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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 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 of Incorporation) (IRS Employer Identification No.)
614 McKinley Place N.E., Minneapolis, MN 55413
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (612) 379-8854
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value.
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes (X) No ( ).
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
The aggregate market value of the Common Stock held by non-affiliates of
the Registrant, based upon the closing sale price on September 8, 1998 as
reported on The Nasdaq Stock Market was approximately $161,854,000. Shares
of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded.
Shares of $.01 par value Common Stock outstanding at September 8, 1998:
20,150,289
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for its 1998 Annual Meeting of
Shareholders are incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS
OVERVIEW
Techne Corporation (the "Company") is a holding company which has two
wholly-owned 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 is a specialty
manufacturer of biological products. Its two major product lines are
hematology controls, which are used in hospital and clinical laboratories
to check the accuracy of blood analysis instruments, and biotechnology
products including purified proteins called cytokines which are sold
exclusively to the research market, and assay kits which are sold to the
research and clinical diagnostic markets. R&D Europe distributes R&D
Systems' biotechnology products in Europe. In fiscal 1996 R&D Europe
opened a sales subsidiary, R&D Systems GmbH (R&D GmbH), in Germany. The
Company also has a foreign sales corporation, Techne Export Inc.
R&D Systems was founded and incorporated in 1976 in Minneapolis, Minnesota
and was acquired by the Company in 1985. In 1977 R&D Systems introduced
its first product, a Platelet-Rich-Plasma control. In 1981 R&D Systems was
the second manufacturer in the world to release a Whole Blood Control with
Platelets, thereby establishing itself as one of the leaders in the field
of hematology control products manufacturing. Subsequently, R&D Systems
has developed several types of hematology controls designed to keep pace
with the technology of the newest models of hematology instruments. These
products are sold throughout the United States directly by R&D Systems and
in many foreign countries through distributors.
In 1985 R&D Systems entered the cytokine market. Cytokines are specialized
protein molecules that stimulate or suppress various cell functions in the
body. Cytokines are in demand by biomedical researchers who want to learn
more about their diverse effects. Encouraged by its success in the
cytokine market, R&D Systems formed a biotechnology division in 1986 with
the goal of producing and marketing a wide range of human cytokines through
genetic engineering. Recombinant DNA technology offers several advantages
over extraction of these proteins from natural sources, including lower
production cost and potentially unlimited supply.
On August 19, 1991, R&D Systems purchased Amgen Inc.'s research reagent and
diagnostic assay kit business. With this purchase, R&D Systems obtained
Amgen's Erythropoietin (EPO) kit, the Company's first cytokine enzyme-
linked immunosorbent assay (ELISA) kit cleared by the FDA for clinical
diagnostic use. This acquisition established R&D Systems as a leader in
cytokine diagnostic assays.
In July 1993, the Company acquired its European biotechnology distributor,
British Bio-technology Products Ltd. (renamed R&D Systems Europe Ltd.) from
British Bio-technology Group plc. R&D Europe distributes biotechnology
products developed by R&D Systems.
In fiscal 1998, the Company invested in preferred stock of ChemoCentryx,
Inc. (CCX), a new technology and drug development company. The investment
gives Techne a 28% interest in CCX. In addition to the equity investment
and joint research efforts, the Company obtained research and diagnostic
market rights to all products discovered or developed by CCX.
On July 1, 1998, R&D Systems purchased Genzyme Corporation's research
products business. This acquisition establishes R&D Systems as the world's
leading supplier of research and diagnostic cytokine products.
THE MARKET
The Company, through its two operating subsidiaries, manufactures and sells
products for the clinical diagnostics market (hematology controls and
calibrators) and the biotechnology research and clinical diagnostics market
(cytokines, assays and related products). In fiscal 1998, R&D Systems'
Hematology Division revenues accounted for approximately 18% of
consolidated revenues of $67,291,438. Revenues from R&D Systems'
Biotechnology Division and R&D Europe were 56% and 26% of consolidated
revenues, respectively.
Biotechnology Products
R&D Systems is the world's leading supplier of cytokines and cytokine-
related reagents to the biotechnology research community. These valuable
proteins exist in minute amounts in different types of cells and can be
extracted from these cells or made through recombinant DNA technology. In
1985, R&D Systems introduced its first cytokine and continues to add to
this product line. The first cytokines were extracted from natural sources
(human and porcine platelets and bovine brain). Currently the majority of
cytokines are produced by recombinant DNA technology. R&D Systems also
sells antibodies for specific cytokines, cytokine assay kits, clinical
diagnostic kits, kits for cytokine receptor binding studies, and related
research reagents.
The growing interest by researchers in cytokines exists because of the
profound effect a tiny amount of a cytokine can have on the cells and
tissues of the body. Cytokines are intercellular messengers. They act as
signals by interacting with specific receptors on the effected cells. They
carry vital signals to the cell's genetic machinery that can trigger events
that can lead to significant changes in a cell, tissue or organism. For
example, cytokines can signal a cell to differentiate, i.e., to acquire the
features necessary for it to take on a more specialized task. Another
example of cytokine action is the key role they play in stimulating cells
surrounding a wound to grow and divide and to attract migratory cells to
the injury site.
R&D Systems' Biotechnology Division was formed in response to a growing
need for highly purified biologically active proteins purified from natural
source materials, and those produced by recombinant DNA techniques. R&D
Systems believes that its recombinant cytokines are addressing this growing
demand for these products within the scientific research community.
During fiscal 1990, the Biotechnology Division released its first cytokine
assay kits under the tradename Quantikine. These kits are used by
researchers to quantify the level of a specific cytokine in a sample of
blood, serum, or other biological fluid. In fiscal 1996, the Biotechnology
Division expanded its Quantikine line by introducing a line of assay kits
for mouse cytokines. These kits are used extensively by research
scientists doing cytokine studies using animal models, such as those used
in pharmaceutical discovery and development programs.
Current Biotechnology Products
Cytokines and Related Antibodies. Cytokines, extracted from natural
sources or produced using recombinant DNA technology, are manufactured
to the highest purity. Polyclonal antibodies are produced by injecting
purified cytokines into animals (primarily goats and rabbits). The
animals' immune systems recognize the cytokines as foreign and develop
antibodies to these cytokines. The polyclonal antibodies are then
extracted from the animals' blood and purified. Monoclonal antibodies
are produced by injecting purified cytokines into mice. The B cells of
a mouse's immune system are then isolated and fused with mouse cancer
cells that will produce the desired antibody. Purified cytokines and
antibodies are made available both as research reagents and as parts of
assay kits (below).
Assay Kits. This product line includes R&D Systems' human and murine
(mouse) Quantikine kits which allow research scientists to quantify the
amount of a specific cytokine in a sample of blood or tissue. Also
included in this product line are assay kits, developed by R&D Europe,
to quantify adhesion molecules. These kits are used by research
scientists to measure cellular adhesion molecules in serum, plasma, or
cell culture media. Cellular adhesion molecules facilitate the movement
of infection fighting cells out of the blood stream to the site of
infections.
Clinical Diagnostic Kits. The EPO kit, acquired from Amgen Inc. in
fiscal 1992, was the first diagnostic assay for which R&D Systems had
FDA marketing clearance. R&D Systems also has FDA marketing clearance
for its transferrin receptor (TfR) and Beta2-microglobulin kits.
Flow Cytometry Products. This product line includes R&D Systems'
Fluorokine kits which are used to measure the presence or absence of
receptors for specific cytokines on the surface of cells.
DNA and Related Products. Designer genes and designer probes are
synthetic DNAs used in the study of gene function.
Hematology Controls and Calibrators
Hematology controls and calibrators, manufactured and marketed through the
Hematology Division of R&D Systems, are products made up of the various
cellular components of blood. Proper diagnosis of many illnesses requires
a thorough and accurate analysis of the patient's blood cells, which is
usually done with automatic or semiautomatic hematology instruments.
Controls and calibrators ensure that these instruments are performing
accurately and reliably.
Blood is composed of plasma, the fluid portion of which is mainly water,
and blood cells, which are suspended in the plasma. There are three basic
types of blood cells: red cells, white cells and platelets. About 95
percent of the blood cells are red cells. Their main job is to transport
oxygen from the lungs throughout the body, which they do by being rich in
hemoglobin. White cells defend the body against foreign invaders.
Platelets serve as a "plug" to blood flow at the site of an injury by
sticking together and to the damaged tissue.
The formed elements of blood--red cells, white cells and platelets--differ
a great deal in size and concentration. The white cells are the largest in
size and platelets the smallest. The red cells are the most numerous. The
average adult has from 20 to 30 trillion red cells. For every thousand red
cells there are approximately one white cell and about 20 platelets. As
noted above, hematology controls are used in automatic and semiautomatic
cell counting analyzers to make sure these instruments are counting blood
cells accurately. The most frequently performed laboratory test on a blood
sample is called a complete blood count, or CBC for short. Doctors use
this test in disease screening and diagnosis. More than a billion of these
tests are done every year, the great majority with cell counting
instruments. In most laboratories the CBC consists of the white cell
count, the red cell count, the hemoglobin reading, and the hematocrit
reading or the percent of red cells in a volume of whole blood after it has
been centrifuged. Also included in a CBC test is the differential which
numbers and classifies the different types of white cells.
These and other characteristics or "parameters" of a blood sample can be
measured by automatic or semiautomatic cell counters. Cell counters can
read the parameters of blood either by impedance, in which a cell
interrupts an electrical current and is counted, or by a laser, in which a
cell interrupts a laser beam and is counted. The number of parameters
measurable in a blood control product depends on the type and
sophistication of the instrument for which the control is designed.
Ordinarily, a hematology control is used once to several times a day to
make sure the instrument is reading accurately. Some instruments need to
be calibrated periodically. Hematology calibrators are similar to controls
but go through additional processing and testing to ensure that the
calibration values assigned are extremely accurate and can be used to
adjust the instrument.
The Hematology Division of R&D Systems offers a complete line of hematology
controls and calibrators for both impedance and laser type cell counters.
R&D Systems believes its products have improved stability and versatility
and a longer shelf life than most of those of its competitors. The
Hematology Division supplies hematology control products for use as
proficiency testing materials by the College of American Pathologists and
the laboratory certifying authorities of a number of states and countries.
All products are priced competitively and come with an unconditional money
back guarantee. R&D Systems recognizes that developing technologies for
cell counting instruments will require increasingly sophisticated and high-
quality controls and is prepared to meet this challenge.
Current Retail Hematology Products
Impedance-Type Whole Blood Controls/Calibrators. The Hematology
Division of R&D Systems currently produces controls and calibrators for
the following impedance-type instruments: Beckman Coulter, TOA Sysmex,
Hycel, Danam, Roche and Abbott Cell-Dyn instruments.
Laser-Type Whole Blood Controls/Calibrators. Currently produced
controls and calibrators for laser-type instruments include products for
the following: Bayer H series instruments, Abbott Cell-Dyn 3000, 3500
and 4000 instruments and the TOA Sysmex NE-8000 and NE-5500 instruments.
Linearity Control. This product provides a means of assessing the
linearity of hematology analyzers for white blood cells, red blood
cells, hemoglobin and platelets.
Whole Blood Reticulocyte Control. This control is designed for manual
and automated counting of reticulocytes (immature red blood cells).
Whole Blood Flow Cytometry Control. This product is a control for flow
cytometry instruments. These instruments are used to identify and
quantify white blood cells by their surface antigens.
Erythrocyte Sedimentation Rate Control. This product, release in fiscal
1998, is designed to monitor erythrocyte sedimentation rate tests.
Multi-Purpose Platelet Reference Control. This product, Platelet-Trol
II, is designed for use by automatic and semi-automatic impedance and
laser instruments and is the successor to Platelet-Rich-Plasma which R&D
Systems introduced in 1977.
PRODUCTS UNDER DEVELOPMENT
R&D Systems is engaged in ongoing research and development in all of its
major product lines: hematology controls and calibrators, biotechnology
cytokines, antibodies, assays and related products. The Company believes
that its future success depends, to a large extent, on the ability to keep
pace with changing technologies and markets. At the same time, the Company
continues to examine its production processes to ensure high quality and
maximum economy.
R&D Systems' Biotechnology Division is planning to release new cytokines,
antibodies and cytokine assay kits in the coming year. All of these
products will be for research purposes only and therefore do not require
FDA clearance. R&D Systems' Hematology Division has developed several new
control products in fiscal 1998 including an erythrocyte sedimentation
control and is continuously working on product improvements and
enhancements.
There is no assurance that any of the products in the research and
development phase can be developed, or, if developed, can be successfully
introduced into the marketplace.
Expenditures for research and development activities were $10,637,804,
$11,701,822 and $10,413,264 for fiscal years 1998, 1997 and 1996,
respectively.
BUSINESS RELATIONSHIPS
In fiscal 1994, R&D Europe entered into a four year Joint Biological
Research Agreement with its former parent, British Bio-technology Group,
plc. Under the agreement, R&D Europe receives the exclusive right to
develop, manufacture, market and sell biomolecules developed by British Bio-
technology Group, plc. or its subsidiaries and any resulting diagnostic
kits in the research reagent and diagnostic markets. R&D Europe paid $5
million over the term of the agreement and will pay royalties for a period
of 14 years on sales of all products licensed under the agreement. In June
1997, the Joint Biological Research Agreement was extended an additional
five years for 100,000 British pounds per year (approximately $165,000).
In fiscal 1998, Techne purchased $2 million of convertible preferred stock
of ChemoCentryx, Inc. (CCX), representing approximately 28% of issued and
outstanding voting shares. 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. Techne is obligated to
purchase up to an additional $3 million of convertible 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.
Original Equipment Manufacturers (OEM) agreements represent the largest
market for hematology controls and calibrators made by R&D Systems. In
fiscal year 1998, OEM contracts accounted for $5,426,956 or 46% of
Hematology Division revenues and 8% of total consolidated revenues.
GOVERNMENT REGULATION
All manufacturers of hematology controls and calibrators are regulated
under the Federal Food, Drug and Cosmetic Act, as amended. All of R&D
Systems' hematology control products are classified as "In Vitro Diagnostic
Products" by the US Food and Drug Administration. The entire hematology
control manufacturing process, from receipt of raw materials to the
monitoring of control products through their expiration date, is strictly
regulated and documented. FDA inspectors make periodic site inspections of
the Hematology Division's control operations and facilities. Hematology
control manufacturing must comply with Good Manufacturing Practices (GMP)
as set forth in the FDA's regulations governing medical devices. R&D
Systems has not experienced any difficulty in complying with GMP
requirements.
Three of R&D Systems' immunoassay kits, EPO, TfR and Beta2-microglobulin,
have FDA clearance to be sold for clinical diagnostic use. R&D Systems
must comply with GMP for the manufacture of these kits. Biotechnology
products manufactured in the United States and sold for use in the research
market do not require FDA clearance.
Some of R&D Systems' research groups use small amounts of radioactive
materials in the form of radioisotopes in their product development
activities. Thus, R&D Systems is subject to regulation by the US Nuclear
Regulatory Commission and has been granted a NRC License due to expire in
April 1999. The license is renewable annually. R&D Systems is also
subject to regulation and inspection by the Department of Health of the
State of Minnesota for its use of radioactive materials. It has been
granted a certificate of registration, which is renewable annually, by the
Minnesota Department of Health. The current certificate expires April 1,
1999. R&D Systems has had no difficulties in renewing these licenses in
prior years and has no reason to believe they wouldn't be renewed in the
future. If, however, the licenses were not renewed, it would have minimal
effect on R&D Systems' business since there are other technologies the
research groups could use to replace radioisotopes.
AVAILABILITY OF RAW MATERIALS
The primary raw material for the Company's hematology controls is whole
blood. Human blood is purchased from commercial blood banks and porcine
and bovine blood is purchased from nearby meat processing plants. After
raw blood is received, it is separated into its components, processed and
stabilized. Although the cost of human blood has increased owing largely
to the requirement that it be tested for HIV ("AIDS") antibodies and
hepatitis, R&D Systems does not anticipate that the higher cost of these
materials will have a seriously adverse effect on its business. R&D
Systems does not perform its own testing for the AIDS antibodies as all
human blood purchased is tested by the supplier. R&D Systems'
Biotechnology Division develops and manufactures the majority of its
cytokines from synthetic genes developed in-house, thus significantly
reducing its reliance on outside resources. R&D Systems typically has
several outside sources for all critical raw materials necessary for the
manufacture of products.
PATENTS AND TRADEMARKS
R&D Systems owns patent protection for certain hematology controls and has
received patent protection for its cytokine TGF-beta 1.2. R&D Systems may
seek patent protection for new or existing products it manufactures. No
assurance can be given that any such patent protection will be obtained.
No assurance can be given that R&D Systems' products do not infringe upon
patents or proprietary rights owned or claimed by others, particularly for
genetically engineered products. Although, with the exception of products
subject to current licensing agreements and the legal proceedings discussed
in Item 3 of this 10-K, R&D Systems has not been notified that its products
infringe upon proprietary rights held by others, it has not conducted a
patent infringement study for each of its products.
R&D Systems and R&D Europe have a number of licensing agreements with
patent holders under which they have the non-exclusive right to patented
technology or the non-exclusive right to manufacture and sell certain
patented cytokine and cytokine related products to the research market.
For fiscal 1998, total royalties paid under these licenses were $2,085,000.
R&D Systems has obtained federal trademark registration for its hematology
control trademark CBC-3D, CBC-7, CBC-8, PLATELET-TROL and StatusFlow and
claims common law rights in the trademarks CBC-CAL PLUS, CBC-CAL KIT, CBC-
TECH, TECH-CAL, CBC-3K, 3K-CAL and CBC-NE. R&D Systems has also obtained
the Quantikine, Fluorokine, Surfacemark and IVD trademarks.
SEASONALITY OF BUSINESS
Sales of the products manufactured by R&D Systems and R&D Europe are not
seasonal, although R&D Europe historically experiences a slowing of sales
during the summer months.
SIGNIFICANT CUSTOMERS
No single customer accounted for more than 10% of total revenues during
fiscal years 1998, 1997 and 1996.
BACKLOG
There was no significant backlog for the Company's products as of the date
of this report or as of a comparable date for fiscal 1997.
COMPETITION
The market for cytokines and research diagnostic assay kits in the United
States and Europe is being supplied by a number of biotechnology companies,
including PerSeptive Biosystems Inc., BioSource International, Endogen,
Sigma Chemical Co., Amersham Pharmacia and CN Biosciences. R&D Systems
believes that it is the leading worldwide supplier of cytokine related
products in the research marketplace. R&D Systems believes that the
expanding line of its products, their recognized quality and competitive
pricing, and the growing demand for these rare and versatile proteins,
antibodies and assay kits, will allow the Company to remain the leader in
the growing biotechnology research and diagnostic market.
Competition is intense in the hematology control business. The first
control products were developed in response to the rapid advances in
electronic instrumentation used in hospital and clinical laboratories for
blood cell counting. Most of the instrument manufacturing companies make
controls for use in their own instruments. With rapid expansion of the
instrument market, however, a need for more versatile controls enabled non-
instrument manufacturers to gain a foothold. Today the market is comprised
of manufacturers of laboratory reagents, chemicals and coagulation products
and independent control manufacturers in addition to instrument
manufacturers. The principal hematology control competitors of R&D
Systems' retail products are Beckman Coulter, Inc., Baxter Healthcare
Corp., Streck Laboratories, Abbott Diagnostics and Hematronix, Inc. R&D
Systems believes it is the third largest supplier of hematology controls in
the marketplace behind Beckman Coulter and Streck Laboratories.
EMPLOYEES
R&D Systems had 320 full-time and 37 part-time employees as of June 30,
1998. R&D Europe had 36 full-time and 10 part-time employees as of June
30, 1998, including 6 full-time and 2 part-time at R&D Europe's sales
subsidiary in Germany.
ENVIRONMENT
Compliance with federal, state and local environmental protection laws in
the United States, England and Germany had no material effect on R&D
Systems or R&D Europe in fiscal year 1998.
FOREIGN AND DOMESTIC OPERATIONS
The following table represents certain financial information relating to
foreign and domestic operations (all amounts are in thousands of US
dollars):
Fiscal Years Ended June 30,
---------------------------
Net Sales to Unaffiliated Customers 1998 1997 1996
- ----------------------------------- ------- ------- -------
R&D Systems:
US $40,044 $34,682 $30,997
Asia 3,507 3,185 2,807
Europe 3,746 2,542 3,009
Canada 1,259 1,001 935
Other 941 599 482
R&D Europe:
United Kingdom 5,783 6,108 5,413
Germany 3,975 3,941 3,507
France 2,745 2,402 2,133
Other Europe 4,441 5,109 4,301
Other 850 1,355 1,005
Gross Margin
- ------------
R&D Systems (US) 38,826 31,907 27,207
R&D Europe (England) 7,519 9,176 8,066
R&D GmbH (Germany) 937 746 317
Net Earnings (Loss)
- -------------------
Parent and R&D Systems (US) 13,689 10,107 8,081
R&D Europe (England) 2,160 896 892
R&D GmbH (Germany) 6 (121) (335)
ChemoCentryx (US) (672) - -
Identifiable Assets
- -------------------
Parent and R&D Systems (US) 62,842 46,760 38,382
R&D Europe (England) 7,831 6,547 5,387
R&D GmbH (Germany) 785 615 624
ChemoCentryx (US) 1,461 - -
CAUTIONARY STATEMENTS
The Company wishes to caution investors that the following important
factors, among others, in some cases have affected and in the future could
affect the Company's actual results of operations and cause such results to
differ materially from those anticipated in forward-looking statements made
in this document and elsewhere by or on behalf of the Company:
Risk of Technological Obsolescence and Competition
The biotechnology industry is subject to rapid and significant
technological change. While the hematology controls industry historically
has been subject to less rapid change, it too is evolving and is impacted
significantly by changes in the automated testing equipment offered by
hardware manufacturers. Competitors of the Company in the United States
and abroad are numerous and include, among others, specialized
biotechnology firms, medical laboratory instrument and equipment
manufacturers and disposables suppliers, major pharmaceutical companies,
universities and other research institutions. There can be no assurance
that the Company's competitors will not succeed in developing technologies
and products that are more effective than any which have been or are being
developed by the Company or that would render the Company's technologies
and products obsolete or noncompetitive. Many of these competitors have
substantially greater resources and product development, production and
marketing capabilities than the Company. With regard to diagnostic kits,
which constitute a relatively minor portion of the Company's business, many
of the Company's competitors have significantly greater experience than the
Company in undertaking preclinical testing and clinical trials of new or
improved diagnostic kits and obtaining Food and Drug Administration (FDA)
and other regulatory approvals of such products.
Patents and Proprietary Rights
The Company's success will depend, in part, on its ability to obtain
licenses and patents, maintain trade secret protection and operate without
infringing the proprietary rights of others. The Company has filed a very
limited number of United States and foreign patent applications for
products in which it believes it has a proprietary interest. The Company
has obtained and is negotiating licenses to produce a number of cytokines
and related products claimed to be owned by others. The Company has not
conducted a patent infringement study for each of its products. It is
possible that products of the Company may unintentionally infringe patents
of third parties or that the Company may have to alter its products or
processes, pay licensing fees or cease certain activities because of patent
rights of third parties, thereby causing additional unexpected costs and
delays which may have a material adverse effect on the Company. The
patenting of hematology and biotechnology processes and products involves
complex legal and factual questions and, to date, there has emerged no
consistent policy regarding the breadth of claims in biotechnology patents.
Protracted and costly litigation may be necessary to enforce rights of the
Company and defend against claims of infringement of rights of others.
Financial Impact of Expansion Strategy
The Company engages in an expansion strategy which includes internal
development of new products, collaboration with manufacturers of automated
instruments which may use the Company's products, investment in joint
ventures and companies developing new products related to the Company's
business and acquisition of companies for new products or additional
customer base. Each of the strategies carries risks that objectives will
not be achieved and future earnings will be adversely effected. During
early development stage, the operating losses of certain companies in which
the Company may invest will be reported as operating losses of the Company,
as is currently the case with ChemoCentryx Inc. On July 1, 1998 the
Company acquired the primary assets of Genzyme Corporation's research
products business for stock, cash and future royalties. Success of this
acquisition will depend upon conversion of customers and distributors from
Genzyme to the Company and selling the Company's broader range of products
to the former Genzyme customers and distributors. The Company anticipates
that in its fiscal year ending June 30, 1999, its earnings will be $.06 to
$.12 per share less than its fiscal year 1998 earnings due primarily to the
sale of acquired inventories at lower gross profit levels and the
amortization of the goodwill associated with the transaction.
Government Regulation
Ongoing research and development activities, including preclinical and
clinical testing, and the production and marketing of the Company's
products are subject to regulation by numerous governmental authorities in
the United States and other countries. All of the Company's products and
manufacturing processes and facilities require governmental licensing or
approval prior to commercial use. The approval process applicable to
clinical diagnostic products of the type which may be developed by the
Company usually takes a number of years and typically requires substantial
expenditures. Delays in obtaining regulatory approvals would adversely
affect the marketing of products developed by the Company and the Company's
ability to receive product revenues or royalties. There can be no
assurance that regulatory approvals for such products will be obtained
without lengthy delays, if at all.
Attraction and Retention of Key Employees
Recruiting and retaining qualified scientific and production personnel to
perform research and development work and product manufacturing is critical
to the Company's success. Although the Company believes it has been and
will be able to attract and retain such personnel, there can be no
assurance that the Company will be successful. In addition, the Company's
anticipated growth and expansion into areas and activities requiring
additional expertise, such as clinical testing, government approvals,
production and marketing, will require the addition of new management
personnel and the development of additional expertise by existing
management personnel. The failure to attract and retain such personnel or
to develop such expertise would adversely affect the Company's business.
ITEM 2. PROPERTIES
The Company does not own any real property. R&D Systems leases space in
three connected buildings located in Minneapolis, Minnesota. The main
building, consisting of approximately 85,000 square feet, is located at 614
McKinley Place N.E., and houses administrative, marketing and Biotechnology
Division manufacturing and research operations. Hematology Division
manufacturing and shipping operations are located at 640 McKinley Place
N.E. and cover approximately 47,000 square feet. The third building is
located at 2201 Kennedy Street and houses administrative and Biotechnology
Division manufacturing and research operations. The Company currently
occupies 107,000 square feet in this building, leaving approximately 98,000
square feet available for future expansion. The Company also occupies an
additional 20,000 square feet in space connecting the three buildings.
This area houses a lunchroom, a library and additional warehouse space.
The current lease for the above buildings extends through December 2017.
Base rent for fiscal 1998 was $2,221,000.
R&D Europe sub-leases approximately 12,500 square feet in two buildings in
Abingdon, England. All of R&D Europe Ltd. operations are located in one
building with the other used for storage. The sub-lease on the main
building expires in June 1999 and R&D Europe is currently in the process of
evaluating several new facilities in the Abindgon area. Estimates of
rental rates for the new facility are not significantly different from
rates under the current sub-lease. Base rent for the above space was
$253,000 in fiscal 1998.
R&D GmbH leases approximately 2,300 square feet as a sales office in
Wiesbaden-Nordenstadt, Germany. Base rent was $35,000 in fiscal 1998.
The Company believes the leased property discussed above is adequate to
meet its occupancy needs in the foreseeable future.
ITEM 3. 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 is in the formal discovery phase, and it is unlikely
it will go to trial before 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during
the fourth quarter of the Company's 1998 fiscal year.
EXECUTIVE OFFICERS OF THE COMPANY
(a) The names, ages and positions of each executive officer of the Company
are as follows:
Name Age Position Officer Since
---- --- -------- -------------
Thomas E. Oland 57 Chairman of the Board, President,
Treasurer and Director 1985
Dr. James A.
Weatherbee 55 Vice President and Chief Scientific
Officer 1995
Dr. Monica Tsang 53 Vice President, Research 1995
Dr. Thomas C.
Detwiler 65 Vice President, Scientific and
Regulatory Affairs 1995
Marcel Veronneau 44 Vice President, Hematology Operations 1995
The term of office of each executive officer is from one annual meeting of
directors until the next annual meeting of directors or until a successor
is elected. There are no arrangements or understandings among any of the
executive officers and any other person (not an officer or director acting
as such) pursuant to which any of the executive officers was selected as an
officer of the Company. Dr. James A. Weatherbee and Dr. Monica Tsang are
husband and wife.
(b) The business experience of the executive officers during the past five
years is as follows:
Thomas E. Oland has been Chairman of the Board, President and Treasurer of
the Company since December 1985.
Dr. James A. Weatherbee was elected a Vice President of the Company in
March 1995. Prior thereto, he served as Chief Scientific Officer for R&D
Systems' Biotechnology Division and has been an employee of R&D Systems
since 1985.
Dr. Monica Tsang was elected a Vice President of the Company in March 1995.
Prior thereto, she served as Executive Director of Cell Biology for R&D
Systems' Biotechnology Division and has been an employee of R&D Systems
since 1985.
Dr. Thomas Detwiler was elected a Vice President of the Company in March
1995. Prior thereto, he served as Vice President of Scientific and
Clinical Affairs for R&D Systems' Biotechnology Division and has been an
employee of R&D Systems since 1993.
Marcel Veronneau was elected a Vice President of the Company in March 1995.
Prior thereto, he served as Director of Operations for R&D Systems'
Hematology Division since joining the Company in 1993.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's common stock trades on The Nasdaq Stock Market under the symbol
"TECH." The following table sets forth for the periods indicated the range of
the closing price per share for the Company as reported by Nasdaq.
1998 SALES PRICE 1997 SALES PRICE
HIGH LOW HIGH LOW
--------- -------- -------- --------
1st Quarter $ 17.75 $ 13.44 $ 15.25 $ 10.13
2nd Quarter 19.75 15.63 13.13 11.00
3rd Quarter 20.00 16.94 13.13 11.06
4th Quarter 19.88 16.00 15.25 11.38
As of September 14, 1998, there were approximately 370 shareholders of record.
As of September 14, 1998, there were over 4,500 beneficial shareholders of the
Company's common stock. TECHNE Corporation has never paid cash dividends on its
common stock. Payment of dividends is within the discretion of TECHNE's Board
of Directors, although the Board of Directors plans to retain earnings for the
foreseeable future for operating the Company's business.
ITEM 6. SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUE, EARNINGS AND CASH FLOW
DATA FOR THE YEARS ENDED JUNE 30 1998 1997 1996 1995 1994
- --------------------------------- ------- ------- ------- ------- -------
Net sales $67,291 $60,924 $54,589 $47,716 $40,330
Gross margin 70.3% 68.7% 65.2% 61.3% 57.9%
Selling, general and
administrative expense 22.8% 23.9% 23.7% 23.4% 22.9%
Research and development expenses 15.8% 19.2% 19.1% 18.0% 16.0%
Interest expense -- 29 2 9 22
Earnings before income taxes 22,411 15,988 12,592 9,648 7,223
Net earnings 15,183 10,882 8,638 6,706 5,094
Diluted earnings per share(1) 0.77 0.56 0.44 0.35 0.27
Capital expenditures 2,955 4,243 6,377 1,311 1,332
Depreciation and amortization 2,306 2,322 1,872 1,655 1,837
Change in net working capital 16,189 6,639 4,573 6,310 4,739
Net cash provided by operating
activities 20,309 12,477 9,760 7,314 6,304
Return on sales 22.6% 17.9% 15.8% 14.1% 12.6%
Return on average equity 27.1% 25.0% 25.3% 25.6% 25.0%
BALANCE SHEET, COMMON STOCK AND
EMPLOYEE DATA AS OF JUNE 30 1998 1997 1996 1995 1994
- --------------------------------- ------- ------- ------- ------- -------
Cash, cash equivalents and
short-term investments $42,694 $24,752 $19,250 $15,945 $10,866
Receivables 10,002 9,114 8,380 7,386 6,593
Inventories 3,811 4,087 3,653 3,266 2,514
Working capital 51,088 34,899 28,260 23,687 17,377
Total assets 72,919 53,922 44,393 34,062 26,806
Long-term debt -- -- -- -- --
Stockholders' equity 63,831 48,081 38,874 29,520 22,955
Average common and dilutive
shares (in thousands)(1) 19,608 19,463 19,443 19,044 19,034
Book value per share(1) 3.35 2.55 2.04 1.57 1.23
Share price (fiscal year)(1):
High 20.00 15.25 16.50 7.94 8.13
Low 13.44 10.13 6.63 4.38 4.63
Price to earnings ratio 25 27 33 19 19
Current ratio 7.87 8.12 6.62 6.75 5.88
Quick ratio 7.09 6.91 5.49 5.66 4.91
Full-time employees 356 326 341 315 277
-
(1) The Company declared a two-for-one stock split with a record date of
November 10, 1997. All prior year share and per share amounts have been
restated to reflect the stock split.
The Company has not declared any cash dividends in the past, and it is not
anticipated that it will declare any dividends in the foreseeable future.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPANY STRUCTURE
TECHNE (the Company) has two operating subsidiaries: R&D Systems, Inc. (R&D
Systems) and R&D Systems Europe Ltd. (R&D Europe). R&D Systems, located in
Minneapolis, Minnesota, has two divisions: Biotechnology and Hematology. The
Biotechnology Division develops and manufactures purified cytokines (proteins),
antibodies and assay kits which are sold to biomedical researchers and
clinical research laboratories. The Hematology Division develops and
manufactures whole blood hematology controls and calibrators which are sold
to hospitals and clinical laboratories to check the performance of hematology
instruments to assure the accuracy of hematology test results. R&D Europe,
located in Abingdon, England, is the European distributor of R&D Systems'
biotechnology products. In fiscal 1996, R&D Europe incorporated a sales
subsidiary, R&D Systems GmbH, in Germany. The Company also has a foreign
sales corporation, Techne Export Inc.
RESULTS OF OPERATIONS
Net sales for fiscal 1998 were $67,291,438, an increase of $6,367,688 (10%)
from fiscal 1997. Sales by R&D Systems for the period increased $7,489,032
(18%), while sales by R&D Europe decreased $1,121,344 (6%). The increase in
consolidated sales for the fiscal year was due to the increase in sales of
proteins and antibodies. Sales of proteins and antibodies by R&D Systems and
R&D Europe for fiscal 1998 were $24,343,221 compared to $18,757,307 in fiscal
1997. In addition, sales of hematology products increased $1,514,469 as a
result of increased sales to one OEM customer and the addition of two OEM
customers in fiscal 1998. 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 22% from fiscal 1997.
Net sales for fiscal 1997 were $60,923,750, an increase of $6,334,696 (12%)
from fiscal 1996. Sales by R&D Europe for the period increased $2,555,914
(16%), while sales by R&D Systems increased $3,778,782 (10%). The majority of
the increase in consolidated sales for the fiscal year was due to an increase
in sales of proteins and antibodies.
Net sales for fiscal 1996 were $54,589,054, an increase of $6,872,888 (14%)
from fiscal 1995. Sales by R&D Europe for the period increased $2,482,778
(18%), while sales by R&D Systems increased $4,390,110 (13%). The increase in
consolidated sales for the fiscal year was due to increased sales of R&D
Systems' immunoassay (Quantikine) kits, increased sales of other R&D Systems'
products by R&D Europe and increased sales of R&D Europe in-house developed
products.
Gross margins, as a percentage of sales, increased from 68.7% in fiscal 1997
to 70.3% in fiscal 1998. R&D Europe gross margins decreased from 52.5% to
47.5% due to changes in product mix and exchange rates. Biotechnology Division
gross margins increased from 71.8% to 72.9% as a result of changes in product
mix and increased production volumes. Hematology Division gross margins
increased from 42.9% in fiscal 1997 to 47.2% in fiscal 1998 also as a result
of changes in product mix and increased production volumes.
Gross margins, as a percentage of sales, increased from 65.2% in fiscal 1996
to 68.7% in fiscal 1997. R&D Europe gross margins increased from 51.2% to
52.5% due to favorable exchange rates. Biotechnology Division gross margins
increased from 69.3% to 71.8% due to lower royalty expense as a result of the
conclusion of royalty payments to Amgen Inc. and lower manufacturing costs due
to increased production volumes. Hematology Division gross margins increased
from 40.1% in fiscal 1996 to 42.9% in fiscal 1997 as a result of changes in
product mix.
Gross margins, as a percentage of sales, increased from 61.3% in fiscal 1995
to 65.2% in fiscal 1996. R&D Europe gross margins increased from 47.5% to
51.2% as a result of a change in product mix and increased margins on products
sold through its German subsidiary. Biotechnology Division gross margins
increased from 67.4% to 69.3% due to lower packaging costs and lower
manufacturing costs due to increased production volumes. Hematology Division
gross margins increased from 36.4% in fiscal 1995 to 40.1% in fiscal 1996 as a
result of changes in product mix and lower raw material costs.
Selling, general and administrative expenses increased $782,425 (5%) in fiscal
1998. The majority of the increase in consolidated selling, general and
administrative expenses in fiscal 1998 was the result of additional occupancy
costs at R&D Systems, plus increased advertising and promotion costs. These
increased costs were partially offset by decreased personnel costs at R&D
Europe as a result of the restructuring of operations undertaken in fiscal
1997.
Selling, general and administrative expenses increased $1,634,862 (13%) in
fiscal 1997. Included in selling, general and administrative expenses for
fiscal 1997 was a restructuring charge of approximately $450,000 related to
R&D Europe. The restructuring involved the withdrawal from the molecular
biology market, the transfer of all major marketing and advertising activities
to R&D Systems and the transfer of immunoassay kit development and
manufacturing activities from R&D Europe to R&D Systems. R&D Europe's sales
function was not affected by the restructuring. The increase in consolidated
selling, general and administrative expenses in fiscal 1997 was also the
result of an increase in Biotechnology Division sales and marketing expenses
as a result of additional staff and increased advertising and promotion
activities.
Selling, general and administrative expenses increased $1,776,325 (16%) in
fiscal 1996. The largest increase in selling, general and administrative
expenses was attributable to R&D Europe operations. During fiscal 1996, R&D
Europe opened a sales subsidiary in Germany and costs associated with start-up
and operations were approximately $735,000. The increase in selling, general
and administrative expenses was also due to R&D Europe's increased sales and
marketing staff in England and increased advertising.
Research and development expenses decreased $1,064,018 in fiscal 1998 and
increased $1,288,558 and $1,808,866 in fiscal 1997 and 1996, respectively. The
decrease in research and development expenses in fiscal 1998 was the result of
a decrease of $1,235,000 in payments by R&D Europe under the Joint Biological
Research Agreement with British Bio-technology Group, plc plus a decrease in
R&D Europe personnel costs as a result of the restructuring. Excluding the
above, the increase in consolidated research and development expenses for the
past three years was primarily the result of the development and release of
new cytokines, antibodies and assay kits by R&D Systems' Biotechnology
Division and the development and release of several new Hematology Division
control products. Management of the Company believes that R&D Systems will
continue to develop new products.
Earnings before taxes increased from $15,987,662 in fiscal 1997 to $22,410,961
in fiscal 1998. This increase in earnings was primarily the result of a
$4,213,580 increase in R&D Systems' Biotechnology Division earnings and a
$997,654 increase in Hematology Division earnings as a result of increased
sales and gross margins. In addition, R&D Europe's earnings before taxes
increased $2,052,537 despite a decrease in sales and gross margin which was
more than offset by decreased expenses.
Earnings before taxes increased from $12,591,870 in fiscal 1996 to $15,987,662
in fiscal 1997. This increase in earnings was primarily the result of a
$3,312,156 increase in R&D Systems' Biotechnology Division earnings and a
$329,872 increase in R&D Europe earnings. These increases in earnings before
taxes were due to increased sales and gross margins, partially offset by
higher expenses. Hematology Division earnings before taxes were slightly less
than fiscal 1996 as a result of lower sales.
Earnings before taxes increased from $9,648,042 in fiscal 1995 to $12,591,870
in fiscal 1996. This increase in earnings was primarily the result of a
$2,203,098 increase in R&D Systems' Biotechnology Division earnings and a
$786,053 increase in Hematology Division earnings. The increase in earnings
before taxes was due to increased sales and gross margins, partially offset by
higher expenses.
Income taxes for fiscal 1998, 1997 and 1996 were provided at rates of
approximately 32%, 32% and 31%, respectively. U.S. federal and state taxes
have been reduced as a result of tax exempt interest income, the benefit of
the foreign sales corporation, and the federal and state credit for research
and development expenditures. Foreign income taxes have been provided at rates
which approximate the tax rates in the United Kingdom and Germany.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments at June 30, 1998, were
$42,694,280, an increase of 72% from the prior year. At June 30, 1997, cash,
equivalents and short-term investments were $24,752,257 compared to
$19,249,535 at June 30, 1996, an increase of 29%. The Company has an unsecured
line of credit of $750,000 available at June 30, 1998. The interest rate on
the line of credit is at the prime rate of 8.5% at June 30, 1998.
Management of the Company expects to be able to meet its future cash and
working capital requirements for operations and capital additions through
currently available funds, cash generated from operations and maturities of
short-term investments.
Cash flows from operating activities
The Company generated cash from operations of $20,309,209, $12,476,548 and
$9,759,549 in fiscal 1998, 1997 and 1996, respectively. The majority of cash
generated from operating activities in all three years resulted from an
increase in net earnings after adjustment for noncash expenses, partially
offset by an increase in accounts receivable due to increased sales.
Cash flows from investing activities
Capital additions were $2,955,196, $4,243,156 and $6,376,922 in fiscal 1998,
1997 and 1996, respectively. Included in fiscal 1998, 1997 and 1996 capital
additions are leasehold improvements of $1,195,000, $2,935,000 and $4,329,000
related to R&D Systems' remodeling and expansion into an adjacent building.
The remaining capital additions in fiscal 1998, 1997 and 1996 were for
laboratory, manufacturing and computer equipment. Total capital additions for
equipment and leasehold improvements planned for fiscal 1999 are expected to
be approximately $4 million. All capital additions are expected to be financed
through currently available cash, cash generated from operations and
maturities of short-term investments.
The Company's net investment (withdrawal) in short-term investments in
fiscal 1998, 1997 and 1996 was ($831,955), $4,326,439 and $1,199,721,
respectively. The Company's investment policy is to place excess cash in
tax-exempt bonds with the objective of obtaining the highest possible return
with the lowest risk, while keeping funds accessible.
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. Cash and cash
equivalents on hand at June 30, 1998 was used to fund the acquisition.
Cash flows from financing activities
The Company received $919,831, $582,846 and $569,125 for the exercise of
options for 97,541, 91,000 and 190,000 shares of common stock in fiscal 1998,
1997 and 1996, respectively.
In fiscal 1998, 1997 and 1996, the Company purchased and retired 20,000,
254,600 and 72,400 shares of Company common stock at a market value of
$280,000, $3,225,205 and $676,206, respectively. In May 1995, the Company
announced a plan to purchase and retire up to $5 million of its common stock.
In April 1997, this was increased an additional $5 million, subject to market
conditions. Any such purchases will be funded from currently available cash.
The Company has never paid cash dividends and has no plans to do so in
fiscal 1999. The Company's earnings will be retained for reinvestment in the
business.
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.
MARKET RISK
At the end of fiscal 1998, the Company had an investment portfolio of fixed
income securities, excluding those classified as cash and cash equivalents, of
$15,321,935 (see Note A of Notes to Consolidated Financial Statements). 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.
FORWARD-LOOKING INFORMATION
Statements in this Annual Report, and elsewhere, that are forward-looking
involve risks and uncertainties which may affect the Company's actual results
of operations. Certain of these risks and uncertainties which have affected
and, in the future, could affect the Company's actual results are discussed
below.
The biotechnology industry is subject to rapid and significant technological
change. While the hematology controls industry historically has been subject
to less rapid change, it too is evolving and is impacted significantly by
changes in the automated testing equipment offered by hardware manufacturers.
Competitors of the Company are numerous and include, among others, specialized
biotechnology firms, medical laboratory instrument and equipment manufacturers
and disposables suppliers, major pharmaceutical companies, universities and
other research institutions. There can be no assurance that the Company's
competitors will not succeed in developing technologies and products that are
more effective than any which have been or are being developed by the Company
or that would render the Company's technologies and products obsolete or
noncompetitive.
The Company's success will depend, in part, on its ability to obtain
licenses and patents, maintain trade secret protection and operate without
infringing the proprietary rights of others. The Company has obtained and is
negotiating licenses to produce a number of cytokines and related products
claimed to be owned by others. Since the Company has not conducted a patent
infringement study for each of its products, it is possible that products of
the Company may unintentionally infringe patents of third parties or that the
Company may have to alter its products or processes, pay licensing fees or
cease certain activities because of patent rights of third parties, thereby
causing additional unexpected costs and delays which may have a material
adverse effect on the Company.
The Company's expansion strategies, which include internal development of
new products, collaborations, investments in joint ventures and companies
developing new products related to the Company's business, and the acquisition
of companies for new products and additional customer base, carry risks that
objectives will not be achieved and future earnings will be adversely affected.
On July 1, 1998, the Company acquired the primary assets of Genzyme
Corporation's research products business. Success of this acquisition will
depend upon conversion of customers and distributors from Genzyme to the
Company. The Company anticipates that in fiscal 1999, its earnings will be
$.06 to $.12 per share less than fiscal year 1998 due primarily to the sale of
acquired inventories at lower gross profit levels and the amortization of
goodwill associated with the transaction.
Ongoing research and development activities, including preclinical and
clinical testing, and the production and marketing of the Company's products
are subject to regulation by numerous governmental authorities in the United
States and other countries. The approval process applicable to clinical
diagnostic products of the type which may be developed by the Company usually
takes a number of years and typically requires substantial expenditures. Delays
in obtaining approvals could adversely affect the marketing of new products
developed by the Company.
Recruiting and retaining qualified scientific and production personnel to
perform research and development work and product manufacturing is critical to
the Company's success. The Company's anticipated growth and its expected
expansion into areas and activities requiring additional expertise will
require the addition of new personnel and the development additional expertise
by existing personnel. The failure to attract and retain such personnel could
adversely affect the Company's business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
At the end of fiscal 1998, the Company had an investment portfolio of fixed
income securities, excluding those classified as cash and cash equivalents,
of $15,321,935. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF EARNINGS
TECHNE CORPORATION AND SUBSIDIARIES
YEAR ENDED JUNE 30,
1998 1997 1996
----------- ----------- -----------
Net sales $67,291,438 $60,923,750 $54,589,054
Cost of sales 20,009,641 19,094,827 18,998,931
----------- ----------- -----------
Gross margin 47,281,797 41,828,923 35,590,123
Operating expenses (income):
Selling, general and administrative 15,367,759 14,585,334 12,950,472
Research and development (Note E) 10,637,804 11,701,822 10,413,264
Amortization of intangible assets
(Note A) 71,457 235,508 235,508
Interest expense -- 29,357 2,242
Interest income (1,206,184) (710,760) (603,233)
----------- ----------- -----------
24,870,836 25,841,261 22,998,253
----------- ----------- -----------
Earnings before income taxes 22,410,961 15,987,662 12,591,870
Income taxes (Note H) 7,228,000 5,106,000 3,954,000
----------- ----------- -----------
Net earnings $15,182,961 $10,881,662 $ 8,637,870
=========== =========== ===========
Basic earnings per share $ .80 $ .58 $ .46
Diluted earnings per share $ .77 $ .56 $ .44
Weighted average common
shares outstanding:
Basic 18,952,968 18,910,608 18,872,806
Diluted 19,607,630 19,462,532 19,442,850
-
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
TECHNE CORPORATION AND SUBSIDIARIES
JUNE 30,
1998 1997
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $27,372,345 $ 8,598,367
Short-term available-for-sale
investments (Note A) 15,321,935 16,153,890
Trade accounts receivable, less allowance
for doubtful accounts of $269,000 and
$52,000, respectively 10,001,937 9,114,447
Inventories (Note B) 3,810,600 4,087,161
Deferred income taxes (Note H) 1,583,000 1,322,000
Prepaid expenses 431,187 521,493
----------- -----------
Total current assets 58,521,004 39,797,358
Equipment and leasehold improvements (Note C) 11,687,300 11,252,741
Intangible assets (Note A) 293,854 365,311
Deferred income taxes (Note H) 1,798,000 1,703,000
Other long-term assets (Note K) 618,723 803,300
----------- -----------
$72,918,881 $53,921,710
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 2,203,130 $ 1,609,362
Salaries, wages and related accounts 2,005,428 1,790,035
Other accounts payable and accrued expenses 1,039,334 498,873
Income taxes payable 2,185,122 1,000,096
----------- -----------
Total current liabilities 7,433,014 4,898,366
Deferred rent 1,655,100 942,300
Contingencies and commitments (Note E) -- --
Stockholders' equity (Note F):
Undesignated capital stock, no par; authorized
5,000,000 shares; none issued or outstanding -- --
Common stock, par value $.01 a share;
authorized 50,000,000 shares; issued and
outstanding 19,049,983 and 18,875,456 shares,
respectively 190,500 188,755
Additional paid-in capital 13,714,445 12,559,071
Retained earnings 49,446,319 34,903,146
Accumulated foreign currency translation
adjustments 479,503 430,072
----------- -----------
Total stockholders' equity 63,830,767 48,081,044
----------- -----------
$72,918,881 $53,921,710
=========== ===========
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TECHNE CORPORATION AND SUBSIDIARIES
ACCUMU-
LATED
FOREIGN
CURRENCY
COMMON STOCK ADDITIONAL TRANSLA-
-------------------- PAID-IN RETAINED TION AD-
SHARES AMOUNT CAPITAL EARNINGS JUSTMENTS
---------- -------- ----------- ----------- ---------
Balances at June 30,
1995 18,750,692 $187,507 $ 8,453,220 $20,734,653 $144,715
Net earnings -- -- -- 8,637,870 --
Common stock issued:
Exercise of options
(Note F) 479,378 4,794 2,016,187 -- --
Surrender and
retirement of
stock to exercise
options (Note K) (118,614) (1,186) 593 (1,451,263) --
Repurchase and re-
tirement of common
stock (72,400) (724) 362 (675,844) --
Tax benefit from
exercise of
stock options -- -- 883,000 -- --
Change in foreign
currency transla-
tion adjustments
(Note A) -- -- -- -- (59,813)
---------- -------- ----------- ----------- --------
Balances at June 30,
1996 19,039,056 190,391 11,353,362 27,245,416 84,902
Net earnings -- -- -- 10,881,662 --
Common stock issued:
Exercise of options
(Note F) 91,000 910 581,936 -- --
Repurchase and re-
tirement of
common stock (254,600) (2,546) 1,273 (3,223,932) --
Tax benefit from
exercise of
stock options -- -- 151,000 -- --
Fair value of
options granted
(Note K) -- -- 471,500 -- --
Change in foreign
currency transla-
tion adjustments
(Note A) -- -- -- -- 345,170
---------- -------- ----------- ----------- --------
Balances at June 30,
1997 18,875,456 188,755 12,559,071 34,903,146 430,072
Net earnings -- -- -- 15,182,961 --
Common stock issued:
Exercise of options
(Note F) 153,376 1,533 1,278,492 -- --
Exercise of warrant
(Note F) 61,775 618 (618) -- --
Surrender and
retirement of
stock to exercise
options (Note K) (20,624) (206) -- (359,988) --
Repurchase and re-
tirement of
common stock (20,000) (200) -- (279,800) --
Tax benefit from
exercise of
stock options -- -- 146,000 -- --
Fair value of
options granted
(Note K) -- -- 200,500 -- --
Cancelation of non-
vested options
(Note K) -- -- (469,000) -- --
Change in foreign
currency transla-
tion adjustments
(Note A) -- -- -- -- 49,431
---------- -------- ----------- ----------- --------
Balances at June 30,
1998 19,049,983 $190,500 $13,714,445 $49,446,319 $479,503
========== ======== =========== =========== ========
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE K)
TECHNE CORPORATION AND SUBSIDIARIES
YEAR ENDED JUNE 30,
1998 1997 1996
------------ ------------ -----------
Cash flows from operating activities:
Net earnings $ 15,182,961 $ 10,881,662 $ 8,637,870
Adjustments to reconcile net
earnings to net cash provided by
operating activities:
Depreciation and amortization 2,306,111 2,321,963 1,872,176
Deferred income taxes (356,000) (662,000) (974,000)
Tax benefit from exercise
of options 146,000 151,000 883,000
Deferred rent 712,800 452,100 67,000
Other 435,332 342,070 248,425
Change in current assets and
current liabilities:
(Increase) decrease in:
Trade accounts receivable (1,037,799) (626,936) (1,151,878)
Inventories 266,427 (379,051) (406,752)
Prepaid expenses 91,141 233,617 (351,486)
Increase (decrease) in:
Trade and other accounts
payable 1,166,236 (527,435) 404,125
Salaries, wages and related
accounts 214,554 60,284 376,333
Income taxes payable 1,181,446 229,274 154,736
------------ ------------ -----------
Total adjustments 5,126,248 1,594,886 1,121,679
------------ ------------ -----------
Net cash provided by operating
activities 20,309,209 12,476,548 9,759,549
Cash flows from investing activities:
Additions to equipment and
leasehold improvements (2,955,196) (4,243,156) (6,376,922)
Proceeds from sale of equipment 233,862 -- --
Purchase of short-term available-
for-sale investments (24,170,831) (15,967,440) (11,859,797)
Proceeds from sale of short-term
available-for-sale investments 25,002,786 11,641,001 10,660,076
Increase in other assets (347,123) (250,000) --
------------ ------------ -----------
Net cash used in investing
activities (2,236,502) (8,819,595) (7,576,643)
Cash flows from financing activities:
Issuance of common stock 919,831 582,846 569,125
Repurchase of common stock (280,000) (3,225,205) (676,206)
------------ ------------ -----------
Net cash provided by (used in)
financing activities 639,831 (2,642,359) (107,081)
Effect of exchange rate changes on
cash 61,440 161,689 28,766
------------ ------------ -----------
Net increase in cash and
cash equivalents 18,773,978 1,176,283 2,104,591
Cash and cash equivalents at
beginning of year 8,598,367 7,422,084 5,317,493
------------ ------------ -----------
Cash and cash equivalents at end
of year $ 27,372,345 $ 8,598,367 $ 7,422,084
============ ============ ===========
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TECHNE CORPORATION AND SUBSIDIARIES
Years Ended June 30, 1998, 1997 and 1996
A. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS: The Company is engaged domestically in the
development and manufacture of biotechnology products and hematology
calibrators and controls through its wholly-owned subsidiary, Research and
Diagnostic Systems, Inc. Through its wholly-owned English subsidiary, R&D
Systems Europe Ltd., the Company distributes biotechnology products
throughout Europe. In fiscal 1996, R&D Systems Europe Ltd. incorporated a
sales subsidiary, R&D Systems GmbH, in Germany. The Company also has a
foreign sales corporation, Techne Export Inc.
ESTIMATES: The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
RISKS AND UNCERTAINTIES: There are no concentrations of business transacted
with a particular customer or supplier nor concentrations of revenue from a
particular product or geographic area that would severely impact the Company
in the near term.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated. The consolidated
financial statements also include the accounts of ChemoCentryx, Inc. (CCX), a
new technology and drug development company, in which the Company made a $2
million investment in convertible preferred stock during fiscal 1998. This
investment represents approximately 28% of issued and outstanding voting
shares of CCX. The Company 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.
REVENUE RECOGNITION: The Company recognizes revenues upon shipment of products.
Revenues are reduced to reflect estimated returns.
RESEARCH AND DEVELOPMENT: Research and development expenditures are expensed
as incurred. Development activities generally relate to creating new products,
improving or creating variations of existing products, or modifying existing
products to meet new applications.
TRANSLATION OF FOREIGN FINANCIAL STATEMENTS: Assets and liabilities of the
Company's foreign operations are translated at year end rates of exchange and
the foreign statements of earnings are translated at the average rate of
exchange for the year. Gains and losses resulting from translating foreign
currency financial statements are not included in operations but are
accumulated in a separate component of stockholders' equity. Foreign currency
transaction gains and losses are included in operations.
SHORT-TERM INVESTMENTS: Short-term investments consist of tax-exempt bonds
with original maturities of generally three months to one year.
The Company reports marketable securities at fair market value. Unrealized
gains and losses on available-for-sale securities are excluded from income,
but are included in a separate component of stockholders' equity. The Company
considers all of its marketable securities available-for-sale. Fair market
values are based on quoted market prices.
Proceeds from sales of available-for-sale securities were $25,002,786,
$11,641,001 and $10,660,076 during fiscal 1998, 1997 and 1996, respectively.
There were no material gross realized gains or losses on these sales. Realized
gains and losses are determined on the specific identification method.
Unrealized gains and losses at June 30, 1998, 1997 and 1996 were not material.
INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out
method) or market.
DEPRECIATION AND AMORTIZATION: Equipment is being depreciated using the
straight-line method over an estimated useful life of five years. Leasehold
improvements are being amortized over estimated useful lives of five to
fifteen years.
INTANGIBLES: Intangible assets, related to the acquisition of Amgen Inc.'s
research reagent and diagnostic kit business in fiscal 1992 and R&D Systems
Europe Ltd. in fiscal 1994 are being amortized on a straight-line basis over
the estimated useful lives and consist of the following:
JUNE 30,
USEFUL LIFE 1998 1997
----------- ---------- ----------
Customer list 3 years $1,010,000 $1,010,000
Technology licensing agreements 16 years 500,000 500,000
Goodwill 6 years 1,225,547 1,225,547
---------- ----------
2,735,547 2,735,547
Less accumulated amortization 2,441,693 2,370,236
---------- ----------
$ 293,854 $ 365,311
========== ==========
IMPAIRMENT OF LONG-LIVED ASSETS: Management periodically reviews the carrying
value of long-term assets based on the estimated undiscounted future cash
flows expected to result from the use of these assets. Should the sum of the
expected future net cash flows be less than the carrying value, an impairment
loss would be recognized. An impairment loss would be measured by the amount
by which the carrying value of the asset exceeds the fair value of the asset
based on discounted estimated future cash flows. To date, management has
determined that no impairment exists.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand and
highly liquid investments with original maturities less than three months.
STOCK OPTIONS: As permitted by Statement of Financial Accounting Standards
(SFAS) No. 123, the Company has elected to continue following the guidance of
Accounting Principles Board (APB) Opinion No. 25 for measurement and
recognition of stock-based transactions with employees. No compensation cost
has been recognized for stock options granted to employees under the plans
because the exercise price of all options granted was at least equal to the
fair value of the common stock at the date of grant.
EARNINGS PER SHARE: During fiscal 1998, the Company adopted SFAS No. 128,
"Earnings per Share." All prior period earnings per share amounts have been
restated to conform to the new standard.
The number of shares used to calculate earnings per share are as follows:
YEAR ENDED JUNE 30,
1998 1997 1996
---------- ---------- ----------
Weighted average common
shares outstanding (Basic) 18,952,968 18,910,608 18,872,806
Dilutive stock options and
warrants outstanding 654,662 551,924 570,044
---------- ---------- ----------
Weighted average common
shares outstanding (Diluted) 19,607,630 19,462,532 19,442,850
========== ========== ==========
RECENT ACCOUNTING STANDARDS: In June 1997, the Financial Accounting Standards
Board (FASB) 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 FASB 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 consolidated financial statements. The Company anticipates the
effect of SFAS No. 130 will result in disclosure of foreign currency
translation adjustments as an element of other comprehensive income.
RECLASSIFICATIONS: Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the current year presentation.
These reclassifications had no impact on net earnings or stockholders' equity
as previously reported.
B. INVENTORIES:
Inventories consist of:
JUNE 30,
1998 1997
---------- ----------
Raw materials $2,125,365 $2,105,836
Finished goods 1,539,696 1,770,742
Work in process -- 89,100
Supplies 145,539 121,483
---------- ----------
$3,810,600 $4,087,161
========== ==========
C. EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements consist of:
JUNE 30,
1998 1997
----------- ----------
Cost:
Leasehold
improvements $10,243,142 $ 9,063,354
Laboratory equipment 9,944,951 9,513,329
Office and computer equipment 2,923,110 2,671,947
----------- -----------
23,111,203 21,248,630
Less accumulated depreciation
and amortization 11,423,903 9,995,889
----------- -----------
$11,687,300 $11,252,741
=========== ===========
D. DEBT:
The Company's short-term line of credit facility consists of an unsecured line
of credit of $750,000 at June 30, 1998. The interest rate charged on the line
of credit is at the prime rate of 8.5% at June 30, 1998. There were no
borrowings on the line in the current year.
E. CONTINGENCIES AND COMMITMENTS:
The Company leases buildings, vehicles and various data processing, office and
laboratory equipment under operating leases. These leases provide for renewal
or purchase options during or at the end of the lease periods. At June 30,
1998, aggregate net minimum rental commitments under noncancelable leases
having an initial or remaining term of more than one year are payable as
follows:
YEAR ENDING JUNE 30:
- --------------------
1999 $ 2,213,872
2000 2,341,679
2001 2,526,672
2002 2,144,408
2003 2,192,739
Thereafter 40,576,069
-----------
$51,995,439
===========
Total rent expense was approximately $2,782,000, $1,893,000 and $1,489,000 for
the years ended June 30, 1998, 1997 and 1996, respectively.
At June 30, 1998, the Company is obligated to purchase up to an additional $3
million of convertible preferred stock of ChemoCentryx Inc. over the next two
years upon CCX's achievement of certain milestones. After purchase of the
additional preferred shares, the Company will own approximately 49% of the
issued and outstanding voting shares (assuming no investment by other
parties).
In fiscal 1994, the Company entered into a four year Joint Biological Research
Agreement with British Bio-technology Group plc. Under the agreement, R&D
Systems Europe Ltd. received the exclusive right to develop, manufacture,
market and sell biomolecules developed by British Bio-technology Group, plc.
or its subsidiaries and any resulting diagnostic kits in the research reagent
and diagnostic markets. In June 1997, the agreement was extended for an
additional five years for 100,000 British pounds per year. Research and
development expenses include $165,000, $1,400,000 and $1,250,000 for the years
ended June 30, 1998, 1997, and 1996, respectively, under this agreement.
The Company is routinely involved in legal actions which are incidental to the
business of the Company. Although it is difficult to predict the ultimate
outcome of these cases, management believes, based on discussions with counsel,
that any ultimate liability will not materially affect the consolidated
financial position or operations of the Company.
F. STOCKHOLDERS EQUITY:
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. All earnings per share and share amounts for the periods
presented have been restated to reflect the stock split.
STOCK OPTION PLANS: The Company has stock option plans which provide for the
granting of stock options to employees (the TECHNE Corporation 1997 and 1987
Incentive Stock Option Plans) and to employees, officers, directors and
consultants (the TECHNE Corporation 1988 Nonqualified Stock Option Plan). The
plans are administered by the Board of Directors, or a committee designated by
the Board, which determines the persons who are to receive awards under the
plans, the number of shares subject to each award and the term and exercise
price of each option. The maximum term of options granted under all plans is
ten years. The number of shares of common stock authorized to be issued are
600,000, 1,600,000 and 1,000,000 under the TECHNE Corporation 1997 Incentive
Stock Option Plan, the TECHNE Corporation 1987 Incentive Stock Option Plan
and the TECHNE Corporation 1988 Nonqualified Stock Option Plan, respectively.
Stock option activity during the three years ended June 30, 1998 consists of
the following:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Outstanding at June 30, 1995 1,105,628 $ 4.91
Granted 439,000 7.88
Exercised (479,378) 4.22
--------- -------
Outstanding at June 30, 1996 1,065,250 6.44
Granted 453,552 11.63
Exercised (91,000) 6.40
Canceled (142,000) 6.66
--------- -------
Outstanding at June 30, 1997 1,285,802 8.25
Granted 181,984 16.26
Exercised (153,376) 8.35
Canceled (59,352) 12.91
--------- -------
Outstanding at June 30, 1998 1,255,058 $ 9.42
========= =======
Options exercisable at June 30:
1996 484,554 $ 5.55
1997 724,502 6.89
1998 956,058 9.04
Currently outstanding and exercisable stock options at June 30, 1998 consist
of the following:
OPTIONS OUTSTANDING
------------------------------------------------
WEIGHTED AVG.
CONTRACTUAL WEIGHTED AVG.
EXERCISE PRICES OUTSTANDING LIFE (YRS.) EXERCISE PRICE
- ----------------- ------------- -------------- ---------------
$ 3.50- 9.99 744,724 4.42 $ 6.48
10.00-14.99 354,334 6.83 11.67
15.00-19.99 156,000 8.33 18.40
-------
1,255,058 5.57 $ 9.42
========= ==== ======
OPTIONS EXERCISABLE
-------------------------------
WEIGHTED AVG.
EXERCISE PRICES EXERCISABLE EXERCISE PRICE
- --------------- ------------- ---------------
$ 3.50- 9.99 552,724 $ 5.74
10.00-14.99 303,334 11.57
15.00-19.99 100,000 19.56
-------
956,058 $ 9.04
======= ======
Total compensation cost recognized for the years ended June 30, 1998 and 1997
for stock options granted to consultants was $34,000 and $169,000,
respectively. If compensation cost for employee options granted in 1998, 1997
and 1996 under the Company's stock option plans had been determined based on
the fair value at the grant dates, consistent with the methods provided in
SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and earnings per share would have been as follows:
YEAR ENDED JUNE 30,
1998 1997 1996
----------- ----------- -----------
Net income:
As reported $15,182,961 $10,881,662 $ 8,637,870
Pro forma 13,464,290 8,764,829 7,836,675
Basic earnings per share:
As reported $ 0.80 $ 0.58 $ 0.46
Pro forma 0.71 0.46 0.42
Diluted earnings per share:
As reported $ 0.77 $ 0.56 $ 0.44
Pro forma 0.69 0.45 0.40
The fair value of options granted under the Company's stock option plans
during 1998, 1997 and 1996 was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used: no
dividend yield, expected volatility of between 35% and 45%, risk-free interest
rates between 5.7% and 6.9% and expected lives between 7 and 10 years.
WARRANT: In fiscal 1994, the Company issued a warrant, expiring in July 1998,
to purchase 100,000 shares of the Company's common stock at $6.88 as part of
the acquisition of R&D Systems Europe Ltd. The warrant was exercised in 1998
in a cashless exercise which resulted in the issurance of 61,775 shares of
common stock.
G. CUSTOMERS:
No customer accounted for more than 10% of the Company's revenues for the years
ended June 30, 1998, 1997 and 1996.
H. INCOME TAXES:
The provisions for income taxes consist of the following:
YEAR ENDED JUNE 30,
1998 1997 1996
----------- ----------- -----------
Earnings before income
taxes consist of:
Domestic $19,101,460 $14,731,035 $11,664,658
Foreign 3,309,501 1,256,627 927,212
----------- ----------- -----------
$22,410,961 $15,987,662 $12,591,870
=========== =========== ===========
Taxes on income consist of:
Currently payable:
Federal $ 6,280,000 $ 4,584,000 $ 2,922,000
State 255,000 65,000 217,000
Foreign 903,000 1,020,000 906,000
Tax benefit from exercise
of stock options 146,000 151,000 883,000
Net deferred (356,000) (714,000) (974,000)
----------- ----------- -----------
$ 7,228,000 $ 5,106,000 $ 3,954,000
=========== =========== ===========
The following is a reconciliation of the federal tax calculated at the
statutory rate of 35% to the actual income taxes provided:
YEAR ENDED JUNE 30,
1998 1997 1996
----------- ----------- -----------
Computed expected federal
income tax expense $ 7,844,000 $ 5,596,000 $ 4,407,000
State income taxes, net of
federal benefit 270,000 223,000 263,000
Foreign sales corporation (317,000) (318,000) (288,000)
Research and development
credits (376,000) (317,000) (70,000)
Tax exempt interest (288,000) (186,000) (150,000)
Graduated income tax rate (100,000) (113,000) (126,000)
Other 195,000 221,000 (82,000)
----------- ----------- -----------
$ 7,228,000 $ 5,106,000 $ 3,954,000
=========== =========== ===========
Deferred income taxes are provided to record the income tax effect of
temporary differences between the tax basis and financial reporting basis of
assets and liabilities. Temporary differences comprising deferred taxes on
the consolidated balance sheets are as follows:
JUNE 30,
1998 1997
---------- ----------
Inventory reserves $ 654,000 $ 501,000
Inventory costs capitalized 455,000 385,000
Foreign net operating loss carryforward 167,000 167,000
Unrealized profit on intercompany sales 158,000 193,000
Other 149,000 76,000
---------- ----------
Current asset 1,583,000 1,322,000
Excess of book over tax intangible
asset amortization 414,000 439,000
Excess of book over tax research expense 666,000 907,000
Deferred rent 579,000 320,000
Other 139,000 37,000
---------- ----------
Noncurrent asset 1,798,000 1,703,000
---------- ----------
$3,381,000 $3,025,000
========== ==========
At June 30, 1998, approximately $500,000 of non-U.S. tax losses were available
for carryforward indefinitely.
The Company's tax returns are subject to audit by various governmental
entities in the normal course of business. The Company does not believe that
such audits will have a material impact on the Company's financial position
or results of operations.
I. FOREIGN OPERATIONS AND EXPORT SALES:
Net sales of the Company's foreign subsidiaries are primarily made to
unaffiliated customers in Europe. The consolidated financial statements
include amounts for the Company's foreign subsidiaries as of and for the years
ended June 30 as follows:
1998 1997 1996
----------- ----------- -----------
Net sales $17,793,598 $18,914,942 $16,359,028
Net income 2,165,501 774,627 557,212
Total assets 8,616,407 7,162,322 6,011,726
Net assets 6,520,264 4,306,065 3,188,114
Capital expenditures 193,070 173,359 635,290
Depreciation expense 342,140 406,441 315,800
Export sales consist of the following:
YEAR ENDED JUNE 30,
1998 1997 1996
---------- ---------- ----------
Europe $3,746,239 $2,542,588 $3,009,550
Asia 3,507,470 3,184,624 2,807,082
Canada 1,258,569 1,000,654 935,327
Other 940,281 598,826 482,151
---------- ---------- ----------
$9,452,559 $7,326,692 $7,234,110
========== ========== ==========
J. BENEFIT PLANS:
PROFIT SHARING PLAN: The Company has a Profit Sharing and Savings Plan for
non-union U.S. employees, which conforms to IRS provisions for 401(k) plans.
The Company may make profit sharing contributions at the discretion of the
Board of Directors. Operations have been charged for contributions to the plan
of $574,500, $525,500 and $485,000 for the years ended June 30, 1998, 1997 and
1996, respectively.
STOCK BONUS PLANS: The Company also has Stock Bonus Plans covering non-union
employees. The Company may make contributions to the plans in the form of
common stock, cash or other property at the discretion of the Board of
Directors. Operations have been charged for contributions to the plans of
$595,000, $525,500 and $485,000 for the years ended June 30, 1998, 1997 and
1996, respectively.
PERFORMANCE INCENTIVE PROGRAM: Under certain employment agreements with
executive officers, the Company recorded bonuses of $109,000, $90,500 and
$106,000 for the years ended June 30, 1998, 1997 and 1996, respectively. In
addition, options for 5,984, 7,252 and 394,000 shares of common stock were
granted to the executive officers during fiscal 1998, 1997 and 1996,
respectively.
K. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
The Company paid and received cash for the following items:
YEAR ENDED JUNE 30,
1998 1997 1996
---------- ---------- ----------
Income taxes paid $6,602,926 $5,388,789 $3,888,409
Interest paid -- 29,357 2,242
Interest received 1,431,305 781,886 665,214
Noncash transactions during the years ended June 30, 1998, 1997 and 1996
consisted of:
In 1998 and 1997, stock options with fair values of $200,500 and $471,500 were
granted to consultants for services to be provided to the Company. At June 30,
1997 deferred compensation of $302,500 related to the grants was included in
other long-term assets. In 1998, the Company canceled all non-vested stock
options granted to consultants.
In 1998, stock options for 55,835 shares of common stock were exercised by
surrender of 20,624 shares of common stock at fair market value of $360,194.
In 1996, stock options for 289,378 shares of common stock were exercised by
surrender of 118,614 shares of common stock at fair market value of
$1,451,856.
L. SUBSEQUENT EVENT:
On July 1, 1998, the Company, through its Research and Diagnostic Systems,
Inc. subsidiary, acquired the research products business of Genzyme
Corporation. The acquisition will be accounted for under the purchase method.
Assets acquired were as follows:
Inventories $ 5,660,000
Equipment 320,000
Customer list 17,000,000
-----------
$22,980,000
===========
In consideration for the acquisition, the Company paid $24.76 million cash,
issued to Genzyme Corporation 987,206 shares of common stock valued at $17
million and will pay royalties for 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 of approximately $37.6 million will
be recorded as goodwill and will be amortized on a straight-line basis over
six years.
Sales by Genzyme Corporation's research products business were $14,574,000 for
the year ended December 31, 1997.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
TECHNE Corporation
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of TECHNE
Corporation and subsidiaries as of June 30, 1998 and 1997, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of TECHNE Corporation and
subsidiaries at June 30, 1998 and 1997 and the results of their operations and
cash flows for each of the three years in the period ended June 30, 1998, in
conformity with generally accepted accounting principles.
Deloitte & Touce LLP
Minneapolis, Minnesota
August 19, 1998
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Other than "Executive Officers of the Company" which is set forth at the
end of Part I of this Form 10-K, the information required by Item 10 is
incorporated herein by reference to the sections entitled "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Company's proxy statement for its 1998 Annual Meeting of Shareholders
which will be filed with the Securities and Exchange Commission pursuant to
Regulation 14A within 120 days after the close of the fiscal year for which
this report is filed.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to
the section entitled "Executive Compensation" in the Company's proxy
statement for its 1998 Annual Meeting of Shareholders which will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the close of the fiscal year for which this report is
filed.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
sections entitled "Principal Shareholders" and "Management Shareholdings"
in the Company's proxy statement for its 1998 Annual Meeting of
Shareholders which will be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the close of
the fiscal year for which this report is filed.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.
A. (1) List of Financial Statements.
The following Consolidated Financial Statements are filed as part of
this Report:
Consolidated Statements of Earnings for the Years Ended
June 30, 1998, 1997 and 1996
Consolidated Balance Sheets as of June 30, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements for the Years
Ended June 30, 1998, 1997 and 1996
Independent Auditors' Report on Consolidated Financial Statements
(2) Financial Statement Schedules.
None.
(3) Exhibits.
See Exhibit Index immediately following signature page.
B. Reports on Form 8-K:
No report on Form 8-K was filed during the quarter ended June 30,
1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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
Date: September 14, 1998 Thomas E. Oland
---------------------
By: Thomas E. Oland
Its: President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Date Signature and Title
- ---- -------------------
September 14, 1998 Thomas E. Oland
---------------------
Thomas E. Oland
President, Treasurer and Director
(principal executive officer and
principal financial and accounting
officer)
September 14, 1998 Roger C. Lucas
---------------------
Dr. Roger C. Lucas, Director
September 14, 1998 Howard V. O'Connell
---------------------
Howard V. O'Connell, Director
September 14, 1998 G. Arthur Herbert
---------------------
G. Arthur Herbert, Director
September 14, 1998 Randolph C. Steer
---------------------
Dr. Randolph C. Steer, Director
September 14, 1998 Lowell E. Sears
---------------------
Lowell E. Sears, Director
September 14, 1998 Christopher S. Henney
---------------------
Dr. Christopher S. Henney, Director
EXHIBIT INDEX
for Form 10-K for the 1998 Fiscal Year
Exhibit
Number Description
- -------- -----------
3.1 Restated Articles of Incorporation of Company, as amended to
date--incorporated by reference to Exhibit 19.1 of the
Company's Form 10-Q for the quarter ended September 30, 1991*
3.2 Restated Bylaws, as amended to date--incorporated by reference
to Exhibit 3.2 of the Company's Form 10, dated October 27,
1988*
10.1 Employee Agreement with Respect to Inventions, Proprietary
Information, and Unfair Competition with Thomas E. Oland
--incorporated by reference to Exhibit 10.2 of the Company's
Form 10, dated October 27, 1988*
10.2** Company's Profit Sharing Plan--incorporated by reference to
Exhibit 10.6 of the Company's Form 10, dated October 27, 1988*
10.3** Company's Stock Bonus Plan--incorporated by reference to
Exhibit 10.7 of the Company's Form 10, dated October 27, 1988*
10.4** 1987 Incentive Stock Option Plan--incorporated by reference to
Exhibit 10.14 of the Company's Form 10, dated October 27, 1988*
10.5 Form of Stock Option Agreement for 1987 Incentive Stock
Option Plan--incorporated by reference to Exhibit 10.15 of the
Company's Form 10, dated October 27, 1988*
10.6** 1988 Nonqualified Stock Option Plan--incorporated by reference
to Exhibit 10.16 of the Company's Form 10, dated October 27,
1988*
10.7 Form of Stock Option Agreement for Nonqualified Stock Option
Plan--incorporated by reference to Exhibit 10.17 of the
Company's Form 10, dated October 27, 1988*
10.8 International Distributor Agreement dated October 1, 1991
between Research and Diagnostic Systems, Inc. and Hycel, S.A.
--incorporated by reference to Exhibit 28.2 of the Company's
Form 8-K dated September 30, 1991, as amended by Forms 8
dated November 1, 1991 and November 25, 1991*
10.9 Lease between The Craig Lyle Limited Partnership and R & D
Systems, Inc.--incorporated by reference to Exhibit 10.29 of the
Company's Form 10-K for the year ended June 30, 1992*
10.10 Stock Purchase Agreement dated July 30, 1993 between the
Company and British Bio-technology Group plc--incorporated by
reference to Exhibit 1 of the Company's Form 8-K dated August
11, 1993*
10.11 Joint Biological Research Agreement dated July 30, 1993 between
the Company and British Bio-technology Group plc--incorporated
by reference to Exhibit 2 of the Company's Form 8-K dated
August 11, 1993*
10.12 Stock Purchase Warrant dated July 30, 1993 for 50,000 shares of
the Company's Common Stock--incorporated by reference to
Exhibit 3 of the Company's Form 8-K dated August 11, 1993*
10.13 Non-Enforcement of Patent Rights dated March 15, 1995 by New
England Medical Center Hospitals, Inc., Tufts University,
Massachusetts Institute of Technology and Wellesley College in
favor of R & D Systems, Inc.--incorporated by reference to
Exhibit 10.2 of the Company's Form 10-Q for the Quarter ended
March 31, 1995*
10.14 Non-Enforcement of Patent Rights dated March 21, 1995 by
Cistron Biotechnology, Inc. ("Cistron") in favor of R & D
Systems, Inc.--incorporated by reference to Exhibit 10.3 of the
Company's Form 10-Q for the Quarter ended March 31, 1995*
10.15 License and Supply Agreement dated March 21, 1995 between
Cistron and R & D Systems--incorporated by reference to Exhibit
10.4 of the Company's Form 10-Q for the Quarter ended March
31, 1995*
10.16 Research and Development Agreement dated April 10, 1995
between Cistron and R & D Systems, Inc.--incorporated by
reference to Exhibit 10.4 of the Company's Form 10-Q for the
Quarter ended March 31, 1995*
10.17 Agreement, dated October 27, 1995 for the first amendment to a
lease agreement between Craig Lyle Limited Partnership (Hillcrest
Development) and R&D Systems, Inc.--incorporated by reference
to Exhibit 10.1 of the Company's Form 10-Q for the quarter
ended September 30, 1995*
10.18 Agreement, dated July 3, 1996 for the second amendment to a
lease agreement between Hillcrest Development and R&D
Systems, Inc.--incorporated by reference to Exhibit 10.23 of the
Company's Form 10-K for the year ended June 30, 1996*
10.19** Employment Agreement, dated March 6, 1996, with James A.
Weatherbee--incorporated by reference to Exhibit 10.24 of the
Company's Form 10-K for the year ended June 30, 1996*
10.20** Employment Agreement, dated March 6, 1996, with Monica
Tsang--incorporated by reference to Exhibit 10.25 of the
Company's Form 10-K for the year ended June 30, 1996*
10.21** Employment Agreement, dated December 28, 1995, with
Thomas Detwiler--incorporated by reference to Exhibit 10.26 of
the Company's Form 10-K for the year ended June 30, 1996*
10.22 Agreement, dated December 19, 1996 for the third amendment to a
lease agreement between Hillcrest Development and R&D Systems,
Inc.--incorporated by reference to Exhibit 10.1 of the Company's
Form 10-Q for the quarter ended December 31, 1996*
10.23** 1997 Incentive Stock Option Plan--incorporated by reference to
Exhibit 10.24 of the Company's Form 10-K for the year ended June
30, 1997*
10.24** Form of Stock Option Agreement for 1997 Incentive Stock Option
Plan--incorporated by reference to Exhibit 10.25 of the Company's
Form 10-K for the year ended June 30, 1997*
10.25 Investment Agreement between ChemoCentryx, Inc. and Techne
Corporation dated November 18, 1997--incorporated by reference
to Exhibit 10.1 of the Company's Form 10-Q for the quarter ended
December 31, 1997*
10.26 Purchase and Sale Agreement dated as of June 22, 1998 among Techne
Corporation, Research and Diagnostic Systems, Inc. and Genzyme
Corporation--incorporated by reference to Exhibit 2.1 of the
Company's Form 8-K dated July 1, 1998, as amended by Form 8-K/A
dated September 14, 1998*
11 Calculation of Earnings Per Share
21 Subsidiaries of the Company:
State/Country of
Name Incorporation
---- ----------------
Research and Diagnostic Systems, Inc. Minnesota
Techne Export Inc. Barbados
R&D Systems Europe Ltd. Great Britain
R&D Systems GmbH Germany
23 Independent Auditors' Consent
27 Financial Data Schedule