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 September 30, 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 number, (Address of principal (Zip Code) including area code) executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) At November 2, 1998, 20,043,189 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)
9/30/98 6/30/98 ------------ ------------ ASSETS Cash and cash equivalents $ 10,625,749 $ 27,372,345 Short-term investments 10,998,142 15,321,935 Accounts receivable (net) 12,989,870 10,001,937 Inventories 9,209,031 3,810,600 Deferred income taxes 1,675,000 1,583,000 Other current assets 588,846 431,187 ------------ ------------ Total current assets 46,086,638 58,521,004 Deferred income taxes 2,092,000 1,798,000 Fixed assets (net) 12,526,629 11,687,300 Intangible assets (net) 52,726,412 293,854 Other assets 509,601 618,723 ------------ ------------ TOTAL ASSETS $113,941,280 $ 72,918,881 ============ ============ LIABILITIES & EQUITY Trade accounts payable $ 3,702,276 $ 2,203,130 Salary and related accruals 1,289,856 2,005,428 Other payables 4,872,710 1,039,334 Income taxes payable 3,283,348 2,185,122 ------------ ------------ Total current liabilities 13,148,190 7,433,014 Deferred rent 1,732,200 1,655,100 Royalty payable 15,228,000 - Common stock, par value $.01 per share; authorized 50,000,000; issued and outstanding 20,056,089 and 19,049,983, respectively 200,561 190,500 Additional paid-in capital 31,454,844 13,714,445 Retained earnings 51,557,595 49,446,319 Accumulated foreign currency translation adjustments 619,890 479,503 ------------ ------------ Total stockholders' equity 83,832,890 63,830,767 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $113,941,280 $ 72,918,881 ============ ============
See notes to unaudited Consolidated Financial Statements. TECHNE CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
QUARTER ENDED ------------------------- 9/30/98 9/30/97 ----------- ----------- Sales $21,335,192 $15,537,143 Cost of sales 6,614,877 4,545,906 ----------- ----------- Gross margin 14,720,315 10,991,237 Operating expenses (income): Selling, general and administrative 4,431,095 4,003,404 Research and development 2,752,125 2,465,848 Amortization expense 2,394,662 42,471 Interest income (212,411) (243,868) ----------- ----------- 9,365,471 6,267,855 ----------- ----------- Earnings before income taxes 5,354,844 4,723,382 Income taxes 1,830,000 1,461,000 ----------- ----------- NET EARNINGS $ 3,524,844 $ 3,262,382 =========== =========== BASIC EARNINGS PER SHARE $ 0.18 $ 0.17 =========== =========== DILUTED EARNINGS PER SHARE $ 0.17 $ 0.17 =========== ===========
See notes to unaudited Consolidated Financial Statements. TECHNE CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED ------------------------- 9/30/98 9/30/97 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 3,524,844 $ 3,262,382 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 2,929,880 568,311 Deferred income taxes (370,000) (232,000) Deferred rent 77,100 178,200 Tax benefit from exercise of options 135,000 11,000 Other 259,523 130,135 Change in current assets and current liabilities, net of acquisition: (Increase) decrease in: Accounts receivable (2,903,205) (37,671) Inventories 317,639 (69,720) Other current assets (153,741) (260,492) Increase (decrease) in: Trade account/other payables 1,575,186 526,582 Salary and related accruals (718,813) (360,692) Income taxes payable 1,073,792 1,587,089 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 5,747,205 5,303,124 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition (Note B) (24,967,220) - Purchase of short-term investments (3,020,000) (7,245,876) Proceeds from sale of short-term investments 7,343,793 3,731,451 Additions to fixed assets (1,042,242) (1,030,222) Increase in other long term assets (150,000) - ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (21,835,669) (4,544,647) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 616,400 5,288 Repurchase of common stock (1,414,508) (280,000) ----------- ----------- NET CASH USED IN FINANCING ACTIVITIES (798,108) (274,712) EFFECT OF EXCHANGE RATE CHANGES ON CASH 139,976 (16,483) ----------- ----------- NET CHANGE IN CASH AND EQUIVALENTS (16,746,596) 467,282 CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 27,372,345 8,598,367 ----------- ----------- CASH AND EQUIVALENTS AT END OF PERIOD $10,625,749 $ 9,065,649 =========== ===========
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 1998. 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, 1998 included in the Company's Annual Report to Shareholders for Fiscal 1998. Certain Consolidated Balance Sheet captions appearing in this interim report are as follows:
9/30/98 6/30/98 ----------- ----------- ACCOUNTS RECEIVABLE Accounts receivable $13,262,870 $10,270,937 Less reserve for bad debts 273,000 269,000 ----------- ----------- NET ACCOUNTS RECEIVABLE $12,989,870 $10,001,937 =========== =========== INVENTORIES Raw materials $ 2,057,986 $ 2,125,365 Supplies 128,083 145,539 Finished goods 7,022,962 1,539,696 ----------- ----------- TOTAL INVENTORIES $ 9,209,031 $ 3,810,600 =========== =========== FIXED ASSETS Laboratory equipment $10,468,510 $ 9,944,951 Office equipment 3,111,912 2,923,110 Leasehold improvements 10,929,763 10,243,142 ----------- ----------- 24,510,185 23,111,203 Less accumulated depreciation and amortization 11,983,556 11,423,903 ----------- ----------- NET FIXED ASSETS $12,526,629 $11,687,300 =========== =========== INTANGIBLE ASSETS Customer list $18,010,000 $ 1,010,000 Technology licensing agreements 500,000 500,000 Goodwill 39,052,767 1,225,547 ----------- ----------- 57,562,767 2,735,547 Less accumulated amortization 4,836,355 2,441,693 ----------- ----------- NET INTANGIBLE ASSETS $52,726,412 $ 293,854 =========== ===========
Effective July 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which requires disclosures of comprehensive income and its components in the Company's financial statements. The Company's total comprehensive income for the quarters ended September 30, 1998 and 1997 was $3,665,231 and $3,140,097, respectively. The Company's comprehensive income consists of net income, unrealized holding gains and losses on securities and foreign currency translation adjustments. During fiscal 1999, the Company will adopt Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," which requires the disclosure of financial and descriptive information about the reportable operating segments of the Company. B. ACQUISITION: On July 1, 1998, the Company, through its Research and Diagnostics Systems, Inc. subsidiary, acquired the research products business of Genzyme Corporation. Assets acquired were as follows: Inventories $ 5,660,000 Equipment 320,000 Customer list 17,000,000 ----------- $22,980,000 =========== The purchase price paid and payable for the acquisition is as follows: $24.76 million cash, 987,206 shares of Techne common stock valued at $17 million and $18.84 million of royalties (present value of an estimated $23.7 million payable over five years) on the Company's biotechnology sales. The excess of the consideration (including acquisition costs) over the fair market value of the assets acquired has been recorded as goodwill and is being amortized on a straight-line basis over six years. The customer list is being amortized on a declining basis over an estimated economic life of five years. Pro forma financial information for the quarter ended September 30, 1997, presented as if the acquisition had occurred on July 1, 1997, are as follows (in 000's except earnings per share data): Sales $19,058 Net earnings 1,097 Basic earnings per share .06 Diluted earnings per share .05 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". The September 30, 1997 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 --------------------- 9/30/98 9/30/97 ---------- ---------- Weighted average common shares outstanding--basic 20,115,898 18,868,132 Dilutive effect of stock options and warrants 427,706 643,102 ---------- ---------- Average common shares outstanding--diluted 20,543,604 19,511,234 ========== ==========
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Quarter Ended September 30, 1998 vs. Quarter Ended September 30, 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, January 1998 and July 1998, Techne purchased $1 million of preferred stock of ChemoCentryx, Inc. (CCX), respectively, representing approximately 37% of issued and outstanding voting shares. In addition, Techne is obligated to purchase up to an additional $2 million of preferred stock over the next year 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 September 30, 1998 were $21,335,192, an increase of $5,798,049 (37%) from the quarter ended September 30, 1997. R&D Systems sales increased $4,364,250 (37%) and R&D Europe sales increased $1,433,799 (38%). The increase in sales was due, in part, to the acquisition of Genzyme Corporation's research products business on July 1, 1998. Sales of these products were $2,463,028 for the quarter ended September 30, 1998. In addition, the increase in consolidated sales for the quarter was due to increased sales of R&D Systems' cytokines, antibodies and immunoassay kits to both R&D Systems customers and to former Genzyme customers as they are converted from Genzyme products to R&D Systems products. Gross Margins Gross margins, as a percentage of sales, decreased slightly from the prior year. Margins for the first quarter of fiscal 1999 were 69.0% compared to 70.7% for the same quarter in fiscal 1998. R&D Europe gross margins decreased from 53.0% to 46.9% for the quarter as a result of the transfer of all manufacturing activities to R&D Systems during fiscal 1998 and changes in product mix. Hematology Division gross margins decreased from 48.5% to 46.0% for the quarter as a result of changes in product mix. Biotechnology Division gross margins decreased from 73.1% to 69.8% for the quarter as a result of changes in product mix and lower gross profit levels on the inventory acquired from Genzyme. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $427,691 (11%) from the first quarter of fiscal 1998. The majority of the increase for the quarter was due to additional sales personnel added in the U.S. and Europe as a result of the Genzyme acquisition. Research and Development Expenses Research and development expenses increased $286,277 (12%) for the quarter ended September 30, 1998. The increase related to products currently under development, many of which have been or will be released in fiscal 1999. Products currently under development include both biotechnology and hematology products. Amortization Expense Amortization expense increased $2,352,191 as a result of the write off of the customer list and goodwill associated with the Genzyme acquisition. Net Earnings Earnings before income taxes increased $631,462 from $4,723,382 in the first quarter of fiscal 1998 to $5,354,844 in the first quarter of fiscal 1999. The increase in earnings before income taxes was due mainly to an increase in Biotechnology Division earnings of $854,103 and an increase in R&D Europe's earnings before taxes of $59,882. These increases were offset by a slight decease in Hematology Division earnings and a net loss by CCX in the first quarter of fiscal 1999. Income taxes for the quarter ended September 30, 1998 were provided at a rate of approximately 34% of consolidated pretax earnings compared to 31% for the prior year. The increase in the tax rate is due to the net loss by CCX in the first quarter of fiscal 1999 for which no tax benefit has been provided. 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 September 30, 1998, cash and cash equivalents and short-term investments were $21,623,891 compared to $42,694,280 at June 30, 1998. The decrease from June 30, 1998 was due to the cash outlay for the Genzyme acquisition. 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 $5,747,205 from operating activities in the first three months of fiscal 1999 compared to $5,303,124 for the first three months of fiscal 1998. The increase was mainly the result of increased net earnings and increased current liabilities. Cash Flows From Investing Activities On July 1, 1998 the Company acquired the research products business of Genzyme Corporation for $24.76 million cash, $17 million common stock and royalties on the Company's biotechnology sales for five years. Acquisition costs through September 30, 1998 were $207,220. Cash and cash equivalents at June 30, 1998 and maturities of short-term investments were used to finance the cash portion of the acquisition. During the three months ended September 30, 1998 short-term investments decreased by $4,323,793. During the three months ended September 30, 1997, the Company increased short-term investments by $3,514,425. The Company's investment policy is to place excess cash in short-term tax-exempt bonds. The objective of this policy is to obtain the highest possible return with the lowest risk, while keeping the funds accessible. Capital additions were $1,042,242 for the first three months of fiscal 1999, compared to $1,030,222 for the first three months of fiscal 1998. Included in the fiscal 1999 and 1998 additions were $683,000 and $721,000 for leasehold improvements related to remodeling of facilities by R&D Systems. The remaining additions in fiscal 1999 and 1998 were for laboratory and computer equipment. Total expenditures for capital additions planned for the remainder of fiscal 1999 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 $616,400 and $5,288 was received during the three months ended September 30, 1998 and 1997, respectively, for the exercise of options for 143,100 and 1,094 shares of common stock. During the first three months of fiscal 1998, options for 24,506 shares of common stock were exercised by the surrender of 7,624 shares of the Company's common stock with a fair market value of $126,194. During the first three months of fiscal 1999 and 1998, the Company purchased and retired 94,000 and 20,000 shares, respectively, of Company common stock at market values of $1,414,508 and $280,000. The Board of Directors has authorized the Company, subject to market conditions and share price, to purchase and retire up to $10 million of its common stock. Through November 2, 1998, 575,600 shares have been purchased at a market value of $6,887,547. The Company has never paid cash dividends and has no plans to do so in fiscal 1999. MARKET RISK At September 30, 1998, the Company had an investment portfolio of fixed income securities, excluding those classified as cash and cash equivalents, of $10,998,142. 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 would not expect to recognize an adverse impact in 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. Historically, the effect of movements in the exchange rates have been immaterial to the consolidated operating results of the Company. YEAR 2000 AND EURO CURRENCY ISSUES The Company must take steps to ensure that it is not adversely affected by Year 2000 software failures which may arise in software applications where two-year digits are used to define the applicable year. The Company is conducting a review of all of its computer systems (information technology as well as embedded systems) to identify those areas that could be affected by Year 2000 noncompliance. The Company plans to complete the process of upgrading those systems which may not be Year 2000 compliant by mid 1999 and does not believe the cost of any such upgrades will be material. The Company is in the process of developing contingency plans should systems fail. The Company has also communicated with many of its suppliers and service providers regarding compliance with Year 2000 requirements. As a result of such inquiries, no significant deficiencies have been identified. The Company will continue to monitor these third parties for Year 2000 compliance. There can be no assurance, however, that there will not be a delay in, or increased costs associated with, upgrading the Company's computer systems, which could have a material adverse effect on the operations and financial position of the Company. In addition, there can be no assurances that the Company's customers and suppliers will not be adversely affected by their own Year 2000 issues, which may indirectly adversely affect the Company. The Company is currently implementing new accounting and operational software at its European subsidiary which will accommodate the conversion on January 1, 1999 to a common currency, the "euro," by members of the European Union. PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS No change. ITEM 2 - CHANGES IN SECURITIES On July 1, 1998, the Company issued 987,206 shares of Common Stock, valued at $17.2203 per share, to Genzyme Corporation ("Genzyme") in connection with the acquisition of Genzyme Corporation's research products business. The sale of such stock was deemed to be exempt from registration under the Securities Act of 1933 by virtue of Section 4(2) thereof. Genzyme represented its intention to acquire the stock for investment purposes only and not with a view to the distribution thereof. In addition, a restrictive legend has been placed on the certificate representing the shares. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES None ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SHAREHOLDERS (a) The Annual Meeting of the Registrant's shareholders was held on Thursday, October 22, 1998. (b) A proposal to set the number of directors at seven was adopted by a vote of 17,377,823 in favor with 23,411 shares against, 27,328 shares abstaining and no shares represented by broker nonvotes. (c) Proxies for the Annual meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934. There was no solicitation in opposition to management's nominees as listed in the proxy statement, and all such nominees were elected, as follows: Nominee For Withheld ------- --- --------- Thomas E. Oland 17,397,763 30,799 Roger C. Lucas 17,305,535 123,027 Howard V. O'Connell 17,393,724 34,838 G. Arthur Herbert 17,388,524 40,038 Randolph C. Steer 17,373,124 55,438 Lowell E. Sears 17,390,275 38,287 Christopher S. Henney 16,765,309 663,253 (d) A proposal to approve the 1998 Nonqualified Stock Option Plan was adopted by a vote of 16,474,038 in favor with 858,298 shares against, 96,226 shares abstaining and no shares represented by broker nonvotes. 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 level of success in converting customers and distributors of Genzyme Corporation's research product business to the Company and selling the Company's broader range of products to the former Genzyme customers and distributors, 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 The following reports on Form 8-K were filed by the Registrant for the quarter ended September 30, 1998: Form 8-K dated July 1, 1998, reporting under Item 2 the acquisition of the research products business of Genzyme Corporation. Form 8-K/A dated July 1, 1998, filed on September 14, 1998, reporting the required financial information related to the above acquisition. 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: November 13, 1998 Thomas E. Oland ------------------------------- Thomas E. Oland President, Chief Executive and Financial Officer EXHIBIT INDEX TO FORM 10-Q TECHNE CORPORATION Exhibit # Description ---------- ------------------ 10.1 1998 Nonqualified Stock Option Plan 10.2 Form of Stock Option Agreement for 1998 Nonqualified Stock Option Plan 27 Financial Data Schedule