SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997, or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________to___________
__________________
Commission file number 0-17272
__________________
TECHNE CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1427402
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
614 MCKINLEY PLACE N.E. (612) 379-8854
MINNEAPOLIS, MN 55413 (Registrant's telephone
(Address of principal number, including area code)
executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes (X) No ( )
At February 2, 1998, 19,002,483 shares of the Company's Common Stock (par
value $.01) were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
TECHNE CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
12/31/97 6/30/97
----------- -----------
ASSETS
Cash and cash equivalents $ 9,900,167 $ 8,598,367
Short-term investments 22,494,774 16,153,890
Accounts receivable (net) 8,766,316 9,114,447
Inventories 4,013,868 4,087,161
Deferred income taxes 1,434,000 1,322,000
Other current assets 562,718 521,493
----------- -----------
Total current assets 47,171,843 39,797,358
Deferred income taxes 1,855,000 1,703,000
Fixed assets (net) 11,580,624 11,252,741
Intangible assets (net) 313,177 365,311
Other assets 730,613 803,300
----------- -----------
TOTAL ASSETS $61,651,257 $53,921,710
=========== ===========
LIABILITIES & EQUITY
Trade accounts payable $ 2,492,694 $ 1,609,362
Salary and related accruals 1,719,824 1,790,035
Other payables 262,665 498,873
Income taxes payable 1,084,174 1,000,096
----------- -----------
Total current liabilities 5,559,357 4,898,366
Deferred rent 1,298,700 942,300
Common stock, par value $.01 per
share; authorized 50,000,000;
issued and outstanding
18,918,878 and 18,875,456,
respectively 189,189 188,755
Additional paid-in capital 13,391,481 12,653,449
Retained earnings 40,792,964 34,808,768
Accumulated foreign currency
translation adjustments 419,566 430,072
----------- -----------
Total stockholders' equity 54,793,200 48,081,044
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $61,651,257 $53,921,710
=========== ===========
See notes to unaudited Consolidated Financial Statements.
TECHNE CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
QUARTER ENDED SIX MONTHS ENDED
------------------------ ------------------------
12/31/97 12/31/96 12/31/97 12/31/96
----------- ----------- ----------- -----------
SALES $15,472,857 $14,409,294 $31,010,000 $28,436,272
Cost of sales 4,885,856 4,571,712 9,431,762 9,349,842
----------- ----------- ----------- -----------
Gross margin 10,587,001 9,837,582 21,578,238 19,086,430
Operating expenses
(income):
Selling, general and
administrative 3,850,195 3,657,534 7,853,599 6,974,769
Research and development 2,515,658 2,947,251 4,981,506 5,830,095
Amortization expense 9,663 58,877 52,134 117,754
Interest expense - 441 - 28,524
Interest income (286,499) (164,012) (530,367) (322,472)
----------- ----------- ----------- -----------
6,089,017 6,500,091 12,356,872 12,628,670
----------- ----------- ----------- -----------
Earnings before
income taxes 4,497,984 3,337,491 9,221,366 6,457,760
Income taxes 1,370,000 1,060,000 2,831,000 2,005,000
----------- ----------- ----------- -----------
NET EARNINGS $ 3,127,984 $ 2,277,491 $ 6,390,366 $ 4,452,760
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.17 $ 0.12 $ 0.34 $ 0.23
DILUTED EARNINGS PER SHARE $ 0.16 $ 0.12 $ 0.33 $ 0.23
See notes to unaudited Consolidated Financial Statements.
TECHNE CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
---------------------------
12/31/97 12/31/96
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 6,390,366 $ 4,452,760
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 1,121,240 1,100,230
Deferred income taxes (273,000) (483,000)
Deferred rent 356,400 159,000
Tax benefit from exercise of options 44,000 -
Other 273,187 79,200
Change in current assets and current
liabilities:
(Increase) decrease in:
Accounts receivable 322,086 1,014,934
Inventories 61,271 (335,828)
Other current assets (41,986) 149,967
Increase (decrease) in:
Trade account/other payables 650,478 (204,516)
Salary and related accruals (68,409) (167,767)
Income taxes payable 91,008 251,793
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,926,641 6,016,773
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (14,547,334) (8,385,000)
Proceeds from sale of
short-term investments 8,206,450 7,350,000
Additions to fixed assets (1,648,881) (3,418,612)
Proceeds from sale of fixed assets 246,728 -
Increase in other long term assets - (250,000)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (7,743,037) (4,703,612)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 367,796 25,189
Repurchase of common stock (280,000) (1,870,827)
------------ ------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 87,796 (1,845,638)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 30,400 64,274
------------ ------------
NET CHANGE IN CASH AND EQUIVALENTS 1,301,800 (468,203)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 8,598,367 7,422,084
------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 9,900,167 $ 6,953,881
============ ============
See notes to unaudited Consolidated Financial Statements.
TECHNE CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. BASIS OF PRESENTATION:
The unaudited Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles and with
instructions to Form 10-Q and Article 10 of Regulation S-X. The
accompanying unaudited Consolidated Financial Statements reflect all
adjustments which are, in the opinion of management, necessary to a fair
presentation of the results for the interim periods presented. All such
adjustments are of a normal recurring nature.
A summary of significant accounting policies followed by the Company is
detailed in the Annual Report to Shareholders for Fiscal 1997. The Company
follows these policies in preparation of the interim Financial Statements.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that the
Consolidated Financial Statements be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto for the fiscal year
ended June 30, 1997 included in the Company's Annual Report to Shareholders
for Fiscal 1997.
Certain Consolidated Balance Sheet captions appearing in this interim
report are as follows:
12/31/97 6/30/97
------------ ------------
ACCOUNTS RECEIVABLE
Accounts receivable $ 8,813,316 $ 9,166,447
Less reserve for bad debts 47,000 52,000
------------ ------------
NET ACCOUNTS RECEIVABLE $ 8,766,316 $ 9,114,447
============ ============
INVENTORIES
Raw materials $ 2,086,806 $ 2,105,836
Work in process - 89,100
Supplies 135,328 121,483
Finished goods 1,791,734 1,770,742
------------ ------------
TOTAL INVENTORIES $ 4,013,868 $ 4,087,161
============ ============
FIXED ASSETS
Laboratory equipment $ 9,529,426 $ 9,513,329
Office equipment 2,807,903 2,671,947
Leasehold improvements 9,782,277 9,063,354
------------ ------------
22,119,606 21,248,630
Less accumulated depreciation
and amortization 10,538,982 9,995,889
------------ ------------
NET FIXED ASSETS $ 11,580,624 $ 11,252,741
============ ============
INTANGIBLE ASSETS
Customer list $ 1,010,000 $ 1,010,000
Technology licensing agreements 500,000 500,000
Goodwill 1,225,547 1,225,547
------------ ------------
2,735,547 2,735,547
Less accumulated amortization 2,422,370 2,370,236
------------ ------------
NET INTANGIBLE ASSETS $ 313,177 $ 365,311
============ ============
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
which will be effective for the Company beginning July 1, 1998. SFAS No.
131 redefines how operating segments are determined and requires disclosure
of certain financial and descriptive information about a company's
operating segments. The Company believes that this statement will not have
a material impact on results reported in its financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which will be effective for the Company
beginning July 1, 1998. SFAS No. 130 requires the disclosure of
comprehensive income and its components in the Company's financial
statements. The Company anticipates the effect of SFAS No. 130 will result
in disclosure of unearned compensation on stock options and foreign
currency translation adjustments on the face of the comprehensive income
statement.
B. STOCK SPLIT:
On October 23, 1997, the Company declared a two-for-one stock split in the
form of a 100% stock dividend payable to shareholders of record on November
10, 1997. The payment date for the stock split was November 17, 1997. All
earnings per share and share amounts included in these financial statements
have been restated to reflect the stock split.
C. EARNINGS PER SHARE:
Shares used in the earnings per share computations are as follows:
QUARTER ENDED SIX MONTHS ENDED
---------------------- ----------------------
12/31/97 12/31/96 12/31/97 12/31/96
---------- ---------- ---------- ----------
Weighted average common shares 18,898,817 18,910,196 18,883,475 18,956,764
Dilutive effect of stock
options and warrants 726,937 532,450 684,750 553,196
---------- ---------- ---------- ----------
Average common and common
equivalent shares outstanding 19,625,754 19,442,646 19,568,225 19,509,960
========== ========== ========== ==========
Effective for the quarter ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings
Per Share". All prior period earnings per share amounts have been restated
to conform to the new standard.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations Quarter and Six Months Ended December 31, 1997
vs. Quarter and Six Months Ended December 31, 1996
Techne Corporation has two operating subsidiaries: Research and Diagnostic
Systems, Inc. (R&D Systems) located in Minneapolis, Minnesota and R&D
Systems Europe Ltd. (R&D Europe) located in Abingdon, England. R&D Systems
has two divisions: Biotechnology and Hematology. The Biotechnology
Division manufactures purified cytokines (proteins), antibodies and assay
kits which are sold primarily to biomedical researchers and clinical
research laboratories. The Hematology Division develops and manufactures
whole blood hematology controls and calibrators which are sold to hospital
and clinical laboratories to check the performance of their hematology
instruments to assure the accuracy of hematology test results. R&D Europe
sells R&D Systems' biotechnology products in Europe, both directly and
through a sales subsidiary in Germany. The Company has a foreign sales
corporation, Techne Export Inc.
In November 1997, Techne purchased $1 million of preferred stock of
ChemoCentryx, Inc. (CCX), representing approximately 16% of issued and
outstanding voting shares. In addition, Techne is obligated to purchase a
projected $4 million of preferred stock over the next two years upon CCX's
achievement of certain milestones. After purchase of the additional
preferred shares, Techne will own approximately 49% of the issued and
outstanding voting shares (assuming no investment by other parties).
Techne has consolidated CCX into its financial statements due to the
limited amount of cash consideration provided by the holders of the common
shares of CCX. CCX is a new technology and drug development company
working in the area of chemokines. Chemokines are cytokines which regulate
the trafficking patterns of leukocytes, the effector cells of the human
immune system. In conjunction with the equity investment and joint
research efforts, Techne obtains exclusive worldwide research and
diagnostic marketing rights to chemokine proteins, antibodies and receptors
discovered or developed by CCX or R&D Systems.
Net Sales
Net sales for the quarter ended December 31, 1997 were $15,472,857, an
increase of $1,063,563 (7%) from the quarter ended December 31, 1996.
Sales for the six months ended December 31, 1997 increased $2,573,728 (9%)
from $28,436,272 to $31,010,000. R&D Systems sales increased $1,414,750
(15%) and $3,191,037 (16%) for the quarter and six months ended December
31, 1997, respectively. R&D Europe sales decreased $351,187 (7%) and
$617,309 (7%) for the quarter and six months ended December 31, 1997,
respectively. The decrease in R&D Europe sales was not unexpected due to
the discontinuance of the molecular biology product line. R&D Europe sales
of continuing product lines increased 25% and 22% from the second quarter
and first six months of last year.
The increase in consolidated sales for the quarter and six months was due,
in part, to increased sales of R&D Systems' cytokines and antibodies.
Sales of cytokines and antibodies by R&D Systems and R&D Europe for the
quarter and six months ended December 31, 1997 were $5,344,896 and
$10,847,122 compared to $4,454,473 and $8,552,995 for the quarter and six
months ended December 31, 1996.
In addition, sales of hematology products increased $335,050 and $840,385
for the quarter and six months ended December 31, 1997, due largely to
increased sales to an OEM customer and the addition of two OEM customers in
fiscal 1998.
Gross Margins
Gross margins, as a percentage of sales, increased from the prior year.
Margins for the second quarter of fiscal 1998 were 68.4% compared to 68.3%
for the same quarter in fiscal 1997. Margins for the six months ended
December 31, 1997 were 69.6% compared to 67.1% for the same period in
fiscal 1997.
R&D Europe gross margins decreased from 54.0% to 48.6% for the quarter and
from 52.9% to 50.6% for the six months ended December 31, 1997 as a result
of changes in product mix and exchange rates. Hematology Division gross
margins increased from 41.6% to 42.2% for the quarter and from 40.8% to
45.5% for the six months ended December 31, 1997, also as a result of
changes in product mix. Biotechnology Division gross margins decreased
slightly from 71.3% to 70.9% for the quarter, but increased from 70.0% to
72.0% for the six months ended December 31, 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $192,661 (5%) from
the second quarter of fiscal 1997 to the second quarter of fiscal 1998.
These expenses also increased $878,830 (13%) for the first six months of
fiscal 1998. The majority of the increase was due to additional occupancy
costs at R&D Systems, plus increased advertising and promotion costs by
both R&D Systems and R&D Europe. These increased costs were partially
offset by decreased personnel costs at R&D Europe as a result of the
restructuring in the third quarter of fiscal 1997.
Research and Development Expenses
Research and development expenses decreased $431,593 (15%) and $848,589
(15%) for the quarter and six months ended December 31, 1997, respectively.
R&D Europe research and development expenses decreased $706,444 and
$1,338,106 for the quarter and six months, respectively, as a result of a
decrease in payments under the Joint Biological Research Agreement with
British Bio-technology Group, plc. and a decrease in personnel as a result
of the restructuring and the transfer of the majority of research and
development activities to R&D Systems. R&D Systems' research and
development expenses increased $274,851 and $489,517 for the quarter and
six months ended December 31, 1997, respectively. The increase related to
products currently under development, many of which have been or will be
released in fiscal 1998. Products currently under development include both
biotechnology and hematology products.
Net Earnings
Earnings before income taxes increased $1,160,493 from $3,337,491 in the
second quarter of fiscal 1997 to $4,497,984 in the second quarter of fiscal
1998. Earnings before taxes for the six months increased $2,763,606 from
$6,457,760 to $9,221,366. The increase in earnings before income taxes was
due mainly to an increase in Biotechnology Division earnings of $746,924
and $1,565,946 and an increase in Hematology Division earnings of $137,322
and $531,511 for the quarter and six months ended December 31, 1997, as a
result of increased sales and gross margins. In addition R&D Europe's
earnings before taxes increased $440,000 and $914,292 for the quarter and
six months as a result of the decrease in research and development
expenses.
Income taxes for the quarters and six months ended December 31, 1997 were
provided at a rate of approximately 30% and 31% of consolidated pretax
earnings compared to 32% and 31% for the prior year. U.S. federal taxes
have been reduced by the credit for research and development expenditures
and the benefit of the foreign sales corporation. Foreign income taxes
have been provided at rates which approximate the tax rates in the United
Kingdom and Germany.
Liquidity and Capital Resources
At December 31, 1997, cash and cash equivalents and short-term investments
were $32,394,941 compared to $24,752,257 at June 30, 1997. The Company has
been accumulating cash and short-term investments for future expansion
purposes. The Company believes it can meet its future cash, working
capital and capital addition requirements through currently available
funds, cash generated from operations and maturities of short-term
investments. The Company has an unsecured line of credit of $750,000. The
interest rate on the line of credit is at prime. There were no borrowings
on the line in the prior or current fiscal years.
Cash Flows From Operating Activities
The Company generated cash of $8,926,641 from operating activities in the
first six months of fiscal 1998 compared to $6,016,773 for the first six
months of fiscal 1997. The increase was mainly the result of increased net
earnings and increased current liabilities.
Cash Flows From Investing Activities
During the six months ended December 31, 1997 and 1996, the Company
increased short-term investments $6,340,884 and $1,035,000, respectively.
The Company's investment policy is to place excess cash in short-term tax-
exempt bonds. The objective of this policy is to obtain the highest
possible return with the lowest risk, while keeping the funds accessible.
Capital additions were $1,648,881 for the first six months of fiscal 1998,
compared to $3,418,612 for the first six months of fiscal 1997. Included
in the fiscal 1998 and 1997 additions were $721,000 and $2,684,000 for
leasehold improvements related to expansion and remodeling of facilities by
R&D Systems. The remaining additions in fiscal 1998 and 1997 were for
laboratory and computer equipment. Total expenditures for capital
additions planned for the remainder of fiscal 1998 are expected to cost
approximately $1.4 million and are expected to be financed through
currently available funds and cash generated from operating activities.
Cash Flows From Financing Activities
Cash of $367,796 and $25,189 was received during the six months ended
December 31, 1997 and 1996, respectively, for the exercise of options for
46,540 and 4,000 shares of common stock. During the first six months of
fiscal 1998, options for 24,506 shares of common stock were exercised by
the surrender of 7,624 shares of the Company's common stock with a fair
market value of $126,194.
During the first six months of fiscal 1998 and 1997, the Company purchased
and retired 20,000 and 144,600 shares, respectively, of Company common
stock at market values of $280,000 and $1,870,827. In May 1995, the
Company announced a plan to purchase and retire up to $5,000,000 of its
common stock. Through February 1, 1997, 437,000 shares have been purchased
at a market value of $4,812,164. Subject to market conditions and share
price, the Company has extended its stock repurchase program and plans to
purchase and retire up to an additional $5,000,000 of common stock.
During the first six months of fiscal 1998, the Company granted stock
options with a fair value of $200,500 to a non-employee for services
rendered to the Company.
The Company has never paid cash dividends and has no plans to do so in
fiscal 1998.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not applicable.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company was sued by Streck Laboratories, Inc. ("Streck") in the
United States District Court for the District of Nebraska in Omaha on
November 5, 1997. Streck alleges in its complaint that the Company
infringes three patents Streck has obtained on white blood cell
hematology controls, one of which was issued in November, 1993, and the
other two in the fall of 1997. Streck seeks an unspecified amount of
damages, an injunction prohibiting further infringement, reasonable
attorneys' fees, and costs. The Company has answered the complaint,
denied infringement and asserted counterclaims against Streck seeking to
have the patents declared invalid and/or not infringed. The case has
not entered the formal discovery phase, and it is unlikely it will go to
trial before 1999.
ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SHAREHOLDERS
Information relating to the Company's Annual Meeting of Shareholders,
held on October 23, 1997, is contained in the Company's Form 10-Q for
the quarter ended September 30, 1997, which is incorporated herein by
reference.
ITEM 5 - OTHER INFORMATION
Forward Looking Information and Cautionary Statements: Statements in
this filing, and elsewhere, which look forward in time involve risks and
uncertainties which may affect the actual results of operations. The
following important factors, among others, have affected and, in the
future, could affect the Company's actual results: the introduction and
acceptance of new biotechnology and hematology products, the levels and
particular directions of research into cytokines by the Company's
customers, the impact of the growing number of producers of cytokine
research products and related price competition, the retention of
hematology OEM and proficiency survey business, the Company's expansion
of marketing efforts in Europe, and the costs and results of research
and product development efforts of the Company and of companies in which
the Company has invested or with which it has formed strategic
relationships.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
See exhibit index immediately following signature page.
B. REPORTS ON FORM 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHNE CORPORATION
(Company)
Date: February 13, 1998 Thomas E. Oland
------------------------------
Thomas E. Oland
President, Chief Executive and
Financial Officer
EXHIBIT INDEX
TO
FORM 10-Q
TECHNE CORPORATION
Exhibit # Description
---------- ------------------
10.1 Investment Agreement between ChemoCentryx, Inc.
and Techne Corporation dated November 18, 1997
27 Financial Data Schedule