SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 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 December 31, 1997, 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 (I.R.S. Employer of incorporation or organization) Identification No.) 614 MCKINLEY PLACE N.E. (612) 379-8854 MINNEAPOLIS, MN 55413 (Registrant's telephone (Address of principal number, including area code) executive offices) (Zip Code) 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 ( ) At February 2, 1998, 19,002,483 shares of the Company's Common Stock (par value $.01) were outstanding. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS TECHNE CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
12/31/97 6/30/97 ----------- ----------- ASSETS Cash and cash equivalents $ 9,900,167 $ 8,598,367 Short-term investments 22,494,774 16,153,890 Accounts receivable (net) 8,766,316 9,114,447 Inventories 4,013,868 4,087,161 Deferred income taxes 1,434,000 1,322,000 Other current assets 562,718 521,493 ----------- ----------- Total current assets 47,171,843 39,797,358 Deferred income taxes 1,855,000 1,703,000 Fixed assets (net) 11,580,624 11,252,741 Intangible assets (net) 313,177 365,311 Other assets 730,613 803,300 ----------- ----------- TOTAL ASSETS $61,651,257 $53,921,710 =========== =========== LIABILITIES & EQUITY Trade accounts payable $ 2,492,694 $ 1,609,362 Salary and related accruals 1,719,824 1,790,035 Other payables 262,665 498,873 Income taxes payable 1,084,174 1,000,096 ----------- ----------- Total current liabilities 5,559,357 4,898,366 Deferred rent 1,298,700 942,300 Common stock, par value $.01 per share; authorized 50,000,000; issued and outstanding 18,918,878 and 18,875,456, respectively 189,189 188,755 Additional paid-in capital 13,391,481 12,653,449 Retained earnings 40,792,964 34,808,768 Accumulated foreign currency translation adjustments 419,566 430,072 ----------- ----------- Total stockholders' equity 54,793,200 48,081,044 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $61,651,257 $53,921,710 =========== ===========
See notes to unaudited Consolidated Financial Statements. TECHNE CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
QUARTER ENDED SIX MONTHS ENDED ------------------------ ------------------------ 12/31/97 12/31/96 12/31/97 12/31/96 ----------- ----------- ----------- ----------- SALES $15,472,857 $14,409,294 $31,010,000 $28,436,272 Cost of sales 4,885,856 4,571,712 9,431,762 9,349,842 ----------- ----------- ----------- ----------- Gross margin 10,587,001 9,837,582 21,578,238 19,086,430 Operating expenses (income): Selling, general and administrative 3,850,195 3,657,534 7,853,599 6,974,769 Research and development 2,515,658 2,947,251 4,981,506 5,830,095 Amortization expense 9,663 58,877 52,134 117,754 Interest expense - 441 - 28,524 Interest income (286,499) (164,012) (530,367) (322,472) ----------- ----------- ----------- ----------- 6,089,017 6,500,091 12,356,872 12,628,670 ----------- ----------- ----------- ----------- Earnings before income taxes 4,497,984 3,337,491 9,221,366 6,457,760 Income taxes 1,370,000 1,060,000 2,831,000 2,005,000 ----------- ----------- ----------- ----------- NET EARNINGS $ 3,127,984 $ 2,277,491 $ 6,390,366 $ 4,452,760 =========== =========== =========== =========== BASIC EARNINGS PER SHARE $ 0.17 $ 0.12 $ 0.34 $ 0.23 DILUTED EARNINGS PER SHARE $ 0.16 $ 0.12 $ 0.33 $ 0.23
See notes to unaudited Consolidated Financial Statements. TECHNE CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED --------------------------- 12/31/97 12/31/96 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 6,390,366 $ 4,452,760 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1,121,240 1,100,230 Deferred income taxes (273,000) (483,000) Deferred rent 356,400 159,000 Tax benefit from exercise of options 44,000 - Other 273,187 79,200 Change in current assets and current liabilities: (Increase) decrease in: Accounts receivable 322,086 1,014,934 Inventories 61,271 (335,828) Other current assets (41,986) 149,967 Increase (decrease) in: Trade account/other payables 650,478 (204,516) Salary and related accruals (68,409) (167,767) Income taxes payable 91,008 251,793 ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 8,926,641 6,016,773 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term investments (14,547,334) (8,385,000) Proceeds from sale of short-term investments 8,206,450 7,350,000 Additions to fixed assets (1,648,881) (3,418,612) Proceeds from sale of fixed assets 246,728 - Increase in other long term assets - (250,000) ------------ ------------ NET CASH USED BY INVESTING ACTIVITIES (7,743,037) (4,703,612) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 367,796 25,189 Repurchase of common stock (280,000) (1,870,827) ------------ ------------ NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 87,796 (1,845,638) EFFECT OF EXCHANGE RATE CHANGES ON CASH 30,400 64,274 ------------ ------------ NET CHANGE IN CASH AND EQUIVALENTS 1,301,800 (468,203) CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 8,598,367 7,422,084 ------------ ------------ CASH AND EQUIVALENTS AT END OF PERIOD $ 9,900,167 $ 6,953,881 ============ ============
See notes to unaudited Consolidated Financial Statements. TECHNE CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) A. BASIS OF PRESENTATION: The unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles 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 1997. The Company follows these policies in preparation of the interim Financial Statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that the Consolidated Financial Statements be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto for the fiscal year ended June 30, 1997 included in the Company's Annual Report to Shareholders for Fiscal 1997. Certain Consolidated Balance Sheet captions appearing in this interim report are as follows:
12/31/97 6/30/97 ------------ ------------ ACCOUNTS RECEIVABLE Accounts receivable $ 8,813,316 $ 9,166,447 Less reserve for bad debts 47,000 52,000 ------------ ------------ NET ACCOUNTS RECEIVABLE $ 8,766,316 $ 9,114,447 ============ ============ INVENTORIES Raw materials $ 2,086,806 $ 2,105,836 Work in process - 89,100 Supplies 135,328 121,483 Finished goods 1,791,734 1,770,742 ------------ ------------ TOTAL INVENTORIES $ 4,013,868 $ 4,087,161 ============ ============ FIXED ASSETS Laboratory equipment $ 9,529,426 $ 9,513,329 Office equipment 2,807,903 2,671,947 Leasehold improvements 9,782,277 9,063,354 ------------ ------------ 22,119,606 21,248,630 Less accumulated depreciation and amortization 10,538,982 9,995,889 ------------ ------------ NET FIXED ASSETS $ 11,580,624 $ 11,252,741 ============ ============ INTANGIBLE ASSETS Customer list $ 1,010,000 $ 1,010,000 Technology licensing agreements 500,000 500,000 Goodwill 1,225,547 1,225,547 ------------ ------------ 2,735,547 2,735,547 Less accumulated amortization 2,422,370 2,370,236 ------------ ------------ NET INTANGIBLE ASSETS $ 313,177 $ 365,311 ============ ============
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which will be effective for the Company beginning July 1, 1998. SFAS No. 131 redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. The Company believes that this statement will not have a material impact on results reported in its financial statements. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," which will be effective for the Company beginning July 1, 1998. SFAS No. 130 requires the disclosure of comprehensive income and its components in the Company's financial statements. The Company anticipates the effect of SFAS No. 130 will result in disclosure of unearned compensation on stock options and foreign currency translation adjustments on the face of the comprehensive income statement. B. STOCK SPLIT: On October 23, 1997, the Company declared a two-for-one stock split in the form of a 100% stock dividend payable to shareholders of record on November 10, 1997. The payment date for the stock split was November 17, 1997. All earnings per share and share amounts included in these financial statements have been restated to reflect the stock split. C. EARNINGS PER SHARE: Shares used in the earnings per share computations are as follows:
QUARTER ENDED SIX MONTHS ENDED ---------------------- ---------------------- 12/31/97 12/31/96 12/31/97 12/31/96 ---------- ---------- ---------- ---------- Weighted average common shares 18,898,817 18,910,196 18,883,475 18,956,764 Dilutive effect of stock options and warrants 726,937 532,450 684,750 553,196 ---------- ---------- ---------- ---------- Average common and common equivalent shares outstanding 19,625,754 19,442,646 19,568,225 19,509,960 ========== ========== ========== ==========
Effective for the quarter ended December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share". All prior period earnings per share amounts have been restated to conform to the new standard. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Quarter and Six Months Ended December 31, 1997 vs. Quarter and Six Months Ended December 31, 1996 Techne Corporation has two operating subsidiaries: Research and Diagnostic Systems, Inc. (R&D Systems) located in Minneapolis, Minnesota and R&D Systems Europe Ltd. (R&D Europe) located in Abingdon, England. R&D Systems has two divisions: Biotechnology and Hematology. The Biotechnology Division manufactures purified cytokines (proteins), antibodies and assay kits which are sold primarily to biomedical researchers and clinical research laboratories. The Hematology Division develops and manufactures whole blood hematology controls and calibrators which are sold to hospital and clinical laboratories to check the performance of their hematology instruments to assure the accuracy of hematology test results. R&D Europe sells R&D Systems' biotechnology products in Europe, both directly and through a sales subsidiary in Germany. The Company has a foreign sales corporation, Techne Export Inc. In November 1997, Techne purchased $1 million of preferred stock of ChemoCentryx, Inc. (CCX), representing approximately 16% of issued and outstanding voting shares. In addition, Techne is obligated to purchase a projected $4 million of preferred stock over the next two years upon CCX's achievement of certain milestones. After purchase of the additional preferred shares, Techne will own approximately 49% of the issued and outstanding voting shares (assuming no investment by other parties). Techne has consolidated CCX into its financial statements due to the limited amount of cash consideration provided by the holders of the common shares of CCX. CCX is a new technology and drug development company working in the area of chemokines. Chemokines are cytokines which regulate the trafficking patterns of leukocytes, the effector cells of the human immune system. In conjunction with the equity investment and joint research efforts, Techne obtains exclusive worldwide research and diagnostic marketing rights to chemokine proteins, antibodies and receptors discovered or developed by CCX or R&D Systems. Net Sales Net sales for the quarter ended December 31, 1997 were $15,472,857, an increase of $1,063,563 (7%) from the quarter ended December 31, 1996. Sales for the six months ended December 31, 1997 increased $2,573,728 (9%) from $28,436,272 to $31,010,000. R&D Systems sales increased $1,414,750 (15%) and $3,191,037 (16%) for the quarter and six months ended December 31, 1997, respectively. R&D Europe sales decreased $351,187 (7%) and $617,309 (7%) for the quarter and six months ended December 31, 1997, respectively. The decrease in R&D Europe sales was not unexpected due to the discontinuance of the molecular biology product line. R&D Europe sales of continuing product lines increased 25% and 22% from the second quarter and first six months of last year. The increase in consolidated sales for the quarter and six months was due, in part, to increased sales of R&D Systems' cytokines and antibodies. Sales of cytokines and antibodies by R&D Systems and R&D Europe for the quarter and six months ended December 31, 1997 were $5,344,896 and $10,847,122 compared to $4,454,473 and $8,552,995 for the quarter and six months ended December 31, 1996. In addition, sales of hematology products increased $335,050 and $840,385 for the quarter and six months ended December 31, 1997, due largely to increased sales to an OEM customer and the addition of two OEM customers in fiscal 1998. Gross Margins Gross margins, as a percentage of sales, increased from the prior year. Margins for the second quarter of fiscal 1998 were 68.4% compared to 68.3% for the same quarter in fiscal 1997. Margins for the six months ended December 31, 1997 were 69.6% compared to 67.1% for the same period in fiscal 1997. R&D Europe gross margins decreased from 54.0% to 48.6% for the quarter and from 52.9% to 50.6% for the six months ended December 31, 1997 as a result of changes in product mix and exchange rates. Hematology Division gross margins increased from 41.6% to 42.2% for the quarter and from 40.8% to 45.5% for the six months ended December 31, 1997, also as a result of changes in product mix. Biotechnology Division gross margins decreased slightly from 71.3% to 70.9% for the quarter, but increased from 70.0% to 72.0% for the six months ended December 31, 1997. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $192,661 (5%) from the second quarter of fiscal 1997 to the second quarter of fiscal 1998. These expenses also increased $878,830 (13%) for the first six months of fiscal 1998. The majority of the increase was due to additional occupancy costs at R&D Systems, plus increased advertising and promotion costs by both R&D Systems and R&D Europe. These increased costs were partially offset by decreased personnel costs at R&D Europe as a result of the restructuring in the third quarter of fiscal 1997. Research and Development Expenses Research and development expenses decreased $431,593 (15%) and $848,589 (15%) for the quarter and six months ended December 31, 1997, respectively. R&D Europe research and development expenses decreased $706,444 and $1,338,106 for the quarter and six months, respectively, as a result of a decrease in payments under the Joint Biological Research Agreement with British Bio-technology Group, plc. and a decrease in personnel as a result of the restructuring and the transfer of the majority of research and development activities to R&D Systems. R&D Systems' research and development expenses increased $274,851 and $489,517 for the quarter and six months ended December 31, 1997, respectively. The increase related to products currently under development, many of which have been or will be released in fiscal 1998. Products currently under development include both biotechnology and hematology products. Net Earnings Earnings before income taxes increased $1,160,493 from $3,337,491 in the second quarter of fiscal 1997 to $4,497,984 in the second quarter of fiscal 1998. Earnings before taxes for the six months increased $2,763,606 from $6,457,760 to $9,221,366. The increase in earnings before income taxes was due mainly to an increase in Biotechnology Division earnings of $746,924 and $1,565,946 and an increase in Hematology Division earnings of $137,322 and $531,511 for the quarter and six months ended December 31, 1997, as a result of increased sales and gross margins. In addition R&D Europe's earnings before taxes increased $440,000 and $914,292 for the quarter and six months as a result of the decrease in research and development expenses. Income taxes for the quarters and six months ended December 31, 1997 were provided at a rate of approximately 30% and 31% of consolidated pretax earnings compared to 32% and 31% for the prior year. U.S. federal taxes have been reduced by the credit for research and development expenditures and the benefit of the foreign sales corporation. Foreign income taxes have been provided at rates which approximate the tax rates in the United Kingdom and Germany. Liquidity and Capital Resources At December 31, 1997, cash and cash equivalents and short-term investments were $32,394,941 compared to $24,752,257 at June 30, 1997. The Company has been accumulating cash and short-term investments for future expansion purposes. 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 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 years. Cash Flows From Operating Activities The Company generated cash of $8,926,641 from operating activities in the first six months of fiscal 1998 compared to $6,016,773 for the first six months of fiscal 1997. The increase was mainly the result of increased net earnings and increased current liabilities. Cash Flows From Investing Activities During the six months ended December 31, 1997 and 1996, the Company increased short-term investments $6,340,884 and $1,035,000, respectively. The Company's investment policy is to place excess cash in short-term tax- exempt bonds. The objective of this policy is to obtain the highest possible return with the lowest risk, while keeping the funds accessible. Capital additions were $1,648,881 for the first six months of fiscal 1998, compared to $3,418,612 for the first six months of fiscal 1997. Included in the fiscal 1998 and 1997 additions were $721,000 and $2,684,000 for leasehold improvements related to expansion and remodeling of facilities by R&D Systems. The remaining additions in fiscal 1998 and 1997 were for laboratory and computer equipment. Total expenditures for capital additions planned for the remainder of fiscal 1998 are expected to cost approximately $1.4 million and are expected to be financed through currently available funds and cash generated from operating activities. Cash Flows From Financing Activities Cash of $367,796 and $25,189 was received during the six months ended December 31, 1997 and 1996, respectively, for the exercise of options for 46,540 and 4,000 shares of common stock. During the first six months of fiscal 1998, options for 24,506 shares of common stock were exercised by the surrender of 7,624 shares of the Company's common stock with a fair market value of $126,194. During the first six months of fiscal 1998 and 1997, the Company purchased and retired 20,000 and 144,600 shares, respectively, of Company common stock at market values of $280,000 and $1,870,827. In May 1995, the Company announced a plan to purchase and retire up to $5,000,000 of its common stock. Through February 1, 1997, 437,000 shares have been purchased at a market value of $4,812,164. Subject to market conditions and share price, the Company has extended its stock repurchase program and plans to purchase and retire up to an additional $5,000,000 of common stock. During the first six months of fiscal 1998, the Company granted stock options with a fair value of $200,500 to a non-employee for services rendered to the Company. The Company has never paid cash dividends and has no plans to do so in fiscal 1998. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS The Company was sued by Streck Laboratories, Inc. ("Streck") in the United States District Court for the District of Nebraska in Omaha on November 5, 1997. Streck alleges in its complaint that the Company infringes three patents Streck has obtained on white blood cell hematology controls, one of which was issued in November, 1993, and the other two in the fall of 1997. Streck seeks an unspecified amount of damages, an injunction prohibiting further infringement, reasonable attorneys' fees, and costs. The Company has answered the complaint, denied infringement and asserted counterclaims against Streck seeking to have the patents declared invalid and/or not infringed. The case has not entered the formal discovery phase, and it is unlikely it will go to trial before 1999. ITEM 2 - CHANGES IN SECURITIES None ITEM 3 - DEFAULTS UPON SENIOR SECURITIES None ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SHAREHOLDERS Information relating to the Company's Annual Meeting of Shareholders, held on October 23, 1997, is contained in the Company's Form 10-Q for the quarter ended September 30, 1997, which is incorporated herein by reference. 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 into cytokines by the Company's customers, the impact of the growing number of producers of cytokine research products and related price competition, the retention of hematology OEM and proficiency survey business, the Company's expansion of marketing efforts in Europe, 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. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS See exhibit index immediately following signature page. B. REPORTS ON FORM 8-K None 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: February 13, 1998 Thomas E. Oland ------------------------------ Thomas E. Oland President, Chief Executive and Financial Officer EXHIBIT INDEX TO FORM 10-Q TECHNE CORPORATION Exhibit # Description ---------- ------------------ 10.1 Investment Agreement between ChemoCentryx, Inc. and Techne Corporation dated November 18, 1997 27 Financial Data Schedule