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 September 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 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 November 3, 2004, 41,313,732 shares of the Company's Common Stock (par value $.01) were outstanding. TECHNE CORPORATION FORM 10-Q SEPTEMBER 30, 2004 INDEX PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of September 30, 2004 (unaudited) and June 30, 2004 3 Consolidated Statements of Earnings for the quarter ended September 30, 2004 and 2003 (unaudited) 4 Consolidated Statements of Cash Flows for the three months ended September 30, 2004 and 2003 (unaudited) 5 Notes to Consolidated Financial Statements (unaudited) 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13 ITEM 4. CONTROLS AND PROCEDURES 14 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 14 ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES 14 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS 15 ITEM 5. OTHER INFORMATION 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15 SIGNATURE 16 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) 9/30/04 6/30/04 -------- -------- ASSETS Cash and cash equivalents $ 62,240 $ 51,201 Short-term available-for-sale investments 44,276 42,534 Trade accounts receivable, net 18,715 20,262 Interest receivable 939 837 Inventories 7,874 7,457 Deferred income taxes 4,926 4,820 Prepaid expenses 989 954 -------- -------- Total current assets 139,959 128,065 Available-for-sale investments 89,546 82,858 Property and equipment, net 79,753 80,504 Goodwill, net 12,540 12,540 Intangible assets, net 2,514 2,819 Deferred income taxes 7,591 7,843 Investments 8,410 8,484 Other long-term assets 2,308 2,347 -------- -------- $342,621 $325,460 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Trade accounts payable $ 3,726 $ 2,695 Salaries, wages and related accounts payable 2,911 3,416 Other accounts payable and accrued expenses 2,537 1,152 Income taxes payable 4,960 4,915 Current portion of long-term debt 1,299 1,281 -------- -------- Total current liabilities 15,433 13,459 Long-term debt, less current portion 14,244 14,576 -------- -------- Total liabilities 29,677 28,035 -------- -------- Commitments and contingencies (Note D) Common stock, par value $.01 per share; authorized 100,000,000; issued and outstanding 41,189,532 and 41,154,922, respectively 412 412 Additional paid-in capital 70,225 68,960 Retained earnings 236,875 222,728 Accumulated other comprehensive income 5,432 5,325 -------- -------- Total stockholders' equity 312,944 297,425 -------- -------- $342,621 $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 ---------------------- 9/30/04 9/30/03 ------- ------- Net sales $40,919 $37,993 Cost of sales 8,887 8,663 ------- ------- Gross margin 32,032 29,330 ------- ------- Operating expenses: Selling, general and administrative 5,634 5,083 Research and development 4,688 4,963 Amortization of intangible assets 305 400 ------- ------- Total operating expenses 10,627 10,446 ------- ------- Operating income 21,405 18,884 Other expense (income): Interest expense 245 175 Interest income (1,053) (726) Other non-operating expense (income), net 466 78 ------- ------- Total other expense (income) (342) (473) ------- ------- Earnings before income taxes 21,747 19,357 Income taxes 7,555 6,785 ------- ------- Net earnings $14,192 $12,572 ======= ======= Earnings per share: Basic $ 0.34 $ 0.31 Diluted $ 0.34 $ 0.30 Weighted average common shares outstanding: Basic 41,169 40,965 Diluted 41,676 41,600 See notes to consolidated financial statements (unaudited). 4 TECHNE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) THREE MONTHS ENDED -------------------- 9/30/04 9/30/03 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $14,192 $12,572 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1,519 1,494 Deferred income taxes 145 9 Losses by equity method investees 74 608 Other 40 122 Change in operating assets and operating liabilities: Trade accounts and interest receivable 1,583 457 Inventories (423) (265) Prepaid expenses (36) (308) Trade and other accounts payable 1,264 (402) Salaries, wages and related accounts 62 308 Income taxes payable 143 733 ------- ------- Net cash provided by operating activities 18,563 15,328 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (463) (1,312) Purchase of available-for-sale investments (37,455) (21,775) Proceeds from sale or maturity of available-for-sale investments 30,235 11,871 Increase in other long-term assets -- (400) ------- ------- Net cash used in investing activities (7,683) (11,616) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 793 1,003 Purchase of common stock for stock bonus plans (260) -- Payments on long-term debt (314) (302) ------- ------- Net cash provided by financing activities 219 701 ------- ------- Effect of exchange rate changes on cash (60) 236 ------- ------- Net increase in cash and cash equivalents 11,039 4,649 Cash and cash equivalents at beginning of period 51,201 39,371 ------- ------- Cash and cash equivalents at end of period $62,240 $44,020 ======= ======= 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. Reclassification: The Company has reclassified available-for-sale investments with contractual maturities of greater than one year at June 30, 2004, as long- term assets to conform with the current quarter presentation. 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): 9/30/04 6/30/04 ------- ------- TRADE ACCOUNTS RECEIVABLE Trade accounts receivable $18,875 $20,495 Less allowance for doubtful accounts 160 233 ------- ------- NET TRADE ACCOUNTS RECEIVABLE $18,715 $20,262 ======= ======= INVENTORIES Raw materials $ 3,610 $ 3,062 Supplies 136 138 Finished goods 4,128 4,257 ------- ------- TOTAL INVENTORIES $ 7,874 $ 7,457 ======= ======= PROPERTY AND EQUIPMENT Land $ 3,264 $ 3,264 Buildings and improvements 77,347 77,333 Building construction in progress 8,329 8,329 Laboratory equipment 17,364 17,081 Office equipment 3,431 3,367 Leasehold improvements 709 627 ------- ------- 110,444 110,001 Less accumulated depreciation and amortization 30,691 29,497 ------- ------- NET PROPERTY AND EQUIPMENT $79,753 $80,504 ======= ======= GOODWILL $38,846 $38,846 Less accumulated amortization 26,306 26,306 ------- ------- NET GOODWILL $12,540 $12,540 ======= ======= 6 9/30/04 6/30/04 ------- ------- INTANGIBLE ASSETS Customer list $18,010 $18,010 Technology licensing agreements 730 730 ------- ------- 18,740 18,740 Less accumulated amortization 16,226 15,921 ------- ------- NET INTANGIBLE ASSETS $ 2,514 $ 2,819 ======= ======= B. EARNINGS PER SHARE: Shares used in the earnings per share computations are as follows (in thousands): QUARTER ENDED -------------------- 9/30/04 9/30/03 ------- ------- Weighted average common shares outstanding-basic 41,169 40,965 Dilutive effect of stock options and warrants 507 635 ------- ------- Weighted average common shares outstanding-diluted 41,676 41,600 ======= ======= 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 68,000 and 516,000 for the quarters ended September 30, 2004, and 2003, respectively. Subsequent to September 30, 2004, warrants for 120,000 shares of Techne common stock were exercised for $1.4 million. C. SEGMENT INFORMATION: Following is financial information relating to the Company's operating segments (in thousands): QUARTER ENDED -------------------- 9/30/04 9/30/03 ------- ------- External sales Hematology $ 4,013 $ 4,281 Biotechnology 25,887 24,032 R&D Systems Europe 11,019 9,680 ------- ------- Total external sales $40,919 $37,993 ======= ======= Intersegment sales Hematology $ -- $ -- Biotechnology 4,804 4,621 R&D Systems Europe -- -- ------- ------- Total intersegment sales $ 4,804 $ 4,621 ======= ======= Earnings before income taxes Hematology $ 1,252 $ 1,430 Biotechnology 17,168 15,828 R&D Systems Europe 4,398 3,349 Corporate and other (1,071) (1,250) ------- ------- Total earnings before income taxes $21,747 $19,357 ======= ======= 7 D. CONTINGENCIES: The Company's tax returns are subject to audit by various governmental entities in the normal course of business. The Company had received an audit assessment of $1.75 million, plus interest, from the State of Minnesota for fiscal years 2000 to 2002. The Company appealed the assessment and in October 2004, reached a settlement with the State of Minnesota for $525,000, plus interest of $81,000. The settlement amount of $525,000 was fully accrued for at June 30, 2004. E. 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, the Company's net earnings and earnings per share would have been as follows (in thousands, except per share data): QUARTER ENDED -------------------- 9/30/04 9/30/03 ------- ------- Net earnings: As reported $14,192 $12,572 Less employee stock-based compensation, net of tax effect 504 94 ------- ------- Pro forma $13,688 $12,478 ======= ======= Basic earnings per share: As reported $ 0.34 $ 0.31 Less employee stock-based compensation, net of tax effect 0.01 0.01 ------- ------- Pro forma $ 0.33 $ 0.30 ======= ======= Diluted earnings per share: As reported $ 0.34 $ 0.30 Less employee stock-based compensation, net of tax effect 0.01 0.00 ------- ------- Pro forma $ 0.33 $ 0.30 ======= ======= 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 -------------------- 9/30/04 9/30/03 ------- ------- Dividend yield -- -- Expected annualized volatility 56% 49%-52% Risk free interest rates 3.2%-3.4% 4.1%-4.4% Expected lives 4 years 7 year 8 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Quarter Ended September 30, 2004 vs. Quarter Ended September 30, 2003 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 13% for the quarter ended September 30, 2004 compared to the quarter ended September 30, 2003. The primary reason for the increase was an 8% sales increase from 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 $314,000 for the quarter ended September 30, 2004. The Company generated cash of $18.3 million from operating activities in the first three months of fiscal 2004 and cash, cash equivalents and available-for-sale investments were $196 million at September 30, 2004 compared to $177 million at June 30, 2004. Net Sales Net sales for the quarter ended September 30, 2004 were $40.9 million, an increase of $2.9 million (8%) from the quarter ended September 30, 2003. R&D Systems' Biotechnology Division net sales increased $1.9 million (8%) for the quarter ended September 30, 2004. R&D Europe net sales increased $1.3 million (14%) for the quarter ended September 30, 2004. Approximately $1.2 million of the increase in R&D Europe net sales for the quarter 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 2% for the quarter ended September 30, 2004. R&D Systems' Hematology Division net sales decreased $268,000 (6%) for the quarter ended September 30, 2004. The decrease in Hematology Division sales for the quarter was primarily due to a decrease in freight revenue as a result of a large survey customer paying freight charges directly to the shipper rather than through the Company and the change to a new distributor in France. Gross Margins Gross margins, as a percentage of net sales, were as follows: QUARTER ENDED -------------------- 9/30/04 9/30/03 ------- ------- Hematology Division 44.7% 45.2% Biotechnology Division 80.1% 79.4% R&D Systems Europe 51.8% 49.2% Consolidated 78.3% 77.2% 9 Consolidated gross margins for the quarter ended September 30, 2004 improved from the quarter ended September 30, 2003 mainly as a result of lower cost of sales at R&D Europe due to favorable exchange rates as a result of a weaker U.S. dollar to the British pound. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $551,000 (11%) from the first quarter of last year. QUARTER ENDED -------------------- 9/30/04 9/30/03 ------- ------- Hematology Division $ 409 $ 391 Biotechnology Division 2,973 2,651 R&D Europe 1,722 1,699 Corporate expenses 530 342 ------- ------- Total selling, general and administrative $ 5,634 $ 5,083 ======= ======= Biotechnology Divisions selling, general and administrative expenses increased $322,000 (12%) for the quarter ended September 30, 2004. The majority of the increase was a result of increased personnel costs related to annual wage increases and the addition of sales and marketing positions ($172,000), increased profit sharing and stock bonus accruals ($52,000) and increased medical costs ($40,000). Corporate expenses increased $188,000 for the quarter ended September 30, 2004 largely as a result of increased legal ($100,000) and consulting fees ($72,000). Research and Development Expenses Research and development expenses are composed of the following (in thousands): QUARTER ENDED -------------------- 9/30/04 9/30/03 ------- ------- Hematology Division expenses $ 188 $ 191 Biotechnology Division expenses 4,500 4,164 ChemoCentryx, Inc. losses -- 436 Discovery Genomics, Inc. losses -- 172 ------- ------- Total research and development expenses $ 4,688 $ 4,963 ======= ======= Research and development expenses decreased $275,000 (6%) for the quarter ended September 30, 2004. Included in research and development expenses for the quarter ended September 30 2003 were the Company's share of losses by ChemoCentryx, Inc. (CCX) and Discovery Genomics, Inc. (DGI), 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 September 30, 2004 was $5.1 million. In the fourth quarter of fiscal 2004, the Company wrote off its investment in DGI as an impairment loss. Excluding CCX and DGI losses, research and development expenses for the quarter ended September 30, 2004 increased $333,000 (8%). Other Non-operating Income/Expense Other non-operating income/expense consists mainly of foreign currency transaction gains and losses, rental income, real estate taxes, depreciation and utility expenses related to properties not used in operations, and the Company's 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. 10 QUARTER ENDED -------------------- 9/30/04 9/30/03 ------- ------- Foreign currency (gains)/losses $ 47 $ (84) Rental income (19) (19) Real estate taxes/utilities 364 181 Hemerus Medical, LLC losses 74 -- ------- ------- Total other non-operating (income)/expense $ 466 $ 78 ======= ======= The Company's net investment in Hemerus at September 30, 2004 was $2.9 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 ended September 30, 2004 were provided at a rate of approximately 34.7% of consolidated earnings before income taxes compared to 35.1% for the quarter ended September 30, 2003. U.S. federal taxes have been reduced by 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 35% to 36%. Liquidity and Capital Resources At September 30, 2004, cash and cash equivalents and available- for-sale investments were $196.1 million compared to $176.6 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 $18.3 million from operating activities in the first quarter of fiscal 2005 compared to $15.3 million for the first quarter of fiscal 2004. The increase was mainly the result of increased earnings in the current year, a larger decrease in accounts receivable in the quarter ended September 30, 2004 compared to the quarter ended September 30, 2003, and an increase in other accounts payable and accrued expenses for the quarter ended September 30, 2004 compared to a decrease in the quarter ended September 30, 2003. The larger decrease in accounts receivable was the result of higher cash collections during the quarter ended September 30, 2004 as compared to the first quarter of last year. The decrease in other accounts payable and accrued expenses in the prior year was a result of the final payment of $1.7 million in August 2003, under a royalty agreement that expired on June 30, 2003. Cash Flows From Investing Activities Capital expenditures for fixed assets for the first quarter of fiscal 2005 and 2004 were $.5 million and $1.3 million, respectively. Included in fiscal 2004 capital additions was $935,000 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 quarter of fiscal 2005 and 2004 were for laboratory and computer equipment and remodeling of laboratory space. 11 Remaining expenditures in fiscal 2005 for laboratory and computer equipment are expected to be approximately $1.5 million. The Company also plans an estimated $8 million build out of laboratory space at its Minneapolis facility in late fiscal 2005 and early 2006. These expenditures are expected to be financed through currently available funds and cash generated from operating activities. The Company has an option to purchase property adjacent to its Minneapolis facility, which expires on January 1, 2005. The option price is approximately $10.4 million of which $2 million was deposited in escrow in fiscal 2002. The Company plans to exercise this option and finance the purchase of the property through currently available funds and cash generated from operations. 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. During the quarter ended September 30, 2004 the Company purchased $37.5 million and had sales or maturities of $30.2 million of available-for-sale investments. During the quarter ended September 30, 2003, the Company purchased $21.8 million and had sales or maturities of $11.9 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 $793,000 and $1 million was received during the quarters ended September 30, 2004 and 2003, respectively, for the exercise of options for 30,000 and 116,000 shares of common stock. During the first three months of fiscal 2005 options for 6,120 shares of common stock were exercised by the surrender of 1,190 shares of the Company's common stock with a fair market value of $45,000. In September 2004, 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. 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. 12 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. 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. See also Note D to these financial statements. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At September 30, 2004, the Company had a professionally managed investment portfolio of fixed income securities, excluding those classified as cash and cash equivalents, of $133.8 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 $1.2 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 September 30, 2004 and 2003, the Company had $406,000 and $750,000, respectively, of dollar denominated intercompany debt at its U.K. subsidiary. At September 30, 2004 and 2003, the U.K. subsidiary had zero and $715,000, 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 gains of 22,000 British pounds ($40,000) and 49,000 British pounds ($84,000) for the quarters ended September 30, 2004 and 2003, respectively. The Company's German subsidiary recognized net foreign currency losses of 72,000 euros ($87,000) for the quarter ended September 30, 2004. 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 September 30, 2004, the Company's long-term debt of $14.2 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 below the 4% floor as of September 30, 2004. 13 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 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. 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 - CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES The following table sets forth the repurchases of Company Common Stock for the quarter ended September 30, 2004. 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 - ---------------- ------------ ---------- ------------------ ---------------- 7/1/04 - 7/31/04 0 -- 0 $6.8 million 8/1/04 - 8/31/04 0 -- 0 $6.8 million 9/1/04 - 9/30/04 6,410 40.50 0 $6.8 million The shares purchased in September 2004 were contributed to the Company's employee Stock Bonus Plans. 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. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES None. 14 ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SHAREHOLDERS (a)The Annual Meeting of the Registrant's shareholders was held on Thursday, October 21, 2004. (b)A proposal to set the number of directors at six was adopted by a vote of 37,332,935 in favor with 136,798 shares against, 21,769 shares abstaining and no shares represented broker nonvotes. (c)Proxies for the Annual Meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934. There was no solicitation in opposition to management's nominees as listed in the Proxy Statement, and all such nominees were elected, as follows: Nominee For Withheld ------------------- ---------- ---------- Thomas E. Oland 36,453,014 1,038,488 Roger C. Lucas 26,205,875 11,285,627 Howard V. O'Connell 35,950,965 1,540,537 G. Arthur Herbert 35,952,530 1,538,972 Randolph C. Steer 35,959,177 1,532,325 Robert V. Baumgartner 35,958,688 1,532,814 ITEM 5 - OTHER INFORMATION 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 6 - EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS See exhibit index following. B. REPORTS ON FORM 8-K Form 8-K dated October 21, 2004 furnishing pursuant to Item 2.02, the Registrant's press release reporting earnings for the first quarter of fiscal 2005 and segment information for the quarter ended September 30, 2004. Form 8-K dated October 21, 2004 filed pursuant to Item 5.02, announcing the resignation of Dr. Christopher S. Henney from the Registrant's Board of Directors. 15 SIGNATURE 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: November 12, 2004 /s/ Thomas E. Oland ------------------------------ President, Chief Executive and Chief Financial Officer EXHIBIT INDEX TO FORM 10-Q TECHNE CORPORATION Exhibit # Description - --------- ------------ 31 Section 302 Certification 32 Section 906 Certification