SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005, 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 or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
614 MCKINLEY PLACE N.E. (612) 379-8854
MINNEAPOLIS, MN 55413 (Registrant's telephone number,
(Address of principal (Zip Code) including area code)
executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes (X) No ( )
At May 3, 2005, 38,448,561 shares of the Company's Common Stock (par value
$.01) were outstanding.
TECHNE CORPORATION
FORM 10-Q
MARCH 31, 2005
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2005
(unaudited) and June 30, 2004 3
Consolidated Statements of Earnings for the quarter
and nine months ended March 31, 2005 and 2004 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months
ended March 31, 2005 and 2004 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
ITEM 4. CONTROLS AND PROCEDURES 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 20
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS 21
ITEM 5. OTHER INFORMATION 21
ITEM 6. EXHIBITS 21
SIGNATURES 21
2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
TECHNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
3/31/05 6/30/04
-------- --------
ASSETS
Cash and cash equivalents $ 59,752 $ 51,201
Short-term available-for-sale investments 12,674 42,534
Trade accounts receivable, net 23,023 20,262
Interest receivable 458 837
Inventories 8,229 7,457
Deferred income taxes 5,221 4,820
Prepaid expenses 917 954
-------- --------
Total current assets 110,274 128,065
Available-for-sale investments 48,148 82,858
Property and equipment, net 89,148 80,504
Goodwill, net 12,540 12,540
Intangible assets, net 1,903 2,819
Deferred income taxes 7,080 7,843
Investments 8,198 8,484
Other long-term assets 697 2,347
-------- --------
$277,988 $325,460
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Trade accounts payable $ 3,811 $ 2,695
Salaries, wages and related accounts payable 4,571 3,416
Other accounts payable and accrued expenses 2,160 1,152
Income taxes payable 6,281 4,915
Current portion of long-term debt 1,257 1,281
-------- --------
Total current liabilities 18,080 13,459
Long-term debt, less current portion 13,661 14,576
-------- --------
Total liabilities 31,741 28,035
-------- --------
Commitments and contingencies
Common stock, par value $.01 per share;
authorized 100,000,000; issued and outstanding
38,441,861 and 41,154,922, respectively 384 412
Additional paid-in capital 72,330 68,960
Retained earnings 166,518 222,728
Accumulated other comprehensive income 7,015 5,325
-------- --------
Total stockholders' equity 246,247 297,425
-------- --------
$277,988 $325,460
======== ========
See notes to consolidated financial statements (unaudited).
3
TECHNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(unaudited)
QUARTER ENDED NINE MONTHS ENDED
------------------ ------------------
3/31/05 3/31/04 3/31/05 3/31/04
-------- -------- -------- --------
Net sales $ 47,935 $ 42,541 $131,101 $118,798
Cost of sales 9,138 8,946 26,966 26,050
-------- -------- -------- --------
Gross margin 38,797 33,595 104,135 92,748
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative 6,379 5,456 18,303 16,058
Research and development 4,631 5,082 13,938 15,495
Amortization of intangible assets 305 400 916 1,199
-------- -------- -------- --------
Total operating expenses 11,315 10,938 33,157 32,752
-------- -------- -------- --------
Operating income 27,482 22,657 70,978 59,996
-------- -------- -------- --------
Other expense (income):
Interest expense 193 167 616 514
Interest income (938) (853) (3,180) (2,341)
Other non-operating expense
(income), net 323 415 1,205 513
-------- -------- -------- --------
Total other income (422) (271) (1,359) (1,314)
-------- -------- -------- --------
Earnings before income taxes 27,904 22,928 72,337 61,310
Income taxes 9,465 8,309 24,772 21,749
-------- -------- -------- --------
Net earnings $ 18,439 $ 14,619 $ 47,565 $ 39,561
======== ======== ======== ========
Earnings per share:
Basic $ 0.46 $ 0.36 $ 1.16 $ 0.96
Diluted $ 0.45 $ 0.35 $ 1.15 $ 0.95
Weighted average common shares outstanding:
Basic 40,423 41,072 40,961 41,024
Diluted 40,896 41,752 41,423 41,668
See notes to consolidated financial statements (unaudited).
4
TECHNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
NINE MONTHS ENDED
-------------------
3/31/05 3/31/04
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 47,565 $ 39,561
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 4,551 4,541
Deferred income taxes 374 197
Losses by equity method investees 232 2,150
Other 128 320
Change in operating assets and operating liabilities:
Trade accounts and interest receivable (1,573) (1,592)
Inventories (718) (835)
Prepaid expenses 51 (364)
Trade and other accounts payable 1,208 (395)
Salaries, wages and related accounts 1,711 1,415
Income taxes payable 1,346 3,060
-------- --------
Net cash provided by operating activities 54,875 48,058
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (10,229) (3,452)
Purchase of available-for-sale investments (124,035) (97,820)
Proceeds from sales of available-for-sale investments 157,815 44,770
Proceeds from maturities of available-for-sale
Investments 30,911 18,773
Increase in other long-term assets (496) (3,400)
-------- --------
Net cash provided by (used in) investing
activities 53,966 (41,129)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 2,779 3,011
Purchase of common stock for stock bonus plans (260) --
Repurchase of common stock, including related costs (103,674) --
Payments on long-term debt (939) (918)
-------- --------
Net cash (used in) provided by financing
activities (102,094) 2,093
-------- --------
Effect of exchange rate changes on cash 1,804 3,333
-------- --------
Net increase in cash and cash equivalents 8,551 12,355
Cash and cash equivalents at beginning of period 51,201 39,371
-------- --------
Cash and cash equivalents at end of period $ 59,752 $ 51,726
======== ========
See notes to consolidated financial statements (unaudited).
5
TECHNE CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
A. BASIS OF PRESENTATION:
The unaudited consolidated financial statements of Techne Corporation and
Subsidiaries (the Company) have been prepared in accordance with accounting
principles generally accepted in the United States of America and with
instructions to Form 10-Q and Article 10 of Regulation S-X. The accompanying
unaudited consolidated financial statements reflect all adjustments which
are, in the opinion of management, necessary to a fair presentation of the
results for the interim periods presented. All such adjustments are of a
normal recurring nature.
A summary of significant accounting policies followed by the Company is
detailed in the Annual Report to Shareholders for fiscal 2004. The Company
follows these policies in preparation of the interim unaudited consolidated
financial statements. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. These unaudited consolidated financial statements
should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto for the fiscal year ended June 30, 2004 included
in the Company's Annual Report to Shareholders for fiscal 2004.
Recent Accounting Pronouncements:
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards No. 123 (Revised 2004) (SFAS No. 123R),
Share-Based Payment. SFAS No. 123R is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation and supersedes Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and its
related implementation guidance. The Statement focuses primarily on
accounting for transactions in which an entity obtains employee services
through share-based payment transactions. SFAS No 123R requires a public
entity measure the cost of employee services received in exchange for the
award of equity instruments based on the fair value of the award at the date
of grant. The cost will be recognized over the period during which an
employee is required to provide services in exchange for the award. SFAS No.
123R is effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005 and the Company will adopt
the standard in the first quarter of fiscal 2006. While the Company cannot
precisely determine the impact on net earnings as a result of the adoption of
SFAS No 123R, estimated compensation expense related to prior periods can be
found in Note E to the financial statements included in this Form 10-Q and
Note A to the financial statements included in the Company's June 30, 2004
Form 10-K. The ultimate amount of increased compensation expense will be
dependent on the number of option shares granted during the year, their
timing and vesting period and the method used to calculate the fair value of
the awards, among other factors.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs. The
Statement amends Accounting Research Bulletin No. 43 to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and spoilage. The Statement also requires the allocation of fixed
production overheads to inventory be based on normal production capacity.
SFAS No. 151 is effective for the Company for inventory costs incurred
beginning in fiscal 2006. Adoption of the Statement is not expected to have
a significant impact on the Company's consolidated financial statements.
6
In December 2004, the FASB issued Staff Position No. 109-1, Application of
FASB Statement No. 109 (SFAS 109), Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004 (FSP 109-1). FSP 109-1 clarifies that the manufacturer's
deduction provided for under the American Jobs Creation Act of 2004 (AJCA)
should be accounted for as a special deduction in accordance with SFAS 109
and not as a tax rate reduction. The adoption of FSP 109-1 will have no
impact on the Company's results of operations or financial position for
fiscal year 2005 because the manufacturer's deduction is not available to the
Company until fiscal year 2006. The Company is evaluating the effect that the
manufacturer's deduction will have in subsequent years.
The FASB also issued Staff Position No. 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004 (FSP 109-2). The AJCA introduces a special one-time
dividends received deduction on the repatriation of certain foreign earnings
to a U.S. taxpayer provided certain criteria are met. The Company is
currently evaluating the effect of repatriation of foreign earnings on
consolidated financial results. At the present time, deferred taxes have not
been recorded on undistributed earnings of foreign subsidiaries as the
amounts are considered permanently invested. If the Company decides to
repatriate foreign earnings a one-time charge may be recorded for the
deferred taxes.
Reclassification:
Effective with the quarter ended September 30, 2004, the Company reclassified
available-for-sale investments with contractual maturities of greater than
one year at June 30, 2004, as long-term assets. The reclassification had no
impact on net earnings, earnings per share or stockholders' equity as
previously reported.
Certain consolidated balance sheet captions appearing in this interim report
are as follows (in thousands):
3/31/05 6/30/04
-------- --------
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable $ 23,193 $ 20,495
Less allowance for doubtful accounts 170 233
-------- --------
NET TRADE ACCOUNTS RECEIVABLE $ 23,023 $ 20,262
======== ========
INVENTORIES
Raw materials $ 3,525 $ 3,062
Supplies 123 138
Finished goods 4,581 4,257
-------- --------
TOTAL INVENTORIES $ 8,229 $ 7,457
======== ========
PROPERTY AND EQUIPMENT
Land $ 4,214 $ 3,264
Buildings and improvements 87,065 77,333
Building construction in progress 8,617 8,329
Laboratory equipment 17,940 17,081
Office equipment 3,721 3,367
Leasehold improvements 739 627
-------- --------
122,296 110,001
Less accumulated depreciation and amortization 33,148 29,497
-------- --------
NET PROPERTY AND EQUIPMENT $ 89,148 $ 80,504
======== ========
GOODWILL $ 38,846 $ 38,846
Less accumulated amortization 26,306 26,306
-------- --------
NET GOODWILL $ 12,540 $ 12,540
======== ========
7
3/31/05 6/30/04
-------- --------
INTANGIBLE ASSETS
Customer list $ 18,010 $ 18,010
Technology licensing agreements 730 730
-------- --------
18,740 18,740
Less accumulated amortization 16,837 15,921
-------- --------
NET INTANGIBLE ASSETS $ 1,903 $ 2,819
======== ========
B. EARNINGS PER SHARE:
Shares used in the earnings per share computations are as follows (in
thousands):
QUARTER ENDED NINE MONTHS ENDED
----------------- -----------------
3/31/05 3/31/04 3/31/05 3/31/04
------- ------- ------- -------
Weighted average common shares
outstanding-basic 40,423 41,072 40,961 41,024
Dilutive effect of forward contract
(see note F) 115 -- 38 --
Dilutive effect of stock options and
Warrants 358 680 424 644
------- ------- ------- -------
Weighted average common shares
outstanding-diluted 40,896 41,752 41,423 41,668
======= ======= ======= =======
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 was 686,000 and 269,000 for the quarter and
nine months ended March 31, 2005, respectively, and 61,000 and 362,000 for
the same prior-year periods.
C. SEGMENT INFORMATION:
Following is financial information relating to the Company's operating
segments (in thousands):
QUARTER ENDED NINE MONTHS ENDED
------------------ ------------------
3/31/05 3/31/04 3/31/05 3/31/04
-------- -------- -------- --------
External sales
Hematology $ 3,652 $ 4,069 $ 12,180 $ 12,804
Biotechnology 30,740 26,069 81,495 72,900
R&D Systems Europe 13,543 12,403 37,426 33,094
-------- -------- -------- --------
Total external sales $ 47,935 $ 42,541 $131,101 $118,798
======== ======== ======== ========
Intersegment sales
Biotechnology $ 5,598 $ 5,145 $ 15,606 $ 14,733
-------- -------- -------- --------
Total intersegment sales $ 5,598 $ 5,145 $ 15,606 $ 14,733
======== ======== ======== ========
Earnings before income taxes
Hematology $ 869 $ 1,272 $ 3,925 $ 4,313
Biotechnology 21,722 17,892 55,311 48,616
R&D Systems Europe 5,980 5,105 15,709 12,502
Corporate and other (667) (1,341) (2,608) (4,121)
-------- -------- -------- --------
Total earnings before income taxes $ 27,904 $ 22,928 $ 72,337 $ 61,310
======== ======== ======== ========
8
D. STOCK OPTIONS:
As permitted through June 30, 2005 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. In December 2004,
the Financial Accounting Standards Board issued Statement of Accounting
Standards No. 123 (Revised 2004) (SFAS No. 123R), Share-Based Payment. The
Statement requires the recognition of compensation cost for equity
instruments issued to employees based on the fair value at the date of grant.
SFAS No. 123R is effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005 and the Company will adopt
the standard in the first quarter of fiscal 2006.
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, the Company's net
earnings and earnings per share would have been as follows (in thousands,
except per share data):
QUARTER ENDED NINE MONTHS ENDED
----------------- -----------------
3/31/05 3/31/04 3/31/05 3/31/04
------- ------- ------- -------
Net earnings:
As reported $18,439 $14,619 $47,565 $39,561
Less employee stock-based
compensation, net of tax effect 161 564 1,359 2,778
------- ------- ------- -------
Pro forma $18,278 $14,055 $46,206 $36,783
======= ======= ======= =======
Basic earnings per share:
As reported $ 0.46 $ 0.36 $ 1.16 $ 0.96
Less employee stock-based
compensation, net of tax effect 0.01 0.02 0.03 0.06
------- ------- ------- -------
Pro forma $ 0.45 $ 0.34 $ 1.13 $ 0.90
======= ======= ======= =======
Diluted earnings per share:
As reported $ 0.45 $ 0.35 $ 1.15 $ 0.95
Less employee stock-based
compensation, net of tax effect 0.00 0.01 0.03 0.07
------- ------- ------- -------
Pro forma $ 0.45 $ 0.34 $ 1.12 $ 0.88
======= ======= ======= =======
No options were granted during the quarter ended March 31, 2005. 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:
QUARTER ENDED NINE MONTHS ENDED
----------------- -----------------
3/31/05 3/31/04 3/31/05 3/31/04
------- ------- ------- -------
Dividend yield -- -- -- --
Expected annualized volatility N/A 48% 52%-56% 48%-53%
Risk free interest rates N/A 4.2% 3.2%-3.9% 3.9%-4.4%
Expected lives N/A 7 years 6 years 7 years
9
E. PROPERTY ACQUISITION:
On January 3, 2005, the Company acquired property adjacent to its Minneapolis
facility for $10.4 million, $2 million of which was deposited in escrow in
fiscal 2002. The remaining purchase price was funded through cash on hand.
A portion of the property is currently leased to third parties and the
Company plans to continue to lease out the building until the space is needed
for its own operations.
F. STOCK REPURCHASE:
In March 2005, the Company repurchased approximately 2.9 million shares of
its common stock under an accelerated stock buyback ("ASB") transaction for
an initial value of approximately $100 million ($34.45 per share). The
transaction was completed under a privately negotiated contract with an
investment bank. The investment bank borrowed the 2.9 million shares to
complete the transaction and will purchase the replacement shares in the open
market over a nine-month period beginning in March 2005. The ASB agreement is
subject to a market price adjustment provision based upon the volume weighted
average price during the nine-month period. At the settlement of the
contract, expected in December 2005, the Company will receive or pay the
price adjustment. The ASB agreement can be settled, at the Company's option,
in cash or shares of the Company's common stock and, accordingly the contract
was classified as equity. The purchase price adjustment will be reflected in
stockholders equity at the time of settlement.
Approximately 1.8 million of the shares repurchased are subject to a collar,
which effectively sets a minimum and maximum price the Company will be
obligated to pay for such shares. The collar was established in exchange for
an up-front payment of $3.5 million. The minimum and maximum price for the
1.8 million shares is approximately $39.00 and $41.00, respectively. The
maximum additional amount that could be required to be paid related to the
shares subject to the collar is $8.5 million or about 215,000 shares. The
adjusted price of the remaining 1.1 million repurchased shares will be based
upon the difference between the volume weighted average price during the
nine-month period and the initial $34.45 per share payment. For each $1.00
change in the average market price during the nine-month period, the
Company's obligation under the uncollared portion of the agreement would
increase or decrease by $1.1 million. There is no limit on the number of
shares that could potentially be required to be paid under the uncollared
portion of the agreement. Should the Company elect to settle the ASB
agreement in shares, each $1.00 increase in the average market price over
$40.00 during the nine-month period will increase the number of shares
required for settlement under the uncollared portion of the agreement, but
reduce the number of shares required by the collared portion of the contract
by a net amount of about 15,000 shares. At an average market price of $40.00
(which approximated the average market price from the transaction date
through March 31, 2005), the settlement amount for the contract would be
approximately $14.8 million or about 370,000 shares.
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations for the Quarter and Nine Months Ended March 31, 2005
and the Quarter and Nine Months Ended March 31, 2004
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 26% and 20% for the quarter and nine
months ended March 31, 2005 compared to the quarter and nine months ended
March 31, 2004. The primary reason for the increase was increased net sales
and improved margins. Net sales for the quarter and nine months ended March
31, 2005, increased 13% and 10%, respectively, from the same periods in the
prior year. Gross margins percentages for the quarter and nine months ended
March 31, 2005 were 81% and 79%, respectively, compared to 79% and 78% for
the same periods in the prior year. 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 $115,000 and $735,000 for the quarter and
nine months ended March 31, 2005, respectively. The Company generated cash
of $54.9 million from operating activities in the first nine months of fiscal
2005 and repurchased 2.9 million shares of common stock for $104 million.
Cash, cash equivalents and available-for-sale investments were $121 million
at March 31, 2005 compared to $177 million at June 30, 2004.
Net Sales
Net sales for the quarter ended March 31, 2005 were $47.9 million, an
increase of $5.4 million (13%) from the quarter ended March 31, 2004. Net
sales for the nine months ended March 31, 2005 were $131.1 million, an
increase of $12.3 million (10%) from the prior-year period. Excluding the
effect of changes in foreign currency exchange rates, consolidated net sales
increased 12% and 8% for the quarter and nine months ended March 31, 2005.
R&D Systems' Biotechnology Division net sales increased $4.7 million (18%)
and $8.6 million (12%), respectively for the quarter and nine months ended
March 31, 2005. The Biotechnology Division sales increase for the quarter was
the result of increased U.S. retail sales. Sales for the quarter to
pharmaceutical/biotechnology customers and academic customers, the two
largest segments of the U.S. market, showed the greatest revenue growth over
the prior year.
R&D Europe net sales increased $1.1 million (9%) and $4.3 million (13%) for
the quarter and nine months ended March 31, 2005, respectively.
Approximately $400,000 and $2.6 million of the increase in R&D Europe net
sales for the quarter and nine months was the result of favorable exchange
rates used in converting British pounds to U.S. dollars. In British pounds,
R&D Europe net sales increased 6% and 5% for the quarter and nine months
ended March 31, 2005.
11
R&D Systems' Hematology Division net sales decreased $417,000 (10%) and
$624,000 (5%) for the quarter and nine months ended March 31, 2005. During
the second quarter of fiscal 2005 a large OEM customer notified the
Hematology Division that they were changing to a new primary vendor for
certain controls and calibrators. Sales to this customer in the quarter
ended March 31, 2005 decreased $428,000 from the prior-year third quarter.
Although the Hematology Division continues to manufacture products for the
customer as a secondary supplier, it is anticipated that the effect on
revenues in the fourth quarter of fiscal 2005 will be a reduction of
approximately $850,000. The reduction in Hematology Division revenues is not
expected to have a significant impact on consolidated earnings and revenues.
Cost of Sales
The manufacturing process for proteins and antibodies has and may continue to
produce quantities in excess of forecasted usage. The Company values its
manufactured protein and antibody inventory based on a two-year forecast.
Protein and antibody quantities in excess of the two-year usage forecast are
considered impaired and not included in the inventory value. The value of
protein and antibody inventory does not change significantly from quarter to
quarter. Protein and antibody production is generally for high-volume
products or for new products with limited initial sales. The Company
capitalizes protein and antibody costs each period in inventory, however
given the insignificant changes in these inventory balances each quarter,
substantially all manufacturing costs for proteins and antibodies, consisting
largely of wages, benefits, facility and equipment costs, are expensed each
quarter. A change in inventory value as a result of changes in the two-year
forecast is reflected in cost of sales in the period of change.
Manufacturing costs and changes in inventory value for proteins and
antibodies charged to cost of sales were $1.6 million and $1.7 million for
the quarters ended March 31, 2005 and 2004, respectively. For the nine
months ended March 31, 2005 and 2004, manufacturing costs and changes in
inventory value for proteins and antibodies charged to cost of sales were
$4.9 million and $4.8 million, respectively.
Gross Margins
Gross margins, as a percentage of net sales, were as follows:
QUARTER ENDED NINE MONTHS ENDED
----------------- -----------------
3/31/05 3/31/04 3/31/05 3/31/04
------- ------- ------- -------
Hematology Division 41.9% 45.1% 46.6% 45.9%
Biotechnology Division 82.5% 80.4% 80.9% 80.0%
R&D Systems Europe 54.8% 53.8% 53.6% 51.3%
Consolidated 80.9% 79.0% 79.4% 78.1%
Consolidated gross margins for the quarter and nine months ended March 31,
2005 improved from the quarter and nine months ended March 31, 2004 mainly as
a result of higher Biotechnology Division margins. The higher Biotechnology
Division margins are primarily due to increased sales of proteins and
antibodies for which the costs expensed for the periods have not changed
significantly from the prior year as discussed above. Consolidated gross
margins for the quarter and nine months also improved as a result of higher
margins at R&D Europe due to favorable exchange rates as a result of a weaker
U.S. dollar to the British pound.
12
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter and nine months
ended March 31, 2005, increased $923,000 (17%) and $2.2 million (14%),
respectively, from the same periods of last year.
QUARTER ENDED NINE MONTHS ENDED
----------------- -----------------
3/31/05 3/31/04 3/31/05 3/31/04
------- ------- ------- -------
Hematology Division $ 505 $ 439 $ 1,350 $ 1,213
Biotechnology Division 3,712 2,917 10,100 8,517
R&D Europe 1,939 1,805 5,855 5,395
Corporate expenses 223 295 998 933
------- ------- ------- -------
Total selling, general
and administrative $ 6,379 $ 5,456 $18,303 $16,058
======= ======= ======= =======
Biotechnology Division selling, general and administrative expenses increased
$795,000 (27%) and $1.6 million (19%) for the quarter and nine months ended
March 31, 2005. The increase for the quarter and nine months was primarily
the result of increased personnel costs related to annual wage increases and
additional sales and marketing personnel (increases of $82,000 and $334,000
for the quarter and nine months, respectively), increased profit sharing
accrual (increases of $370,000 and $556,000 for the quarter and nine months,
respectively) and increased advertising and promotion expenditures (increases
of $100,000 and $199,000 for the quarter and nine months, respectively).
The increase in R&D Europe selling, general and administrative expenses of
$134,000 and $460,000 for the quarter and nine months ended March 31, 2005,
was primarily the result of the change in foreign currency exchange rates
used to convert results from British pounds to U.S. dollars. In British
pounds, R&D Europe selling, general and administrative expenses increased
44,000 British pounds (1,022,000 and 978,000 British pounds for the quarters
ended March 31, 2005 and 2004, respectively) and 13,000 British pounds
(3,133,000 and 3,120,000 British pounds for the nine months ended
March 31, 2005 and 2004, respectively).
Research and Development Expenses
Research and development expenses are composed of the following (in
thousands):
QUARTER ENDED NINE MONTHS ENDED
----------------- -----------------
3/31/05 3/31/04 3/31/05 3/31/04
------- ------- ------- -------
Hematology Division expenses $ 199 $ 203 $ 576 $ 584
Biotechnology Division expenses 4,432 4,290 13,362 12,761
ChemoCentryx, Inc. losses -- 519 -- 1,783
Hemerus Medical, LLC losses -- 23 -- 23
Discovery Genomics, Inc. losses -- 47 -- 344
------- ------- ------- -------
Total research and development
expenses $ 4,631 $ 5,082 $13,938 $15,495
======= ======= ======= =======
Research and development expenses decreased $451,000 (9%) and $1.6 million
(10%) for the quarter and nine months ended March 31, 2005, respectively.
Included in research and development expenses for the quarter and nine months
ended March 31, 2004 were the Company's share of losses by ChemoCentryx, Inc.
(CCX), Discovery Genomics, Inc. (DGI) and Hemerus Medical, LLC (Hemerus),
companies in which the Company has invested. In May 2004, the Company
changed from the equity method to the cost method of accounting for its
investment in CCX and no longer records its share of CCX losses in its
consolidated results. The change to the cost method of accounting for CCX
was the result of the Company's ownership percentage declining below 20% and
qualitative factors which indicated that the Company does not exercise
significant influence over the operations of CCX. The Company's net
investment in CCX at March 31, 2005 was $5.1 million. In the fourth quarter
of fiscal 2004, the Company wrote off its investment in DGI as an impairment
loss. Beginning in fiscal 2005, the Company's share of Hemerus losses is
included in other non-operating expenses since the company began selling
product and was no longer considered a development stage company. Excluding
CCX, DGI and Hemerus losses, research and development expenses for the
quarter and nine months ended March 31, 2005 increased $138,000 (3%) and
$593,000 (4%), respectively, mainly as a result of wage increases.
13
Other Non-operating Expense and Income
Other non-operating expense and income consists mainly of foreign currency
transaction gains, rental income, real estate taxes, depreciation and utility
expenses related to properties not used in operations, and the Company's
fiscal 2005 share of losses by Hemerus Medical, LLC (Hemerus), in which the
Company invested in January 2004. As Hemerus is a limited liability
corporation, the Company is required to account for its investment using the
equity method of accounting.
QUARTER ENDED NINE MONTHS ENDED
----------------- -----------------
3/31/05 3/31/04 3/31/05 3/31/04
------- ------- ------- -------
Foreign currency (gains)/losses $ 29 $ 85 $ (6) $ (128)
Rental income (318) (20) (390) (85)
Real estate taxes, depreciation and
Utilities 527 350 1,369 726
Hemerus Medical, LLC losses 85 -- 232 --
------- ------- ------- -------
Total other non-operating expense
(income) $ 323 $ 415 $ 1,205 $ 513
======= ======= ======= =======
The Company's net investment in Hemerus at March 31, 2005 was $2.7 million.
The Company has financial exposure to the losses of Hemerus to the extent of
its net investment in the company. 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.
Income Taxes
Income taxes for the quarter and nine months ended March 31, 2005 were
provided at rates of approximately 33.9% and 34.2% of consolidated earnings
before income taxes compared to 36.2% and 35.5% for the quarter and nine
months ended March 31, 2004. The decrease in the effective tax rate was due
to the reduction of non-deductible losses by CCX and DGI. U.S. federal taxes
have been reduced by the credit for research and development expenditures and
the benefit for extraterritorial income. 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 the remainder of fiscal 2005 to range from 34%
to 36%.
Liquidity and Capital Resources
At March 31, 2005, cash and cash equivalents and available-for-sale
investments were $121 million compared to $177 million at June 30, 2004. The
Company believes it can meet its future cash, working capital and capital
addition requirements through currently available funds, cash generated from
operations and maturities of short-term available-for-sale investments. The
Company has an unsecured line of credit of $750,000. The interest rate on
the line of credit is at prime. There were no borrowings on the line in the
prior or current fiscal year.
Cash Flows From Operating Activities
The Company generated cash of $54.9 million from operating activities in the
first nine months of fiscal 2005 compared to $48.1 million in the first nine
months of fiscal 2004. The increase was mainly the result of increased
earnings in the current year partially offset by a smaller increase in income
taxes payable. For the nine months ended March 31, 2004 income taxes payable
increased $3.1 million compared to $1.3 million in the nine months ended
March 31, 2005. The difference was mainly the result of increased tax
payments made in fiscal 2005.
14
Cash Flows From Investing Activities
Capital expenditures for fixed assets for the first nine months of fiscal
2005 and 2004 were $10.2 million and $3.5 million, respectively. Included in
fiscal 2005 capital expenditures was $8.4 million for property acquired in
Minneapolis in January 2005. The purchase total price of the property was
$10.4 million, $2 million of which was deposited in escrow in fiscal 2002.
The property purchase was financed through cash on hand. Included in fiscal
2004 capital additions was $2.2 million related to property in southeast
Minnesota. The Company acquired the property in fiscal 2003 and in fiscal
2004 constructed additional facilities at this site. The remaining capital
additions in the first nine months of fiscal 2005 and 2004 were for
laboratory and computer equipment and remodeling of laboratory space.
Remaining expenditures in fiscal 2005 for laboratory and computer equipment
are expected to be approximately $800,000. The Company also plans, in late
fiscal 2005 and early fiscal 2006, an estimated $8 million build-out of
laboratory space at its Minneapolis facility and construction of an $800,000
barn on its property in southeast Minnesota. These expenditures are expected
to be financed through currently available funds and cash generated from
operating activities.
During the nine months ended March 31, 2005, the Company purchased $124
million and had sales or maturities of $189 million of available-for-sale
investments. During the nine months ended March 31, 2004, the Company
purchased $97.8 million and had sales or maturities of $63.5 million of
available-for-sale investments. The Company's investment policy is to place
excess cash in bonds and other investments with maturities of less than three
years. The objective of this policy is to obtain the highest possible return
with minimal risk, while keeping the funds accessible.
Cash Flows From Financing Activities
Cash of $1.4 million was received during the nine months ended March 31, 2005
for the exercise of warrants to purchase 120,000 shares of common stock.
Cash of $1.4 million and $3.0 million was received during the nine months
ended March 31, 2005 and 2004, respectively, for the exercise of options for
57,000 and 175,000 shares of common stock. During the first nine months of
fiscal 2005 and fiscal 2004, options for 16,120 and 1,000 shares of common
stock were exercised by the surrender of 3,326 and 200 shares of the
Company's common stock with fair market values of $131,000 and $9,000,
respectively.
In the first nine months of fiscal 2005, the Company purchased 6,410 shares
of common stock for its employee Stock Bonus Plans. These shares, along with
17,411 previously purchased shares, were issued to the Company's Stock Bonus
Plans on September 15, 2004 to settle the fiscal 2004 accrued liability
balance of $966,000.
In March 2005, the Company repurchased approximately 2.9 million shares of
its common stock under an accelerated stock buyback ("ASB") transaction for
an initial value of approximately $100 million ($34.45 per share). The
repurchase of the shares was funded with a portion of the Company's cash and
available-for-sale investments. The ASB agreement is subject to a market
price adjustment provision based upon the volume weighted average price
during the nine-month period. At the settlement of the contract, expected in
December 2005, the Company will receive or pay the price adjustment. The ASB
agreement can be settled, at the Company's option, in cash or shares of the
Company's common stock.
15
Approximately 1.8 million of the shares repurchased are subject to a collar,
which effectively sets a minimum and maximum price the Company will be
obligated to pay for such shares. The collar was established in exchange for
an up-front payment of $3.5 million. The minimum and maximum price for the
1.8 million shares is approximately $39.00 and $41.00, respectively. The
maximum additional amount that could be required to be paid related to the
shares subject to the collar is $8.5 million or about 215,000 shares. The
adjusted price of the remaining 1.1 million repurchased shares will be based
upon the difference between the volume weighted average price during the
nine-month period and the initial $34.45 per share payment. For each $1.00
change in the average market price during the nine-month period, the
Company's obligation under the uncollared portion of the agreement would
increase or decrease by $1.1 million. There is no limit on the number of
shares that could potentially be required to be paid under the uncollared
portion of the agreement. Should the Company elect to settle the ASB
agreement in shares, each $1.00 increase in the average market price over
$40.00 during the nine-month period will increase the number of shares
required for settlement under the uncollared portion of the agreement, but
reduce the number of shares required by the collared portion of the contract
by a net amount of about 15,000 shares. At an average market price of $40.00
(which approximated the average market price from the transaction date
through March 31, 2005), the settlement amount for the contract would be
approximately $14.8 million or about 370,000 shares.
The Company has never paid cash dividends and has no plans to do so in fiscal
2005.
Critical Accounting Policies
The Company's significant accounting policies are discussed in the Company's
Annual Report to Shareholders for fiscal 2004. The application of certain of
these policies requires judgments and estimates that can affect the results
of operations and financial position of the Company. Management believes the
following accounting policies are critical to the preparation of the
consolidated financial statements. The following should be read in
conjunction with the more complete discussion of the Company's accounting
policies included in the Annual Report to Shareholders for fiscal 2004.
Accounts receivable. The Company continually monitors collections from its
customers and maintains a provision for estimated credit losses based upon
historical experience and specific collection issues that have been
identified. If financial conditions of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Inventory. The manufacturing process for proteins and antibodies has and may
continue to produce quantities in excess of forecasted usage. The Company
values its manufactured protein and antibody inventory based on a two-year
forecast. Any protein and antibody quantities in excess of its two-year
usage forecast is considered impaired and not included in the inventory
value. Any significant 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.
Goodwill, intangible and other long-lived assets. The Company periodically
assesses the impairment of goodwill, intangible and other long-lived assets.
If any such assets were determined to be impaired, the carrying value of the
asset would be written down to its fair value.
Investments. The accounting treatment (cost or equity method) of the
Company's equity investments in start-up and early development stage
companies is dependent on a number of factors, including, but not limited to,
the Company's ownership percentage and the Company's ability to exercise
significant influence over the operations and financial policies of the
investee.
16
Income taxes. The Company's tax returns are subject to audit by various
governmental entities in the normal course of business. Audits can involve
complex issues, which may require extended periods of time to resolve. The
Company believes that adequate provisions for income taxes have been made in
the consolidated financial statements.
Recent Accounting Pronouncements:
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards No. 123 (Revised 2004) (SFAS No. 123R),
Share-Based Payment. SFAS No. 123R is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation and supersedes Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and its
related implementation guidance. The Statement focuses primarily on
accounting for transactions in which an entity obtains employee services
through share-based payment transactions. SFAS No 123R requires a public
entity measure the cost of employee services received in exchange for the
award of equity instruments based on the fair value of the award at the date
of grant. The cost will be recognized over the period during which an
employee is required to provide services in exchange for the award. SFAS No.
123R is effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005 and the Company will adopt
the standard in the first quarter of fiscal 2006. While the Company cannot
precisely determine the impact on net earnings as a result of the adoption of
SFAS No 123R, estimated compensation expense related to prior periods can be
found in Note E to the financial statements included in this Form 10-Q and
Note A to the financial statements included in the Company's June 30, 2004
Form 10-K. The ultimate amount of increased compensation expense will be
dependent on the number of option shares granted during the year, their
timing and vesting period and the method used to calculate the fair value of
the awards, among other factors.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs. The
Statement amends Accounting Research Bulletin No. 43 to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and spoilage. The Statement also requires the allocation of fixed
production overheads to inventory be based on normal production capacity.
SFAS No. 151 is effective for the Company for inventory costs incurred
beginning in fiscal 2006. Adoption of the Statement is not expected to have
a significant impact on the Company's consolidated financial statements.
In December 2004, the FASB issued Staff Position No. 109-1, Application of
FASB Statement No. 109 (SFAS 109), Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004 (FSP 109-1). FSP 109-1 clarifies that the manufacturer's
deduction provided for under the American Jobs Creation Act of 2004 (AJCA)
should be accounted for as a special deduction in accordance with SFAS 109
and not as a tax rate reduction. The adoption of FSP 109-1 will have no
impact on the Company's results of operations or financial position for
fiscal year 2005 because the manufacturer's deduction is not available to the
Company until fiscal year 2006. The Company is evaluating the effect that the
manufacturer's deduction will have in subsequent years.
The FASB also issued Staff Position No. 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004 (FSP 109-2). The AJCA introduces a special one-time
dividends received deduction on the repatriation of certain foreign earnings
to a U.S. taxpayer provided certain criteria are met. The Company is
currently evaluating the effect of repatriation of foreign earnings on
consolidated financial results. At the present time, deferred taxes have not
been recorded on undistributed earnings of foreign subsidiaries as the
amounts are considered permanently invested. If the Company decides to
repatriate foreign earnings a one-time charge may be recorded for the
deferred taxes.
17
Forward Looking Information and Cautionary Statements:
Statements in this filing, and elsewhere, which look forward in time involve
risks and uncertainties which may affect the actual results of operations.
The following important factors, among others, have affected and, in the
future, could affect the Company's actual results: the introduction and
acceptance of new biotechnology and hematology products, the levels and
particular directions of research by the Company's customers, the impact of
the growing number of producers of biotechnology research products and
related price competition, the retention of hematology OEM (private label)
and proficiency survey business, the impact of changes in foreign currency
exchange rates, and the costs and results of research and product development
efforts of the Company and of companies in which the Company has invested or
with which it has formed strategic relationships. For additional information
concerning such factors, see the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 2005, the Company had a professionally managed investment
portfolio of fixed income securities, excluding those classified as cash and
cash equivalents, of $60.8 million. 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. subsidiary and European operations 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 $1.4 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 March 31, 2005 and 2004, the Company had $31,000 and
$26,000, respectively, of dollar denominated intercompany debt at its U.K.
subsidiary. At March 31, 2005 and 2004, the U.K. subsidiary had $326,000 and
$420,000, respectively, of 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 losses of 38,000 British pounds ($71,000) and
46,000 British pounds($85,000) for the quarters ended March 31, 2005 and 2004,
respectively. For the nine months ended March 31, 2005 and 2004, the Company's
U.K. subsidiary recognized net foreign currency gains of 84,000 British pounds
($156,000) and 76,000 British pounds ($128,000), respectively. The Company's
German subsidiary recognized net foreign currency gains of 32,000 euros
($42,000) for the quarter ended March 31, 2005 and net foreign currency losses
of 121,000 euros ($150,000) for the nine months ended March 31, 2005. 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 March 31, 2005, the Company's long-term debt of $13.7 million consisted
of a mortgage note payable with a floating interest rate at the one-month
LIBOR rate plus 2.5% with a floor of 4%. The floating interest rate on the
mortgage note payable was 5.2% as of March 31, 2005.
18
In March 2005, the Company repurchased approximately 2.9 million shares of
its common stock under an accelerated stock buyback ("ASB") transaction for
an initial value of approximately $100 million ($34.45 per share). The ASB
agreement is subject to a market price adjustment provision based upon the
volume weighted average price during the nine-month period. At the settlement
of the contract, expected in December 2005, the Company will receive or pay
the price adjustment. The ASB agreement can be settled, at the Company's
option, in cash or shares of the Company's common stock.
Approximately 1.8 million of the shares repurchased are subject to a collar,
which effectively sets a minimum and maximum price the Company will be
obligated to pay for such shares. The collar was established in exchange for
an up-front payment of $3.5 million. The minimum and maximum price for the
1.8 million shares is approximately $39.00 and $41.00, respectively. The
maximum additional amount that could be required to be paid related to the
shares subject to the collar is $8.5 million or about 215,000 shares. The
adjusted price of the remaining 1.1 million repurchased shares will be based
upon the difference between the volume weighted average price during the
nine-month period and the initial $34.45 per share payment. For each $1.00
change in the average market price during the nine-month period, the
Company's obligation under the uncollared portion of the agreement would
increase or decrease by $1.1 million. There is no limit on the number of
shares that could potentially be required to be paid under the uncollared
portion of the agreement. Should the Company elect to settle the ASB
agreement in shares, each $1.00 increase in the average market price over
$40.00 during the nine-month period will increase the number of shares
required for settlement under the uncollared portion of the agreement, but
reduce the number of shares required by the collared portion of the contract
by a net amount of about 15,000 shares. At an average market price of $40.00
(which approximated the average market price from the transaction date
through March 31, 2005), the settlement amount for the contract would be
approximately $14.8 million or about 370,000 shares.
ITEM 4 - 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 changes 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.
19
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
See Item 3 of the Registrant's Annual Report of Form 10-K for the fiscal year
ended June 30, 2004.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth the repurchases of Company common stock for
the quarter ended March 31, 2005:
Maximum
Total Number of Approximate
Shares Purchased Dollar Value of
as Part of Shares that May
Total Number Average Publicly Announced Yet Be Purchased
of Shares Price Paid Plans or Under the Plans
Period Purchased Per Share Programs or Programs
- ---------------- ------------ ---------- ------------------ ---------------
1/1/05 - 1/31/05 0 -- 0 $6.8 million
2/1/05 - 2/28/05 0 -- 0 $6.8 million
3/1/05 - 3/31/05 2,902,758 $34.45(1) 2,902,758 $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.
(1) On February 17, 2005, the Board of Directors of the Company approved the
repurchase of approximately 2.9 million shares of its common stock under an
accelerated stock buyback ("ASB") transaction for an initial value of
approximately $100 million ($34.45 per share). The transaction was completed
under a privately negotiated contract with an investment bank. The ASB
agreement is subject to a market price adjustment provision based upon the
volume weighted average price during the nine-month period. At the settlement
of the contract, expected in December 2005, the Company will receive or pay
the price adjustment. The ASB agreement can be settled, at the Company's
option, in cash or shares of the Company's common stock. The purchase price
adjustment will be reflected in stockholders equity at the time of
settlement.
Approximately 1.8 million of the shares repurchased are subject to a collar,
which effectively sets a minimum and maximum price the Company will be
obligated to pay for such shares. The collar was established in exchange for
an up-front payment of $3.5 million. The minimum and maximum price for the
1.8 million shares is approximately $39.00 and $41.00, respectively. The
maximum additional amount that could be required to be paid related to the
shares subject to the collar is $8.5 million or about 215,000 shares. The
adjusted price of the remaining 1.1 million repurchased shares will be based
upon the difference between the volume weighted average price during the
nine-month period and the initial $34.45 per share payment. For each $1.00
change in the average market price during the nine-month period, the
Company's obligation under the uncollared portion of the agreement would
increase or decrease by $1.1 million. There is no limit on the number of
shares that could potentially be required to be paid under the uncollared
portion of the agreement. Should the Company elect to settle the ASB
agreement in shares, each $1.00 increase in the average market price over
$40.00 during the nine-month period will increase the number of shares
required for settlement under the uncollared portion of the agreement, but
reduce the number of shares required by the collared portion of the contract
by a net amount of about 15,000 shares. At an average market price of $40.00
(which approximated the average market price from the transaction date
through March 31, 2005), the settlement amount for the contract would be
approximately $14.8 million or about 370,000 shares.
20
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SHAREHOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS
See exhibit index following.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHNE CORPORATION
(Company)
Date: May 9, 2005 /s/ Thomas E. Oland
----------------------------------
President, Chief Executive Officer
May 9, 2005 /s/ Gregory J. Melsen
----------------------------------
Chief Financial Officer
21
EXHIBIT INDEX
TO
FORM 10-Q
TECHNE CORPORATION
Exhibit # Description
- --------- -----------
10.1 Accelerated Share Repurchase Agreement
31.1 Section 302 Certification
31.2 Section 302 Certification
32.1 Section 906 Certification
32.2 Section 906 Certification
22