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, 2004
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 10, 2004 as
reported on The Nasdaq Stock Market was approximately $1,609,000,000. 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 10, 2004:
41,168,982
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for its 2004 Annual Meeting of
Shareholders are incorporated by reference into Part III.
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 15
Supplemental Item - Executive Officers of the Company 15
PART II
Item 5. Market for the Company's Common Equity, Related 16
Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of 18
Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market 27
Risk
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants 41
on Accounting and Financial Disclosure
Item 9A. Controls and Procedures 41
PART III
Item 10. Directors and Executive Officers 42
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial Owners and 42
Management And Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions 43
Item 14. Principal Accountant Fees and Services 43
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports 43
on Form 8-K
SIGNATURES 46
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 performance 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) and a sales office in France.
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, transforming growth factor-beta (TGF-beta). Cytokines are
specialized protein molecules that stimulate or suppress various cellular
functions in the body. Cytokines are in demand by biomedical researchers who
want to learn more about their diverse effects. Encouraged by its early
success in the cytokine market, R&D Systems formed a biotechnology division
in fiscal 1986 with the goal of producing a wide range of 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 and in 2004, the Company made equity investments
in the preferred stock of ChemoCentryx, Inc. (CCX), a technology and drug
development company. The Company currently holds approximately 19.9% 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.
3
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
consolidated cost of sales for fiscal 2003 and 2002 were $2.3 million and
$1.8 million, respectively, of royalties paid to Genzyme under the purchase
agreement. The royalty agreement expired on June 30, 2003.
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) 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 currently holds a 38% 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. During the fourth quarter of fiscal 2004,
the Company determined that its investment in DGI was other than temporarily
impaired and wrote off the remaining net investment of $1.5 million.
In January 2004, the Company purchased a 10% interest in Hemerus Medical, LLC
(Hemerus) for $3 million. Hemerus was formed in March 2001 and has acquired
and is developing technology for the separation of leukocytes from blood and
blood components.
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 2004, 2003 and 2002, R&D
Systems' Hematology Division revenues accounted for approximately 11%, 11%
and 12%, respectively, of consolidated revenues. Revenues from R&D Systems'
Biotechnology Division were 62%, 63% and 65% and revenues from R&D Europe
were 27%, 26% and 23% of consolidated revenues for fiscal 2004, 2003 and
2002, 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.
The growing interest by academic and commercial 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 affected
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 played in stimulating
cells surrounding a wound to grow and divide, to attract migratory cells to
the injury site and mediate the healing process.
4
In recent years, R&D Systems' Biotechnology Division has also added enzymes
to its product portfolio. Enzymes are biological catalysts that accelerate
a variety of chemical reactions in cells. Most enzymes, including proteases,
kinases and phosphatases, are proteins that modify the structure and function
of other proteins. Many enzymes are important markers and therapeutic
targets for diseases such as cancer, Alzheimer's, arthritis, diabetes,
hypertension, obesity, AIDS and SARS.
The Biotechnology Division markets its cytokine assay kits under the
tradename Quantikine(r). These kits are used by scientific researchers to
quantify the level of a specific cytokine in a sample of serum, plasma or
other biological fluid for basic research and for cytokine studies in
pharmaceutical discovery and development programs.
R&D Systems currently manufactures and sells over 6,800 biotechnology
products.
Current Biotechnology Products
Cytokines and Enzymes. Cytokines, extracted from natural sources or produced
using recombinant DNA technology, are manufactured to the highest purity.
Enzymes and related factors including enzyme substrates and inhibitors are
highly purified and characterized to ensure the highest biological activity.
Antibodies. The Company's polyclonal antibodies are produced in animals
(primarily goats). The animals' immune systems recognize an injected
cytokine as foreign and develop antibodies to the cytokine. The polyclonal
antibodies are then purified from the animals' blood. Monoclonal antibodies
are produced by injecting purified cytokines into mice or by an in vitro
(animal-free) process.
Assay Kits. This product line includes R&D Systems' human and animal
Quantikine kits which allow research scientists to quantify the amount of a
specific cytokine in a sample of serum or other biological fluids. 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 the infection or injury.
Clinical Diagnostic Kits. The EPO kit, acquired from Amgen Inc. in fiscal
1992, was the first diagnostic assay for which R&D Systems received 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(r)
kits, which are used to measure the presence or absence of cell surface
receptors for specific cytokines.
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.
5
Hematology Controls and Calibrators
Hematology controls and calibrators, manufactured by and marketed through the
Hematology Division of R&D Systems, are products composed of the various
cellular components of blood which have been stabilized. Proper diagnosis of
many illnesses requires a thorough and accurate analysis of a patient's blood
cells, which is usually done with automated or semi-automated hematology
instruments. Controls and calibrators produced by the Hematology Division
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 is the function of
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.
These fundamental components (red cells, white cells and platelets) differ
widely 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 automated and semi-automated cell counting analyzers to make sure
these instruments are counting blood cells in patient samples 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 one 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 hemoglobin reading, and the hematocrit reading (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 automated or semi-automated cell counters. 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. In addition, most instruments
need to be calibrated periodically. Hematology calibrators are similar to
controls, but go through additional testing to ensure that the calibration
values assigned are extremely accurate and can be used to calibrate the
instrument.
The Hematology Division of R&D Systems offers a wide range 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
Whole Blood CBC Controls/Calibrators. The Hematology Division of R&D Systems
currently produces controls and calibrators for the following brands of
analyzers: Abbott Diagnostics, Beckman Coulter, Bayer Technicon and Sysmex.
6
Linearity and Reportable Range Controls. These products provide a means of
assessing the linearity of hematology analyzers for white blood cells, red
blood cells, platelets and reticulocytes. Because hematology analyzers are
single point calibrated, these products allow users to determine and validate
the reportable range of an instrument.
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 markers.
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(r) II
and Platelet-Trol Extended, are designed for use by automated and semi-
automated analyzers.
PRODUCTS UNDER DEVELOPMENT
R&D Systems is engaged in ongoing research and development in all of its
major product lines: controls and calibrators (Hematology Division) and
cytokines, antibodies, assays and related products (Biotechnology Division).
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 efficiency.
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 2004 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 and Hemerus, companies in which the Company
has invested. Research and development expense was as follows (in
thousands):
Year ended June 30,
2004 2003 2002
------- ------- -------
R&D Systems' expenses $17,920 $17,393 $15,615
CCX losses 2,437 2,580 1,350
DGI losses 364 608 505
Hemerus losses 52 -- --
------- ------- -------
$20,773 $20,581 $17,470
======= ======= =======
Percent of revenue 12.9% 14.2% 13.3%
7
BUSINESS RELATIONSHIPS
The Company has invested in the Preferred Stock (Series A and B) of
ChemoCentryx, Inc. (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. Through April 2004 the Company held 26% of the
outstanding stock of CCX and accounted for the investment under the equity
method of accounting. In May and June, 2004 CCX obtained $38.1 million in
financing through the issuance of approximately 14.7 million shares of
Preferred (Series B) Stock. The financing included a $5.1 million investment
by the Company. After the financing, the Company holds a 19.9% equity
interest in CCX. The Company then evaluated the cost versus equity method of
accounting for its investment in CCX and determined that it does not have the
ability to exercise significant influence over the operating and financial
policies of CCX and therefore, after April 2004, accounted for its investment
on a cost basis. The Company's net investment in CCX was $5.1 million and
$2.5 million at June 30, 2004 and 2003, respectively. The Company has been
issued warrants for 1.7 million shares of CCX Preferred Stock (Series A)
which expire on December 31, 2005.
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) 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 currently holds a 38% 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. During the fourth quarter of fiscal
2004, the Company determined that its investment in DGI was other than
temporarily impaired and wrote off the remaining net investment of $1.5
million. The Company's net investment in DGI was $1.9 million at June 30,
2003.
On January 1, 2004, the Company purchased a 10% interest in Hemerus Medical,
LLC (Hemerus) for $3 million. Hemerus was formed in March 2001 and has
acquired and is developing technology for the separation of leukocytes from
blood and blood components. Leukoreduced blood is important in blood
transfusion. Hemerus owns two patents and has several patent applications
pending and is currently pursuing FDA clearance to market its products in the
U.S. In parallel with this investment, R&D Systems entered into a Joint
Research Agreement with Hemerus. The research will involve joint projects to
explore the use of Hemerus' filter technology to applications within R&D
Systems' Hematology and Biotechnology Divisions. Such applications, if any,
may have commercial potential in other laboratory environments. The Company
accounts for its investment in Hemerus under the equity method of accounting.
The Company's net investment in Hemerus was $2.9 million at June 30, 2004.
Original Equipment Manufacturer (OEM) agreements represent the largest market
for hematology controls and calibrators made by R&D Systems. In fiscal 2004,
2003 and 2002, OEM contracts accounted for $7.7 million, $7.2 million and
$7.6 million, respectively, or 5%, 5% 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 Quality System
Regulations (QSR) as set forth in the FDA's regulations governing medical
devices.
8
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 QSR 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 2005. 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, 2005. 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. 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 2004, 2003
and 2002, total royalties expensed under these licenses were approximately
$2.3 million, $2.3 million and $2.1 million, 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.
9
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 2004, 2003 or 2002.
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 2003. 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 Biosciences, Fisher Scientific 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 R&D Systems'
retail products are Beckman Coulter, Inc., Sysmex, Streck Laboratories,
Abbott Diagnostics, Bio-Rad Laboratories and Bayer Technicon. 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 484 full-time and 40 part-time employees as of June 30, 2004.
R&D Europe had 50 full-time and 12 part-time employees as of June 30, 2004,
including 10 full-time and 1 part-time at R&D Europe's sales subsidiary in
Germany.
10
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 2004.
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):
2004 2003 2002
-------- -------- --------
Net Sales to External Customers:
Hematology Division:
US $ 14,797 $ 14,119 $ 13,100
Other 2,681 2,547 2,470
Biotechnology Division:
US 79,762 73,655 67,857
Other 19,620 17,310 16,798
R&D Europe:
Other 44,397 37,380 30,675
-------- -------- --------
$161,257 $145,011 $130,900
======== ======== ========
Gross Margin:
R&D Systems (US) $103,560 $ 93,991 $ 87,558
R&D Europe (England) 18,616 13,151 9,178
R&D GmbH (Germany) 4,194 2,473 1,656
-------- -------- --------
$126,370 $109,615 $ 98,392
======== ======== ========
Net Earnings (Loss):
Parent and R&D Systems (US) $ 45,479 $ 41,630 $ 24,436
R&D Europe (England) 10,259 6,306 4,324
R&D GmbH (Germany) 1,566 648 225
ChemoCentryx (US) (2,437) (2,580) (1,350)
Discovery Genomics (US) (1,887) (608) (505)
Hemerus (US) (52) -- --
-------- -------- --------
$ 52,928 $ 45,396 $ 27,130
======== ======== ========
Identifiable Assets:
Parent and R&D Systems (US) $275,948 $229,714 $214,606
R&D Europe (England) 44,851 31,472 22,594
R&D GmbH (Germany) 4,661 2,091 1,047
-------- -------- --------
$325,460 $263,277 $238,247
======== ======== ========
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:
11
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 instrument
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. 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.
12
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. 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. In addition the Company may be required to write
off investments if they are determined to be other than temporarily impaired.
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 are 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.
13
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 in three
adjoining buildings.
In fiscal 2002, the Company purchased property adjacent to its Minneapolis
facility for approximately $8.9 million. The Company has renovated this
property and plans to lease out approximately 70% of the 176,000 square foot
building as retail and office space and use the remainder as warehouse and
storage space. The Company has constructed an infill to connect this
building to its current facility. The Company will begin finishing the
78,000 square foot infill, to be used primarily for laboratory space, in
fiscal 2005.
The Company has entered into an option agreement for additional real estate
adjacent to the current facility. This option is exercisable through January
1, 2005. The Company may negotiate an extension of the option beyond January
1, 2005, but if unable to do so, plans to exercise the option prior to its
expiration date.
In fiscal 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 $131,000 and $72,000
in fiscal 2004 and 2003, respectively. The remaining property is used by the
Company to house goats used for polyclonal antibody production. In fiscal
2004, the Company constructed additional buildings on this site for $2.3
million.
R&D Europe leases approximately 17,000 square feet in a building in Abingdon,
England. Base rent was $446,000 in fiscal 2004.
R&D GmbH leases approximately 2,300 square feet as a sales office in
Wiesbaden-Nordenstadt, Germany. Base rent was $39,000 in fiscal 2004.
The Company believes the owned 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.
14
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 2004 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 63 Chairman of the Board, President,
Treasurer, Chief Executive and
Chief Financial Officer and Director 1985
Dr. Monica Tsang 59 Vice President, Research 1995
Marcel Veronneau 49 Vice President, Hematology Operations 1995
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 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.
15
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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 2004 Price Fiscal 2003 Price
High Low High Low
----------- ----------- ----------- -----------
1st Quarter $35.40 $28.11 $32.79 $22.79
2nd Quarter 39.00 32.10 34.75 28.42
3rd Quarter 42.20 37.35 28.99 20.76
4th Quarter 43.45 37.48 31.02 18.95
As of September 10, 2004, there were approximately 320 shareholders of
record. As of September 10, 2004, there were over 23,000 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.
The following table sets forth the repurchases of Company Common Stock for
the quarter ended June 30, 2004.
Maximum Approximate
Dollar Value
Total Number of of Shares
Shares Purchased that May Yet
Total Number Average as Part of Be Purchased
of Shares Price Paid Publicly Announced Under the Plans
Period Purchased Per Share Plans or Programs or Programs
- ------ ------------ --------- -------------------- -----------------
4/1/04-4/30/04 0 -- 0 $6.8 million
5/1/04-5/31/04 0 -- 0 $6.8 million
6/1/04-6/30/04 0 -- 0 $6.8 million
In May 1995, the Company announced a plan to purchase and retire its Common
Stock. Repurchases of $40 million were authorized as follows: May 1995 - $5
million; April 1997 - $5 million; January 2001 - $10 million; October 2002 -
$20 million. The plan does not have an expiration date.
16
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
Revenue, Earnings and Cash
Flow Data For the Years Ended
June 30, 2004 2003 2002(1) 2001 2000
- ------------------------- -------- -------- -------- -------- --------
Net sales $161,257 $145,011 $130,900 $115,357 $103,838
Gross margin(2) 78.4% 75.6% 75.2% 75.4% 74.2%
Selling, general and
administrative expenses(2) 13.5% 13.4% 15.1% 15.1% 16.4%
Research and development
expenses (2) 12.9% 14.2% 13.3% 12.6% 10.8%
Operating income(2) 51.0% 46.7% 26.8% 40.0% 37.9%
Earnings before income
taxes(2) 51.2% 48.0% 28.8% 41.4% 38.0%
Net earnings(2) 32.8% 31.3% 20.7% 29.5% 25.6%
Return on average equity 19.8% 20.5% 14.1% 21.4% 22.3%
Return on average assets 18.0% 18.1% 12.0% 17.2% 17.5%
Diluted earnings per share $ 1.27 $ 1.08 $ 0.64 $ 0.80 $ 0.63
Capital expenditures 3,710 15,194 22,276 6,815 30,368
Depreciation and
amortization(3) 6,040 6,353 12,688 12,737 12,651
Interest expense 678 974 1,320 1,381 1,441
Net cash provided by
operating activities 65,553 54,089 27,667 46,372 38,739
Balance Sheet, Common Stock
And Employee Data as of
June 30, 2004 2003 2002 2001 2000
- ------------------------- -------- -------- -------- -------- --------
Cash, cash equivalents
and short-term available-
for-sale investments $176,593 $118,763 $ 97,064 $ 97,072 $ 59,824
Receivables 21,099 19,179 19,414 18,322 15,601
Inventories 7,457 6,332 6,077 5,438 4,652
Working capital 197,464 138,707 114,448 108,300 73,740
Total assets 325,460 263,277 238,247 215,525 180,410
Long-term debt, less
current portion 14,576 15,852 17,101 18,050 18,935
Stockholders' equity 297,425 236,617 206,517 177,660 141,145
Average common and
common equivalent
shares (in thousands) 41,697 42,031 42,523 42,668 42,206
Book value per share(4) $ 7.23 $ 5.78 $ 4.97 $ 4.29 $ 3.41
Share price:
High 43.45 34.75 37.05 74.00 70.00
Low 28.11 18.95 25.30 22.50 12.38
Price to earnings ratio 34 28 44 41 103
Current ratio 15.67 13.86 8.82 7.81 6.87
Quick ratio 14.69 12.76 7.96 7.26 6.00
Full-time employees 534 525 509 494 440
(1)Fiscal 2002 results include a $17.5 million before tax charge ($11.4
million after tax and $.27 diluted earnings per share) for settlement of
litigation with Amgen, Inc.
(2)As a percent of net sales.
(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.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
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 sales subsidiary, R&D
Systems GmbH, in Germany and a sales office in France.
OVERALL RESULTS
Consolidated net earnings increased 17% for fiscal 2004 as compared to fiscal
2003. The primary reasons for the increase were increased net sales and
improved gross margins. Net sales increased 11% from fiscal 2003 and gross
margins increased from 76% to 78%. The favorable impact on consolidated net
earnings of the strengthening of the British pound as compared to the U.S.
dollar for R&D Europe results was $1.1 million for the year ended June 30,
2004.
Consolidated net earnings increased 67% for fiscal 2003 as compared to
fiscal 2002. Excluding the litigation settlement discussed below from fiscal
2002 results, consolidated net earnings for fiscal 2003 increased 18%. The
increase was due mainly to increased sales (11%) and decreased goodwill
amortization of $6.3 million. The favorable impact on consolidated net earnings
of exchange rates used to convert R&D Europe results from British pounds to
U.S. dollars was $0.6 million for the year ended June 30, 2003.
RESULTS OF OPERATIONS
Net sales (in thousands):
YEAR ENDED JUNE 30,
2004 2003 2002
-------- -------- --------
Hematology Division $ 17,478 $ 16,666 $ 15,570
Biotechnology Division 99,382 90,965 84,655
R&D Systems Europe 44,397 37,380 30,675
-------- -------- --------
$161,257 $145,011 $130,900
======== ======== ========
Net sales for fiscal 2004 were $161.3 million, an increase of $16.2
million (11.2%) from fiscal 2003. The increase in consolidated net sales for
the fiscal year was due mainly to the increase in sales of proteins and
antibodies ($9.1 million) and immunoassay kits ($5.0 million). R&D Europe's net
sales in fiscal 2004 were affected by favorable exchange rates used in
converting British pounds to U.S. dollars. The effect of foreign exchange rates
on R&D Europe's net sales for fiscal 2004 was an increase of approximately $4.0
million. Excluding the effect of exchange rates, R&D Europe's net sales in
British pounds increased 8.0% and consolidated net sales increased 8.4% for
fiscal 2004, mainly due to increased sales volume.
Net sales for fiscal 2003 were $145.0 million, an increase of $14.1
million (10.8%) from fiscal 2002. The increase in consolidated net sales for
the fiscal year was due largely to an increase in sales of proteins and
antibodies ($10.5 million). R&D Europe's net sales for fiscal 2003 were also
affected by favorable exchange rates. The effect of foreign exchange rates on
R&D Europe's net sales for fiscal 2003 was an increase of $3.4 million.
Excluding the effect of exchange rates, R&D Europe's net sales in British
pounds increased 10.8% and consolidated net sales increased 8.2%, mainly due to
increased sales volume. The Hematology Division net sales increase of 7.0% in
fiscal 2003 was higher than historical increases of 3% to 5% as a result of the
addition of an incremental new distributor in January 2003.
Gross margins, as a percentage of net sales, were as follows:
YEAR ENDED JUNE 30,
2004 2003 2002
---------- ---------- ----------
Hematology Division 46.2% 47.2% 45.0%
Biotechnology Division 80.4% 79.0% 79.2%
R&D Systems Europe 51.4% 41.8% 36.1%
Consolidated 78.4% 75.6% 75.2%
18
The majority of the increase in gross margin percentage in fiscal 2004 was
the result of R&D Europe's gross margins increasing from 41.8% to 51.4%.
Approximately one-half of this increase was due to favorable exchange rates as
a result of a weaker U.S. dollar to the British pound and one-half was due to
the expiration, on June 30, 2003, of a five-year, 5% royalty agreement
associated with the purchase of Genzyme, Inc.'s reagent business in fiscal
1999. R&D Europe expensed $1.8 million in fiscal 2003 under this agreement. The
Biotechnology Division gross margin percentage increase of 1.4% in fiscal 2004,
was mainly a result of changes in product/customer mix. The Hematology Division
gross margin percentage decrease of 1% in fiscal 2004 was due to changes in
customer mix.
Gross margins, as a percentage of net sales, increased slightly in fiscal
2003, mainly as a result of an increase in Hematology Division gross margin
percentage and an increase in R&D Europe gross margin percentage. 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 fiscal
2002 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.
Selling, general and administrative expenses increased $2.3 million (12%) in
fiscal 2004 and decreased $422,000 (2%) in fiscal 2003. Selling, general and
administrative expenses were as follows (in thousands):
YEAR ENDED JUNE 30,
2004 2003 2002
------- ------- -------
Hematology Division $ 1,697 $ 1,507 $ 1,626
Biotechnology Division 11,761 10,825 11,647
------- ------- -------
R&D Systems, Inc. 13,458 12,332 13,273
R&D Systems Europe 7,194 6,355 5,458
Corporate 1,073 690 1,068
------- ------- -------
$21,725 $19,377 $19,799
======= ======= =======
R&D Systems' selling general and administrative expenses increased $1.1
million in fiscal 2004 and decreased $940,000 in fiscal 2003, mainly as a
result of changes in the amount of profit sharing and stock bonus
contributions. Profit sharing and stock bonus expense by R&D Systems was $1.8
million, $0.9 million and $2.0 million in fiscal 2004, 2003 and 2002,
respectively.
R&D Europe's selling, general and administrative expenses increased
$839,000 (13%) and $897,000 (16%) in fiscal 2004 and 2003, respectively. The
majority of the increases were the result of the exchange rates to convert
expenses from British pounds to U.S. dollars. In British pounds, R&D Europe's
selling, general and administrative expenses increased 3% and 6% for fiscal
2004 and 2003, respectively.
Corporate selling, general and administrative expenses increased $383,000
in fiscal 2004 and decreased $378,000 in fiscal 2003. The increase in fiscal
2004 was largely the result of increased consulting fees incurred associated
with compliance with Sarbanes-Oxley ($173,000), higher audit and accounting
related fees ($78,000) and higher directors' and officers' liability insurance
premiums ($100,000). The decrease in fiscal 2003 was a result of a decrease in
legal expenses as a result of the settlement of litigation with Amgen, Inc. in
fiscal 2002.
Research and development expenses increased $192,000 and $3.1 million in fiscal
2004 and 2003, respectively. Included in research and development expenses are
the Company's share of losses by companies in which the Company has invested.
Included are losses by ChemoCentryx, Inc. (CCX) through April 2004, losses by
Discovery Genomics, Inc. (DGI), and losses by Hemerus Medical, LLC (Hemerus)
beginning in January 2004. Research and development expenses are composed of
the following (in thousands):
YEAR ENDED JUNE 30,
2004 2003 2002
------- ------- -------
Hematology Division $ 781 $ 770 $ 735
Biotechnology Division 17,139 16,623 14,880
------- ------- -------
R&D Systems, Inc. 17,920 17,393 15,615
ChemoCentryx, Inc. losses 2,437 2,580 1,350
Discovery Genomics, Inc. losses 364 608 505
Hemerus Medical. LLC losses 52 -- --
------- ------- -------
$20,773 $20,581 $17,470
======= ======= =======
The Company's net investment in CCX at June 30, 2004 was $5.1 million. As
a development stage company, CCX is dependent on its ability to raise
additional funds to continue its research and development efforts. If such
funding were unavailable or inadequate to fund operations, the Company would
potentially recognize an impairment loss to the extent of its remaining net
investment.
19
In May and June 2004, CCX obtained $38.1 million in additional financing
through the issuance of additional preferred stock, including a $5.1 additional
investment by the Company. After the financing the Company holds a 19.9% equity
interest in CCX. The Company then evaluated the cost versus equity method of
accounting for its investment in CCX and determined that it does not have the
ability to exercise significant influence over the operating and financial
policies of CCX and therefore, after April 2004, accounted for its investment
on a cost basis.
During the fourth quarter of fiscal 2004, the Company determined that its
investment in DGI was other than temporarily impaired and wrote off the
remaining net investment of $1.5 million.
The Company's net investment in Hemerus at June 30, 2004 was $2.9 million.
Hemerus' success is dependent in part, upon receiving FDA clearance to market
its products. If such clearance is not received, the Company would potentially
recognize an impairment loss to the extent of its remaining net investment.
Excluding CCX, DGI and Hemerus losses, research and development expenses
by the Company increased $527,000 and $1.8 million in fiscal 2004 and 2003,
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. The increase in fiscal 2003 was largely the result of
the addition of approximately ten full-time equivalent research positions from
the prior year. In fiscal 2004, the Biotechnology Division increased the number
of research positions only slightly, but plans on adding up to fifteen
positions in fiscal 2005.
Amortizaton 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 $6.3 million in fiscal 2002. As of June 30, 2002 the
Company had net unamortized goodwill of $12.5 million. 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 and 2004. The Company used discounted cash flow and other
fair value methodologies to assess impairment.
The pro forma effects of implementation of SFAS No. 142 to fiscal 2002
would be as follows (in thousands, except per share data):
YEAR ENDED
JUNE 30, 2002
--------------
Reported net income $27,130
Goodwill amortization, net of tax 4,076
-------
Adjusted net income $31,206
=======
Reported basic earnings per share $ 0.65
Goodwill amortization 0.10
-------
Adjusted basic earnings per share $ 0.75
=======
Reported diluted earnings per share $ 0.64
Goodwill amortization 0.09
-------
Adjusted diluted earnings per share $ 0.73
=======
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.
Other non-operating expense (income) consists of foreign currency transaction
gains, rental income, and real estate and utility expenses related to currently
unoccupied property as follows (in thousands):
YEAR ENDED JUNE 30,
2004 2003 2002
------ ------ ------
Foreign currency gains $(64) $(356) $ (352)
Rental income (131) (72) --
Real estate taxes/utilities 977 550 107
---- ----- ------
$782 $ 122 $ (245)
==== ===== ======
Income taxes for fiscal 2004, 2003 and 2002 were provided at rates of
approximately 36%, 35% and 28%, 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. U.S. taxes have been reduced as a result of federal
tax-exempt interest income, the federal benefit of extraterritorial income
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 2005
to be 35% to 36%.
20
QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL 2004 FISCAL 2003
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR.
------- ------- ------- ------- ------- ------- ------- -------
Net sales $37,993 $38,264 $42,542 $42,459 $34,548 $33,300 $37,737 $39,426
Gross margin 29,330 29,823 33,595 33,621 25,858 24,929 28,980 29,847
Earnings
before taxes 19,357 19,025 22,928 21,231 15,907 14,988 19,118 19,543
Income taxes 6,785 6,655 8,309 7,864 5,462 5,107 6,724 6,866
Net earnings 12,572 12,370 14,619 13,367 10,445 9,881 12,394 12,677
Basic earnings
per share 0.31 0.30 0.36 0.33 0.25 0.24 0.30 0.31
Diluted earnings
per share 0.30 0.30 0.35 0.32 0.25 0.23 0.30 0.31
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term available-for-sale investments at June
30, 2004 were $176.6 million compared to $118.8 million at June 30, 2003. At
June 30, 2002, cash, equivalents and short-term available-for-sale investments
were $97.1 million. The Company has an unsecured line of credit of $750,000
available at June 30, 2004. The line of credit expires on October 31, 2004. The
interest rate on the line of credit is at the prime rate (4.0% at June 30,
2004). There were no borrowings on the line in the current or prior fiscal
year.
Management of the Company expects to be able to meet its foreseeable
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.
Cash flows from operating activities. The Company generated cash from
operations of $65.6 million, $54.1 million and $27.7 million in fiscal 2004,
2003 and 2002, respectively. The increase in cash generated from operating
activities in fiscal 2004 of $11.5 million was the result of increased net
earnings and a $1.1 million decrease in trade and other accounts payable
compared to a $6.1 million decrease in fiscal 2003. These changes were
partially offset by a $3.3 million increase in income taxes payable compared to
a $6.5 million increase in fiscal 2003. Net earnings in fiscal 2004 increased
$9.1 million before the $1.5 million impairment loss on the write-off of the
Company's investment in DGI, which did not affect the Company's cash balances.
The $6.1 million decrease in trade and other accounts payable in fiscal 2003
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 $2.8 million
change in income taxes payable between fiscal 2003 and fiscal 2004 was due to
higher U.S. taxable income in fiscal 2004 ($4 million increase in income taxes
payable compared to fiscal 2003) offset by higher U.S. income tax payments in
fiscal 2004 ($7.5 million more than made in fiscal 2003).
The increase in cash generated from operating activities in fiscal 2003 of
$26.4 million was the result of increased net earnings, increased losses by
equity method investees and a $6.5 million increase in income taxes payable
compared to a $4.4 million decrease in fiscal 2002. These changes were
partially offset by decreased goodwill amortization and a $6.1 million decrease
in trade and other accounts payable compared to a $2.8 million decrease in
fiscal 2002. 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 change 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 $6.3 million in fiscal 2003 as a result of adoption of Statement of
Financial Accounting Standards No. 142.
Cash flows from investing activities. Capital additions consist of the
following (in thousands):
YEAR ENDED JUNE 30,
2004 2003 2002
------- ------- -------
Laboratory, manufacturing,
and computer equipment $ 1,127 $ 977 $ 2,124
Building improvements (Minneapolis) -- 202 522
Construction/property
purchase (southeast Minnesota) 2,330 2,705 --
Property purchase (Minneapolis) -- -- 6,015
Renovation/construction (Minneapolis) 253 11,310 13,615
------- ------- -------
$ 3,710 $15,194 $22,276
======= ======= =======
The Company acquired property in southeast Minnesota in fiscal 2003 and,
in fiscal 2004 constructed additional facilities at this site to house
21
goats used in the production of its antibodies. The renovation/construction
costs in fiscal 2004, 2003 and 2002 were for renovation of the Minneapolis
property purchased in fiscal 2002, construction of an infill connecting the
purchased property to R&D Systems' existing property and construction of a
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. Costs to finish the infill are
estimated at $8 million and are expected to be completed in late fiscal 2005 or
early 2006. All construction is expected to be financed through currently
available funds and cash generated from operating activities.
Capital additions for laboratory, manufacturing and computer equipment
planned for fiscal 2005 are expected to be approximately $2.0 million and are
expected to be financed through currently available cash and cash generated
from operations.
The Company's net purchases of (proceeds from) short-term
available-for-sale investments in fiscal 2004, 2003 and 2002 was $47.3 million,
$6.5 million and ($5.1) million, 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.
In January 2004, the Company purchased a 10% interest in Hemerus Medical,
LLC (Hemerus) for $3 million. Hemerus was formed in March 2001 and has acquired
and is developing technology for the separation of leukocytes from blood and
blood components. The Company accounts for its investment in Hemerus under the
equity method of accounting. The Company's net investment in Hemerus, was $2.9
million at June 30, 2004.
In May and June, 2004, the Company made additional investments totaling
$5.1 million in ChemoCentryx, Inc. (CCX), a technology and drug development
company. After the additional investment, the Company holds a 19.9% equity
interest in CCX and will account for the investment under the cost method of
accounting as discussed previously. The Company's net investment in CCX was
$5.1 million and $2.5 million at June 30, 2004 and 2003, respectively.
In fiscal 2002, 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 38% equity interest in DGI and
accounts for this investment under the equity method of accounting. During the
fourth quarter of fiscal 2004, the Company determined that its investment in
DGI was other than temporarily impaired and wrote off the remaining net
investment of $1.5 million. The Company's net investment in DGI was $1.9
million at June 30, 2003.
The Company paid $2.0 million in March 2002 as a nonrefundable deposit on
an option, which expires on January 1, 2005, to purchase additional property
adjacent to its Minneapolis facility. The Company may negotiate an extension of
the option beyond January 1, 2005, but if unable to do so, plans to exercise
the option prior to its expiration date.
Cash flows from financing activities. The Company received $4.1 million, $2.4
million and $332,000 for the exercise of options for 241,000, 265,000 and
87,000 shares of common stock in fiscal 2004, 2003 and 2002, respectively.
In fiscal 2003 and 2002, the Company purchased and retired 1,027,000 and
30,000 shares of Company common stock at market values of $22.5 million and
$745,000, 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, 2004,
$33.2 million 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 2005. The Company's net earnings will be retained for reinvestment
in the business.
22
CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's contractual obligations and
commercial commitments as of June 30, 2004 (in thousands):
PAYMENTS DUE BY PERIOD
----------------------------------
LESS THAN 1-3 4-5 AFTER
TOTAL 1 YEAR YEARS YEARS 5 YEARS
------- ------- ------- ------- -------
Long-term debt $15,857 $ 1,281 $ 2,723 $ 2,951 $ 8,902
Operating leases 6,112 621 1,188 1,061 3,242
Minimum royalty payments 125 125 -- -- --
------- ------- ------- ------- -------
$22,094 $ 2,027 $ 3,911 $ 4,012 $12,144
======= ======= ======= ======= =======
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.
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. Gross trade receivables
totaled $20.5 million and the allowance for doubtful accounts was $233,000 at
June 30, 2004.
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 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.
Inventories of proteins and antibodies in excess of the two-year sales forecast
were $8.6 million at June 30, 2004.
Valuation of goodwill. The Company is required to perform an annual review for
impairment of goodwill in accordance with Statement of Financial Accounting
Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill is considered
to be impaired if it is determined that the carrying value of the reporting
unit exceeds its fair value. Assessing the impairment of goodwill requires the
Company to make judgments regarding the fair value of the net assets of its
reporting units and the allocation of the carrying value of shared assets to
the reporting units. The Company's annual assessment included comparison of
the carrying value of the net assets of the Biotechnology Division to its
share of the Company's market capitalization at June 30, 2004. A significant
change in the Company's market capitalization or in the carrying value of net
assets of the Biotechnology Division could result in an impairment charge in
future periods. Goodwill at June 30, 2004 was $12.5 million.
23
Valuation of intangible and other long-lived assets. The Company periodically
assesses the impairment of intangible and other long-lived assets which
requires it to make assumptions and judgments regarding the fair value of these
asset groups. Asset groups are considered to be impaired if their carrying
value exceeds the asset groups' ability to continue to generate income from
operations and positive cash flow in future periods. If asset groups are
considered impaired, the amount by which the carrying value exceeds its fair
value would be written off as an impairment loss. Intangible assets and other
long-lived assets at June 30, 2004, were $2.8 million and $2.3 million,
respectively.
Valuation of investments. The Company has made equity investments in several
start-up and early development stage companies, among them CCX, DGI and
Hemerus. The accounting treatment of each investment (cost method or equity
method) is dependent upon a number of factors, including, but not limited to,
the Company's share in the equity of the investee and the Company's ability to
exercise significant influence over the operating and financial policies of the
investee. In determining which accounting treatment to apply, the Company must
make judgments based upon the quantitative and qualitative aspects of the
investment.
The Company periodically assesses its equity investments for impairment.
Development stage companies, of the type the Company has invested in, are
dependent on their ability to raise additional funds to continue research and
development efforts and on receiving patent protection and/or FDA clearance to
market their products. If such funding were unavailable or inadequate to fund
operations or if patent protection or FDA clearance were not received, the
Company would potentially recognize an impairment loss to the extent of its
remaining net investment. The Company's net investment at June 30, 2004 in CCX
and Hemerus were $5.1 million and $2.9 million, respectively. During the fourth
quarter of fiscal 2004, the Company determined that its investment in DGI was
other than temporarily impaired and wrote off the remaining net investment of
$1.5 million.
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. The Company
has received an audit assessment of $1.75 million, plus interest, from the
State of Minnesota for fiscal years 2000 to 2003. The Company has filed an
appeal with the Minnesota Department of Revenue for abatement of the
assessment. The Company believes that the ultimate resolution of the matter
will not materially affect the consolidated financial position or operations of
the Company. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (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 is 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 were applicable to the Company for the
quarter ended December 31, 2003. The Company assessed its relationships with
ChemoCentryx, Inc. (CCX) and Discovery Genomics, Inc. (DGI) and determined that
neither
24
investment was required to be consolidated in the Company's financial
statements pursuant to FIN 46. In December 2003, the FASB revised FIN 46. The
Company was required to follow the revised FIN 46 guidance effective for the
quarter ended March 31, 2004. The Company determined that none of the Company's
investments in CCX, DGI and the January 2004 investment in Hemerus Medical,
LLC, are required to be consolidated in the Company's financial statements
pursuant to the revised FIN 46.
In May 2003, the FASB issued Statement of Financial Accounting Standard
No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF
BOTH LIABILITIES AND EQUITY, which established standards for how an issuer
classifies and measures in its statement of financial position certain
financial instruments with characteristics of both debt and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances) because that financial instrument
embodies an obligation of the issuer. For example, the Statement requires
liability classification for a financial instrument issued in the form of
shares that are mandatorily redeemable, e.g., includes an unconditional
obligation requiring the issuer to redeem it by transferring at a specified or
determinable date or dates or upon an event certain to occur. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company has adopted SFAS No. 150 and it did
not have a significant impact on the Company's financial statements.
MARKET RISK
At the end of fiscal 2004, the Company had an independently managed investment
portfolio of fixed income securities, excluding those classified as cash and
cash equivalents, of $125.4 million (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. At the current level of R&D Europe operating results, a 10%
increase or decrease in the average exchange rate used to translate operating
results into U.S. dollars would have an approximate $1.1 million effect on
consolidated operating income annually.
The Company's exposure to foreign exchange rate fluctuations also arises
from transferring funds from the U.K. subsidiary to the U.S. subsidiary and from
transferring funds from the German subsidiary and French sales office to the
U.K. subsidiary. At June 30, 2004 and 2003, the Company had $119,000 and
$358,000 dollar denominated intercompany debt at its U.K. subsidiary and the
U.K. subsidiary had $93,000 and $295,000 dollar denominated intercompany debt
from its European operations. 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 (British Pound)36,000
($64,000), (British Pound)224,000 ($356,000) and (British Pound)243,000
($352,000) for the years ended June 30, 2004, 2003 and 2002, respectively. 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, 2004, 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, 2004.
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
25
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 less subject to rapid change, it too is evolving and is impacted
significantly by changes in the automated testing equipment offered by
instrument 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.
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. Additionally, if the Company determines that its investment in such
companies is "other than temporarily" impaired, the Company may write off its
entire investment in such 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.
26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
See discussion under "Market Risk" in Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF EARNINGS
TECHNE CORPORATION AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30,
2004 2003 2002
-------- -------- --------
Net sales $161,257 $145,011 $130,900
Cost of sales 34,887 35,396 32,508
-------- -------- --------
Gross margin 126,370 109,615 98,392
Operating expenses:
Selling, general and administrative 21,725 19,377 19,799
Research and development 20,773 20,581 17,470
Amortization of intangible assets (Note D) 1,599 1,939 8,549
Litigation settlement (Note F) -- -- 17,500
-------- -------- --------
Total operating expenses 44,097 41,897 63,318
-------- -------- --------
Operating income 82,273 67,718 35,074
Other expense (income):
Interest expense 678 974 1,320
Interest income (3,251) (2,933) (3,737)
Impairment loss on equity investment (Note A) 1,523 -- --
Other non-operating expense (income), net 782 122 (245)
-------- -------- --------
Total other expense (income) (268) (1,837) (2,662)
-------- -------- --------
Earnings before income taxes 82,541 69,555 37,736
Income taxes (Note H) 29,613 24,159 10,606
-------- -------- --------
Net earnings $ 52,928 $ 45,396 $ 27,130
======== ======== ========
Earnings per share:
Basic $ 1.29 $ 1.10 $ 0.65
Diluted $ 1.27 $ 1.08 $ 0.64
Weighted average common shares outstanding:
Basic 41,046 41,237 41,508
Diluted 41,697 42,031 42,523
See Notes to Consolidated Financial Statements.
27
CONSOLIDATED BALANCE SHEETS
TECHNE CORPORATION AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30,
2004 2003
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 51,201 $ 39,371
Short-term available-for-sale investments (Note A) 125,392 79,392
Trade accounts receivable, less allowance for
doubtful accounts of $233 and $268, respectively 20,262 18,387
Interest receivable on short-term
available-for-sale investments 837 792
Inventories (Note B) 7,457 6,332
Deferred income taxes (Note H) 4,820 4,237
Prepaid expenses 954 1,004
-------- --------
Total current assets 210,923 149,515
Property and equipment, net (Note C) 80,504 81,166
Goodwill, net (Note D) 12,540 12,540
Intangible assets, net (Note D) 2,819 4,418
Deferred income taxes (Note H) 7,843 8,715
Investments (Note A) 8,484 4,398
Other long-lived assets (Note F) 2,347 2,525
-------- --------
$325,460 $263,277
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 2,695 $ 2,216
Salaries, wages and related accounts 3,416 1,781
Other accounts payable and accrued expenses 1,152 2,605
Income taxes payable 4,915 2,972
Current portion of long-term debt (Note E) 1,281 1,234
-------- --------
Total current liabilities 13,459 10,808
Long-term debt, less current portion (Note E) 14,576 15,852
-------- --------
Total liabilities 28,035 26,660
-------- --------
Commitments and contingencies (Notes F and H)
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
41,154,922 and 40,913,226 shares, respectively 412 409
Additional paid-in capital 68,960 63,279
Retained earnings 222,728 169,809
Accumulated other comprehensive income 5,325 3,120
-------- --------
Total stockholders' equity 297,425 236,617
-------- --------
$325,460 $263,277
======== ========
See Notes to Consolidated Financial Statements.
28
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TECHNE CORPORATION AND SUBSIDIARIES
(IN THOUSANDS)
ACCUM.
OTHER
COMPRE-
ADDITIONAL HENSIVE
COMMON STOCK PAID-IN RETAINED INCOME
SHARES AMOUNT CAPITAL EARNINGS (LOSS) TOTAL
------ ------ ---------- --------- -------- --------
Balances at June 30, 2001 41,432 $414 $57,383 $121,209 $ (1,346) $177,660
Comprehensive income:
Net earnings -- -- -- 27,130 -- 27,130
Other comprehensive
income, net of tax:
Foreign currency
translation adjustments -- -- -- -- 1,494 1,494
--------
Comprehensive income 28,624
Common stock issued for
exercise of options
(Note G) 167 2 555 -- -- 557
Surrender and retirement of
stock to exercise options
(Note L) (7) (0) -- (225) -- (225)
Repurchase and retirement
of common stock (30) 0 -- (745) -- (745)
Tax benefit from exercise
of stock options -- -- 646 -- -- 646
------ ------ ---------- --------- -------- ---------
Balances at June 30, 2002 41,562 416 58,584 147,369 148 206,517
Comprehensive income:
Net earnings -- -- -- 45,396 -- 45,396
Other comprehensive
income, net of tax:
Foreign currency
translation adjustments -- -- -- -- 2,028 2,028
Unrealized gains on
available-for-sale
investments -- -- -- -- 944 944
---------
Comprehensive income 48,368
Common stock issued for
exercise of options
(Note G) 392 4 2,893 -- -- 2,897
Surrender and retirement of
stock to exercise options
(Note L) (14) (0) -- (454) -- (454)
Repurchase and retirement
of common stock (1,027) (11) -- (22,502) -- (22,513)
Tax benefit from exercise
of stock options -- -- 1,802 -- -- 1,802
------ ------ ---------- --------- -------- ---------
Balances at June 30, 2003 40,913 409 63,279 169,809 3,120 236,617
Comprehensive income:
Net earnings -- -- -- 52,928 -- 52,928
Other comprehensive
income, net of tax:
Foreign currency
translation adjustments -- -- -- -- 3,271 3,271
Unrealized losses on
available-for-sale
investments -- -- -- -- (1,066) (1,066)
---------
Comprehensive income 55,133
Common stock issued for
exercise of options
(Note G) 242 3 4,094 -- -- 4,097
Surrender and retirement of
stock to exercise options
(Note L) (0) (0) -- (9) -- (9)
Tax benefit from exercise
of stock options -- -- 1,587 -- -- 1,587
------ ------ ---------- --------- -------- ---------
Balances at June 30, 2004 41,155 $412 $68,960 $222,728 $ 5,325 $297,425
====== ====== ========== ========= ======== =========
See Notes to Consolidated Financial Statements.
29
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE L)
TECHNE CORPORATION AND SUBSIDIARIES
(IN THOUSANDS)
YEAR ENDED JUNE 30,
2004 2003 2002
--------- --------- ---------
Cash flows from operating activities:
Net earnings $ 52,928 $ 45,396 $ 27,130
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 6,040 6,353 12,688
Deferred income taxes 317 232 (6,292)
Losses by equity method investees 2,853 3,188 1,855
Impairment loss on equity investment 1,523 -- --
Other 335 539 590
Change in operating assets and
operating liabilities:
Trade accounts and interest receivable (1,170) (638) (855)
Inventories (1,017) (173) (560)
Prepaid expenses (119) (62) (210)
Trade and other accounts payable (1,069) (6,082) (2,830)
Salaries, wages and related accounts 1,614 (1,116) 553
Income taxes payable/receivable 3,318 6,452 (4,402)
--------- --------- ---------
Net cash provided by
operating activities 65,553 54,089 27,667
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment (3,710) (15,194) (22,276)
Purchase of short-term available-
for-sale investments (144,230) (64,560) (64,680)
Proceeds from maturities of short-term
available-for-sale investments 96,895 58,045 69,812
Real estate deposits -- -- (1,999)
Increase in investments (8,462) -- (3,000)
Increase in other long-term assets -- -- (259)
--------- --------- ---------
Net cash used in investing activities (59,507) (21,709) (22,402)
--------- --------- ---------
Cash flows from financing activities:
Issuance of common stock 4,088 2,443 332
Repurchase of common stock -- (22,513) (745)
Payments on long-term debt (1,229) (964) (885)
--------- --------- ---------
Net cash provided by (used in)
financing activities 2,859 (21,034) (1,298)
--------- --------- ---------
Effect of exchange rate changes on cash
and cash equivalents 2,925 1,633 1,157
--------- --------- ---------
Net increase in cash and cash equivalents 11,830 12,979 5,124
Cash and cash equivalents at beginning
of year 39,371 26,392 21,268
--------- --------- ---------
Cash and cash equivalents at end of year $ 51,201 $ 39,371 $ 26,392
========= ========= =========
See Notes to Consolidated Financial Statements.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TECHNE CORPORATION AND SUBSIDIARIES
Years Ended June 30, 2004, 2003 and 2002
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 and a sales office in France.
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 revenue when persuasive evidence of
an arrangement exists, delivery has occurred or services have been rendered,
the price is fixed or determinable and collectibility is reasonably assured.
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 obtaining research market rights to products
developed by the investee companies. (See INVESTMENTS below).
ADVERTISING COSTS: Advertising expenses (including production and communication
costs) for fiscal 2004, 2003 and 2002 were $2.6 million, $2.5 million and $2.4
million, respectively. The Company expenses advertising expenses as incurred.
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 three months or less.
31
SHORT-TERM INVESTMENTS: Short-term investments consist of debt instruments with
original maturities of generally greater than 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. If an
"other than temporary" impairment is determined to exist, the difference
between the value of the investment security recorded in the financial
statements and the Company's current estimate of the fair value is recognized
as a charge to earnings in the period in which the impairment is determined.
At June 30, 2004 and 2003, the amortized cost and market value of the Company's
available-for-sale securities by major security type were as follows (in
thousands):
JUNE 30,
2004 2003
------------------ ----------------
Cost Market Cost Market
-------- -------- ------- -------
State and municipal securities $124,014 $123,893 $78,448 $79,392
Corporate securities 1,500 1,499 -- --
-------- -------- ------- -------
125,514 125,392 78,448 79,392
Unrealized (losses) gains (122) -- 944 --
-------- -------- ------- -------
$125,392 $125,392 $79,392 $79,392
======== ======== ======= =======
Contractual maturities of available-for-sale securities are shown below (in
thousands). 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 $ 41,663
Due in one to three years 83,729
--------
$125,392
========
Proceeds from maturities of available-for-sale securities were $96.9 million,
$58.0 million and $69.8 million during fiscal 2004, 2003 and 2002,
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: At June 30, 2004 the Company had net
unamortized goodwill of $12.5 million. The Company completed its annual
impairment testing of goodwill and concluded that no impairment existed as of
June 30, 2004. The Company used discounted cash flow and other fair value
methodologies to assess impairment. Other intangible assets are being amortized
over their estimated useful lives. (See Note D.)
IMPAIRMENT OF INTANGIBLE AND OTHER LONG-LIVED ASSETS: Management periodically
reviews the carrying value of intangible and other long-lived assets based on
the estimated discounted 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 group
exceeds the fair value of the asset group based on discounted estimated future
cash flows. To date, management has determined that no impairment exists.
32
INVESTMENTS: The Company has invested in the Preferred Stock (Series A and B)
of ChemoCentryx, Inc. (CCX), a technology and drug development company. Through
April 2004 the Company held 26% of the outstanding stock of CCX and accounted
for the investment under the equity method of accounting. In May and June, 2004
CCX obtained $38.1 million in financing through the issuance of approximately
14.7 million shares of Preferred (Series B) Stock. The financing included a
$5.1 million investment by the Company. After the financing the Company holds a
19.9% equity interest in CCX. The Company then evaluated the cost versus equity
method of accounting for its investment in CCX and determined that it does not
have the ability to exercise significant influence over the operating and
financial policies of CCX and therefore, after April 2004, accounted for its
investment on a cost basis. The Company's net investment in CCX was $5.1
million and $2.5 million at June 30, 2004 and 2003, respectively. In connection
with its original investment in CCX, the Company was issued warrants for 1.7
million 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 38% equity
interest in DGI and accounted for this investment under the equity method of
accounting. During the fourth quarter of fiscal 2004, the Company determined
that its investment in DGI was other than temporarily impaired and wrote off
the remaining net investment of $1.5 million. The Company's net investment in
DGI was $1.9 million at June 30, 2003. The Company has been issued warrants for
1.5 million shares of DGI Preferred Stock (Series A) which expire on August 2,
2008.
On January 1, 2004, the Company purchased a 10% interest in Hemerus Medical,
LLC (Hemerus) for $3 million. Hemerus was formed in March 2001 and has acquired
and is developing technology for the separation of leukocytes from blood and
blood components. Leukoreduced blood is important in blood transfusion. Hemerus
owns two patents and has several patent applications pending and is currently
pursuing FDA clearance to market its products in the U.S. In parallel with this
investment, R&D Systems entered into a Joint Research Agreement with Hemerus.
The research will involve joint projects to explore the use of Hemerus's filter
technology to applications within R&D Systems' Hematology and Biotechnology
Divisions. Such applications, if any, may have commercial potential in other
laboratory environments. The Company accounts for its investment in Hemerus
under the equity method of accounting. The Company's net investment in Hemerus
was $2.9 million at June 30, 2004.
As a development stage company, CCX is dependent on its ability to raise
additional funds to continue its research and development efforts. If such
funding were unavailable or inadequate to fund operations, the Company would
potentially recognize an impairment loss to the extent of its remaining net
investment. Hemerus' success is dependent, in part, upon receiving FDA
clearance to market its products. If such clearance is not received, the
Company would potentially recognize an impairment loss to the extent of its
remaining net investment. The Company does not provide loans, guarantees or
other financial assistance to CCX, DGI or Hemerus 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 (in thousands, except per share data):
33
YEAR ENDED JUNE 30,
2004 2003 2002
------- ------- -------
Net earnings:
As reported $52,928 $45,396 $27,130
Less employee stock-based compensation,
net of taxes 3,253 609 1,131
Plus employee stock-based compensation
expense included in net earnings -- -- --
------- ------- -------
Pro forma $49,675 $44,787 $25,999
======= ======= =======
Basic earnings per share:
As reported $ 1.29 $ 1.10 $ 0.65
Less employee stock-based compensation,
net of taxes 0.08 0.01 0.02
Plus employee stock-based compensation
expense included in net earnings -- -- --
------- ------- -------
Pro forma $ 1.21 $ 1.09 $ 0.63
======= ======= =======
Diluted earnings per share:
As reported $ 1.27 $ 1.08 $ 0.64
Less employee stock-based compensation,
net of taxes 0.08 0.01 0.03
Plus employee stock-based compensation
expense included in net earnings -- -- --
------- ------- -------
Pro forma $ 1.19 $ 1.07 $ 0.61
======= ======= =======
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,
2004 2003 2002
--------- --------- ---------
Dividend yield -- -- --
Expected volatility 48%-53% 48%-52% 56%-73%
Risk-free interest rates 3.9%-4.4% 4.2%-4.5% 4.6%-5.3%
Expected lives 7 years 7 years 7 years
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.
RECENT ACCOUNTING PRONOUNCEMENTS: In January 2003, the Financial Accounting
Standards Board (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 is 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
were applicable to the Company for the quarter ended December 31, 2003. The
Company assessed its relationships with ChemoCentryx, Inc. (CCX) and Discovery
Genomics, Inc. (DGI) and determined that neither investment was required to be
consolidated in the Company's financial statements pursuant to FIN 46. In
December 2003, the FASB revised FIN 46. The Company was required to follow the
revised FIN 46 guidance effective for the quarter ended March 31, 2004. The
Company has determined that none of the Company's investments in CCX, DGI and
the January 2004 investment in Hemerus Medical, LLC, are required to be
consolidated in the Company's financial statements pursuant to the revised FIN
46.
In May 2003, the FASB issued Statement of Financial Accounting Standard No.
150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY, which established standards for how an issuer
classifies and measures in its statement of financial position certain
financial instruments with characteristics of both debt and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances) because that financial instrument
embodies an obligation of the issuer. For example, the Statement requires
liability classification for a financial instrument issued in the form of
shares that are mandatorily redeemable, e.g., includes an unconditional
obligation requiring the issuer to redeem it by transferring at a specified
or determinable date or dates or upon an event certain to occur. SFAS No.
150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The Company has adopted SFAS
No. 150 and it did not have a significant impact on the Company's financial
statements.
34
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 (in thousands):
JUNE 30,
2004 2003
------ ------
Raw materials $3,062 $2,618
Finished goods 4,257 3,595
Supplies 138 119
------ ------
$7,457 $6,332
====== ======
C. PROPERTY AND EQUIPMENT:
Property and equipment consist of (in thousands):
JUNE 30,
2004 2003
-------- --------
Cost:
Land $ 3,264 $ 2,999
Buildings and improvements 77,333 64,930
Building construction in progress 8,329 18,310
Laboratory equipment 17,081 16,372
Office and computer equipment 3,367 3,106
Leasehold improvements 627 537
-------- --------
110,001 106,254
Less accumulated depreciation and
amortization 29,497 25,088
-------- --------
$ 80,504 $ 81,166
======== ========
D. GOODWILL AND INTANGIBLE ASSETS:
Goodwill and intangible assets consist of (in thousands):
JUNE 30,
USEFUL LIFE 2004 2003
------------- -------- --------
Goodwill N/A $ 38,846 $ 38,846
Less accumulated amortization 26,306 26,306
-------- --------
$ 12,540 $ 12,540
======== ========
Customer list 10 years $ 18,010 $ 18,010
Technology licensing agreements 16 years 730 730
-------- --------
18,740 18,740
Less accumulated amortization 15,921 14,322
-------- --------
$ 2,819 $ 4,418
======== ========
The pro forma effects of implementation of SFAS No. 142 to prior periods would
be as follows (in thousands, except per share data):
JUNE 30,
2002
-------
Reported net earnings $27,130
Goodwill amortization, net of tax 4,076
-------
Adjusted net earnings $31,206
=======
Reported basic earnings per share $ 0.65
Goodwill amortization 0.10
-------
Adjusted basic earnings per share $ 0.75
=======
Reported diluted earnings per share $ 0.64
Goodwill amortization 0.09
-------
Adjusted diluted earnings per share $ 0.73
=======
The estimated future amortization expense for other intangible assets as of
June 30, 2004 is as follows (in thousands):
YEAR ENDING JUNE 30:
- --------------------
2005 $1,221
2006 881
2007 541
2008 176
------
$2,819
======
E. DEBT:
The Company's short-term line of credit facility consists of an unsecured line
of credit of $0.8 million at June 30, 2004. The line of credit expires on
October 31, 2004. The interest rate charged on the line of credit is at the
prime rate (4.0% at June 30, 2004). There were no borrowings on the line
outstanding as of June 30, 2004 and 2003.
35
Long-term debt consists of (in thousands):
JUNE 30,
2004 2003
-------- --------
Mortgage note, payable in monthly
installments through August 2014 $ 15,857 $ 17,086
Less current portion 1,281 1,234
-------- --------
$ 14,576 $ 15,852
======== ========
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, 2004.
Scheduled principal maturities of long-term debt as of June 30, 2004 assuming a
4% interest rate are as follows (in thousands):
YEAR ENDING JUNE 30:
- --------------------
2005 $ 1,281
2006 1,334
2007 1,389
2008 1,445
2009 1,506
Thereafter 8,902
-------
$15,857
=======
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,
2004, aggregate net minimum rental commitments under noncancelable leases
having an initial or remaining term of more than one year are payable as
follows (in thousands):
YEAR ENDING JUNE 30:
- --------------------
2005 $ 621
2006 614
2007 574
2008 543
2009 518
Thereafter 3,242
------
$6,112
======
Total rent expense was approximately $594,000, $554,000, and $406,000 for the
years ended June 30, 2004, 2003 and 2002, 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. The option expires on
January 1, 2005 and required a nonrefundable deposit of $2 million. A deposit
of $1,000 was made on the option in fiscal 2000 with the remainder of the
deposit made in fiscal 2002. The deposit is included in other long-term assets.
The Company may negotiate an extension of the option beyond January 1, 2005,
but if unable to do so, plans to exercise the option prior to its expiration
date.
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
36
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, 2004 under the 1997
and 1998 Plans were 2.4 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, 2004 consists of
the following (shares in thousands):
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------ -----------------
Outstanding at June 30, 2001 1,904 $ 16.40
Granted 33 29.42
Canceled (24) 36.50
Exercised (167) 3.33
-----
Outstanding at June 30, 2002 1,746 17.62
Granted 34 30.40
Canceled (31) 36.50
Exercised (392) 7.40
-----
Outstanding at June 30, 2003 1,357 20.45
Granted 239 36.40
Canceled (17) 45.83
Exercised (242) 16.93
-----
Outstanding at June 30, 2004 1,337 23.60
=====
Options exercisable at June 30:
2002 1,685 17.22
2003 1,350 20.37
2004 1,225 22.36
Currently outstanding and exercisable stock options at June 30, 2004 consist of
the following (shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
WEIGHTED AVG.
EXERCISE CONTRACTUAL WEIGHTED AVG. WEIGHTED AVG.
PRICES OUTSTANDING LIFE (YRS.) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------ ----------- ------------- -------------- ----------- --------------
$ 3.37-10.00 520 1.83 $ 5.35 520 $ 5.35
10.01-20.00 89 5.00 19.44 89 19.44
20.01-40.00 662 4.83 35.81 565 35.67
40.01-65.00 66 6.33 50.24 51 53.00
----- -----
1,337 3.75 23.60 1,225 22.36
===== =====
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 $0.9 million.
The warrants are outstanding as of June 30, 2004 and expire on June 30, 2006.
H. INCOME TAXES:
The provisions for income taxes consist of the following (in thousands):
YEAR ENDED JUNE 30,
2004 2003 2002
------- ------- -------
Earnings before income taxes consist of:
Domestic $65,716 $59,216 $31,214
Foreign 16,825 10,339 6,522
------- ------- -------
$82,541 $69,555 $37,736
======= ======= =======
Taxes (benefits) on income consist of:
Currently payable:
Federal $22,333 $19,997 $15,054
State 2,014 504 11
Foreign 4,977 3,448 1,855
Net deferred:
Federal 247 112 (5,412)
State 19 161 (1,020)
Foreign 23 (63) 118
------- ------- -------
$29,613 $24,159 $10,606
======= ======= =======
37
The following is a reconciliation of the federal tax calculated at the
statutory rate of 35% to the actual income taxes provided (in thousands):
YEAR ENDED JUNE 30,
2004 2003 2002
------- ------- -------
Computed expected federal income tax expense $28,889 $24,344 $13,207
State income taxes, net of federal benefit 1,026 494 8
Extraterritorial income tax benefit (1,079) (937) (892)
Research and development tax credits (268) (347) (373)
Tax-exempt interest (720) (735) (1,005)
Increase in federal deferred tax valuation
allowance 1,531 1,116 649
Other 234 224 (988)
------- ------- -------
$29,613 $24,159 $10,606
======= ======= =======
Temporary differences comprising deferred taxes on the consolidated balance
sheets are as follows (in thousands):
JUNE 30,
2004 2003
-------- --------
Inventory $ 3,297 $ 2,723
Inventory costs capitalized 961 1,012
Unrealized profit on intercompany sales 438 351
Other 124 151
------- -------
Current asset 4,820 4,237
Excess of book over tax intangible asset
amortization 7,079 7,958
Excess of book over tax research expense 286 309
Excess of book over tax depreciation 534 551
Excess tax basis in equity investments 2,976 1,353
Valuation allowance (2,976) (1,353)
Other (56) (103)
------- -------
Noncurrent asset 7,843 8,715
------- -------
$12,663 $12,952
======= =======
A deferred tax valuation allowance is required when it is more likely than not
that all or a portion of deferred tax assets will not be realized. The Company
has provided a valuation allowance for the potential capital loss carryover
resulting from the excess tax basis in equity investment. The Company believes
that it is more likely than not that the recorded deferred tax asset, net of
valuation allowance, will be realized.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $36.9 million as of June 30, 2004. Deferred taxes have not been
provided on such undistributed earnings, as it is the Company's intent to
indefinitely reinvest the undistributed earnings in the foreign operations.
The Company's tax returns are subject to audit by various governmental entities
in the normal course of business. The Company has received an audit assessment
of $1.75 million, plus interest, from the State of Minnesota for fiscal years
2000 to 2003. The Company has filed an appeal with the Minnesota Department of
Revenue for abatement of the assessment. The Company believes that the ultimate
resolution of the matter will not materially effect the consolidated financial
position or operations of the Company.
I. EARNINGS PER SHARE:
The number of shares used to calculate earnings per share are as follows (in
thousands, except per share data):
YEAR ENDED JUNE 30,
2004 2003 2002
------- ------- -------
Net earnings used for basic
and diluted earnings per share $52,928 $45,396 $27,130
======= ======= =======
Weighted average shares
used in basic computation 41,046 41,237 41,508
Dilutive stock options and warrants 651 794 1,015
------- ------- -------
Weighted average shares
used for diluted computation 41,697 42,031 42,523
======= ======= =======
Basic EPS $ 1.29 $ 1.10 $ 0.65
Diluted EPS $ 1.27 $ 1.08 $ 0.64
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 352,000, 582,000 and 579,000 at June 30, 2004, 2003
and 2002, 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
38
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, 2004, 2003 and 2002.
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 (in
thousands):
YEAR ENDED JUNE 30,
2004 2003 2002
-------- -------- --------
External net sales
Hematology $ 17,478 $ 16,666 $ 15,570
Biotechnology 99,382 90,965 84,655
R&D Systems Europe 44,397 37,380 30,675
-------- -------- --------
Total external net sales $161,257 $145,011 $130,900
======== ======== ========
Intersegment sales
Hematology $ -- $ -- $ --
Biotechnology 19,686 18,131 16,726
R&D Systems Europe -- 40 57
-------- -------- --------
Total intersegment sales $ 19,686 $ 18,171 $ 16,783
======== ======== ========
Earnings before taxes
Hematology $ 5,901 $ 5,938 $ 5,094
Biotechnology 66,630 58,468 47,777
R&D Systems Europe 16,825 10,339 6,522
Corporate and other (6,815) (5,190) (21,657)
-------- -------- --------
Total earnings before taxes $ 82,541 $ 69,555 $ 37,736
======== ======== ========
Assets
Hematology $ 22,093 $ 21,308 $ 20,182
Biotechnology 181,610 141,425 132,937
R&D Systems Europe 49,512 33,563 23,641
Corporate and other 73,554 68,329 62,833
Intersegment eliminations (1,309) (1,348) (1,346)
-------- -------- --------
Total assets $325,460 $263,277 $238,247
======== ======== ========
Depreciation and amortization
Hematology $ 346 $ 355 $ 316
Biotechnology 3,632 4,106 10,780
R&D Systems Europe 275 288 252
Corporate and other 1,787 1,604 1,340
-------- -------- --------
Total depreciation and amortization $ 6,040 $ 6,353 $ 12,688
======== ======== ========
Capital purchases
Hematology $ 46 $ 43 $ 831
Biotechnology 2,786 7,799 2,332
R&D Systems Europe 144 193 201
Corporate and other 734 7,159 18,912
-------- -------- --------
Total capital purchases $ 3,710 $ 15,194 $ 22,276
======== ======== ========
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., Discovery Genomics, Inc. and Hemerus, the
impairment loss on the equity investment in fiscal 2004 and the litigation
settlement in fiscal 2002.
Following is financial information relating to geographic areas (in thousands):
YEAR ENDED JUNE 30,
2004 2003 2002
-------- -------- --------
External sales
United States $ 94,559 $ 87,774 $ 80,957
Other areas 66,698 57,237 49,943
-------- -------- --------
Total external sales $161,257 $145,011 $130,900
======== ======== ========
Long-lived assets
United States $ 81,870 $ 82,481 $ 71,616
Other areas 752 814 835
-------- -------- --------
Total long-lived assets $ 82,622 $ 83,295 $ 72,451
======== ======== ========
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 PLANS: 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 $902,000, $440,000 and $1,022,000 for the years ended June 30, 2004, 2003
and 2002, respectively. The Company operates a defined contribution pension
plan for employees of R&D Systems Europe Ltd. Operations have been charged for
contributions to the plan of $105,000, $84,000 and $84,000 for the years ended
June 30, 2004, 2003 and 2002, 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
39
Directors. The Company purchases its common stock at market value for
contribution to the plans. For the years ended June 30, 2004, 2003 and 2002
operations have been charged $947,000, $463,000 and $1,081,000, respectively.
PERFORMANCE INCENTIVE PROGRAM: Under certain employment agreements with
executive officers, the Company recorded bonuses of $66,000, $68,000 and
$98,000 for the years ended June 30, 2004, 2003 and 2002, respectively. In
addition, options for 41,758, 3,460 and 3,108 shares of common stock were
granted to the executive officers during fiscal 2004, 2003 and 2002,
respectively.
L. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NONCASH INVESTING AND
FINANCING ACTIVITIES:
The Company paid and received cash for the following items (in thousands):
YEAR ENDED JUNE 30,
2004 2003 2002
-------- -------- --------
Income taxes paid $ 25,979 $ 17,477 $ 21,251
Interest paid 672 1,022 1,326
Interest received 3,474 3,380 3,665
In fiscal 2004, stock options for 1,000 shares of common stock were exercised
by the surrender of 204 shares of common stock at fair market value of $9,000.
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
$454,000. 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 $225,000.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
TECHNE Corporation
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of TECHNE
Corporation and Subsidiaries (the Company) as of June 30, 2004 and 2003, and
the related consolidated statements of earnings, stockholders' equity and cash
flows for the years 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 audits.
We conducted our audits in accordance the standards of the Public Company
Accounting Oversight Board (United States). 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, the fiscal 2004 and 2003 consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of TECHNE Corporation and Subsidiaries as of June 30, 2004
and 2003 and the results of their operations and their cash flows for the years
then ended in conformity with U.S. generally accepted accounting principles.
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 10, 2004
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
TECHNE Corporation
Minneapolis, Minnesota
We have audited the accompanying consolidated statements of earnings,
stockholders' equity, and cash flows of TECHNE Corporation and
Subsidiaries (the "Company") for the year 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 audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States of America). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the results of operations and cash flows of
TECHNE Corporation and Subsidiaries for the year ended June 30, 2002,
in conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE & TOUCHE LLP
August 13, 2002
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. 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.
41
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", "Committees and Meetings of the Board of Directors", "Code of
Ethics and Business Conduct and Financial Fraud Hotline" and "Compliance With
Section 16(a) of the Securities Exchange Act" in the Company's proxy
statement for its 2004 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 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 2004 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 AND RELATED STOCKHOLDER MATTERS
Information about the Company's equity compensation plans at June 30, 2004 is
as follows (shares in thousands):
Number of
Number of Weighted- Securities
Securities to be Average Remaining
Issued Upon Exercise Price Available for
Exercise of of Outstanding Future Issuance
Outstanding Options, Under Equity
Options, Warrants Warrants and Compensation
Plan Category and Rights Rights Plans
- ------------- ----------------- -------------- ---------------
Equity compensation
plans approved by
Stockholders(1) 1,337 $23.60 3,452
Equity compensation
plans not approved
by stockholders(2) 120 $11.89 0
(1) Includes the Company's 1997 and 1987 Incentive Stock Option Plans and 1998
and 1988 Nonqualified Stock Option Plans. No future grants will be made
under the 1987 and 1988 Plans.
(2) Includes warrants issued as part of a real estate purchase. The warrants
expire on June 30, 2006.
The remaining information required by Item 12 is incorporated by reference to
the sections entitled "Principal Shareholders" and "Management Shareholdings"
in the Company's proxy statement for its 2004 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.
42
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 16 is incorporated herein by reference to
the section entitled "Audit Fees" in the Company's proxy statement for its
2004 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.
PART IV
ITEM 15. 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, 2004, 2003 and 2002
Consolidated Balance Sheets as of June 30, 2004 and 2003
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2004, 2003 and 2002
Notes to Consolidated Financial Statements for the Years
Ended June 30, 2004, 2003 and 2002
Report of Independent Registered Public Accounting Firm
43
(2) Financial Statement Schedules.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNT
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
(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, 2004:
Allowance for
doubtful accounts $268 $ 76 $(111) $233
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
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM ON SCHEDULE
Board of Directors and Stockholders
TECHNE Corporation
Minneapolis, Minnesota
Under the date of August 10, 2004, we reported on the consolidated balance
sheets of TECHNE Corporation and Subsidiaries as of June 30, 2004 and 2003
and the related consolidated statements of earnings, stockholders' equity and
cash flows for the years then ended. In connection with our audit of the
aforementioned financial statements, we also have audited the related
financial statement schedule for the years ended June 30, 2004 and 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 audits. In our
opinion, such financial statement schedule for the years ended June 30, 2004
and 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 2004 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 10, 2004
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
TECHNE Corporation
Minneapolis, Minnesota
We have audited the consolidated financial statements of TECHNE Corporation
and Subsidiaries (the "Company") for the year ended June 30, 2002, and have
issued our report thereon dated August 13, 2002; such consolidated financial
statements and report are included elsewhere in this Form 10-K. Our audit also
included the financial statement schedule of the Company for the year ended
June 30, 2002 listed in Item 15 (2). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audit. In our opinion, such financial statement
schedule for the year ended June 30, 2002, 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
(3) Exhibits.
See Exhibit Index immediately following signature page.
B. Reports on Form 8-K:
Form 8-K dated April 27, 2004 furnishing pursuant to Item 12, the
Registrant's press release reporting earnings for its third quarter of
fiscal 2004 and segment information for the quarter and nine months
ended March 31, 2004.
Form 8-K dated August 10, 2004 furnishing pursuant to Item 12, the
Registrant's press release reporting earnings for its fourth quarter
of fiscal 2004 and segment information for the year ended June 30, 2004.
45
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 10, 2004 /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 10, 2004 /s/ Thomas E. Oland
-------------------
Thomas E. Oland
Chairman of the Board, President,
Treasurer, Chief Executive Officer,
Chief Financial Officer and
Director
September 10, 2004 /s/ Roger C. Lucas, Ph.D.
-------------------------
Dr. Roger C. Lucas
Vice Chairman and Director
September 10, 2004 /s/ Howard V. O'Connell
-----------------------
Howard V. O'Connell, Director
September 10, 2004 /s/ G. Arthur Herbert
---------------------
G. Arthur Herbert, Director
September 10, 2004 /s/ Randolph C. Steer, Ph.D., M.D.
----------------------------------
Dr. Randolph C. Steer, Director
September 10, 2004 /s/ Christopher S. Henney, Ph.D., D.Sc.
---------------------------------------
Dr. Christopher S. Henney, Director
September 10, 2004 /s/ Robert V. Baumgartner
-------------------------
Robert V. Baumgartner, Director
46
EXHIBIT INDEX
for Form 10-K for the 2004 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
47
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
48
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.
10.41** Extension, dated June 30, 2004, to Employment Agreement with
Monica Tsang, Ph.D.
10.42** Extension, dated June 30, 2004, to Employment Agreement with
Marcel Veronneau
- -------------
*Incorporated by reference; SEC File No. 0-17272
**Management contract or compensatory plan or arrangement
49
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 Consent of KPMG LLP, Independent Registered Public Accounting Firm
23.1 Consent of Deloitte & Touche LLP, Independent Registered Public
Accounting Firm
31 Section 302 Certification
32 Section 906 Certification
- -------------
*Incorporated by reference; SEC File No. 0-17272
**Management contract or compensatory plan or arrangement
50