biotechnology
Division products throughout Europe. No customer accounted for more than 10% of
the Company's net sales for the years ended June 30, 2003, 2002 and 2001.
The accounting policies of the segments are the same as those described in Note
A. In evaluating segment performance, management focuses on sales and earnings
before taxes.
Following is financial information relating to the operating segments:
YEAR ENDED JUNE 30,
2003 2002 2001
------------ ------------ ------------
External net sales
Hematology $ 16,666,038 $ 15,570,656 $ 14,710,464
Biotechnology 90,964,494 84,654,661 73,656,405
R&D Systems Europe 37,380,368 30,675,078 26,989,693
------------ ------------ ------------
Total external net sales $145,010,900 $130,900,395 $115,356,562
============ ============ ============
Intersegment sales
Hematology $ -- $ -- $ --
Biotechnology 18,130,542 16,726,082 15,010,487
R&D Systems Europe 40,255 56,880 77,237
------------ ------------ ------------
Total intersegment sales $ 18,170,797 $ 16,782,962 $ 15,087,724
============ ============ ============
Earnings before taxes
Hematology $ 5,937,827 $ 5,094,411 $ 5,057,119
Biotechnology 58,467,852 47,776,492 39,766,406
R&D Systems Europe 10,339,482 6,521,624 5,328,242
Corporate and other (5,189,868) (21,656,858) (2,343,391)
------------ ------------ ------------
Total earnings before taxes $ 69,555,293 $ 37,735,669 $ 47,808,376
============ ============ ============
Interest income
Hematology $ 353,444 $ 444,749 $ 508,149
Biotechnology 1,725,641 2,520,245 2,032,596
R&D Systems Europe 714,306 539,228 552,245
Corporate and other 139,957 233,085 290,708
------------ ------------ ------------
Total interest income $ 2,933,348 $ 3,737,307 $ 3,383,698
============ ============ ============
Depreciation and amortization
Hematology $ 354,899 $ 315,987 $ 239,909
Biotechnology 4,105,713 10,780,188 11,028,893
R&D Systems Europe 288,335 251,649 174,940
Corporate and other 1,603,900 1,340,091 1,293,706
------------ ------------ ------------
Total depreciation and amortization $ 6,352,847 $ 12,687,915 $ 12,737,448
============ ============ ============
Capital purchases
Hematology $ 43,129 $ 831,110 $ 313,936
Biotechnology 7,798,746 2,332,490 3,472,146
R&D Systems Europe 193,309 201,047 655,430
Corporate and other 7,158,572 18,911,615 2,373,441
------------ ------------ ------------
Total capital purchases $ 15,193,756 $ 22,276,262 $ 6,814,953
============ ============ ============
35
Corporate and other reconciling items include the results of unallocated
corporate expenses and assets, the operations of the Company's equity
investments in ChemoCentryx, Inc. and Discovery Genomics, Inc. and the
litigation settlement in fiscal 2002.
Following is financial information relating to geographic areas:
YEAR ENDED JUNE 30,
2003 2002 2001
------------ ------------ ------------
External sales
United States $ 87,773,839 $ 80,957,103 $ 71,018,421
Other areas 57,237,061 49,943,292 44,338,141
------------ ------------ ------------
Total external sales $145,010,900 $130,900,395 $115,356,562
============ ============ ============
Long-lived assets
United States $ 82,480,695 $ 71,615,578 $ 51,404,348
Other areas 813,905 835,381 815,851
------------ ------------ ------------
Total long-lived assets $ 83,294,600 $ 72,450,959 $ 52,220,199
============ ============ ============
External sales are attributed to countries based on the location of the
customer/distributor. Long-lived assets are comprised of land, buildings and
improvements, equipment and deposits on real estate.
K. BENEFIT PLANS:
PROFIT SHARING PLAN: The Company has a Profit Sharing and Savings Plan for
non-union U.S. employees, which conforms to IRS provisions for 401(k) plans.
The Company may make profit sharing contributions at the discretion of the
Board of Directors. Operations have been charged for contributions to the plan
of $440,000, $1,022,000 and $810,000 for the years ended June 30, 2003, 2002
and 2001, respectively.
STOCK BONUS PLANS: The Company also has Stock Bonus Plans covering non-union
employees. The Company may make contributions to the plans in the form of
common stock, cash or other property at the discretion of the Board of
Directors. The Company purchases its common stock at market value for
contribution to the plans. For the years ended June 30, 2003, 2002 and 2001
operations have been charged $463,000, $1,081,000 and $851,000, respectively.
PERFORMANCE INCENTIVE PROGRAM: Under certain employment agreements with
executive officers, the Company recorded bonuses of $68,000, $98,000 and
$101,000 for the years ended June 30, 2003, 2002 and 2001, respectively. In
addition, options for 3,460, 3,108 and 1,938 shares of common stock were
granted to the executive officers during fiscal 2003, 2002 and 2001,
respectively.
L. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NONCASH INVESTING
AND FINANCING ACTIVITIES:
The Company paid and received cash for the following items:
YEAR ENDED JUNE 30,
2003 2002 2001
------------ ------------ ------------
Income taxes paid $ 17,477,244 $ 21,251,320 $ 7,508,196
Interest paid 1,022,120 1,325,640 1,386,085
Interest received 3,379,607 3,664,930 3,748,696
In fiscal 2003, stock options for 126,784 shares of common stock were exercised
by the surrender of 14,092 shares of common stock at fair market value of
$454,586. In fiscal 2002, stock options for 80,000 shares of common stock were
exercised by the surrender of 7,654 shares of common stock at fair market
value of $224,968. In fiscal 2001, stock options for 1,000 shares of common
stock were exercised by surrender of 224 shares of common stock at fair market
value of $8,554.
36
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
TECHNE Corporation
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheet of TECHNE
Corporation and Subsidiaries (the Company) as of June 30, 2003, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the fiscal 2003 consolidated financial statements present
fairly, in all material respects, the consolidated financial position of TECHNE
Corporation and Subsidiaries as of June 30, 2003 and the results of their
operations and cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in note A to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," on July 1, 2002.
/s/ KPMG LLP
Minneapolis, Minnesota
August 8, 2003
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
TECHNE Corporation
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheet of TECHNE
Corporation and Subsidiaries (the Company) as of June 30, 2002, and the
related consolidated statements of earnings, stockholders' equity and cash
flows for each of the two years in the period ended June 30, 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of TECHNE Corporation and
Subsidiaries as of June 30, 2002 and the results of their operations and cash
flows for each of the two years in the period ended June 30, 2002, in conformity
with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
August 13, 2002
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Previously reported on Form 8-K dated November 18, 2002.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Other than "Executive Officers of the Company" which is set forth at the end
of Part I of this Form 10-K, the information required by Item 10 is
incorporated herein by reference to the sections entitled "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Company's proxy statement for its 2003 Annual Meeting of Shareholders
which will be filed with the Securities and Exchange Commission pursuant to
Regulation 14A within 120 days after the close of the fiscal year for which
this report is filed. The Company has adopted a Code of Ethics and Business
Conduct applicable to all of its directors, officers and employees. A copy
of the Code is posted on the Company's website, www.techne-corp.com.
37
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to
the section entitled "Executive Compensation" in the Company's proxy
statement for its 2003 Annual Meeting of Shareholders which will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A within
120 days after the close of the fiscal year for which this report is filed.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
sections entitled "Principal Shareholders", "Management Shareholdings" and
"Equity Compensation Plans" in the Company's proxy statement for its 2003
Annual Meeting of Shareholders which will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the
close of the fiscal year for which this report is filed.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-
15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based
on this evaluation, the principal executive officer and principal financial
officer concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company
in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. There was no change in
the Company's internal control over financial reporting during the Company's
most recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
ITEM 15. AUDIT COMMITTEE FINANCIAL EXPERT
The Audit Committee of the Board of Directors of the Company is composed of
Messrs. G. Arthur Herbert and Howard V. O'Connell and Dr. Randolph A. Steer,
and since August 11, 2003, Mr. Robert V. Baumgartner. All members are
"independent" as such term is defined in applicable rules of the NASD. The
Board of Directors has determined that for fiscal 2003, Messrs. Herbert and
O'Connell and Dr. Steer served as "financial experts" as such term is defined
in Section 407 of the Sarbanes-Oxley Act.
ITEM 16. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 16 does not apply to the Company until it
files its Annual Report of Form 10-K for the year ended June 30, 2004.
38
PART IV
ITEM 17. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
A. (1) List of Financial Statements.
The following Consolidated Financial Statements are filed as part of
this report:
Consolidated Statements of Earnings for the Years Ended
June 30, 2003, 2002 and 2001
Consolidated Balance Sheets as of June 30, 2003 and 2002
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2003, 2002 and 2001
Notes to Consolidated Financial Statements for the Years
Ended June 30, 2003, 2002 and 2001
Independent Auditors' Report
(2) Financial Statement Schedules.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNT
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
(in 000's)
Balance at Provision Balance at
Beginning Charged/(Credited) Accounts End of
of Year to Income Written Off Year
---------- ------------------ ----------- ----------
Year ended June
30, 2003:
Allowance for
doubtful accounts $263 $ 91 $ (86) $268
Year ended June
30, 2002:
Allowance for
doubtful accounts 126 137 -- 263
Year ended June
30, 2001:
Allowance for
doubtful accounts 162 29 (65) 126
39
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
Board of Directors and Stockholders
TECHNE Corporation
Minneapolis, Minnesota
Under the date of August 8, 2003, we reported on the consolidated balance
sheet of TECHNE Corporation and Subsidiaries as of June 30, 2003 and the
related consolidated statements of earnings, stockholders' equity and cash
flows for the year then ended. In connection with our audit of the
aforementioned financial statements, we also have audited the related
financial statement schedule for the year ended June 30, 2003 as listed in
the accompanying index. The financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statement schedule based on our audit. In our
opinion, such financial statement schedule for the year ended June 30, 2003,
when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
Our report on the fiscal 2003 consolidated financial statements of TECHNE
Corporation and Subsidiaries refers to the Company's adoption of the
provisions of Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets," on July 1, 2002.
/s/ KPMG LLP
Minneapolis, Minnesota
August 8, 2003
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
TECHNE Corporation
Minneapolis, Minnesota
We have audited the consolidated financial statements of TECHNE Corporation
and Subsidiaries (the Company) as of June 30, 2002 and for each of the two
years in the period ended June 30, 2002, and have issued our report thereon
dated August 13, 2002; such consolidated financial statements and report are
included in the Company's Annual Report on Form 10-K. Our audits also
included the financial statement schedule of the Company for the years ended
June 30, 2002 and 2001 listed in Item 17 (2). This financial statement
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule for the years ended June 30, 2002 and 2001,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
August 13, 2002
40
(3) Exhibits.
See Exhibit Index immediately following signature page.
B. Reports on Form 8-K:
Form 8-K dated May 1, 2003 furnishing pursuant to Item 12, the
Registrant's press release reporting earnings for its third quarter of
fiscal 2003.
Form 8-K dated August 12, 2003 furnishing pursuant to Item 12, the
Registrant's press release reporting earnings for it fourth quarter of
fiscal 2003 and segment information for the year ended June 30, 2003.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TECHNE CORPORATION
Date: September 26, 2003 /s/ Thomas E. Oland
---------------------------
By: Thomas E. Oland
Its: President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Date Signature and Title
- ---- --------------------
September 26, 2003 /s/ Thomas E. Oland
--------------------
Thomas E. Oland
Chairman of the Board, President,
Treasurer, Chief Executive Officer,
Chief Financial and Accounting
Officer and Director
September 26, 2003 /s/ Roger C. Lucas, Ph.D.
-------------------------
Dr. Roger C. Lucas
Vice Chairman and Director
September 26, 2003 /s/ Howard V. O'Connell
------------------------
Howard V. O'Connell, Director
September 26, 2003 /s/ G. Arthur Herbert
-------------------------
G. Arthur Herbert, Director
September 26, 2003 /s/ Randolph C. Steer, Ph.D., M.D.
----------------------------------
Dr. Randolph C. Steer, Director
September 26, 2003 /s/ Christopher S. Henney, Ph.D., D.Sc.
---------------------------------------
Dr. Christopher S. Henney, Director
September 26, 2003 /s/ Robert V. Baumgartner
-------------------------
Robert V. Baumgartner, Director
41
EXHIBIT INDEX
for Form 10-K for the 2003 Fiscal Year
Exhibit
Number Description
- ------- -----------
3.1 Restated Articles of Incorporation of Company, as amended to date-
-incorporated by reference to Exhibit 3.1 of the Company's Form 10-Q
for the quarter ended September 30, 2000*
3.2 Restated Bylaws, as amended to date--incorporated by reference to
Exhibit 3.2 of the Company's Form 10, dated October 27, 1988*
10.1 Employee Agreement with Respect to Inventions, Proprietary
Information, and Unfair Competition with Thomas E. Oland-
incorporated by reference to Exhibit 10.2 of the Company's Form 10,
dated October 27, 1988*
10.2** Company's Profit Sharing Plan--incorporated by reference to Exhibit
10.6 of the Company's Form 10, dated October 27, 1988*
10.3** Company's Stock Bonus Plan--incorporated by reference to Exhibit
10.7 of the Company's Form 10, dated October 27, 1988*
10.4** 1987 Incentive Stock Option Plan--incorporated by reference to
Exhibit 10.14 of the Company's Form 10, dated October 27, 1988*
10.5 Form of Stock Option Agreement for 1987 Incentive Stock Option
Plan--incorporated by reference to Exhibit 10.15 of the Company's
Form 10, dated October 27, 1988*
10.6** 1988 Nonqualified Stock Option Plan--incorporated by reference to
Exhibit 10.16 of the Company's Form 10, dated October 27, 1988*
10.7 Form of Stock Option Agreement for Nonqualified Stock Option
Plan--incorporated by reference to Exhibit 10.17 of the Company's
Form 10, dated October 27, 1988*
10.8 International Distributor Agreement dated October 1, 1991 between
Research and Diagnostic Systems, Inc. and Hycel, S.A.--incorporated
by reference to Exhibit 28.2 of the Company's Form 8-K dated
September 30, 1991, as amended by Forms 8 dated November 1, 1991
and November 25, 1991*
10.9** Employment Agreement, dated March 6, 1996, with Monica Tsang--
incorporated by reference to Exhibit 10.25 of the Company's Form 10-K
for the year ended June 30, 1996*
10.10** 1997 Incentive Stock Option Plan--incorporated by reference to
Exhibit 10.24 of the Company's Form 10-K for the year ended June 30,
1997*
10.11 Form of Stock Option Agreement for 1997 Incentive Stock Option
Plan--incorporated by reference to Exhibit 10.25 of the Company's Form
10-K for the year ended June 30, 1997*
10.12 Investment Agreement between ChemoCentryx, Inc. and Techne
Corporation dated November 18, 1997--incorporated by reference to
Exhibit 10.1 of the Company's Form 10-Q for the quarter ended December
31, 1997*
10.13 Purchase and Sale Agreement dated as of June 22, 1998 among Techne
Corporation, Research and Diagnostic Systems, Inc. and Genzyme
Corporation--incorporated by reference to Exhibit 2.1 of the Company's
Form 8-K dated July 1, 1998, as amended by Form 8-K/A dated September
14, 1998*
- ------------
*Incorporated by reference; SEC File No. 0-17272
**Management contract or compensatory plan or arrangement
42
Exhibit
Number Description
- ------- -----------
10.14** 1998 Nonqualified Stock Option Plan--incorporated by reference to
Exhibit 10.1 of the Company's Form 10-Q for the quarter ended September
30, 1998*
10.15 Form of Stock Option Agreement for 1998 Nonqualified Stock Option
Plan--incorporated by reference to Exhibit 10.2 of the Company's Form
10-Q for the quarter ended September 30, 1998*
10.16 Purchase Agreement dated January 22, 1999, between R&D Systems,
Inc. and Hillcrest Development, relating to the purchase of property as
614 and 640 McKinley Place NE and 2201 Kennedy Street in Minneapolis,
Minnesota and First amendment dated February 5, 1999--incorporated by
reference to Exhibit 10.1 of the Company's Form 10-Q for the quarter
ended December 31, 1998*
10.17** Extension, dated March 31, 1999, to Employment Agreement with Monica
Tsang, Ph.D.--incorporated by reference to Exhibit 10.2 of the
Company's Form 10-Q for the quarter ended March 31, 1999*
10.18** Extension, dated March 31, 1999, to Employment Agreement with Marcel
Veronneau--incorporated by reference to Exhibit 10.3 of the Company's
Form 10-Q for the quarter ended March 31, 1999*
10.19 Second Amendment, dated February 2, 1999, to Purchase Agreement
dated January 22, 1999 between R&D Systems, Inc. and Hillcrest
Development--incorporated by reference to Exhibit 10.4 of the Company's
Form 10-Q for the quarter ended March 31, 1999*
10.20 Third Amendment, dated April 3, 1999, to Purchase Agreement dated
January 22, 1999 between R&D Systems, Inc. and Hillcrest Development--
incorporated by reference to Exhibit 10.5 of the Company's Form 10-Q
for the quarter ended March 31, 1999*
10.21 Phase I Option Agreement, dated February 10, 1999, between R&D
Systems, Inc. and Hillcrest Development and form of Purchase Agreement
relating to the purchase of property at 2101 Kennedy Street in
Minneapolis, Minnesota-- incorporated by reference to Exhibit 10.6 of
the Company's Form 10-Q for the quarter ended March 31, 1999*
10.22 First Amendment, dated April 10, 1999, to Phase I Option Agreement
dated February 10, 1999-- incorporated by reference to Exhibit 10.7 of
the Company's Form 10-Q for the quarter ended March 31, 1999*
10.23 Phase II Option Agreement, dated February 10, 1999, between R&D
Systems, Inc. and Hillcrest Development and form of Purchase Agreement
relating to the purchase of property at 2001 Kennedy Street in
Minneapolis, Minnesota-- incorporated by reference to Exhibit 10.8 of
the Company's Form 10-Q for the quarter ended March 31, 1999*
10.24 Second Amendment, dated June 9, 1999, to Phase I Option Agreement
dated February 10, 1999-- incorporated by reference to Exhibit 10.33 of
the Company's Form 10-K for the year ended June 30, 1999*
10.25 Second Amendment, dated June 10, 1999, to Phase II Option Agreement
dated February 10, 1999-- incorporated by reference to Exhibit 10.34 of
the Company's Form 10-K for the year ended June 30, 1999*
10.26 Warrant to purchase 60,000 shares of Common Stock issued to
Hillcrest Development on July 1, 1999--incorporated by reference to
Exhibit 10.35 of the Company's Form 10-K for the year ended June 30,
1999*
- -------------
*Incorporated by reference; SEC File No. 0-17272
**Management contract or compensatory plan or arrangement
43
Exhibit
Number Description
- ------- -----------
10.27 Combination Mortgage, Security Agreement and Fixture Financing
Statement dated July 1, 1999 between the Company and TCF National Bank
Minnesota (TCF)--incorporated by reference to Exhibit 10.36 of the
Company's Form 10-K for the year ended June 30, 1999*
10.28 Promissory Note from the Company to TCF dated July 1, 1999 in the
principal amount of $20,400,000-- incorporated by reference to Exhibit
10.37 of the Company's Form 10-K for the year ended June 30, 1999*
10.29** Employment Agreement, dated October 1, 1999, with Timothy M. Heaney--
incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q
for the quarter ended September 30, 1999*
10.30 Investment Agreement between the Company and Discovery Genomics, Inc.
dated August 2, 2001--incorporated by reference to Exhibit 10.30 of the
Company's for 10-K for the year ended June 30, 2001.
10.31 Research and License Agreement between R&D Systems and Discovery
Genomics, Inc. dated August 2, 2001--incorporated by reference to
Exhibit 10.31 of the Company's 10-K for the year ended June 30, 2001.
10.32 Investors Rights Agreement dated February 2, 2001 among ChemoCentryx,
Inc., the Company and certain investors amending the Investment
Agreement between ChemoCentryx, Inc. and the Company dated November 18,
1997--incorporated by reference to Exhibit 10.32 of the Company's 10-K
for the year ended June 30, 2001.
10.33 Letter Agreement dated February 2, 2001 between ChemoCentryx, Inc. and
the Company amending the terms of warrants held by the Company--
incorporated by reference to Exhibit 10.33 of the Company's 10-K for
the year ended June 30, 2001.
10.34 Third Amendment, dated October 4, 2000, to Phase I Option Agreement
dated February 10, 1999--incorporated by reference to Exhibit 10.34 of
the Company's 10-K for the year ended June 30, 2001.
10.35** Extension, dated August 28, 2001, to Employment Agreement with
Monica Tsang, Ph.D.--incorporated by reference to Exhibit 10.35 of the
Company's 10-K for the year ended June 30, 2001.
10.36** Extension, dated August 28, 2001, to Employment Agreement with
Marcel Veronneau--incorporated by reference to Exhibit 10.36 of the
Company's 10-K for the year ended June 30, 2001.
10.37 Exercise of Option Agreement Relating to 2101 Kennedy Street dated
October 31, 2001--incorporated by reference to Exhibit 10.1 of the
Company's 10-Q for the quarter ended September 30, 2001.
10.38 Warranty Deed for purchase of certain property in Hennepin County,
Minnesota--incorporated by reference to Exhibit 10.1 of the Company's
10-Q for the quarter ended March 31, 2002.
10.39 Correction/Amendment to Investment Agreement dated April 23, 2002,
between Techne Corporation and Discovery Genomics, Inc.-incorporated by
reference to Exhibit 10.39 of the Company's 10-K for the year ended
June 30, 2002.
10.40 Form of Indemnification Agreement entered into with each director and
executive officer of the Registrant-incorporated by reference to
Exhibit 10.1 of the Company's 10-Q for the quarter ended December 31,
2002.
- -------------
*Incorporated by reference; SEC File No. 0-17272
**Management contract or compensatory plan or arrangement
44
Exhibit
Number Description
- ------- -----------
21 Subsidiaries of the Company:
State/Country of
Name Incorporation
---- -------------
Research and Diagnostic Systems, Inc. Minnesota
R&D Systems Europe Ltd. Great Britain
R&D Systems GmbH Germany
23 Independent Auditors' Consent of KPMG LLP
23.1 Independent Auditors' Consent of Deloitte & Touche LLP
31 Section 302 Certification
32 Section 906 Certification
- -------------
*Incorporated by reference; SEC File No. 0-17272
**Management contract or compensatory plan or arrangement
45