SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2000, 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. MINNEAPOLIS, MN 55413 (612) 379-8854 (Address of principal (Registrant's telephone number, executive offices) (Zip Code) including area 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, 2001, 41,457,790 shares of the Company's Common Stock (par value $.01) were outstanding. ITEM 1 - FINANCIAL STATEMENTS TECHNE CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) 12/31/00 6/30/00 ------------ ------------ ASSETS Cash and cash equivalents $ 16,855,236 $ 17,356,108 Short-term investments 63,930,605 42,468,183 Accounts receivable (net) 15,382,233 15,600,868 Inventories 4,854,846 4,651,615 Income taxes receivable - 3,290,314 Deferred income taxes 2,514,000 2,440,000 Other current assets 846,744 494,117 ------------ ------------ Total current assets 104,383,664 86,301,205 Deferred income taxes 4,109,000 3,938,000 Property and equipment (net) 47,176,209 46,266,177 Intangible assets (net) 31,890,873 36,335,500 Other assets 7,515,780 7,568,699 ------------ ------------ TOTAL ASSETS $195,075,526 $180,409,581 ============ ============ LIABILITIES & EQUITY Trade accounts payable $ 3,524,564 $ 2,630,164 Salary and related accruals 2,004,086 2,998,696 Other payables 6,003,336 6,107,979 Income taxes payable 2,309,989 - Current portion of long-term debt 854,086 824,315 ------------ ------------ Total current liabilities 14,696,061 12,561,154 Royalty payable 5,846,000 7,768,000 Long-term debt 18,502,300 18,935,049 Common stock, par value $.01 per share; authorized 100,000,000; issued and outstanding 41,454,290 and 41,381,998, respectively 414,543 413,820 Additional paid-in capital 53,819,315 52,857,444 Retained earnings 102,413,334 88,336,230 Accumulated other comprehensive loss (616,027) (462,116) ------------ ------------ Total stockholders' equity 156,031,165 141,145,378 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $195,075,526 $180,409,581 ============ ============ See notes to unaudited Consolidated Financial Statements. TECHNE CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) QUARTER ENDED SIX MONTHS ENDED ------------------------ ------------------------ 12/31/00 12/31/99 12/31/00 12/31/99 ----------- ----------- ----------- ----------- Sales $26,688,666 $25,126,839 $54,410,229 $49,747,892 Cost of sales 6,766,978 6,977,732 13,571,167 13,974,502 ----------- ----------- ----------- ----------- Gross margin 19,921,688 18,149,107 40,839,062 35,773,390 Operating expenses (income): Selling, general and administrative 4,154,722 4,723,955 8,629,248 9,129,153 Research and development 3,594,500 2,660,928 6,863,209 5,851,823 Amortization expense 2,222,313 2,307,312 4,444,627 4,614,625 Interest expense 350,009 364,093 703,634 731,191 Interest income (835,366) (292,244) (1,520,216) (528,704) ----------- ----------- ----------- ----------- 9,486,178 9,764,044 19,120,502 19,798,088 ----------- ----------- ----------- ----------- Earnings before income taxes 10,435,510 8,385,063 21,718,560 15,975,302 Income taxes 3,453,000 2,821,000 7,233,000 5,563,000 ----------- ----------- ----------- ----------- Net earnings $ 6,982,510 $ 5,564,063 $14,485,560 $10,412,302 =========== =========== =========== =========== Earnings per share (Note D): Basic earnings per share $ 0.17 $ 0.14 $ 0.35 $ 0.26 Diluted earnings per share $ 0.16 $ 0.13 $ 0.34 $ 0.25 Weighted average common shares outstanding: Basic 41,457,269 40,353,126 41,436,094 40,327,246 Diluted 42,840,275 42,121,092 42,800,185 41,884,244 See notes to unaudited Consolidated Financial Statements. TECHNE CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) SIX MONTHS ENDED -------------------------- 12/31/00 12/31/99 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 14,485,560 $ 10,412,302 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 6,274,267 6,143,922 Deferred income taxes (258,000) (596,000) Other 552,919 284,357 Change in current assets and current liabilities: (Increase) decrease in: Accounts receivable 146,581 456,389 Inventories (212,233) 1,589,316 Other current assets (350,821) 31,341 Increase (decrease) in: Trade account/other payables (1,209,832) (892,861) Salary and related accruals (989,559) (216,698) Income taxes, net 5,831,027 (71,635) ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 24,269,909 17,140,433 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term investments (34,000,954) (10,400,000) Proceeds from sale of short-term investments 12,538,532 6,122,938 Additions to property and equipment (2,747,232) (24,651,700) Real estate deposit - (2,000,000) Increase in other long term assets (500,000) (1,450,000) ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (24,709,654) (32,378,762) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 733,142 729,628 Proceeds from issuance of long-term debt - 20,400,000 Payments on long-term debt (402,978) (251,704) Repurchase of common stock (400,004) - ------------ ------------ NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (69,840) 20,877,924 EFFECT OF EXCHANGE RATE CHANGES ON CASH 8,713 286,069 ------------ ------------ NET CHANGE IN CASH AND EQUIVALENTS (500,872) 5,925,664 CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 17,356,108 12,769,468 ------------ ------------ CASH AND EQUIVALENTS AT END OF PERIOD $ 16,855,236 $ 18,695,132 ============ ============ 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 2000. 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, 2000 included in the Company's Annual Report to Shareholders for Fiscal 2000. Certain Consolidated Balance Sheet captions appearing in this interim report are as follows: 12/31/00 6/30/00 ----------- ----------- ACCOUNTS RECEIVABLE Accounts receivable $15,542,233 $15,762,868 Less reserve for bad debts 160,000 162,000 ----------- ----------- NET ACCOUNTS RECEIVABLE $15,382,233 $15,600,868 =========== =========== INVENTORIES Raw materials $ 2,246,917 $ 2,288,719 Supplies 131,041 124,732 Finished goods 2,476,888 2,238,164 ----------- ----------- TOTAL INVENTORIES $ 4,854,846 $ 4,651,615 =========== =========== FIXED ASSETS Land $ 871,000 $ 871,000 Buildings and improvements 45,107,246 43,965,312 Laboratory equipment 15,563,897 14,114,039 Office equipment 3,664,858 3,535,164 Leasehold improvements 149,767 180,770 ----------- ----------- 65,356,768 62,666,285 Less accumulated depreciation and amortization 18,180,559 16,400,108 ----------- ----------- NET FIXED ASSETS $47,176,209 $46,266,177 =========== =========== INTANGIBLE ASSETS Customer list $18,010,000 $18,010,000 Technology licensing agreements 500,000 500,000 Goodwill 39,075,089 39,075,089 ----------- ----------- 57,585,089 57,585,089 Less accumulated amortization 25,694,216 21,249,589 ----------- ----------- NET INTANGIBLE ASSETS $31,890,873 $36,335,500 =========== =========== Effective July 1, 2000, the Company adopted Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which provides guidance on accounting for derivatives and hedge transactions. The adoption of this pronouncement did not impact operating results or financial position. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which provides guidance in applying generally accepted accounting principles to revenue recognition in financial statements. The application of this SAB did not have a material impact on the Company's reported operating results or financial position. B. EARNINGS PER SHARE: Shares used in the earnings per share computations are as follows: QUARTER ENDED SIX MONTHS ENDED ---------------------- ---------------------- 12/31/00 12/31/99 12/31/00 12/31/99 ---------- ---------- ---------- ---------- Weighted average common shares outstanding-basic 41,457,269 40,353,126 41,436,094 40,327,246 Dilutive effect of stock options and warrants 1,383,006 1,767,966 1,364,091 1,556,998 ---------- ---------- ---------- ---------- Average common shares outstanding-diluted 42,840,275 42,121,092 42,800,185 41,884,244 ========== ========== ========== ========== C. SEGMENT INFORMATION: Following is financial information relating to the Company's operating segments: QUARTER ENDED SIX MONTHS ENDED ------------------------ ------------------------ 12/31/00 12/31/99 12/31/00 12/31/99 ----------- ----------- ----------- ----------- External sales Hematology $ 3,677,677 $ 3,220,811 $ 7,185,894 $ 6,384,499 Biotechnology 16,585,983 15,459,607 34,506,898 30,533,927 R&D Systems Europe 6,425,006 6,446,421 12,717,437 12,829,466 ----------- ----------- ----------- ----------- Total external sales $26,688,666 $25,126,839 $54,410,229 $49,747,892 =========== =========== =========== =========== Intersegment sales Hematology $ -- $ -- $ -- $ -- Biotechnology 3,884,920 3,269,989 7,285,577 6,456,418 R&D Systems Europe 16,130 22,361 37,382 83,631 ----------- ----------- ----------- ----------- Total intersegment sales $ 3,901,050 $ 3,292,350 $ 7,322,959 $ 6,540,049 =========== =========== =========== =========== Income before taxes Hematology $ 1,363,492 $ 946,697 $ 2,448,650 $ 1,876,671 Biotechnology 8,792,524 6,458,576 18,365,809 13,031,572 R&D Systems Europe 1,228,255 1,229,794 2,361,067 2,276,095 Corporate and other (948,761) (250,004) (1,456,966) (1,209,036) ----------- ----------- ----------- ----------- Total income before taxes $10,435,510 $ 8,385,063 $21,718,560 $15,975,302 =========== =========== =========== =========== D. STOCK SPLIT: On November 9, 2000, the Company declared a two-for-one stock split to be effected in the form of a 100% stock dividend to shareholders of record on November 24, 2000. The payment date for the stock split was December 1, 2000. All earnings per share and share amounts included in these financial statements have been restated to reflect the stock split. The shareholders also approved an amendment to the Company's Articles of Incorporation to increase authorized common stock from 50,000,000 to 100,000,000 shares. E. CONTINGENCIES: A party has presented invoices in the amount of $28 million for materials provided to the Company over past years, allegedly pursuant to a contract under which no accounting or invoices were rendered for nine years. The Company has brought a declaratory judgement action seeking to have the court declare that no amount is owed. The Company's management believes that no material amount is owed, that it has claims against the other party, and that the ultimate resolution of the matter will not have a material adverse effect on the financial condition or results of operations of the Company. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Quarter and Six Months Ended December 31, 2000 vs. Quarter and Six Months Ended December 31, 1999 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'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, both directly and through a sales subsidiary in Germany. The Company has a foreign sales corporation, Techne Export Inc. The Company has an equity interest in ChemoCentryx, Inc. (CCX), a 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. The Company accounts for this investment under the equity method of accounting and recognizes 100% of the losses of CCX due to the limited amount of cash consideration provided by the holders of the common shares of CCX. The Company's investment in CCX was $3,171,237 and $3,553,516 at December 31, 2000 and June 30, 2000, respectively. Net Sales Net sales for the quarter ended December 31, 2000 were $26,688,666, an increase of $1,561,827 (6%) from the quarter ended December 31, 1999. Sales for the six months ended December 31, 2000 increased $4,662,337 (9%) from $49,747,892 to $54,410,229. R&D Systems' Biotechnology Division sales increased $1,126,376 (7%) and $3,972,971 (13%) and R&D Systems' Hematology Division sales increased $456,866 (14%) and $801,395 (13%) for the quarter and six months, respectively. R&D Europe sales decreased $21,415 (.3%) and $112,029 (1%) for the quarter and six months ended December 31, 2000. The Biotechnology Division sales increase for the quarter was lower than expected due to two fewer prime shipping days during the quarter as compared to last year, slower than normal sales during the current Thanksgiving and Christmas holiday period and three large bulk orders in the second quarter of last year which resulted in an unusually large sales increase of 24% for that quarter. The increase in Hematology sales was due mainly to increased OEM sales. R&D Europe's decline in revenue was entirely a result of changes in foreign currency exchange rates. In British Pounds, R&D Europe's sales increased 11% and 10% over the second quarter and first six months of last year. Adjusted for all changes in exchange rates, R&D Europe's revenues for the second quarter and first six months of fiscal 2001 would have been approximately $1.0 million and $1.9 million higher than reported. Gross Margins Gross margins, as a percentage of sales, increased from the prior year. Margins for the second quarter of fiscal 2001 were 74.6% compared to 72.2% for the same quarter in fiscal 2000. Margins for the six months ended December 31, 2000 were 75.1% compared to 71.9% for the same period in fiscal 2000. Biotechnology Division margins increased from 73.7% to 78.2% for the quarter and from 73.5% to 78.7% for the six months ended December 31, 2000. Margins in the first six months of last year were affected by the higher cost of inventory acquired from Genzyme Corporation. R&D Europe gross margins decreased from 43.2% to 35.4% for the quarter and from 44.0% to 37.3% for the six months ended December 31, 2000 as a result of changes in exchange rates. Hematology Division gross margins increased slightly from 48.5% to 48.9% for the quarter and decreased slightly from 47.1% to 46.7% for the six months as a result of changes in product mix. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased $569,233 (12%) and $499,905 (5%) from the second quarter and first six months of last year. This was mainly the result of exchange rate changes, lower profit sharing accruals and the timing of certain printing and promotion expenses. It is anticipated that printing and promotion expenses will accelerate in the third and fourth quarters of fiscal 2001. Research and Development Expenses Research and development expenses increased $933,572 (35%) and $1,011,386 (17%) for the quarter and six months ended December 31, 2000. Research and development expenses by R&D Systems increased $478,000 (17%) and $936,000 (17%) for the quarter and six months, respectively. The R&D Systems research expense increase relates to products currently under development, many of which are expected to be released in fiscal 2001. Products currently under development include both biotechnology and hematology products. Research expenses related to ChemoCentryx increased $538,000 and $267,000 for the quarter and six months ended December 31, 2000 as a result of increased spending. The increases in research and development expenses by R&D Systems and ChemoCentryx were offset by a reduction in R&D Europe research expenses as a result of the cancellation of a research agreement with British Biotechnology Group plc. and the completion of the transfer of all R&D Europe research activities to R&D Systems. Net Earnings Earnings before income taxes increased $2,050,447 from $8,385,063 in the second quarter of fiscal 2000 to $10,435,510 in the second quarter of fiscal 2001. Earnings before taxes for the six months increased $5,743,258 from $15,975,302 to $21,718,560. The increase in earnings before income taxes was due primarily to the increase in sales and improved gross margins discussed previously. Income taxes for the quarter and six months ended December 31, 2000 were provided at a rate of approximately 33% of consolidated pretax earnings compared to 34% and 35% for the quarter and first six months of the prior year. The decrease in tax rate from the prior year is due primarily to an increase in tax exempt interest income. 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, 2000, cash and cash equivalents and short-term investments were $80,785,841 compared to $59,824,291 at June 30, 2000. 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 $24,269,909 from operating activities in the first six months of fiscal 2001 compared to $17,140,433 for the first six months of fiscal 2000. The increase was mainly the result of increased net earnings and an increase in income taxes payable during the first six months of fiscal 2001. Cash Flows From Investing Activities During the six months ended December 31, 2000 and December 31, 1999, short-term investments increased by $21,462,422 and $4,277,062, 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 expenditures for fixed assets for the first six months of fiscal 2001 and 2000 were $2,747,232 and $24,651,700 (including $21.9 million for the purchase of R&D Systems' Minneapolis facility), respectively. Included in the fiscal 2001 and 2000 additions were $1,142,000 and $1,921,000 for building improvements related to remodeling of facilities by R&D Systems. The remaining capital additions in fiscal 2001 and 2000 were for laboratory and computer equipment. Total expenditures for capital additions and building improvements planned for the remainder of fiscal 2001 are expected to cost approximately $4 million and are expected to be financed through currently available funds and cash generated from operating activities. During the first six months of fiscal 2000, the Company invested an additional $1 million in ChemoCentryx, Inc. The Company also paid $2 million and issued warrants to purchase 120,000 shares of common stock as a deposit on an option to purchase property adjacent to its Minneapolis facility. Cash Flows From Financing Activities Cash of $733,142 and $729,628 was received during the six months ended December 31, 2000 and 1999, respectively, for the exercise of options for 81,516 and 126,540 shares of common stock. During the first six months of fiscal 2001 and 2000 options for 1,000 and 19,584 shares of common stock were exercised by the surrender of 224 and 6,950 shares of the Company's common stock with fair market values of $8,554 and $112,271, respectively. During the first six months of fiscal 2001, the Company purchased and retired 10,000 shares of Company common stock at a market value of $400,004. The Board of Directors has authorized the Company, subject to market conditions and share price, to purchase and retire up to $20 million of its common stock. From the start of the repurchase program through February 2, 2001, 1,311,200 shares have been purchased at a market value of $9,154,118. The Company has never paid cash dividends and has no plans to do so in fiscal 2001. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At December 31, 2000, the Company had an investment portfolio of fixed income securities, excluding those classified as cash and cash equivalents, of $63,930,605. 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. PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS The information required by Item 1 is contained in the Company's Form 10-Q for the quarter ended September 30, 2000, which is incorporated herein by reference. 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 November 9, 2000 is contained in the Company's Form 10-Q for the quarter ended September 30, 2000, 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 impact of changes in foreign currency exchange rates, the outcome of litigation involving the Company 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 None. B. REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter ended December 31, 2000. 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, 2001 Thomas E. Oland ------------------------------ President, Chief Executive and Financial Officer