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, 2002
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. ( )
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant, based upon the closing sale price on September 13, 2002 as
reported on The Nasdaq Stock Market was approximately $1,205,801,000. 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 13, 2002:
41,326,936
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for its 2002 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 operating segments 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 (cytokines) and antibodies 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. R&D Europe has a German sales
subsidiary, R&D Systems GmbH (R&D GmbH). The Company also had a foreign
sales corporation, Techne Export Inc., which was dissolved in fiscal 2002.
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 research reagent market with its first
cytokine, TGF-beta. 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.
In fiscal 1992, 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 enzyme-linked
immunosorbent assay kit for a cytokine that had been cleared by the U.S. Food
and Drug Administration (FDA) for clinical diagnostic use.
In fiscal 1994, 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 and manufactured by R&D Systems.
During fiscal 1998, 1999, and 2000, the Company made equity investments in
the preferred stock of ChemoCentryx, Inc. (CCX), a technology and drug
development company. The Company currently holds approximately 26% of the
outstanding stock of 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.
In fiscal 1999, R&D Systems purchased Genzyme Corporation's research products
business. This acquisition established R&D Systems as the world's leading
supplier of research and diagnostic cytokine products.
In fiscal 2002, the Company made an equity investment of $3 million and
entered into a research and license agreement with Discovery Genomics, Inc.
(DGI). DGI holds licenses from the University of Minnesota to develop
technologies used for functional genomics and the discovery of druggable
targets. The Company currently holds a 39% equity interest in DGI and also
received the rights to develop antibodies and immunoassay kits for proteins
discovered by DGI and the rights to sell such products to the research
market.
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 2002, R&D Systems'
Hematology Division revenues accounted for approximately 12% of consolidated
revenues of $130,900,395. Revenues from R&D Systems' Biotechnology Division
and R&D Europe were 65% and 23% 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 almost all 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. R&D Systems believes that
its cytokines are addressing the 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 and has subsequently released kits for other animal models,
including rat and pig. 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 immortalized mouse
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, murine (mouse
and rat) and porcine (pig) 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 received 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. Red cells 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 stem blood flow at the site of an injury by initiating a
complex series of biochemical reactions that lead to the formation of a clot.
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 and
constitute 95 percent of all blood cells. The average adult has from 20 to
30 trillion red cells. For every 500 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. One of the most
frequently performed laboratory tests 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 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: Abbott Cell-Dyn, ABX, Beckman
Coulter, Danam, Hycel, Roche and TOA Sysmex instruments.
Laser-Type Whole Blood Controls/Calibrators. Currently produced controls
and calibrators for laser-type instruments include products for the
following: Beckman Coulter MAXM, STKS and GENS; Abbott Cell-Dyn 3000,
3200, 3500 and 4000 instruments; ABX instruments; Bayer Technicon ADVIA
and H series 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.
Whole Blood Glucose/Hemoglobin Control. This product is designed to
monitor instruments for measuring glucose and hemaglobin.
Erythrocyte Sedimentation Rate Control. This product is designed to
monitor erythrocyte sedimentation rate tests.
Multi-Purpose Platelet Reference Control. This product, Platelet-Trol(r)
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 2002 and is continuously working on product
improvements and enhancements. However, 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 $17,470,267,
$14,522,233 and $11,198,309 for fiscal year 2002, 2001 and 2000,
respectively.
BUSINESS RELATIONSHIPS
During fiscal 1998, 1999, and 2000, the Company purchased a total of $5
million of convertible preferred stock of ChemoCentryx, Inc. (CCX), which
gave the Company a 49% interest in CCX through January 2001. In February
2001, CCX obtained $23 million in financing through the issuance of 8,846,154
shares of additional preferred stock. The Company currently holds
approximately 26% of the outstanding voting stock of CCX. CCX is a
technology and drug development company working in the area of chemokines.
Chemokines are cytokines which regulate the trafficking patterns of
leukocytes, the effector cells of the human immune system. In conjunction
with the equity investment and joint research efforts, the Company obtained
exclusive worldwide research and diagnostic marketing rights to chemokine
proteins, antibodies and receptors discovered or developed by CCX or R&D
Systems. The Company accounts for the investment under the equity method of
accounting and, through January 2001, recognized 100% of the losses of CCX
due to the limited amount of cash consideration provided by the holders of
the common shares of CCX. Subsequent to January 2001, the Company is
including CCX operating results in its consolidated financial statements
based on its ownership percentage. The Company's net investment in CCX was
$5,091,046 and $6,441,481 at June 30, 2002 and 2001, respectively.
On August 2, 2001, the Company made an equity investment of $3 million and
entered into a research and license agreement with Discovery Genomics, Inc.
(DGI) of Minneapolis, Minnesota. DGI holds licenses from the University of
Minnesota to develop technologies used for functional genomics and the
discovery of druggable targets. The Company acquired a 39% equity interest
in DGI and warrants to acquire additional equity. The Company also received
the rights to develop antibodies and immunoassay kits for proteins discovered
by DGI and an exclusive, royalty free license to sell such products in the
research market. The Company's investment is accounted for under the equity
method of accounting. The Company's net investment in DGI was $2,494,985 at
June 30, 2002.
Original Equipment Manufacturers (OEM) agreements represent the largest
market for hematology controls and calibrators made by R&D Systems. In
fiscal 2002, OEM contracts accounted for $7,609,435 or 49% of Hematology
Division revenues and 6% 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 FDA. 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.
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 (NRC) and has been granted an NRC license due to expire
in April 2003. 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, 2003. R&D
Systems has had no difficulties in renewing these licenses in prior years and
has no reason to believe they will not 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,
the higher cost of these materials has not had a serious adverse effect on
the Company's business. R&D Systems does not perform its own testing for the
AIDS antibodies as the supplier tests all human blood purchased. 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. 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. R&D Systems 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 2002, total
royalties expensed under these licenses were approximately $2,143,000.
R&D Systems has obtained federal trademark registration for certain of its
hematology controls and biotechnology product groups. R&D Systems believes
it has common law trademark rights to certain marks in addition to those
which it has registered.
SEASONALITY OF BUSINESS
Sales of the products manufactured by R&D Systems and R&D Europe,
particularly R&D Europe, historically experience a slowing of sales or of the
rate of sales growth during the summer months. The Company believes this
slowing is a result of vacation schedules in Europe and Japan and of academic
schedules in the United States.
SIGNIFICANT CUSTOMERS
No single customer accounted for more than 10% of total revenues during
fiscal 2002, 2001 or 2000.
BACKLOG
There was no significant backlog of orders for the Company's products as of
the date of this report or as of a comparable date for fiscal 2001.
COMPETITION
The worldwide market for cytokines and research diagnostic assay kits is
being supplied by a number of biotechnology companies, including BD
Biosciences, BioSource International, PeproTech, Inc., 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 the growing demand for these rare and versatile
proteins, antibodies and assay kits, will allow the Company to remain
competitive 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. Historically, most of the instrument manufacturing companies made
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., TOA Sysmex, 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 460 full-time and 48 part-time employees as of June 30, 2002.
R&D Europe had 49 full-time and 9 part-time employees as of June 30, 2002,
including 10 full-time and 1 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 2002.
FOREIGN AND DOMESTIC OPERATIONS
The following table represents certain financial information relating to
foreign and domestic operations for the fiscal years ended June 30 (all
amounts are in thousands of US dollars):
2002 2001 2000
-------- -------- --------
Net Sales to External Customers
Hematology Division:
US $ 13,101 $ 12,357 $ 11,140
Other 2,470 2,353 2,435
Biotechnology Division:
US 67,856 58,661 51,788
Other 16,798 14,995 12,443
R&D Europe:
Other 30,675 26,990 26,032
Gross Margin
R&D Systems (US) 87,558 76,578 66,125
R&D Europe (England) 9,178 8,731 9,373
R&D GmbH (Germany) 1,657 1,623 1,590
Net Earnings (Loss)
Parent and R&D Systems (US) 24,436 31,006 22,418
R&D Europe (England) 4,324 3,310 3,269
R&D GmbH (Germany) 225 229 253
ChemoCentryx (US) (1,350) (500) 643
Discovery Genomics (US) (505) -- --
Identifiable Assets
Parent and R&D Systems (US) 214,606 197,743 165,834
R&D Europe (England) 22,594 17,029 13,546
R&D GmbH (Germany) 1,047 753 1,030
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 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 affected. During the early
development stage, under the equity method of accounting, a percentage of the
losses of certain companies in which the Company may invest will be reported
as losses of the Company, as is the case with ChemoCentryx, Inc. and
Discovery Genomics, Inc.
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. Some of the Company's products and manufacturing
processes and facilities require governmental 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
On July 1, 1999, the Company purchased, for approximately $28 million, the
facilities R&D Systems had been leasing in Minneapolis, Minnesota. The R&D
Systems complex currently includes 365,000 square feet of administrative,
research and manufacturing space. The Hematology Division manufacturing and
shipping operations are located at 640 McKinley Place N.E. (47,000 square
feet). Biotechnology Division manufacturing and research operations are
located at 600 McKinley Place NE (85,000 square feet) and 2201 Kennedy Street
(200,000 square feet). Administrative, sales and marketing functions are also
located at the 2201 Kennedy Street building. The Company also occupies an
additional 20,000 square feet in space connecting the three buildings. This
area houses a lunchroom, a library and warehouse space. In addition, the
Company constructed a 13,000 square foot entrance to the facility.
On March 15, 2002, the Company purchased property adjacent to its Minneapolis
facility for approximately $8.9 million. The Company has begun to renovate
this property and, when complete in late fiscal 2003, the building will add
approximately 176,000 square feet of space. The Company plans to lease out
approximately 70% of the building as retail and office space and use the
remainder as warehouse and storage space. The Company has begun construction
on an infill to connect this building to its current facility. The 78,000
square foot infill, expected to be completed in late fiscal 2002, will be
used primarily for laboratory space.
The Company has entered into an option agreement for additional real estate
adjacent to the current facility. This option is exerciable through January
2005.
R&D Europe leases approximately 17,000 square feet in a building in Abingdon,
England. Base rent was $267,000 in fiscal 2002.
R&D GmbH leases approximately 2,300 square feet as a sales office in
Wiesbaden-Nordenstadt, Germany. Base rent was $28,000 in fiscal 2002.
The Company believes the acquired property, purchase option and leased
property discussed above are adequate to meet its occupancy needs in the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On September 19, 2000, the Company brought a declaratory judgement action in
United States District Court for the District of Minnesota (the Court)
seeking to have the Court declare that no amount is owed by the Company to
Amgen, Inc. (Amgen) in connection with invoices in the amount of $31.9
million rendered by Amgen in June 2000 for materials provided to the Company
in past years. The Company also claimed damages for breach of contract and
unfair business practices in violation of applicable statutes. Amgen
subsequently acknowledged error and reduced the amount of its invoices by
$3.9 million to $28 million. Amgen filed a counterclaim seeking the $28
million plus interest and attorneys fees. On May 30, 2002, the parties
agreed to a $17.5 million full, complete and final cash settlement of the
dispute. The settlement was paid prior to June 30, 2002.
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 2002 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 61 Chairman of the Board, President, 1985
Treasurer, Chief Executive and
Chief Financial and Accounting
Officer and Director
Dr. Monica Tsang 57 Vice President, Research 1995
Marcel Veronneau 47 Vice President, Hematology Operations 1995
Timothy M. Heaney 56 Vice President, Secretary, General 1999
Counsel and Director
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.
(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, Treasurer, Chief
Executive and Chief Financial and Accounting Officer of the Company since
December 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.
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.
Timothy M. Heaney was elected a Vice President of the Company in October
1999. Prior thereto, he was a partner at Fredrikson and Byron, P.A., the
Company's outside legal counsel and had served as the managing partner on the
Company's account.
An additional officer, Dr. James A. Weatherbee, who served as Vice President
and Chief Scientific Officer since 1995, is on medical leave. Dr. Weatherbee
and Dr. Tsang are husband and wife.
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 Exchange 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.
Fiscal 2002 Price Fiscal 2001 Price
High Low High Low
----------- ----------- ----------- -----------
1st Quarter $ 35.49 $ 25.90 $ 74.00 $ 36.50
2nd Quarter 36.85 27.91 62.66 32.00
3rd Quarter 37.05 27.02 33.69 22.50
4th Quarter 32.72 25.30 38.41 24.81
As of September 13, 2002, there were approximately 300 shareholders of
record. As of September 13, 2002, there were over 22,000 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 2002 2001 2000 1999 (1) 1998
- ----------------------------- -------- -------- -------- -------- --------
Net sales $130,900 $115,357 $103,838 $ 90,901 $ 67,291
Gross margin 75.2% 75.4% 74.2% 69.9% 70.3%
Selling, general and
administrative expenses 14.9% 15.4% 16.7% 18.6% 22.8%
Research and development
expenses 13.3% 12.6% 10.8% 13.2% 15.8%
Interest expense 1,320 1,381 1,441 -- --
Earnings before income
taxes(2) 37,736 47,808 39,412 26,054 22,411
Net earnings(2) 27,130 34,045 26,583 16,656 15,183
Diluted earnings per share(2) 0.64 0.80 0.63 0.40 0.39
Capital expenditures 22,276 6,815 30,368 5,564 2,780
Depreciation and amortization 12,688 12,737 12,651 11,890 2,303
Change in net working capital 6,148 34,560 36,352 (12,544) 15,033
Net cash provided by
operating activities(2) 27,667 46,372 38,739 28,422 20,875
Return on sales(2) 20.7% 29.5% 25.6% 18.3% 22.6%
Return on average equity(2) 14.1% 21.4% 22.3% 20.7% 27.1%
BALANCE SHEET, COMMON STOCK
AND EMPLOYEE DATA AS OF
JUNE 30 2002 2001 2000 1999 (1) 1998
- ----------------------------- -------- -------- -------- -------- --------
Cash, cash equivalents and
short-term available-for-
sale investments $ 97,064 $ 97,072 $ 59,824 $ 29,114 $ 41,436
Receivables 19,414 18,322 15,601 13,520 10,002
Inventories 6,077 5,438 4,652 5,715 3,811
Working capital 114,448 108,300 73,740 37,388 49,932
Total assets 238,247 215,525 180,410 123,801 72,785
Long-term debt, less
current portion 17,101 18,050 18,935 -- --
Stockholders' equity 206,517 177,660 141,145 96,838 63,831
Average common and common
equivalent shares
(in thousands) 42,523 42,668 42,206 41,373 39,215
Book value per share(3) 4.97 4.29 3.41 2.41 1.67
Share price:
High 37.05 74.00 70.00 14.75 10.00
Low 25.30 22.50 12.38 6.13 6.72
Price to earnings ratio 44 41 103 31 25
Current ratio 8.82 7.81 6.87 3.78 7.84
Quick ratio 7.96 7.26 6.00 3.17 7.05
Full-time employees 509 494 440 402 356
(1) The Company acquired the research products business of Genzyme Corporation
on July 1, 1998.
(2) Fiscal 2002 results include a $17,500,000 before tax charge ($11,375,000
after tax and $.27 diluted earnings per share) for settlement of
litigation with Amgen, Inc.
(3) Total stockholders' equity divided by total shares outstanding at June 30.
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 Corporation (the Company) has two operating subsidiaries: Research and
Diagnostic Systems, Inc. (R&D Systems) and R&D Systems Europe Ltd. (R&D
Europe). R&D Systems, located in Minneapolis, Minnesota, has two operating
segments: its Biotechnology Division and its Hematology Division. 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, the Company's third operating segment, located in
Abingdon, England, is the European distributor of R&D Systems' biotechnology
products. R&D Europe has a German sales subsidiary, R&D Systems GmbH. The
Company also had a foreign sales corporation, Techne Export Inc., which was
dissolved in fiscal 2002.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of the Company's financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On an ongoing
basis, management evaluates its estimates. Management bases its estimates on
historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The Company has identified the policies outlined below as critical to its
business operations and an understanding of results of operations. The
listing is not intended to be a comprehensive list of all accounting
policies.
Valuation of accounts receivable
The Company performs ongoing credit evaluations of its customers and adjusts
credit limits based upon payment history and the customers' current
creditworthiness, as determined by management's review of their current
credit information. The Company continuously monitors collections and
payments from its customers and maintains a provision for estimated credit
losses based upon the Company's historical experience and any specific
customer collection issues that have been identified. While such credit
losses have historically been within the Company's general expectations and
the provisions established, the Company cannot guarantee that it will
continue to experience the same credit loss rates that have occurred in the
past.
Valuation of inventory
Inventories are valued at the lower of cost (first-in, first-out method) or
market. The Company regularly reviews inventories on hand and records a
provision for slow-moving and obsolete inventory, inventory not meeting
quality control standards and inventory subject to expiration. The provision
for slow-moving and obsolete inventory is based on current estimates of
future product demand, market conditions and related management initiatives.
Any significant unanticipated changes in product demand or market conditions
could have an impact on the value of inventories.
Income taxes
The Company operates within multiple taxing jurisdictions and is subject to
audit in these jurisdictions. These audits can involve complex issues, which
may require an extended period of time to resolve. In management's opinion,
adequate provisions for income taxes have been made for all years presented.
Assessment of claims or pending litigation
The Company is routinely subject to claims and involved in legal actions
which are incidental to the business of the Company. The ultimate outcomes of
these matters, by their nature, are difficult to predict. Accordingly,
management may be unable to make a reasonable estimate of the liabilities
that could result from unfavorable outcomes of any asserted claims or pending
litigation. As additional information becomes available, the Company will
assess the potential liabilities related to claims or pending litigation and
revise estimates as needed. Such revisions could materially impact the
Company's consolidated financial position or results of operations.
RESULTS OF OPERATIONS
Net sales for fiscal 2002 were $130,900,395, an increase of $15,543,833 (13%)
from fiscal 2001. Net sales by R&D Systems' Biotechnology Division for the
period increased $10,998,256 (15%). Net sales by R&D Systems' Hematology
Division increased $860,192 (6%) and net sales by R&D Europe increased
$3,685,385 (14%). The increase in consolidated net sales for the fiscal year
was due largely to increased sales of proteins and antibodies.
Net sales for fiscal 2001 were $115,356,562, an increase of $11,518,407 (11%)
from fiscal 2000. Net sales by R&D Systems' Biotechnology Division for the
period increased $9,426,085 (15%). Net sales by R&D Systems' Hematology
Division increased $1,135,001 (8%) and net sales by R&D Europe increased
$957,321 (4%). The increase in consolidated net sales for the fiscal year was
due largely to increased sales of proteins and antibodies. R&D Europe's net
sales for fiscal 2001 were affected by changes in foreign currency exchange
rates. In British pounds, R&D Europe's net sales increased 14% from the prior
year and, adjusted for all changes in exchange rates, R&D Europe's net sales
for fiscal 2001 would have been approximately $2.9 million higher than
reported.
Net sales for fiscal 2000 were $103,838,155, an increase of $12,937,458 (14%)
from fiscal 1999. Net sales by R&D Systems' Biotechnology Division for the
period increased $9,269,504 (17%). Net sales by R&D Systems' Hematology
Division increased $901,919 (7%) and net sales by R&D Europe increased
$2,766,035 (12%). The increase in consolidated net sales for the fiscal year
was due largely to increased sales of proteins and antibodies.
Gross margins, as a percentage of sales, decreased slightly from 75.4% in
fiscal 2001 to 75.2% in fiscal 2002. Biotechnology Division gross margins
increased from 78.6% to 79.2% in fiscal 2002 as a result of increased
manufacturing efficiencies. R&D Europe gross margins decreased from 38.3% to
36.1% in fiscal 2002 mainly as a result of changes in exchange rates.
Hematology Division gross margins decreased from 46.7% to 45.0% in fiscal
2002 as a result of higher raw material costs in the second quarter of the
year. Blood costs increased significantly during the second quarter of
fiscal 2002 as a result of a decreased blood supply. Costs decreased during
the remainder of the year when the blood supply returned to a more normal
level.
Gross margins, as a percentage of sales, increased from 74.2% in fiscal 2000
to 75.4% in fiscal 2001. Biotechnology Division gross margins increased from
76.9% to 78.6% in fiscal 2001. Margins in the first half of fiscal 2000 were
affected by higher cost inventory acquired from Genzyme. R&D Europe gross
margins decreased from 41.9% to 38.3% in fiscal 2001 mainly as a result of
changes in exchange rates. Hematology Division gross margins decreased from
48.4% to 46.7% in fiscal 2001 as a result of changes in product mix.
Gross margins, as a percentage of sales, increased from 69.9% in fiscal 1999
to 74.2% in fiscal 2000. Biotechnology Division gross margins increased from
70.8% to 76.9% in fiscal 2000. Margins in fiscal 1999 were affected by higher
cost inventory acquired from Genzyme. R&D Europe gross margins decreased from
46.0% in fiscal 1999 to 41.9% in fiscal 2000 mainly as a result of changes in
exchange rates. Hematology Division gross margins did not change
significantly from the prior year.
Selling, general and administrative expenses increased $1,839,980 (10%),
$399,084 (2%) and $452,914 (3%) in fiscal 2002, 2001 and 2000. The increase
in each year was mainly the result of increased wages and benefits. In fiscal
2001, the increase in wages and benefits was partially offset by the effect
of exchange rate changes and in fiscal 2000, the increase was partially
offset by decreased rent expense due to the purchase of R&D Systems'
Minneapolis facility at the beginning of the fiscal year.
Research and development expenses increased $2,948,034 and $3,323,924 in
fiscal 2002 and 2001, respectively, and decreased $806,489 in fiscal 2000.
Included in fiscal 2002 research and development expenses were losses of
$1,350,435 and $505,015 by ChemoCentryx, Inc. (CCX) and Discovery Genomics,
Inc. (DGI), development stage companies in which Company has invested. Fiscal
2001 research and development expenses included losses by CCX of $499,687.
Fiscal 2000 research and development expenses included income of $642,585 by
CCX as a result of research grant money received by CCX, which offset CCX's
research expenses. Exclusive of CCX and DGI, research and development
expenses by the Company increased $1.6 million, $2.4 million and $1.6 million
in fiscal 2002, 2001 and 2000, respectively. These increases were 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.
Litigation settlement. In the fourth quarter of fiscal 2002, the Company
recorded a $17.5 million charge as a result of a litigation settlement. In
fiscal 2000, Amgen, Inc. had presented invoices in the amount of $28 million
for materials provided to the Company over past years, allegedly pursuant to
a contract under which no accounting or invoices were rendered for nine
years. The Company brought a declaratory judgement action seeking to have the
court declare that no amount was owed on the invoices. Amgen, Inc. filed a
counterclaim seeking the $28 million plus interest and attorneys fees. On May
30, 2002, the parties agreed to a $17.5 million cash settlement of the
dispute. The settlement was paid in June 2002 with cash on hand and the
liquidation of approximately $15 million of short-term available-for-sale
investments. The after-tax amount of the charge to Techne's fiscal 2002
results was approximately $11.4 million or $.27 per diluted share. Excluding
the settlement, earnings per diluted share would have been $.91 for the
fiscal year compared to $.80 in the prior year. Future operations and sales
will not be affected adversely in any way as a direct result of the
settlement.
Earnings before taxes decreased from $47,808,376 in fiscal 2001 to
$37,735,669 in fiscal 2002. The decrease was the result of the litigation
settlement discussed above. Excluding the settlement, Techne's earnings
before taxes for the fiscal year would have been approximately $55.2 million
compared to $47.8 million in the prior year, an increase of $7.4 million. R&D
Systems' Biotechnology Division earnings increased $8,010,086, R&D Systems'
Hematology Division earnings increased $37,292 and R&D Europe earnings
increased $1,193,382. The increases in earnings were due mainly to increased
sales. The increased earnings by the above segments were partially offset by
$850,748 and $505,015 in increased operating losses by CCX and DGI as a
result of increased research spending.
Earnings before taxes increased from $39,411,797 in fiscal 2000 to
$47,808,376 in fiscal 2001. The increase in earnings was primarily the result
of a $8,543,176 increase in R&D Systems' Biotechnology Division earnings, a
$573,280 increase in R&D Systems' Hematology Division earnings and a $270,873
increase in R&D Europe earnings. The increases in earnings were due mainly to
increased sales and improved Biotechnology Division gross margins. The
increased earnings by the above segments were partially offset by a
$1,142,272 increase in operating losses by CCX as a result of increased
research spending.
Earnings before taxes increased from $26,054,010 in fiscal 1999 to
$39,411,797 in fiscal 2000. The increase in earnings was primarily the result
of a $10,803,845 increase in R&D Systems' Biotechnology Division earnings, a
$777,379 increase in R&D Systems' Hematology Division earnings and a $804,885
increase in R&D Europe earnings. The increases in earnings were due mainly to
increased sales and improved Biotechnology Division gross margins. In
addition, as a result of the research grant money received by CCX in fiscal
2000, CCX's losses decreased $2,059,224 from fiscal 1999. The above increases
in earnings were partially offset by increased interest expense related to
financing of the building acquisition.
Income taxes for fiscal 2002, 2001 and 2000 were provided at rates of
approximately 28%, 29% and 33%, respectively. The tax rate in fiscal 2002
includes the effect of a $1 million credit due to changes in state tax
regulations. The tax rate in fiscal 2001 includes the effect of a one-time
$1.2 million credit as a result of the close-out of pending issues related to
a state income tax examination for fiscal years 1996 through 1999. U.S.
federal and state taxes have been reduced as a result of tax-exempt interest
income, the benefit of extraterritorial income in fiscal 2002, the benefit of
the foreign sales corporation in fiscal 2001 and 2000, 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.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL 2002 FISCAL 2001
------------------------------- -------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QTR. QTR. QTR. QTR.(1) QTR. QTR. QTR. QTR.
------- ------- ------- ------- ------- ------- ------- -------
Net sales $29,843 $31,137 $34,285 $35,636 $27,722 $26,689 $30,241 $30,705
Gross margin 22,295 23,109 25,893 27,096 20,917 19,922 22,748 23,345
Earnings
(loss) be-
fore taxes 12,256 12,407 15,350 (2,277) 11,283 10,436 12,684 13,406
Income taxes 3,831 3,972 4,776 (1,973) 3,780 3,453 2,519 4,011
Net earnings
(loss) 8,425 8,435 10,574 (304) 7,503 6,983 10,165 9,395
Basic earn-
ings (loss)
per share 0.20 0.20 0.25 (0.01) 0.18 0.17 0.25 0.23
Diluted earn-
ings (loss)
per share 0.20 0.20 0.25 (0.01) 0.18 0.16 0.24 0.22
(1) Results include a $17,500,000 before tax charge ($11,375,000 after tax)
for settlement of litigation with Amgen, Inc. Excluding the settlement basic
and diluted earnings per share would have been $.27 and $.26, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term available-for-sale investments at June
30, 2002 were $97,063,821 compared to $97,071,868 at June 30, 2001. At June
30, 2000, cash, equivalents and short-term available-for-sale investments
were $59,824,291. The Company has an unsecured line of credit of $750,000
available at June 30, 2002. The line of credit expires on October 31, 2002.
The interest rate on the line of credit is at the prime rate of 4.75% at June
30, 2002.
Management of the Company expects to be able to meet its future cash and
working capital requirements for operations, debt repayment, facility
expansion and capital additions through currently available funds, cash
generated from operations and maturities of short-term available-for-sale
investments.
Cash flows from operating activities
The Company generated cash from operations of $27,667,227, $46,371,711 and
$38,739,403 in fiscal 2002, 2001 and 2000, respectively. The decrease in cash
generated from operating activities in fiscal 2002 compared to 2001 was a
result of decreased net earnings due to the $17.5 million litigation
settlement and increased income tax payments. The majority of the increase in
cash generated from operating activities in fiscal 2001 compared to fiscal
2000 resulted from an increase in net earnings after adjustment for noncash
expenses.
Cash flows from investing activities
The Company's net (proceeds) purchases of short-term available-for-sale
investments in fiscal 2002, 2001 and 2000 was ($5,132,736), $33,335,894 and
$26,123,527, respectively. The Company's investment policy is to place excess
cash in municipal and corporate bonds with the objective of obtaining the
highest possible return with the lowest risk, while keeping funds accessible.
On August 2, 2001, the Company made an equity investment of $3 million in
Discovery Genomics, Inc. (DGI). DGI holds licenses from the University of
Minnesota to develop technologies used for functional genomics and the
discovery of drug targets. The Company holds a 39% equity interest in DGI and
accounts for this investment under the equity method of accounting. The
Company's net investment in DGI was $2,494,985 at June 30, 2002.
Capital additions (excluding the building purchases and construction
discussed below) were $2,645,977, $4,920,832 and $8,505,709 in fiscal 2002,
2001 and 2000, respectively. Included in fiscal 2002, 2001 and 2000 capital
additions are building improvements of $.5 million, $2.3 million and $5.1
million related to R&D Systems' remodeling. The remaining capital additions
were for laboratory, manufacturing and computer equipment. Capital additions
for laboratory, manufacturing and computer equipment planned for fiscal 2003
are expected to be approximately $1.4 million and are expected to be financed
through currently available cash and cash generated from operations.
On March 15, 2002, the Company purchased property adjacent to its Minneapolis
facility for approximately $8.9 million. In fiscal 2000, the Company paid $2
million and issued warrants to purchase 120,000 shares of common stock as a
deposit on the acquisition. The warrants were valued at $858,000. The
remaining $6 million purchase price was financed through cash on hand. The
Company has begun to renovate this property and to build an infill to connect
it to its current facility. The Company incurred costs of $7.8 million in
fiscal 2002 on this construction. Remaining construction costs are estimated
to be approximately $16 million with the completion of the construction
expected in late fiscal 2003. The construction is expected to be financed
through cash on hand and cash generated from operations.
During fiscal 2002, the Company completed construction of a $7.8 million
parking ramp at its Minneapolis facility. Construction was begun on the ramp
in fiscal 2001 and $1.9 million of the construction costs were paid in that
year. The remaining $5.9 million of construction costs paid in fiscal 2002
were financed through cash on hand and cash generated from operations.
On July 1, 1999, the Company purchased the facilities it had occupied in
Minneapolis, Minnesota for approximately $28 million. Cash of $4 million and
200,000 shares of common stock valued at $2.16 million were placed in escrow
during fiscal 1999. The remainder of the purchase price was financed through
cash on hand and a $20.4 million 15-year mortgage.
The Company paid $1,999,000 on March 15, 2002 as a nonrefundable deposit on
an option, which expires in 2005, to purchase additional property adjacent to
its Minneapolis facility. In fiscal 2000, the Company had paid an original
$1,000 deposit on this option.
Cash flows from financing activities
The Company received $332,173, $814,892 and $6,470,910 for the exercise of
options for 87,400, 89,616 and 1,052,046 shares of common stock in fiscal
2002, 2001 and 2000, respectively.
In fiscal 2002 and 2001, the Company purchased and retired 30,000 and 40,000
shares of Company common stock at market values of $745,615 and $1,163,768,
respectively. In May 1995, the Company announced a plan to purchase and
retire up to $5 million of its common stock. In April 1997 and January 2001
this was increased an additional $5 million and $10 million, respectively.
Through June 30, 2002, $10,663,497 of common stock had been purchased under
the plan. Subsequent to June 30, 2002, the Company has purchased an
additional $5,864,890 of common stock. Any additional purchases will be
funded from currently available cash.
The Company has never paid cash dividends and has no plans to do so in fiscal
2003. The Company's earnings will be retained for reinvestment in the
business.
Contractual obligations
The following table summarizes the Company's contractual obligations and
commercial commitments as of June 30, 2002:
Payments Due by Period ($000's)
----------------------------------------------
Less than After
Total 1 Year 1-3 Years 4-5 Years 5 Years
----- --------- --------- --------- -------
Long-term debt $18,050 $ 950 $ 2,110 $ 2,434 $12,556
Operating leases 5,727 481 897 834 3,515
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards (SFAS) No. 141, BUSINESS COMBINATIONS and
SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 applies to
all business combinations initiated after June 30, 2001 and prohibits the use
of the pooling-of-interests method of accounting. There are also transition
provisions provided that apply to business combinations completed before July
1, 2001 that were accounted for using the purchase method. Under SFAS No.
142, goodwill as well as other intangibles determined to have an infinite
life will no longer be amortized; however, these assets will be reviewed for
impairment on a periodic basis. SFAS No. 142 also includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reclassification of certain intangibles out of previously reported goodwill
and the identification of reporting units for purposes of assessing potential
future impairments of goodwill. The Company adopted SFAS No. 142 on July 1,
2002. The Company has six months from the date it initially applies SFAS No.
142 to complete an initial goodwill impairment test. The Company is currently
assessing, but has not yet determined, if a cumulative effect adjustment will
be required upon adoption. As of June 30, 2002, the Company had net goodwill
and other intangible assets of approximately $12.6 million and $6.3 million,
respectively. Amortization expense recorded during fiscal 2002, 2001, and
2000 was approximately $8.5 million, $8.9 million and $9.2 million,
respectively.
In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS. SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS No. 143 applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and/or the normal operations
of a long-lived asset, except for certain obligations of lessees. SFAS No.
143 is effective for the Company in fiscal 2003. Management believes that the
adoption of SFAS No. 143 will not have a material impact on the Company's
financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and reporting
provisions of APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS-
REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND
EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS,
for the disposal of a segment of a business (as previously defined in that
Opinion). SFAS No. 144 is effective for the Company in fiscal 2003.
Management believes that the adoption of SFAS No. 144 will not have a
material impact on the Company's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB STATEMENTS
NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL
CORRECTIONS. SFAS No. 145 will be effective for the Company on July 1, 2002.
Management believes that the adoption of SFAS No. 145 will not have a
material impact on the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES. SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, LIABILITY
RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT
AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING). SFAS No.
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. SFAS No. 146 will be effective for exit or
disposal activities that are initiated by the Company after December 31,
2002.
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.
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 that 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 are 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 of additional
expertise by existing personnel. The failure to attract and retain such
personnel could adversely affect the Company's business.
For additional information on risks and uncertainties, see the Company's
periodic reports filed with the Securities and Exchange Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
At the end of fiscal 2002, the Company had a professionally managed
investment portfolio of fixed income securities, excluding those classified
as cash and cash equivalents, of $70,671,341 (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.
As of June 30, 2002, the Company's long-term debt consisted of a mortgage
note payable with a fixed interest rate of 7% through July 2006 and is
thereafter adjusted based on U.S. Treasury rates. Thus, during the period
that the interest rate is fixed, interest rate fluctuations would not impact
interest expense or cash flows. However, the mortgage note payable will
increase or decrease in value if market interest rates change. As of June 30,
2002, the fair market value of the Company's mortgage note payable
approximated its carrying value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF EARNINGS
TECHNE CORPORATION AND SUBSIDIARIES
YEAR ENDED JUNE 30,
2002 2001 2000
------------ ------------ ------------
Net sales $130,900,395 $115,356,562 $103,838,155
Cost of sales 32,507,846 28,424,906 26,750,650
------------ ------------ ------------
Gross margin 98,392,549 86,931,656 77,087,505
Operating expenses:
Selling, general and administrative 19,554,195 17,714,215 17,315,131
Research and development 17,470,267 14,522,233 11,198,309
Amortization of intangible assets
(Note A) 8,549,246 8,889,254 9,229,250
Litigation settlement (Note F) 17,500,000 -- --
Interest expense 1,320,479 1,381,276 1,441,272
Interest income (3,737,307) (3,383,698) (1,508,254)
------------ ------------ ------------
60,656,880 39,123,280 37,675,708
------------ ------------ ------------
Earnings before income taxes 37,735,669 47,808,376 39,411,797
Income taxes (Note H) 10,606,000 13,763,000 12,829,000
------------ ------------ ------------
Net earnings $ 27,129,669 $ 34,045,376 $ 26,582,797
============ ============ ============
Earnings per share:
Basic $ 0.65 $ 0.82 $ 0.65
Diluted $ 0.64 $ 0.80 $ 0.63
Weighted average common
shares outstanding:
Basic 41,507,727 41,438,670 40,625,482
Diluted 42,522,664 42,668,236 42,206,042
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
TECHNE CORPORATION AND SUBSIDIARIES
JUNE 30,
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 26,392,480 $ 21,267,791
Short-term available-for-sale
investments (Note A) 70,671,341 75,804,077
Trade accounts receivable, less
allowance for doubtful accounts
of $263,000 and $126,000, respectively 16,913,002 15,894,048
Interest receivable 2,500,616 2,428,240
Inventories (Note C) 6,077,035 5,437,594
Deferred income taxes (Note H) 3,762,000 2,720,000
Prepaid expenses 915,854 639,759
Income taxes receivable 1,845,421 --
------------ ------------
Total current assets 129,077,749 124,191,509
Property and equipment, net (Note D) 70,312,602 49,193,972
Intangible assets, net (Note A) 18,897,000 27,446,246
Deferred income taxes (Note H) 9,400,000 4,128,000
Other long-term assets (Notes A and F) 10,559,608 10,565,386
------------ ------------
$238,246,959 $215,525,113
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 4,326,359 $ 3,477,072
Salaries, wages and related accounts 2,873,505 2,302,553
Other accounts payable and accrued expenses 6,480,023 6,155,189
Income taxes payable -- 3,071,982
Current portion of long-term debt (Note E) 949,637 884,760
------------ ------------
Total current liabilities 14,629,524 15,891,556
Royalty payable -- 3,923,000
Long-term debt, less current portion (Note E) 17,100,652 18,050,289
Commitments and contingencies (Note F) -- --
Stockholders' equity (Note G):
Undesignated capital stock, no par;
authorized 5,000,000 shares;
none issued or outstanding -- --
Common stock, par value $.01 a share;
authorized 100,000,000 shares;
issued and outstanding 41,562,136 and
41,432,390 shares, respectively 415,621 414,324
Additional paid-in capital 58,584,103 57,382,636
Retained earnings 147,369,149 121,209,686
Accumulated other comprehensive
income (loss) 147,910 (1,346,378)
------------ ------------
Total stockholders' equity 206,516,783 177,660,268
------------ ------------
$238,246,959 $215,525,113
============ ============
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TECHNE CORPORATION AND SUBSIDIARIES
ACCUM.
OTHER
COMPRE-
ADDITIONAL HENSIVE
COMMON STOCK PAID-IN RETAINED INCOME
SHARES AMOUNT CAPITAL EARNINGS (LOSS) TOTAL
---------- -------- ----------- ------------ ----------- ------------
Balances at June 30, 1999 40,265,310 $402,653 $34,324,255 $ 62,058,879 $ 52,600 $ 96,838,387
Comprehensive income:
Net earnings -- -- -- 26,582,797 -- 26,582,797
Other comprehensive
loss, net of tax:
Foreign currency trans-
lation adjustments -- -- -- -- (514,716) (514,716)
------------
Comprehensive income 26,068,081
Common stock issued:
Exercise of options
(Note G) 1,129,630 11,296 6,765,125 -- -- 6,776,421
Fair value of warrants
issued (Note G) -- -- 858,000 -- -- 858,000
Surrender and retirement
of stock to exercise
options (Note K) (12,942) (129) 64 (305,446) -- (305,511)
Tax benefit from exercise
of stock options -- -- 10,910,000 -- -- 10,910,000
---------- -------- ----------- ------------ ----------- ------------
Balances at June 30, 2000 41,381,998 413,820 52,857,444 88,336,230 (462,116) 141,145,378
Comprehensive income:
Net earnings -- -- -- 34,045,376 -- 34,045,376
Other comprehensive
loss, net of tax:
Foreign currency trans-
lation adjustments -- -- -- -- (884,262) (884,262)
-----------
Comprehensive income 33,161,114
Common stock issued:
Exercise of options
(Note G) 90,616 906 822,540 -- -- 823,446
Surrender and retirement
of stock to exercise
options (Note K) (224) (2) -- (8,552) -- (8,554)
Repurchase and retirement
of common stock (40,000) (400) -- (1,163,368) -- (1,163,768)
Sale of stock by equity
method investee (Note A) -- -- 3,387,652 -- -- 3,387,652
Tax benefit from exercise
of stock options -- -- 315,000 -- -- 315,000
---------- -------- ----------- ------------ ----------- ------------
Balances at June 30, 2001 41,432,390 414,324 57,382,636 121,209,686 (1,346,378) 177,660,268
Comprehensive income:
Net earnings -- -- -- 27,129,669 -- 27,129,669
Other comprehensive
income, net of tax:
Foreign currency trans-
lation adjustments -- -- -- -- 1,494,288 1,494,288
------------
Comprehensive income 28,623,957
Common stock issued:
Exercise of options
(Note G) 167,400 1,674 555,467 -- -- 557,141
Surrender and retirement
of stock to exercise
options (Note K) (7,654) (77) -- (224,891) -- (224,968)
Repurchase and retirement
of common stock (30,000) (300) -- (745,315) -- (745,615)
Tax benefit from exercise
of stock options -- -- 646,000 -- -- 646,000
---------- -------- ----------- ------------ ----------- ------------
Balances at June 30, 2002 41,562,136 $415,621 $58,584,103 $147,369,149 $ 147,910 $206,516,783
========== ======== =========== ============ =========== ============
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE K)
TECHNE CORPORATION AND SUBSIDIARIES
YEAR ENDED JUNE 30,
2002 2001 2000
------------ ------------ ------------
Cash flows from operating activities:
Net earnings $ 27,129,669 $ 34,045,376 $ 26,582,797
Adjustments to reconcile net
earnings to net cash provided by
operating activities:
Depreciation and amortization 12,687,915 12,737,448 12,651,350
Deferred income taxes (6,292,000) (508,000) (1,157,000)
Other 2,445,232 919,722 (404,042)
Change in current assets and
current liabilities:
(Increase) decrease in:
Trade accounts and
interest receivable (855,339) (3,036,047) (2,141,023)
Inventories (560,517) (846,902) 986,120
Prepaid expenses (210,042) (153,452) (9,850)
Increase (decrease) in:
Trade and other
accounts payable (2,829,566) (2,867,638) (2,898,880)
Salaries, wages and
related accounts 553,404 (680,839) 695,184
Income taxes payable/receivable (4,401,529) 6,762,043 4,434,747
------------ ------------ ------------
Total adjustments 537,558 12,326,335 12,156,606
------------ ------------ ------------
Net cash provided by
operating activities 27,667,227 46,371,711 38,739,403
Cash flows from investing activities:
Real estate deposits (1,999,000) -- (2,001,000)
Additions to property and equipment (22,276,262) (6,814,953) (30,367,862)
Purchase of short-term available-
for-sale investments (64,679,571) (57,177,268) (39,569,406)
Proceeds from sale of short-term
available-for-sale investments 69,812,307 23,841,374 13,445,879
Increase in other long-term assets (3,259,103) (500,000) (1,552,160)
------------ ------------ ------------
Net cash used in
investing activities (22,401,629) (40,650,847) (60,044,549)
Cash flows from financing activities:
Issuance of common stock 332,173 814,892 6,470,910
Repurchase of common stock (745,615) (1,163,768) --
Proceeds from issuance of
long-term debt -- -- 20,400,000
Payments on long-term debt (884,760) (824,315) (640,636)
------------ ------------ ------------
Net cash (used in) provided
by financing activities (1,298,202) (1,173,191) 26,230,274
Effect of exchange rate changes
on cash and cash equivalents 1,157,293 (635,990) (338,488)
------------ ------------ ------------
Net increase in cash and
cash equivalents 5,124,689 3,911,683 4,586,640
Cash and cash equivalents
at beginning of year 21,267,791 17,356,108 12,769,468
------------ ------------ ------------
Cash and cash equivalents at
end of year $ 26,392,480 $ 21,267,791 $ 17,356,108
============ ============ ============
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TECHNE CORPORATION AND SUBSIDIARIES
Years Ended June 30, 2002, 2001 and 2000
A. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS: TECHNE Corporation and Subsidiaries (the Company) are
engaged domestically in the development and manufacture of biotechnology
products and hematology calibrators and controls. These activities are
primarily conducted through its wholly owned subsidiary, Research and
Diagnostic (R&D) Systems, Inc. Through its wholly owned English subsidiary, R&D
Systems Europe Ltd., the Company distributes biotechnology products throughout
Europe. R&D Systems Europe Ltd. has a sales subsidiary, R&D Systems GmbH, in
Germany. The Company also had a foreign sales corporation, Techne Export Inc.,
which was dissolved in fiscal 2002.
ESTIMATES: The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
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.
RISK 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.
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 other comprehensive income. Foreign currency transaction gains
and losses are included in operations.
REVENUE RECOGNITION: The Company recognizes revenues upon shipment of products.
Revenues are reduced to reflect estimated returns. Freight charges to customers
are included in net sales and freight costs are included in cost of sales.
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.
EARNINGS PER SHARE: The number of shares used to calculate earnings per share
are as follows:
YEAR ENDED JUNE 30,
2002 2001 2000
---------- ---------- ----------
Weighted average common
shares outstanding (basic) 41,507,727 41,438,670 40,625,482
Dilutive stock options
and warrants outstanding 1,014,937 1,229,566 1,580,560
---------- ---------- ----------
Weighted average common shares
outstanding (diluted) 42,522,664 42,668,236 42,206,042
========== ========== ==========
CASH AND EQUIVALENTS: Cash and cash equivalents include cash on hand and highly
liquid investments with original maturities of less than three months.
SHORT-TERM INVESTMENTS: Short-term investments consist of bonds with original
maturities of generally three months to three years.
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 other comprehensive income. The Company considers all of its
marketable securities available-for-sale. Fair market values are based on
quoted market prices.
Proceeds from maturities and sales of available-for-sale securities were
$69,812,307, $23,841,374 and $13,445,879 during fiscal 2002, 2001 and 2000,
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, 2002, 2001 and 2000 were not
material.
INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out
method) or market.
DEPRECIATION AND AMORTIZATION: Equipment is depreciated using the straight-line
method over an estimated useful life of five years. Buildings, building
improvements and leasehold improvements are amortized over estimated useful
lives of five to forty years.
INTANGIBLES: Intangible assets related to the acquisition of Genzyme
Corporation's research products business in fiscal 1999 and Amgen Inc.'s
research reagent and diagnostic kit business in fiscal 1992 are amortized on a
straight-line basis over the estimated useful lives and consist of the
following:
JUNE 30,
USEFUL LIFE 2002 2001
----------- ----------- -----------
Customer list 10 years $18,010,000 $18,010,000
Technology licensing agreements 16 years 500,000 500,000
Goodwill 6 years 39,075,089 39,075,089
----------- -----------
57,585,089 57,585,089
Less accumulated amortization 38,688,089 30,138,843
----------- -----------
$18,897,000 $27,446,246
=========== ===========
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.
INVESTMENTS: The Company's accounting policy is to recognize gains arising from
issuances of stock by subsidiaries or equity method investees as a component of
stockholders' equity for all issuances that meet the conditions of SEC Staff
Accounting Bulletin (SAB) No. 51., ACCOUNTING FOR THE SALE OF STOCK BY A
SUBSIDIARY.
The Company has an interest in the issued and outstanding voting shares of
ChemoCentryx, Inc. (CCX), a technology and drug development company. The
Company accounts for this investment under the equity method of accounting and
through January 2001 had a 49% interest in CCX. Through January 2001, the
Company included 100% of the operating results of CCX in its consolidated
financial statements due to the limited amount of cash consideration provided
by the holders of the common shares of CCX. In February 2001, CCX obtained $23
million in financing through the issuance of 8,846,154 shares of preferred
stock. The Company currently holds approximately 26% of the outstanding voting
stock of CCX and is including CCX operating results in its consolidated
financial statements based on its ownership percentage. The Company's net
investment in CCX, which is included in other long-term assets, was $5,091,046
and $6,441,481 at June 30, 2002 and 2001, respectively.
On August 2, 2001, the Company made an equity investment of $3 million in
Discovery Genomics, Inc. (DGI). DGI holds licenses from the University of
Minnesota to develop technologies used for functional genomics and the
discovery of drug targets. The Company holds a 39% equity interest in DGI and
accounts for this investment under the equity method of accounting. The
Company's net investment in DGI, which is included in other long-term assets,
was $2,494,985 at June 30, 2002.
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.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: The Company has determined that
it has no free-standing or embedded derivatives. All contracts that contain
provisions meeting the definition of a derivative also meet the requirements
of, and have been designated as, normal purchases or sales. The Company's
policy is to not use free-standing derivatives and to not enter into contracts
with terms that cannot be designated as normal purchases or sales.
NEW ACCOUNTING PRONOUNCEMENTS: In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141,
BUSINESS COMBINATIONS and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
SFAS No. 141 applies to all business combinations initiated after June 30, 2001
and prohibits the use of the pooling-of-interests method of accounting. There
are also transition provisions provided that apply to business combinations
completed before July 1, 2001 that were accounted for using the purchase
method. Under SFAS No. 142, goodwill as well as other intangibles determined to
have an infinite life will no longer be amortized; however, these assets will
be reviewed for impairment on a periodic basis. SFAS No. 142 also includes
provisions for the reclassification of certain existing recognized intangibles
as goodwill, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. The Company adopted SFAS No. 142 on
July 1, 2002. The Company has six months from the date it initially applies
SFAS No. 142 to complete an initial goodwill impairment test. The Company is
currently assessing, but has not yet determined, if a cumulative effect
adjustment will be required upon adoption. As of June 30, 2002, the Company had
net goodwill and other intangible assets of approximately $12.6 million and
$6.3 million, respectively. Amortization expense recorded during fiscal 2002,
2001, and 2000 was approximately $8.5 million, $8.9 million and $9.2 million,
respectively.
In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS. SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS No. 143 applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and/or the normal operations of
a long-lived asset, except for certain obligations of lessees. SFAS No. 143 is
effective for the Company in fiscal 2003. Management believes that the adoption
of SFAS No. 143 will not have a material impact on the Company's financial
position or results of operations.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-
LIVED ASSETS TO BE DISPOSED OF, and the accounting and reporting provisions of
APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS-REPORTING THE EFFECTS
OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND
INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a segment
of a business (as previously defined in that Opinion). SFAS No. 144 is
effective for the Company in fiscal 2003. Management believes that the adoption
of SFAS No. 144 will not have a material impact on the Company's financial
position or results of operations.
In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB STATEMENTS NO.
4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS.
SFAS No. 145 will be effective for the Company on July 1, 2002. Management
believes that the adoption of SFAS No. 145 will not have a material impact on
the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES. SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, LIABILITY
RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT
AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING). SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost was recognized at the date of an entity's commitment
to an exit plan. SFAS No. 146 will be effective for exit or disposal activities
that are initiated by the Company after December 31, 2002.
B. PROPERTY ACQUISITION:
On March 15, 2002, the Company purchased property adjacent to its Minneapolis
facility for approximately $8.9 million. In fiscal 2000, the Company paid $2
million and issued warrants to purchase 120,000 shares of common stock as a
deposit on the acquisition. The warrants were valued at $858,000. The remaining
$6 million purchase price was financed through cash on hand.
C. INVENTORIES:
Inventories consist of:
JUNE 30,
2002 2001
---------- ----------
Raw materials $2,785,949 $2,552,179
Finished goods 3,172,191 2,749,820
Supplies 118,895 135,595
---------- ----------
$6,077,035 $5,437,594
========== ==========
D. PROPERTY AND EQUIPMENT:
Property and equipment consist of:
JUNE 30,
2002 2001
----------- -----------
Cost:
Land $ 1,571,000 $ 871,000
Buildings and improvements 63,541,408 47,012,870
Building construction in progress 7,728,660 1,894,121
Laboratory equipment 16,694,898 15,023,754
Office and computer equipment 4,263,512 3,833,730
Leasehold improvements 497,087 459,191
----------- -----------
94,296,565 69,094,666
Less accumulated depreciation and
amortization 23,983,963 19,900,694
----------- -----------
$70,312,602 $49,193,972
=========== ===========
E. DEBT:
The Company's short-term line of credit facility consists of an unsecured line
of credit of $750,000 at June 30, 2002. The line of credit expires on October
31, 2002. The interest rate charged on the line of credit is at the prime rate
of 4.75% at June 30, 2002. There were no borrowings on the line outstanding as
of June 30, 2002 and 2001.
Long-term debt consists of:
JUNE 30,
2002 2001
----------- -----------
Mortgage note, payable in monthly
installments of $183,631 including
interest $18,050,289 $18,935,049
Less current portion 949,637 884,760
----------- -----------
$17,100,652 $18,050,289
=========== ===========
The interest rate on the mortgage note is fixed at 7% through July 2006 and is
thereafter adjusted based on U.S. Treasury rates.
Principal maturities of long-term debt as of June 30, 2002 are as follows:
YEAR ENDING JUNE 30:
- --------------------
2003 $ 949,637
2004 1,016,017
2005 1,093,772
2006 1,173,975
2007 1,260,058
Thereafter 12,556,830
-----------
$18,050,289
===========
F. COMMITMENTS AND CONTINGENCIES:
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,
2002, 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:
- --------------------
2003 $ 481,180
2004 457,254
2005 439,767
2006 434,501
2007 399,801
Thereafter 3,515,011
-----------
$ 5,727,514
===========
Total rent expense was approximately $406,000, $337,000 and $305,000 for the
years ended June 30, 2002, 2001 and 2000, respectively.
In fiscal 1999, the Company entered into an option agreement for real estate
adjacent to its R&D Systems; facility. The purchase price for the property
under the option is $7 million plus capital improvement costs. This option
expires on January 1, 2005 and required a nonrefundable deposit of $2 million.
A deposit of $1,000 was made on this option in fiscal 2000 with the remainder
of the deposit made on March 15, 2002. The deposit is included in other long-
term assets.
In fiscal 2000, Amgen, Inc. had presented invoices in the amount of $28 million
for materials provided to the Company over past years, allegedly pursuant to a
contract under which no accounting or invoices were rendered for nine years.
The Company brought a declaratory judgement action seeking to have the court
declare that no amount was owed on the invoices. Amgen, Inc. filed a
counterclaim seeking the $28 million plus interest and attorneys fees. On May
30, 2002, the parties agreed to a $17.5 million full, complete and final cash
settlement of the dispute. The settlement was paid prior to June 30, 2002.
Portions of the Company's short-term available-for-sale investments were held
in brokerage accounts carried by a clearing firm which in September 2001 was
placed in bankruptcy. In October 2001, the trustee appointed pursuant to the
Securities Investor Protection Act released to the Company cash and securities
representing approximately 90% of the total value of the accounts and has
withheld securities and cash equivalents in the amount of approximately $3.5
million pending resolution of the bankruptcy proceeding. The Company has been
notified by the trustee that an additional distribution of securities of
approximately $2.5 million would be made to the Company subsequent to June 30,
2002. Management believes that all of its securities and cash equivalents will
be returned to the Company as the trustee has available the assets of
customers' accounts, SIPC insurance and third party insurance. Accordingly, no
impairment loss has been recognized at this time.
The Company is routinely subject to claims and involved in legal actions which
are incidental to the business of the Company. Although it is difficult to
predict the ultimate outcome of these matters, management believes that any
ultimate liability will not materially affect the consolidated financial
position or operations of the Company.
G. STOCKHOLDERS' EQUITY:
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 1998 and 1988 Nonqualified Stock Option
Plans). 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 is 3,200,000, 3,200,000, 1,600,000 and 2,000,000 under the TECHNE
Corporation 1997 Incentive Stock Option Plan, the TECHNE Corporation 1987
Incentive Stock Option Plan, the TECHNE Corporation 1998 Nonqualified Stock
Option Plan and the TECHNE Corporation 1988 Nonqualified Stock Option Plan,
respectively.
Stock option activity during the three years ended June 30, 2002 consists of
the following:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Outstanding at June 30, 1999 2,315,666 $ 5.43
Granted 231,304 17.93
Exercised (1,129,630) 6.00
----------
Outstanding at June 30, 2000 1,417,340 7.02
Granted 593,098 38.23
Canceled (15,348) 37.44
Exercised (90,616) 9.09
----------
Outstanding at June 30, 2001 1,904,474 16.40
Granted 33,108 29.42
Canceled (24,104) 36.50
Exercised (167,400) 3.33
----------
Outstanding at June 30, 2002 1,746,078 17.62
==========
Options exercisable at June 30:
2000 1,298,338 6.55
2001 1,804,328 15.76
2002 1,684,860 17.22
Currently outstanding and exercisable stock options at June 30, 2002 consist of
the following:
OPTIONS OUTSTANDING
------------------------------------------------
WEIGHTED AVG.
CONTRACTUAL WEIGHTED AVG.
EXERCISE PRICES OUTSTANDING LIFE (YRS.) EXERCISE PRICE
- --------------- ------------- -------------- ---------------
$ 2.69-10.00 961,174 3.58 $ 5.35
10.01-20.00 205,498 5.92 18.02
20.01-36.50 517,976 5.33 36.05
50.00-65.00 61,430 8.25 52.94
---------
1,746,078 4.58 17.62
=========
OPTIONS EXERCISABLE
-------------------------------
WEIGHTED AVG.
EXERCISE PRICES EXERCISABLE EXERCISE PRICE
- --------------- ------------- ---------------
$ 2.69-10.00 961,174 $ 5.35
10.01-20.00 182,282 18.30
20.01-36.50 479,974 36.01
50.00-65.00 61,430 52.94
---------
1,684,860 17.22
=========
If compensation cost for employee options granted 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 earnings and earnings per share would
have been as follows:
YEAR ENDED JUNE 30,
2002 2001 2000
----------- ----------- -----------
Net earnings:
As reported $27,129,669 $34,045,376 $26,582,797
Pro forma 25,998,856 16,624,096 24,817,402
Basic earnings per share:
As reported $ 0.65 $ 0.82 $ 0.65
Pro forma 0.63 0.40 0.61
Diluted earnings per share:
As reported $ 0.64 $ 0.80 $ 0.63
Pro forma 0.61 0.39 0.59
The fair value of options granted under the Company's stock option plans were
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 40% and 99%, risk-free interest rates between 4.6% and 6.1% and
expected lives between 7 and 10 years.
WARRANTS: In fiscal 2000, the Company issued warrants to purchase 120,000
shares of the Company's common stock at $11.89 per share as a nonrefundable
deposit on an option to purchase property adjacent to its R&D Systems'
facility. The fair market value of the warrants was $858,000.
H. INCOME TAXES:
The provisions for income taxes consist of the following:
YEAR ENDED JUNE 30,
2002 2001 2000
----------- ----------- -----------
Earnings before income
taxes consist of:
Domestic $31,214,045 $42,480,134 $34,354,428
Foreign 6,521,624 5,328,242 5,057,369
----------- ----------- -----------
$37,735,669 $47,808,376 $39,411,797
=========== =========== ===========
Taxes (benefits) on
income consist of:
Currently payable:
Federal $14,408,000 $13,578,000 $ 1,358,000
State 11,000 (1,173,000) 305,000
Foreign 1,855,000 1,513,000 1,396,000
Tax benefit from exercise
of stock options 646,000 315,000 10,910,000
Net deferred (6,314,000) (470,000) (1,140,000)
----------- ----------- -----------
$10,606,000 $13,763,000 $12,829,000
=========== =========== ===========
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,
2002 2001 2000
----------- ----------- -----------
Computed expected federal
income tax expense $13,207,000 $16,733,000 $13,794,000
State income taxes,
net of federal benefit 41,000 (1,138,000) 335,000
Foreign sales corporation -- (697,000) (566,000)
Extraterritorial income
benefit (892,000) -- --
Research and development
credits (406,000) (563,000) (605,000)
Tax-exempt interest (1,005,000) (887,000) (318,000)
Other (339,000) 315,000 189,000
----------- ----------- -----------
$10,606,000 $13,763,000 $12,829,000
=========== =========== ===========
State income taxes for the year ended June 30, 2001 were affected by a one-time
$1.2 million credit as a result of the close-out of pending issues related to a
state income tax examination for fiscal years 1996 through 1999.
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,
2002 2001
----------- -----------
Inventory $ 2,334,000 $ 1,564,000
Inventory costs capitalized 903,000 735,000
Unrealized profit on intercompany sales 346,000 306,000
Other 179,000 115,000
----------- -----------
Current asset 3,762,000 2,720,000
Excess of book over tax intangible
asset amortization 8,728,000 3,491,000
Excess of book over tax research expense 246,000 361,000
Excess of book over tax depreciation 603,000 503,000
Other (177,000) (227,000)
----------- -----------
Noncurrent asset 9,400,000 4,128,000
----------- -----------
$13,162,000 $ 6,848,000
=========== ===========
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. SEGMENT INFORMATION:
The Company has three reportable operating segments based on the nature of
products and geographic location: Hematology Division, Biotechnology Division
and R&D Systems Europe. The Hematology Division develops and manufactures
hematology controls and calibrators for sale world-wide. The Biotechnology
Division develops and manufactures biotechnology research and diagnostic
products for sale world-wide. R&D Systems Europe distributes Biotechnology
Division products throughout Europe. No customer accounted for more than 10% of
the Company's revenues for the years ended June 30, 2002, 2001 and 2000.
The accounting policies of the segments are the same as those described in Note
A. In evaluating segment performance, management focuses on sales and income
before taxes. Sales between segments are made at prices which would approximate
transfers to unaffiliated distributors.
Following is financial information relating to the operating segments:
YEAR ENDED JUNE 30,
2002 2001 2000
----------- ----------- -----------
External sales
Hematology $ 15,570,656 $ 14,710,464 $ 13,575,463
Biotechnology 84,654,661 73,656,405 64,230,320
R&D Systems Europe 30,675,078 26,989,693 26,032,372
------------ ------------ ------------
Total external sales $130,900,395 $115,356,562 $103,838,155
============ ============ ============
Intersegment sales
Hematology $ -- $ -- $ --
Biotechnology 16,726,082 15,010,487 13,422,813
R&D Systems Europe 56,880 77,237 135,106
------------ ------------ ------------
Total intersegment sales $ 16,782,962 $ 15,087,724 $ 13,557,919
============ ============ ============
Earnings before taxes
Hematology $ 5,094,411 $ 5,057,119 $ 4,483,839
Biotechnology 47,776,492 39,766,406 31,223,230
R&D Systems Europe 6,521,624 5,328,242 5,057,369
Corporate and other (21,656,858) (2,343,391) (1,352,641)
------------ ------------ ------------
Total earnings before taxes $ 37,735,669 $ 47,808,376 $ 39,411,797
============ ============ ============
Interest income
Hematology $ 444,749 $ 508,149 $ 322,166
Biotechnology 2,520,245 2,032,596 751,720
R&D Systems Europe 539,228 552,245 376,405
Corporate and other 233,085 290,708 57,963
------------ ------------ ------------
Total interest income $ 3,737,307 $ 3,383,698 $ 1,508,254
============ ============ ============
Depreciation and amortization
Hematology $ 315,987 $ 239,909 $ 187,077
Biotechnology 10,780,188 11,028,893 11,135,442
R&D Systems Europe 251,649 174,940 221,272
Corporate and other 1,340,091 1,293,706 1,107,559
------------ ------------ ------------
Total depreciation
and amortization $ 12,687,915 $ 12,737,448 $ 12,651,350
============ ============ ============
Capital purchases
Hematology $ 831,110 $ 313,936 $ 437,057
Biotechnology 2,332,490 3,472,146 4,122,418
R&D Systems Europe 201,047 655,430 150,471
Corporate and other 18,911,580 2,373,441 25,657,916
------------ ------------ ------------
Total capital purchases $ 22,276,227 $ 6,814,953 $ 30,367,862
============ ============ ============
Corporate and other reconciling items include the results of unallocated
corporate expenses and assets, the elimination of profit on intersegment sales,
the litigation settlement and the operations of the Company's equity
investments in ChemoCentryx, Inc. and Discovery Genomics, Inc.
Following is financial information relating to geographic areas:
YEAR ENDED JUNE 30,
2002 2001 2000
------------ ------------ ------------
External sales
United States $ 80,957,103 $ 71,018,421 $ 62,927,628
Other areas 49,943,292 44,338,141 40,910,527
------------ ------------ ------------
Total external sales $130,900,395 $115,356,562 $103,838,155
============ ============ ============
Long-lived assets
United States $ 71,615,578 $ 51,404,348 $ 48,928,147
Other areas 835,381 815,851 374,325
------------ ------------ ------------
Total long-lived assets $ 72,450,959 $ 52,220,199 $ 49,302,472
============ ============ ============
External sales are attributed to countries based on the location of the
customer/distributor. Long-lived assets are comprised of land, buildings and
improvements, equipment and deposits on real estate.
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
$1,022,000, $810,000 and $787,500 for the years ended June 30, 2002, 2001 and
2000, 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. The Company purchases its common stock at market value for
contribution to the plans for the years ended June 30, 2002, 2001 and 2000 and
operations have been charged $1,081,000, $851,000 and $832,000, respectively.
PERFORMANCE INCENTIVE PROGRAM: Under certain employment agreements with
executive officers, the Company recorded bonuses of $98,000, $101,000 and
$126,000 for the years ended June 30, 2002, 2001 and 2000, respectively. In
addition, options for 3,108, 1,938 and 6,304 shares of common stock were
granted to the executive officers during fiscal 2002, 2001 and 2000,
respectively.
K. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NONCASH INVESTING AND
FINANCING ACTIVITIES:
The Company paid and received cash for the following items:
YEAR ENDED JUNE 30,
2002 2001 2000
----------- ----------- -----------
Income taxes paid $21,251,320 $ 7,508,196 $ 9,561,485
Interest paid 1,325,640 1,386,085 1,326,009
Interest received 3,664,930 3,748,696 1,626,260
Noncash transactions during the years ended June 30, 2002, 2001 and 2000
consisted of:
In fiscal 2002, stock options for 80,000 shares of common stock were exercised
by the surrender of 7,654 shares of common stock at fair market value of
$224,968. In fiscal 2001, stock options for 1,000 shares of common stock were
exercised by surrender of 224 shares of common stock at fair market value of
$8,554. In fiscal 2000, stock options for 77,584 shares of common stock were
exercised by surrender of 12,942 shares of common stock at fair market value of
$305,511.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
TECHNE Corporation and Subsidiaries
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of TECHNE
Corporation and Subsidiaries (the Company) as of June 30, 2002 and 2001, and
the related consolidated statements of earnings, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 2002. 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 auditing standards generally
accepted in the United States of America. 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 consolidated financial position of TECHNE Corporation
and Subsidiaries at June 30, 2002 and 2001 and the results of their operations
and cash flows for each of the three years in the period ended June 30, 2002,
in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
August 13, 2002
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 2002 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 2002 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 2002 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, 2002, 2001 and 2000
Consolidated Balance Sheets as of June 30, 2002 and 2001
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2002, 2001 and 2000
Notes to Consolidated Financial Statements for the Years
Ended June 30, 2002, 2001 and 2000
Independent Auditors' Report
(2) Financial Statement Schedules.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNT
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
Balance at Provision Balance at
Beginning Charged/(Credited) Accounts End of
of Year to Income Written Off Year
---------- ------------------ ----------- ----------
(000's)
Year ended June
30, 2002:
Allowance for
doubtful accounts $126 $137 $-- $263
Year ended June
30, 2001:
Allowance for
doubtful accounts 162 29 (65) 126
Year ended June
30, 2000:
Allowance for
doubtful accounts 300 (103) (35) 162
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
TECHNE Corporation and Subsidiaries
Minneapolis, Minnesota
We have audited the consolidated financial statements of TECHNE Corporation
and Subsidiaries (the Company) as of June 30, 2002 and 2001, and for each of
the three years in the period ended June 30, 2002, and have issued our report
thereon dated August 13, 2002; such consolidated financial statements and
report are included in the Company's Fiscal 2002 Annual Report and are
incorporated herein by reference. Our audits also included the financial
statement schedule of the Company listed in Item 14. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
August 13, 2002
(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, 2002.
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 27, 2002 /s/ 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 27, 2002 /s/ Thomas E. Oland
-------------------
Thomas E. Oland
Chairman of the Board, President,
Treasurer, Chief Executive Officer,
Chief Financial and Accounting
Officer and Director
September 27, 2002 /s/ Roger C. Lucas, Ph.D.
-------------------------
Dr. Roger C. Lucas
Vice Chairman and Director
September 27, 2002 /s/ Howard V. O'Connell
-----------------------
Howard V. O'Connell, Director
September 27, 2002 /s/ G. Arthur Herbert
----------------------
G. Arthur Herbert, Director
September 27, 2002 /s/ Randolph C. Steer, Ph.D., M.D.
----------------------------------
Dr. Randolph C. Steer, Director
September 27, 2002 /s/ Lowell E. Sears
--------------------
Lowell E. Sears, Director
September 27, 2002 /s/ Christopher S. Henney, Ph.D., D.Sc.
---------------------------------------
Dr. Christopher S. Henney, Director
September 27, 2002 /s/ Timothy M. Heaney
---------------------
Timothy M. Heaney
Vice President, Secretary, General
Counsel and Director
CERTIFICATIONS
I, Thomas E. Oland, certify that:
1. I have reviewed this annual report on Form 10-K of Techne
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement or a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operation and cash flows of the registrant as of, and for, the
periods presented in this annual report.
Date: September 27, 2002
/s/ Thomas E. Oland
- --------------------
Thomas E. Oland
Chief Executive Officer and
Chief Financial Officer
EXHIBIT INDEX
for Form 10-K for the 2002 Fiscal Year
Exhibit
Number Description
- -------- -----------
3.1 Restated Articles of Incorporation of Company, as amended to date
--incorporated by reference to Exhibit 3.1 of the Company's Form 10-Q
for the quarter ended September 30, 2000*
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** 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*
10.10** 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*
10.11 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*
10.12 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*
10.13 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*
10.14** 1998 Nonqualified Stock Option Plan--incorporated by reference to
Exhibit 10.1 of the Company's Form 10-Q for the quarter ended
September 30, 1998*
10.15 Form of Stock Option Agreement for 1998 Nonqualified Stock Option
Plan--incorporated by reference to Exhibit 10.2 of the Company's Form
10-Q for the quarter ended September 30, 1998*
10.16 Purchase Agreement dated January 22, 1999, between R&D Systems,
Inc. and Hillcrest Development, relating to the purchase of property
as 614 and 640 McKinley Place NE and 2201 Kennedy Street in
Minneapolis, Minnesota and First amendment dated February 5, 1999
--incorporated by reference to Exhibit 10.1 of the Company's Form
10-Q for the quarter ended December 31, 1998*
10.17** Extension, dated March 31, 1999, to Employment Agreement with Monica
Tsang, Ph.D.--incorporated by reference to Exhibit 10.2 of the
Company's Form 10-Q for the quarter ended March 31, 1999*
10.18** Extension, dated March 31, 1999, to Employment Agreement with Marcel
Veronneau--incorporated by reference to Exhibit 10.3 of the Company's
Form 10-Q for the quarter ended March 31, 1999*
10.19 Second Amendment, dated February 2, 1999, to Purchase Agreement
dated January 22, 1999 between R&D Systems, Inc. and Hillcrest
Development--incorporated by reference to Exhibit 10.4 of the
Company's Form 10-Q for the quarter ended March 31, 1999*
10.20 Third Amendment, dated April 3, 1999, to Purchase Agreement dated
January 22, 1999 between R&D Systems, Inc. and Hillcrest Development
--incorporated by reference to Exhibit 10.5 of the Company's Form
10-Q for the quarter ended March 31, 1999*
10.21 Phase I Option Agreement, dated February 10, 1999, between R&D
Systems, Inc. and Hillcrest Development and form of Purchase
Agreement relating to the purchase of property at 2101 Kennedy Street
in Minneapolis, Minnesota-- incorporated by reference to Exhibit 10.6
of the Company's Form 10-Q for the quarter ended March 31, 1999*
10.22 First Amendment, dated April 10, 1999, to Phase I Option Agreement
dated February 10, 1999-- incorporated by reference to Exhibit 10.7
of the Company's Form 10-Q for the quarter ended March 31, 1999*
10.23 Phase II Option Agreement, dated February 10, 1999, between R&D
Systems, Inc. and Hillcrest Development and form of Purchase
Agreement relating to the purchase of property at 2001 Kennedy Street
in Minneapolis, Minnesota-- incorporated by reference to Exhibit 10.8
of the Company's Form 10-Q for the quarter ended March 31, 1999*
10.24 Second Amendment, dated June 9, 1999, to Phase I Option Agreement
dated February 10, 1999-- incorporated by reference to Exhibit 10.33
of the Company's Form 10-K for the year ended June 30, 1999*
10.25 Second Amendment, dated June 10, 1999, to Phase II Option Agreement
dated February 10, 1999-- incorporated by reference to Exhibit 10.34
of the Company's Form 10-K for the year ended June 30, 1999*
10.26 Warrant to purchase 60,000 shares of Common Stock issued to
Hillcrest Development on July 1, 1999--incorporated by reference to
Exhibit 10.35 of the Company's Form 10-K for the year ended June 30,
1999*
10.27 Combination Mortgage, Security Agreement and Fixture Financing
Statement dated July 1, 1999 between the Company and TCF National
Bank Minnesota (TCF)--incorporated by reference to Exhibit 10.36 of
the Company's Form 10-K for the year ended June 30, 1999*
10.28 Promissory Note from the Company to TCF dated July 1, 1999 in the
principal amount of $20,400,000-- incorporated by reference to
Exhibit 10.37 of the Company's Form 10-K for the year ended June 30,
1999*
10.29** Employment Agreement, dated October 1, 1999, with Timothy M. Heaney--
incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q
for the quarter ended September 30, 1999*
10.30 Investment Agreement between the Company and Discovery Genomics, Inc.
dated August 2, 2001--incorporated by reference to Exhibit 10.30 of
the Company's for 10-K for the year ended June 30, 2001.
10.31 Research and License Agreement between R&D Systems and Discovery
Genomics, Inc. dated August 2, 2001--incorporated by reference to
Exhibit 10.31 of the Company's 10-K for the year ended June 30, 2001.
10.32 Investors Rights Agreement dated February 2, 2001 among ChemoCentryx,
Inc., the Company and certain investors amending the Investment
Agreement between ChemoCentryx, Inc. and the Company dated November
18, 1997--incorporated by reference to Exhibit 10.32 of the Company's
10-K for the year ended June 30, 2001.
10.33 Letter Agreement dated February 2, 2001 between ChemoCentryx, Inc.
and the Company amending the terms of warrants held by the Company--
incorporated by reference to Exhibit 10.33 of the Company's 10-K for
the year ended June 30, 2001.
10.34 Third Amendment, dated October 4, 2000, to Phase I Option Agreement
dated February 10, 1999--incorporated by reference to Exhibit 10.34
of the Company's 10-K for the year ended June 30, 2001.
10.35** Extension, dated August 28, 2001, to Employment Agreement with
Monica Tsang, Ph.D.--incorporated by reference to Exhibit 10.35 of
the Company's 10-K for the year ended June 30, 2001.
10.36** Extension, dated August 28, 2001, to Employment Agreement with
Marcel Veronneau--incorporated by reference to Exhibit 10.36 of the
Company's 10-K for the year ended June 30, 2001.
10.37 Exercise of Option Agreement Relating to 2101 Kennedy Street dated
October 31, 2001--incorporated by reference to Exhibit 10.1 of the
Company's 10-Q for the quarter ended September 30, 2001.
10.38 Warranty Deed for purchase of certain property in Hennepin County,
Minnesota--incorporated by reference to Exhibit 10.1 of the Company's
10-Q for the quarter ended March 31, 2002.
10.39 Correction/Amendment to Investment Agreement dated April 23, 2002,
between Techne Corporation and Discovery Genomics, Inc.
11 Calculation of Earnings Per Share
21 Subsidiaries of the Company:
State/Country of
Name Incorporation
---- ----------------
Research and Diagnostic Systems, Inc. Minnesota
R&D Systems Europe Ltd. Great Britain
R&D Systems GmbH Germany
23 Independent Auditors' Consent
99 Certification
- -------------
*Incorporated by reference; SEC File No. 0-17272
**Management contract or compensatory plan or arrangement