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, 2003, 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 ( ) Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes (X) No ( ) At May 5, 2003, 40,760,448 shares of the Company's Common Stock (par value $.01) were outstanding. TECHNE CORPORATION FORM 10-Q MARCH 31, 2003 INDEX PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of March 31, 2003 (unaudited) and June 30, 2002 3 Consolidated Statements of Earnings for the quarter and nine months ended March 31, 2003 and 2002 (unaudited) 4 Consolidated Statements of Cash Flows for the nine months ended March 31, 2003 and 2002 (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 15 ITEM 4. CONTROLS AND PROCEDURES 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 16 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 16 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16 ITEM 5. OTHER INFORMATION 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16 SIGNATURES 17 2 PART I. FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS TECHNE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) 3/31/03 6/30/02 ------------ ------------ ASSETS Cash and cash equivalents $ 26,836,002 $ 26,392,480 Short-term available-for-sale investments 76,775,269 70,671,341 Trade accounts receivable (net) 18,733,954 16,913,002 Interest receivable 2,210,218 2,500,616 Inventories 6,558,346 6,077,035 Deferred income taxes 4,104,000 3,762,000 Income taxes receivable -- 1,845,421 Prepaid expenses 1,262,314 915,854 ------------ ------------ Total current assets 136,480,103 129,077,749 Property and equipment (net) 81,543,402 70,312,602 Goodwill (net) (Note B) 12,540,000 12,540,000 Intangible assets (net) (Note B) 4,902,562 6,357,000 Deferred income taxes 8,824,000 9,400,000 Other long-term assets 7,915,190 10,559,608 ------------ ------------ $252,205,257 $238,246,959 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Trade accounts payable $ 3,296,090 $ 4,326,359 Salaries, wages and related accounts payable 2,145,726 2,873,505 Other accounts payable and accrued expenses 3,176,955 6,480,023 Income taxes payable 3,586,653 -- Current portion of long-term debt 1,220,415 949,637 ------------ ------------ Total current liabilities 13,425,839 14,629,524 Long-term debt, less current portion 16,163,560 17,100,652 ------------ ------------ Total liabilities 29,589,399 31,730,176 Commitments and contingencies (Note E) Common stock, par value $.01 per share; authorized 100,000,000; issued and outstanding 40,855,948 and 41,562,136, respectively 408,559 415,621 Additional paid-in capital 61,086,736 58,584,103 Retained earnings 159,211,735 147,369,149 Accumulated other comprehensive income 1,908,828 147,910 ------------ ------------ Total stockholders' equity 222,615,858 206,516,783 ------------ ------------ $252,205,257 $238,246,959 ============ ============ See notes to consolidated financial statements (unaudited). 3 TECHNE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) QUARTER ENDED NINE MONTHS ENDED ------------------------ -------------------------- 3/31/03 3/31/02 3/31/03 3/31/02 ----------- ----------- ------------ ------------ Net sales $37,736,518 $34,285,276 $105,584,968 $ 95,264,853 Cost of sales 8,756,163 8,392,165 25,817,172 23,968,392 ----------- ----------- ------------ ------------ Gross margin 28,980,355 25,893,111 79,767,796 71,296,461 Operating expenses: Selling, general and administrative 4,705,923 4,469,162 14,557,695 13,913,188 Research and development 5,285,180 4,442,057 15,097,517 12,741,064 Amortization of intangible assets 484,813 2,137,312 1,454,438 6,411,935 Interest expense 178,274 323,719 797,499 997,243 Interest income (732,060) (886,595) (2,226,483) (2,762,607) Other non-operating income/expense (net) (59,313) 57,544 74,385 (16,690) ----------- ----------- ------------ ------------ 9,862,817 10,543,199 29,755,051 31,284,133 ----------- ----------- ------------ ------------ Earnings before income taxes 19,117,538 15,349,912 50,012,745 40,012,328 Income taxes 6,724,000 4,776,000 17,293,000 12,579,000 ----------- ----------- ------------ ------------ Net earnings $12,393,538 $10,573,912 $ 32,719,745 $ 27,433,328 =========== =========== ============ ============ Earnings per share: Basic $ 0.30 $ 0.25 $ 0.79 $ 0.66 Diluted $ 0.30 $ 0.25 $ 0.78 $ 0.65 Weighted average common shares outstanding: Basic 41,296,620 41,544,110 41,369,059 41,488,383 Diluted 41,990,671 42,524,992 42,198,103 42,531,964 See notes to consolidated financial statements (unaudited). 4 TECHNE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) NINE MONTHS ENDED -------------------------- 3/31/03 3/31/02 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 32,719,745 $ 27,433,328 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 4,769,475 9,439,663 Deferred income taxes 242,000 (757,000) Losses by equity method investees 2,279,712 1,041,068 Other 364,707 330,957 Change in current assets and current liabilities: Trade accounts and interest receivable (1,250,602) (1,962,671) Inventories (447,975) (505,363) Prepaid expenses (335,890) (331,805) Trade and other accounts payable (4,382,315) (3,745,346) Salaries, wages and related accounts (739,780) 170,001 Income taxes payable 5,936,251 15,090 ------------ ------------ Net cash provided by operating activities 39,155,328 31,127,922 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (14,513,514) (13,942,179) Real estate deposit -- (1,999,000) Purchase of short-term available-for- sale investments (53,440,000) (39,419,571) Proceeds from sale of short-term available-for-sale investments 48,375,072 32,902,541 Increase in other long-term assets -- (3,034,103) ------------ ------------ Net cash used in investing activities (19,578,442) (25,492,312) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 1,531,978 328,873 Repurchase of common stock (20,481,567) (485,010) Payments on long-term debt (666,314) (660,259) ------------ ------------ Net cash used in financing activities (19,615,903) (816,396) ------------ ------------ Effect of exchange rate changes on cash 482,539 54,801 ------------ ------------ Net increase in cash and cash equivalents 443,522 4,874,015 Cash and cash equivalents at beginning of period 26,392,480 21,267,791 ------------ ------------ Cash and cash equivalents at end of period $ 26,836,002 $ 26,141,806 ============ ============ 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: 3/31/03 6/30/02 ------------ ------------ ACCOUNTS RECEIVABLE Accounts receivable $ 19,000,954 $ 17,176,002 Less allowance for doubtful accounts 267,000 263,000 ------------ ------------ NET ACCOUNTS RECEIVABLE $ 18,733,954 $ 16,913,002 ============ ============ INVENTORIES Raw materials $ 2,795,314 $ 2,785,949 Supplies 129,446 118,895 Finished goods 3,633,586 3,172,191 ------------ ------------ TOTAL INVENTORIES $ 6,558,346 $ 6,077,035 ============ ============ PROPERTY AND EQUIPMENT Land $ 2,998,800 $ 1,571,000 Buildings and improvements 64,929,704 63,541,408 Building construction in progress 17,769,501 7,728,660 Laboratory equipment 16,267,535 16,694,898 Office equipment 3,098,116 4,263,512 Leasehold improvements 512,725 497,087 ------------ ------------ 105,576,381 94,296,565 Less accumulated depreciation and amortization 24,032,979 23,983,963 ------------ ------------ NET PROPERTY AND EQUIPMENT $ 81,543,402 $ 70,312,602 ============ ============ 6 3/31/03 6/30/02 ------------ ------------ GOODWILL $ 38,845,547 $ 38,845,547 Less accumulated amortization 26,305,547 26,305,547 ------------ ------------ NET GOODWILL $ 12,540,000 $ 12,540,000 ============ ============ INTANGIBLE ASSETS Customer list $ 18,010,000 $ 18,010,000 Technology licensing agreements 500,000 500,000 Acquisition costs 229,542 229,542 ------------ ------------ 18,739,542 18,739,542 Less accumulated amortization 13,836,980 12,382,542 ------------ ------------ NET INTANGIBLE ASSETS $ 4,902,562 $ 6,357,000 ============ ============ 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 $4.9 million, respectively, at March 31, 2003. The pro forma effects of implementation of SFAS No. 142 to prior periods would be as follows: QUARTER ENDED NINE MONTHS ENDED ------------------------ ------------------------ 3/31/03 3/31/02 3/31/03 3/31/02 ----------- ----------- ----------- ----------- Reported net income $12,393,538 $10,573,912 $32,719,745 $27,433,328 Goodwill amortization, net of tax -- 1,018,500 -- 3,056,500 ----------- ----------- ----------- ----------- Adjusted net income $12,393,538 $11,592,412 $32,719,745 $30,489,828 =========== =========== =========== =========== Reported basic earnings per share $ 0.30 $ 0.25 $ 0.79 $ 0.66 Goodwill amortization 0.00 0.03 0.00 0.07 ----------- ----------- ----------- ----------- Adjusted basic earnings per share $ 0.30 $ 0.28 $ 0.79 $ 0.73 =========== =========== =========== =========== Reported diluted earnings per share $ 0.30 $ 0.25 $ 0.78 $ 0.65 Goodwill amortization 0.00 0.02 0.00 0.07 ----------- ----------- ----------- ----------- Adjusted diluted earnings per share $ 0.30 $ 0.27 $ 0.78 $ 0.72 =========== =========== =========== =========== 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 March 31, 2003 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 three months) $ 485 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 NINE MONTHS ENDED ---------------------- ---------------------- 3/31/03 3/31/02 3/31/03 3/31/02 ---------- ---------- ---------- ---------- Weighted average common shares outstanding-basic 41,296,620 41,544,110 41,369,059 41,488,383 Dilutive effect of stock options and warrants 694,051 980,882 829,044 1,043,581 ---------- ---------- ---------- ---------- Weighted average common shares outstanding-diluted 41,990,671 42,524,992 42,198,103 42,531,964 ========== ========== ========== ========== 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 were 585,920 and 581,310 at March 31, 2003 and 2002, respectively. During the quarter ended March 31, 2003, the Company purchased and retired 679,000 shares of Company common stock at a market value of $14,616,677. The effect of the purchases was a 236,700 reduction in the weighted average common shares outstanding for the quarter ended March 31, 2003. The full impact of the above purchases will be reflected in the fourth quarter weighted average common shares outstanding. 8 During the first nine months of fiscal 2003 and 2002, the Company purchased and retired 926,500 and 20,000 shares of Company common stock at a market value of $20,481,567 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 May 1, 2003, 2,397,700 shares have been purchased at a market value of $33,176,069. D. SEGMENT INFORMATION: Following is financial information relating to the Company's operating segments: QUARTER ENDED NINE MONTHS ENDED ------------------------ ------------------------- 3/31/03 3/31/02 3/31/03 3/31/02 ----------- ----------- ------------ ----------- External sales Hematology $ 3,996,260 $ 3,630,788 $ 11,756,641 $11,103,610 Biotechnology 23,642,089 22,701,874 66,583,212 61,786,231 R&D Systems Europe 10,098,169 7,952,614 27,245,115 22,375,012 ----------- ----------- ------------ ----------- Total external sales $37,736,518 $34,285,276 $105,584,968 $95,264,853 =========== =========== ============ =========== Intersegment sales Hematology $ -- $ -- $ -- $ -- Biotechnology 4,874,133 4,586,030 13,525,573 12,532,307 R&D Systems Europe 13,565 17,865 37,045 47,300 ----------- ----------- ------------ ----------- Total intersegment sales $ 4,887,698 $ 4,603,895 $ 13,562,618 $12,579,607 =========== =========== ============ =========== Earnings before income taxes Hematology $ 1,338,726 $ 1,068,211 $ 3,901,042 $ 3,462,170 Biotechnology 15,955,208 13,787,428 42,649,248 34,919,770 R&D Systems Europe 3,187,534 1,671,832 7,322,252 4,488,280 Corporate and other (1,363,930) (1,177,559) (3,859,797) (2,857,892) ----------- ----------- ------------ ----------- Total earnings before income taxes $19,117,538 $15,349,912 $ 50,012,745 $40,012,328 =========== =========== ============ =========== 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 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. 9 In March 2002, the Company purchased property adjacent to its Minneapolis facility for approximately $8.9 million. In fiscal 2000, the Company paid $2 million and issued warrants to purchase 120,000 shares of common stock as a deposit on the acquisition. The warrants were valued at $858,000. The remaining $6 million of the purchase price was financed through cash on hand. In addition, the Company paid $1,999,000 in March 2002 as a nonrefundable deposit on an option, which expires in 2005, to purchase additional adjacent property. In fiscal 2000, the Company paid an original $1,000 deposit on this option. G. MODIFICATION OF LOAN AGREEMENT: As of March 31, 2003, 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 March 31, 2003. H. STOCK OPTIONS: As permitted by Statement of Financial Accounting Standards (SFAS) No. 123, the Company has elected to continue following the guidance of Accounting Principles Board (APB) Opinion No. 25 for measurement and recognition of stock-based transactions with employees. No compensation cost has been recognized for stock options granted to employees under the plans because the exercise price of all options granted was at least equal to the fair value of the common stock at the date of grant. If compensation cost for employee options granted under the Company's stock option plans had been determined based on the fair value at the grant dates, consistent with the methods provided in SFAS No. 123 the Company's net earnings and earnings per share would have been as follows: QUARTER ENDED NINE MONTHS ENDED ------------------------ ------------------------ 3/31/03 3/31/02 3/31/03 3/31/02 ----------- ----------- ----------- ----------- Net earnings: As reported $12,393,538 $10,573,912 $32,719,745 $27,433,328 Less employee stock- based compensation, net of taxes 40,588 136,047 622,248 994,767 ----------- ----------- ----------- ----------- Pro forma $12,352,950 $10,437,865 $32,097,497 $26,438,561 =========== =========== =========== =========== Basic earnings per share: As reported $ 0.30 $ 0.25 $ 0.79 $ 0.66 Less employee stock- based compensation 0.00 0.00 0.01 0.02 ----------- ----------- ----------- ----------- Pro forma $ 0.30 $ 0.25 $ 0.78 $ 0.64 =========== =========== =========== =========== Diluted earnings per share: As reported $ 0.30 $ 0.25 $ 0.78 $ 0.65 Less employee stock- based compensation 0.01 0.00 0.02 0.03 ----------- ----------- ----------- ----------- Pro forma $ 0.29 $ 0.25 $ 0.76 $ 0.62 =========== =========== =========== =========== 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: no dividend yield, expected volatility of between 41% and 99%, risk-free interest rates between 4.2% and 6.1% and expected lives between 7 and 10 years. 10 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Quarter and Nine Months Ended March 31, 2003 vs. Quarter and Nine Months Ended March 31, 2002 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 March 31, 2003 were $37,736,518, an increase of $3,451,242 (10%) from the quarter ended March 31, 2002. Net sales for the nine months ended March 31, 2003 increased $10,320,115 (11%) from $95,264,853 to $105,584,968. R&D Systems' Biotechnology Division net sales increased $940,215 (4%) and $4,796,981 (8%) and R&D Systems' Hematology Division net sales increased $365,472 (10%) and $653,031 (6%) for the quarter and nine months ended March 31, 2003, respectively. R&D Europe net sales increased $2,145,555 (27%) and $4,870,103 (22%) for the quarter and nine months ended March 31, 2003. In British pounds, R&D Europe's net sales increased 13% and 11% for the quarter and nine 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 second quarter and 10% in the current quarter was primarily due to the reduction in R&D Systems' Biotechnology Division sales growth. Biotechnology Division sales for the second and third quarter of fiscal 2003 increased 3.7% and 4.1%, respectively from last year compared to a 16.1% increase in the first quarter of fiscal 2003. The decline in sales growth rates occurred across all major product lines and customer segments and can be attributed mainly to economic factors. The increase in the year-over-year growth rate for the Biotechnology Division from 3.7% in the second quarter to 4.1% in the third quarter was mainly the result of increased sales growth to its largest customer segment, pharmaceutical and biotechnology research companies. Gross margins Gross margins for the third quarter of fiscal 2003 were 76.8% compared to 75.5% for the same quarter in fiscal 2002. Gross margins for the nine months ended March 31, 2003 were 75.6% compared to 74.8% for the same period in fiscal 2002. 11 Biotechnology Division margins increased slightly from 79.5% to 80.0% for the quarter, but remained steady at 78.9% for the nine months ended March 31. R&D Europe gross margins increased from 35.8% to 43.0% for the quarter and from 35.8% to 41.2% for the nine months ended March 31, 2003 as a result of favorable exchange rate changes due to the weakening of the U.S. dollar to the British pound sterling. Hematology Division gross margins increased from 41.5% to 45.4% for the quarter and from 43.0% to 45.3% for the nine months ended March 31, 2003 as a result of lower raw material costs. Blood costs during the first three quarters of last fiscal year were high due to supply shortages. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $236,761 (5%) and $644,507 (5%) from the third quarter and first nine months of last year, respectively. Research and Development Expenses Research and development expenses increased $843,123 (19%) and $2,356,453 (18%) for the quarter and nine months ended March 31, 2003. Included in research and development expenses are the Company's share of 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 NINE MONTHS ENDED ---------------------- ------------------------ 3/31/03 3/31/02 3/31/03 3/31/02 ---------- ---------- ----------- ----------- R&D Systems' expenses $4,361,942 $3,912,624 $12,817,805 $11,699,996 Chemocentryx, Inc. losses 792,163 388,640 1,807,540 749,500 Discovery Genomics, Inc. losses 131,075 140,793 472,172 291,568 ---------- ---------- ----------- ----------- Total research and development expenses $5,285,180 $4,442,057 $15,097,517 $12,741,064 ========== ========== =========== =========== Excluding CCX and DGI losses, research and development expenses for the third quarter and first nine months of fiscal 2003 increased $449,318 (11%) and $1,117,809 (10%), 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 $4.9 million, respectively, at March 31, 2003. 12 The pro forma effects of implementation of SFAS No. 142 to prior periods would be as follows: QUARTER ENDED NINE MONTHS ENDED ------------------------ ------------------------ 3/31/03 3/31/02 3/31/03 3/31/02 ----------- ----------- ----------- ----------- Reported net income $12,393,538 $10,573,912 $32,719,745 $27,433,328 Goodwill amortization, net of tax -- 1,018,500 -- 3,056,500 ----------- ----------- ----------- ----------- Adjusted net income $12,393,538 $11,592,412 $32,719,745 $30,489,828 =========== =========== =========== =========== Reported basic earnings per share $ 0.30 $ 0.25 $ 0.79 $ 0.66 Goodwill amortization 0.00 0.03 0.00 0.07 ----------- ----------- ----------- ----------- Adjusted basic earnings per share $ 0.30 $ 0.28 $ 0.79 $ 0.73 =========== =========== =========== =========== Reported diluted earnings per share $ 0.30 $ 0.25 $ 0.78 $ 0.65 Goodwill amortization 0.00 0.02 0.00 0.07 ----------- ----------- ----------- ----------- Adjusted diluted earnings per share $ 0.30 $ 0.27 $ 0.78 $ 0.72 =========== =========== =========== =========== 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/expense consists mainly of foreign currency transaction gains and losses, rental income, and real estate taxes and utility expenses related to properties under construction/renovation. Net Earnings Earnings before income taxes increased $3,767,626 from $15,349,912 in the third quarter of fiscal 2002 to $19,117,538 in the third quarter of fiscal 2003. Earnings before income taxes for the nine months increased $10,000,417 from $40,012,328 to $50,012,745. 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 nine months ended March 31, 2003 were provided at a rate of approximately 35% of consolidated pretax earnings compared to 31% 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. 13 Liquidity and Capital Resources At March 31, 2003, cash and cash equivalents and short-term available-for- sale investments were $103,611,271 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 $39,155,328 from operating activities in the first nine months of fiscal 2003 compared to $31,127,922 for the first nine months of fiscal 2002. The increase was mainly the result of increased earnings after adjustment for noncash items and increased income taxes payable. The increase in income taxes payable was the result of higher U.S. taxable income in the first nine months of fiscal 2003 ($2,169,000 increase in income taxes payable compared to fiscal 2002) and lower income tax deposits made in the first nine months of fiscal 2003 ($3,489,000 less than made in the first nine months of fiscal 2002). Cash Flows From Investing Activities Capital expenditures for fixed assets for the first nine months of fiscal 2003 and 2002 were $14,513,514 and $13,942,179, respectively. Included in fiscal 2003 capital additions was $10.6 million for renovation of property purchased in fiscal 2002 and the construction of an infill connecting this property to R&D Systems' existing property, $202,000 for the completion of the parking ramp and $2.7 million for the purchase of property in southeastern Minnesota as described previously in Note F. Included in capital additions for the first nine months of fiscal 2002 was $6 million for property acquired in Minneapolis, $701,000 for renovation of the property and construction of the infill and $5.1 million for construction of a parking ramp. The remaining capital additions in the first nine 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 $7 million with completion expected in fiscal 2004. The majority of the work to complete the projects will take place in fiscal 2004. The renovation and 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 nine months ended March 31, 2003 the Company purchased $53,440,000 and sold $48,375,072 of short-term available-for-sale investments. During the nine months ended March 31, 2002, the Company purchased $39,419,571 and sold $32,902,541 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 nine months of fiscal 2002, the Company invested $3 million in Discovery Genomics, Inc. Cash Flows From Financing Activities Cash of $1,531,978 and $328,873 was received during the nine months ended March 31, 2003 and 2002, respectively, for the exercise of options for 112,750 and 86,800 shares of common stock. During the first nine months of fiscal 2003 and 2002 options for 120,000 and 80,000 shares of common stock 14 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 nine months of fiscal 2003 and 2002, the Company purchased and retired 926,500 and 20,000 shares of Company common stock at a market value of $20,481,567 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 May 1, 2003, 2,397,700 shares have been purchased at a market value of $33,176,069. The Company has never paid cash dividends and has no plans to do so in fiscal 2003. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At March 31, 2003, the Company had a professionally managed investment portfolio of fixed income securities, excluding those classified as cash and cash equivalents, of $76,775,269. 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 March 31, 2003, 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 March 31, 2003. 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. 15 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 None ITEM 5 - OTHER INFORMATION Forward Looking Information and Cautionary Statements: Statements in this filing, and elsewhere, which look forward in time involve risks and uncertainties which may affect the actual results of operations. The following important factors, among others, have affected and, in the future, could affect the Company's actual results: the introduction and acceptance of new biotechnology and hematology products, the levels and particular directions of research by the Company's customers, the impact of the growing number of producers of biotechnology research products and related price competition, the retention of hematology OEM (private label) and proficiency survey business, the impact of changes in foreign currency exchange rates, and the costs and results of research and product development efforts of the Company and of companies in which the Company has invested or with which it has formed strategic relationships. For additional information concerning such factors, see the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS See exhibit index following. B. REPORTS ON FORM 8-K Form 8-K dated May 1, 2003 furnishing pursuant to Item 12, the Registrant's press release reporting earnings for the third quarter of fiscal 2003. 16 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: May 13, 2003 /s/ Thomas E. Oland -------------------------------- President, Chief Executive and Chief Financial Officer 17 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 and auditors (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: May 13, 2003 /s/ Thomas E. Oland - ------------------------------- Thomas E. Oland Chief Executive Officer and Chief Financial Officer 18 EXHIBIT INDEX TO FORM 10-Q TECHNE CORPORATION Exhibit # Description - ----------- ------------------- 99 Certification 19