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 March 31, 1998, 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 May 1, 1998, 19,032,483 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)
3/31/98 6/30/97 ----------- ----------- ASSETS Cash and cash equivalents $12,139,591 $ 8,598,367 Short-term investments 24,331,524 16,153,890 Accounts receivable (net) 10,237,674 9,114,447 Inventories 3,886,927 4,087,161 Deferred income taxes 1,439,000 1,322,000 Other current assets 529,087 521,493 ----------- ---------- Total current assets 52,563,803 39,797,358 Deferred income taxes 1,769,000 1,703,000 Fixed assets (net) 11,806,483 11,252,741 Intangible assets (net) 303,515 365,311 Other assets 478,900 803,300 ----------- ----------- TOTAL ASSETS $66,921,701 $53,921,710 =========== =========== LIABILITIES & EQUITY Trade accounts payable $ 2,394,128 $ 1,609,362 Salary and related accruals 2,015,023 1,790,035 Other payables 842,440 498,873 Income taxes payable 1,395,586 1,000,096 ----------- ----------- Total current liabilities 6,647,177 4,898,366 Deferred rent 1,476,900 942,300 Common stock, par value $.01 per share; authorized 50,000,000; issued and outstanding 19,026,233 and 18,875,456, respectively 190,262 188,755 Additional paid-in capital 13,524,588 12,653,449 Retained earnings 44,581,134 34,808,768 Accumulated foreign currency translation adjustments 501,640 430,072 ----------- ----------- Total stockholders' equity 58,797,624 48,081,044 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $66,921,701 $53,921,710 =========== ===========
See notes to unaudited Consolidated Financial Statements. TECHNE CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
QUARTER ENDED NINE MONTHS ENDED ------------------------ ------------------------ 3/31/98 3/31/97 3/31/98 3/31/97 ----------- ----------- ----------- ----------- SALES $17,698,472 $16,251,827 $48,708,472 $44,688,099 Cost of sales 5,490,966 4,979,754 14,922,728 14,329,596 ----------- ----------- ----------- ----------- Gross margin 12,207,506 11,272,073 33,785,744 30,358,503 Operating expenses (income): Selling, general and administrative 3,748,958 4,114,790 11,602,557 11,089,559 Research and development 2,725,251 2,940,709 7,706,757 8,770,804 Amortization expense 9,662 58,877 61,796 176,631 Interest expense - 731 - 29,255 Interest income (314,023) (188,936) (844,390) (511,408) ----------- ----------- ----------- ----------- 6,169,848 6,926,171 18,526,720 19,554,841 ----------- ----------- ----------- ----------- Earnings before income taxes 6,037,658 4,345,902 15,259,024 10,803,662 Income taxes 2,015,000 1,394,000 4,846,000 3,399,000 ----------- ----------- ----------- ----------- NET EARNINGS $ 4,022,658 $ 2,951,902 $10,413,024 $ 7,404,662 =========== =========== =========== =========== BASIC EARNINGS PER SHARE $ 0.21 $ 0.16 $ 0.55 $ 0.39 DILUTED EARNINGS PER SHARE $ 0.20 $ 0.15 $ 0.53 $ 0.38
See notes to unaudited Consolidated Financial Statements. TECHNE CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED ------------------------- 3/31/98 3/31/97 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $10,413,024 $ 7,404,662 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1,699,813 1,683,709 Deferred income taxes (181,000) (363,000) Deferred rent 534,600 305,550 Tax benefit from exercise of options 127,000 - Other 205,900 126,705 Change in current assets and current liabilities: (Increase) decrease in: Accounts receivable (1,152,283) (596,832) Inventories 192,467 (298,033) Other current assets (7,503) (82,138) Increase (decrease) in: Trade account/other payables 1,131,345 (353,579) Salary and related accruals 225,532 (431,358) Income taxes payable 392,725 (165,457) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 13,581,620 7,230,229 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term investments (20,145,831) (11,324,586) Proceeds from sale of short-term investments 11,968,197 8,945,000 Additions to fixed assets (2,443,887) (3,876,338) Proceeds from sale of fixed assets 246,503 - Increase in other long term assets (150,000) (250,000) ----------- ----------- NET CASH USED BY INVESTING ACTIVITIES (10,525,018) (6,505,924) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 653,488 115,096 Repurchase of common stock (280,000) (2,976,452) ----------- ----------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 373,488 (2,861,356) EFFECT OF EXCHANGE RATE CHANGES ON CASH 111,134 106,272 ----------- ----------- NET CHANGE IN CASH AND EQUIVALENTS 3,541,224 (2,030,779) CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 8,598,367 7,422,084 ----------- ----------- CASH AND EQUIVALENTS AT END OF PERIOD $12,139,591 $ 5,391,305 =========== ===========
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:
3/31/98 6/30/97 ----------- ----------- ACCOUNTS RECEIVABLE Accounts receivable $10,283,674 $ 9,166,447 Less reserve for bad debts 46,000 52,000 ----------- ----------- NET ACCOUNTS RECEIVABLE $10,237,674 $ 9,114,447 =========== =========== INVENTORIES Raw materials $ 2,221,142 $ 2,105,836 Work in process - 89,100 Supplies 129,525 121,483 Finished goods 1,536,260 1,770,742 ----------- ----------- TOTAL INVENTORIES $ 3,886,927 $ 4,087,161 =========== =========== FIXED ASSETS Laboratory equipment $ 9,653,781 $ 9,513,329 Office equipment 2,849,483 2,671,947 Leasehold improvements 10,244,340 9,063,354 ----------- ----------- 22,747,604 21,248,630 Less accumulated depreciation and amortization 10,941,121 9,995,889 ----------- ----------- NET FIXED ASSETS $11,806,483 $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 2,432,032 2,370,236 ----------- ----------- NET INTANGIBLE ASSETS $ 303,515 $ 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 consolidated 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: 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. Shares used in the earnings per share computations are as follows:
QUARTER ENDED NINE MONTHS ENDED ---------------------- ---------------------- 3/31/98 3/31/97 3/31/98 3/31/97 ---------- ---------- ---------- ---------- Weighted average common shares outstanding--basic 19,005,562 18,888,756 18,923,525 18,934,536 Dilutive effect of stock options and warrants 637,260 550,182 668,917 550,286 ---------- ---------- ---------- ---------- Average common shares outstanding--diluted 19,642,822 19,438,938 19,592,442 19,484,822 ========== ========== ========== ==========
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Quarter and Nine Months Ended March 31, 1998 vs. Quarter and Nine Months Ended March 31, 1997 Techne Corporation (Techne) 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 and January 1998, Techne purchased $1 million of preferred stock of ChemoCentryx, Inc. (CCX), respectively, representing approximately 28% of issued and outstanding voting shares. In addition, Techne is obligated to purchase a projected $3 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 March 31, 1998 were $17,698,472, an increase of $1,446,645 (9%) from the quarter ended March 31, 1997. Sales for the nine months ended March 31, 1998 increased $4,020,373 (9%) from $44,688,099 to $48,708,472. R&D Systems sales increased $1,694,851 (15%) and $4,885,888 (16%) for the quarter and nine months ended March 31, 1998, respectively. R&D Europe sales decreased $248,206 (5%) and $865,515 (6%) for the quarter and nine months ended March 31, 1998, 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% from the third quarter and first nine months of last year. The increase in consolidated sales for the quarter and nine 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 nine months ended March 31, 1998 were $6,672,281 and $17,519,404 compared to $5,033,963 and $13,586,958 for the quarter and nine months ended March 31, 1997. In addition, sales of hematology products increased $183,432 and $1,023,817 for the quarter and nine months ended March 31, 1998, 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, were slightly less for the third quarter, but increased from the first nine months of the prior year. Margins for the third quarter of fiscal 1998 were 69.0% compared to 69.4% for the same quarter in fiscal 1997. Margins for the nine months ended March 31, 1998 were 69.4% compared to 67.9% for the same period in fiscal 1997. R&D Europe gross margins decreased from 53.0% to 42.8% for the quarter and from 52.9% to 47.8% for the nine months ended March 31, 1998 as a result of changes in product mix and exchange rates. Hematology Division gross margins decreased from 46.1% to 44.4% for the quarter, but increased from 42.7% to 45.1% for the nine months ended March 31, 1998. Biotechnology Division gross margins increased from 71.5% to 72.5% for the quarter and from 70.6% to 72.2% for the nine months ended March 31, 1998 as a result of changes in product mix. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased $365,832 (9%) from the third quarter of fiscal 1997 to the third quarter of fiscal 1998. These expenses increased $512,998 (5%) for the first nine months of fiscal 1998. Included in third quarter fiscal 1997 selling, general and administrative expenses was approximately $450,000 related to R&D Europe restructuring charges. The majority of the increase for the nine months was due to additional occupancy costs at R&D Systems, plus increased advertising and promotion costs by R&D Systems. 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 $215,458 (7%) and $1,064,047 (12%) for the quarter and nine months ended March 31, 1998, respectively. R&D Europe research and development expenses decreased $699,080 and $2,037,186 for the quarter and nine 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 $252,576 and $742,093 for the quarter and nine months ended March 31, 1998, 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 $1,691,756 from $4,345,902 in the third quarter of fiscal 1997 to $6,037,658 in the third quarter of fiscal 1998. Earnings before taxes for the nine months increased $4,455,362 from $10,803,662 to $15,259,024. The increase in earnings before income taxes was due mainly to an increase in Biotechnology Division earnings of $885,088 and $2,451,034 and an increase in Hematology Division earnings of $119,561 and $651,072 for the quarter and nine months ended March 31, 1998, as a result of increased sales and gross margins. In addition R&D Europe's earnings before taxes increased $877,774 and $1,792,066 for the quarter and nine months as a result of a decrease in sales and gross margin offset by decreased selling, general and administrative and research and development expenses. Income taxes for the quarter and nine months ended March 31, 1998 were provided at a rate of approximately 33% and 32% 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 March 31, 1998, cash and cash equivalents and short-term investments were $36,471,115 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 $13,581,620 from operating activities in the first nine months of fiscal 1998 compared to $7,230,229 for the first nine 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 nine months ended March 31, 1998 and 1997, the Company increased short-term investments $8,177,634 and $2,379,586, 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 $2,443,887 for the first nine months of fiscal 1998, compared to $3,876,338 for the first nine months of fiscal 1997. Included in the fiscal 1998 and 1997 additions were $1,180,110 and $2,825,226 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 $.6 million and are expected to be financed through currently available funds and cash generated from operating activities. Cash Flows From Financing Activities Cash of $653,488 and $115,096 was received during the nine months ended March 31, 1998 and 1997, respectively, for the exercise of options for 73,791 and 17,000 shares of common stock. During the first nine months of fiscal 1998, options for 55,835 shares of common stock were exercised by the surrender of 20,624 shares of the Company's common stock with a fair market value of $360,194. During the first nine months of fiscal 1998, a warrant for 61,775 shares of common stock was exercised in a cashless transaction. During the first nine months of fiscal 1998 and 1997, the Company purchased and retired 20,000 and 234,600 shares, respectively, of Company common stock at market values of $280,000 and $2,976,452. In May 1995, the Company announced a plan to purchase and retire up to $5,000,000 of its common stock. Through May 1, 1998, 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 nine months of fiscal 1998, the Company granted stock options with a fair value of $200,500 to a consultant for services to be rendered to the Company, pursuant to the Company's 1988 Nonqualified Stock Option Plan. During the first nine months of fiscal 1998, the Company canceled all non-vested stock options granted to consultants. The total fair value, at the dates of grant, of the options canceled was $469,000. 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 No change. ITEM 2 - CHANGES IN SECURITIES On January 5, 1998, the Company issued 61,775 shares of Common Stock to British Bio-technology plc in connection with the cashless exercise of a warrant initially issued in July 1993 to purchase 100,000 shares at an exercise price of $6.8805 per share. The issuance of such securities was deemed to be exempt from registration under the Securities Act of 1933 by virtue of Sections 3(a)(9) and 4(2) thereof. 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 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: May 14, 1998 Thomas E. Oland ---------------------------------- Thomas E. Oland President, Chief Executive and Financial Officer EXHIBIT INDEX TO FORM 10-Q TECHNE CORPORATION
Exhibit # Description Restated ---------- ------------------ -------- 27.1 Financial Data Schedule-- March 31, 1998 NO 27.2 Financial Data Schedule-- June 30, 1997, March 31, 1997, December 31, 1996, September 30, 1996 YES 27.3 Financial Data Schedule-- June 30, 1996, March 31, 1996, June 30, 1995 YES