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 December 31, 2002, 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 number, (Address of principal 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 4, 2003, 41,531,998 shares of the Company's Common Stock (par value $.01) were outstanding. TECHNE CORPORATION FORM 10-Q DECEMBER 31, 2002 INDEX PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of December 31, 2002 (unaudited) and June 30, 2002 3 Consolidated Statements of Earnings for the quarter and six months ended December 31, 2002 and 2001 (unaudited) 4 Consolidated Statements of Cash Flows for the six months ended December 31, 2002 and 2001 (unaudited) 5 Notes to Consolidated Financial Statements (unaudited) 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14 ITEM 4. CONTROLS AND PROCEDURES 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 15 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15 ITEM 5. OTHER INFORMATION 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16 SIGNATURES 16 2 PART I. FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS TECHNE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) 12/31/02 6/30/02 ------------ ------------ ASSETS Cash and cash equivalents $ 28,821,496 $ 26,392,480 Short-term available-for-sale investments 78,911,716 70,671,341 Trade accounts receivable (net) 14,866,138 16,913,002 Interest receivable 2,151,117 2,500,616 Inventories 6,537,120 6,077,035 Deferred income taxes 3,969,000 3,762,000 Income taxes receivable -- 1,845,421 Prepaid expenses 1,048,312 915,854 ------------ ------------ Total current assets 136,304,899 129,077,749 Property and equipment (net) 80,955,464 70,312,602 Goodwill (net) (Note B) 12,540,000 12,540,000 Intangible assets (net) (Note B) 5,387,375 6,357,000 Deferred income taxes 9,186,000 9,400,000 Other long-term assets 8,959,995 10,559,608 ------------ ------------ $253,333,733 $238,246,959 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Trade accounts payable $ 3,475,927 $ 4,326,359 Salaries, wages and related accounts payable 1,352,360 2,873,505 Other accounts payable and accrued expenses 4,433,950 6,480,023 Income taxes payable 1,261,790 -- Current portion of long-term debt 1,387,725 949,637 ------------ ------------ Total current liabilities 11,911,752 14,629,524 Long-term debt, less current portion 16,197,862 17,100,652 ------------ ------------ Total liabilities 28,109,614 31,730,176 Commitments and contingencies (Note E) Common stock, par value $.01 per share; authorized 100,000,000; issued and outstanding 41,531,248 and 41,562,136, respectively 415,312 415,621 Additional paid-in capital 61,018,423 58,584,103 Retained earnings 161,428,083 147,369,149 Accumulated other comprehensive income 2,362,301 147,910 ------------ ------------ Total stockholders' equity 225,224,119 206,516,783 ------------ ------------ $253,333,733 $238,246,959 ============ ============ See notes to consolidated financial statements (unaudited). 3 TECHNE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) QUARTER ENDED SIX MONTHS ENDED ------------------------ ----------------------- 12/31/02 12/31/01 12/31/02 12/31/01 ----------- ----------- ----------- ----------- Net sales $33,300,214 $31,136,911 $67,848,450 $60,979,577 Cost of sales 8,370,754 8,028,285 17,061,009 15,576,227 ----------- ----------- ----------- ----------- Gross margin 24,929,460 23,108,626 50,787,441 45,403,350 Operating expenses: Selling, general and administrative 4,901,125 4,755,376 9,851,772 9,444,026 Research and development 4,979,240 4,309,273 9,812,337 8,299,007 Amortization of intangible assets 484,812 2,137,311 969,625 4,274,623 Interest expense 296,535 334,819 619,225 673,524 Interest income (703,983) (913,287) (1,494,423) (1,876,012) Other non-operating income/expense (net) (16,562) 78,499 133,698 (74,234) ----------- ----------- ----------- ----------- 9,941,167 10,701,991 19,892,234 20,740,934 ----------- ----------- ----------- ----------- Earnings before income taxes 14,988,293 12,406,635 30,895,207 24,662,416 Income taxes 5,107,000 3,972,000 10,569,000 7,803,000 ----------- ----------- ----------- ----------- Net earnings $ 9,881,293 $ 8,434,635 $20,326,207 $16,859,416 =========== =========== =========== =========== Earnings per share: Basic $ 0.24 $ 0.20 $ 0.49 $ 0.41 Diluted $ 0.23 $ 0.20 $ 0.48 $ 0.40 Weighted average common shares outstanding: Basic 41,444,808 41,486,607 41,403,906 41,461,183 Diluted 42,315,579 42,540,904 42,300,344 42,536,336 See notes to consolidated financial statements (unaudited). 4 TECHNE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) SIX MONTHS ENDED -------------------------- 12/31/02 12/31/01 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 20,326,207 $ 16,859,416 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 3,133,541 6,269,166 Deferred income taxes 20,000 (446,000) Losses by equity method investees 1,356,474 511,635 Other 243,139 220,638 Change in current assets and current liabilities: Trade accounts and interest receivable 2,626,705 1,037,167 Inventories (405,535) (516,417) Prepaid expenses (117,896) (121,626) Trade and other accounts payable (3,097,719) (2,722,141) Salaries, wages and related accounts (1,531,719) (410,695) Income taxes payable 3,552,691 (1,067,670) ------------ ------------ Net cash provided by operating activities 26,105,888 19,613,473 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (12,765,186) (6,174,608) Purchase of short-term available-for- sale investments (41,320,000) (26,214,571) Proceeds from sale of short-term available-for-sale investments 34,190,625 24,923,000 Increase in other long-term assets -- (3,000,000) ------------ ------------ Net cash used in investing activities (19,894,561) (10,466,179) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 1,511,628 155,917 Repurchase of common stock (5,864,890) (485,010) Payments on long-term debt (464,702) (432,749) ------------ ------------ Net cash used in financing activities (4,817,964) (761,842) ------------ ------------ Effect of exchange rate changes on cash 1,035,653 430,271 ------------ ------------ Net increase in cash and cash equivalents 2,429,016 8,815,723 Cash and cash equivalents at beginning of period 26,392,480 21,267,791 ------------ ------------ Cash and cash equivalents at end of period $ 28,821,496 $ 30,083,514 ============ ============ 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 2002. 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. It is suggested that these unaudited consolidated financial statements be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto for the fiscal year ended June 30, 2002 included in the Company's Annual Report to Shareholders for fiscal 2002. Certain consolidated balance sheet captions appearing in this interim report are as follows: 12/31/02 6/30/02 ------------ ------------ ACCOUNTS RECEIVABLE Accounts receivable $ 15,135,138 $ 17,176,002 Less allowance for doubtful accounts 269,000 263,000 ------------ ------------ NET ACCOUNTS RECEIVABLE $ 14,866,138 $ 16,913,002 ============ ============ INVENTORIES Raw materials $ 2,856,620 $ 2,785,949 Supplies 126,703 118,895 Finished goods 3,553,797 3,172,191 ------------ ------------ TOTAL INVENTORIES $ 6,537,120 $ 6,077,035 ============ ============ PROPERTY AND EQUIPMENT Land $ 2,998,800 $ 1,571,000 Buildings and improvements 65,116,101 63,541,408 Building construction in progress 16,289,583 7,728,660 Laboratory equipment 17,671,674 16,694,898 Office equipment 4,478,383 4,263,512 Leasehold improvements 522,263 497,087 ------------ ------------ 107,076,804 94,296,565 Less accumulated depreciation and amortization 26,121,340 23,983,963 ------------ ------------ NET PROPERTY AND EQUIPMENT $ 80,955,464 $ 70,312,602 ============ ============ GOODWILL AND INTANGIBLE ASSETS Customer list $ 18,010,000 $ 18,010,000 Technology licensing agreements 500,000 500,000 Goodwill 39,075,089 39,075,089 ------------ ------------ 57,585,089 57,585,089 Less accumulated amortization 39,657,714 38,688,089 ------------ ------------ NET GOODWILL AND INTANGIBLE ASSETS $ 17,927,375 $ 18,897,000 ============ ============ 6 In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 will be effective for exit or disposal activities that are initiated by the Company after December 31, 2002. In December 2002, the FASB issued SFAS No. 148, Stock Compensation. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company does not plan to change their method of accounting for stock-based employee compensation. The Company will make the required interim disclosures effective with the quarter ending March 31, 2003. B. GOODWILL AND INTANGIBLE ASSETS: In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 applies to all business combinations initiated after June 30, 2001 and prohibits the use of the pooling-of-interests method of accounting. SFAS No. 142 requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic tests of the goodwill's impairment and that other intangible assets be amortized over their useful lives unless these lives are determined to be indefinite. The Company assessed the recoverability of its goodwill and other intangibles upon the adoption of SFAS No. 142 and determined no impairment existed at July 1, 2002. The Company used cash flow and fair value methodologies to assess impairment. The Company had net goodwill and other intangible assets of approximately $12.5 million and $5.4 million, respectively, at December 31, 2002. The pro forma effects of implementation of SFAS No. 142 to prior periods would be as follows: QUARTER ENDED SIX MONTHS ENDED ---------------------- ------------------------ 12/31/02 12/31/01 12/31/02 12/31/01 ---------- ---------- ----------- ----------- Reported net income $9,881,293 $8,434,635 $20,326,207 $16,859,416 Goodwill amortization, net of tax -- 1,019,500 -- 2,038,000 ---------- ---------- ----------- ----------- Adjusted net income $9,881,293 $9,454,135 $20,326,207 $18,897,416 ========== ========== =========== =========== Reported basic earnings per share $ 0.24 $ 0.20 $ 0.49 $ 0.41 Goodwill amortization 0.00 0.03 0.00 0.05 ---------- ---------- ----------- ----------- Adjusted basic earnings per share $ 0.24 $ 0.23 $ 0.49 $ 0.46 ========== ========== =========== =========== Reported diluted earnings per share $ 0.23 $ 0.20 $ 0.48 $ 0.40 Goodwill amortization 0.00 0.02 0.00 0.04 ---------- ---------- ----------- ----------- Adjusted diluted earnings per share $ 0.23 $ 0.22 $ 0.48 $ 0.44 ========== ========== =========== =========== 7 YEAR ENDED ------------------------------------- 6/30/02 6/30/01 6/30/00 ----------- ----------- ----------- Reported net income $27,129,669 $34,045,376 $26,582,797 Goodwill amortization, net of tax 4,076,000 4,076,000 4,076,000 ----------- ----------- ----------- Adjusted net income $31,205,669 $38,121,376 $30,658,797 =========== =========== =========== Reported basic earnings per share $ 0.65 $ 0.82 $ 0.65 Goodwill amortization 0.10 0.10 0.10 ----------- ----------- ----------- Adjusted basic earnings per share $ 0.75 $ 0.92 $ 0.75 =========== =========== =========== Reported diluted earnings per share $ 0.64 $ 0.80 $ 0.63 Goodwill amortization 0.09 0.09 0.10 ----------- ----------- ----------- Adjusted diluted earnings per share $ 0.73 $ 0.89 $ 0.73 =========== =========== =========== The estimated future amortization expense for other intangible assets as of December 31, 2002 for the remainder of fiscal year 2003 and the five succeeding fiscal years is as follows (in thousands): Estimated Amortization Year ended June 30 Expense - ------------------- ------------ 2003 (remaining six months) $ 970 2004 1,599 2005 1,221 2006 881 2007 541 2008 175 C. EARNINGS PER SHARE: Shares used in the earnings per share computations are as follows: QUARTER ENDED SIX MONTHS ENDED ---------------------- ---------------------- 12/31/02 12/31/01 12/31/02 12/31/01 ---------- ---------- ---------- ---------- Weighted average common shares outstanding-basic 41,444,808 41,486,607 41,403,906 41,461,183 Dilutive effect of stock options and warrants 870,771 1,054,297 896,438 1,075,153 ---------- ---------- ---------- ---------- Weighted average common shares outstanding-diluted 42,315,579 42,540,904 42,300,344 42,536,336 ========== ========== ========== ========== 8 D. SEGMENT INFORMATION: Following is financial information relating to the Company's operating segments: QUARTER ENDED SIX MONTHS ENDED ------------------------ ------------------------ 12/31/02 12/31/01 12/31/02 12/31/01 ----------- ----------- ----------- ----------- External sales Hematology $ 3,986,601 $ 3,823,229 $ 7,760,381 $ 7,472,822 Biotechnology 20,453,677 19,718,623 42,941,123 39,084,357 R&D Systems Europe 8,859,936 7,595,059 17,146,946 14,422,398 ----------- ----------- ----------- ----------- Total external sales $33,300,214 $31,136,911 $67,848,450 $60,979,577 =========== =========== =========== =========== Intersegment sales Hematology $ -- $ -- $ -- $ -- Biotechnology 4,501,122 4,128,793 8,651,440 7,946,277 R&D Systems Europe 9,515 9,950 23,480 29,435 ----------- ----------- ----------- ----------- Total intersegment sales $ 4,510,637 $ 4,138,743 $ 8,674,920 $ 7,975,712 =========== =========== =========== =========== Earnings before income taxes Hematology $ 1,397,779 $ 1,254,284 $ 2,562,316 $ 2,393,959 Biotechnology 12,449,296 10,552,117 26,694,040 21,132,342 R&D Systems Europe 2,323,845 1,388,050 4,134,718 2,816,448 Corporate and other (1,182,627) (787,816) (2,495,867) (1,680,333) ----------- ----------- ----------- ----------- Total earnings before income taxes $14,988,293 $12,406,635 $30,895,207 $24,662,416 =========== =========== =========== =========== E. CONTINGENCIES: Portions of the Company's short-term available-for-sale investments were held in brokerage accounts carried by a clearing firm which in late September 2001 was placed in bankruptcy. The trustee appointed pursuant to the Securities Investor Protection Act has released to the Company cash and securities representing approximately 99% of the total value of the accounts and has withheld securities and cash equivalents in the amount of approximately $250,000 pending resolution of the bankruptcy proceeding. Management believes that all of its securities and cash equivalents will be returned to the Company as the trustee has available the assets of customers' accounts, SIPC insurance and third party insurance. Accordingly, no impairment loss has been recognized at this time. F. PROPERTY ACQUISITION: In December 2002, the Company purchased approximately 649 acres of farmland, including buildings, in southeastern Minnesota for $2.7 million in cash. The property was purchased to house goats used in the Company's polyclonal antibody production. Currently the Company houses over 700 goats in two barns that it donated in 1997 and 2001, respectively, to the University of Minnesota College of Veterinary Medicine. These facilities are near capacity and additional space is required. G. MODIFICATION OF LOAN AGREEMENT: As of December 31, 2002, the Company's long-term debt consisted of a mortgage note payable. The interest rate on the mortgage note was fixed at 7% through November 2002. The terms of the note payable were modified in December 2002 to include a floating interest rate at the one month 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 December 31, 2002. 9 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Quarter and Six Months Ended December 31, 2002 vs. Quarter and Six Months Ended December 31, 2001 Overview Techne Corporation (the Company) 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's principal products are purified cytokines (proteins), antibodies and assay kits, which are sold primarily to biomedical researchers at pharmaceutical companies and academic and government research laboratories. The Hematology Division's principal products are 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 directly, through a branch office in France and through a sales subsidiary in Germany. The Company also had a foreign sales corporation, Techne Export Inc., which was dissolved in fiscal 2002. Net Sales Net sales for the quarter ended December 31, 2002 were $33,300,214, an increase of $2,163,303 (7%) from the quarter ended December 31, 2001. Net sales for the six months ended December 31, 2002 increased $6,868,873 (11%) from $60,979,577 to $67,848,450. R&D Systems' Biotechnology Division net sales increased $735,054 (4%) and $3,856,766 (10%) and R&D Systems' Hematology Division net sales increased $163,372 (4%) and $287,559 (4%) for the quarter and six months ended December 31, 2002, respectively. R&D Europe net sales increased $1,264,877 (17%) and $2,724,548 (19%) for the quarter and six months ended December 31, 2002. In British pounds, R&D Europe's net sales increased 7% and 10% for the quarter and six months. The slowing of the Company's sales growth as compared to prior-year periods from a 16% growth rate in the first quarter of the current fiscal year to 7% in the current quarter was primarily due to the unexpected reduction in R&D Systems' Biotechnology Division sales growth. Biotechnology Division's sales for the second quarter of fiscal 2003 increased 4% from last year compared to a 16% increase in the first quarter of fiscal 2003. The decline in sales growth occurred across all major product lines and customer segments and can be attributed mainly to economic factors and the timing of the Christmas and New Year holidays, which fell in the middle of the work week. Competitive factors are not believed to have had an impact on the second quarter decline in sales growth. Gross margins Gross margins for the second quarter of fiscal 2003 were 74.9% compared to 74.2% for the same quarter in fiscal 2002. Gross margins for the six months ended December 31, 2002 were 74.9% compared to 74.5% for the same period in fiscal 2002. Biotechnology Division margins increased slightly from 78.0% to 78.3% for the quarter, but decreased slightly from 78.6% to 78.3% for the six months ended December 31, 2002. R&D Europe gross margins increased from 35.6% to 40.4% 10 for the quarter and from 35.9% to 40.1% for the six months ended December 31, 2002 as a result of exchange rate changes. Hematology Division gross margins increased from 44.4% to 47.0% for the quarter and from 43.7% to 45.2% for the six months ended December 31, 2002 as a result of lower raw material costs. Blood costs during the first half of last fiscal year were high due to supply shortages. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $145,749 (3%) and $407,746 (4%) from the second quarter and first six months of last year, respectively. Research and Development Expenses Research and development expenses increased $669,967 (16%) and $1,513,330 (18%) for the quarter and six months ended December 31, 2002. Included in research and development expenses are losses by ChemoCentryx, Inc. (CCX) and Discovery Genomics, Inc. (DGI), development stage companies in which the Company has invested. Research and development expenses are composed of the following: QUARTER ENDED SIX MONTHS ENDED ---------------------- ---------------------- 12/31/02 12/31/01 12/31/02 12/31/01 ---------- ---------- ---------- ---------- R&D Systems' expenses $4,320,409 $3,927,123 $8,455,863 $7,787,372 Chemocentryx, Inc. losses 496,233 277,309 1,015,377 360,860 Discovery Genomics losses 162,598 104,841 341,097 150,775 ---------- ---------- ---------- ---------- Total research and development expenses $4,979,240 $4,309,273 $9,812,337 $8,299,007 ========== ========== ========== ========== Excluding CCX and DGI losses, research and development expenses for the second quarter and first six months of fiscal 2003 increased $393,286 (10%) and $668,491 (9%), respectively. Amortization of Intangible Assets In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 applies to all business combinations initiated after June 30, 2001 and prohibits the use of the pooling-of-interests method of accounting. SFAS No. 142 requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic tests of the goodwill's impairment and that other intangible assets be amortized over their useful lives unless these lives are determined to be indefinite. The Company assessed the recoverability of its goodwill and other intangibles upon the adoption of SFAS No. 142 and determined no impairment existed at July 1, 2002. The Company used cash flow and fair value methodologies to assess impairment. The Company had net goodwill and other intangible assets of approximately $12.5 million and $5.4 million, respectively, at December 31, 2002. 11 The pro forma effects of implementation of SFAS No. 142 to prior periods would be as follows: QUARTER ENDED SIX MONTHS ENDED ---------------------- ------------------------ 12/31/02 12/31/01 12/31/02 12/31/01 ---------- ---------- ----------- ----------- Reported net income $9,881,293 $8,434,635 $20,326,207 $16,859,416 Goodwill amortization, net of tax -- 1,019,500 -- 2,038,000 ---------- ---------- ----------- ----------- Adjusted net income $9,881,293 $9,454,135 $20,326,207 $18,897,416 ========== ========== =========== =========== Reported basic earnings per share $ 0.24 $ 0.20 $ 0.49 $ 0.41 Goodwill amortization 0.00 0.03 0.00 0.05 ---------- ---------- ----------- ----------- Adjusted basic earnings per share $ 0.24 $ 0.23 $ 0.49 $ 0.46 ========== ========== =========== =========== Reported diluted earnings per share $ 0.23 $ 0.20 $ 0.48 $ 0.40 Goodwill amortization 0.00 0.02 0.00 0.04 ---------- ---------- ----------- ----------- Adjusted diluted earnings per share $ 0.23 $ 0.22 $ 0.48 $ 0.44 ========== ========== =========== =========== YEAR ENDED ------------------------------------- 6/30/02 6/30/01 6/30/00 ----------- ----------- ----------- Reported net income $27,129,669 $34,045,376 $26,582,797 Goodwill amortization, net of tax 4,076,000 4,076,000 4,076,000 ----------- ----------- ----------- Adjusted net income $31,205,669 $38,121,376 $30,658,797 =========== =========== =========== Reported basic earnings per share $ 0.65 $ 0.82 $ 0.65 Goodwill amortization 0.10 0.10 0.10 ----------- ----------- ----------- Adjusted basic earnings per share $ 0.75 $ 0.92 $ 0.75 =========== =========== =========== Reported diluted earnings per share $ 0.64 $ 0.80 $ 0.63 Goodwill amortization 0.09 0.09 0.10 ----------- ----------- ----------- Adjusted diluted earnings per share $ 0.73 $ 0.89 $ 0.73 =========== =========== =========== Other Non-operating Income/Expenses Other non-operating income/expenses consist mainly of foreign currency transaction gains and losses and real estate and utility expenses related to properties under construction/renovation. Net Earnings Earnings before income taxes increased $2,581,658 from $12,406,635 in the second quarter of fiscal 2002 to $14,988,293 in the second quarter of fiscal 2003. Earnings before income taxes for the six months increased $6,232,791 from $24,662,416 to $30,895,207. The increase in earnings before income taxes was due primarily to the increase in sales and reduction in goodwill amortization. Income taxes for the quarter and six months ended December 31, 2002 were provided at a rate of approximately 34% of consolidated pretax earnings compared to 32% for the prior-year periods. The increase in the tax rate was primarily the result of increased losses by CCX and DGI for which there are no tax benefits, decreased tax exempt interest income and changes in state income tax regulations. U.S. federal taxes have been reduced by the credit for research and development expenditures and the benefit for foreign sales. Foreign income taxes have been provided at rates which approximate the tax rates in the United Kingdom, France and Germany. 12 Liquidity and Capital Resources At December 31, 2002, cash and cash equivalents and short-term available-for- sale investments were $107,733,212 compared to $97,063,821 at June 30, 2002. 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 years. Cash Flows From Operating Activities The Company generated cash of $26,105,888 from operating activities in the first six months of fiscal 2003 compared to $19,613,473 for the first six months of fiscal 2002. The increase was mainly the result of increased earnings after adjustment for noncash items and increased income taxes payable. Cash Flows From Investing Activities Capital expenditures for fixed assets for the first six months of fiscal 2003 and 2002 were $12,765,186 and $6,174,608, respectively. Included in the first six months of fiscal 2003 capital additions was $9 million for renovation of property purchased in fiscal 2002 and the construction of an infill joining the property with R&D Systems' existing property. Also included in the first six months of fiscal 2003 capital additions was $2.7 million for the purchase of property in southeastern Minnesota as described previously in Note F. Included in the first six months of fiscal 2003 and 2002 capital additions were $202,000 and $4.2 million, respectively, for construction of a parking ramp. The remaining capital additions in the first six months of fiscal fiscal 2003 and 2002 were for laboratory and computer equipment and remodeling of laboratory space. Remaining expenditures in fiscal 2003 for laboratory and computer equipment are expected to cost approximately $500,000 and are expected to be financed through currently available funds and cash generated from operating activities. Costs to finish the renovation of the property purchased in fiscal 2002 and the construction of the infill are estimated at approximately $8 million with completion expected in fiscal 2004. The renovation costs and construction of the infill are expected to be financed through currently available funds, cash generated from operating activities and maturities of short-term available-for-sale investments. During the six months ended December 31, 2002 the Company purchased $41,320,000 and sold $34,190,625 of short-term available-for-sale investments. During the six months ended December 31, 2001, the Company purchased $26,214,571 and sold $24,923,000 of short-term available-for-sale investments. The Company's investment policy is to place excess cash in short-term bonds and other short-term investments. The objective of this policy is to obtain the highest possible return with minimal risk, while keeping the funds accessible. During the first six months of fiscal 2002, the Company invested $3 million in Discovery Genomics, Inc. Cash Flows From Financing Activities Cash of $1,511,628 and $155,917 was received during the six months ended December 31, 2002 and 2001, respectively, for the exercise of options for 109,050 and 24,950 shares of common stock. During the first six months of fiscal 2003 and 2002 options for 120,000 and 80,000 shares of common stock 13 were exercised by the surrender of 12,438 and 7,654 shares of the Company's common stock with a fair market values of $404,981 and $224,968, respectively. During the first six months of fiscal 2003 and 2002, the Company purchased and retired 247,500 and 20,000 shares of Company common stock at a market value of $5,864,890 and $485,010, respectively. The Board of Directors has authorized the Company, subject to market conditions and share price, to purchase and retire up to $40 million of its common stock. From the start of the repurchase program through February 1, 2003, 1,618,700 shares have been purchased at a market value of $16,528,387. The Company has never paid cash dividends and has no plans to do so in fiscal 2003. New Accounting Pronouncements In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 will be effective for exit or disposal activities that are initiated by the Company after December 31, 2002. In December 2002, the FASB issued SFAS No. 148, Stock Compensation. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company does not plan to change their method of accounting for stock-based employee compensation. The Company will make the required interim disclosures effective with the quarter ending March 31, 2003. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At December 31, 2002, the Company had a professionally managed investment portfolio of fixed income securities, excluding those classified as cash and cash equivalents, of $78,911,716. These securities, like all fixed income instruments, are subject to interest rate risk and will decline in value if market interest rates increase. However, the Company has the ability to hold its fixed income investments until maturity and therefore the Company does not expect any such increase in interest rates to have an adverse impact on income or cash flows. The Company operates internationally, and thus is subject to potentially adverse movements in foreign currency rate changes. 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 December 31, 2002, the Company's long-term debt consisted of a mortgage note payable. The interest rate on the mortgage note was fixed at 7% through November 2002. The terms of the note payable were modified in December 2002 to include a floating interest rate at the one month 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 December 31, 2002. 14 ITEM 4 - CONTROLS AND PROCEDURES The Company's Chief Executive and Financial Officer, with the participation of Company management, has concluded, based on an evaluation within 90 days of the filing date of this report, that the Company's disclosure controls and procedures are effective for gathering, analyzing and disclosing information required to be disclosed in the Company's reports filed under the Securities Exchange Act of 1934. Management is not aware of any significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the above mentioned evaluation, including any significant deficiencies or material weaknesses of internal controls that would require corrective action. PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS None 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 24, 2002 is contained in the Company's Form 10-Q for the quarter ended September 30, 2002, 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 (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. 15 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS See exhibit index following. B. REPORTS ON FORM 8-K The following report on Form 8-K was filed by the Registrant during the quarter ended December 31, 2002: Form 8-K dated November 18, 2002, reporting under Item 4 a change in the Registrant's certifying accountant. 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, 2003 /s/ Thomas E. Oland -------------------------------- President, Chief Executive and Chief Financial Officer 16 CERTIFICATIONS I, Thomas E. Oland, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Techne Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and the other financial information included in this quarterly report, fairly present in all respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the date of this quarterly report (the "Evaluation Date"); c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design and operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 13, 2003 /s/ Thomas E. Oland - ---------------------- Thomas E. Oland Chief Executive Officer and Chief Financial Officer 17 EXHIBIT INDEX TO FORM 10-Q TECHNE CORPORATION Exhibit # Description - ----------- ---------------------------- 10.1 Form of Indemnification Agreement entered into with each director and executive officer of the Registrant 99 Certification