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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For fiscal year ended MAY 31, 1997
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________ to ___________.
Commission File Number: 0-17988
NEOGEN CORPORATION
(Name of small business issuer in its charter)
MICHIGAN 38-2367843
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
620 LESHER PLACE, LANSING, MICHIGAN 48912
(Address of principal executive offices) (Zip Code)
517/372-9200
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.16 PAR VALUE
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 in response
to Item 405 of Regulation S-B is not contained in this form, and no disclosure
will 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-KSB or any amendment to this Form 10-KSB. ( )
The issuer's revenue for its most recent fiscal year was $15,259,423.
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of May 31, 1997 was $34,883,954 based on the closing price
as reported by the NASDAQ National Market.
THE ISSUER WAS NOT INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PAST FIVE YEARS
As of August 11, 1997, registrant had outstanding 6,118,008 shares.
DOCUMENTS INCORPORATED BY REFERENCE
THE REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE PREPARED PURSUANT TO
REGULATION 14A AND FILED IN CONNECTION WITH SOLICITATION OF PROXIES FOR ITS
OCTOBER 9, 1997 ANNUAL MEETING OF SHAREHOLDERS IS INCORPORATED BY REFERENCE
INTO PART III OF THIS FORM 10-KSB.
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PART I
ITEM 1. BUSINESS
GENERAL
Neogen Corporation develops, manufactures, and markets a diverse line
of products used to provide solutions for safety and improved quality in food,
agriculture and pharmacologics. The Company's products are grouped into two
areas, diagnostic test kits and veterinary instruments. The Company's
diagnostic test kits aid in the detection of foodborne bacteria, natural
toxins, drug residues, pesticide residues, plant disease infections and quality
aspects. These diagnostic test kits are generally less expensive, easier to
use and provide greater accuracy and speed than many of the conventional
diagnostic methods currently being used.
The Company has developed and markets over 140 diagnostic test kits
used in food safety, plant disease detection, animal health, pharmacologic
research and a limited number of products for human clinical use. These tests
are generally immunoassay products that rely on the Company's proprietary
antibodies capable of the detection of residues allowing for rapid and accurate
test results. All of the Company's diagnostic test kits are disposable, single
use products. The Company has developed its diagnostic test kits so they can
be utilized across multiple market segments.
The Company's Ideal Instruments subsidiary manufactures and markets
over 250 different veterinary instrument products used to administer animal
health and in obstetrics and surgery. The veterinary instrument product line
assists in the promotion of animal health principally through the delivery of
more precise drug treatments such as antibiotics and vaccines and is aimed at
reducing potential residues in meat and milk while improving animal production
efficiency.
The Company's vision is to become a world leader in diagnostic
development and marketing. To meet this vision, the Company has developed a
growth strategy consisting of the following elements: (i) increasing sales of
existing products; (ii) introducing new products and product lines; (iii)
expanding international sales; and (iv) acquiring businesses and forming
strategic alliances.
The Company was formed as a Michigan corporation in June 1981 and
actual operations began in 1982. The Company's principal executive offices are
located at 620 Lesher Place, Lansing, Michigan 48912-1595 and its telephone
number is (517) 372-9200.
RECENT DEVELOPMENTS
New Products
In July, 1997, the Company announced the release of the Reveal(R)
Bio-Plate test system. This diagnostic test system will be used within the
food industry to detect general E.coli. Testing for this bacteria is mandated
by new USDA/FSIS regulations. The total market for general E.coli tests is
estimated to be in excess of $10 million and is expected to grow a rate of 20
percent per year.
On June 25, 1997, the Company introduced a new diagnostic test kit for
the detection of listeria. The Reveal(R) for Listeria Test System utilizes the
Oxoid(R) test device and Neogen's unitized enrichment media. Listeria is a
bacteria found in many different types of foods including meat, eggs, dairy,
chicken, seafood and vegetables. Management believes testing for listeria is
widespread and growing.
On March 24, 1997, the Company announced the introduction of a new
veterinary instrument marketed under the name Pro-Pistol(TM). This
revolutionary pistol grip syringe has a unique ergonomic design and is
produced from alloy metals making it 40% lighter than other syringes. Market
acceptance in the first five months after introduction exceeded management's
expectations.
In December 1996, the Company announced the EPM testing service for
equine veterinarians. EPM affects the central nervous system of a horse and
can be fatal. EPM testing provides an added service within the Company's
professional equine group which has grown 500% per year since 1993.
New U.S. Meat and Poultry Regulations
Federal regulations concerning food safety and food adulteration have
had a favorable impact on the sales of several of the Company's diagnostic
products, and management believes this impact will be even greater in the
future. In July 1996, the U.S. Department of Agriculture's Food Safety
Inspection Service adopted a final rule governing federally inspected meat and
poultry processing plants, and businesses outside the U.S. which export meat
and poultry into the U.S. This rule and accompanying regulations will require
mandatory testing for a number of hazardous adulterants that may affect the
safety of meat and poultry. Implementation of these regulations have begun and
will continue to be phased in over the next several years. Management expects
them to have a positive impact on sales of several of the Company's diagnostic
test kits, such as the Reveal BioPlate.
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New U.S. Seafood Regulations Issued
In December 1995, the U.S. Food and Drug Administration issued a final
rule concerning the procedures required for safe and sanitary processing and
importing of fish and fishery products. This rule and accompanying regulations
have had no material effect on the Company's diagnostic revenues to this point,
since the rule does not become effective until December 1997. However,
management believes these regulations could have a positive impact on future
sales for its seafood marketing group.
Salmonella Test Approved
In September 1996, the Company was awarded an approval and
certification for its diagnostic test kit for the detection of salmonella by
the Association of Official Analytical Chemists -- Research Institute. This is
a third party test validation organization which is recognized on a worldwide
basis. Management believes this certification will further enhance sales of
this disposable diagnostic test kit.
New Distributorships Signed
In September 1996, the Company entered into a distribution agreement
with Merck KGaA to become the exclusive distributor to the U.S. food
processing industry for that company's test to determine the level of plant
sanitation. Marketed under the trade name Hy-Lite(R), the test detects the
presence of any living cells as an indication of whether processing equipment
and other surfaces have been properly cleaned and sanitized. The test requires
less than 10 minutes to conduct and is portable enough to be used at the site
where cleaning is taking place.
In October 1996, Neogen entered into an agreement with Orion
Diagnostica of Finland to distribute Hygicult(R) microbiological tests to the
food industry. The agreement gives Neogen the rights to market four different
tests for microbiological contamination. The tests provide users with a simple
method for thorough sanitation monitoring during the production process.
Share Repurchase Program
In June 1997, the Company announced that it would repurchase up to
250,000 shares of its outstanding common stock. The share repurchase program
was put in place because management and Neogen's Board of Directors believe
that the Company's shares are undervalued from time to time by the market. The
shares will be repurchased on the open market or in negotiated transactions,
depending upon market conditions and other factors. Accordingly, there is no
guarantee as to the exact number of shares to be repurchased.
Restructuring Program
In June 1996, the Company announced a restructuring program for
certain operating divisions. As part of the restructuring plan, the Company
discontinued its electronic instrument operations and implemented a
reorganization of sales and marketing activities related to veterinary
instruments. The restructuring program was designed to better position the
Company over the long term to compete more efficiently and increase market
share. In connection with the restructuring plan, the Company incurred a
one-time charge of $695,000, or $.15 per share, in the fourth quarter of fiscal
1996. See Note 3 of the Notes to Consolidated Financial Statements.
ACQUISITIONS
A part of the Company's growth strategy has been to acquire products
and businesses that provide the Company with access to technology or products
with which to expand its core business. Since 1982, the Company has made
several such acquisitions. The information below summarizes acquisitions
completed in the past two years.
Triple Crown
Effective July 1, 1997, the Company acquired substantially all of the
assets of Triple Crown, a division of W.J. Bartus, Inc. Neogen is in the
process of relocating the business to its facilities in Lexington, Kentucky.
The products and technologies acquired have been merged into the Company's
professional equine division and are expected to add approximately $1,800,000
in new sales in the first 12 months following acquisition. See Note 4 of the
Notes to Consolidated Financial Statements.
International Diagnostic Systems Corporation
In June 1995, the Company acquired certain assets of International
Diagnostic Systems Corporation of St. Joseph, Michigan. The Company acquired
inventory and technology for 35 different diagnostic tests used to detect drugs
of abuse in animals. The business was moved to the Company's facilities in
Lexington, Kentucky.
BUSINESS STRATEGY
The Company's vision is to become a worldwide leader in offering
solutions for safety and improved quality in food, agriculture and
pharmacologics. The Company expects to expand its diagnostics and detection
products and increase its market penetration of veterinary instruments with a
focus on new delivery devices to minimize animal trauma and reduce the
likelihood of drug residues in meat and milk products. The Company's strategy
to achieve these objectives includes the following:
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* Increased Sales of Existing Products. The Company
will continue to expand its product offering in multiple market
segments. The Company focuses on selling its products into seven
market segments: grain, nut and spice processors; meat, poultry and
egg processors; seafood processors; animal producers; fruit and
vegetable producers/processors; human clinical and pharmacologic
research; and private and public laboratories. The Company has
generally developed its diagnostic test kits so they can be utilized
across multiple market segments.
* Introduction of New Products. The Company has
a continued commitment to research and development programs and
has invested approximately 9% of revenues in this area over the past
two years. The Company plans to continue to leverage its own internal
research and development efforts through strategic relationships with
other organizations and important government contracts and grants. The
majority of the Company's new product development is focused on
expanding disposable product offerings to the Company's current
markets.
* Expansion of International Sales. The Company
believes that the demand outside the United States for disposable
diagnostic test kits such as those manufactured by the Company is at
least equal to demand in the United States. As such, the Company will
continue to emphasize international sales as an important factor in
its growth. The Company is developing distribution channels to take
advantage of these markets where there is a growing need for
diagnostic test kits such as those manufactured by the Company.
* Acquisitions And Strategic Alliances. In the past,
the Company has expanded its product offerings and technology base
through several acquisitions. It also seeks to expand its products
through licensing and distribution agreements. The Company plans to
continue to aggressively pursue strategic acquisitions, and licensing
and distribution agreements to enhance its position in its existing
markets where it is more cost effective to use these strategies rather
than to rely solely on internal development of new products.
INDUSTRY OVERVIEW
Due to growing concern related to the presence of harmful residues and
microorganisms in food or the environment and their potential health risks,
food producers, processors, pharmaceutical and chemical companies, research
institutions, and regulatory agencies are all experiencing increased pressures
to find more efficient testing and monitoring programs. The Company's strategy
is based on its belief that there will be a continued increase in demand for
effective tools to better manage the use of biological products and to detect
harmful residues and microorganisms when present in food, animal feeds, and the
environment.
Industry consulting groups have estimated the total market for testing
of food and environmental safety will be in the range of $500 million within
the next several years. They estimate that a significant portion of this
potential market is represented by firms not testing and tests that are not
currently being conducted. Another significant portion of the market is
represented by older, traditional methods utilizing laborious microbiological
techniques, or time consuming, and expensive, chemical analysis. Management
believes that a significant portion of this market potential will shift to
rapid, easy to use and inexpensive, test systems such as those produced by the
Company.
COMPANY MARKETS
The Company has focused its strategy on the food safety market. The
Company is marketing and developing several types of diagnostic tests to aid
each of the individual food market areas in detecting natural toxins, drug
residues, foodborne bacteria, pesticide residues, disease infections and
quality aspects. The Company's products are sold into the following seven
definable market segments:
Grain, nut and spice processors. Corn, wheat, barley, oats, milo,
rice, oil seeds and various other minor grain products become the principal
ingredient for a multitude of food industries. A large variety of nuts, along
with spices, chocolate, coffee and tea, are also universally consumed. The
safety of these ingredients is a significant source of concern for snack food
producers, pasta manufacturers, flour millers, animal feed processors,
bakeries, baby food producers, brewers, distillers and cereal manufacturers,
just to name a few of those whose livelihood depends upon the abundance of safe
ingredients.
The Company's diagnostic tests are used throughout these industries to
monitor for the presence of harmful natural toxins, pesticides and foodborne
bacteria. The Company generally defines this market as being from the time the
products leave the farm gate until they reach the consumer's plate.
Management believes it is the leader in the sale of disposable
diagnostic tests to the grain, nut and spice industries and has a larger
selection of products available to these industries than any of its
competitors.
Meat, Poultry and Egg Processors. According to the U.S. Department of
Agriculture, there are approximately 114 million cattle, hogs and lambs
slaughtered in the U.S. each year and over 840 million chickens are processed
in the U.S. annually. The principal concern for meat, poultry and egg safety
is contamination by foodborne bacteria.
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Management believes that the meat and poultry group has the best
opportunity currently to contribute to the Company's growth. The Company
offers tests for the bacteria E. coli O157:H7 and general E. coli, salmonella,
listeria, and several tests to determine the general level of plant sanitation.
A major reorganization in testing procedures by the U.S. Department of
Agriculture's Food Safety Inspection Service was announced in July 1996.
Implementation of these new regulations began in January 1997 for all meat and
poultry plants in the U.S. according to an adoption schedule that will continue
through January 2000. These new regulations will mandate certain bacteria
testing by all inspected plants, and the programs will encourage the use of a
number of other rapid tests, such as those produced by the Company.
Seafood Processors. Seafood is known to cause foodborne illnesses as
a result of both natural toxins and bacteria. At present, the U.S. seafood
industry does not have mandatory inspection requirements before its products
can be marketed. However, in December 1995, the U.S. Food and Drug
Administration issued final rules that will establish mandatory inspection
programs for this industry in the U.S. Though the final rules will not be in
full force until December 1997, the industry is now beginning to implement
quality control procedures that will include the use of rapid diagnostic tests.
The Company's tests for this market include a general sanitation rapid test as
well as tests used to detect the presence of salmonella, listeria, and
histamine, which can result in serious illness or death.
A significant portion of the world's seafood supply now comes from
aquaculture production rather than wild harvest. These producers and
processors must also be concerned about the possibilities of pesticide
contamination from runoff water into their production areas and residues of
drugs that may have been used to ensure fish health during the production
process.
Animal Producers. The animal production industry promotes food safety
even while the animal is inside the farm gate. The Company's Ideal Instruments
subsidiary manufacturers and markets 250 different products that are used to
administer animal health. Developed to provide more precise drug delivery,
these instruments help minimize the presence of animal health drugs that might
find their way into the meat and milk supply.
The Company also markets a vaccine, specialized testing service, and a
line of premium healthcare products that are sold to the professional equine
market. The Company's line of diagnostic tests to detect drugs in animals are
sold virtually throughout the world to detect the presence of drugs of abuse in
racing animals. Most racing jurisdictions perform post-race tests on horses
and greyhounds to make certain the animals' performance was not altered
intentionally by some drug.
Many integrated poultry and livestock producers also use the Company's
diagnostic tests to detect harmful residues in animal feeds. These residues
can affect overall production efficiencies.
Fruit and Vegetable Producers/Processors. As with animals,
significant portions of food safety begin inside the farm gate where plant
production takes place. The Company manufactures and markets a group of
diagnostic tests that are used by fruit and vegetable producers as well as
greenhouse and ornamental plant producers to detect the presence of certain
infectious diseases. These diseases affect crop production and can play a
major role in the quality and safety of the final food products.
This industry's testing arises from the potential presence of harmful
residues that might affect the safety of its products. The residues that
require rapid and inexpensive test kits include foodborne bacteria, natural
toxins, and pesticides. Several of the Company's products meet these industry
needs and others are being developed. The Company began this year building the
sales and marketing organization to serve this industry and management expects
product demand will grow over the next several years.
Human Clinical and Pharmacologic Research. The Company sells a
limited number of products used in clinical medicine and by the pharmaceutical
research industry. Since these products can be manufactured in the same
facilities, utilizing the same equipment and personnel, the Company has
continued to support this market activity.
As the Company continues to develop diagnostic tests for the detection
of foodborne bacteria, it foresees an opportunity to introduce these products
into the human clinical market. For example, the same test used to detect the
presence of salmonella in a food product can also be used clinically to
determine if a patient is suffering from salmonella infection. The market for
human clinical test products is well-established and is served by a number of
mature, well-capitalized firms. As a result, the Company does not intend to
enter into this market by itself, but expects to pursue opportunities in this
market only by means of strategic alliances and joint ventures with companies
presently in the market.
As a part of its immunoassay diagnostics test development programs,
the Company has discovered methods to manufacture unique, stable enzymes used
in test color development. The Company now markets these products to research
laboratories and other commercial diagnostic kit manufacturers around the
world.
The Company does not anticipate being a major factor in these markets.
However, its current products are profitable and synergistic to the Company's
other manufacturing activities.
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Private and Public Laboratories. Private laboratories purchase
diagnostic tests from the Company to provide testing services to most of the
market areas indicated in this section. These private laboratories perform
tests for firms which do not wish to do their own testing internally. Public
laboratories generally use the Company's test for regulatory purposes. As an
example, the U.S. Department of Agriculture uses several of the Company's
natural toxin test kits to determine the quality and safety of grain products.
The Company's test kit for the detection of E. coli O157:H7 is used by the Food
Safety Inspection Service to monitor for the presence of this harmful bacteria
in a number of laboratory locations. The Company's bacteria tests are used by
government animal pathology labs to aid in determining causes of animal health
problems, and plant tests are used in regulatory labs to aid in plant
quarantine situations.
PRODUCTS
DIAGNOSTIC TEST KITS
The Company has developed and markets over 140 separate diagnostic
test kits used in food safety, plant diseases, animal health, pharmacologic
research and a limited number of products for human clinical use. These tests
are generally characterized as immunoassay products that rely on the Company's
proprietary antibodies capable of detecting specific analytes at the parts per
billion levels. Generally, the test kits are single use, faster, less
expensive, require less laboratory equipment and less technical capabilities
than conventional testing methods.
Food Safety. Several of the Company's food safety test kits are
aimed at the detection of harmful foodborne bacteria. These tests are
marketed under the Company's trade name, Reveal(R). Current tests in this
one-step simple format are used to detect the presence of salmonella, listeria,
and E. coli O157:H7. Neogen also markets a test for general E. Coli under the
Reveal name and company scientists are developing test kits for other harmful
bacteria that are expected to be completed during the 1998 fiscal year.
Through a marketing agreement with Merck KGaA, the Company has the distribution
rights to the U.S. food industry HY-LITE(R), which is used to detect general
plant sanitation levels. The Company also has marketing rights from Orion
Diagnostica to distribute four different tests for microbiological
contamination including yeast and fungi.
The Company's Veratox(R) and Agri-Screen(R) diagnostic tests are used
by the food industry to detect levels of naturally occurring toxins. These
products include both qualitative and quantitative tests for aflatoxin,
vomitoxin, T-2 toxin, zerealenone, ochratoxin and fumonisin. Other natural
toxin tests are being developed to detect toxins of concern in fruits and
vegetables.
The Company's Agri-Screen Ticket(R) test is used by the food industry
to detect harmful residues of a large number of plant pesticides.
Plant Diseases. Marketed under the trade name Alert(R), the Company
has several diagnostic tests that are used to detect plant diseases. These
quick 10 minute tests identify the presence of Pythium, Phytophthora,
Rhizoctonia, Xanthamonas, and Sclerotina. The kits are used as an early
detection device, and as a tool to limit fungicide applications.
Animal Health. Under the ELISA Technologies(R) trade name, the Company
markets over 50 high sensitivity immunoassay tests for drugs of abuse in
animals and residues in meat. These include tests for narcotic analgesics,
stimulants, depressants, tranquilizers, anesthetics, steroids and diuretics.
ELISA Technologies also provides a testing service for equine veterinarians to
detect EPM which affects the central nervous system of horses and can be fatal.
In addition, ELISA markets Bot Tox B, the only USDA approved vaccine for the
prevention of Type B botulism in horses.
The Company also has developed a test kit for the detection of a
proprietary drug used to control internal parasites. This test kit allows
poultry producers to monitor for the effective level of this drug as a feed
additive. The Company's tests for bacteria and natural toxins are also used by
producers to ensure animal health.
Other Diagnostic Tests. Marketed under the AMPCOR(R) label, the
Company has 15 different diagnostic tests used by the human clinical market
for the detection of serology disorders and a sexually transmitted disease.
Sold under its ELISA Technologies trade name, the Company has several
products used for the detection of biologically active substances in humans by
researchers and pharmaceutical companies for biomedical research purposes.
These tests are used to detect cyclic nucleotides, hormones, leukotrienes,
prostaglandins and steroids. Under the trademarks K-Blue and K-Gold, the
Company sells reagents used by others in diagnostic test kit manufacturing.
Sales of diagnostic products accounted for approximately 70% and 78%
of the Company's total revenues for fiscal years 1996 and 1997, respectively.
VETERINARY INSTRUMENTS
Through its wholly-owned subsidiary Ideal Instruments, Inc. ("Ideal"),
the Company markets a complete line of veterinary instruments and animal health
delivery systems. Ideal offers approximately 250 different products, over half
of which are instruments used to deliver animal health products such as
antibiotics and vaccines. Most of the remaining instruments are used in
obstetrics and surgery. Included among these products is a line of disposable
syringes and needles presently custom manufactured and imported by Ideal.
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The veterinary instruments product line is designed to provide better
control of animal health products, thereby reducing the likelihood of
antibiotic and pharmaceutical residues contaminating meat or milk products. At
the same time, the use of quality, high precision delivery instruments helps
producers improve efficiency.
In fiscal years ended May 31, 1996 and 1997, sales of veterinary
instruments as a percentage of total revenues were 29% and 22% respectively.
RESEARCH AND DEVELOPMENT
The Company maintains a strong commitment to research and development.
The Company's product development efforts are focused on the enhancement of
existing product lines and in development of new products based on the
Company's existing technologies. The Company employs 16 individuals in its
research and development department, including immunologists, chemists,
engineers and microbiologists. Research and development expenditures were
approximately $1.2 million and $1.3 million, representing 10% and 9% of total
revenues in fiscal 1996 and 1997, respectively. The Company currently intends
to maintain its research and development expenditures at approximately 10% of
total revenues.
The Company has ongoing development projects for new immunoassay
diagnostic tests for the food safety and pharamacologics markets, as well as
development projects for new and improved veterinary instruments. Current and
ongoing research and development projects include:
U.S. Department of Agriculture Grant. The Company continues to work
on a grant from the U.S. Department of Agriculture for the development of a
time-temperature test device. This simple device, if perfected, could be used
for accurate assessment or monitoring of a fast-food restaurant's cooking
process and equipment. Research on this project is expected to be completed in
fiscal 1998. There can be no assurance that this product will ultimately be
successfully developed or marketed.
Collaboration with Academic Institutions. Since its inception, the
Company has identified a substantial amount of applied research in its area of
interest at universities that has been developed by researchers. The Company
has worked with over 45 scientific collaborators associated with 17 academic
institutions. The Company utilizes these relationships in three strategic
ways: (i) the technology is transferred from the scientist or university to
the Company for the completion of development from the precursor findings or
laboratory prototypes; (ii) the Company seeks out and contracts with university
researchers to aid its own staff in a part of the development activities for
products previously identified by the Company; and (iii) new products developed
by the Company are tested in laboratories on a widespread geographic basis
prior to the products' market release. The Company believes its research
strategy has enabled it to produce better products, faster and more cost
effectively than if the research, development and testing were done exclusively
by Company employees in Company facilities.
Other Collaboration Efforts. Portions of certain technologies
utilized in some products marketed by the Company were acquired from or
developed in collaboration with affiliated partnerships, independent
scientists, governmental units, universities, and other third parties. The
Company has entered into agreements with these parties which provide for the
payment of royalties based upon sales of products which utilize the pertinent
technology. For fiscal 1996 and 1997, royalty payments under these agreements
amounted to $579,045 and $771,204, respectively.
SALES AND MARKETING
The Company has chosen to organize its sales efforts according to
market segments rather than by product or geographic orientation. Management
believes that this strategy has enhanced revenue growth and market share
increases. The Company's sales and technical service organizations understand
their customers' businesses and are knowledgeable on how the Company's various
products can be used within those industries. Close relationships built with
individual customers also help the Company identify new diagnostic test
products that can be useful.
During the fiscal year ended May 31, 1997, the Company had in excess
of 1,500 customers for its products. Since many of these customers are
distributors, the total number of end users of the Company's products is
considerably larger. Sales to international markets in fiscal 1997 accounted
for 27% of the Company's consolidated revenues. See Note 11 of the Notes to
the Company's Consolidated Financial Statements. No single distributor or
customer accounted for more than 10% of the Company's revenues in any of the
past three years.
The Company markets, sells and services its products in more than 75
countries through its own sales force, as well as through distributors in
certain geographic areas. 53 people, or approximately 30% of the Company's
total employees, are engaged in these sales and marketing activities. The
Company operates its sales and distribution organization differently for given
markets and products as summarized below:
Food Diagnostic Products. The Company has separately organized sales
forces that focus on the key industries in the food area. This group handles
both sales and technical services of the Company's disposable test kits. In
the U.S. these products are sold directly to end-users. Sales Organizations are
maintained for: grain, nut and spices; meat, poultry and eggs; fruits and
vegetables; and seafood.
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Veterinary Instruments. Animal health distribution is well
established in most countries of the world. Consequently, the Company markets
virtually all of its veterinary instruments through a network of domestic and
international distributors. These distributors typically market pharmaceutical
and biological products that are companions to veterinary instruments. The
Company has a sales force specifically dedicated to sales of the product line
through the distributor channels.
Clinical and Pharmacologic Biomedical Research. The Company does not
anticipate being a major factor in the marketing of products used in the human
clinical and pharmaceutical research areas. However, several products are
included in the Company's array of diagnostic tests as a result of
acquisitions. These products are profitable and synergistic to the Company's
other manufacturing activities. A separate sales organization is responsible
for this product group and sells through distributors and to large end users.
International Sales. Virtually all of the Company's sales to
customers outside of the U.S. and Canada are through distributors who typically
market the Company's products as well as other products that are used by the
same customer base. The Company's distribution organization is stronger in the
South and Central American countries than in Europe or Asia since this
geographic area was the Company's first focus. The Company is currently
pursuing distribution channels in Europe and Asia to increase sales. The
Company does not maintain sales offices outside the U.S.
PROPRIETARY PROTECTION AND APPROVALS
The Company applies for patents and trademarks whenever appropriate.
Since its inception, the Company has acquired and received 16 patents and 32
trademarks, and has several pending patents and trademarks. The patents expire
at various times over the next 20 years, beginning in 1997.
The Company has no material pending litigation as to proprietary
rights to its products which poses a significant threat to its operations, and
management believes that the Company has adequate protection as to proprietary
rights for its products. However, the Company is aware that substantial
research in agricultural biotechnology has taken place at universities,
governmental agencies and other companies throughout the world and that
numerous patent applications have been filed and that and that numerous patents
have been issued. In addition, patent litigation (none involving the Company
or its products) currently exists with respect to fundamental agricultural
biotechnology and biochemistry. Accordingly, there can be no assurance that
the Company's existing patents will be sufficient to protect completely the
Company's proprietary rights.
The Company uses trade secrets as proprietary protection in numerous
of its diagnostic products. In many cases, the Company has developed unique
antibodies capable of detecting residues in minute levels. The supply of these
antibodies, and the proprietary techniques utilized for their development,
oftentimes offer better protection than the filing of patents. Such
proprietary reagents are kept in secure facilities and stored in more than one
location to circumvent their destruction by natural disaster.
One of the major areas affecting the success of biotechnology
development involves the time, costs and uncertainty surrounding regulatory
approvals. Currently, the only Company products requiring regulatory approval
are Bot Tox-B(R) and serological test kits sold to human clinical laboratories
(which were acquired via the Company's acquisition of AMPCOR, Incorporated).
On a combined basis, sales for these products amounted to less than 10% of
total sales in fiscal year 1997. The Company's strategy is to select products
on the fringe of regulatory approval areas which do not require mandatory
approval to be marketed.
The Company does utilize third party validations on many of its
disposable test kits as a marketing tool to provide its customers with the
proper assurances. These include validation by the Association of Official
Analytical Chemists, independently administered third-party, multi-laboratory
collaborative studies and approvals by the U.S. Federal Grain Inspection
Service and the U.S. Food Safety Inspection Service for use of Company products
in their own laboratories.
MANUFACTURING
The Company manufactures its products in Lansing, Michigan, Lexington,
Kentucky, Bridgeport, New Jersey, and Schiller Park, Illinois. There are
currently 92 full-time employees assigned to manufacturing in these four
locations. All locations generally operate on a one-shift basis, but could be
increased to a two-shift basis. The Company believes it could double its
current output of its two primary product lines using the current space
available with minimal amounts of additional capital equipment.
The Company's Schiller Park, Illinois facility, which is used
primarily to manufacture the Ideal veterinary instruments line, is a complete
metal working operation with equipment that allows Ideal to go from raw
materials, such as brass rod and tubing, to finished instruments with
skin-wrapped merchandisable packaging.
The Lexington, Kentucky facility is devoted exclusively to the
manufacture of pharmacological diagnostic test kits, test kits for drug
residues and professional equine products marketed by ELISA Technologies.
Proprietary antibodies for some of these diagnostic kits were produced at the
University of Kentucky under a license and supply agreement. All other
manufacturing operations, including preparation of other reagents, quality
assurance and final kit assembly, are performed by ELISA Technologies personnel
in the Lexington facilities.
-8-
<PAGE> 9
The Bridgeport, New Jersey facility manufactures all of the Company's
one-step diagnostic tests for the detection of microorganisms as well as kits
sold into the human clinical laboratory market. Proprietary monoclonal and
polyclonal antibodies are produced as needed in laboratories at the New Jersey
operations. Additional laboratory personnel prepare reagents and perform
quality assurance functions. Final kit assembly, packaging and shipping are
all performed in specific designated areas within the New Jersey facility. The
manufacture of the one-step diagnostic tests requires the use of several
custom-designed machines which enable manufacturing personnel to achieve
high-volume output on a per-hour basis.
Manufacturing diagnostic tests for natural toxins, pesticides and
plant disease diagnostic tests takes place at the Company's corporate
headquarters in Lansing, Michigan. Proprietary monoclonal and polyclonal
antibodies for the Company's diagnostic kits are produced on a regular schedule
in the Company's immunology laboratories in Lansing. Other reagents are
similarly prepared by the chemistry group. These component parts are then
transferred to another section in the same building, where final kit assembly
and quality assurance are conducted, and shipping takes place.
The Company purchases component parts and raw materials from over 200
suppliers. Though many of these supplies are purchased from a single source in
order to achieve the greatest volume discounts, the Company believes it has
identified acceptable alternative suppliers for all of its components and raw
materials.
Shipments of diagnostic test kits and veterinary instrument products
are generally accomplished within a 48-hour turnaround time. As a result of
this quick response time, the Company does not maintain a large backlog of
unshipped orders.
COMPETITION
The Company knows of no competitor that is pursuing its fundamental
strategy of developing a full line of products ranging from disposable tests to
veterinary instruments for a large number of food safety concerns. However,
the Company does have competitors for each of its primary product lines. The
Company competes with a large number of companies ranging from very small
businesses to divisions of large companies. Many of these firms have
substantially greater financial resources than the Company.
Academic institutions and other public and private research
organizations are also conducting research activities and may commercialize
products on their own or through joint ventures. The existence of competing
products or procedures that may be developed in future years may adversely
affect the marketability of the products developed by the Company.
The Company competes primarily on the basis of ease of use, speed,
accuracy, and other similar performance characteristics of its products. The
breadth of the Company's product line, the effectiveness of its sales and
customer service organizations and pricing are also components in the Company's
competitive plan. The Company is not aware of any factors within its product
lines that place the Company in a negative competitive position relative to its
competitors.
GOVERNMENTAL REGULATION
A significant portion of the Company's products are affected by the
regulations of various domestic and foreign government agencies, including the
U.S. Department of Agriculture and the U.S. Food and Drug Administration.
Though less than 10% of the Company's revenue is currently derived from
products requiring government approval prior to sale, a significant portion of
its revenue is derived from products used to monitor and detect the presence of
residues that are regulated by various government agencies. Furthermore, a
significant portion of the Company's growth may be affected by the
implementation of new regulations such as the U.S. Food and Drug
Administration's final rule, Procedures For The Safe and Sanitary Processing
And Importing of Fish and Fishery Products, and the final rule of the U.S.
Department of Agriculture, Pathogen Reduction; Hazard Analysis and Critical
Control Point Systems.
The Company's development and manufacturing processes involve the use
of certain hazardous materials, chemicals and compounds. The Company believes
that its safety features for handling and disposing of such commodities comply
with the standards prescribed by local, state and federal regulations. The
Company's cost to comply with these regulations is not significant and the
Company has no reason to believe that any such future legislation or rules
would be materially adverse to its business.
EMPLOYEES
Currently, the Company employs approximately 186 full-time persons.
None of the employees are covered by collective bargaining agreements. There
have been no work stoppages or slow downs due to labor-related problems. The
Company believes that its relationship with its employees is good. All
employees having access to proprietary information have executed confidentially
agreements with the Company.
INSURANCE
The Company maintains product liability insurance on all products with
a coverage limit of $2 million per occurrence. In addition, the Company also
maintains insurance in amounts and types which the Company believes to be
customary in its industry.
-9-
<PAGE> 10
ITEM 2. PROPERTIES
The Company's corporate offices and Michigan-based manufacturing and
research facilities are maintained in a 26,000 square foot building located in
Lansing, Michigan. This facility was purchased by the Company on land contract
in August 1985 and is fully paid for. In fiscal 1996, the Company purchased
additional facilities comprising 1,100 square feet within one block of the
existing corporate headquarters. The new facility is used for offices to
accommodate ten persons employed in sales and marketing functions.
Veterinary instrument manufacturing operations are housed in a 34,000
square foot building located at 9355 West Byron Street in Schiller Park,
Illinois. The Company entered into a seven-year, non-cancelable operating
lease for this property effective August 1, 1993. The lease agreement provides
for annual lease payments of $100,300 for each of the first two years with
increases of approximately 3.5% thereafter for the remainder of the lease.
The ELISA Technologies operations are maintained in 12,000 square feet
of leased space in a three story building located at 628 East Third Street in
Lexington, Kentucky. The Company entered into a five-year, non-cancelable
operating lease for the space effective July 1, 1993. The lease agreement
provides for annual lease payments, including all utilities, of $57,600 for the
first year and increasing by $1,200 per year each year after.
The AMPCOR Diagnostics, Inc. operations are housed in 9,200 square
feet of leased space on one floor in a building located at 603 Heron Drive,
Bridgeport, New Jersey. The Company entered into a three-year three-month,
non-cancelable operating lease for the space effective February 1, 1995. The
lease agreement provides for annual lease payments of $37,585 plus additional
rent equal to $7,334 per year with the additional rent subject to annual
increase based upon actual increases to certain operating expenses.
Management believes that the Company's operating facilities are
suitable for conducting its current business, but also believes that additional
facilities will be required as a result of anticipated growth in sales and
personnel.
ITEM 3. LEGAL PROCEEDINGS
Although the Company is a party to ordinary routine litigation
incidental to its business, there are no pending material adverse legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on the Nasdaq National Market under the
symbol "NEOG". The following table sets forth, for the fiscal periods
indicated, the high and low sales prices for the Common Stock as reported on
the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
FISCAL YEAR ENDED MAY 31, 1996
<S> <C> <C>
First Quarter....................................................................... $8.00 $5.88
Second Quarter...................................................................... 8.25 5.88
Third Quarter....................................................................... 6.25 4.63
Fourth Quarter...................................................................... 8.25 5.13
FISCAL YEAR ENDED MAY 31, 1997
First Quarter....................................................................... 9.00 6.38
Second Quarter...................................................................... 9.38 6.50
Third Quarter....................................................................... 8.50 6.25
Fourth Quarter...................................................................... 7.75 6.13
</TABLE>
As of July 31, 1997, there were approximately 525 stockholders of
record of Common Stock which the Company believes represents a total of
approximately 5,000 beneficial holders. The Company has never paid any cash
dividends on its Common Stock and does not anticipate paying any cash dividends
in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information in this Management's Discussion and Analysis of
Financial Condition and Results of Operations contains both historical
financial information and forward-looking statements. Neogen does not provide
forecasts of future financial performance. While management is optimistic
about the Company's long-term prospects, historical financial information may
not be indicative of future financial performance.
-10-
<PAGE> 11
Forward-looking statements included herein involve certain risks and
uncertainties. Various factors, including competition, recruitment of and
dependence on key employees, impact of weather on agriculture and food
production, identification and integration of acquisitions, research and
development risks, patent and trade secret protection, government regulation
and other risks detailed from time to time in the Company's reports on file at
the Securities and Exchange Commission may cause actual results to differ
materially from those contained in the forward-looking statements.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
INCREASE
REVENUES (DOLLARS IN THOUSANDS) 1997 (DECREASE) 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Product Sales:
<S> <C> <C> <C>
Diagnostic Products $11,876 36% $ 8,759
Veterinary Instruments 3,353 (6%) 3,569
Contract Revenues 30 (80%) 162
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $15,259 22% $ 12,490
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The substantial increase in sales of diagnostic products was due to
several factors. Sales of test kits used to detect mycotoxins in the grain,
nuts and spice market increased $1,947,000 or 40% over the prior year. A
majority of this increase was due to higher sales of test kits for the
detection of vomitoxin. A large portion of the 1996 midwest winter wheat crop
was found to contain high levels of this harmful residue. Although difficult
to predict, management believes that sales of vomitoxin test kits will not
likely be as strong in fiscal year 1998. However, management also believes
demand for its other mycotoxin diagnostic test kits, which grew at a rate of
25% in 1997, will continue to grow in 1998.
Sales of diagnostic products and reagents sold to the pharmacologics
and professional equine markets increased $693,000 or 27% in fiscal 1997.
Sales increases were realized throughout the product line and management
believes that the Company's professional equine products will experience strong
growth in 1998.
Much of the remaining increase in diagnostic product sales was due to
a 106% increase in sales of test kits used to detect microorganisms in meat and
poultry markets. Management believes that the meat and poultry market along
with the seafood market offer the best opportunities for future sales growth
for the Company.
The decline in veterinary instrument sales was primarily due to
depressed economic conditions in cattle markets resulting in lower overall
demand for durable veterinary instruments. Recently, cattle prices have
improved while grain prices have decreased. Management believes that the
combination of these factors will result in improved markets for its veterinary
instrument segment during the 1998 fiscal year.
The decline in contract revenues compared to the prior year is
primarily due to scheduled completion in the second quarter of last year of two
contracts with the United States Department of Agriculture. It is common for
contract revenues to fluctuate from year to year depending on timing and terms
of the contracts.
<TABLE>
<CAPTION>
COST OF GOODS SOLD (DOLLARS IN THOUSANDS) 1997 INCREASE 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of Goods Sold $ 6,201 13% $ 5,485
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The increase in cost of goods sold is a direct result of the overall
increase in product sales. Expressed as a percentage of sales, cost of goods
sold declined to 41% compared to 44% in the prior year. This improvement was
due to a higher sales mix of diagnostic test kits, increased labor productivity
and better utilization of fixed overhead costs for diagnostic products.
<TABLE>
<CAPTION>
OPERATING EXPENSES (DOLLARS IN THOUSANDS) 1997 INCREASE 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales and Marketing $ 4,197 19% $ 3,539
General and Administrative 2,230 26% 1,774
Research and Development 1,320 7% 1,238
Restructuring Charges - - N/A 695
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Sales and marketing expenses increased $658,000 in 1997 compared to
1996. Due to the substantial increase in sales volume, commissions and
royalties for diagnostic products were $313,000 higher in 1997. A total of
$265,000 was due to higher salaries, fringe and travel costs associated with
the hiring of new salesmen and technical support personnel as part of expanded
sales and marketing programs for diagnostic products. Increases in the
provision for doubtful accounts ($135,000) and advertising and promotions for
diagnostic products ($95,000) were partially offset by a decrease in
commissions for veterinary instrument sales ($177,000).
A number of expense categories within general and administrative were
higher in 1997 compared to 1996. In virtually every case, the increases were
due to higher sales volume, better operating performance or an overall increase
in administrative business activity. Significant increases included bonus
accruals ($136,000); salaries, fringe and related travel expenses ($82,000);
legal and professional fees ($72,000); amortization expense ($39,000); investor
relations ($25,000); consulting ($26,000); and Michigan Single Business Tax
($21,000).
-11-
<PAGE> 12
The increase in research and development expense was due to higher
salaries as a result of increased staffing and expenses related to third party
validations for certain diagnostic products. Management believes that research
and development is critical to the Company's future. Accordingly, the Company
expects that future research and development expense will approximate 10% of
total revenues.
In the fourth quarter of 1996, the Company recorded restructuring
charges associated with the discontinuance of electronic instrument operations
and reorganization of sales and marketing efforts for veterinary instruments
(See note 3 to Consolidated Financial Statements). Liabilities of $218,000
related to the restructuring charges declined throughout fiscal year 1997 as
the Company paid or settled these liabilities.
<TABLE>
<CAPTION>
OTHER INCOME (EXPENSE) (DOLLARS IN THOUSANDS) 1997 INCREASE 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other Income (Expense) $ 564 14,100% $ 4
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
During the second quarter, the Company completed a public offering of
common stock (See note 6 to Consolidated Financial Statements). A portion of
the proceeds from the offering was used to pay down short-term bank borrowings
resulting in lower interest expense. The remaining proceeds were invested in
short-term marketable securities which resulted in higher interest income. In
addition, the Company's share of royalties paid to an affiliated partnership
increased significantly in the second, third and fourth quarters.
<TABLE>
<CAPTION>
NET INCOME (LOSS) AND INCOME (LOSS) PER SHARE (DOLLARS IN THOUSANDS) 1997 INCREASE 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income (Loss) $ 1,812 843% ($244)
Net Income (Loss) Per Share $ .32 ($.05)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The significant improvement in net income and net income per share is
primarily due to the substantial increase in sales volume of diagnostic
products compared to the prior year along with the increase in other income.
FINANCIAL CONDITION AND LIQUIDITY
At May 31, 1997 the Company had $13,044,000 in cash and marketable
securities, working capital of $17,265,000 and stockholders' equity of
$21,013,000. In addition the Company has bank lines of credit totaling
$2,500,000 with nothing borrowed against these lines as of May 31, 1997. Cash
and marketable securities increased $10,861,000 during fiscal year 1997
primarily as a result of the public offering of the Company's common stock
completed on October 22, 1996 (See note 6 to the Consolidated Financial
Statements).
In July, 1996 the Company made a second and final cash payment of
approximately $53,000 in connection with the purchase of certain assets of
International Diagnostics Systems Corporation of St. Joseph, Michigan (see note
4 to Consolidated Financial Statements). Effective July 1, 1997, the Company
acquired substantially all of the assets of Triple Crown Pharmaceuticals, a
division of W. J. Bartus, Inc. of Ft. Pierce, Florida. The initial purchase
price consisted of a cash payment of approximately $1,400,000 paid in July.
The increase in accounts receivable at May 31, 1997 compared to 1996
is due exclusively to a substantial increase in sales volume in the last two
months of the current fiscal year for professional equine and pharmacologic
products sold by the Company's Lexington, KY division. Inventories are higher
at May 31, 1997 to support the strong increases in sales of diagnostic
products, as a result of new products introduced during the last half of fiscal
1997 and in anticipation of future increases in sales.
The increase in accounts payable is partially due to higher trade
payables for inventory at May 31, 1997 compared to May 31, 1996 and also the
result of an overall increase in vendor activity due to increased sales volume.
Accrued liabilities, excluding the accrual for restructuring charges, increased
$391,000 primarily due to increased accruals for taxes, royalties, commissions
and bonuses, all of which are the result of increased sales and improved
operating performance.
The Company did not borrow any additional funds during fiscal year
1997 and made scheduled payments on long-term debt totaling $71,000. In
addition, the Company used $1,029,000 of proceeds from a public offering of its
common stock to pay off existing short-term borrowings on two separate bank
lines of credit at the end of October, 1996. Neogen expended approximately
$630,000 during 1997 for additions to property, equipment, and other assets.
At May 31, 1997, the Company had no material commitments for capital
expenditures. Inflation and changing prices are not expected to have a
material effect on the Company's operations.
Neogen has been profitable for sixteen of its last seventeen quarters
and has generated positive cash flows from operations during this period.
Management believes that the Company's existing cash and marketable securities
at May 31, 1997, along with its available bank lines of credit, will be
sufficient to fund activities for the foreseeable future. Such funds may not
be sufficient to meet the Company's longer term cash requirements to
commercialize products currently under development or its plans to acquire
additional technology and products that fit within the Company's mission
statement. Accordingly, the Company may be required to issue equity securities
or enter into other financing arrangements for a portion of the Company's
future capital needs.
-12-
<PAGE> 13
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NEOGEN CORPORATION
AND SUBSIDIARIES
CONTENTS
Page
Number
------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 14
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets 15
Statements of Operations 17
Statements of Stockholders' Equity 18
Statements of Cash Flows 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20 - 28
-13-
<PAGE> 14
NEOGEN CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Neogen Corporation
Lansing, Michigan
We have audited the accompanying consolidated balance sheets of Neogen
Corporation and subsidiaries as of May 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Neogen Corporation
and subsidiaries at May 31, 1997 and 1996, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
BDO SEIDMAN, LLP
Troy, Michigan
July 17, 1997
-14-
<PAGE> 15
NEOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
May 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS (NOTE 5)
CURRENT ASSETS
<S> <C> <C>
Cash $ 718,864 $ 625,992
Marketable securities (Note 2) 12,324,913 1,557,041
Accounts receivable, less allowance for
doubtful accounts of $320,000 and $185,000 2,024,161 1,643,181
Inventories (Notes 1 and 3) 3,620,200 3,378,671
Prepaid expenses and other current assets 353,437 318,882
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 19,041,575 7,523,767
- ------------------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Land and improvements 33,882 33,882
Buildings and improvements 463,814 440,532
Machinery and equipment 3,707,027 3,192,665
Furniture and fixtures 325,019 305,139
- ------------------------------------------------------------------------------------------------------------------------------------
4,529,742 3,972,218
Less accumulated depreciation 2,965,190 2,590,430
- ------------------------------------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 1,564,552 1,381,788
- ------------------------------------------------------------------------------------------------------------------------------------
INTANGIBLE AND OTHER ASSETS
Goodwill, net of accumulated amortization
of $297,520 and $210,740 (Note 4) 2,012,195 2,034,153
Other assets, net of accumulated amortization
of $457,669 and $330,810 530,151 591,436
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTANGIBLE AND OTHER ASSETS 2,542,346 2,625,589
- ------------------------------------------------------------------------------------------------------------------------------------
$ 23,148,473 $11,531,144
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-15-
<PAGE> 16
NEOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
May 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Notes payable - banks (Note 5) $ - $ 1,043,946
Accounts payable 842,985 497,502
Accruals
Compensation and benefits 607,052 369,788
Restructuring charges (Note 3) 12,684 217,794
Other 242,730 88,878
Current maturities of long-term debt (Note 5) 71,147 71,147
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,776,598 2,289,055
LONG-TERM DEBT, less current maturities (Note 5) 207,770 278,918
OTHER LONG-TERM LIABILITIES 150,905 105,467
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,135,273 2,673,440
- ------------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS (Notes 9, 10 and 13)
STOCKHOLDERS' EQUITY (Notes 6 and 7)
Common stock, $.16 par value, shares authorized
10,000,000; issued and outstanding 6,110,608
and 4,559,260 977,697 729,482
Additional paid-in capital 23,937,397 13,841,617
Retained earnings (deficit) (3,901,894) (5,713,395)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 21,013,200 8,857,704
- ------------------------------------------------------------------------------------------------------------------------------------
$ 23,148,473 $11,531,144
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-16-
<PAGE> 17
NEOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended May 31,1997 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
REVENUES
<S> <C> <C>
Sales $ 15,229,098 $12,328,103
Contract revenues 30,325 162,308
- ------------------------------------------------------------------------------------------------------------------------------------
15,259,423 12,490,411
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of goods sold 6,201,301 5,484,524
Sales and marketing 4,197,283 3,538,876
General and administrative 2,230,438 1,773,966
Research and development 1,319,732 1,237,643
Restructuring charges (Note 3) - 695,500
- ------------------------------------------------------------------------------------------------------------------------------------
13,948,754 12,730,509
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 1,310,669 (240,098)
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income 449,331 75,733
Interest expense (66,851) (153,286)
Other 181,552 81,312
- ------------------------------------------------------------------------------------------------------------------------------------
564,032 3,759
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE TAXES ON INCOME 1,874,701 (236,339)
TAXES ON INCOME (Note 8) (63,200) (7,200)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 1,811,501 $ (243,539)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE (Note 1) $ .32 $ (.05)
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-17-
<PAGE> 18
NEOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1997 AND 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock Additional Retained
------------ Paid-In Earnings
Shares Amount Capital (Deficit)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, June 1, 1995 4,460,027 $713,604 $13,592,684 $ (5,469,856)
Exercise of options 59,300 9,489 130,332 -
Exercise of warrants 39,933 6,389 118,601 -
Net loss for the year - - - (243,539)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE, May 31, 1996 4,559,260 729,482 13,841,617 (5,713,395)
Exercise of options 48,466 7,754 126,294 -
Exercise of warrants 1,782 285 8,304 -
Issuance of common stock 1,501,100 240,176 9,961,182 -
Net income for the year - - - 1,811,501
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE, May 31, 1997 6,110,608 $977,697 $23,937,397 $ (3,901,894)
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-18-
<PAGE> 19
NEOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year Ended May 31, 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,811,501 $ (243,539)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Depreciation and amortization 624,113 537,232
Loss (gain) on sale of equipment (1,520) 2,489
Changes in operating assets and liabilities
Accounts receivable (380,980) 38,019
Inventories (241,529) 460,838
Prepaid expenses and other current assets (34,555) 36,145
Accounts payable 345,483 (245,150)
Accrued liabilities 186,006 272,923
- ----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,308,519 858,957
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of marketable securities 11,886,003 4,028,704
Purchases of marketable securities (22,653,875) (4,030,046)
Proceeds from sale of equipment 7,206 7,863
Purchases of property, equipment and other assets (630,760) (403,217)
Acquisitions of businesses (53,122) (680,056)
- ----------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (11,444,548) (1,076,752)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on notes payable - banks (1,043,946) (15,000)
Payments on long-term borrowings (71,148) (88,304)
Net proceeds from issuance of common shares 10,343,995 264,811
- ----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,228,901 161,507
- ----------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 92,872 (56,288)
CASH, AT BEGINNING OF YEAR 625,992 682,280
- ----------------------------------------------------------------------------------------------------------------------
CASH, AT END OF YEAR $ 718,864 $ 625,992
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
-19-
<PAGE> 20
NEOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
NATURE OF OPERATIONS
Neogen Corporation and subsidiaries (the Company) develop, manufacture, and
sell a diverse line of products to provide solutions for safety and improved
quality in food, agriculture and pharmacologics. The Company's products are
currently used for animal health applications, food safety testing and in
medical research.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Neogen
Corporation, Ideal Instruments, Inc. (Ideal), AMPCOR Diagnostics, Inc.
(AMPCOR) and several majority owned companies which are general partners for
research limited partnerships. The investments in partnerships are not
significant to the consolidated financial statements.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect (1) the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities as of the date of
the financial statements, and (2) revenues and expenses during the
reporting period. Actual results could differ from these estimates.
RISKS AND UNCERTAINTIES
Diagnostic products, specifically test kits for the detection of vomitoxin,
contributed a significant portion of the Company's revenues and profits
growth in fiscal 1997. A large portion of the 1996 midwest winter wheat
crop was found to contain high levels of vomitoxin, resulting in a
significant increase in test kits to detect this harmful residue. Although
difficult to predict, management believes that sales of these test kits
will not likely be as strong in fiscal 1998. The Company expects that its
ability to maintain or expand its current levels of revenues and profits in
the future will depend on various factors, including the impact of weather
on agriculture and food production.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable.
The Company attempts to minimize credit risk by reviewing all customers'
credit history before extending credit and by monitoring customers' credit
exposure on a continuing basis. The Company establishes an allowance for
possible losses on accounts receivable based upon factors surrounding the
credit risk of specific customers, historical trends and other information.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of accounts receivable, accounts payable, and accrued
expenses approximate fair value because of the short maturity of these
items.
The carrying amounts of the notes payable and long-term debt issued
pursuant to the Company's bank credit agreements approximate fair value
because the interest rates on these instruments change with market rates.
MARKETABLE SECURITIES
All marketable securities are classified as available-for-sale and are
available to support current operations or to take advantage of other
investment opportunities. These securities are stated at estimated fair
market value. The cost of securities sold is based on the specific
identification method and interest earned is included in other income.
-20-
<PAGE> 21
NEOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INVENTORIES
Inventories are stated at the lower of cost, determined on the first-in,
first-out method, or market. The components of inventories are as follows:
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Raw material $ 1,507,216 $ 1,468,316
Work-in-process 852,789 889,110
Finished goods 1,260,195 1,021,245
- --------------------------------------------------------------------------------
$ 3,620,200 $ 3,378,671
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Expenditures for major improvements
are capitalized while repairs and maintenance are charged to expense.
Depreciation is provided on the straight-line method over the estimated useful
lives of the respective assets, generally twenty to thirty-one years for
buildings and improvements and three to ten years for furniture, machinery and
equipment. Depreciation expense was $389,582 and $320,869 in 1997 and 1996,
respectively.
INTANGIBLE ASSETS
Goodwill represents the excess of acquisition costs over the estimated fair
value of net assets acquired. Goodwill is amortized on a straight-line basis
over periods ranging from fifteen to twenty-five years. The Company reviews
goodwill for impairment based upon undiscounted cash flows from operations
before interest over the remaining lives of the goodwill. If necessary,
impairment will be measured based on the difference between discounted future
cash flows and the net book value of the related goodwill.
Other intangible assets, consisting primarily of covenants not to compete,
licenses and patents, are recorded at fair value at the date of acquisition.
These intangible assets are amortized on a straight-line basis over periods
ranging from five to seventeen years.
LONG-LIVED ASSETS
The Company adopted the provision of Statement of Financial Accounting
Standards No. 121 (SFAS 121) "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed of" during the year ended May
31, 1997. SFAS 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and related goodwill to be
held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The effect of adopting this standard was not material.
The Company reviews the carrying values of its long-lived assets for possible
impairment whenever events or changes in circumstance indicate that the
carrying amount of the assets may not be recoverable. The Company evaluates
whether impairment exists on the basis of undiscounted future cash flows from
operations before interest for the remaining useful life of the assets. Any
long-lived assets held for disposal are reported at the lower of these carrying
amounts or fair value less costs to sell.
REVENUE RECOGNITION
The Company recognizes product sales at the time of shipment. Contract revenues
are recognized as services are performed using the percentage of completion
method and/or upon achievement of certain levels of performance as specified in
the contracts.
-21-
<PAGE> 22
NEOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE
Net income (loss) per share amounts are computed based on the weighted
average number of common shares outstanding, adjusted to reflect the
assumed exercise of outstanding stock options and warrants, to the extent
these items had a dilutive effect on the computations. Shares used in the
computation were 5,648,504 and 4,513,817 in 1997 and 1996, respectively.
The Financial Accounting Standards Board has issued SFAS No. 128, "Earnings
per Share," which modifies the standards for computing earnings per share.
The statement is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. This statement
is not expected to have a material impact on the Company's computation of
earnings per share.
COMPARATIVE FINANCIAL STATEMENTS
Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
2. MARKETABLE SECURITIES
The Company currently invests in only high quality, short-term investments
with maturity dates of less than one year, which are classified as
available-for-sale. As such, there were no significant differences between
amortized cost and estimated fair market value at May 31, 1997 and 1996.
Additionally, since investments are short-term and are generally allowed to
mature, realized gains and losses for both years have been minimal. The
following table presents the estimated fair value breakdown of investment by
category:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Corporate Debt Securities $ 11,174,812 $ 1,453,399
U.S. Treasury and Agency Securities 1,150,101 103,642
------------------------------------------------------------------------------------------------
$ 12,324,913 $ 1,557,041
------------------------------------------------------------------------------------------------
</TABLE>
3. RESTRUCTURING CHARGES
In May 1996, the Company recorded charges of $695,500 related to a
restructuring program for certain of its operations. The restructuring
charges include $437,700 related to inventory valuation adjustments and
writedowns to exit its electronic instruments operations, $205,300 related
to veterinary instrument sales group reorganization and $52,500 of other
costs. The restructuring program resulted in liabilities of $217,794 at May
31, 1996. The majority of these liabilities were paid or settled during the
1997 fiscal year.
4. ACQUISITION
Effective June 15, 1995, Neogen acquired certain assets of International
Diagnostic Systems Corp. (IDS) of St. Joseph, Michigan. The acquisition was
accounted for by the purchase method and all acquired assets, consisting of
inventory and technology for 35 different diagnostic tests used to detect
drugs of abuse in animals, were moved to the Company's Lexington, Kentucky
division.
The purchase price consisted of initial consideration of approximately
$680,000 paid in cash at closing, resulting in goodwill of approximately
$622,000. The Company made a second and final cash payment of $53,122 in
July 1996 based upon sales performance for the twelve-month period ended
June 14, 1996.
5. NOTES PAYABLE AND LONG-TERM DEBT
The Company and its subsidiaries have available lines-of-credit and
borrowing arrangements with banks totaling $2,500,000. At May 31, 1997 and
1996, there were $-0- and $1,043,946, respectively, of borrowings
outstanding. Any borrowings bear interest at .75% over the prime rate (the
prime rate was 8.50% at May 31, 1997), and are collateralized by
substantially all assets of the Company and its subsidiaries.
-22-
<PAGE> 23
NEOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Long-term debt consisted of the following:
- -------------------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Term note payable to bank $ 238,092 $ 295,236
Installment note payable 40,825 54,829
- -------------------------------------------------------------------------------------------------------------------------
278,917 350,065
Less current maturities 71,147 71,147
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 207,770 $ 278,918
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The term note is payable in eighty-four monthly installments of $4,762 plus
interest at .75% over the prime rate and is collateralized by substantially
all the assets of Neogen and AMPCOR.
The installment note is payable in sixty monthly installments of $1,167 plus
interest at .75% over prime rate and is collateralized by substantially all
the assets of AMPCOR.
The terms of certain financing agreements contain, among other provisions,
the requirements to meet certain financial ratios and levels of working
capital and tangible net worth, and restrict the payment of dividends.
Maturities of long-term debt are: 1998 - $71,147; 1999 - $71,148; 2000 -
$69,961; 2001 - $57,144; and 2002 - $9,517.
6. PUBLIC STOCK OFFERING
On October 22, 1996, the Company sold to the public 1,500,000 shares of
common stock at a price of $7.50 per share. The net proceeds to the Company
after deducting underwriting commissions and other expenses of the offering
were approximately $10,201,000.
7. STOCK OPTIONS AND STOCK WARRANTS
The Company has a Stock Option Plan (the Plan) under which qualified and
non-qualified options to purchase shares of common stock may be granted to
eligible directors, members of the Scientific Review Council, officers, or
employees of the Company at an exercise price of not less than the fair
market value of the stock on the date of grant. The Plan was adopted in
1987, and the number of shares authorized for issuance under this Plan is
1,059,375. At May 31, 1997, options have been granted with three to five
year vesting schedules and option terms of five to ten years. A total of
100,900 shares were available for future grants under the Plan.
The Company applies Accounting Principles Board Opinion No. 25 in accounting
for its stock option plans. Accordingly, no compensation cost has been
recognized for the Plan. Had compensation expense for the Company's stock
option plans been determined based on the fair value at the grant dates
consistent with the method of SFAS No. 123, the Company's net income (loss)
and net income (loss) per share would have been the following pro forma
amounts:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INCOME (LOSS)
As reported $ 1,811,501 $ (243,539)
Pro forma 1,571,757 (343,097)
NET INCOME (LOSS) PER SHARE
As reported .32 (.05)
Pro forma .28 (.08)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
-23-
<PAGE> 24
NEOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
The following is a summary of the Plan's activity:
Weighted Average
Shares Exercise Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at June 1, 1995
(140,472 exercisable) 404,600 $ 4.21
Granted 99,500 6.63
Exercised (59,300) 2.45
Forfeited (2,000) 8.00
- --------------------------------------------------------------------------------------------------------------------
Outstanding at May 31, 1996
(172,156 exercisable) 442,800 4.97
Granted 118,000 7.55
Exercised (48,466) 2.77
Forfeited (22,634) 6.86
- --------------------------------------------------------------------------------------------------------------------
Outstanding at May 31, 1997
(219,077 exercisable) 489,700 5.73
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions for grants in 1997 and 1996, respectively:
dividend yield of 0% for both years: expected volatility of 68.0% for both
years; risk free interest rates of 6.5% and 6.1%; and expected lives from
five years to ten years for both years.
The weighted-average grant date fair value of options granted in 1997 and
1996 was $4.38 and $5.18, respectively.
The following is a summary of stock options outstanding at May 31,1997:
<TABLE>
<CAPTION>
Options Outstanding
-------------------
Weighted
Average Weighted
Remaining Average
Contractual Exercise
Price Range Number Life (Years) Price
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$1.88 - 2.50 97,000 1.59 $ 2.28
2.75 - 3.00 31,000 4.56 2.86
4.63 - 5.63 50,500 6.42 4.93
6.50 - 7.25 182,700 3.20 6.90
7.50 - 9.25 128,500 5.98 7.65
- ----------------------------------------------------------------------------------------------------
489,700 4.03 $ 5.73
- ----------------------------------------------------------------------------------------------------
Options Exercisable
-------------------
Weighted
Average
Exercise
Price Range Number Price
- ----------------------------------------------------------------------------------------------------
$ 1.88 - 2.50 67,600 $ 2.20
2.75 - 3.00 31,000 2.86
4.63 - 5.63 50,500 4.93
6.50 - 7.25 59,305 6.99
7.50 - 9.25 10,672 8.31
- ----------------------------------------------------------------------------------------------------
219,077 $ 4.52
- ----------------------------------------------------------------------------------------------------
</TABLE>
-24-
<PAGE> 25
NEOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average exercise price of the 172,156 shares which were
exercisable at May 31, 1996, was $3.70.
The following table summarizes warrant activity for the years ended May
31, 1997 and 1996. All warrants are exercisable for unregistered
common stock of the Company and expire between 1998 and 2000.
<TABLE>
<CAPTION>
Warrant
Shares Price
=============================================================================================================================
<S> <C> <C>
Outstanding warrants at June 1, 1995 120,307 $ 2.63 to 4.82
Warrants exercised during the year (39,933) 3.13
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding warrants at May 31, 1996 80,374 2.63 to 4.82
Warrants exercised during the year (1,782) 4.82
Warrants repurchased (30,000) 4.63
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding Warrants at May 31, 1997 48,592 $ 4.82
=============================================================================================================================
</TABLE>
8. TAXES ON INCOME
Income taxes are calculated using the liability method specified by SFAS
No. 109 "Accounting for Income Taxes."
As of May 31, 1997, the Company has net operating loss carryforwards of
approximately $2,200,000 for income tax purposes which expire between 2002
and 2008. In addition, the Company has approximately $285,000 of tax
credit carryforwards, the majority of which expire between 1998 and 2010.
Approximately $60,000 of the tax credit carryforwards have no expiration.
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and
assets as of May 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Deferred tax liabilities:
1997 1996
=============================================================================================================================
<S> <C> <C>
Depreciation and amortization $ 126,000 $ 57,000
Losses of affiliated partnerships 54,000 47,000
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX LIABILITIES $ 180,000 $ 104,000
- -----------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
1997 1996
=============================================================================================================================
Net operating loss carryforwards $ 748,000 $ 1,496,000
Tax credit carryforwards 285,000 250,000
Inventory reserves 233,000 216,000
Other 247,000 140,000
- -----------------------------------------------------------------------------------------------------------------------------
1,513,000 2,102,000
VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS (1,333,000) (1,998,000)
- -----------------------------------------------------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS 180,000 104,000 n
- -----------------------------------------------------------------------------------------------------------------------------
NET DEFERRED TAX $ - $ -
=============================================================================================================================
</TABLE>
-25-
<PAGE> 26
NEOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SFAS No. 109 requires that a valuation allowance be recorded against tax
assets which are not likely to be realized. The Company's
carryforwards expire at specific future dates and utilization of certain
carryforwards is limited to specific amounts each year. Due to the
uncertain nature of their ultimate realization based upon past
performance and the difficulty predicting future results, the Company has
established a full valuation allowance against these carryforward
benefits and is recognizing the benefits only as reassessment
demonstrates they are realizable. The need for this valuation allowance
is subject to periodic review. If the allowance is reduced, the tax
benefits of the carryforwards will be recorded in future operations as a
reduction of the Company's income tax expense.
The reconciliation of income taxes computed at the U.S. federal
statutory tax rates to income tax expense for the years ended May 31,
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tax at U.S. statutory rates $ (637,000) $ 80,000
Adjustment of valuation allowance 665,000 (85,000)
Alternative minimum tax (35,000) (2,000)
State income taxes, net of tax effect (17,000) (4,800)
Other (39,200) 4,600
-------------------------------------------------------------------------------------------------------------------------
TAXES ON INCOME $ (63,200) $ (7,200)
=========================================================================================================================
</TABLE>
9. COMMITMENTS
The Company has agreements with related research limited partnerships and
unrelated third parties which provide for the payment of royalties on the
sale of certain products. Royalty expense, primarily to related research
limited partnerships, under the terms of these agreements for 1997 and
1996 was $771,204 and $579,045, respectively.
The Company leases office and manufacturing facilities under
noncancelable operating leases. Rent expense for 1997 and 1996 was
$215,000 and $221,000, respectively. Future minimum rental payments for
these leases are as follows: 1998 - $212,000; 1999 - $145,000; 2000 -
$118,000; and 2001 - $30,000.
10. DEFINED CONTRIBUTION BENEFIT PLAN
The Company maintains a defined contribution 401(k) benefit plan covering
substantially all employees. Employees are permitted to defer up to 15%
of compensation, with the Company matching 40% of the first 5% deferred.
The Company's expense under this plan was $53,752 and $45,402 for the
years ended May 31, 1997 and 1996, respectively.
11. INDUSTRY SEGMENT INFORMATION
The Company has two industry segments through which it conducts its
business - diagnostic products and veterinary instruments. The
diagnostic products segment includes test kits to detect harmful, natural
toxins, pesticides, and microorganisms. These products also include test
kits for the detection of drugs of abuse in race horses, test kits used
in research by universities and pharmaceutical companies, and test kits
to detect plant diseases in ornamental plants, turf grasses, and
horticulture crops. In addition, this segment includes electronic
instruments which were primarily used to monitor environmental conditions
and predict the onset of diseases or emergence of insects. In May 1996,
the Company decided to exit its electronic instruments operations (Note
3).
The veterinary instrument segment includes veterinary instruments to
provide more precise and accurate delivery of animal health products.
-26-
<PAGE> 27
NEOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------
The following table summarizes Neogen's industry segment information:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------------------------------------------------------------------
REVENUES
Diagnostic Products
<S> <C> <C>
Sales of products $ 11,875,675 $ 8,758,920
Other revenues 30,325 162,308
------------------------------------------------------------------------------------------------------------------
11,906,000 8,921,228
------------------------------------------------------------------------------------------------------------------
Veterinary instruments 3,353,423 3,569,183
------------------------------------------------------------------------------------------------------------------
$ 15,259,423 $ 12,490,411
------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
Diagnostic products $ 1,502,614 $ 23,876
Veterinary instruments (191,945) (263,974)
------------------------------------------------------------------------------------------------------------------
$ 1,310,669 $ (240,098)
------------------------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
Diagnostic products $ 8,091,565 $ 7,202,571
Veterinary instruments 2,731,995 2,771,532
Corporate 12,324,913 1,557,041
------------------------------------------------------------------------------------------------------------------
$ 23,148,473 $ 11,531,144
------------------------------------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION EXPENSE
Diagnostic products $ 509,460 $ 437,030
Veterinary instruments 114,653 100,202
------------------------------------------------------------------------------------------------------------------
$ 624,113 $ 537,232
------------------------------------------------------------------------------------------------------------------
CAPITAL EXPENDITURES
Diagnostic products $ 417,192 $ 274,496
Veterinary instruments 210,040 138,027
------------------------------------------------------------------------------------------------------------------
$ 627,232 $ 412,523
------------------------------------------------------------------------------------------------------------------
Neogen has no significant foreign operations. Export sales amounted to
$4,157,401 or 27% of consolidated sales in 1997 and $2,580,128 or 21% in
1996, respectively, and were derived primarily in the geographic areas of
South and Latin America, Canada, Europe, and the Far East. No export
sales to any single geographic area exceeded 10% of consolidated sales.
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
1997 1996
------------------------------------------------------------------------------------------------------------------
Cash Paid During the Year For
<S> <C> <C>
Interest $ 67,906 $ 153,212
Taxes on income 24,741 14,000
------------------------------------------------------------------------------------------------------------------
</TABLE>
-27-
<PAGE> 28
NEOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SUBSEQUENT EVENT
Effective July 1, 1997, Neogen acquired certain assets of Triple
Crown, a division of W.J. Bartus, Inc. of Fort Pierce, Florida.
The acquisition will be accounted for by the purchase method and all
acquired assets, consisting of inventory, fixed assets and 20 related
products will be moved to the Company's Lexington, Kentucky division.
The initial purchase price consisted of a cash payment of
approximately $1,400,000. Additional consideration may be paid based
upon operating performance for the twelve-month period ending June
1998.
-28-
<PAGE> 29
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Certain information required by Part III has been omitted from this Report
since the Company will file a definitive proxy statement pursuant to Regulation
14A (the "Proxy Statement") not later than 120 days after the end of the fiscal
year covered by this Report, and certain information included therein is
incorporated herein by reference.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors and executive officers
required by this Item is incorporated by reference to the Company's Proxy
Statement.
OFFICERS AND OTHER KEY INDIVIDUALS OF THE REGISTRANT
The officers of the Company are elected by and serve at the discretion of the
Board of Directors. The Board of Directors has also named a Scientific Review
Council (SRC) to serve at the pleasure of the Board. The Scientific Review
Council meets six to ten times annually to review the research progress of the
Company and to recommend or approve new research and product development
activities of the Company. The names and occupations of the Company's officers
and SRC members are set forth below.
<TABLE>
<CAPTION>
YEAR JOINED
NAME POSITION WITH THE COMPANY THE COMPANY
---- ------------------------- -----------
<S> <C> <C>
James L. Herbert President, Chief Executive Officer, Director 1982
G. Bruce Papesh Secretary, Director 1993
Lon M. Bohannon Vice President, Chief Financial Officer, Director 1985
Brinton M. Miller, Ph.D. Vice President, Scientific Affairs 1984
Gerald S. Traynor Vice President 1990
Donald W. Uglow Vice President 1990
Terri A. Juricic Vice President 1992
Martin R. Gould Vice President, AMPCOR Diagnostics, Inc. 1994
N. Edward L. Bradley Vice President 1994
John E. Cantlon, Ph.D. Chairman, Scientific Review Council 1990
Edward Tolbert, Ph.D. Scientific Review Council 1982
Robert Hollingworth, Ph.D. Scientific Review Council 1991
Gavin L. Meerdink, DVM Scientific Review Council 1992
Perry Gehring, Ph.D. Scientific Review Council 1994
</TABLE>
There are no family relationships among officers or SRC members.
Information concerning the officers and SRC members follows:
James L. Herbert, age 57, has been President, Chief Executive Officer, and a
director of the Company since he joined Neogen in June, 1982. He previously
held the position of Corporate Vice President of DeKalb Ag Research, a major
agricultural genetics and energy company. He has management experience in
animal biologics, specialized chemical research, medical instruments,
aquaculture, animal nutrition, and poultry and livestock breeding and
production.
G. Bruce Papesh age 50, was elected to the Board of Directors in October, 1993
and was elected Secretary in October, 1994. Since 1987, Mr. Papesh has served
as President of Dart, Papesh & Co., an investment consulting and financial
services firm. Mr. Papesh provides investment services to Kenneth B. Dart and
Robert C. Dart, who together own 6.4% of the Company's Common Stock. Mr.
Papesh asserts that he has no investment power over the Company's common stock
owned by Kenneth B. Dart or Robert C. Dart. Mr. Papesh also serves on the
Board of Directors of Immucor, Inc., a publicly-traded immunodiagnostics
company that manufactures and markets products for the human clinical blood
bank industry.
Dr. Brinton M. Miller, age 70, joined the Company in January, 1984 as Vice
President of Research and Development. He presently serves as the Company's
chief scientific officer. Prior to joining Neogen, Dr. Miller held numerous
research management positions during his 27-year career with Merck, Sharp and
Dohme Laboratories.
Lon M. Bohannon, age 44, joined the Company in October 1985 as Vice President
of Finance, was promoted to Chief Financial Officer in June 1987, was promoted
to Vice-President-Administration and Chief Financial Officer in November 1994,
and elected to the Board of Directors in October 1996. He is responsible for
all areas of accounting, finance, human resources, and investor relations. A
CPA, he was Administrative Controller for Federal Forge, Inc., a metal forging
and stamping firm, from March 1980 until October 1985, and a member of the
public accounting firm of Ernst & Young from June 1975 to March 1980.
-29-
<PAGE> 30
Gerald S. Traynor, age 62, joined Neogen in July, 1990 as General Manager for
Ideal Instruments, Inc. He was promoted to Vice President of Instrument
Development and Manufacturing in January, 1991 with responsibility for the
Company's veterinary instrument and electronic instrument manufacturing
operations. He was Vice President of Manufacturing for Martin Yale Industries
for three years before joining Neogen and filled the same position for The
Hedman Company from 1983-1987. Earlier, he served 16 years in various
manufacturing management positions at ITT.
Donald W. Uglow, age 56, joined the Company in October, 1990 as Vice President
of Diagnostic Sales and Marketing. He is responsible for all sales and
marketing activities for the Company's line of diagnostic products for food
safety to the grain, nut and spice, and the fruit and vegetable markets. Prior
to joining Neogen, he served as Ag Chemical Sales and Marketing Manager for
Great Lakes Chemical Company. Prior to his experience at Great Lakes Chemical,
he owned and operated a farm implement business and served in sales and
marketing management of Novartis (formerly Ciba-Geigy).
Terri A. Juricic, age 32, joined Neogen Corporation on September 1, 1992 as
part of the Company's acquisition of WTT, Incorporated. She currently serves
as Vice President and General Manager of the Company's Lexington division. Ms.
Juricic graduated from Miami University in 1986. From 1986 to 1991, she was
Controller for Freeze Point Cold Storage Systems and concurrently served in the
same capacity for Powercore, Inc. In 1990, she joined WTT, Incorporated as
President, the position she held at the time Neogen acquired the business.
Martin R. Gould, age 46, joined the Company on August 17, 1994 in connection
with Neogen's acquisition of AMPCOR, Inc. He currently serves as Vice
President and General Manager for AMPCOR Diagnostics, Inc. Mr. Gould holds a
Master of Science degree in Biomedical Science from Drexel University. From
1974 to 1986 he served as manager of Research and Development and Production
Manager for E.M. Science, a division of Merck and Company. In 1987, he joined
AMPCOR, Inc. as President, a position he held at the time Neogen acquired the
business.
Edward L. Bradley, age 37, joined Neogen in February 1995 as Vice President of
Sales and Marketing for AMPCOR Diagnostics, Inc. In June 1996, he also assumed
sales and marketing management responsibilities for Ideal Instruments and was
made a Vice President of Neogen Corporation. From 1988 to 1995, Bradley served
in several sales and marketing capacities for Mallinckrodt Animal Health, most
recently holding the position of National Sales Manager responsible for the
company's 40 employees in their Food Animal Products Division. Prior to
joining Mallinckrodt, Bradley held several sales and marketing positions for
Stauffer Chemical Company.
Dr. John E. Cantlon joined the Scientific Review Council in August 1990 and was
elected chairman in 1992. He was a member of the faculty of Michigan State
University from June 1954 until he retired in 1990. He served as Vice
President of Research and Graduate Studies for Michigan State University
beginning in 1975.
Dr. N. Edward Tolbert has been a member of the Scientific Review Council since
February 1984. He has been a professor of biochemistry at Michigan State
University since June 1958, is the former president of the Society of Plant
Physiology and a member of the National Academy of Sciences
Dr. Robert Hollingworth joined the Scientific Review Council in July 1991.
Since 1987, he has served as director of Pesticide and Research Center and
professor at Michigan State University. Prior to joining Michigan State
University, Dr. Hollingworth was a professor in the Department of Entomology at
Purdue University for over 20 years.
Dr. Gavin L. Meerdink joined the Scientific Review Council in October 1992.
Dr. Meerdink has a 20-year career as a diagnostician and toxicologist with
special interest in agricultural chemicals and mycotoxins. Since 1989, he has
served as Professor and Head of Clinical Toxicology in the College of
Veterinary Medicine at the University of Illinois. From 1983 to 1989 he was
Chief Diagnostician and Research Scientist at the University of Arizona and he
has held associate professorships at Michigan State University and Iowa State
University. Early in his career, Dr. Meerdink spent four years in private
practice as a Doctor of Veterinary Medicine.
Dr. Perry Gehring joined the Scientific Review Council in April 1994. Dr.
Gehring has served as Vice President for Research and Development of Dow Elanco
since 1989. His career has focused primarily on the study of toxicity of
chemical substances. In addition to his current position, he has held various
senior research and development executive positions for the Dow Chemical
Company.
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<PAGE> 31
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Jack C. Parnell, a Company director, is a governmental relations advisor the
law firm of Kahn, Soares & Conway. Kahn, Soares & Conway has been retained by
the Company to represent it in governmental relations matters. The Company
pays Kahn, Soares & Conway a monthly fee of $1,750 for ten hours of consulting.
The agreement with Kahn, Soares & Conway is terminable by either party at the
end of any month.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
(1) Exhibits. The Exhibits listed on the accompanying Index to Exhibits
immediately following the signatures are filed as part of, or
incorporated by reference into, this Report.
(b) No reports on Form 8-K were filed by the Company during the fiscal quarter
ended May 31, 1997.
31
<PAGE> 32
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.
NEOGEN CORPORATION
/s/ James L. Herbert
---------------------------------------
James L. Herbert, President
Chief Executive Officer
Dated: August 13, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ James L. Herbert President, Chief Executive August 13, 1997
- ------------------------------- Officer, Director (Principal
James L. Herbert Executive Officer)
/s/ Lon M. Bohannon Vice President of Administration August 13, 1997
- ------------------------------- Chief Financial Officer, Director
Lon M. Bohannon (Principal Financial and Accounting
Officer)
*
- ------------------------------- Chairman, Board of Directors
Herbert D. Doan
*
- ------------------------------- Director
Robert M. Book
*
- ------------------------------- Director
Gordon E. Guyer
*
- ------------------------------- Secretary and Director
G. Bruce Papesh
*
- ------------------------------- Director
Jack C. Parnell
*
- ------------------------------- Director
Thomas H. Reed
*By: /s/ James L. Herbert August 13, 1997
--------------------------
James L. Herbert, Attorney-in-Fact
</TABLE>
32
<PAGE> 33
Neogen Corporation
Annual Report on Form 10-KSB
Year Ended May 31, 1997
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3 (a) (7) Articles of Incorporation, as restated
3 (b) (1) By-Laws, as amended
10 (a) (1) Neogen Research Limited Partnership II/ Neogen Corporation Agreement for the Sale of Patent Rights
and Related Know How, dated October 14, 1988
10 (b) (2) Neogen Research Limited Partnership IV/ Neogen Corporation Agreement for the Sale of Copyrights and
and Related Know How, dated July 31, 1989
10 (c) (5) Neogen Corporation/Enzytec, Incorporated Asset Purchase Agreement, dated October 1, 1993
10 (d) (1) Neogen Corporation/Michigan Department of Public Health Equine Botulism Vaccine Agreement, as amended,
originally dated April 9, 1988
10 (e) (7) Neogen Corporation/United States Department of Agriculture License Agreement, dated June 29, 1994
10 (f) (4) Ideal Instruments, Inc. Lease Agreement for 9355 West Byron Street, Schiller Park, Illinois, dated June 29, 1993
10 (g) (1) Neogen Research Limited Partnership II First Amended and Restated Partnership Agreement, dated
December 30, 1985
10 (h) (7) Neogen Corporation/Merck KGaA Distribution Agreement
10 (i) (6) Neogen Corporation/United States Department of Agriculture SBIR Phase II Grant Award, dated
November 30, 1993.
10 (j) (6) Neogen Corporation/United States Department of Agriculture Grants
10 (k) (7) AMPCOR Diagnostics, Inc. Lease Agreement for space at 603 Huron Drive, Bridgeport, New Jersey, dated as
of January 26, 1995.
10 (l) (3) Amended and Restated Incentive Stock Option Plan II and Sample Individual Incentive Stock Option Agreement
10 (m) (6) Neogen/International Diagnostic Systems Asset Purchase Agreement, dated June 27, 1995
10 (n) (4) ELISA Technologies Lease Agreement for space at 628 East Third Street, Lexington, Kentucky, dated
May 19, 1993
10 (o) (5) Neogen/Agri-Sales Associates Marketing Agency Agreement, dated May 10, 1994
10 (p) (6) Amendment to Neogen/Agri-Sales Marketing Agency Agreement, dated June 25, 1995
10 (q) (6) Neogen/AMPCOR Asset Purchase Agreement, dated August 1, 1994
10 (r) (7) Neogen Corporation/Kahn, Soares and Conway Contract
10 (s) (6) NBD Bank Loan Documents
10 (t) (6) Comerica Bank Loan Documents
10 (u) (7) NBD Bank Amendment, dated September 11, 1996
10 (v) (7) Comerica Bank Amendments, dated August 29, 1995 and September 12, 1996
10 (w) Neogen Corporation/W.J. Bartus, Inc. Asset Purchase Agreement, dated July 3, 1997
10 (x) Neogen Corporation/Orion Diagnostica Distribution Agreement
10 (y) Neogen Corporation/Oxoid Distribution Agreement
11 Computation of Earnings Per Share
13 Annual Report to Shareholders for the Year Ended May 31, 1997 (to be deemed filed only to the extent required
by the instructions to exhibits for reports on Form 10-KSB)
21 List of Subsidiaries
23 Consent of Independent Auditors
24 Power of Attorney (included on Signature Page)
27 Financial Data Schedule
(1) Incorporated by reference to the exhibit filed with the Registrant's Registration Statement on Form S-18 (No. 33-29844C)
filed July 17, 1989 and amended on August 17, 1989 and August 22, 1989, which Registration became effective August 30,
1989.
(2) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended May 31,
1990.
(3) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended May 31,
1992.
(4) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-KSB for the year ended May
31, 1993.
(5) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-KSB for the year ended May
31, 1994.
(6) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-KSB for the year ended May
31, 1995.
(7) Incorporated by reference to the exhibit filed with the Registrant's Registration Statement on Form S-2 (No. 333-12193)
filed September 17, 1996 and amended on October 18, 1996, which Registration became effective October 22, 1996.
</TABLE>
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<PAGE> 1
EXHIBIT 10(W)
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is made this 3rd day of July, 1997 between
NEOGEN CORPORATION., a Michigan corporation whose address is 620 Lesher Place,
Lansing, Michigan 48912 ("the Buyer"), W. J. BARTUS, INC., a Florida
corporation, whose address is 7312 Commercial Circle, Fort Pierce, Florida
34951 ("the Seller"), and WILLIAM J. BARTUS, a Florida resident whose address
is 22 Sailfish Road, Vero Beach, Florida 32960 ("Bartus") ("the Agreement").
RECITALS
A. Seller is engaged in the equine pharmaceutical business and
specifically using the identification of Triple Crown, in the business of
manufacturing and marketing various products to improve the health and
performance of horses ("the Business").
B. Buyer desires to purchase, and Seller desires to sell, those assets of
Seller hereinafter described upon the terms, conditions, and covenants
contained in this Agreement.
THE PARTIES AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF ASSETS. Based upon the representations,
warranties and agreements contained in this Agreement and subject to the terms
and conditions set forth in this Agreement, at the Closing Date, as defined in
Paragraph 4, Seller shall sell, transfer and deliver to Buyer, and Buyer shall
purchase and accept from Seller, the following assets used or employed by
Seller in the conduct of the Business (collectively referred to as the
"Purchased Assets").
(a) MACHINERY AND EQUIPMENT. All manufacturing, laboratory, and office
machinery and equipment, furniture, fixtures, supplies, fixed assets and other
tangible personal property including, but not limited to, the equipment listed
on attached Exhibit 1.a ("Machinery and Equipment");
(b) INTANGIBLE PROPERTY. All of the intangible property of Seller,
including, but not limited to, the following listed on attached Exhibit 1.b:
(1) Patents, trademarks, trade names and copyrights
and applications therefore;
(2) Trade secrets and secret manufacturing processes;
(3) Permits and licenses, used or employed by Seller in the
Business; and
<PAGE> 2
(4) The name "TRIPLE CROWN" and all derivations thereof, and the
goodwill associated therewith throughout the world, formulas, designs, research
and development, production, sales, and credit reports, data, models, catalogs,
technical specifications, files, business and accounting records, customer
lists, budgets, forecasts, telephone numbers, facsimile numbers and all other
business documents and information and computer programs which relate primarily
to the Business (Subparagraphs 1(b)(1) to (4) are hereinafter collectively
referred to as "Intangible Property").
(c) ACCOUNTS RECEIVABLE. All receivables generated from sales of
inventory in the ordinary course of Seller's Business, including but not
limited to, those listed on attached Exhibit 1.c, recorded in accordance with
generally accepted accounting principles ("GAAP") which are less than 90 days
old ("the Receivables");
(d) INVENTORIES. All inventories, including, but not limited to,
merchandise, materials, component parts, manufacturing supplies, work in
process and finished goods, currently offered as part of Seller's product line
including, but not limited to, the inventories listed on attached Exhibit 1.d,
recorded in accordance with GAAP in quantities equal to sales during the 6
months preceding the month of the Closing Date ("the Inventories");
(e) CONTRACT RIGHTS. All rights, benefits and causes of action in favor
of Seller resulting or arising from contracts, purchase orders, sales orders,
service agreements, commission agreements, dealership or distribution
agreements, marketing agreements, licensing agreements, warranties, guaranties
or otherwise, which relate primarily to the Business ("Contract Rights").
These include, but are not limited to, those listed on Exhibit 1.e.
(f) OTHER CURRENT ASSETS. All prepaid insurance, deposits, prepaid
expenses and other current assets including, but not limited to, those listed
on Exhibit 1.f. ("Other Current Assets").
2. NON-ASSUMPTION OF LIABILITIES.
(a) GENERAL NON-ASSUMPTION OF LIABILITIES. Buyer shall not assume,
expressly or implicitly, pay, perform or discharge any debts, liabilities or
obligations of any nature of Seller, whether or not related to the Business,
other than those specifically listed in Exhibit 2.a ("Assumed Liabilities").
All the debts, liabilities and obligations of Seller, whether fixed or
contingent, accrued or unaccrued, known or unknown shall continue to be the
responsibility of Seller, which shall pay, perform and discharge them in
accordance with their terms, and nothing contained in this Agreement shall be
construed in any fashion as imposing, directly or indirectly,
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<PAGE> 3
responsibility for any such debt, liability and obligation on Buyer except
those listed in Exhibit 2.a.
(b) PRODUCT LIABILITIES: WARRANTY CLAIMS. Without limiting the
generality of Subparagraph 2(a) above, Buyer shall not assume, nor be liable
whatsoever for, liabilities, obligations or claims for losses, damages,
liabilities, costs or expenses exceeding One Hundred Dollars ($100.00) per
claim and One Thousand Dollars ($1,000.00) in the aggregate based upon, or
arising out of, any claim alleging defect or negligence in the assembly,
processing, manufacture or sale of products, goods or services by Seller on or
prior to the Closing Date, including, but not limited to, negligence, product
liability, whether based on contract or tort, or warranty claims regarding such
products, goods or services arising out of transactions, accidents or events
on, prior to, or after the Closing Date, and regardless of any claim was filed
or made known to the Seller or Buyer prior to the Closing Date.
(c) ADDITIONAL LIABILITIES. Notwithstanding the provisions of
Subparagraph 2(a) above to the contrary, and as an express exception thereto,
Buyer shall assume, perform and discharge Seller's liability, existing as of
the Closing Date, with respect to all duties and obligations of Seller with
respect to the distribution and sales agreements listed in Exhibit 1.(e), the
assumption of which Buyer expressly and separately acknowledges to Seller on
the Closing Date.
(d) ASSETS FREE OF LIENS. The Purchased Assets shall be transferred to
Buyer free and clear of any and all claims, liens, mortgages, security
interests, encumbrances, charges or other restrictions of title or ownership,
except as otherwise specifically provided in this Agreement.
3. PURCHASE PRICE AND METHOD OF PAYMENTS. The purchase price to be paid
by Buyer to Seller for the Purchased Assets shall be computed and paid as
provided in this Paragraph 3.
(a) Buyer shall pay Seller an initial payment of One Million One Hundred
Thousand Dollars ($1,100,000.00) for the Purchased Assets, except Receivables
and Inventories ("Main Price"). The Main Price shall be paid by bank wire
transfer at Closing. The Main Price shall be reduced by the amount of the
Assumed Liabilities and by any payments made to Seller's creditors directly.
(b) Buyer shall pay Seller the face value of the Receivables determined
pursuant to paragraph 1.(c) at Closing ("Receivables Price").
(c) Buyer shall pay Seller the value of the Inventories determined
pursuant to paragraph 1.(d) at Closing ("Inventories Price").
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<PAGE> 4
(d) Within five (5) business days following the first anniversary after
Closing, Buyer will pay a secondary payment to Seller of up to Five Hundred
Thousand Dollars ($500,000) as to the Purchased Assets except Receivables and
Inventories. This secondary payment shall be calculated as follows: Net Sales
from July 1, 1997 through June 30, 1998 shall be used as a base. Raw material
costs for the same period shall be subtracted from Net Sales ("Gross Amount").
Six Hundred Fifty Thousand Dollars ($650,000) shall be subtracted from the
Gross Amount ("Net Amount"). The Net Amount shall be multiplied by two and
shall constitute the second payment; provided the second payment shall not be
less than zero ($0) nor greater than Five Hundred Thousand Dollars ($500,000).
(e) The term "Net Sales" shall mean the total of the aggregate gross
invoice prices of products of Buyer attributable to the Business, less the sum
of (i) cash, trade or quantity discounts; (ii) sales, use, tariff,
import/export duties or other excise taxes imposed upon particular sales; (iii)
transportation charges; and (iv) allowances or credits to customers because of
rejections or returns.
(f) An amount equal to One Hundred Thousand Dollars ($100,000) of the
payment made at Closing shall be assigned to a Covenant Not To Compete from
William J. Bartus pursuant to paragraph 23.
(g) The purchase price to be paid by Buyer shall be allocated in the
manner required by Section 1060 of the Internal Revenue Code of 1986, as
amended ("Code"), and the Treasury Regulations promulgated thereunder. In
making the allocation, Buyer and Seller shall apply the fair market values set
forth on the Certificate of Allocation substantially in the form of attached
Exhibit 3.g. This allocation shall be conclusive and binding on the Buyer and
Seller for all purposes, including the reporting and disclosure requirements of
the Code.
(h) Buyer agrees to maintain books and records to permit the calculation
of the amounts due Seller pursuant to this Paragraph and to give Seller
reasonable access at reasonable times to review the records. Also, Buyer
agrees to use its best efforts and sound business judgment to generate Net
Sales and control raw material costs. Buyer agrees to provide Seller with a
monthly summary of Net Sales for July, 1997 through June, 1998.
4. THE CLOSING. The parties agree that the effective date of closing
shall be as the close of business on the 30th day of June, 1997. All assets,
liabilities and income generated after June 30, 1997 shall be for the credit of
Buyer. The closing of the purchase and sale provided for in this Agreement
shall be held at the offices of Buyer, or at such other place as may be fixed
by mutual agreement of Buyer and Seller, within 10 days of the date of
execution of this Agreement by Seller. The
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<PAGE> 5
date and event of closing are respectively referred to in this Agreement as the
"Closing Date" and "Closing." At the Closing:
(a) Seller shall deliver to Buyer a Warranty Bill of Sale, substantially
in the form of attached Exhibit 4.a.-1, Assignment of Contracts, substantially
in the form of Exhibit 4.a-2, endorsed certificates of title for all titled
Purchased Assets and the certificates, opinions and other matters required by
Paragraph 7; and
(b) Buyer shall deliver to Seller the purchase price required by paragraph
3. and the other matters required by Paragraph 8.
5. REPRESENTATIONS AND WARRANTIES OF SELLER. In order to induce Buyer to
enter into this Agreement, Seller makes the following representations and
warranties, each of which shall be deemed to be independently material and
relied upon by Buyer, regardless of any investigation made by, or information
known to, Buyer:
(a) ORGANIZATION AND QUALIFICATION. Seller is validly existing and in
good standing under the laws of the State of Florida. No failure on the part
of Seller to be qualified as a foreign corporation in any jurisdiction
materially and adversely affects the Business or financial position or results
of the operation of the properties of Seller by reason of any disability
affecting its right to own property, collect receivables, enforce contracts or
otherwise. Seller has the requisite corporate power and authority to own or
hold under lease or similar agreement all of the Purchased Assets and to carry
on the Business as it is now being conducted.
(b) NO VIOLATION. Except as disclosed in Exhibit 5.b, the execution and
delivery of this Agreement by Seller and the consummation of the transactions
contemplated hereby will not violate any provision of law, order, or regulation
of any governmental authority, the corporate charter or by-laws of Seller or
constitute a default under any judgment, order or decree of any court of
governmental agency or instrumentality, or conflict or constitute a breach or a
default under any agreement to which the Seller is a party or by which it is
bound.
(c) FINANCIAL INFORMATION. Seller has provided in Exhibit 5.c its (i)
unaudited balance sheet and statements of income, stockholders equity and cash
flows as of and for the period ended December 31, 1996 ("Financial
Statements"); and (ii) interim financial statements for the periods ending May
31, 1997 ("Interim Financial Statements"). The Financial Statements:
(1) Have been prepared in accordance with the book of account and
records of Seller.
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<PAGE> 6
(2) Fairly present and are true, complete and correct statements of
Seller's financial condition and the results of its operation as of and for the
periods therein specified.
(3) Have been prepared in accordance with generally accepted
accounting principles ("GAAP") consistently applied.
(4) Do not include or omit to state any fact which renders them
misleading.
(5) Make full and adequate disclosure of all Seller's obligations and
liabilities (fixed or contingent, known or unknown).
(d) TITLE TO ASSETS. Seller owns and has corporate power to own, and has
good and marketable title to all of the Purchased Assets free and clear of
liens, security interests, mortgages, pledges, claims or encumbrances of any
kind whatsoever, except as shown in Exhibit 5.d.i. Seller has delivered to
Buyer true and complete copies of all leases, contracts, agreements, options
and commitments relating to the Purchased Assets as evidenced in Exhibit
5.d.ii. All such leases, contracts, agreements, options and commitments are
legally valid and binding and in full force and effect, and there are no
defaults or breaches by Seller thereunder or counterclaims or defenses against
it. Seller has received no notice of any default, breach, counterclaim or
offset by any other party to such leases, contracts, agreements, options and
commitments, nor does Seller have any knowledge thereof. All such leases,
contracts, agreements, options and commitments will continue in full force and
effect on the same terms as currently exist, notwithstanding the consummation
of the sale contemplated by this Agreement.
(e) CONDITION OF ASSETS. All Purchased Assets utilized in the Business
conform in all material respects with all applicable building, zoning,
environmental, health and safety rules and other rules and regulations. All of
the Purchased Assets utilized in the Business, including all their components
and parts, are ready for operation, and, taking into account their ages, are in
normal operating condition and good order and repair. There are no conditions
or events, except for normal wear and tear and the age of the Purchased Assets,
which would prevent the continued normal operation of the Purchased Assets or
would otherwise materially and adversely affect the operation and/or use of the
same as currently used by Seller.
(f) TRADE RIGHTS. Seller owns or has adequate licenses or other rights
to all Intangible Property which are necessary to conduct the Business as
presently conducted. To the best of Seller's knowledge, no product
manufactured or sold by any manufacturing process employed by Seller conflicts
with or infringes upon any
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<PAGE> 7
United States or foreign patent of others. The Intangible Property will allow
Buyer to manufacture and market the products currently being sold or under
development by Seller. Seller owns all rights to, and property interest in,
the Intangible Property. Seller's rights, titles and interest in and to the
Intangible Property are valid and enforceable. No claim, suit or action is
pending, or to Seller's knowledge and belief threatened, alleging that Seller
is infringing upon the asserted and tangible rights of others, or that Seller's
use of the Intangible Property infringes or conflicts with the asserted rights
of others.
(g) RECEIVABLES. The list of Receivables attached as Exhibit 1.c is a
complete and accurate list of all the Receivables as of June 30, 1997 valued in
accordance with GAAP. All of the Receivables listed on Exhibit 1.c arose from
bona fide sales transactions of Seller, and no portion of the Receivables is
subject to counterclaim or offset or is otherwise in dispute. All of the
Receivables are good and collectible in full in the ordinary course of business
at the net aggregate amounts disclosed on Exhibit 1.c.
Any Receivables acquired as part of the Purchased Assets which remain
uncollected on the ninetieth day after the Closing Date shall be reassigned to
Seller and an amount equal to such uncollected Receivables shall be deducted
from the amount owed Seller.
(h) INVENTORIES. The inventories reflected on the Financial Statements
and the Inventories are accurately valued in accordance with GAAP consistently
applied. The Inventories, in the aggregate, are usable and salable in the
ordinary course of the Business and contain no slow-moving or obsolete items.
No Inventories have been consigned to others.
(i) CONTRACTS. Exhibit 5.d.ii describes all Contract Rights to which
Seller is a party or to which it is bound and which arose out of, or relate to,
the Purchased Assets which extend beyond the Closing Date. True and correct
copies of all such documents evidencing the Contract Rights have been delivered
by Seller to Buyer. If Buyer assumes such contracts, orders and other
obligations, the benefits thereof may be assigned to Buyer and Buyer shall be
vested with Seller's rights thereunder notwithstanding the consummation of the
transactions contemplated hereby, except as described on Exhibit 5.d.i.
(j) LITIGATION. Except as disclosed in Exhibit 5.(j), there are no
actions, suits, proceedings or investigations pending or threatened against
Seller at law or in equity, or before any federal, state or municipal or other
governmental department, commission, board, agency or instrumentality, domestic
or foreign, which involves a demand for any judgment or liability and which
could affect the Business, the Purchased Assets or the transactions
contemplated by this Agreement. Seller is
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<PAGE> 8
not in default with respect to any order, writ, injunction or decree of any
court of federal, state, or municipal or other governmental department,
commission, board, agency or instrumentality, domestic or foreign, and that
there are no such orders, decrees, injunctions or regulations issued
specifically against Seller which may affect, limit or control the method or
manner of the Business, the Purchased Assets or any transactions contemplated
by this Agreement.
(k) COMPLIANCE WITH LAW. Seller has complied with all applicable laws,
orders and regulations of any federal, state or municipal or other governmental
department, commission, board, agency or instrumentality, domestic or foreign,
having jurisdiction, including, but not limited to, laws, orders and
regulations thereof relating to antitrust, wage, hours, collective bargaining,
environmental protection, employee safety, or legislation pertaining to illegal
bribes or kickbacks.
(l) PAYMENT OF TAXES. Other than those payroll taxes specifically listed
in Exhibit 5.l, Seller has timely filed all required declarations, returns, and
reports with foreign, federal, state and local taxing authorities, and all
taxes, interest and penalties required to be paid pursuant to those returns
have been or are being paid when due. There is no tax audit or examination now
pending or threatened with respect to the Business. Copies of Seller's 1994 -
1996 U.S. and Florida Corporate Income Tax Returns have been provided to Buyer.
(m) NO ADVERSE CHANGES. Between December 31, 1996 and May 31, 1997 and
since May 31, 1997, except as disclosed in Seller's financial statements dated
May 31, 1997, there has been no material adverse change in the condition,
financial or otherwise, of the Seller or in the Business other than changes
(not in the aggregate adverse) occurring in the ordinary course of business.
(n) WARRANTIES AND PRODUCT LIABILITY. Seller has previously delivered to
Buyer copies of all outstanding standard product warranties and guaranties
given by Seller with respect to the Business and copies of all other product
warranties and guaranties now in effect with respect to products manufactured
or sold by Seller concerning the Business. Except as fully described in
Exhibit 5.n, there are no pending claims or actions against the Seller for
breach of warranty or based upon product liability (whether based on tort or
contract principles) and, to the best of Seller's knowledge, no such claims or
actions are threatened. Seller knows of no defects in craftsmanship, design or
engineering with respect to any product now or heretofore sold or manufactured
by Seller in the Business which may constitute the basis for any such claim
against Seller or Buyer.
(o) CONTINGENT AND UNDISCLOSED LIABILITIES. Seller has no material
debts, obligations or liabilities, whether known or unknown, fixed or
contingent, of any nature whatsoever, relating to the Business or the Purchased
Assets not disclosed
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<PAGE> 9
in writing to Buyer and Seller knows of no basis for any assertion of any
material claim against the Seller or Buyer for any material liability relating
to the Business or Purchased Assets except those disclosed in Exhibit 5.o.
(p) PERFORMANCE OF CONTRACTS. Except as disclosed in Exhibit 5.(p),
Seller is not in material default, nor has it breached any material provision
of, any contract, agreement, lease, obligation, license or permit with regard
to all agreements relating to the Business to which it is a party or by which
it is bound. Except as disclosed in Exhibit 5.(p), Seller has fully performed
each material term, condition and covenant of each such contract, agreement,
lease, obligation, license or permit required to be performed on or prior to
the date hereof. Except as disclosed in Exhibit 5.(p), Seller knows of no
state of facts which, with the giving of notice or the passing of time, or
both, would give rise to any material default or revocation. Except as
disclosed in Exhibit 5.(p), Seller is neither subject to any penalty, discount
or liquidated damages due to the delayed delivery of products, goods or
services of the Business, nor has it received any notice that any of the
Business's customer relations are in jeopardy because of such late deliveries
or otherwise.
(q) EVENTS SUBSEQUENT TO DECEMBER 31, 1996. Except as disclosed in
Exhibit 5.(q), Seller has not, since December 31, 1996:
(1) INCURRED LIABILITIES. Incurred any obligation or liability
(absolute, contingent, accrued or otherwise) or guaranteed or become a surety
of any debt, except in connection with the performance of this Agreement or in
the ordinary course of business;
(2) DISCHARGED DEBT. Discharged or satisfied any lien or
encumbrance, pertaining to the Purchased Assets or the Business, or paid or
satisfied any obligation or liability (absolute, contingent, accrued or
otherwise) other than (i) liabilities shown on Seller's accounting records on
May 31, 1997 or (ii) liabilities incurred since the date thereof in the
ordinary course of the Business;
(3) ENCUMBRANCES. Mortgaged, pledged or subjected to any lien,
charge, security interest or other encumbrance any of the Purchased Assets;
(4) DISPOSITION OF ASSETS. Sold or transferred any of the Purchased
Assets, or canceled any debts or claims or waived any rights, except in the
ordinary course of the Business;
(5) SALE OF BUSINESS. Entered into any contract for the sale of the
Business or the Purchased Assets, or any part thereof, or for the purchase of
another business, whether by merger, consolidation, exchange of capital stock
or otherwise (other than negotiations with respect to this Agreement);
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(6) ACCOUNTING PROCEDURE. Changed or modified the accounting
methods or practices relating to the Business; or
(7) CAPITAL EXPENDITURE. Purchased or made a commitment for the
purchase of capital assets for use or employment in the Business.
(r) CUSTOMER RELATIONS. Seller knows of no state of facts, nor have any
communications been made to it, which would indicate that (i) any current
customer of Seller which accounted for more than 5% of Seller's sales relative
to the Business for the most recent fiscal year ending, or (ii) any current
supplier of Seller (if such supplier could not be replaced by Seller at
comparable cost), will terminate its business relations with Seller.
(s) BROKERAGE. Seller has made commitments for a brokerage fee in
connection with the transactions contemplated by this Agreement to Walden
Associates, of Franklin Lakes, New Jersey. Seller is solely responsible for
payment of these fees.
(t) BOOKS AND RECORDS. The books of account of Seller relating to the
Business are complete and correct in all material respects and reflect all of
the transactions entered into by or on behalf of Seller to which it is a party
or by which it is affected.
(u) USE OF CLOSING PROCEEDS. Seller shall apply the proceeds to be
received at closing first toward its unpaid federal and state taxes that are
presently due and payable.
(v) BINDING EFFECT. The Agreement and all related documents have been
duly executed, made and delivered by Seller and constitute a legal, valid and
binding obligation of Seller enforceable against it in accordance with their
respective terms, subject to the laws of general application affecting
creditors' rights.
(w) AUTHORIZATION. The execution and delivery of this Agreement and the
transactions contemplated hereby have been duly authorized by the sole
shareholder and the Board of Directors of Seller and on the Closing Date all of
the necessary corporate action to authorize the execution and delivery of this
Agreement and the purchase hereby will have been taken.
(x) EMPLOYEE RELATIONS. Exhibit 5.x. sets forth a list of all of the
officers, employees and agents of Seller and, for each individual, indicates
his or her
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position, salary or wage rate and respective fringe benefits and any
other remuneration paid or payable. Except as disclosed on Exhibit 5.x.:
(1) There is not now in existence or pending, nor has there been
within the last three years, any grievance, arbitration, administrative
hearing, claim of unfair labor practice, wrongful discharge, employment
discrimination or sexual harassment or other employment dispute of any nature
pending or, to the best of Seller's knowledge, threatened against Seller.
(2) Seller is, and during all applicable limitation periods has
been, in material compliance with all applicable Federal, state, local or
foreign laws, executive orders and regulations respecting employment and
employment practice, terms and conditions of employment, occupational safety,
wages and hours and there is no existing but unasserted claim for violation of
any such laws, executive orders or regulations nor, to the best of Seller's
knowledge, is there any factual basis upon which such a claim could be asserted.
(3) Seller has no collective bargaining agreements and is not a
party to any written or oral, express or implied, other contract, agreement or
arrangement with any labor union or any other similar arrangement that is not
terminable at will by Seller without cost, liability or penalty.
(4) Seller is not a party to any written or oral contract, agreement
or arrangement with any of its present or former directors, officers, employees
or agents with respect to length, duration or conditions of employment (or the
termination thereof), salaries, bonuses, percentage compensation, deferred
compensation or any other form of remuneration, or with respect to any matter
not disclosed on Exhibit 5.x.(4).
(5) There is no pending claim or, to the best of Seller's knowledge,
threatened or existing but unasserted claim, against Seller for violation of
any contract, agreement or arrangement described in Exhibit 5.x.(5), nor to the
best of Seller's knowledge, is there any factual basis upon which such a claim
could be asserted.
(6) Upon termination of the employment of any of the Seller's
employees by Seller, Buyer shall not incur any liability for severance or
termination pay or any other obligation to Seller's employees or to any person,
entity or government.
(y) EMPLOYEE BENEFIT PLANS.
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(1) Exhibit 5.y. sets forth all "employee pension benefit plans",
"employee welfare benefit plans" and "multi-employer plans" within the
respective meanings of Sections 3(1) and 3(2() and 3(37) of the Employment
Retirement Income Security Act of 1974, as amended ("ERISA"), all incentive
compensation plans, benefit plans for retired employees and all other employee
benefit plans maintained by Seller, or to which Seller has made payments or
contributions on behalf of its employees since 1974, including, without
limitation, all plans or contracts providing for bonuses, pensions,
profit-sharing, stock options, stock purchase rights, deferred compensation,
insurance and retirement benefits of any nature, whether formal or informal and
whether legally binding or not (each such plan is referred to individually as a
"Plan", collectively as the Plans").
(2) To the best of Seller's knowledge, and except for any
multi-employer plans, all Plans covered by the Code and ERISA are, and during
all applicable limitation periods have been, in material compliance with the
Code and ERISA, and all retirement or pension Plans and welfare benefit plans
are qualified plans under the Code and each Plan is in material compliance with
the applicable provisions of the Code.
(3) There has been no transaction in connection with which Seller or
any of its directors, agents, officers, or employees could be subject to either
a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed
by Section 4975 of the Code or any similar provision of foreign law.
(4) No Plan that is a qualified plan under Section 401(a) of the
Code and no trust created thereunder has been terminated, partially terminated,
curtailed, discontinued or merged into another plan or trust, except in
compliance with notice and disclosure to the Internal Revenue Service (the
"IRS"), the Department of Labor and the Pension Benefit Guaranty Corporation
(the "PBGC"); and any such termination, partial termination, curtailment,
discontinuance or merger has been accompanied by the issuance of a current
favorable determination letter by the IRS and, where applicable, has been
accompanied by plan termination proceedings with and through the PBGC.
(5) To the best of Seller's knowledge, there are no payments that
have become due from any Plan, the trusts created thereunder, or from seller
which have not been paid through normal administrative procedures to the Plan
participants or beneficiaries entitled thereto.
(6) Seller has made full and timely payment of all required and
discretionary contributions to the Plans, and no unfunded liability exists with
respect to any Plan.
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(7) There has been no "reportable event" as defined in Section 4043
of ERISA with respect to any Plan or any trust created thereunder.
(8) None of the Plans is a "defined benefit plan" within the meaning
of Section 3(35) of ERISA and none is subject to Title IV of ERISA.
(9) Neither Seller nor any of its directors, officers, employees, or
agents have any outstanding liabilities of any nature to the PBGC, the IRS, or
the Department of Labor in any way relating to the Plans.
(10) Seller is not a party to or otherwise subject to any express or
implied agreement or plan to provide health coverage or other benefits to
retired or current employees except as set forth in Exhibit 5.y.
(11) Seller is not a party to or otherwise subject to any express or
implied agreement or plan to provide any employee benefits, wages, deferral
compensation, or any other form of benefit or remuneration beyond the date of
Closing.
(12) With respect to all of its employees, former employees and
qualified beneficiaries as of the Closing Date, Seller has or will comply with
all applicable health care continuation requirements under the Code and ERISA.
Seller agrees to use its best efforts expeditiously to provide Buyer with all
information that Buyer deems necessary to determine whether there have been any
failures to comply with the continuation health care requirements of section
162(k)/4980B of the Code and sections 601 through 609 of ERISA as such
requirements have applied to any group health plan maintained by or for Seller
which failure occurred with respect to any current or former employee of Seller
or any spouse, former spouse, dependent child, or former dependent child of any
such employee, on or prior to the Closing Date. Seller further agrees to use
its best efforts expeditiously to provide to Buyer all information that Buyer
deems necessary to correct any failures to comply with such continuation health
care coverage requirements. Such information shall include, without
limitation, the identification of all covered employees (as defined in section
162(k)(7)(B)/4980B(f)(7) of the Code) and their qualified beneficiaries (as
defined in section 162(k)(7)(B)/4980B(g)(1) of the Code), the identification of
all qualifying events with respect to such covered employees or qualified
beneficiaries (as defined in section 162(k)(3)/4980B(f)(3) of the Code, and
information otherwise demonstrating compliance with all of the continuation
health care coverage requirements of section 162(k)/4980B of the Code and
sections 601 through 608 of ERISA. For purposes of this provision, references
to the Code and ERISA shall include references to any provisions of such
statutes as they may be amended from time to time.
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(z) ENVIRONMENTAL MATTERS. Except as disclosed on Exhibit 5.z.(1):
(1) No Hazardous Substances have been or are currently generated,
stored, transported, utilized, disposed of, managed, released or located on,
under or from 7312 Commercial Circle, Fort Pierce, Florida or any other
premises Seller has occupied ("the Premises") (whether or not in reportable
quantities) by Seller or its agents or invitees, or in any manner introduced
onto the Premises by Seller or its agents or invitees, including, without
limitation, the septic, sewage or other waste disposal systems serving the
Premises except in accordance with all applicable Environmental Laws.
(2) Seller has no knowledge of any threat of release of any Hazardous
Substances on, under or from the Premises.
(3) Seller has not received any notice from the United States
Environmental Protection Agency or any other Governmental Authority (as defined
below) claiming that (i) the Premises or any use thereof violates any of the
Environmental Laws (as defined below), or (ii) Seller or any of its employees
or agents have violated any of the Environmental Laws.
(4) Seller has not incurred any liability to the State of Florida,
Pennsylvania, the United States of America or any other Governmental Authority
under any of the Environmental Laws.
(5) There are no Environmental Enforcement Actions pending or
threatened to the best of Seller's knowledge.
(6) To the best of Seller's knowledge, there are no underground
storage tanks on or under the Premises.
(7) The following definitions apply to this paragraph.
(i) "ENVIRONMENTAL ENFORCEMENT ACTIONS" means actions or orders
instituted, threatened, required or completed by any Governmental Authority and
all claims made or threatened by any person against Seller or the Premises,
arising out of or in connection with any of the Environmental Laws or the
assessment, monitoring, clean-up, containment, re-mediation or removal of, or
damages caused or alleged to be caused by, any Hazardous Substances (i) located
on or under the Premises, (ii) emanating from the Premises, or (iii) generated,
stored, transported, utilized, disposed of, managed or released by Seller.
(ii) "ENVIRONMENTAL LAWS" means federal, state and local laws,
statutes, ordinances, rules, regulations, codes, orders, judgments, orders and
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the like applicable to (i) environmental conditions on, under or emanating from
the Premises including, but not limited to, (a) laws of the State of New Jersey;
and the associated rules and regulations promulgated in connection with any of
these laws, and (b) laws of the federal government commonly known as the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended, the Resource Conservation and Recovery Act, as amended, the Toxic
Substance Control Act, as amended, the Federal Water Pollution Control Act, as
amended, and the Federal Clean Air Act; and the associated rules and
regulations promulgated in connection with any of these laws; and (ii) the
generation, storage, transportation, utilization, disposal, management or
release (whether or not on, under or from the Premises) of Hazardous Substances
by Seller.
(iii) "GOVERNMENTAL AUTHORITY" means agencies, authorities,
bodies, boards, commissions, courts, instrumentalities, legislatures and
offices of any nature whatsoever for any government unit or political
subdivision, whether federal, state, county, district, municipal, city or
otherwise, and whether now or later in existence.
(iv) "HAZARDOUS SUBSTANCES" shall mean, collectively, (i) any
"hazardous material," "hazardous substance," "hazardous waste," "oil,"
"regulated substance," "toxic substance," "restricted hazardous waste,"
"special waste" or words of similar import as defined under any of the
Environmental Laws; (ii) asbestos in any form; (iii) urea formaldehyde foam
insulation; (iv) polychlorinated biphenyls; (v) radon gas; (vi) flammable
explosives; (vii) radioactive materials; (viii) any chemical, contaminant,
solvent, material, pollutant or substance that may be dangerous or detrimental
to the Premises, the environment, or the health and safety of occupants of the
Premises or of the owners or occupants of any other real property nearby the
Premises, and (ix) any substance, the generation, storage, transportation,
utilization, disposal, management, release or location of which on, under or
from the Premises is prohibited or otherwise regulated pursuant to any of the
Environmental Laws.
(aa) SHAREHOLDER LIST. Attached as Exhibit 5.(aa) is a complete and
accurate list of each shareholder and the number of shares owned by the
shareholder.
(bb) INSURANCE. Exhibit 5.(bb) lists all policies of liability, property
damage, fire, workers' compensation/employer's liability, title or other forms
of insurance owned or carried by Seller (the "Policies") and insurance agents
or brokers providing such insurance coverage. Seller has received no notice
from any insurance carrier regarding the possible cancellation of or premium
increase with respect to the Policies. Seller has no claim pending or
anticipated against any of the insurance carriers under any of the Policies and
there has been no actual or alleged occurrence of any kind which may give rise
to any such claim.
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(cc) REPRESENTATIONS AND WARRANTIES TRUE AND CORRECT. The representations
and warranties contained herein, and all statements or information disclosed by
any of the Exhibits, do not include any untrue statement or material fact nor
omit to state a material fact required to be stated herein or therein or
necessary in order to make the statements herein or therein, in light of the
circumstances under which they are made, not misleading.
6. REPRESENTATIONS AND WARRANTIES OF BUYER. In order to induce Seller to
enter into this Agreement, Buyer makes the following representations and
warranties, each of which shall be deemed to be independent materially and
relied upon by Seller, regardless of any investigation made by, or information
known to, Seller:
(a) ORGANIZATION. Buyer is, and on the Closing Date shall be, a
corporation validly existing and in good standing under the laws of the State
of Michigan.
(b) AUTHORIZATION. The execution and delivery of this Agreement and the
transactions contemplated hereby have been duly authorized by the Board of
Directors of Buyer and on the Closing Date all of the necessary corporate
action to authorize the execution and delivery of this Agreement and the
purchase hereby will have been taken.
(c) NO VIOLATION. The execution and delivery of this Agreement by the
Buyer and the consummation of the transactions contemplated hereby will not
violate any law, order or regulation of any governmental authority, or
corporate charter or bylaws of Buyer or constitute a default under any
judgment, order or decree of any court or governmental agency or
instrumentality, or conflict with or constitute a breach or default under any
agreement to which Buyer is a party or by which it is bound.
(d) BROKERAGE. Buyer has not made a commitment for a brokerage, finders
or similar fees in connection with the transactions contemplated by this
Agreement.
(e) BINDING EFFECT. The Agreement and all related documents have been
duly executed, made and delivered by Buyer, as appropriate, and constitute a
legal, valid and binding obligation of Buyer enforceable against Buyer in
accordance with their respective terms, subject to the laws of general
application affecting creditors' rights.
(f) REPRESENTATIONS AND WARRANTIES TRUE AND CORRECT. The representations
and warranties contained herein do not include any untrue statement or material
fact nor omit to state a material fact required to be stated herein or therein
or
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necessary in order to make the statements herein or therein, in light of the
circumstances under which they are made, not misleading.
7. CONDITIONS OF BUYER'S OBLIGATION TO CLOSE. The obligations of Buyer
pursuant to this Agreement are subject to the following conditions having been
met, or waived in writing by Buyer, at or prior to the Closing Date:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
made by Seller in Paragraph 5 shall be true and correct in all material
respects on and as of the Closing Date.
(b) APPROVALS AND CONSENTS. All necessary approvals and consents with
respect to the transactions contemplated hereby, the absence of which would
have a material and adverse effect on Buyer's rights under this Agreement, or
which would result in the forfeiture or breach of any material rights acquired
by Buyer pursuant to the provision of any material contract or agreement
assumed by and hereunder, or without which the Buyer would be precluded or
materially impeded from conducting the Business, shall have been received by
Buyer. Specifically, Buyer shall have received the consent of HyMed and Butler
Sales Associates to the assignment of the agreements between Seller and HyMed
and Butler Sales Associates.
(c) DELIVERY OF INSTRUMENTS OF CONVEYANCE OF THE PURCHASED ASSETS. Seller
shall have delivered to Buyer, satisfactory to Buyer in form and substance,
conveyancing documents to transfer title to the Purchased Assets to Buyer.
(d) NO LITIGATION. No investigation, suit, action or other proceedings
shall be threatened or pending before any court or governmental agency in which
it is sought to restrain, prohibit or obtain damages or other relief in
connection with this Agreement or the consummation of the transactions
contemplated hereby.
(e) NO ADVERSE CHANGE. There shall have been no change or development
related to the Business, the Purchased Assets, results of operations or in the
condition, financial or otherwise, of the Business, which has had or may
reasonably be expected to have a material adverse effect on the condition,
financial or otherwise, of the operation of the Business or ownership of the
Purchased Assets.
(f) RELATED DOCUMENTS. All of the related documents are executed at or
prior to closing, including the Title Transfer Documents.
(g) OPINION OF COUNSEL. Buyer shall have received an opinion of Seller's
counsel, dated the Closing Date, satisfactory in form and substance to Buyer
and its counsel substantially in the form of attached Exhibit 7.(g).
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8. CONDITIONS TO SELLER'S OBLIGATION TO CLOSE. The obligations of Seller,
under this Agreement are subject to the following conditions having been met,
or waived in writing by Seller, at or prior to the Closing Date:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Buyer in Paragraph 6 shall be correct in all material respects on and as of the
Closing Date.
(b) PAYMENT OF PURCHASE PRICE. Buyer shall have delivered to Seller the
Main Price, Receivables Price and Inventories Price as provided in Paragraph 3.
(c) NO LITIGATION. No investigation, suit, action or other proceedings
shall be threatened or pending before any court or governmental agency in which
it is sought to restrain, prohibit or obtain damages or other relief in
connection with this Agreement or the consummation of the transactions
contemplated hereby.
(d) OPINION OF COUNSEL. Seller shall have received an opinion of Buyer's
counsel, dated the Closing Date, satisfactory in form and substance to Seller
and its counsel substantially in the form of attached Exhibit 8.(d).
9. SURVIVAL OF REPRESENTATIONS AND INDEMNIFICATION.
(a) SURVIVAL OF REPRESENTATIONS. Buyer and Seller agree that all
representations, warranties and covenants of Seller ("the Representations")
shall survive the execution and delivery of this Agreement, the Closing Date
and any investigation or audit made by Buyer. The Representations given in
Paragraphs 5.(a), (d), (f) and (v) through (w) shall continue for two (2) years
after the expiration of any statute of limitations under which a claim may be
made and all others shall expire upon the fifth anniversary of the Closing
Date.
(b) INDEMNIFICATION. Seller agrees to defend, indemnify and hold Buyer
harmless from and against any and all loss, damage, claims and expenses
(including accountants' and attorneys' fees) incurred by Buyer which Buyer may
sustain at any time by reason of (i) the breach of any of the Representations
made by Seller herein or any agreement or document delivered in connection with
this Agreement or with the closing of the transactions contemplated hereby (ii)
Buyer being deemed to be a "successor" employer to Seller for purpose of COBRA
obligations; provided, however, that Buyer shall give the Seller prompt notice
(as provided in Paragraph 13) of any asserted claim hereunder ("Indemnifiable
Damage"). Buyer shall have the right to set off any Indemnifiable Damage it
may incur against the amount it owes Seller. This right of set off shall be in
addition to any other rights Buyer may have against Seller. Buyer and Seller
shall cooperate in defending against any claim
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to which the Seller's indemnity obligations apply, and in minimizing the costs,
losses and damage involved in such claim. Buyer will not compromise, settle,
or admit liability in any claim to which the Seller's indemnity obligations
apply, and will not incur significant costs or expenses with respect to any
such claim, without the consent of Seller, which shall not be unreasonably
withheld.
10. SELLER'S COVENANTS. Seller covenants and agrees with Buyer as
follows:
(a) ACCESS TO PROPERTIES AND RECORDS OF SELLER. Seller will give Buyer
and its representatives full access during normal business hours to all of its
properties, books, contracts, documents and records, the opportunity to make
reasonable investigation, and any additional financial statements of, and all
information with respect to the business and affairs of, Seller that Buyer may
reasonably request.
(b) CONDUCT OF SELLER'S BUSINESS PENDING CLOSING. Between the date of the
Agreement and the Closing Date, Seller shall operate its business in the usual,
regular and ordinary manner on a basis consistent with prior years and shall
use it best efforts to preserve its present business organization in tact, keep
available the services of its present officers an employees and preserve it
present business relationships with persons having business relationships with
it.
11. SELLER'S TERMINATION OF EMPLOYEES.
(a) Seller agrees to terminate the employment of David McGee on or the day
before the Closing Date.
(b) Buyer has no obligation to hire any current employee of Seller.
(c) Between the date this Agreement is executed and the Closing Date,
Seller shall permit Buyer to, or shall, on behalf of Buyer, distribute Buyer's
employment information and have access to David McGee for purposes of
determining whether Buyer will hire him.
12. TRANSACTIONS SUBSEQUENT TO CLOSING.
(a) FURTHER ASSURANCES. Buyer and Seller agree that, from time to time
after Closing, and upon request, they shall execute, acknowledge and deliver
such other instruments as reasonably may be required to more effectively
transfer and vest in Buyer the Purchased Assets or to otherwise carry out the
terms and conditions of this Agreement.
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(b) MAINTENANCE OF SELLER. Until the Federal, state and local income tax
liabilities of Seller attributable for all periods ending on or prior to the
Closing have been examined and reported on by the Internal Revenue Service (or
closed by applicable statute of limitations) and finally determined, Seller's
legal existence shall be maintained and Seller shall maintain at all times
sufficient working capital to insure Seller's ability to pay its tax
obligations on a punctual basis.
13. PROPER NOTICES. All notices and other communications required or
permitted under this Agreement shall be deemed to have been given if mailed by
registered or certified mail, postage prepaid, or otherwise delivered by hand
or messenger, fax or telegram, to the parties at the address listed on page 1,
attention President, or to such other changed address as such party may have
given by notice.
14. APPLICABLE LAW. This Agreement and its validity, construction and
performance shall be governed in all respects by the laws of the State of
Michigan.
15. BULK TRANSFER. Buyer agrees to waive compliance with the provisions
of any applicable bulk sale or transfer of law in exchange for Seller's
covenant to indemnify and hold Buyer harmless from and against all liabilities
Buyer may incur arising from such non-compliance.
16. INTEGRATION. This Agreement sets forth the entire agreement and
understanding between the parties as to the subject matter hereof, and
supersedes all prior discussions, representations, amendments or understandings
of every kind and nature between them.
17. AMENDMENTS. Any amendment, alteration, supplement, modification or
waiver shall be invalid unless it is set forth in writing, signed by the party
intending to be bound thereby.
18. SEVERABILITY. If any provision of this Agreement becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without the
provision(s).
19. ASSIGNABILITY. This Agreement may be assigned by Buyer without the
prior written consent of Seller; provided, Buyer shall continue to be liable
for the performance of all obligations pursuant to the Agreement.
20. BENEFIT. This Agreement shall be binding upon and inure to the
benefit of Buyer and Seller and their successors and permitted assigns.
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21. CAPTIONS. Captions contained in this Agreement are inserted for
reference and in no way define, limit, extend or describe the Agreement or the
intent of any provision herein.
22. PRONOUNS. All pronouns and any variation thereof shall be deemed to
refer to the masculine, feminine, neuter, singular or plural as the identity of
the parties may require.
23. COVENANT NOT TO COMPETE. Without prior written consent of Buyer,
Seller and W. J. Bartus agree that, for a five (5) year period from and after
the Closing Date, they shall not individually or jointly, alone, or as an
officer, agent, employee, or director, of any other corporation, university, or
other entity, directly or indirectly, own, manage, operate, or control in the
ownership, management, operation, or control of or work for, or permit the use
of their names by, or be connected in any manner with any business or activity
in any country which is at the time competitive with any product of the
Business as defined in Item A of the Recitals. While the restrictions set
forth above are considered by the parties to be reasonable in all
circumstances, it is recognized that restrictions of the nature in question may
fail for technical reasons unforeseen and accordingly it is hereby agreed and
declared that if any of such restrictions shall be adjudged to be void as going
beyond what is reasonable in all the circumstances for the protection of the
interests of the Buyer but would be valid if part of the wording thereof were
deleted or the periods if any thereof reduced or the range of activities or
area dealt with thereby reduced in scope, these restrictions shall be applied
with such modifications as may be necessary to make it valid and effective.
As consideration for this agreement not to compete, One Hundred Thousand
Dollars ($100,000) as a part of the initial purchase price described in
Paragraph 3.(a) shall be deemed as payment for this covenant not to compete.
No additional consideration shall be paid by Buyer.
24. TRADE SECRETS. It is agreed that the products and information
relating to the Business and anticipated improvements relating to them
constitute trade secrets. Seller and W. J. Bartus agree that they shall not
individually or jointly disclose to any person any trade secrets regardless of
nature, type or physical manifestation or any other information concerning the
business affairs of Buyer and the Business, including, but not limited to,
information related to the products identified in Item B of the Recitals and
improvements made thereto. This restriction shall include information imparted
or divulged to, gained or developed by, or otherwise discovered by Seller, or
W. J. Bartus in executing this Agreement. Anything in this Agreement to the
contrary notwithstanding, Seller, and W. J. Bartus shall not be bound by this
Paragraph 24 to the extent that the information
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they desire to divulge is or becomes publicly known, other than through a
breach of their obligations hereunder.
25. CONSULTATION. In order to further induce Buyer to enter into this
Agreement, William J. Bartus agrees to enter into a Consulting Agreement
substantially in the form of Exhibit 25.
26. CONSTRUCTION OF AGREEMENT. The parties agree that this Agreement has
been jointly drafted and that neither party may assert an ambiguity in the
construction of this Agreement against another party because the other party
allegedly drafted the allegedly ambiguous provision.
27. VENUE. The parties agree that any action shall be brought in the
court of appropriate jurisdiction in Ingham County, Michigan or U.S. District
Court for the Western District located in Lansing, Michigan. The parties
consent to jurisdiction and waive all claims of improper venue and forum non
conveniens.
28. ENFORCEMENT OF AGREEMENT. Each party agrees to pay all of the other
party's costs and expenses, including actual attorney's fees, in enforcing the
terms of this Agreement, including collection of amount owed to a party.
The parties have caused this Agreement to be executed as of the date and
year first above written.
SELLER:
W. J. BARTUS, INC.
By:/s/ W. J. Bartus, President
-------------------------------
W. J. Bartus, President
BUYER:
NEOGEN CORPORATION
By:/s/ James L. Herbert
-------------------------------
James L. Herbert, President
-22-
<PAGE> 23
In consideration of the terms of the Asset Purchase Agreement, William J.
Bartus agrees to (i) guaranty the performance of Seller; and (ii) the
provisions of paragraphs 23 through 25.
/s/ William J. Bartus
- ---------------------
William J. Bartus
-23-
<PAGE> 24
LIST OF EXHIBITS
Exhibit 1.a Machinery and Equipment
Exhibit 1.b Intangible Property
Exhibit 1.c Receivables
Exhibit 1.d Inventories
Exhibit 1.e Contract Rights
Exhibit 1.f Other Assets
Exhibit 2.a Assumed Liabilities
Exhibit 3.g Allocation of Purchase Price
Exhibit 4.a-1 Warranty Bill of Sale
Exhibit 4.a-2 Assignment of Contracts
Exhibit 5.b Violations
Exhibit 5.c Financial Statements
Exhibit 5.d.i Exceptions to Good Title and Free and Clear of Liens
Exhibit 5.d.ii List of Contracts
Exhibit 5.j Litigation
Exhibit 5.l Non-Payment of Taxes
Exhibit 5.n Liability Claims
Exhibit 5.o. Undisclosed and Contingent Liabilities
Exhibit 5.p Non-Performance of Contracts
Exhibit 5.q Changes Since December 31, 1996
-1-
<PAGE> 25
Exhibit 5.x Employee Information
Exhibit 5.x(4) Employment Agreements
Exhibit 5.x(5) Employment Claims
Exhibit 5.y Employee Benefit Plans
Exhibit 5.z(1) Environmental Matters
Exhibit 5.(aa) Shareholder List
Exhibit 5.(bb) Insurance Information
Exhibit 7.(g) Seller's Opinion of Counsel
Exhibit 8.(d) Buyer's Opinion of Counsel
Exhibit 25 William J. Bartus Consulting Agreement
-2-
<PAGE> 1
EXHIBIT 10(X)
DIAGNOSTIC DISTRIBUTORSHIP AGREEMENT
This Agreement, entered into on this 20th day of September, 1996, by and
between:
ORION DIAGNOSTICA, INC.
P.O. Box 218
Somerset, New Jersey 08875
a corporation organized under the laws of the State of New York hereinafter
referred to as SUPPLIER; and
NEOGEN CORPORATION
620 Lesher Place
Lansing, MI 48912
USA
hereinafter referred to as DISTRIBUTOR.
W I T N E S S E T H
WHEREAS, SUPPLIER manufactures foodborne bacteria diagnostic products and
desires to sell its products through a distributor; and
WHEREAS, DISTRIBUTOR desires to purchase the SUPPLIER'S foodborne bacteria
diagnostic products for resale to end users; and
WHEREAS, the parties desire to enter into a distributorship agreement
governing their relationship;
NOW, THEREFORE, in consideration of the mutual terms and conditions set
forth herein, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. PRODUCT
1.1 Products: The products covered by this Agreement are those products
and accessories set forth and attached hereto in Exhibit A ("Products"),
together with the parts and components necessary for the repair and replacement
thereof.
Exhibit A may be amended from time to time by mutual written consent of
the parties.
1.2 Product Modifications: SUPPLIER shall make available for sale to
DISTRIBUTOR any improved or updated version of the products by notice to
DISTRIBUTOR (which notice shall include all of the same type of information and
level of detail as set forth on Exhibit A hereto, proposed manufacturing and
delivery
<PAGE> 2
schedules, proposed pricing and minimum annual volumes and, to the
extent available, working prototypes, clinical data, and documented test
results). DISTRIBUTOR shall have sixty (60) days from the receipt of such
notice to notify SUPPLIER that it has accepted such product modification as a
product subject to the terms and conditions hereof. If DISTRIBUTOR fails to so
accept the product modification, SUPPLIER shall not be bound by the terms of
this agreement with respect to such product modification, and SUPPLIER shall be
free to sell the product modification, without limitation of prices and
quantities with respect to which the prices are equal or greater to those
proposed to DISTRIBUTOR for the quantities involved in such sales, but not at
lesser prices unless SUPPLIER re-offers such product modification, to
DISTRIBUTOR at such price pursuant to the terms hereof and DISTRIBUTOR fails to
so accept such product modification, at such price.
1.3 Shelf Life: SUPPLIER represents and warrants that all products with a
limited shelf life will have a minimum four and one-half (4-1/2) months
remaining shelf life at date of shipment.
2. DISTRIBUTORSHIP AND TERRITORY
2.1 Exclusivity: SUPPLIER hereby grants to DISTRIBUTOR, and DISTRIBUTOR
accepts, the non-exclusive right for three (3) months after execution of this
agreement and the exclusive right thereafter to sell, distribute, and service
the products in the food and industrial market for the term of and pursuant to
the conditions of this agreement.
2.2 Territory: The territory in which the DISTRIBUTOR has the exclusive
right to sell and distribute shall be the United States. Distributor shall
also have non-exclusive rights to distribute Products in Canada and South and
Central America, in countries mutually agreed upon in writing.
3. ORDERS; VOLUME
3.1 Orders: DISTRIBUTOR shall make purchases by submitting firm purchase
orders to SUPPLIER.
3.2 Volume: DISTRIBUTOR'S twelve (12) month projected purchase volume is
________________ tests. DISTRIBUTOR agrees to purchase and SUPPLIER agrees to
supply and ship products at a rate consistent with this projected volume.
4. SHIPPING AND DELIVERY
4.1 Shipping: SUPPLIER shall ship all products F.O.B. Somerset, New
Jersey. SUPPLIER will ship all Products for which it has received a firm
purchase order within thirty (30) days of order receipt. The parties agree
that time is of the essence regarding delivery of Products.
-2-
<PAGE> 3
5. PRICE AND PAYMENT TERMS
5.1(a) Initial Price: The initial price for the products shall be as set
forth on Exhibit A attached hereto and made a part hereof, and shall remain in
effect for at least one (1) year from the date hereof. Such prices and any
subsequent prices shall not exceed prices offered by SUPPLIER to any other
distributor or purchaser for similar quantities of the products sold on no less
favorable terms and conditions, and DISTRIBUTOR shall enjoy the benefits of any
discounts that SUPPLIER offers to its other customers for prompt payment or
otherwise.
5.1(b) Subsequent Prices: No less than ninety (90) days prior to the end
of the one (1) year period described above for any product (and each subsequent
such period), SUPPLIER and DISTRIBUTOR agree to meet and to negotiate in good
faith the prices for the product for the succeeding one (1) year period. If
the parties are unable to reach an agreement prior to the commencement of the
subsequent one (1) year period, the price for the product shall be the prices
then currently in effect. However, once agreement is reached on a new price,
all units purchased during the subsequent one (1) year period will be
re-invoiced at the agreed upon price. The price negotiations between the
parties shall take into consideration the current market conditions effecting
the sale of the products and the rate of inflation as determined in reference
to the United States Department of Labor, Bureau of Labor Statistics, Producer
Price Index, and the exchange rate between the U.S. and Finland currencies.
Those components relating to the allocation or re-allocation of overhead,
overtime (whether authorized or not), debt service due to refinancing of plant
and equipment, and any other items of cost or expense not directly related to
the production of the products shall be excluded from the negotiations of the
products' prices.
5.2 Payment Terms: Payment terms shall be full amount due 30 days from
date of invoice.
6. PACKAGING
6.1 Packaging: SUPPLIER will supply products in sizes and packaging
configurations corresponding to those set forth in Exhibit A. SUPPLIER will
print lot numbers conspicuously on both outer shipping cartons and on inner
packs. SUPPLIER will print expiration date conspicuously on both outer
shipping cartons and on inner units of dated products.
7. TERMS AND TERMINATION
7.1 Terms: The term of this Agreement shall be for three (3) years,
commencing on date first shown on page one of this Agreement. The term with
respect to each product shall automatically renew for additional periods of one
(1) year each unless either party shall notify the other to the contrary by the
date ninety (90) days prior to the end of the initial term or ninety (90) days
prior to the end of any renewal term with respect to such product or until such
later date as the parties may otherwise
-3-
<PAGE> 4
agree in writing.
7.2 Termination: Notwithstanding the foregoing, this Agreement may be
terminated for cause at any time as follows:
a. In the event of default or material breach of the terms of
this Agreement by either party, written notice may be given to the
defaulting party. Thereafter, the defaulting party shall have
thirty (30) days to cure said breach. In the event that said breach
has not been cured within said thirty (30) day period, this
Agreement shall terminate on the thirtieth (30th) day following the
notice of default.
b. In the event of nationalization, expropriation, liquidation
or bankruptcy of, or an assignment for the benefit of creditors of,
or a declaration of insolvency by, either party.
c. Notwithstanding the Term specified in Section 7.1 above,
Supplier shall have the right to terminate or convert this agreement
to a non-exclusive agreement upon prior written notice within thirty
(30) days after the first anniversary date of this agreement if
purchases do not equal or exceed 4,000 boxes for the first year; or
within thirty (30) days after the second anniversary if purchases do
not equal or exceed 8,000 boxes for the second year.
8. WARRANTIES, INDEMNITY, AND RECALL
8.1 Warranties: SUPPLIER warrants that the Products will conform to the
specifications set forth in product literature and Exhibit A and that they will
be merchantable and fit for their intended purpose.
8.2 Indemnity: SUPPLIER will indemnify and hold DISTRIBUTOR harmless from
any and all claims, actions, costs, expenses or damages, including attorney's
fees and expenses, resulting from any actual or alleged patent infringement in
the use or sale of the products. Warranties otherwise arising in connection
with the sale or use of the products where such liability results from the act
or omission of SUPPLIER shall be limited to the free replacement of the
product(s) in question. Such indemnity shall not apply if claims arise solely
as a result of the DISTRIBUTOR'S making representations about the Products
which are inconsistent with the warranties and representations of the SUPPLIER.
8.3 Recall: In the event of a confirmed Product failure, or a recall
ordered by a government agency, SUPPLIER agrees to reimburse DISTRIBUTOR for
all recall Products including shipping.
-4-
<PAGE> 5
9. TRADEMARKS
9.1 Trademark License: SUPPLIER hereby reserves the
exclusive right to SUPPLIER'S trademarks.
10. MISCELLANEOUS
10.1 Force Majeure: No failure or omission by the parties hereto in the
performance of any obligations of this Agreement shall be deemed a breach of
this Agreement nor create any liability if the same shall arise from any cause
or causes beyond the control of the parties, including, but not limited to, the
following, which, for the purpose of this Agreement shall be regarded as beyond
the control of the parties in question: act of God, acts or omissions of any
government or any rules, regulations or orders of any governmental authority or
any officer, department, agency or instrumentality thereof; fire, storm, flood,
earthquake, insurrection, riot, invasion or strikes. The affected party shall
use its best efforts to remedy the effects of such force majeure. Any force
majeures shall not excuse performance by the party, but shall postpone
performance, unless such force majeure continues more than ninety (90) days.
In such event, the other party may cancel its obligations hereunder.
10.2 Assignment: Neither party may assign this Agreement without the
prior written consent of the other party.
10.3 Notices: Any notice required or permitted to be given under the
terms of this Agreement shall be in writing, shall be given manually or by mail
or telegram.
10.4 Entire Agreement: This Agreement, including exhibits constitutes the
entire Agreement between the parties relating to the subject matter hereof and
cancels and supersedes all prior agreements and understandings, whether written
or oral, between the parties with respect to such subject matter.
10.5 Modifications, Waiver: This Agreement may not be modified orally and
no modification or any claimed waiver of any of the provisions hereof shall be
binding unless in writing and signed by the party against whom enforcement of
such modification or waiver is sought.
10.6 Relationship of the Parties: This Agreement does not constitute
either party the agent or legal representative of the other for any purpose
whatsoever.
10.7 This Agreement shall be construed and enforced in accordance with the
Laws of the State of Michigan, USA.
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties have executed this Agreement by their duly
authorized representatives:
SUPPLIER DISTRIBUTOR
By:____________________________ By:___________________________
Title:_________________________ Title:________________________
Date:__________________________ Date:_________________________
-6-
<PAGE> 7
EXHIBIT A
PACKAGE PRICE TO
PRODUCT CONFIGURATION DISTRIBUTOR*
- ------- ------------- ---------------
-7-
<PAGE> 8
*Prices are FOB Somerset, New Jersey, USA.
Funds to be paid in currency of the United States
-8-
<PAGE> 1
EXHIBIT 10(y)
CONFIDENTIAL
AGREEMENT BETWEEN
OXOID INC AND NEOGEN CORPORATION
This Agreement, entered into on July 1, 1997 by and between:
OXOID INC
217 Colonnade Road
Nepean
Ontario, K2E 7K3
a corporation organised under the laws of the Canada hereinafter referred to as
SUPPLIER; and
NEOGEN CORPORATION
620 Lesher Place
Lansing, MI 48912
a Corporation organised under the laws of the State of Michigan and hereinafter
referred to as DISTRIBUTOR.
W I T N E S S E T H
WHEREAS, SUPPLIER manufactures diagnostic test kits and reagents for
the detection of Listeria, hereinafter referred to as PRODUCTS, and desires to
sell its products through a distributor; and
WHEREAS, DISTRIBUTOR desires to purchase the SUPPLIER'S PRODUCTS for
resale to end users; and
WHEREAS, the parties desire to enter into a distributorship agreement
governing their relationship;
NOW, THEREFORE, in consideration of the mutual terms and conditions set
forth herein, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. PRODUCT
1.1 PRODUCTS: The products covered by this Agreement are those
products and accessories set forth and attached hereto in
Exhibit A ("PRODUCTS").
Exhibit A may be amended from time to time by mutual written
consent of the parties.
1 of 8
<PAGE> 2
1.2 Product Modifications: Any improved or updated version of the
PRODUCTS introduced by SUPPLIER during the term hereof shall be
available to DISTRIBUTOR under the same terms and conditions
herein. SUPPLIER may at any time cease to manufacture any
PRODUCTS from its range of PRODUCTS in the Territory, provided
SUPPLIER gives DISTRIBUTOR ninety (90) days notice of intention.
1.3 Shelf Life: SUPPLIER represents and warrants that all products
with a limited shelf life will have a minimum of twelve months
remaining shelf life at date of shipment to DISTRIBUTOR.
2. DISTRIBUTORSHIP AND TERRITORY
2.1 Non-exclusivity: SUPPLIER hereby grants to DISTRIBUTOR, and
DISTRIBUTOR accepts, the non-exclusive right to sell,
distribute, and service the PRODUCTS for the term of and
pursuant to the conditions of this Agreement. SUPPLIER retains
the right to sell and service the products but will not name
other distributors in the United States without first providing
DISTRIBUTOR with sixty (60) days notice of such intent.
2.2 Territory: The territory in which the DISTRIBUTOR has the right
to sell and distribute shall be the United States, Canada, South
America and Central America only ("the Territory").
2.3 During the term of this Agreement, DISTRIBUTOR shall not
directly or indirectly be involved in the manufacture or
distribution of any goods which will compete with PRODUCTS in
the Territory.
3. ORDERS
3.1 Orders: DISTRIBUTOR shall make purchases by submitting firm
purchase orders to SUPPLIER, using the DISTRIBUTOR'S purchase
order form shown in Exhibit B.
3.2 Volume: DISTRIBUTOR'S twelve (12) month projected purchase
volume is shown in Exhibit C (Projections). A six (6) month
forecast will be submitted to the SUPPLIER at the beginning of
each quarter. The volume forecast for the first three (3)
months of this forecast will be taken as a firm order. For the
purposes of this clause quarters shall begin on the first of the
month of January, April, July and October.
3.3 Intentionally Omitted.
2 of 8
<PAGE> 3
4. SHIPPING AND DELIVERY
4.1 Shipping: SUPPLIER shall ship all products ex-works. SUPPLIER
will ship all PRODUCTS for which it has received a firm purchase
order within sixty (60) days of order receipt.
5. PRICE AND PAYMENT TERMS
5.1 Price: SUPPLIER will supply and ship Product at the prices shown
in Exhibit A. Such prices shall be effective for a period of
one year commencing on July 1, 1997 and thereafter the SUPPLIER
reserves the right to modify these prices annually, considering
changes in raw material costs, manufacturing costs, freight and
other market conditions including relevant price indices or
statistics used by the UK government or independent
organisation, giving ninety (90) days written notice to the
DISTRIBUTOR and providing the DISTRIBUTOR with reasonable
explanation of the change. When a new price is set by the
SUPPLIER it shall automatically supersede all such prior price
lists.
5.2 Payment Terms: Payment terms shall be full amount due thirty
(30) days from date of invoice. The SUPPLIER'S terms and
conditions shall take precedence.
6. PACKAGING
6.1 Packaging: SUPPLIER will supply products in sizes and packaging
configurations corresponding to those set forth in Exhibit A.
SUPPLIER will print any expiration date and lot numbers
conspicuously on all packages. Any additional actual costs for
packaging shall be borne by DISTRIBUTOR. All packaging shall be
approved by SUPPLIER. If no comment on this packaging is made
by SUPPLIER within thirty (30) days of SUPPLIER receiving
samples of packaging, DISTRIBUTOR may assume approval. All
packaging designs and get ups shall belong to SUPPLIER.
7. STOCK
7.1 DISTRIBUTOR shall purchase and maintain at all times adequate
stocks of the PRODUCTS in keeping with the requirements of the
Territory.
3 of 8
<PAGE> 4
8. TERM AND TERMINATION
8.1 Intentionally Omitted.
8.2 Termination: Notwithstanding the foregoing, this Agreement may
be terminated for cause at any time as follows:
a. In the event of default or material breach of the terms of this
Agreement by either party, written notice may be given to the
defaulting party. Thereafter, the defaulting party shall have
thirty (30) days to cure said breach. In the event that said
breach has not been cured within said thirty (30) days period,
this Agreement shall terminate on the thirtieth (30th) day
following the notice of default.
b. In the event of nationalisation, expropriation, liquidation or
bankruptcy of, or an assignment for the benefit of creditors of,
or a declaration of insolvency or cessation of trading by,
either party.
c. There is a change in ownership of the other party which is
unacceptable to either party.
Neither party shall be liable to the other party because of
termination of or refusal to renew this Agreement for
compensation, reimbursement, or damages on account of the loss
of prospective profit on anticipated sales or on account of
expenditures, investments, leases, or any type of commitments
made in connection with the business of the other party.
4 of 8
<PAGE> 5
9. OBLIGATIONS ON TERMINATION
9.1 The provision of Clauses 8 and 12 and this Clause shall survive
even after the termination or cancellation of this Agreement.
9.2 Upon termination or cancellation of this Agreement pursuant to
Clause 8, any and all obligations of DISTRIBUTOR accrued and
existing under this Agreement shall become due and payable.
9.3 Upon termination of this Agreement DISTRIBUTOR shall return to
SUPPLIER without delay such confidential documents and such
promotional material as SUPPLIER may request. Notwithstanding
the foregoing, upon termination or cancellation of this
Agreement, DISTRIBUTOR shall be entitled, at DISTRIBUTOR'S
option to sell any stock on hand at the date of such termination
or cancellation.
10. WARRANTIES, INDEMNITY, AND RECALL
10.1 Intentionally Omitted.
10.2 Intentionally Omitted.
11. TRADEMARKS
11.1 Trademark License: SUPPLIER hereby grants to DISTRIBUTOR the
royalty-free right to use SUPPLIER'S trademarks on SUPPLIER'S
products and in promoting the SUPPLIER'S product during the term
of this Agreement. DISTRIBUTOR hereby grants to SUPPLIER the
royalty-free right to use DISTRIBUTOR'S trademarks on SUPPLIER'S
product for sale to DISTRIBUTOR during the term of this
Agreement. Each party shall discontinue to use of the other
party's trademarks upon the termination hereof.
5 of 8
<PAGE> 6
12. CONFIDENTIALITY
The parties hereto shall keep confidential all trade secrets and
other confidential information and commercially sensitive
information provided by the other party (including prices for
the PRODUCTS, plans for product development, etc.,) acquired in
the course of transactions under this Agreement, and shall not
disclose such secrets or information to any individual, firm or
corporation except when authorised in writing to do so by the
other party. This clause shall remain effective for ten (10)
years after the termination or cancellation of this Agreement.
The proprietary information provided by either party shall not
be used by the other party for any purpose other than as set
forth in this Agreement.
13. GOVERNING LAW AND JURISDICTION
13.1 This Agreement shall be construed and enforced in accordance
with the Laws of Michigan, USA.
13.2 All disputes arising under or in connection with this Agreement
shall be fully and finally resolved under either the then
effective rules of arbitration of the American Arbitration
Association or the Rules of Conciliation Arbitration of the
International Chamber of Commerce. The arbitration shall be
conducted in the State of New York before a panel of three
arbitrators under the auspices of the American Arbitration
Association or International Chamber of Commerce. The party who
initiates the arbitration shall designate which body shall
conduct the arbitration. Each party shall each designate one
arbitrator. The parties hereby consent to the State of New York
as the exclusive venue for such arbitration and neither party
will bring any suit, claim or action in any way arising out of
or relating to this Agreement in any other forum.
Further, the SUPPLIER and DISTRIBUTOR hereby irrevocably and
unconditionally waive any objections to such venue and each
agrees that it shall not otherwise plead or claim that such
venue is improper. The arbitrators shall be persons
knowledgeable in the legal and business issues involved in and
common to the sale of Food Microbiology testing products, with
each arbitrator having at least five years experience in such
business. The decision of the arbitrators shall be conclusive,
final and binding upon the parties and may be enforced by any
court of competent jurisdiction in the United States or in any
other applicable jurisdiction.
6 of 8
<PAGE> 7
14. MISCELLANEOUS
14.1 Force Majeure: No failure or omission by the parties hereto in
the performance of any obligations of this Agreement shall be
deemed a breach of this Agreement nor create any liability if
the same shall arise from any cause or causes beyond the control
of the parties, including, but not limited to, the following,
which, for the purpose of this Agreement shall be regarded as
beyond the control of the parties in question; act of God, acts
or omissions of any government or any rules, regulations or
orders of any governmental authority or any officer, department,
agency or instrumentality thereof; fire, storm, flood,
earthquake, insurrection, riot, invasion or strikes. The
affected party shall use its best efforts to remedy the effects
of such force majeure. Any force majeure shall not excuse
performance by the party, but shall postpone performance, unless
such force majeure continues more than ninety (90) days. In such
event, the other party may cancel its obligations hereunder.
14.2 Assignment: This Agreement may not be assigned without the
prior written consent of the other party.
14.3 Notices: Any notice required or permitted to be given under the
terms of this Agreement shall be in writing, properly addressed
to the appropriate person at the address set out herein or such
address as notified from time to time and shall be given in
person or by registered mail or telegram.
14.4 Entire Agreement: This Agreement, including exhibits
constitutes the entire Agreement between the parties relating to
the subject matter hereof and cancels and supersedes all prior
agreements and understandings, whether written or oral, between
the parties with respect to such subject matter.
14.5 Modifications; Waiver: This Agreement may not be modified
orally and no modification or any claimed waiver of any of the
provisions hereof shall be binding unless in writing and signed
by the party against whom enforcement of such modification or
waiver is sought.
14.6 Relationship of the Parties: This Agreement does not constitute
either party the agent or legal representative of the other for
any purpose whatsoever.
7 of 8
<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this Agreement by their
duly authorised representatives:
SUPPLIER DISTRIBUTOR
Signed: Gerald Moore Signed: James L. Herbert
-------------------------- ----------------------------
Gerald Moore James L. Herbert
President, Oxoid Inc. President, Neogen Corporation
Date: June 6, 1997 Date: June 16, 1997
-------------------------- ----------------------------
8 of 8
<PAGE> 1
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
NEOGEN CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended May 31
1997 1996
---- ----
<S> <C> <C>
Weighted average common and common equivalent shares outstanding:
Average shares outstanding
5,512,633 4,513,817
Net effect of dilutive stock warrants - based on the treasury
stock method using average market price which is greater
than year-end market price
17,247 (Note 1)
Net effect of dilutive stock options - based on the treasury
stock method using average market price which is greater
than year-end market price
118,624 (Note 1)
--------- ---------
Totals 5,648,504 4,513,817
========= =========
Net Income (Loss)
$1,811,501 $ (243,539)
========== ==========
Net Income (Loss) Per Share
$ .32 $ (0.05)
========== ==========
</TABLE>
Note 1 - Amounts for 1996 are not computed because the effect of outstanding
warrants and options is anti-dilutive.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
NEOGEN CORPORATION AND SUBSIDIARIES
May 31, 1997
Percentage
Owned By
State Neogen
Incorporated Corporation
------------ -----------
Neogen Research Corporation II Michigan 90%
Neogen Research Corporation IV Michigan 100%
Ideal Instruments, Inc. Michigan 100%
AMPCOR Diagnostics, Inc. Michigan 100%
All of the subsidiaries listed above are included in the consolidated financial
statements of Neogen Corporation.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Neogen Corporation
Lansing, Michigan
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of the Registration Statement (Form S-8) of our report
dated July 17, 1997, relating to the consolidated financial statements of
Neogen Corporation and subsidiaries, appearing in the Company's Annual Report
on Form 10-KSB for the year ended May 31, 1997.
BDO SEIDMAN, LLP
Troy, Michigan
August 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE NEOGEN
CORPORATION FORM 10-KSB FOR THE YEAR ENDED MAY 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB.
</LEGEND>
<CIK> 0000711377
<NAME> NEOGEN CORPORATION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 718,864
<SECURITIES> 12,324,913
<RECEIVABLES> 2,344,161
<ALLOWANCES> 320,000
<INVENTORY> 3,620,200
<CURRENT-ASSETS> 19,041,575
<PP&E> 4,529,742
<DEPRECIATION> 2,965,190
<TOTAL-ASSETS> 23,148,473
<CURRENT-LIABILITIES> 1,776,598
<BONDS> 0
0
0
<COMMON> 977,697
<OTHER-SE> 20,035,503
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</TABLE>
