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