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
For fiscal year ended May 31, 1998
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
Commission File Number: 0-17988
NEOGEN CORPORATION
(Name of small business issuer in its charter)
MICHIGAN 38-2367843
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No. )
620 LESHER PLACE, LANSING, MICHIGAN 48912
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(Address of principal executive offices) (Zip Code)
517/372-9200
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(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.16 PAR VALUE
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(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 $ 18,488,389
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The aggregate market value of the voting stock held by
non-affiliates of the registrant as of May 31, 1998 was $44,546,084 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 10, 1998, registrant had outstanding 6,232,079 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 8, 1998 ANNUAL MEETING OF SHAREHOLDERS IS INCORPORATED BY
REFERENCE INTO PART III OF THIS FORM 10-KSB.
Transitional Small Business Disclosure Format (check one) Yes___ No__X__
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PART I
ITEM 1. BUSINESS
General
Neogen Corporation develops, manufactures, and markets a diverse
line of products dedicated to food and animal safety. 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's
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.
The Company has developed and markets over 140 diagnostic test kits
used in food safety, animal safety, plant disease detection, 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 diagnostic test kit segment also includes a line of consumable
products marketed primarily to veterinarians and distributors serving the
professional equine industry. These products include grooming aids, a
USDA-approved vaccine to prevent botulism in horses, a biologic used in
treatment of equine respiratory infections and a line of premium health care
products.
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 Company's 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. The veterinary instrument line 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 development and
marketing of products dedicated to food and animal safety. 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 business 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 December, 1997, Neogen announced a qualitative histamine test for
the seafood market to be marketed under the name Alert(R) for Histamine. In
May, 1998, the Company announced the release of a quantitative histamine test
which is marketed under the name Veratox(R) Histamine. The Company estimates
the worldwide rapid histamine test market is $7 million.
In October, 1997, Neogen introduced a new Alert test for the
detection of sulfites in seafood. The test was developed in cooperation with
the Aquatic Food Products Laboratory at the University of Florida. The test
is used by seafood processors to make certain sulfite levels do not exceed
federal regulatory levels.
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 will become growing and widespread.
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New U.S. Meat 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. 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
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.
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 did not become effective
until January 1998. However, Company management believes these regulations
could have a positive impact on future sales for its seafood marketing group,
since the U.S. seafood industry has not previously been subject to mandatory
inspection.
Share Repurchase Program
In August 1998, 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, if any.
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 recent
acquisitions.
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 relocated
the business to its facilities in Lexington, Kentucky. The products and
technologies acquired have been merged into the Company's professional equine
division and added approximately $1,930,000 in new sales in the fiscal year
ended May 31, 1998. See Note 3 of the Notes to Consolidated Financial
Statements.
Vetoquinol U.S.A., Inc.
Effective December 30, 1997, Neogen acquired substantially all of
the assets of Vetoquinol U.S.A., Inc. a wholly owned subsidiary of the French
company, Vetoquinol S.A. Sales and administrative functions have been moved
to the Company's Lexington, Kentucky facilities. Neogen continues to operate
a Tampa, Florida production facility. The principal product acquired is a
biologic used for the treatment of equine respiratory infections. The
acquired assets resulted in approximately $570,000 of sales during fiscal
year 1998. See Note 3 of the Notes to Consolidated Financial Statements.
Business Strategy
The Company's vision is to become a worldwide leader in offering
products dedicated to food and animal safety. The Company expects to expand
its diagnostics and professional equine 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:
* Increased Sales of Existing Products. The Company will
continue to expand its product offering in multiple market segments
including: grain, nut and spice processors; meat, poultry and egg
processors; seafood processors; animal producers; fruit and
vegetable producers/processors; food service providers; 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.
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* 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 food and animal safety, animal
producers, 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. Similarly, management believes that
demand for products to ensure safety in food and companion animals will
continue to grow.
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 and animal
safety markets. 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
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 offers one of
the best opportunities 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. In December 1995, the U.S. Food
and Drug Administration issued final rules that established mandatory
inspection programs for the seafood industry in the U.S. effective January,
1998. 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, sulfites 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, immunostimulant, 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.
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, animal safety, plant diseases, 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 analyses 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 tradename, Reveal(R). Current tests in this
one-step simple format are used to detect the presence of salmonella,
listeria, general E. coli 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. Through a marketing agreement with
Merck KGaA, the Company has the distribution rights to the U.S. food industry
for 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) 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, zeralenone, ochratoxin, histamine 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.
The seafood industry uses the Company's Alert for Sulfites to make certain
sulfilte levels do not exceed federal regulatory levels.
Animal Safety. 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. Neogen 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, the company
markets Bot Tox B, the only USDA approved vaccine for the prevention of Type
B botulism in horses and a line of approximately 20 premium health care
products sold to the professional equine market. Neogen also markets
EqStim(R), and Immuno Regulin(R), biologic products used as immunostimulants
to help fight off infections in horses and dogs.
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.
Plant Diseases. Marketed under the tradename Alert(R), the Company
has several diagnostic tests that are used to detect plant diseases. These
quick 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.
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.
The Company also 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 -Gold, the Company sells reagents used by
others in diagnostic test kit manufacturing.
Sales of diagnostic products accounted for approximately 81% and 78%
of the Company's total revenues for fiscal years 1998 and 1997, respectively.
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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.
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, 1998 and 1997, sales of veterinary
instruments as a percentage of total revenues were 19% 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 27
individuals in its research and development department, including
immunologists, chemists, engineers and microbiologists. Research and
development expenditures were approximately $1.4 million and $1.3 million,
representing 8% and 9%, of total revenues in fiscal 1998 and 1997,
respectively. The Company currently intends to maintain its research and
development expenditures at approximately 9% of total revenues.
The Company has ongoing development projects for new immunoassay
diagnostic tests for the food safety, animal safety and pharamacologics
markets, as well as engineering projects for new and improved veterinary
instruments.
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 in 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 1998 and 1997, royalty payments under these agreements
amounted to $ 713,000, and $771,000, respectively.
Sales and Marketing
The Company has chosen to organize its sales efforts according to
market segments rather than by product or geographic orientation. 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, 1998, the Company had in excess
of 2,000 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
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fiscal 1998 accounted for 22% of the Company's consolidated revenues. See
Note 10 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. 63 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 Safety 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; retail food services; private laboratories; and seafood.
Animal Safety/Veterinary Instruments. The Company maintains
separately organized sales forces that focus on the professional equine
market and veterinary instruments. Products for the professional equine
market are handled by a direct sales force who sell directly to equine
veterinarians and also work through established distributors selling to this
market. 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 veterinary instruments 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 more than 50
patents and trademarks, and has several pending patents and trademarks. The
patents expire at various times over the next 20 years.
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 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 Company has several products requiring regulatory
approval including Bot Tox-B(R), EqStim(R), Immuno Regulin(R) and serological
test kits sold to human clinical laboratories. On a combined bases, sales for
these products amounted to approximately 10% of total sales in fiscal year
1998. The Company's strategy is to select technical and proprietary products
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.
-8-
Manufacturing
The Company manufactures its products in Lansing, Michigan,
Lexington, Kentucky, Bridgeport, New Jersey, Schiller Park, Illinois and
Tampa, Florida. There are currently 90 full-time employees assigned to
manufacturing in these five 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 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. 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 Neogen personnel in the Lexington facilities.
The Tampa, Florida facility is a USDA approved manufacturing plant
devoted to the production of the biologic products EqStim and Immuno Regulin.
P. acnes seed cultures are added to media and then subjected to several
stages of further processing resulting in a product that is filled and
packaged within the Tampa facility. Final product is then shipped to Neogen's
Lexington, Kentucky facilities for inventory and distribution to customers.
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 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 and animal 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.
-9-
<PAGE>
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.
A significant portion of the Company's 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 material, chemicals and compounds. The Company
believes that its safety features for handling and disposing of such
commodities comply with the standard 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 210 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 $3 million per occurrence. In addition, the Company
also maintains insurance in amounts and types which the Company believes to
be customary in its industry.
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. The Company also owns
facilities comprising 1,100 square feet within one block of the existing
corporate headquarters 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 annual increases of approximately 3.5% thereafter for
the remainder of the lease.
The Company's Kentucky operations are maintained in 23,000 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.
Effective September 1, 1997, the lease was amended to extend the term of the
lease to August 31, 1999 and to provide for annual lease payments, including
all utilities, of $90,000.
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. On
January 22, 1998, the lease was amended to extend the lease term to November
1, 1999 and, effective May 1, 1998, provides for annual lease payments of
$38,960 plus additional rent equal to $8,268 per year with the additional
rent subject to annual increase based upon actual increases to certain
operating expenses.
The Company's Florida manufacturing operations are maintained in
5,200 square feet of leased space at 5910 Breckenridge Center Parkway, Tampa,
Florida. The leased facilities are subject to a non-cancelable operating
lease that expires September 30, 1998 and that provides for annual lease
payments of approximately $44,000 including the Company's share of certain
operating expenses and property taxes. The Company negotiated a new three
year non-cancelable operating lease for the same facilities that commences on
October 1, 1998. The new lease provides for annual lease payments of $31,422
in year one increasing 4% in years two and three. In addition, the new lease
provides for additional lease payments for operating expenses and property
taxes estimated to be $13,625 annually and subject to increases based on
actual costs incurred.
<PAGE>
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.
-10-
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In August, 1996, the company initiated a lawsuit in the U.S.
District Court for the Western District of Michigan, Southern Division
against Arthur J. Trickey and Arthur M. Trickey ("Mr. Trickey"). This
litigation involves a dispute over a letter of intent the Company entered
into with Mr. Trickey to distribute certain products Mr. Trickey alleged he
had developed. The action seeks a ruling that the letter of intent is not a
binding contract, and recovery of damages in connection with overcharges,
other breaches, as well as for trademark infringement. Mr. Trickey has filed
counterclaims alleging a common law right to the disputed trademark. If the
Company prevails in its claims against Mr. Trickey, the Company does not
expect to be able to collect any significant damages. If Mr. Trickey prevails
in his counterclaims, the Company believes its exposure will not be
significant since sales under the disputed trademark to date have been
modest.
The Company also filed a lawsuit against Vicam, L.P., Vicam
Management Corporation and Jack L. Radlo ("Vicam") in August, 1996 in the
U.S. District Court for the Middle District of Florida. The Company is suing
to recover damages the Company incurred in the character of lost sales of its
new aflatoxin detection kit caused by Vicam's publication of the false
allegation that Vicam's kit violates two patents licensed to Vicam. The
Company has two independent expert patent opinions that conclude that the
Company's product does not infringe Vicam's licensed patents. Vicam has
filed a counterclaim alleging that the Company's aflatoxin detection product
infringes one patent licensed to Vicam. The amount of the Company's damages
(lost sales) should it prevail have not yet been quantified. If Vicam were to
prevail, the Company believes that their damages would be relatively
insignificant since the Company's sales of this product have not been
material.
In April 1998, Stephen C. Edberg, Stephen C. Wardlaw and Idexx
Laboratories, Inc. initiated a lawsuit against the Company in the U.S.
District Court for the District of Connecticut claiming patent infringement
and trade dress violations. The Company has filed a motion to dismiss for
lack of personal jurisdiction and/or improper venue. This litigation is at a
very early stage and the Company denies all liability related to this action.
Furthermore, the Company does not believe it will suffer any significant
damages should the competitor prevail since sales of the product in question
have been modest.
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 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, 1998
<S> <C> <C>
First Quarter.................................................. $12.25 $ 7.00
Second Quarter................................................. 14.88 10.00
Third Quarter.................................................. 14.00 9.88
Fourth Quarter................................................. 12.25 8.00
<CAPTION>
Fiscal Year Ended May 31, 1997
<S> <C> <C>
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>
-11-
<PAGE>
As of July 31, 1998, there were approximately 525 stockholders of
record of Common Stock which the Company believes represents a total of
approximately 7,000 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.
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.
Results of Operations
<TABLE>
<CAPTION>
REVENUES (Dollars in Thousands) 1998 Increase 1997
- ------------------------------- ---- -------- ----
<S> <C> <C> <C>
Product Sales:
Diagnostic Products $14,994 26% $11,906
Veterinary Instruments 3,494 4% 3,353
------- -- -------
TOTAL REVENUES $18,488 21% $15,259
------- -- -------
</TABLE>
The strong growth in diagnostic product sales was due to several
factors. The acquisitions of Vetoquinol U.S.A., Inc., effective December 30,
1997 and Triple Crown, effective July 1, 1997 accounted for $2,499,000 in
increased sales. Greater demand for test kits and other products sold to the
professional equine market contributed $538,000 in higher sales while sales
of test kits and reagents for pharmacologics were up $145,000. Diagnostic
test kits sold to the meat and poultry market for the detection of
microorganisms such as E. coli O157:H7 and Salmonella increased $644,000, or
93%, in 1998 compared to 1997.
Offsetting these increases in diagnostic product sales was a
$725,000 or 22% decline in sales of test kits used for the detection of
vomitoxin. Sales of diagnostic tests for the detection of mycotoxins,
including vomitoxin, are influenced by the uncertainty of weather which
impacts growing conditions for grains, nuts and spices. Management discussed
its belief that sales of vomitoxin test kits would likely decline in the
current fiscal year in the company's 10-KSB for the year ended May 31, 1997.
The increase in veterinary instrument sales was primarily the result
of sales to a new customer of specialty syringes and needles used to inject
marinades and spices into various red and white meats.
<TABLE>
<CAPTION>
COST OF GOODS SOLD (Dollars in Thousands) 1998 Increase 1997
- ----------------------------------------- ---- -------- ----
<S> <C> <C> <C>
Cost of Goods Sold $7,960 28% $6,201
</TABLE>
Costs of goods sold increased $1,759,000 in fiscal year 1998, mostly
as a result of the overall increase in product sales. In addition, raw
material expense increased substantially due to a change sales mix. Sales of
products sold to the professional equine market, which carry a higher
material cost increased significantly while sales of diagnostic test kits to
detect vomitoxin, which have a much lower material cost, declined. Management
expects raw material cost to continue to run higher, both in dollars and as a
percent of sales, in the fiscal year ending, May 31, 1999.
<TABLE>
<CAPTION>
OPERATING EXPENSES (Dollars in Thousands) 1998 Increase 1997
- ----------------------------------------- ---- -------- ----
<S> <C> <C> <C>
Sales and Marketing $4,910 17% $4,197
General and Administrative 2,716 22% 2,230
Research and Development 1,425 8% 1,320
------ -- ------
</TABLE>
<PAGE>
The increase in sales and marketing expense for the year is
primarily due to higher costs, including the acquisitions of Triple Crown and
Vetoquinol, U.S.A., Inc., associated with marketing products to the
professional equine market. Salaries, fringe, recruiting, relocation,
commissions, royalties, travel, advertising and promotions all showed
increases compared to the prior year, which, in total amounted to $583,000.
-12-
<PAGE>
The majority of the increase in general and administrative expense
in fiscal 1998 is the result of higher cost in two categories. Consulting
expense was $178,000 higher due primarily to contract services associated
with a new computer installation, increased consulting pertaining to
manufacturing and approvals for professional equine products and also because
of management consulting pertaining to the company's Ampcor Diagnostic, Inc.
subsidiary.
In addition, legal and professional fees increased $202,000 compared
to the prior year. Management believes that the company is not involved in
any material adverse legal proceedings. However, Neogen is a party in several
lawsuits as discussed in ITEM 3. LEGAL PROCEEDINGS in the Company's Form
10-KSB for the year ended May 31, 1998. Management intends to vigorously
pursue this litigation and cannot predict the outcome of these lawsuits.
Furthermore, the company has no way to predict the level of expenses that may
be incurred in fiscal year 1999 in pursuing this litigation.
<TABLE>
<CAPTION>
OTHER INCOME(Dollars in Thousands) 1998 Increase 1997
- ---------------------------------- ---- -------- ----
<S> <C> <C> <C>
Other Income $897 59% $564
</TABLE>
Other income was $333,000 higher than last year. In October 1996,
the Company completed a public offering of common stock. A portion of the
proceeds 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 has resulted in higher interest income. In
addition, the Company's share of royalties, paid to an affiliated
partnership, increased significantly compared to the prior year.
<TABLE>
<CAPTION>
NET INCOME and INCOME PER SHARE (Dollars in Thousands) 1998 Increase 1997
- ------------------------------------------------------ ---- -------- ----
<S> <C> <C> <C>
Net Income $2,248 24% $1,812
Net Income Per Share - Diluted $ .35 $ .32
</TABLE>
The increase in net income and net income per share is the direct
result of the increase in sales of diagnostic products, including
acquisitions, along with the increase in other income.
Neogen's effective federal tax rate has been insignificant because
the company has had net operating loss carryforwards available to offset
taxable income. Upon utilization of its remaining net operating loss
carryforwards, Neogen's effective federal tax rate will increase
significantly.
Financial Condition and Liquidity
At May 31, 1998 the Company had $10,589,000 in cash and marketable
securities, working capital of $17,192,000 and stockholders' equity of
$23,609,000. In addition, the Company has bank lines of credit totaling
$10,000,000 with nothing borrowed against these lines as of May 31, 1998.
Cash and marketable securities decreased $2,455,000 during fiscal year 1998
as a result of the acquisitions of certain assets of W.J. Bartus, Inc. and
Vetoquinol U.S.A., Inc..
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, 1997. A second and final cash
payment of up to $500,000 will be paid in fiscal year 1999 provided the
seller meets certain conditions of the asset purchase agreement. Effective
December 30, 1997 the Company acquired certain assets of Vetoquinol, U.S.A.,
Inc. located in Tampa, Florida. The initial purchase price consisted of a
cash payment of approximately $2,035,000 paid at closing and a second cash
payment of approximately $153,000 paid in April, 1998.
Accounts receivable are higher at May 31, 1998 than May 31, 1997
partially as a result of the aforementioned acquisitions and partially
because of higher sales volume during the last quarter of fiscal 1998
compared to the last quarter of fiscal 1997. Inventories are higher at May
31, 1998 as a result of the acquisitions, to support increases in sales of
professional equine products and in anticipation of future increases in sales
volume.
The increase in goodwill and other non-current assets at May 31,
1998 compared to May 31, 1997 was due to the previously discussed
acquisitions. Accounts payable decreased $264,000 partially due to lower
trade payables for inventory at May 31, 1998 and also due to the timing of
year-end cut-offs and scheduled payment dates for trade payables.
The Company did not borrow any additional funds during fiscal year
1998 and made scheduled payments on long-term debt totaling $56,000. Neogen
expended approximately $646,000 during 1998 for additions to property,
equipment and other assets. At May 31, 1998 the Company had no material
commitments for capital expenditures. Inflation and changing prices are not
expected to have a material effect
-13-
<PAGE>
on the Company's operations.
Neogen has been profitable for twenty of its last twenty-one
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, 1998, along with its available bank lines of credit and
cash expected to be generated from future operations, will be sufficient to
fund activities for the foreseeable future. However, existing cash and
marketable securities may not be sufficient to meet the Company's 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.
Year 2000
The company believes that its financial and manufacturing systems
are year 2000 compliant with the exception of the financial software used at
its Ideal Instruments subsidiary. The Company plans on implementing software
changes by November 30, 1998 at the Ideal Instruments subsidiary to ensure
year 2000 compliance. The Company does not expect implementation of these
changes to have a material impact on its results of operation. The Company's
operations with respect to the year 2000 may also be affected by other
entities with whom it transacts business. The Company is currently unable to
determine the potential impact, if any, that could result from such entities'
failure to adequately address this issue.
-14-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NEOGEN CORPORATION
AND SUBSIDIARIES
CONTENTS
Page
Number
------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 16
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets 17-18
Statements of Income 19
Statements of Stockholders' Equity 20
Statements of Cash Flows 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22-30
-15-
<PAGE>
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, 1998 and 1997, and the related
consolidated statements of income, 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, 1998 and 1997, 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 16, 1998
-16-
<PAGE>
<TABLE>
<CAPTION>
Neogen Corporation and Subsidiaries
Consolidated Balance Sheets
May 31, 1998 1997
- ------- ---- ----
<S> <C> <C>
Assets (Note 4)
Current Assets
Cash $ 719,877 $ 718,864
Marketable securities (Note 2) 9,868,862 12,324,913
Accounts receivable, less allowance for
doubtful accounts of $227,000 and $320,000 3,088,858 2,024,161
Inventories (Note 1) 4,474,030 3,620,200
Prepaid expenses and other current assets 441,319 353,437
----------- -----------
Total Current Assets 18,592,946 19,041,575
----------- -----------
Property and Equipment
Land and improvements 49,263 33,882
Buildings and improvements 499,146 463,814
Machinery and equipment 4,356,271 3,707,027
Furniture and fixtures 376,157 325,019
----------- -----------
5,280,837 4,529,742
Less accumulated depreciation 3,395,786 2,965,190
----------- -----------
Net Property and Equipment 1,885,051 1,564,552
----------- -----------
Intangible and Other Assets
Goodwill, net of accumulated amortization
of $456,943 and $297,520 (Note 3) 4,023,235 2,012,195
Other assets, net of accumulated amortization
of $544,603 and $457,669 911,410 530,151
----------- -----------
Total Intangible and Other Assets 4,934,645 2,542,346
----------- -----------
$25,412,642 $23,148,473
=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
Neogen Corporation and Subsidiaries
Consolidated Balance Sheets
May 31, 1998 1997
- ------- ---- ----
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 578,814 $ 842,985
Accruals
Compensation and benefits 569,121 607,052
Other 203,895 255,414
Current maturities of long-term debt (Note 4) 48,672 71,147
------------ ------------
Total Current Liabilities 1,400,502 1,776,598
Long-Term Debt, less current maturities (Note 4) 174,392 207,770
Other Long-Term Liabilities 228,411 150,905
------------ ------------
Total Liabilities 1,803,305 2,135,273
------------ ------------
Commitments (Notes 3, 8 and 9)
Stockholders' Equity (Notes 5 and 6)
Common stock, $.16 par value, shares authorized
10,000,000; issued and outstanding 6,208,179
and 6,110,608 993,309 977,697
Additional paid-in capital 24,269,549 23,937,397
Retained earnings (deficit) (1,653,521) (3,901,894)
------------ ------------
Total Stockholders' Equity 23,609,337 21,013,200
------------ ------------
$ 25,412,642 $ 23,148,473
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
Neogen Corporation and Subsidiaries
Consolidated Statements of Income
Year Ended May 31, 1998 1997
- ------------------ ---- ----
<S> <C> <C>
Net Sales $ 18,488,389 $ 15,259,423
------------ ------------
Operating Expenses
Cost of goods sold 7,959,655 6,201,301
Sales and marketing 4,909,997 4,197,283
General and administrative 2,715,738 2,230,438
Research and development 1,424,583 1,319,732
------------ ------------
17,009,973 13,948,754
------------ ------------
Operating Income 1,478,416 1,310,669
------------ ------------
Other Income (Expense)
Interest income 605,990 449,331
Interest expense (22,581) (66,851)
Other 313,548 181,552
------------ ------------
896,957 564,032
------------ ------------
Income Before Taxes On Income 2,375,373 1,874,701
Taxes On Income (Note 7) 127,000 63,200
------------ ------------
Net Income $ 2,248,373 $ 1,811,501
============ ============
Basic Earnings Per Share (Note 1) $ .36 $ .33
Diluted Earnings Per Share (Note 1) $ .35 $ .32
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
Neogen Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years Ended May 31, 1998 and 1997
Common Stock Additional Retained
------------ Paid-In Earnings
Shares Amount Capital (Deficit)
------ ------ ------- ---------
<S> <C> <C> <C> <C>
Balance, June 1, 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 (Note 5) 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)
Exercise of options 97,100 15,536 329,958 --
Exercise of warrants 471 76 2,194 --
Net income for the year -- -- -- 2,248,373
--------- ----------- ----------- -----------
Balance, May 31, 1998 6,208,179 $ 993,309 $24,269,549 $(1,653,521)
========= =========== =========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
Neogen Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended May 31, 1998 1997
- ------------------ ---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 2,248,373 $ 1,811,501
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 715,681 624,113
Loss (gain) on sale of equipment 8,843 (1,520)
Changes in operating assets and liabilities
Accounts receivable (622,662) (380,980)
Inventories (449,877) (241,529)
Prepaid expenses and other current assets (81,947) (34,555)
Accounts payable (264,171) 345,483
Accrued liabilities (89,450) 186,006
------------ ------------
Net Cash Provided By Operating Activities 1,464,790 2,308,519
------------ ------------
Cash Flows From Investing Activities
Sales of marketable securities 25,575,582 11,886,003
Purchases of marketable securities (23,119,531) (22,653,875)
Proceeds from sale of equipment 20,975 7,206
Purchases of property, equipment and other assets (645,681) (630,760)
Acquisitions of businesses (3,587,033) (53,122)
------------ ------------
Net Cash Used In Investing Activities (1,755,688) (11,444,548)
------------ ------------
Cash Flows From Financing Activities
Net proceeds from issuance of common shares 347,764 10,343,995
Payments on long-term borrowings (55,853) (71,148)
Net payments on notes payable - banks -- (1,043,946)
------------ ------------
Net Cash Provided By Financing Activities 291,911 9,228,901
------------ ------------
Net Increase in Cash 1,013 92,872
Cash, at beginning of year 718,864 625,992
------------ ------------
Cash, at end of year $ 719,877 $ 718,864
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
-21-
<PAGE>
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 dedicated to food and animal safety. 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,
contribute a significant portion of the Company's revenues and profits. 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.
-22-
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Raw material $2,003,124 $1,507,216
Work-in-process 837,679 852,789
Finished goods 1,633,227 1,260,195
---------- ----------
$4,474,030 $3,620,200
========== ==========
</TABLE>
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 $469,324 and $389,582 in
1998 and 1997, 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 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.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS
No. 128 replaced the previously reported primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
necessary, restated to conform to the SFAS No. 128 requirements. The
following table presents the earnings per share calculations:
-23-
<PAGE>
Neogen Corporation and Subsidiaries
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended May 31, 1998 1997
- -------------------------- ---- ----
<S> <C> <C>
Numerator for Basic and Diluted
Earnings Per Share
Net income $2,248,373 $1,811,501
========== ==========
Denominator
Denominator for basic earnings per
share - weighted average shares 6,176,995 5,512,633
Effect of Dilutive Securities
Stock options and warrants 219,860 135,871
---------- ----------
Dilutive Potential Common Stock
Denominator for diluted earnings per
share - adjusted weighted average shares
and assumed conversions 6,396,855 5,648,504
========== ==========
Basic Earnings Per Share .36 .33
========== ==========
Diluted Earnings Per Share .35 .32
========== ==========
</TABLE>
Options to purchase 33,400 and 128,500 shares of common stock at prices
ranging from $11.31 to $13.25 and $7.50 to $9.25 in 1998 and 1997
respectively, were outstanding, but were not included in the computation of
diluted earnings per share because the option's exercise price was greater
than the average market price of the common shares.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." These statements are
effective for financial periods beginning after December 15, 1997 and require
comparative information for earlier years to be restated. Management has not
determined the impact, if any, these statements may have on future financial
statement disclosures.
Statement of Position (SOP) 98-5, "Reporting on the Cost of Start-Up
Activities," was issued in April 1998 and SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued in June 1998.
These statements are effective in fiscal 2000 and are not expected to have a
material impact on the consolidated financial statements.
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, 1998 and 1997.
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:
-24-
<PAGE>
Neogen Corporation and Subsidiaries
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Corporate Debt Securities $ 7,770,996 $10,674,812
Certificates of Deposit 1,099,653 500,000
U.S. Treasury and Agency Securities 998,213 1,150,101
----------- -----------
$ 9,868,862 $12,324,913
=========== ===========
</TABLE>
3. Acquisitions
Effective July 1, 1997, Neogen acquired certain assets of Triple Crown, a
division of W.J. Bartus, Inc. of Fort Pierce, Florida. The acquisition was
accounted for by the purchase method and all acquired assets, consisting of
inventory, fixed assets and 20 related products were moved to the Company's
Lexington, Kentucky division.
The initial purchase price consisted of a cash payment of approximately
$1,400,000, resulting in goodwill of approximately $900,000. Additional
consideration in the amount of approximately $500,000 is expected to be paid
in fiscal 1999 based upon the seller meeting certain conditions of the asset
purchase agreement.
Effective December 30, 1997, Neogen acquired certain assets of Vetoquinol,
U.S.A., Inc. located in Tampa, Florida. The acquisition was accounted for by
the purchase method. Neogen plans to continue to operate the production
facility in Tampa and has relocated all sales and administrative functions to
the Company's Lexington, Kentucky facility.
The purchase price consisted of initial consideration of approximately
$2,035,000 in cash paid at closing. A second cash payment of approximately
$153,000 was paid in April, 1998. The cumulative purchase price resulted in
goodwill of approximately $1,250,000. Additional consideration not to exceed
$200,000 may be paid based upon operating performance for the twelve month
periods ending December 31, 1998 and 1999.
Proforma results of operations are not presented as the effect of the
acquisitions was not material to the consolidated results of operations of
the Company for the year ended May 31, 1998.
4. Notes Payable and Long-Term Debt
The Company and its subsidiaries have available working capital
lines-of-credit and borrowing arrangements with banks totaling $2,500,000. At
May 31, 1998 and 1997, there were no borrowings outstanding. These
arrangements bear interest from the prime rate less .50% to the prime rate
plus .75% (the prime rate was 8.50% at May 31, 1998), and are collateralized
by substantially all assets of the Company and its subsidiaries.
In addition, the Company maintains an unsecured acquisition line-of-credit in
the amount of $7,500,000 at the prime rate less .50%. There were no
borrowings on this line-of-credit at May 31, 1998.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Term note payable to bank $223,064 $238,092
Installment note payable -- 40,825
-------- --------
223,064 278,917
Less current maturities 48,672 71,147
-------- --------
Total Long-Term Debt $174,392 $207,770
======== ========
</TABLE>
-25-
<PAGE>
Neogen Corporation and Subsidiaries
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------------------
The term note is payable in sixty monthly installments of $4,056 plus
interest at the prime rate less .50% and is collateralized by substantially
all the assets of Neogen and 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: 1999 - $48,672; 2000 - $48,672; 2001 -
$48,672; 2002 - $48,672; and 2003 - $28,376.
5. 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.
6. Stock Options and Stock Warrants
The Company maintains Stock Option Plans (the Plans) 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 number of shares
authorized for issuance under the Plans is 1,459,375. At May 31, 1998,
options have been granted with three to five year vesting schedules and
option terms of five to ten years. A total of 366,600 shares were available
for future grants under the Plans.
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 Plans. 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 and
earnings per share would have been the following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net Income
As reported $ 2,248,373 $ 1,811,501
Pro forma 1,921,062 1,571,757
Earnings Per Share
As reported:
Basic .36 .33
Diluted .35 .32
Pro forma:
Basic .31 .29
Diluted .30 .28
</TABLE>
-26-
<PAGE>
Neogen Corporation and Subsidiaries
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------------------
The following is a summary of the Plans' activity:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------ ----------------
<S> <C> <C>
Outstanding at June 1, 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
Granted 145,000 9.08
Exercised (97,100) 3.56
Forfeited (10,700) 6.94
------- --------
Outstanding at May 31, 1998
(209,544 exercisable) 526,900 $ 7.03
======= ========
</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 1998 and 1997, respectively: dividend yield of 0%
for both years: expected volatility of 55.0% and 68.0%; risk free interest
rates of 6.0% and 6.5%; and expected lives of four years for 1998 and from
five to ten years for 1997.
The weighted-average grant date fair value of options granted in 1998 and
1997 was $4.32 and $4.38, respectively.
The following is a summary of stock options outstanding at May 31,1998:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------
Weighted
Average Weighted
Remaining Average
Contractual Exercise
Price Range Number Life (Years) Price
----------- ------ ------------ --------
<S> <C> <C> <C>
$1.88 - 2.75 52,300 1.8 $2.29
2.87 - 2.87 6,000 2.7 2.87
4.63 - 6.88 119,100 3.4 6.03
7.13 - 9.25 316,100 4.4 7.71
11.31 - 13.25 33,400 7.3 12.31
------- --- -----
526,900 4.1 $7.03
======= === =====
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
-------------------------
Weighted Average
Price Range Number Exercise Price
----------- ------ ----------------
<S> <C> <C>
$ 1.88 - 2.75 42,200 $2.25
2.87 - 2.87 6,000 2.87
4.63 - 6.88 73,568 5.71
7.13 - 9.25 87,776 7.53
11.31 - 13.25 -- --
------- -----
209,544 $5.69
======= =====
</TABLE>
-27-
<PAGE>
Neogen Corporation and Subsidiaries
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------------------
The weighted-average exercise price of the 219,077 shares which were
exercisable at May 31, 1997, was $4.52.
The following table summarizes warrant activity for the years ended May 31,
1998 and 1997. All warrants are exercisable for unregistered common stock of
the Company and expire in 2000.
<TABLE>
<CAPTION>
Warrant
Shares Price
------ -------
<S> <C> <C>
Outstanding Warrants at June 1, 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
Warrants exercised during the year (471) 4.82
Warrants expiring during the year (4,856) 4.82
------ -------------
Outstanding Warrants at May 31, 1998 43,265 $4.82
====== =============
</TABLE>
7. Taxes On Income
Income taxes are calculated using the liability method specified by SFAS No.
109 "Accounting for Income Taxes."
As of May 31, 1998, the Company has net operating loss carryforwards of
approximately $670,000 for income tax purposes which expire between 2002 and
2008. In addition, the Company has approximately $370,000 of tax credit
carryforwards, the majority of which expire between 1999 and 2010.
Approximately $90,000 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,
1998 and 1997 are as follows:
Deferred tax liabilities:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Property and equipment $ 147,000 $ 126,000
Losses of affiliated partnerships 45,000 54,000
----------- -----------
Total Deferred Tax Liabilities 192,000 180,000
----------- -----------
Deferred tax assets:
Net operating loss carryforwards 228,000 748,000
Tax credit carryforwards 373,000 285,000
Inventory 114,000 233,000
Other 176,000 247,000
----------- -----------
891,000 1,513,000
Valuation Allowance for Deferred Tax Assets (699,000) (1,333,000)
----------- -----------
Net Deferred Tax Assets 192,000 180,000
----------- -----------
Net Deferred Tax $ -- $ --
=========== ===========
</TABLE>
-28-
<PAGE>
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. 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, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Tax at U.S. statutory rates $ 808,000 $ 637,000
Adjustment of valuation allowance (634,000) (665,000)
Alternative minimum tax 40,000 35,000
State income taxes, net of tax effect 57,000 17,000
Tax credit carryforwards (88,000) (35,000)
Other (56,000) 74,200
--------- ---------
Taxes on Income $ 127,000 $ 63,200
========= =========
</TABLE>
8. 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 1998 and 1997
was $713,000 and $771,000, respectively.
The Company leases office and manufacturing facilities under noncancelable
operating leases. Rent expense for 1998 and 1997 was $282,000 and $215,000,
respectively. Future minimum rental payments for these leases are as follows:
1999 - $277,000; 2000 - $141,000; and 2001 - $30,000.
9. 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 60% (40% in fiscal 1997) of the first
5% deferred. The Company's expense under this plan was $72,292 and $53,752
for the years ended May 31, 1998 and 1997, respectively.
10. 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,
microorganisms and a line of consumable products marketed to the professional
equine industry. 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.
The veterinary instrument segment includes veterinary instruments to provide
more precise and accurate delivery of animal health products.
-29-
<PAGE>
Neogen Corporation and Subsidiaries
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------------------
The following table summarizes Neogen's industry segment information:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues
Diagnostic products $ 14,994,411 $ 11,906,000
Veterinary instruments 3,493,978 3,353,423
------------ ------------
$ 18,488,389 $ 15,259,423
============ ============
Operating Income (Loss)
Diagnostic products $ 1,710,204 $ 1,502,614
Veterinary instruments (231,788) (191,945)
------------ ------------
$ 1,478,416 $ 1,310,669
============ ============
Identifiable Assets
Diagnostic products $ 12,682,961 $ 8,091,565
Veterinary instruments 2,860,819 2,731,995
Corporate 9,868,862 12,324,913
------------ ------------
$ 25,412,642 $ 23,148,473
============ ============
Depreciation and Amortization Expense
Diagnostic products $ 584,457 $ 509,460
Veterinary instruments 131,224 114,653
------------ ------------
$ 715,681 $ 624,113
============ ============
Capital Expenditures
Diagnostic products $ 351,923 $ 417,192
Veterinary instruments 224,154 210,040
------------ ------------
$ 576,077 $ 627,232
============ ============
</TABLE>
Neogen has no significant foreign operations. Export sales amounted to
$4,039,571 or 22% of consolidated sales in 1998 and $3,771,168 or 25% in
1997, 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.
11. Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash Paid During the Year For
Interest $ 22,793 $ 67,906
Taxes on income 53,071 24,741
========== ==========
</TABLE>
-30-
<PAGE>
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 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 other key individuals are set forth below.
Year Joined
Name Position with the Company Company the
---- ------------------------- -----------
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. Senior Vice President 1984
Gerald S. Traynor Vice President 1990
Terri A. Juricic Vice President 1992
Edward L. Bradley Vice President 1994
Joseph M. Madden, Ph.D. Vice President, Scientific Affairs 1997
Paul S. Satoh, Ph.D. Vice President, Diagnostic Research &
Development 1998
John E. Cantlon, Ph.D. Chairman, Scientific Review Council 1990
N. 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
There are no family relationships among directors, officers or key
individuals. Information concerning the Board of Directors, executive
officers and key individuals of the Company follows:
James L. Herbert, age 58, 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 51, was elected to the Board of Directors in October,
1993 and was elected Secretary in October, 1994. Mr. Papesh was co-founder of
Dart, Papesh & Co., a Lansing, Michigan based company that provides
investment consulting and other financial services. He has served as
President of Dart, Papesh & Co. Inc, since 1987. Mr. Papesh provides
investment services to Kenneth B. Dart and Robert C. Dart who are deemed to
beneficially own 5.4% 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 and Robert C. Dart. Mr. Papesh also serves on the Board of Directors
of Immucor, Inc., a publicly-traded immunodiagnostics company that
manufactures and markets tests, reagents, and instruments for the human
clinical blood bank industry.
Dr. Brinton M. Miller, age 71, joined the Company in January, 1984 as Vice
President of Research and Development. He presently serves on a part-time
basis, as the Company's senior vice-president. Prior to joining Neogen, Dr.
Miller held numerous research management positions during his 27-year career
with Merck, Sharp and Dohme Laboratories.
-31-
<PAGE>
Lon M. Bohannon, age 45, 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.
Gerald S. Traynor, age 63, 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.
Terri A. Juricic, age 33, 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 and
is responsible for all sales pertaining to animal safety. 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.
Edward L. Bradley, age 38, joined Neogen in February 1995 as Vice President
of Sales and Marketing for AMPCOR Diagnostics, Inc. In June 1996, he was made
a Vice President of Neogen Corporation. Currently, Mr. Bradley is responsible
for all sales and marketing activities focused on food safety products on a
worldwide basis. From 1988 to 1995, Bradley served in several sales and
marketing capacities for Mallinckrodt Animal Health, including the position
of National Sales Manager responsible for 40 employees in their Food Animal
Products Division. Prior to joining Mallinckrodt, Bradley held several sales
and marketing positions for Stauffer Chemical Company.
Dr. Joseph M. Madden, age 49, joined Neogen in December 1997 as Vice
President of Scientific Affairs after retiring from the Food and Drug
Administration as its Microbiology Strategic Manager. He joined the FDA in
1978 and spent his first 10 years as a research microbiologist for the
agency. Dr. Madden has served on numerous committees on food safety,
including his current appointment to the National Advisory Committee on
Microbiological Criteria for Foods. He is regarded by regulatory agencies and
the food industry as being one of the nation's top experts on both scientific
and regulatory issues relating to food safety.
Dr. Paul S. Satoh, age 61, became Neogen's Vice President for Research and
Development in March 1998 after having spent 25 years as a senior scientist
and research manager at Pharmacia & Upjohn Inc. Dr. Satoh joined Neogen after
serving nearly six years on the company's Scientific Review Council as an
immunology specialist. At Upjohn, Satoh also taught immunopharmacology at the
University of Michigan in Ann Arbor, and general studies in chemistry and
social issues in biology at Western Michigan University. His most recent
position at Upjohn was that of a senior scientist responsible for strategic
information analysis and competitive intelligence.
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.
<PAGE>
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.
-32-
<PAGE>
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, 1998.
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<PAGE>
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 18, 1998
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.
Signature Title Date
/s/ James L. Herbert President, Chief Executive August 18, 1998
- -------------------- Officer, Director (Principal
James L. Herbert Executive Officer)
/s/ Lon M. Bohannon Vice President of Administration August 18, 1998
- -------------------- Chief Financial Officer,
Lon M. Bohannon Director 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 18, 1998
James L. Herbert,
Attorney-in-fact
34
<PAGE>
Neogen Corporation
Annual Report on Form 10-KSB
Year Ended May 31, 1998
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3 (a) (7) Articles of Incorporation, as restated
3 (a) (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) Neogen/Vetoquinol U.S.A., Inc. Asset Purchase Agreement
dated December 31, 1997
10 (c) Neogen 1997 Stock Option Plan
10 (d) (1) Neogen Corporation/Michigan Department of Public Health
Equine Botulism Vaccine Agreement, as amended, originally
dated April 9, 1998
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) Lease Agreement for Florida Manufacturing facilities
10 (j) (7) AMPCOR Diagnostics, Inc. Lease Agreement for space at 603
Huron Drive, Bridgeport, New Jersey, dated as of January
26, 1995
10 (k) Amendments to AMPCOR Diagnostics, Inc. Lease Agreement
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) Amendment to ELISA Technologies Lease Agreement
10 (p) (6) Neogen/AMPCOR Asset Purchase Agreement, dated August 1, 1994
10 (q) (7) Neogen Corporation/Kahn, Soares and Conway contract
10 (r) NBD Bank Loan Documents
10 (s) Comerica Bank Loan Documents
10 (t) (8) Neogen Corporation/W.J. Bartus, Inc. Asset Purchase
Agreement, dated July 3, 1997
10 (u) (8) Neogen Corporation/Orion Diagnostica Distribution Agreement
10 (v) (8) Neogen Corporation/Oxoid Distribution Agreement
13 Annual Report to Shareholders for the Year Ended May 31,
1998 (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.
(8) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-KSB for the year ended May 31, 1997.
-35-
Asset Purchase Agreement
This Asset Purchase Agreement is made on December ______, 1997,
between Neogen Corporation, a Michigan corporation whose address is 620
Lesher Place, Lansing, Michigan 48912 ("the Buyer"), and VETOQUINOL U.S.A.,
Inc., a Delaware corporation, whose address is 5910 G Breckenridge, Tampa,
Florida 33610 ("the Seller") ("the Agreement").
Recitals
A. Seller is engaged in the animal biologics and wound care business
and specifically uses the identification of EqStim(R) , ImmunoRegulin(R) and
MycAseptic(R) in the business of manufacturing and marketing various products
to improve the health and performance of animals ("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 located at 5910 G Breckenridge,
Tampa, Florida, 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 related to the P. acnes and MycAseptic products (collectively
"Products"), patents, trademarks, trade names, copyrights and applications
thereof, trade secrets and secret information process, permits and licenses
used or employed by Seller to the extent assignable, all as listed on
attached Exhibit 1.b., but expressly excluding all rights to use of P. acnes
products as a production enhancer feed additive for food producing animals
for sale and distribution throughout the world (including marketing,
registration, manufacturing, and further development rights) and the patents
and patent applications relating to those products;
<PAGE>
(c) Additional Assets. The name "EqStim, ImmunoRegulin,
MycAseptic, and ImmunoVet" 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 records, customer lists, budgets,
forecasts, telephone numbers, facsimile numbers and all other business
documents and information and information contained on computer programs
which relate primarily to the Business, but excluding tax and accounting
records.
Section 1(b) and (c) are collectively referred to as
"Intangible Property".
(d) Accounts Receivable. All receivables generated from sales
of Products in the ordinary course of the Business before the Closing Date,
including those listed on attached Exhibit 1.d, which are less than 90 days
old on the Closing Date ("the Receivables");
(e) 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 the Products,
CothiVet and AluSpray, including, but not limited to, the inventories listed
on attached Exhibit 1.e, recorded at the lower of cost or average current
selling price ("Inventories"). Buyer shall receive the inventories of all
products described in this Paragraph, but shall only pay for quantities of
inventory of any product that are not in excess of sales of the product
during the 12 months preceding the month of the Closing Date;
(f) Contract Rights. To the extent assignable, 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 and Products ("Contract Rights") and that are
listed on Exhibit 1.f. Buyer agrees to pay Seller Seven Thousand and 00/100
Dollars ($7,000.00) for 35 days of consulting time under the term of the
Consulting Agreement between Seller and Mr. Bobby Edwards. Seller assumes no
responsibility for Mr. Edwards' performance as to the Consulting Agreement;
(g) Other Current Assets. All prepaid insurance, deposits,
prepaid expenses and other current assets related to Products including, but
not limited to, those listed on Exhibit 1.g. ("Other Current Assets").
-2-
<PAGE>
(h) Related Agreement. Buyer and Seller's parent company,
VETOQUINOL, S.A., a French corporation ("Parent"), are contemporaneously
entering into a Cross-License and Non-Competition Agreement ("Rights
Agreement") by which each party will grant certain rights to the other. The
Rights Agreement is attached as Exhibit 16. Provisions of the Rights
Agreement and any amendments thereto shall be construed to be a part of this
Agreement. If there should be an assertion of ambiguity between this
Agreement and the Rights Agreement, terms of this Agreement shall take
precedence.
(i) Excluded Assets. The Purchased Assets do not include the
following: (i) cash, cash equivalents, or securities, (ii) vehicles, (iii)
diagnostic products, (iv) patents or patent applications except those related
to Ionone, (v) rights or contracts pertaining to Actidine, Stomadhex, or
ABCheck, pili technology, or (vi) rights to use of P. acnes products as a
production enhancer feed additive for food producing animals for sale and
distribution throughout the world (including marketing, registration,
manufacturing, and further development rights).
2. Liabilities.
(a) General Non-Assumption of Liabilities. Except to the
extent provided in this Agreement, 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
obligations of Seller occurring after the Closing Date pursuant to the Tampa
building lease specifically listed in Exhibit 2.a ("Assumed Liabilities").
Except to the extent provided in this Agreement, 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, responsibility for any such debt, liability
and obligation on Buyer.
(b) Product Liabilities: Warranty Claims. Seller shall be
responsible for Product Claims (as defined below) arising from sales invoiced
before the Closing Date. Buyer shall be responsible for Product Claims
arising from sales invoiced on or after the Closing Date. The term "Product
Claims" means liabilities, obligations, or claims for losses, damages,
liabilities, costs or expenses based on, or arising from, any claim alleging
defect or negligence in the assembly, processing, manufacture or sale of
products, goods, or services, including, but not limited to, negligence,
product liability (tort or contract), and warranty claims.
(c) Additional Assumed Liabilities. Notwithstanding the
provisions of Subparagraph 2(a) above to the contrary, and as an express
exception thereto,
-3-
<PAGE>
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 and other Contract Rights
listed in Exhibit 1.(f), 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 for such matters that are related to the Contract Rights or
the Assumed Liabilities, that do not materially impair the use of the
Purchased Assets for their intended purposes, or 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
Six Hundred Forty-Seven Thousand Dollars ($1,647,000.00) for the Purchased
Assets, except Receivables and Inventories ("Main Price"). The Main Price
shall be paid by bank wire transfer at Closing, less the amount of the One
Hundred Thousand Dollars ($100,000.00) that Buyer has deposited with Seller
as an indication of good faith, which Seller may retain as partial payment of
the Main Price.
(b) Buyer shall pay Seller by bank wire transfer at Closing an
amount equal to seventy percent (70%) of Two Hundred Sixty-Nine Thousand
Seven Hundred Forty-Seven and 72/100 Dollars ($269,747.72) ("Preliminary
Receivables Price") as the estimated value of the Receivables determined by
mutual agreement of the parties. A final adjustment in payment or refund
shall take place at a post closing on the one hundredth day after Closing
("Post Closing"). Buyer shall present at the Post Closing a statement
certifying the amount of the Receivables that have been collected through
that date and include an accounting of collected and uncollected Receivables.
To the extent that the amount collected by Buyer from the Receivables between
Closing and Post Closing exceeds the Preliminary Receivables Price, Buyer
shall pay this amount to Seller in cash. To the extent that the amount
collected by Buyer between Closing and Post Closing is less than the
Preliminary Receivables Price, Seller shall refund this amount to Buyer in
cash. Buyer shall concurrently transfer to Seller any uncollected
Receivables.
(c) Buyer shall pay Seller an amount equal to seventy percent
(70%) of Two Hundred Eighty-Four Thousand Six Hundred Seventy-One and 47/100
Dollars ($284,671.47) ("Preliminary Inventories Price") as the estimated
value of the Inventories determined by mutual agreement of the parties by
bank
-4-
<PAGE>
wire transfer at Closing. A final adjustment in payment or refund shall take
place at Post Closing. Buyer shall present at the Post Closing a statement
certifying the amount of the Inventories determined pursuant to Section 1(e)
("Inventories Price"). To the extent that the Inventories Price exceeds the
Preliminary Inventories Price, Buyer shall pay this amount to Seller in cash.
To the extent that the Inventories Price is less than the Preliminary
Receivables Price, Seller shall refund this amount to Buyer in cash.
Adjustment of Inventories will be limited to correction of physical counts,
recording the amount at the lower of cost or average current selling price or
mathematical errors ("Changes"). Buyer shall give Seller a list of all
Changes and any defects in the condition of the inventions within fourteen
(14) days of the Closing Date.
(d) Within thirty (30) days following the first anniversary
after Closing, Buyer will pay a secondary payment to Seller of up to One
Hundred Thousand Dollars ($100,000.00) as to the Purchased Assets except
Receivables and Inventories. This secondary payment shall be calculated as
follows: Net Sales of all P. acnes products from January 1, 1998 through
December 31, 1998 shall be used as a base ("Base"). One Million Two Hundred
Thousand Dollars ($1,200,000.00) shall be subtracted from the Base ("Net
Amount"). The Net Amount shall be multiplied by ten percent (10%) and shall
constitute the second payment; provided the second payment shall not be less
than zero ($0) nor greater than One Hundred Thousand Dollars ($100,000.00).
(e) Within thirty (30) days following the second anniversary
after Closing, Buyer will pay a third payment to Seller of up to One Hundred
Thousand Dollars ($100,000.00) as to the Purchased Assets except Receivables
and Inventories. This third payment shall be calculated as follows: Net Sales
of all P. acnes products from January 1, 1999 through December 31, 1999 shall
be used as a Base. One Million Two Hundred Thousand Dollars ($1,200,000.00)
shall be subtracted from the Base. The Net Amount shall be multiplied by ten
percent (10%) and shall constitute the third payment; provided such payment
shall not be less than zero ($0) nor greater than One Hundred Thousand
Dollars ($100,000.00).
(f) The term "Net Sales" shall mean the total of the aggregate
gross invoice prices of P. acnes products of Buyer, 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. Concurrently with its delivery of payment, Buyer shall furnish to
Seller a certificate of its chief financial officer with respect to Net Sales
amounts for the relevant period. Buyer shall furnish to Seller a quarterly
report regarding Net Sales during the previous quarter and on a cumulative
basis.
-5-
<PAGE>
(g) An amount equal to Twenty Thousand Dollars ($20,000) of
the payment made at Closing shall be assigned to a Covenant Not To Compete
from Seller pursuant to paragraph 23.
(h) 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.h. This allocation shall be conclusive and binding on the
Buyer and Seller for all purposes, including the reporting and disclosure
requirements of the Code.
(i) Buyer agrees to maintain books and records to permit the
calculation of the amounts due Seller pursuant to this Section and to give
Seller and its independent accountants reasonable access at reasonable times
to review the records. At Seller's request and its expense, Buyer shall
furnish to Seller a certificate of its independent certified public
accountants, verifying the Net Sales and other financial accounting amounts
specified in this section. Also, Buyer agrees to use its best efforts and
sound business judgment to generate Net Sales.
4. The Closing. The parties agree that the effective date of closing
shall be as the close of business on the 30th day of December, 1997. All
assets, liabilities and income generated after December 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 Seller, or at such other place
as may be fixed by mutual agreement of Buyer and Seller, concurrently with
the execution of this Agreement by Seller. The 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 and
Assumption of Contracts, substantially in the form of Exhibit 4.a-2, 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 relied upon by
Buyer, regardless of any investigation made by, or information known to,
Buyer:
-6-
<PAGE>
(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 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 material 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
November 30, 1997 ("Interim Financial Statements"). The Financial Statements:
(1) Have been prepared in accordance with the books of
account and records of Seller.
(2) Fairly present Seller's financial condition and the
results of its operation as of and for the periods therein specified, subject
to normal year end adjustments for the interim Financial Statements, prepared
on a consistent basis.
(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 that are
listed on Exhibit 1(f). 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.
-7-
<PAGE>
(e) Condition of Assets. Notwithstanding anything to the
contrary in this Agreement, Seller does not warrant to Buyer the physical
condition of the Machinery and Equipment, and Buyer shall accept the
Machinery and Equipment "as is" on the Closing Date in their then-current
physical condition. Seller makes no warranties or representations, either
express or implied, as to any matter whatsoever relating to the condition of
the Machinery and Equipment, including without limitation, the design and
condition of the Machinery and Equipment, their merchantability, quality,
suitability, or fitness for any particular purposes and without limiting the
generality of the foregoing, Seller shall not be liable for any deft, either
latent or patent, in the condition of the Machinery and Equipment or for any
direct or consequential damages therefrom.
(f) Trade Rights. To Seller's knowledge, no Products
manufactured and sold by any manufacturing process employed by Seller
conflicts with or infringes on any United States or foreign patent of others
and Seller has not received any notice of such a claim. The parties
acknowledge that the Intangible Property consists of know-how that is not
protected by patents or other legally enforceable claim (except as set forth
in any confidentiality agreements with employees or independent contractors).
To Seller's knowledge, no trade secret associated with the Products has been
misappropriated or has been challenged or threatened in any way.
(g) Receivables. The list of Receivables attached as Exhibit
1.d is a complete and accurate list of all the Receivables as of December 30,
1997. All of the Receivables listed on Exhibit 1.d arose from bona fide sales
transactions of Seller, and no portion of the Receivables is subject to
counterclaim or offset or is otherwise subject to a notice of dispute.
(h) Inventories. The Inventories are reflected on the
Financial Statements and the Inventories are recorded at the lower of cost or
average selling price. No Inventories have been consigned to others.
(i) Contracts. Exhibit 5.d.ii describes all material 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.
(j) Litigation. Except as disclosed in Exhibit 5.(j), there
are no actions, suits, proceedings or investigations pending or to Seller's
knowledge, threatened against Seller at law or in equity, or before any
federal, state or municipal or other governmental department, commission,
board, agency or
-8-
<PAGE>
instrumentality, domestic or foreign, which involves a demand for any
judgment or liability and which could materially adversely affect the
Business, the Purchased Assets or the transactions contemplated by this
Agreement. Seller is not in material 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 there are no such orders, decrees, injunctions or
regulations issued specifically against Seller which may materially adversely
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 in all material
respects 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.
Seller owns or has adequate licenses to conduct the Business as currently
conducted in compliance with all material provisions of applicable law.
(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 before the imposition
of interest, penalty, or assessment. There is no tax audit or examination now
pending or to Seller's knowledge, threatened with respect to the Business.
(m) No Adverse Changes. Since November 30, 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 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
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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 before the Closing Date not disclosed 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 and that is material to the business.
(q) Events Subsequent to November 30, 1997. Except as
disclosed in Exhibit 5.q., Seller has not, since November 30, 1997:
(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 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);
(6) Accounting Procedure. Changed or modified the
accounting methods or practices relating to the Business; or
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(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 communications that
have 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 no commitments for a brokerage
fee in connection with the transactions contemplated by this Agreement,
except for bonuses payable by Seller.
(t) Intentionally Left Blank.
(u) Reserve for Taxes. Seller shall reserve from the proceeds
to be received at Closing an amount sufficient to pay unpaid federal and
state taxes that are 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 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 Seller's knowledge, threatened against Seller.
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(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.
(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 that is not terminable at will by
Seller 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 Seller's
knowledge, threatened or claim, against Seller for violation of any contract,
agreement or arrangement described in Exhibit 5.x.(5).
(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.
(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 (each such plan is referred to individually as a "Plan",
collectively as the Plans").
(2) To Seller's knowledge, and except for any
multi-employer plans, all Plans covered by the Code and ERISA are, and during
all applicable
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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 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.
(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.
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(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.
(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 5910-G Breckenridge, Tampa, 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.
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(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, 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 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 Florida; 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
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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. Parent owns all of the issued and
outstanding stock of Seller.
(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.
(cc) Technology Agreements; Ownership of Master Seed. Exhibit
5.(cc) lists all agreements (collectively, the "Technology Agreements") by
which Seller either acquired or granted rights to any technology relating to
P.acnes, including the Immunostimulant Technology License Agreement dated
January 19, 1995, between Seller and Immunomed Corporation, as amended
pursuant to a First Amendment to the Immunostimulant Technology License
Agreement dated April 6, 1995 (the "License Agreement"). Exhibit 5.(cc) also
lists the agreements known to Seller pursuant to which the foregoing
technology has been further licensed or transferred. Complete copies of these
agreements have been furnished to Buyer. Seller has the right to assign all
of its interests in the License Agreement to the Buyer and after the
assignment, Buyer will have all of the rights of Seller in and to the License
Agreement. The Technology Agreements to which Seller is a party are in full
force and effect. No modification has been made to the Technology Agreements
to which Seller is a party, except as set forth in Schedule 5.(cc). To
Seller's knowledge, no party to the Technology Agreements to which Seller is
a
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party, with or without the giving of notice, is in default under those
agreements and Seller knows of no basis for any default by it or by any other
party to the Technology Agreements. Exhibit 5.(cc) lists all parties to which
any aspect of the technology used in connection with P.acnes has been
disclosed by Seller, Parent, and to Seller's knowledge, all other third
parties. To Seller's knowledge, only Seller, Buyer, and The Van Kampen Group,
Inc. (or its affiliate, Delft Pharma International, a Utah corporation) are
the only persons that have in their possession master seed for P.acnes. After
the transaction contemplated by this Agreement, Buyer will own master seed
for P.acnes.
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
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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 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, including the assignment of lease and sub-lease.
(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.
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(f) Related Documents. All of the related documents are
executed at or prior to closing, including the Title Transfer Documents.
(g) Additional Agreements. Buyer shall have received an
executed copy of the Rights Agreement and the Performance Agreement between
Buyer and Parent, substantially in the form of Exhibit 7.(g) ("Performance
Agreement").
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) Additional Agreements. Seller shall have received executed
copies of the Rights Agreement, Performance Agreement and Assignment and
Assumption Agreement.
(e) 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 Seller's rights under this
Agreement.
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), (j), (k), (l), (o), (v), (w),
(z), and (cc) 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 second anniversary of the Closing Date.
(b) Indemnification.
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(1) Generally. 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 (including all items disclosed in the Exhibits) 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) a
Product Claim arising from Seller's sales before the Closing Date; or (iii)
Buyer being deemed to be a "successor" employer to Seller for purpose of
COBRA obligations ("Indemnifiable Damage"). Buyer shall have the right to set
off any Indemnifiable Damage it may incur against the amount it owes Seller
("Disputed Amount"); provided the Disputed Amount is placed in escrow until
resolved according to the terms of the Agreement. This right of set off shall
be in addition to any other rights Buyer may have against Seller. Buyer
agrees to defend, indemnify, and hold harmless Seller from and against any
and all loss, damage, claims, and expenses (including accountants' and
attorney's fees) incurred by Seller that Seller may sustain by reason of (i)
the breach of any of the Representations (including all of the items
disclosed in the Exhibits) made by Buyer herein or in any agreement or
document delivered in connection with this Agreement or with the closing of
the transactions contemplated by this Agreement; or (ii) any liability
assumed by Buyer pursuant to this Agreement or the other documents delivered
in connection with this Agreement; or (iii) otherwise arising out of the
ownership by Buyer of the Purchased Assets or the operation of the Business
on or after the Closing Date (including, without limitation, Product Claims
arising from Buyer's sales following the Closing Date). Buyer shall be
entitled to indemnification only if its claim is made within the applicable
time period specified in Section 9.(a).
(2) Procedure for Indemnity. On the occurrence of any
event that could give rise to a claim against, or to a right of defense and
indemnity by, Buyer or Seller pursuant to this Agreement, or in the event
that any suit, action, investigation, claim or proceeding is begun, made or
instituted against Buyer or Seller as a result of which the other may become
obligated under this Agreement, the party claiming indemnification (the
"Indemnified Party") shall so notify the other party (the "Indemnifying
Party"). The Indemnifying Party will be relieved from any obligation to
provide indemnity to the extent its ability to defend the claims is
materially prejudiced by a notice delay. After receipt of the notice, the
Indemnifying Party shall have the right to promptly undertake to defend,
contest, or otherwise protect against any such event or any suit, action,
investigation, claim or proceeding arising thereform, using counsel of its
choice. The Indemnified Party, at its own cost, may elect to participate in
the defense using counsel of its choice. Buyer and Seller shall cooperate in
defending against any claim to which indemnity obligations apply, and in
minimizing the costs, losses and damage involved in such claim. Neither party
will compromise, settle, or admit liability in any claim to which
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the other party's indemnity obligations apply, and will not incur significant
costs or expenses with respect to any such claim, without the consent of the
other party, which shall not be unreasonably withheld.
(3) Limit of Liability. Anything in Section 9 to the
contrary notwithstanding, Seller's maximum amount of Indemnifiable Damages
shall be limited to the total purchase price paid to it pursuant to Section 3
of the Agreement as to Section 2, Section 5.d., j., k., l., o., v., w., z.,
and (cc), Section 15, and any knowing misrepresentation. Seller shall not
have any liability for the remaining warranties in Section 5 after the
aggregate amount of Indemnifiable Damages paid by Seller exceeds $250,000.
The sole recourse of either party for a breach of any representation or
warranty shall be pursuant to this section.
10. Collection of Receivables:
(a) Buyer shall use its best efforts to collect the
Receivables as promptly as possible following the Closing. Buyer shall first
consult with and obtain Seller's consent to any compromise of any of the
Receivables that results in collection of less than 90% of its face value or
that defers payment for more than thirty days. Buyer shall have no duty to
undertake collection steps, other than routine billing.
(b) Any Receivables acquired as part of the Purchased Assets
which remain uncollected on the one hundredth 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 at the Post
Closing. In its internal accounting, Seller shall assign funds received from
a customer first to those invoices designated for payment by the customer,
and if not designated, to the oldest invoice of the customer.
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11. Employees.
(a) Seller agrees to terminate the employment of those
individuals shown in Exhibit 11 on or the day before the Closing Date.
(b) Buyer shall use its best efforts to hire the employees
listed in Exhibit 11.
12. Transactions Subsequent to Closing.
(a) Further Assurances. Buyer and Seller agree that, from time
to time after Closing, and upon reasonable 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.
(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.
(c) Temporary Use of Vetoquinol Name. Buyer and Seller
acknowledge that some components of the Inventories bear Vetoquinol labels.
Seller grants to Buyer permission to sell these Inventories bearing the
Vetoquinol labels for up to twelve (12) months after the Closing. Buyer shall
use its best efforts to sell the Inventories that bear Seller's label as soon
as reasonably possible.
13. Proper Notices. All notices and other communications required or
permitted under this Agreement shall be deemed to have been given upon actual
receipt 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 and Vetoquinol, S.A., whose
address is Magny-Vernois, B.P. 189, 70204, Lure Cedex, France, 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
Florida.
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
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indemnify and hold Buyer harmless from and against all liabilities Buyer may
incur arising from such non-compliance.
16. Integration. This Agreement and all schedules, exhibits and
agreements attached hereto set forth the entire agreements 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 including but not limited to the Confidentiality
Agreement entered into on September 26, 1997.
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.
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 Parent agree that, for a ten (10) year period from and after the
Closing Date, they shall not market register or develop P.acnes products for
sale and distribution in those territories or for those product applications
as to which Buyer has the exclusive rights to market, register, manufacture,
and further develop particular product applications of P.acnes, except as
specifically licensed to Parent in the Rights Agreement. Seller and Parent
acknowledge that this non-compete applies to them whether they act
individually or jointly, alone, or as an officer, agent, employee, director,
or shareholder of any other corporation, university, or other entity. While
the restrictions set forth above are considered by the parties to
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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, Twenty Thousand
Dollars ($20,000.00) as a part of the Main 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. Confidential Information. It is agreed that the products and
information relating to the Business and anticipated improvements relating to
them constitute confidential information ("Confidential Information"). Seller
and Parent agree not to individually or jointly disclose to any person any
Confidential Information 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, except as
specifically permitted in the Rights Agreement. This restriction shall
include information imparted or divulged to, gained or developed by, or
otherwise discovered by Seller in executing this Agreement. Anything in this
Agreement to the contrary notwithstanding, Seller and Parent shall not be
bound by this Paragraph 24 to the extent that the information they desire to
divulge is or becomes publicly known, other than through a breach of their
obligations hereunder or required by law.
25. 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.
26. Venue. The parties agree that any action shall be brought in the
court of appropriate jurisdiction in Hillsborough County, Florida or U.S.
District Court for the Middle District located in Tampa, Florida. The parties
consent to jurisdiction and waive all claims of improper venue and forum non
conveniens.
27. 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.
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28. Seller's Knowledge. For purposes of this Agreement, the term
"knowledge" when applied to Seller means the actual knowledge of Patrick
Bellon, John Connell, Terry Kuykendall, and Bobby Edwards.
29. Dispute Resolution.
(a) Demand for Arbitration. Except regarding a claim for
fraud, rescission of the Agreement or violation of Sections 23 or 24, any
controversy, dispute or claim arising out of, in connection with, or in
relation to, the construction, performance or breach of this Agreement,
including without limitation, the validity, scope and enforceability of this
Section 29, shall be adjudicated by arbitration conducted in accordance with
the then existing rules for commercial arbitration of the American
Arbitration Association ("AAA"), or any successor organization by a single
arbitrator. The demand for arbitration shall be delivered in accordance with
the Notice provisions of this Agreement.
(b) Selection of Arbitrators. Within five (5) days after
receipt of such demand, the parties shall jointly request a list of
arbitrators from the AAA from the greater Tampa, Florida area. Upon receipt
of the list of arbitrators, each party shall mark selections and/or
rejections and resubmit the list to the AAA. The selections and rejections
shall take place within seven (7) days after receipt of the proposed
arbitrators from the AAA. The parties shall cooperate with the AAA and the
appointed arbitrator for the purpose of setting an expeditious hearing, which
shall be conducted in Tampa, Florida.
(c) Costs and Expenses. The costs of the arbitration, the fees
and expenses of the arbitrator, hearing room, and court reporter shall be
borne by the nonprevailing party. Each party may be represented by counsel if
it so chooses.
(d) Binding Nature of Decision. The parties intend this
agreement to arbitrate to be valid, enforceable and irrevocable. The decision
of the arbitrator with respect to all matters except the validity of this
Agreement, which shall be rendered no later than six (6) months after the
date the hearing begins, shall be final and binding upon the parties and
judgment on such award may be entered by either party in any court having
jurisdiction over the person or properly of the party against whom such award
is sought to be enforced. The parties stipulate that these arbitration
provisions shall be a complete defense to any suit, action or proceeding
instituted in any federal, state or local court, or before any administrative
tribunal with respect to any dispute, controversy or alleged breach of this
Agreement. The arbitration provisions of this Agreement shall survive any
termination or expiration of this Agreement.
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The parties have caused this Agreement to be executed as of the date
and year first above written.
Seller: Buyer:
VETOQUINOL, U.S.A., Inc. Neogen Corporation
By:___________________________ By:_____________________________
James L. Herbert, President
Its:___________________________
NEOGEN CORPORATION
1997 STOCK OPTION PLAN
1. Definitions: As used herein, the following terms shall have the
following meanings:
(a) "Code" shall mean the Internal Revenue Code of 1986, as
amended, and the applicable rules and regulations thereunder.
(b) "Committee" shall mean, (i) with respect to administration
of the Plan regarding Participants who are subject to Section 16(a)
and (b) of the Exchange Act, a committee meeting the standards of
Rule 16b-3 of the Rules and Regulations under the Exchange Act, or
any similar successor rule, appointed by the Board of Directors of
the Company to perform any of the functions and duties of the
Committee under the Plan, or the Board of Directors as a whole, and
(ii) with respect to administration of the Plan regarding all other
Participants, such committee or the Board of Directors of the
Company, as described in clause (i), or such other committee or
entity appointed by the Board of Directors of the Company to perform
any of the functions and duties of the Committee under the Plan.
(c) "Common Shares" shall mean the Common Shares, $.16 par
value, of the Company.
(d) "Company" shall mean Neogen Corporation, a Michigan
corporation, or any successor thereof.
(e) "Discretion" shall mean the sole discretion of the
Committee, with no requirement whatsoever that the Committee follow
past practices, act in a manner consistent with past practices, or
treat any key employee, director, or SRC member in a manner
consistent with the treatment afforded other key employees,
directors, or SRC members with respect to the Plan or otherwise.
(f) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder.
(g) "Incentive Option" shall mean an option to purchase Common
Shares which meets the requirements set forth in the Plan and also is
intended to be, and qualifies as, an incentive stock option within
the meaning of Section 422 of the Code.
(h) "Nonqualified Option" shall mean an option to purchase
Common Shares which meets the requirements set forth in the Plan but
is not intended to be, or does not qualify as, an incentive stock
option within the meaning of the Code.
(i) "Participant" shall mean any individual covered by
Paragraph 11
<PAGE>
or designated by the Committee under Paragraph 6 for participation in
the Plan.
(j) "Plan" shall mean this Neogen Corporation 1997 Stock
Option Plan.
(k) "Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations thereunder.
(l) "Subsidiary" shall mean any corporation or other entity in
which the Company has a direct or indirect ownership interest of 50%
or more of the total combined voting power of all classes of
outstanding voting equity interests.
(m) "Outside Director" shall mean any member of the Company's
Board of Directors who is not an employee of Neogen Corporation or
any of its Subsidiaries.
(n) "SRC member" shall mean any member of the Company's
Scientific Review Council who is not an employee of Neogen
Corporation or any of its Subsidiaries.
2. Purpose of Plan: The purpose of the Plan is to provide key
employees (including officers), directors, and SRC members of the Company and
its Subsidiaries (collectively, "key employees") with an increased incentive
to make significant and extraordinary contributions to the long-term
performance and growth of the Company and its Subsidiaries, to join the
interests of key employees, directors, and SRC members with the interests of
the shareholders of the Company, and to facilitate attracting and retaining
key employees, directors, and SRC members of exceptional ability.
3. Administration: The Plan shall be administered by the Committee.
Subject to the provisions of the Plan, the Committee shall determine, from
those eligible to be Participants under the Plan, the persons to be granted
stock options, the amount of stock to be optioned to each such person, the
time such options shall be granted and the terms and conditions of any stock
options. Such terms and conditions may, in the Committee's Discretion,
include, without limitation, provisions providing for termination of the
option, forfeiture of the gain on any option exercises or both if the
Participant competes with the Company or otherwise acts contrary to the
Company's interests, and provisions imposing restrictions, potential
forfeiture or both on shares acquired upon exercise of options granted
pursuant to this Plan. The Committee may condition any grant on the potential
Participant's agreement to such terms and conditions.
Subject to the provisions of the Plan, the Committee is authorized to
interpret the Plan, to promulgate, amend and rescind rules and regulations
relating to the Plan and to make all other determinations necessary or
advisable for its administration. Interpretation and construction of any
provision of the Plan by the Committee shall, unless otherwise determined by
the Board of Directors of the Company, be final and conclusive. A majority of
the Committee shall constitute a quorum, and the acts of a majority of the
members present at any meeting at which a quorum is present, or acts approved
in writing by a majority of the Committee, shall be the acts of the
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<PAGE>
Committee.
4. Indemnification: In addition to such other rights of
indemnification as they may have, the members of the Committee shall be
indemnified by the Company in connection with any claim, action, suit or
proceeding relating to any action taken or failure to act under or in
connection with the Plan or any option granted hereunder to the full extent
provided for under the Company's articles of incorporation or bylaws with
respect to indemnification of directors of the Company.
5. Maximum Number of Shares Subject to Plan: The maximum number of
shares with respect to which stock options may be granted under the Plan
shall be an aggregate of 400,000 Common Shares, which may consist in whole or
in part of authorized and unissued or reacquired Common Shares. Unless the
Plan shall have been terminated, shares covered by the unexercised portion of
canceled, expired or otherwise terminated options under the Plan shall again
be available for option and sale.
Subject to Paragraph 17, the number and type of shares subject to
each outstanding stock option, the option price with respect to outstanding
stock options, the aggregate number and type of shares remaining available
under the Plan, and the maximum number and type of shares that may be granted
to any Participant in any fiscal year of the Company pursuant to Paragraph 6,
shall be subject to such adjustment as the Committee, in its Discretion,
deems appropriate to reflect such events as stock dividends, stock splits,
recapitalizations, mergers, statutory share exchanges or reorganizations of
or by the Company; provided that no fractional shares shall be issued
pursuant to the Plan, no rights may be granted under the Plan with respect to
fractional shares, and any fractional shares resulting from such adjustments
shall be eliminated from any outstanding option.
6. Participants: Subject to Paragraph 11, the Committee shall
determine and designate from time to time, in its Discretion, those key
employees (including officers), directors, and SRC members of the Company or
any Subsidiary to whom options are to be granted and who thereby become
Participants under the Plan; provided, however, that (a) Incentive Options
shall be granted only to employees (as defined in the Code) of the Company or
a corporate Subsidiary, to the extent required by Section 422 of the Code, or
any successor provision, and (b) no Participant may be granted stock options
to purchase more than 100,000 Common Shares in the aggregate in any fiscal
year of the Company, subject to any adjustments provided in the final
paragraph of Paragraph 5 and in Paragraph 17.
7. Allotment of Shares: Subject to Paragraph 11, the Committee shall
determine and fix the number of Common Shares to be offered to each
Participant; provided that no Incentive Option may be granted under the Plan
to any one Participant which would result in the aggregate fair market value,
determined as of the date the option is granted, of the underlying stock with
respect to which Incentive Options are exercisable for the first time by such
individual during any calendar year (under all of such plans of the Company
and its parent and Subsidiary corporations) exceeding $100,000.
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<PAGE>
8. Option Price: Subject to the rules set forth in this Paragraph 8,
the Committee, in its Discretion, shall establish the option price at the
time any option is granted. Such option price shall not be less than 100% of
the fair market value of the stock on the date on which such option is
granted; provided that with respect to an Incentive Option granted to an
employee who at the time of the grant owns (after applying the attribution
rules of Section 424(d) of the Code) more than 10% of the total combined
voting stock of the Company or of any parent or Subsidiary, the option price
shall not be less than 110% of the fair market value of the stock subject to
the Incentive Option on the date such option is granted. Fair market value of
a share shall be determined by the Committee and may be determined by using
the closing sale price of the Company's stock on any exchange or other market
on which the Common Shares shall be traded on such date, or if there is no
sale on such date, on the next following date on which there is a sale, or
the average of the closing bid and asked prices in any market or quotation
system in which the Common Shares shall be listed or traded on such date. The
option price will be subject to adjustment in accordance with the provisions
of Paragraphs 5 and 17 of the Plan.
9. Granting and Exercise of Options: The granting of options under
the Plan shall be effected in accordance with determinations made by the
Committee pursuant to the provisions of the Plan, by execution of instruments
in writing in form approved by the Committee. Such instruments shall
constitute binding contracts between the Company and the Participant.
Subject to the terms of the Plan, the Committee, in its Discretion,
may grant to Participants Incentive Options, Nonqualified Options or any
combination thereof. Each option granted under the Plan shall designate the
number of shares covered thereby, if any, with respect to which the option is
an Incentive Option and the number of shares covered thereby, if any, with
respect to which the option is a Nonqualified Option.
Subject to the terms of the Plan, each option granted under the Plan
shall be exercisable at any such time or times or in any such installments as
may be determined by the Committee in its Discretion; provided that the
aggregate fair market value (determined as of the date the option is granted)
of the underlying stock with respect to which Incentive Options are
exercisable for the first time by such individual during any calendar year
(under all of such plans of the Company and its parent and Subsidiary
corporations) shall not exceed $100,000. Except as provided in Paragraph14,
options may be exercised only while the Participant is an employee, director,
or SRC member of the Company or a Subsidiary.
Notwithstanding any other term or provision of this Plan, but subject
to the requirements of the Code with respect to Incentive Options that are
intended to remain Incentive Options, in connection with a Participant
ceasing to be an employee of the Company or a Subsidiary for any reason, the
stock option agreement may provide for the acceleration of, or the Committee
may accelerate, in its Discretion (exercised at the date of the grant of the
stock option or after the date of grant), in whole or in part, the time or
times or installments with respect to which any option granted under this
Plan shall be exercisable in connection with termination of a Participant's
employment with the Company or a Subsidiary, subject to any restrictions,
terms and conditions
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<PAGE>
fixed by the Committee either at the date of the award or at the date it
exercises such Discretion.
Successive stock options may be granted to the same Participant,
whether or not the option or options previously granted to such Participant
remain unexercised. A Participant may exercise any option granted under the
Plan, if then exercisable, notwithstanding that options granted to such
Participant prior to the option then being exercised remain unexercised.
10. Payment of Option Price: At the time of the exercise in whole or
in part of any option granted under this Plan, payment in full in cash, or
with the consent of the Committee, in its Discretion, in Common Shares or by
a promissory note payable to the order of the Company which is acceptable to
the Committee, shall be made by the Participant for all shares so purchased.
Such payment may, with the consent of the Committee, in its Discretion, also
consist of a cash down payment and delivery of such a promissory note in the
amount of the unpaid exercise price. In the Discretion of, and subject to
such conditions as may be established by, the Committee, payment of the
option price may also be made by the Company retaining from the shares to be
delivered upon exercise of the stock option that number of shares having a
fair market value on the date of exercise equal to the option price of the
number of shares with respect to which the Participant exercises the option.
In the Discretion of the Committee, a Participant may exercise an option, if
then exercisable, in whole or in part, by delivery to the Company of written
notice of the exercise in such form as the Committee may prescribe,
accompanied by irrevocable instructions to a stock broker to promptly deliver
to the Company full payment for the shares with respect to which the option
is exercised from the proceeds of the stock broker's sale of or loan against
some or all of the shares. Such payment may also be made in such other manner
as the Committee determines is appropriate, in its Discretion. No Participant
shall have any of the rights of a shareholder of the Company under any option
until the actual issuance of shares to such Participant, and prior to such
issuance no adjustment shall be made for dividends, distributions or other
rights in respect of such shares, except as provided in Paragraphs 5 and 17.
11. Automatic Stock Options: Notwithstanding other provisions of this
Plan and to the extent shares are available for grant under the Plan, Outside
Directors and SRC members shall automatically be granted Non-qualified Stock
Options on the terms described in this Paragraph 11.
Each Outside Director of the Corporation shall automatically be
granted a Nonqualified Stock Option to purchase 5,000 shares of Common Stock
as of the date he or she is first elected or appointed to the Board of
Directors. Each Outside Director of the Corporation who is re-elected to the
Board of Directors shall automatically be granted a Nonqualified Stock Option
to purchase 2,000 shares of Common Stock as of the date of each re-election.
Each person who is elected or appointed to serve as an SRC member
shall automatically be granted a Nonqualified Stock Option to purchase 2,500
shares of Common Stock as of the date of his or her election or appointment.
Each SRC member who is re-elected to the Scientific Review Council shall
automatically be granted a Nonqualified Stock Option to purchase 1,000 shares
of Common Stock as of the date of each re-election.
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<PAGE>
All options granted under this Paragraph 11 shall be exercisable in
one-third cumulative annual installments beginning one year after the date of
grant, shall expire ten years after the date of grant and shall have an
option price equal to 100% of the fair market value of the Company's Common
Stock on the date of grant.
12. Non-transferability of Options: No option granted under the Plan
to a Participant shall be transferable by such Participant otherwise than by
will or by the laws of descent and distribution, and each such option shall
be exercisable, during the lifetime of the Participant, only by the
Participant.
13. Continuance of Employment; No Right to Continued Employment: The
Committee may require, in its Discretion, that any Participant under the Plan
to whom an option shall be granted shall agree in writing as a condition of
the granting of such option to remain in his or her position as an employee,
director, or SRC member of the Company or a Subsidiary for a designated
minimum period from the date of the granting of such option as shall be fixed
by the Committee.
Nothing contained in the Plan or in any option granted pursuant to
the Plan, nor any action taken by the Committee hereunder, shall confer upon
any Participant any right with respect to continuation of employment, or
other service by or to the Company or a Subsidiary nor interfere in any way
with the right of the Company or a Subsidiary to terminate such person's
employment, or other service at any time.
14. Termination of Employment; Expiration of Options: Subject to the
other provisions of the Plan, including, without limitation, Paragraphs 9,
and 17 and this Paragraph 14, all rights to exercise options shall terminate
when a Participant ceases to be an employee, director, or SRC member of the
Company or a Subsidiary for any cause, except that the Committee may, in its
Discretion, permit the exercise of all or any portion of the options granted
to such Participant
(i) for a period not to exceed three months following such
termination with respect to Incentive Options that are intended to
remain Incentive Options if such termination is not due to death or
permanent disability of the Participant,
(ii) for a period not to exceed one year following termination
of employment with respect to Incentive Options that are Intended to
remain Incentive Options if termination of employment is due to the
death or permanent disability of the Participant, and
(iii) for a period not to extend beyond the expiration date
with respect to Nonqualified Options or Incentive Options that are
not intended to remain Incentive Options,
all subject to any restrictions, terms and conditions fixed by the Committee
either at the date of the award or at the date it exercises such Discretion.
In no event, however, shall an option be
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<PAGE>
exercisable after its expiration date, and, unless the Committee in its
Discretion determines otherwise (pursuant to Paragraphs 9 or 17), an option
may only be exercised after termination of a Participant's employment or
other service by or to the Company to the extent exercisable on the date of
such termination or to the extent exercisable as a result of the reason for
such termination. The Committee may evidence the exercise of its Discretion
under this Paragraph 14 in any manner it deems appropriate, including by
resolution or by a provision in, or amendment to, the option.
If not sooner terminated, each stock option granted under the Plan
shall expire not more than 10 years from the date of the granting thereof;
provided that with respect to an Incentive Option, such option shall expire
not more than 5 years after the date of granting thereof.
15. Investment Purpose: If the Committee in its Discretion determines
that as a matter of law such procedure is or may be desirable, it may require
a Participant, upon any exercise of any option granted under the Plan or any
portion thereof and as a condition to the Company's obligation to deliver
certificates representing the shares subject to exercise, to execute and
deliver to the Company a written statement, in form satisfactory to the
Committee, representing and warranting that the Participant's purchase of
Common Shares upon exercise thereof shall be for such person's own account,
for investment and not with a view to the resale or distribution thereof and
that any subsequent sale or offer for sale of any such shares shall be made
either pursuant to (a) a Registration Statement on an appropriate form under
the Securities Act, which Registration Statement has become effective and is
current with respect to the shares being offered and sold, or (b) a specific
exemption from the registration requirements of the Securities Act, but in
claiming such exemption the Participant shall, prior to any offer for sale or
sale of such shares, obtain a favorable written opinion from counsel for or
approved by the Company as to the availability of such exemption. The Company
may endorse an appropriate legend referring to the foregoing restriction upon
the certificate or certificates representing any shares issued or transferred
to the Participant upon exercise of any option granted under the Plan.
16. Withholding Payments: If upon the exercise of any Nonqualified
Option or a disqualifying disposition (within the meaning of Section 422 of
the Code) of shares acquired upon exercise of an Incentive Option, there
shall be payable by the Company or a Subsidiary any amount for income tax
withholding, in the Committee's Discretion, either the Participant shall pay
such amount to the Company, or the amount of Common Shares delivered by the
Company to the Participant shall be appropriately reduced, to reimburse the
Company or such Subsidiary for such payment. The Company or any of its
Subsidiaries shall have the right to withhold the amount of such taxes from
any other sums or property due or to become due from the Company or any of
its Subsidiaries to the Participant upon such terms and conditions as the
Committee shall prescribe. The Company may also defer issuance of the stock
upon exercise of such option until payment by the Participant to the Company
of the amount of any such tax. The Committee may, in its Discretion, permit
Participants to satisfy such withholding obligations, in whole or in part, by
electing to have the amount of Common Shares delivered or deliverable by the
Company upon exercise of a stock option appropriately reduced, or by electing
to tender Common Shares back to the Company subsequent to exercise of a stock
option to reimburse the Company or such
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<PAGE>
Subsidiary for such income tax withholding, subject to such rules and
regulations, if any, as the Committee may adopt. The Committee may make such
other arrangements with respect to income tax withholding as it shall
determine.
17. Extraordinary Transactions: In case the Company (i) consolidates
with or merges into any other corporation or other entity and is not the
continuing or surviving entity of such consolidation or merger, or (ii)
permits any other corporation or other entity to consolidate with or merge
into the Company and the Company is the continuing or surviving entity but,
in connection with such consolidation or merger, the Common Shares are
changed into or exchanged for stock or other securities of any other
corporation or other entity or cash or any other assets, or (iii) transfers
all or substantially all of its properties and assets to any other
corporation or other person or entity, or (iv) dissolves or liquidates, or
(v) effects a capital reorganization or reclassification in such a way that
holders of Common Shares shall be entitled to receive stock, securities, cash
or other assets with respect to or in exchange for the Common Shares, then,
and in each such case, proper provision shall be made so that, each
Participant holding a stock option upon the exercise of such option at any
time after the consummation of such consolidation, merger, transfer,
dissolution, liquidation, reorganization or reclassification (each
transaction, for purposes of this Paragraph 17, being herein called a
"Transaction"), shall be entitled to receive (at the aggregate option price
in effect for all Common Shares issuable upon such exercise immediately prior
to such consummation and as adjusted to the time of such Transaction), in
lieu of Common Shares issuable upon such exercise prior to such consummation,
the stock and other securities, cash and assets to which such Participant
would have been entitled upon such consummation if such Participant had so
exercised such stock option in full immediately prior thereto (subject to
adjustments subsequent to such Transaction provided for in Paragraph 5).
Notwithstanding anything in the Plan to the contrary, in connection
with any Transaction and effective as of a date selected by the Committee,
which date shall, in the Committee's judgment, be far enough in advance of
the Transaction to permit Participants holding stock options to exercise
their options and participate in the Transaction as a holder of Common
Shares, the Committee, acting in its Discretion without the consent of any
Participant, may effect one or more of the following alternatives with
respect to all of the outstanding stock options (which alternatives may be
made conditional on the occurrence of the applicable Transaction and which
may, if permitted by law, vary among individual Participants): (a) accelerate
the time at which stock options then outstanding may be exercised so that
such stock options may be exercised in full for a limited period of time on
or before a specified date fixed by the Committee after which specified date
all unexercised stock options and all rights of Participants thereunder shall
terminate; (b) accelerate the time at which stock options then outstanding
may be exercised so that such stock options may be exercised in full for
their then remaining term; or (c) require the mandatory surrender to the
Company of outstanding stock options held by such Participants (irrespective
of whether such stock options are then exercisable) as of a date, before or
not later than sixty days after such Transaction, specified by the Committee,
and in such event the Company shall thereupon cancel such stock options and
shall pay to each Participant an amount of cash equal to the excess of the
fair market value of the aggregate Common Shares subject to such stock
option, determined as
-8-
<PAGE>
of the date such Transaction is effective, over the aggregate option price of
such shares, less any applicable withholding taxes; provided, however, the
Committee shall not select an alternative (unless consented to by the
Participant) such that, if a Participant exercised his or her accelerated
stock option pursuant to alternative (a) or (b) and participated in the
Transaction or received cash pursuant to alternative (c), the alternative
would result in the Participant's owing any money by virtue of the operation
of Section 16(b) of the Exchange Act. If all such alternatives have such a
result, the Committee shall, in its Discretion, take such action to put such
Participant in as close to the same position as such Participant would have
been in had alternative (a), (b) or (c) been selected but without resulting
in any payment by such Participant pursuant to Section 16(b) of the Exchange
Act. Notwithstanding the foregoing, with the consent of affected
Participants, each with respect to such Participant's option only, the
Committee may in lieu of the foregoing make such provision with respect to
any Transaction as it deems appropriate.
18. Effectiveness of Plan: This Plan shall be effective on the date
the Board of Directors of the Company adopts this Plan, provided that the
shareholders of the Company approve the Plan within 12 months after its
adoption by the Board of Directors. Options may be granted before shareholder
approval of this Plan, but each such option shall be subject to shareholder
approval of this Plan. No option granted under this Plan shall be exercisable
unless and until this Plan shall have been approved by the Company's
shareholders.
19. Termination, Duration and Amendments to the Plan: The Plan may be
abandoned or terminated at any time by the Board of Directors of the Company.
Unless sooner terminated, the Plan shall terminate on the date ten years
after the earlier of its adoption by the Board of Directors or its approval
by the shareholders of the Company, and no stock options may be granted under
the Plan thereafter. The termination of the Plan shall not affect the
validity of any option which is outstanding on the date of termination.
For the purpose of conforming to any changes in applicable law or
governmental regulations, or for any other lawful purpose, the Board of
Directors shall have the right, with or without approval of the shareholders
of the Company, to amend or revise the terms of this Plan or any option
agreement under this Plan at any time; provided, however, that (i) to the
extent required by Section 162(m) of the Code and related regulations, or any
successor rule, but only with respect to amendments or revisions affecting
Participants whose compensation is subject to Section 162(m) of the Code, and
to the extent required by Section 422 of the Code, or any successor section,
but only with respect to Incentive Options, no such amendment or revision
shall increase the maximum number of shares in the aggregate which are
subject to this Plan (subject, however, to the provisions of Paragraphs 5 and
17) without the approval or ratification of the shareholders of the Company,
and (ii) no such amendment or revision shall change the option price (except
as contemplated by Paragraphs 5 and 17) or alter or impair any option which
shall have been previously granted under this Plan, in a manner adverse to a
Participant, without the consent of such Participant.
As adopted by the Board of Directors on August 14, 1997.
-9-
LEASE AGREEMENT
STATE OF FLORIDA )
COUNTY OF HILLSBOROUGH )
THIS LEASE AGREEMENT, made and entered into as of this the ________
day of _____________, 1998, between Connecticut General Life Insurance Company,
on behalf of its Separate Account R, hereinafter referred to as "Lessor", and
Neogen Corporation, hereinafter referred to as "Lessee," without regard to
number or gender.
W I T N E S S E T H
1. PREMISES. In consideration of the rents herein provided, and the terms,
provisions and covenants hereof, Lessor hereby leases, lets, and demises to
Lessee the following described Premises (sometimes referred to in this Lease,
interchangeably as "Premises" or "Net Rentable Area", and more particularly
described in Exhibit "A" attached hereto) situated in Suite "G", 5910
Breckenridge Center Parkway, Tampa, Florida, 33610, sometimes referred to as
"the Building" or "the Property". Net Rentable Area is determined by
measuring from the exterior surface of outside building walls, and from the
center of interior tenant dividing walls, and shall include all area within
those walls. The number of square feet of Net Rentable Area comprising the
Premises shall be 5,237, unless enlarged or reduced by written amendment or
addendum hereto.
2. TERM. TO HAVE AND TO HOLD, the aforedescribed Premises for a term of
thirty-six (36) months, commencing on the first (1st) day of October, 1998,
and ending at midnight on the thirtieth (30th) day of September, 2001. The
date specified above for the commencement of the term, or if Lessor cannot
deliver possession, the date on which the Premises are first available for
occupancy by the Lessee is hereinafter referred to as the "Commencement Date"
(Commencement Date). By occupying the Premises, Lessee shall be deemed to
have accepted the same as suitable for the purpose herein intended, and to
have acknowledged that the same complies fully with Lessor's covenants and
obligations. Within ten (10) days after request of Lessor, Lessee agrees to
give Lessor a letter certifying that the Lessee has accepted delivery of the
Premises and, that the condition of the Premises complies with Lessor's
covenants and obligations hereunder.
3. RENT. Lessee covenants and agrees that it will pay to Lessor for the use
of the Premises, Base Rent as follows:
(a) Base Rent. In consideration for this Lease and subject to the
adjustments hereinafter specified in this Lease, as rental for the
Premises, the Lessee hereby agrees to pay to the Lessor, without
deduction, set-off, prior notice or demand, the rental sums set
forth below during the term of this Lease (hereinafter referred to
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<PAGE>
as "Base Rent") plus applicable state of Florida sales tax. Said
rental shall be payable in advance in monthly installments as set
forth below commencing on the dates as set forth below. All rental
installments to be paid by Lessee as herein provided shall be paid
to CGLIC/SAR Breckenridge Park at the following address until
notice to the contrary is given by Lessor:
Breckenridge Park Building #2
c/o Crocker Realty Trust
433 Plaza Real, Suite 335
Boca Raton, FL 3343
The first such monthly installment shall be due and payable at the
time of the execution of this Lease. If the beginning date of this
Lease commences on any day of the month other than on the first
day, the monthly Base Rent for the unexpired portion of said month
shall be prorated and paid on a per diem basis, and the Lessor
shall credit the difference, if any, toward the payment of the
rent for the next calendar month.
<TABLE>
<CAPTION>
Period Rate/Sq. Ft. Monthly Payment Period Total
------ ------------ --------------- ------------
<S> <C> <C> <C>
10/01/98 - 09/30/99 $6.00 $2,618.50 $31,422.00
10/01/99 - 09/30/00 $6.24 $2,723.24 $32,678.88
10/01/00 - 09/30/01 $6.49 $2,832.34 $33,988.08
</TABLE>
(b) Additional Rents. Operating Expenses. In addition to the base
rent set forth above, Lessee further agrees to pay as Additional
Rental Lessee's pro rata share of all Operating Expenses of the
Building, it being understood that the base rent payable by Lessee
to Lessor is the absolute net rent to be received by Lessor and
there shall be no charges or impositions against said rent. Lessor
may, within nine (9) months following the close of any calendar
year for which additional rental is due under this Paragraph,
invoice Lessee for its pro rata share of operating expenses. The
invoice shall include in reasonable detail the computations of the
additional rental, and Lessee agrees to make payment of the
additional rental to Lessor within thirty (30) days following
receipt of the invoice. In addition to Lessor's right to invoice
Lessee for actual operating expenses, if any, at the end of each
calendar year, Lessor shall have the right but not the obligation,
at any time during the term of this Lease, to estimate operating
expenses for the coming calendar year (or remaining part thereof)
and invoice Lessee for its pro rata share of such estimated
operating expenses. Lessee shall pay monthly, concurrent with each
Base Rent payment due hereunder, an amount equal to one-twelfth
(1/12) the estimated annual operating expenses, such payment being
considered "Additional Rent". In the event of an overpayment or
underpayment by Lessee, each party hereby agrees to an appropriate
adjustment to be paid or credited, as the case may be, as
determined by the accounting of actual operating expenses as
provided herein, to the Additional Rent payment next becoming due
from Lessee. Such adjustment shall be made within thirty (30) days
after Lessor has finally determined
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<PAGE>
the actual operating expenses for the calendar year and notified
Lessee of the payment (or credit) which is due. Appropriate
proration shall be made for partial periods. Lessee shall have the
right, at any time within sixty (60) days from receipt of Lessor's
notice of the actual Additional Rent due hereunder, and at
Lessee's own expense and at a reasonable time, to inspect Lessor's
books at the Lessor or its agent's place of business, relevant to
the Additional Rent due under this Paragraph, or at Lessor's
option, Lessor shall provide to Lessee a statement of operating
expenses in reasonable detail. In the event that Lessee shall
dispute the Additional Rent due hereunder (including election by
Lessee to inspect Lessor's books, as provided for above), Lessee
shall nonetheless be required to pay the Additional Rent so
invoiced to Lessee as and when required herein pending resolution
of such dispute. Lessee's obligation to pay this rent shall
survive the termination of the Lease.
For the purposes of this Lease, the term "Operating
Expenses" shall mean any and all costs and expenses paid,
incurred, or accrued by Lessor, or its agents, for any calendar
year or portion of a calendar year, in connection with the
operation, management, servicing, maintenance, and repair of all
Common Areas and of the Building of which the Premises are a part,
as determined and stated in accordance with generally accepted
accounting principles; and, further, shall include all insurance
premiums Lessor is required to pay hereunder, sewer and water
charges, and real property taxes and installments of special
assessments, but shall exclude: provisions for depreciation;
interest on indebtedness, leasing commissions, and income taxes;
dividends; and other expenses which do not relate to the operation
of the Building.
The term "Common Areas", as used in this Lease, shall
mean the portions of the Property provided and maintained by
Lessor for the common use and benefit of Lessor and occupants of
the Property, generally, and the employees, invitees, and
licensees of Lessor and such occupants. Lessee's proportionate
share of Lessor's expenses described above shall be determined by
multiplying the amount of such operating and maintenance costs by
a factor, the numerator of which shall be the Net Rentable Area of
the Premises (as stated in Section 1 of this Lease) and the
denominator of which shall be the Net Rentable Area of the
Building of which the Premises are a part. For the purposes of
this Lease, this factor shall be .10.
(c) Sales Tax. Lessee shall also pay, along with all rentals due
under this Lease, an amount equal to any tax on the rentals now or
hereafter imposed by any lawful authority.
(d) Payment Conditions. Except as herein expressly provided to the
contrary in this Lease, all rent payments due under this Lease
shall be payable in legal tender of the United States of America
on the first day of each month during the
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<PAGE>
term of this Lease, in advance, without set-off or deduction.
Other remedies for nonpayment of rent notwithstanding, if the
monthly rental payment is not received by Lessor on or before the
tenth day of the month for which rent is due, or if any other
payment due Lessor by Lessee is not received by Lessor on or
before the tenth day of the month next following the month in
which Lessee was invoiced, a service charge of five percent (5%)
of such past due amounts shall become due and payable in addition
to such other amounts owed under this Lease.
4. ASSIGNMENT AND SUBLETTING. Lessee shall not assign, mortgage, pledge, or
encumber this Lease, or permit all or any part of the Premises to be
subleased without the prior written consent of Lessor and Lessor's mortgagee,
if any, which consent shall not be unreasonably withheld or delayed. Any
transfer of this Lease by merger, consolidation, reorganization, or
liquidation of Lessee, or by operation of law, or change in ownership of or
power to vote the majority of the outstanding voting stock of a corporate
Lessee, or by change in ownership of a controlling partnership interest in a
partnership Lessee, shall constitute an assignment for the purposes of this
paragraph. Notwithstanding the foregoing, Lessee shall have the right to
assign or sublease part or all of the Premises to any of its subsidiaries,
affiliates or any parent corporation of Lessee with prior written notice to
Lessor, provided that: (i) Lessee continues to be primarily liable on its
obligations as set forth herein; (ii) any such assignee or sublessee shall
assume and be bound by all covenants and obligations of Lessee herewith;
(iii) the proposed assignee or sublessee is, in Lessor's good faith
judgement, compatible with other tenants in the Building and seeks to use the
Premises only for the Permitted Lessee and for a use that is not prohibited
under the terms of a lease with another tenant in the Building; and (iv) such
use would not result in a material change in the number of personnel working
in, or members of the general public visiting, the Premises.
In addition to other reasonable bases, Lessee hereby agrees that
Lessor shall be deemed to be reasonable in withholding its consent, if: (a)
such proposed assignment or sublease is for a term less than the whole of the
remaining Lease term; or (b) Lessee is in default under any of the terms,
covenants, conditions, provisions and agreements of this lease at the time of
request for consent or on the effective date of such subletting or
assignment; or (c) the proposed subtenant or assignee is, in Lessor's good
faith judgement, incompatible with other tenants in the Building, or seeks to
use any portion of the Premises for a use not consistent with other uses in
the Building, or is financially incapable of assuming the obligations of this
Lease; or (d) the proposed assignee or sublessee or its business is subject
to compliance with additional requirements of the law (including related
regulation) commonly known as the "Americans With Disabilities Act" beyond
those requirements which are applicable to the Lessee, unless the proposed
assignee or sublessee shall (i) first deliver plans and specifications for
complying with such additional requirements and obtain Lessor's consent
thereto, and (ii) comply with all Lessor's conditions for or contained in
such consent, including without limitation, requirements for security to
assure the lien-free completion of such improvements by and at the sole cost
and expense of Lessee or its sublessee or assignee. Lessee shall submit to
Lessor the name of the proposed assignee
4
<PAGE>
or subtenant, the terms of the proposed assignment or subletting, the nature
of the proposed subtenant's or assignee's business and such information as to
the assignee's or subtenant's financial responsibility and general reputation
as Lessor may reasonably require.
No subletting or assignment, even with the consent of Lessor,
shall relieve Lessee of its primary obligation to pay the Rent and to perform
all of the other obligations to be performed by Lessee hereunder. The
acceptance of Rent by Lessor from any other person or entity shall not be
deemed to be a waiver by Lessor of any provision of this Lease or to be a
consent to any assignment, subletting or other transfer, or a novation.
Consent to one assignment, subletting or other transfer shall not be deemed
to constitute consent to any subsequent assignment, subletting or transfer.
In lieu of giving any consent to a sublease or an assignment of
all the Premises, Lessor may, at Lessor's option, elect to terminate this
Lease. In the case of a proposed subletting of a portion of the Premises,
Lessor may, at Lessor's option, elect to terminate the Lease with respect to
that portion of the Premises being proposed for subletting. The effective
date of any such termination shall be thirty (30) days after the proposed
effective date of any proposed assignment or subletting.
One-half of any proceeds in excess of Lessee's Base Rent and
Lessee's pro rata share of operating expenses which is received by Lessee
pursuant to an assignment or subletting consented to by Lessor, less
reasonable brokerage commissions actually paid by Lessee, and less other
reasonable costs incurred by Lessee in connection with making the space
available for lease, shall be remitted to Lessor as additional Rent within
ten (10) days of receipt by Lessee. For purposes of this Paragraph, all money
or value in whatever form received by Lessee from or on account of any party
as consideration for an assignment or subletting shall be deemed to be
proceeds received by Lessee pursuant to an assignment or subletting.
5. USE. Lessee covenants that during the term of this Lease, the Premises
shall be used and occupied only as a general office for medical research,
product development, and production and for no other purpose or purposes
without the prior written consent of Landlord. Lessee agrees to cause the
Premises to be operated for such use during the entire term of this Lease,
unless prevented from doing so by causes beyond Lessee's control, and to
conduct its business at all times in a reputable manner. In no event shall
Lessee conduct its business in any manner that would be objectionable or
unsuitable for the general business reputation and standards of the Property
or in conflict with the restrictions of record from time to time affecting
the Property, and Lessor shall have the authority to prescribe such
additional rules (or to modify or rescind rules in existence from time to
time) governing the conduct of business on the Property, as Lessor, in its
sole discretion, shall deem necessary to insure that such standards are
observed.
6. CARE OF PREMISES. Lessee shall not perform any acts or carry on any
practices
5
<PAGE>
which may injure the Premises or be a nuisance or menace to other occupants
of the Property. Lessee shall keep the Premises clean and free from rubbish,
vermin and dirt at all times, and shall store all trash and garbage within
the Premises and arrange for the regular pickup of such trash and garbage at
Lessee's expense. Lessee shall not burn any trash or garbage of any kind in
or about the Premises.
Lessee shall not keep, store, or display any items or inventory on
or otherwise obstruct the exterior area adjacent to the Premises without the
written consent of Lessor. Lessee shall not use, or permit the use of, any
portion of the Premises for any unlawful purpose or purposes. Lessee shall
not make any structural changes in the Premises without Lessor's prior
written consent, which consent shall be subject to such conditions as Lessor,
in its sole discretion, may impose.
7. MAINTENANCE. Lessor shall maintain the foundation, outer walls, and roof
of the Building in good condition and repair, except that Landlord shall not
be required to make any repairs occasioned by the negligent act or omission
of Lessee or Lessee's agents or employees. Lessee shall make all repairs and
replacements to the Premises not expressly assumed by Lessor under this
Lease, and shall keep all portions of the Premises, including, without
limitation, the interior of the Premises and the wiring and plumbing systems
and conduits, exterior doors, windows and window frames, in good order,
condition, and repair during the entire term of this Lease, and shall also
keep the Premises in a clean, sanitary, and safe condition in accordance with
Law and in accordance with all directives, rules, and regulations of
governmental agencies having jurisdiction over the Premises or Lessee's use
thereof.
Notwithstanding anything contained herein to the contrary, Lessee
shall, at its sole cost and expense, maintain and keep the heating,
ventilating and air conditioning systems, apparatus and equipment (the "HVAC
Systems") in good condition and repair during the entire term of this Lease.
Within thirty (30) days of the date Lessee takes possession of the Premises,
Lessee shall enter into a maintenance contract, requiring at least bimonthly
service with a reputable and licensed full service HVAC maintenance firm, for
the routine maintenance and servicing of the HVAC Systems. Lessee shall
furnish Lessor with a copy of the then current maintenance contract. Lessor
shall have the specific right to annually inspect, or have inspected, the
HVAC equipment, and if in Lessor's reasonable judgment such equipment is not
being properly maintained, Lessor shall have the right to give notice to
Lessee of such, and Lessor may, at the expense of the Lessee, undertake to
make such repairs as are necessary to put the HVAC equipment in good
condition.
8. ALTERATIONS AND IMPROVEMENTS. Lessee shall not make, or allow to be made,
any alterations or physical additions in or to the leased Premises without
first obtaining the written consent of Lessor. Any alterations, physical
additions, or improvements to the leased Premises made by Lessee shall at
once become the property of Lessor and shall be surrendered to Lessor upon
the termination of this Lease. Lessor, at its option, may require Lessee to
remove any physical additions and/or repair any alterations in order to
restore the leased Premises to the condition existing prior to the time
Lessee took possession, all costs of such removal and/or alterations to be
borne by Lessee. This clause shall not apply to movable equipment or
furniture
6
<PAGE>
owned by Lessee which may be removed by Lessee at the end of the term of this
Lease if Lessee is not then in default and if such equipment and furniture is
not then subject to any other rights, liens, and interests of Lessor.
9. UTILITIES. Lessee agrees to pay promptly, before delinquency, all charges
for electricity, telephone, janitorial services, and for all other utilities
and services supplied to the Premises, whether determined by meter or
otherwise. If such charges are not so paid, they shall be added to the next
or any subsequent month's rent thereafter to become due, if Lessor elects,
and be collectable as rent.
10. ASSUMPTION OF RISK-INDEMNITY-LIABILITY INSURANCE. Lessor shall not be
liable to Lessee or Lessee's customers, licensees, agents, invitees, or
employees, or to any other person on the Premises for any injury or damages
to its, his, or their persons or property by any cause whatsoever, including,
but not limited to, acts or omissions of any other occupant of the Property,
construction defects, water, rain, stoppage, or leaks of gas, or other defect
in, on, or about the Premises, unless such injury is due to Lessor's
negligence. Lessee covenants and agrees to indemnify and save Lessor harmless
from and against any and all claims for damage or injuries to Property and/or
for any personal injury or loss of life in, upon, or about the Premises or on
the Common Areas immediately adjacent to the Premises, arising for any reason
whatsoever during the term of this Lease, except such as may be the result of
the negligence or continuing default of Lessor, or Lessor's agents,
employees, or contractors.
Lessee covenants and agrees to provide on or before the
Commencement Date and keep in force during the term of this Lease, a
commercial liability policy of insurance, insuring Lessor and Lessee (and
naming them both in the policy) against any liability whatsoever occasioned
by accident on or about the Premises, or any appurtenances thereto. Such
policy shall be written by a good and solvent insurance company in the amount
of One Million Dollars ($1,000,000.00) combined single limit coverage. The
original policy or a certificate thereof, together with evidence of payment
therefor, shall be delivered to Lessor at least ten (10) days prior to the
Commencement Date. Lessee shall renew such policy not less than thirty (30)
days prior to its Expiration Date, from time to time, and furnish such
renewals and evidence of payment therefor to Lessor. Such policy or
certificates shall contain a provision that the insurer will not cancel the
policy without giving Lessor ten (10) days' written notice.
11. CASUALTY INSURANCE. Lessor shall, at all times during the term of this
Lease, maintain a policy or policies of insurance issued by a reputable
insurance company, insuring the Building against loss or damage by fire,
explosion, or other hazards and contingencies for the full insurable value
thereof; provided, that Lessor shall not be obligated to insure any
furniture, equipment, machinery, goods, or supplies not covered by this Lease
which Lessee may bring or obtain upon the leased Premises, or any additional
improvements which Lessee may construct thereon. If the annual premiums
charged Lessor for such casualty insurance exceed the standard premium rates
because the nature of Lessee's operation results in extrahazardous exposure,
then Lessee shall, upon receipt of appropriate premium invoices, reimburse
Lessor for such increases
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<PAGE>
in such premiums.
12. LESSOR'S RIGHT OF ENTRY. Lessor shall have the right, at all reasonable
hours, to enter the leased Premises for the following reasons: inspection,
cleaning, or making repairs, making alterations or additions, as Lessor may
deem necessary or desirable; determining Lessee's use of the leased Premises,
or determining if an act of default under this Lease has occurred.
13. RIGHTS OF MORTGAGEE. Lessee accepts this Lease subject and subordinate to
any recorded mortgage, deed of trust and other lien presently existing upon
the leased Premises. Lessor is hereby irrevocably vested with full power and
authority to subordinate Lessee's interest under this Lease to any mortgage,
deed of trust, or other lien hereafter placed on the leased Premises, and
Lessee agrees, upon demand, to execute additional instruments subordinating
this Lease as Lessor may require. If the interests of Lessor under this Lease
shall be transferred by reason of foreclosure or other proceedings for
enforcement of any mortgage on the leased Premises, Lessee shall be bound to
the transferee (sometimes called the "Purchaser") under the terms, covenants,
and conditions of this Lease for the balance of the terms remaining, and any
extensions or renewals, with the same force and effect as if the Purchaser
were Lessor under this Lease, and Lessee agrees to attorn to the Purchaser,
including the mortgagee under any such mortgage, if it be the Purchaser, as
its Lessor, the attornment to be effective and self-operative without the
execution of any further instruments upon the Purchaser succeeding to the
interest of Lessor under this Lease. The respective rights and obligations of
Lessee and the Purchaser, upon the attornment, to the extent of the then
remaining balance of the term of this Lease, and any extensions or renewals,
shall be and are the same as those set forth in this Lease. In the event that
Lessor shall default in the performance of the terms and provisions of this
Lease, Lessee hereby agrees to give Lessor's Mortgagee, by registered mail, a
copy of any notice of default served upon the Lessor, provided that prior to
such notice Lessee has been notified in writing, (by way of notice of
Assignment of Rents and Leases, or otherwise) of the address of such
Mortgagee. Lessee further agrees that if Lessor shall have failed to cure
such default within the time provided for in this Lease, then the Mortgagee
shall have an additional sixty (60) days within which to cure such default,
or, if such default cannot be cured within that time, then such additional
time is may be necessary to cure such default provided said Mortgagee has
commenced and is diligently pursuing the remedies necessary to cure such
default (including, but not limited to commencement of foreclosure
proceedings, if necessary to effect such cure). Lessee hereby agrees that it
shall not terminate this Lease while such remedies are being so diligently
pursued by Lessor's Mortgagee.
14. ESTOPPEL CERTIFICATES. Lessee agrees to furnish promptly, from time to
time, upon request of Lessor or Lessor's mortgagee, a statement certifying
that Lessee is in possession of the Premises; the Premises are acceptable;
the Lease is in force and effect; the Lease is unmodified; Lessee claims no
present charge, lien, or claim of offset against rent; the rent is paid for
the current month, but is not paid and will not be paid for more than one
month in advance; there is no existing default by reason of some act or
omission by Lessor; and such other matters as may be reasonably required by
Lessor or Lessor's mortgagee or assignee.
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<PAGE>
15. QUIET ENJOYMENT. Lessor warrants that it has full right to execute and to
perform this Lease and to grant the estate demised, and that Lessee, upon
payment of the required rents and performing the terms, conditions,
covenants, and agreements contained in this Lease, shall peaceably and
quietly have, hold, and enjoy the leased Premises during the full term of
this Lease, as well as any extension or renewal thereof.
16. COMPLIANCE WITH LAW. Lessee shall comply with all laws, ordinances,
orders, rules, and regulations (State, Federal, Municipal, and other agencies
or bodies having any jurisdiction thereof) relating to the use, condition, or
occupancy of the leased Premises.
17. HOLDING OVER. In the event of holding over by Lessee, after the
expiration or termination of this Lease, such hold over shall be as a tenant
at will, and all terms and provisions of this Lease shall be applicable
during such period, except that Lessee shall pay Lessor, as rental for the
period of such hold over, an amount equal to twice the rent which would have
been payable by Lessee had such hold over period been a part of the original
term of this Lease, and Lessee will vacate said Premises and deliver the same
to Lessor upon Lessee's receipt of notice from Lessor to vacate said
Premises. The rental payable during such hold over period shall be payable to
Lessor on demand. No holding over by Lessee, whether with or without consent
of Lessor, shall operate to extend this Lease except as herein provided.
18. CONDEMNATION. If the whole or any part of the Premises shall be taken by
any public authority under the power of eminent domain, or be conveyed by
deed in lieu of condemnation, then the term of this Lease shall cease on the
part so taken from the day possession of the portion of the Premises so taken
is required by the condemning authority. If the part so taken shall destroy
the usefulness of the Premises for Lessee's business purposes, then Lessee
shall have the right either to terminate this Lease as of such date or to
continue in the possession of the remainder of the Premises under the terms
herein provided, except that the then current monthly Base Rent shall be
reduced in proportion to the amount of the Premises taken. If Lessee shall
fail to terminate this Lease within thirty (30) days after its receipt of
notice of the taking, Lessee's failure shall be regarded as a waiver of its
right to cancel, whereupon this Lease shall continue for the then balance of
the term. If Lessee exercises its right to cancel, all advance rent paid by
Lessee shall be adjusted to the date of termination. If Lessee fails to
exercise its right to cancel, Lessor shall, at its own cost and expense (but
only to the extent of the condemnation proceeds paid to Lessor as
compensation for the portion of the Premises so taken), make repairs made
necessary due to the partial taking.
The parties agree that, except as expressly noted in the preceding
paragraph, Lessee shall not be entitled to any damages or compensation by
reason of the taking of its leasehold or any portion thereof, and Lessor
shall be entitled to all compensation paid by the condemning authority.
19. DAMAGES OR DESTRUCTION. In the event the Premises are damaged by fire,
explosion, or other casualty, Lessor shall commence the repair, restoration,
or rebuilding thereof,
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within ninety (90) days of such damage, after first notifying the Lessee
within thirty (30) days of such intent. If the casualty or the repair,
restoration, or rebuilding caused thereby shall render the Premises
untenantable, in whole or in part, an equitable abatement in rent shall be
allowed from the date when the damage occurred until the date when the
Premises are again fit for occupancy by Lessee. If such a fire, explosion, or
other casualty damages the building in which the Premises are located to the
extent of fifty percent (50%) or more thereof, Lessor may, in lieu of
repairing, restoring, or rebuilding the same, terminate this Lease within
sixty (60) days after occurrence of the event causing the damage. In such
event, the obligation of Lessee to pay rent and other charges hereunder,
shall end as the date when the occupancy ceased. In the event Lessor's fire
and extended coverage insurance provides for a "deductible" and a loss occurs
which is the kind of risk otherwise insured under the policy, and such loss
is the result of the Lessee's or its agents, employees, or contractors
negligence, act or omission, then Lessee shall pay to Lessor, promptly upon
being billed therefor the lesser of the (a) the amount of the loss or (b) the
amount of the deductible.
20. EVENTS OF DEFAULT. The following events shall be deemed to be events of
default by Lessee under this Lease:
(a) Lessee shall fail to pay any installment of the rent herein
reserved when due, or any other payment or reimbursement to Lessor
required herein when due.
(b) Lessee shall become insolvent, or shall make a transfer in
fraud of creditors, or shall make an assignment for the benefit of
creditors;
(c) Lessee shall file a petition under any section or chapter of
the National Bankruptcy Act, as amended, or under any similar Law
or Statute of the United States or any State thereof, or Lessee
shall be adjudged bankrupt or insolvent in proceedings filed
against Lessee thereunder;
(d) A receiver or trustee shall be appointed for all or
substantially all of the assets of Lessee;
(e) Lessee shall desert or vacate any substantial portion of the
Premises;
(f) Lessee shall fail to comply with any term, provision, or
covenant of this Lease (including the rules and regulations of the
Building), other than the foregoing in this Section 20, and shall
not cure such failure within thirty (30) days after written notice
thereof to Lessee; or
(g) There shall occur, during any twelve-month period during the
term of this Lease, more than two events of default, as specified
in subsections (a) through (e) above regardless of whether such
defaults have been cured by Lessee within the allowed grace
periods.
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21. REMEDIES. Upon the occurrence of any such events of default described in
Section 20 hereof, Lessor shall have the option to pursue any one or more of
the following remedies without notice or demand whatsoever:
(a) Terminate this Lease, in which event Lessee shall immediately
surrender the Premises to Lessor, and if Lessee fails to do so,
Lessor may, without prejudice to any other remedy which it may
have for possession or arrearages in rent, enter upon and take
possession of the Premises, and expel or remove Lessee and any
other person who may be occupying such Premises or any part
thereof, without being liable for prosecution or any claim of
damages therefor; and Lessee agrees to pay to Lessor, on demand,
the amount of all loss and damage which Landlord may suffer by
reason of such termination, whether through inability to relet the
Premises on satisfactory terms or otherwise;
(b) Enter upon and take possession of the Premises and expel or
remove Lessee and any other person who may be occupying such
Premises or any part thereof, without being liable for prosecution
or any claim for damages therefor, and relet the Premises and
receive the rent therefor; and Lessee agrees to pay to the Lessor,
on demand, any deficiency that may arise by reason of such
reletting, including without limitation, costs incurred for space
planning, rent concessions, remodeling and tenant improvements,
advertising, and leasing commissions. In the event Lessor is
successful in reletting the Premises at a rental in excess of that
agreed to be paid by Lessee, pursuant to the terms of this Lease,
Lessor and Lessee each mutually agree that Lessee shall not be
entitled, under any circumstances, to such excess rental, and
Lessee does hereby specifically waive any claim to such excess
rental;
(c) Enter upon the Premises without being liable for prosecution
or any claim for damages therefor, and do whatever Lessee is
obligated to do under the terms of this Lease; and Lessee agrees
to reimburse Lessor, on demand, for any expenses which Lessor may
incur in thus effecting compliance with Lessee's obligations under
this Lease; and Lessee further agrees that Lessor shall not be
liable for any damages resulting to the Lessee from such action,
whether caused by the negligence of Lessor or otherwise;
(d) Lessee covenants and agrees that Lessee will pay, in addition
to the rentals and other sums agreed to be paid hereunder, all
sums and expenses incurred by Lessor in enforcing, defending, or
interpreting Lessor's rights under this Lease, including without
limitation, all court costs, all attorneys' fees (whether incurred
out of court, in the trail court, on appeal, or in bankruptcy
proceedings), and all collection costs and fees charged by third
parties in connection with Lessor's enforcement of Lessor's rights
hereunder.
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22. WAIVER OF DEFAULT OR REMEDY. Failure of Lessor to declare an event of
default, immediately upon its occurrence or delay in taking any action in
connection with an event of default, shall not constitute a waiver of the
default, but Lessor shall have the right to declare the default at any time
and take such action as is lawful or authorized under this Lease. Pursuit of
any one or more of the remedies set forth in Paragraph 21 above shall not
preclude pursuit of any one or more of the other remedies provided elsewhere
in this Lease or provided by Law, nor shall pursuit of any remedy provided
constitute a forfeiture or waiver of any rent or damages accruing to Lessor
by reason of the violation of any of the terms, provisions, or covenants of
this Lease. Failure by Lessor to enforce one or more of the remedies provided
upon an event of default shall not be deemed or construed to constitute a
waiver of the default or of any other violation or breach of any of the
terms, provisions, and covenants contained in this Lease.
23. Intentionally omitted.
24. SECURITY DEPOSIT. Lessee, contemporaneously, with the execution of this
Lease, has deposited with Lessor the sum of Two Thousand Six Hundred Eighteen
and 50/00 Dollars ($2,618.50), receipt of which is hereby acknowledged by
Lessor as security for the full and faithful performance by Lessee of all the
terms, covenants, and conditions of this Lease upon Lessee's part to be
performed, which sum shall be returned to Lessee after the time fixed as the
expiration of the term hereof, provided Lessee has fully and faithfully
carried out all of the terms, covenants, and conditions on Lessee's part to
be performed. Lessor shall have the right, but not the obligation, to apply
any part of the deposit to cure any default of Lessee, and if Lessor does so,
Lessee shall, upon demand, deposit with Lessor the amount so applied so that
Lessor shall have the full deposit on hand at all times during the term of
this Lease. Lessee's failure to pay to Lessor a sufficient amount to restore
the security deposit to the original sum deposited, within five (5) days
after receipt of demand therefor, shall constitute a default under this
Lease. No interest shall be paid by Lessor to Lessee on such security
deposit. Should Lessee comply with all of the terms, covenants, and
conditions of this Lease and promptly pay all of the rent due hereunder, as
it falls due, and all other sums payable by Lessee to Lessor hereunder, the
deposit shall be returned in full to tenant at the end of the term of this
Lease or at the earliest termination of this Lease.
In the event of a sale of the Premises or the Property, Lessor
shall have the right to transfer the security deposit to the vendee, and
Lessor shall be released from all further liability for the return of such
security deposit. Lessee agrees to look solely to the new Lessor for the
return of the security deposit. The provisions of this Paragraph shall apply
to every transfer or assignment made of the security deposit to a new Lessor.
The security deposit under this Lease shall not be mortgaged, assigned, or
encumbered by the Lessee without the written consent of Lessor and may be
commingled with other funds of Lessor.
25. SURRENDER. Upon the termination of this Lease, whether by forfeiture,
lapse of time, or otherwise, or upon the termination of Lessee's right to
possession of the Premises, Lessee will,
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at once, surrender and deliver up the Premises, together with all
improvements thereon, to Lessor in good condition and repair, ordinary wear
and tear accepted. Said improvements shall include all plumbing, lighting,
electrical, heating, cooling and ventilating fixtures and equipment, and
other articles of personal property used in the operation of the Premises (as
distinguished from operations, incident to the business of Lessee, articles
of personal property incident to Lessee's business are hereinafter referred
to as "Trade Fixtures"). All additional hardware, non-Trade Fixtures, and all
improvements, temporary or permanent, in or upon the premises placed there by
Lessee, shall become Lessor's property and shall remain upon the Premises
upon such termination of this Lease by lapse of time or otherwise, without
compensation or allowance or credit to Lessee, unless Lessor requests their
removal in writing at or before the time of such termination of this Lease.
If Lessor so requests removal of said additions, hardware, non-Trade
Fixtures, and improvements, and Lessee does not make such removal at said
termination of this Lease, or within ten (10) days after such request,
whichever is later, Lessor may remove and deliver the same to any other place
of business of Lessee or warehouse the same, and Lessee shall pay the cost of
such removal, delivery, and warehousing to Lessor on demand. Lessee may
remove Trade Fixtures upon the termination of this Lease provided, however,
that Lessee shall repair any injury or damage to the Premises which may
result from such removals.
26. RELOCATION. In the event Lessor determines, at its sole discretion, to
utilize the Premises for other purposes during the term of this Lease, Lessee
hereby agrees to promptly relocate to other space in the Building or to
another building in the Breckenridge Park controlled by Lessor or its
affiliate so designated by Lessor, provided such other space is of comparable
size as the Premises and is approved by Lessee in its sole reasonable
judgement, which approval must be granted or withheld in writing within ten
(10) days of receipt of notice to Lessee, failing which Lessee's approval of
this relocation shall be deemed granted. Lessor shall pay all out-of-pocket
expenses of any such relocation, including the expenses of reprinting
stationery, moving and reconstruction of all Lessee furnished and Lessor
furnished improvements. In the event of such relocation, this Lease shall
continue in full force and effect without any change in the terms or other
conditions, but with the new location substituted for the old location as set
forth in Paragraph 1 of this Lease.
27. SIGNS. Lessee, at Lessee's cost and expense, shall have the right to
install and maintain a sign on the Premises, subject to the previous written
approval of Lessor as to dimensions, materials, location and design, and
subject to such standards as Lessor shall establish for all signs on the
Property. Lessor shall provide, at the Lessee's expense, the metal base, upon
which the aforementioned sign shall be affixed.
28. LESSOR'S LIMITED LIABILITY. The liability of Lessor to Lessee for any
default by Lessor under the terms of this Lease shall be expressly limited to
the interest of Lessor in the Premises and the Property, and Lessee agrees to
look solely to Lessor's interest in the Premises and Property for the
recovery of any judgment or deficiency. Lessee hereby acknowledges and agrees
that Lessor shall have no personal liability for the default of its
obligations under this Lease.
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29. LIENS AND ENCUMBRANCES. Lessee shall have no authority, express or
implied, to create or place any lien or encumbrance of any kind or nature
whatsoever upon, or in any manner to bind, the interest of Lessor in the
Premises or to charge the rentals payable hereunder for any claim in favor of
any person dealing with Lessee, including those who may furnish materials or
perform labor for any construction or repairs, and each such claim shall
affect and each such lien shall attach to, if at all, only the leasehold
interest granted to Lessee by this instrument.
Lessee covenants and agrees that it will pay, or cause to be paid,
all sums legally due and payable by it on account of any labor performed or
materials furnished in connection with any work performed on the Premises on
which any lien is, or can be validly and legally asserted against its
leasehold interest in the Premises, or the improvements thereon, and that it
will save and hold Lessor harmless from any and all loss, cost, or expense
based on or arising out of asserted claims or liens against the leasehold
estate or against the right, title, and interest of the Lessor in the
Premises under the terms of this Lease.
30. INTEREST. Monies owed by one party to the other shall, after due date,
bear interest at the maximum legal rate.
31. NOTICES. Each provision of this instrument or of any applicable
governmental laws, ordinances, regulations, and other requirements, with
reference to the sending, mailing, or delivery of any notice, or the making
of any payment by Lessor to Lessee, or with reference to the sending, mailing
or delivery of any notice, or the making of any payment by Lessee to Lessor,
shall be deemed to be complied with, when, and if the following steps are
taken:
(a) All rent and other payments required to be made by Lessee to
Lessor hereunder, shall be payable to Lessor at the address
hereinbelow set forth, or at such other address as Lessor may
specify from time to time, by written notice delivered in
accordance herewith. Lessee's obligation to pay rent and any other
amounts to Lessor under the terms of this Lease shall not be
deemed satisfied until such rent and other amounts have been
actually received by Lessor;
(b) All payments required to be made by Lessor to Lessee hereunder
shall be payable to Lessee at the address hereinbelow set forth,
or at such other address within the continental United States as
Lessee may specify from time to time, by written notice delivered
in accordance herewith;
(c) Any notice or document required or permitted to be delivered
hereunder, shall be deemed to be delivered, whether actually
received or not, when deposited in the United States Mail, postage
prepaid, Certified or Registered Mail, or deposited with a
reputable express courier service addressed to the parties hereto
at the respective addresses set out below, or at such other
address as they have
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theretofore specified by written notice, delivered in accordance
herewith:
LESSOR
Connecticut General Life Insurance Company
c/o Cigna Investments, Inc.
900 Cottage Grove Road
Bloomfield, Connecticut 06002
With a copy to:
Crocker Realty Trust
433 Plaza Real, Suite 335
Boca Raton, Florida 33432
LESSEE
Attn: Lon Bohannon
Neogen Corporation
620 Lesher Place
Lansing, MI 48912
If and when included within the term "Lessor", as used
in this instrument, there is more than one person, firm, or
corporation, all shall jointly arrange among themselves for their
joint execution of such a notice specifying some individual at
some specific address for the receipt of notices and payments to
Lessor; if and when included within the term "Lessee", as used in
this instrument, there is more than one person, firm, or
corporation, all shall jointly arrange among themselves for their
joint execution of such a notice specifying some individual at
some specific address within the continental United States for the
receipt of notices and payments to Lessee. All parties included
within the terms "Lessor" and "Lessee", respectively, shall be
bound by notices given in accordance with the provisions of this
Paragraph to the same effect as if each had receive such notice.
32. RIGHTS RESERVED TO LESSOR. Without limiting any other rights reserved or
available to Lessor under this Lease, at law or in equity, Lessor, on behalf
of itself and its agents, reserves the following rights to be exercised at
Lessor's election:
(a) To change the street address of the Premises;
(b) To show the Premises to prospective purchasers, mortgagees, or
other persons having a legitimate interest in viewing the same,
and, at any time within one (1) year prior to the expiration of
Lease term, to persons wishing to rent the
15
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Premises;
(c) To place and maintain "For Rent" signs on the Property and on
the exterior of the Building of which the Premises are a part;
(d) During the last ninety (90) days of the Lease term, if during
or prior to that time, Lessee vacates the Premises to decorate,
remodel, repair, alter, or otherwise prepare the Premises for new
occupancy, and;
(e) Lessor may enter upon the Premises for any and all of said
purposes and may exercise any and all of the foregoing rights
hereby reserved without being deemed guilty of any eviction or
disturbance of Lessee's use or possession of the Premises, and
without being liable in any manner to Lessee.
33. CONSTRUCTION OF LEASE. The section headings used herein are for
convenience and reference only. This Lease shall be interpreted and governed
by the Laws of the State of Florida.
34. BINDING EFFECT. Each and all of the covenants, provisions, and agreements
herein contained shall be binding upon and inure to the benefit of the
parties hereto, respectively, and their heirs, personal representatives,
successors and assigns, except that the right of Lessee to assign or sublease
Lessee's interest under this Lease is, and shall be, subject to the written
consent of Lessor as provided above, which provision is not intended to be
waived, qualified, or altered in any manner whatsoever by this clause or any
other clause in this Lease referring to "assigns".
35. MISCELLANEOUS.
(a) Words of any gender used in this Lease shall be held and
construed to include any other gender, and words in the singular
number shall be held to include the plural, unless the context
otherwise requires.
(b) This Lease may not be altered, changed, or amended except by
an instrument in writing signed by both parties hereto.
(c) If any clause or provision of this Lease is illegal, invalid,
or unenforceable under the present or future laws effective during
the term of this Lease, then, and in that event, it is the
intention of the parties hereto that the remainder of this Lease
shall not be affected thereby, and it is also the intention of the
parties to this Lease that in lieu of each clause or provision of
this Lease that is illegal, invalid or unenforceable, there be
added as a part of this Lease contract, a clause or provision as
similar in terms to such illegal, invalid, or unenforceable clause
or provision as may be possible and be legal, valid, and
enforceable.
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36. ATTORNEY'S FEES. In the event that either party defaults in the
performance of any of the terms, covenants, agreements, or conditions
contained in this Lease, and the aggrieved party places the enforcement of
this Lease, or any part thereof, or the collection of any rent or other sum
due, or to become due hereunder, or recovery of the possession of the
Premises, in the hands of an attorney or files suit upon the same, the
defaulting party agrees to pay the prevailing party's reasonable attorney's
fees and all costs and expenses, and payment of the same shall be secured in
like manner as is herein provided, as to security for rent.
37. LEASING COMMISSION. Lessor and Lessee hereby acknowledge that Lessor is
being represented by Crocker & Associates, L.P., and Lessee is not being
represented by a broker in connection with the negotiation of the terms and
conditions of this Lease Agreement. Lessor acknowledges that it shall be
responsible for paying to Crocker & Associates, L.P. a leasing commission
pursuant to a separate Commission Agreement between such parties and which
commission shall be the sole commission due to Crocker & Associates, L.P.
Lessor and Lessee hereby agree to indemnify each other from and against any
claims for commissions by parties or brokers other than Crocker & Associates,
L.P. and/or such parties as may be claiming a commission or other
compensation by, through or under the indemnifying party.
38. NO MERGER. The voluntary or other surrender of this Lease by Lessee for
the cancellation of this Lease by mutual agreement of Lessee and Lessor or
the termination of this Lease on account of Lessee's default, will not
constitute a merger, and will, at Lessor's option (a) terminate all or any
subleases and subtenancies, or (b) operate as an assignment to Lessor of all
or any subleases or subtenancies. Lessor's option under this Paragraph 38
will be exercised by written notice to Lessee and all known sublessee's or
subtenants in the Premises or any part of the Premises.
39. HAZARDOUS MATERIALS. Lessee hereby agrees that it will not cause or
permit the storage, use, generation or disposition of any Hazardous Materials
(as defined below) in, on, or about the Premises or the Property, by Lessee,
its agents, employees or contractors. Lessee will not permit the Premises to
be used or operated in a manner that may cause the Premises or the Property
to be contaminated by any Hazardous Materials in violation of any Hazardous
Materials Laws. Lessee will immediately advise Lessor in writing of (i) any
and all enforcement, cleanup, remedial, removal, or any other governmental or
regulatory actions instituted, completed or threatened pursuant to any
Hazardous Materials Laws relating to any Hazardous Materials affecting the
Premises, and (ii) all claims made or threatened by any third party Lessee,
Lessor or the Premises, relating to damage, contribution, cost recovery,
compensation, loss or injury resulting from any Hazardous Materials on or
about the Premises. Without Lessor's prior written consent, Lessee will not
take any remedial action or enter into any agreements for settlements in
response to the presence of any Hazardous Materials in, on or about the
Premises.
Lessee will be solely responsible for and will defend, indemnify
and hold Lessor, its agent and employees harmless from and against any and
all claims, costs and liabilities, including attorneys fees and costs,
arising out of or in connection with Lessee's breach of its obligations in
17
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this Paragraph 39. Lessee will be solely responsible for and will defend,
indemnify, and hold Lessor, its agents, and employees, harmless from and
against any and all claims, costs, and liabilities, including attorneys fees
and costs, arising out of or in connection with the removal, cleanup, and
restoration work and materials necessary to return the Premises and any other
property of whatever nature located on the Property to their condition
existing prior to the appearance of Lessee's Hazardous Materials on the
Premises. Lessee's obligations under this Paragraph 39 will survive the
expiration or other termination of this Lease.
For the purpose of this Section of the Lease, "Hazardous
Materials" means any explosives, radioactive materials, hazardous wastes, or
hazardous substances, including without limitation substances defined as
"Hazardous Substances" in the Comprehensive Environmental Response
Compensation and Liability Act of 1980, as amended, 42 U.S.C. ss. 9601-9657;
the Hazardous Materials Transportation Act of 1975, 49 U.S.C. ss. 1801-1812;
the Resource Conservation and Recovery Act of 1976, 42 U.S.C. ss. 6901-6987;
or any other federal, state, or local statute, law, ordinance, code, rule,
regulation, order, or decree, regulating, relating to or imposing liability
or standards of conduct concerning hazardous materials, wastes or substances
now or at any time hereinafter in effect (collectively, "Hazardous Materials
Laws").
40. RADON DISCLOSURE. Radon is a naturally occurring radioactive gas that,
when it has accumulated in a structure in sufficient quantities, may present
health risks to persons who are exposed to it. Levels of radon that exceed
federal and state guidelines have been found in structures in the State of
Florida. Additional information regarding radon and radon testing may be
acquired from the county Public Health Unit. Lessor makes no representations
to Lessee concerning the presence or absence of radon gas in the Premises or
the Building at any time or in any quantity. By executing this Lease, Lessee
expressly releases Lessor from any loss, claim, liability or damage now or
hereafter arising from or relating to the presence at any time of such
substances in the Premises or the Building.
41. TENANT IMPROVEMENTS. Lessor hereby accepts the Premises in its "as is"
condition, it being understood that Lessor shall not be required to provide
any additional improvements or alterations to the Premises.
42. PARKING. During the term of this Lease, Lessee shall have the
nonexclusive use in common with Lessor, other tenants of the Building, their
guests and invitees, of the unreserved common automobile parking areas,
driveways, and footways, subject to rules and regulations for the use thereof
as prescribed from time to time by Lessor. Lessor shall have the right to
reserve parking spaces as it elects and condition use thereof on such terms
as it elects.
43. THIS LEASE is contingent upon Lessee accepting and executing this Lease
Agreement by no later than August 20, 1998, or this Lease shall be null and
void.
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LESSOR: WITNESS:
Connecticut General Life Insurance
Company
On Behalf of its Separate Account R
BY: _______________________________ ________________________________
________________________________
ITS: ______________________________ (Print name as signed above)
________________________________
DATE:______________________________
________________________________
(Print name as signed above)
LESSEE: WITNESS:
Neogen Corporation
a Michigan corporation
BY: _______________________________ ________________________________
________________________________
ITS: ______________________________ (Print name as signed above)
________________________________
DATE:______________________________
________________________________
(Print name as signed above)
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<PAGE>
LEASE AGREEMENT
BY AND BETWEEN
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
ON BEHALF OF ITS SEPARATE ACCOUNT R ("LESSOR")
AND
NEOGEN CORPORATION ("LESSEE")
5910 BRECKENRIDGE PARKWAY, SUITE G
TAMPA, FLORIDA 33610
TABLE OF CONTENTS
SECTION CAPTION PAGE
1. PREMISES.................................................. 1
2. TERM...................................................... 1
3. RENT...................................................... 1
4. ASSIGNMENT OR SUBLEASE.................................... 4
5. USE....................................................... 5
6. CARE OF PREMISES.......................................... 6
7. MAINTENANCE............................................... 6
8. ALTERATIONS AND IMPROVEMENTS.............................. 6
9. UTILITIES................................................. 7
10. ASSUMPTION OF RISK-INDEMNITY LIABILITY INSURANCE.......... 7
11. CASUALTY INSURANCE........................................ 7
12. LESSOR'S RIGHT OF ENTRY................................... 8
13. RIGHTS OF MORTGAGEE....................................... 8
14. ESTOPPEL CERTIFICATES..................................... 8
15. QUIET ENJOYMENT........................................... 9
16. COMPLIANCE WITH LAW....................................... 9
17. HOLDING OVER.............................................. 9
18. CONDEMNATION.............................................. 9
19. DAMAGES OR DESTRUCTION....................................10
20. EVENTS OF DEFAULT.........................................10
<PAGE>
21. REMEDIES..................................................11
22. WAIVER OF DEFAULT OR REMEDY...............................12
23. Intentionally Omitted.....................................12
24. SECURITY DEPOSIT..........................................12
25. SURRENDER.................................................13
26. RELOCATION................................................13
27. SIGNS.....................................................13
28. LESSOR'S LIMITED LIABILITY................................13
29. LIENS AND ENCUMBRANCES....................................14
30. INTEREST..................................................14
31. NOTICES...................................................14
32. RIGHTS RESERVED TO LESSOR.................................15
33. CONSTRUCTION OF LEASE.....................................16
34. BINDING EFFECT............................................16
35. MISCELLANEOUS.............................................16
36. ATTORNEY'S FEES...........................................17
37. LEASING COMMISSION........................................17
38. NO MERGER.................................................17
39. HAZARDOUS MATERIALS.......................................17
40. RADON DISCLOSURE..........................................18
41. TENANT IMPROVEMENTS.......................................18
42. PARKING...................................................18
43. THIS LEASE................................................18
SIGNATURE PAGE............................................19
EXHIBITS
"A" DEMISED PREMISES
LEASE AMENDMENT #1
This Lease Amendment made and entered into this 29th day of September, 1997,
by and between Whitesell Enterprises, hereinafter referred to as "Lessor" and
Ampcor Diagnostics, Inc., hereinafter referred to as "Lessee".
Whereas, Lessor leased to Lessee that certain premises known as Units 3 and
4, 603 Heron Drive, Bridgeport, New Jersey, pursuant to a Lease Agreement
dated January 26, 1995, the terms and conditions being more particularly
described therein, and
Whereas, Lessor and Lessee wish to amend the Lease Agreement the parties
hereby agree to the following:
1) The Termination Date shall be corrected to reflect a three year,
three month term changing the termination date from January 31,
1998, to April 30, 1998.
All other terms and conditions of the original Lease Agreement shall remain
in full force and effect.
LESSOR: WHITESELL ENTERPRISES
By _____________________________
Thomas R. Whitesell
LESSEE: AMPCOR DIAGNOSTICS, INC.
By _____________________________
<PAGE>
LEASE AMENDMENT #2
This Lease Amendment made and entered into this 22nd day of January, 1998, by
and between Whitesell Enterprises, hereinafter referred to as "Landlord",
and Ampcor Diagnostics, Inc., hereinafter referred to as "Tenant".
Whereas, Landlord leased to Tenant that certain premises known as Units 3 and
4, 603 Heron drive Bridgeport, New Jersey, pursuant to a Lease dated January
26, 1995, subsequently amended by Lease Amendment #1 dated September 29,
1997, the terms and conditions being more particularly described therein, and
Whereas, Landlord and Tenant wish to further amend the Lease, the parties
hereby agree to the following:
1) Tenant shall renew the existing lease for an additional eighteen
(18) months commencing on May 1, 1998, and terminating November 1,
1999.
2) Tenant's base rent for this renewal period shall be calculated at
the rate of $4.25 per square foot net, $38, 959.75 per year,
$3,246.65 per month.
3) Tenant shall have one (1), two (2) year option to renew the lease
with six (6) months prior written notification. Base rent for the
renewal option shall be calculated at the rate of $4.50 per square
foot net, $41,251.50 per year, $3,437.63 per month per month.
All other terms and conditions of the original Lease, as amended, shall
remain in full force and effect.
LESSOR: WHITESELL ENTERPRISES
By _____________________________
Thomas R. Whitesell
LESSEE: AMPCOR DIAGNOSTICS, INC.
By _____________________________
August 25, 1997
Mr. Carrell Eakle
Eakle, Current & Company
315 Romany Road
Lexington, KY 40502
Dear Carrell:
Neogen Corporation hereby accepts the changes listed below to the lease dated
May 19, 1993 by and between Carrell Eakle and Neogen Corporation. If you are
in agreement, please sign and return one copy of the letter for our files.
Section 2.03 Description of Leased Premises:
Premises shall include the 1st and 2nd floor, consisting of 11,500 square
feet and the 3rd floor, basement and garage area, consisting of 11,950 square
feet.
Section 2.04 (B) Term
The term of this lease shall expire on, August 31, 1999. Neogen shall have
the option to go to a month to month lease, with a 60 day "out clause" after
August 31, 1999.
Section 3.01 Amount of Rent
Effective September 1, 1997 and for the remainder of the Lease, Neogen shall
pay $7,500.00/month.
Sincerely,
Terri A. Juricic
Vice President & General Manager
ACCEPTED:
Mr. Carrell Eakle
_________________________
By
_________________________
Date
[GRAPHIC OMITTED] Credit Authorization Agreement
NBD Bank (the "Bank"), whose address is 611 Woodward Avenue, Detroit,
Michigan 48226-3947, has approved the credit facilities listed below
(collectively, the "Credit Facilities," and individually, as designated
below) to Ideal Instruments, Inc., a Michigan Corporation (the "Borrower"),
whose address is 9355 West Bryon Street, Schiller Park, Illinois 60176,
subject to the terms and conditions set forth in this agreement.
1 Credit Facilities.
1 Uncommitted Credit Authorizations. The Bank has approved the
uncommitted credit authorizations listed below (collectively,
the "Credit Authorizations," and individually, as designated
below) subject to the terms and conditions of this agreement
and the Bank's continuing satisfaction with the Borrower's
financial status. Disbursements under the Credit
Authorizations are solely at the Bank's discretion. Any
disbursement on one or more occasions shall not commit the
Bank to make any subsequent disbursement.
A. Facility A. The Bank has approved an uncommitted Credit
Authorization to the Borrower in the principal sum not
to exceed $_________ in the aggregate at any one time
outstanding ("Facility A"). Credit under Facility A
shall be in the form of disbursements evidenced by
credits to the Borrower's account and shall be repayable
as set forth in a Master Demand Note executed
concurrently (referred to in this agreement both
singularly and together with any other promissory notes
referenced in this Section 1 as the "Notes"). The
proceeds of Facility A shall be used for the following
purpose: ___________. Facility A shall expire on ________
unless earlier withdrawn.
[X] B. Facility B (Including Letters of Credit). The Bank has
approved an uncommitted Credit Authorization to the
Borrower in the principal sum not to exceed
$1,000,000.00 in the aggregate at any one time
outstanding ("Facility B"). Facility B shall include the
issuance of commercial letters of credit not exceeding
$150,000.00 in the aggregate at any one time
outstanding, expiring not later than March 31, 1999 (the
"Letters of Credit"). Each Letter of Credit shall be in
form acceptable to the Bank and shall bear a fee of ____%
per year of the face amount of each standby Letter of
Credit plus an issuance fee of $150,000.00 upon issuance
of each Letter of Credit. Credit under Facility B shall
be in the form of disbursements evidenced by credits to
the Borrower's account and shall be repayable as set
forth in a Master Demand Note executed concurrently
(referred to in this agreement both singularly and
together with any other promissory notes referenced in
this Section 1 as the "Notes") or by issuance of a
Letter of Credit upon completion of an application
acceptable to the Bank. The proceeds of Facility B shall
be used for the following purpose: working capital.
Facility B shall expire on September 30, 1998 unless
earlier withdrawn.
C. Facility C (Purchase Money Term Loans). The Bank has
approved an uncommitted credit authorization to the
Borrower in the principal sum not to exceed $_____ in the
aggregate at any one time outstanding ("Facility C").
Facility C shall be in the form of loans evidenced by
the Borrower's notes on the Bank's form (referred to in
this agreement both singularly and together with any
other promissory notes referenced in this Section 1 as
the "Notes"), the proceeds of which shall be used to
purchase the following equipment _______. Interest on each
loan shall accrue at a rate to be agreed upon by the
Bank and the Borrower at the time the loan is made. The
maturity of each note shall not exceed ____ months from
the note date. Notwithstanding the aggregate amount of
Facility C stated above, the original principal amount
of each loan shall not exceed the lesser of ____% of the
cost of the equipment purchased with loan proceeds or
$_____. Facility C shall expire ____ on unless earlier
withdrawn.
<PAGE>
1.2 Term Loans. The Bank agrees to extend credit to the Borrower
in the form of term loan(s) (whether one or more, the "Term
Loans") in the principal sum(s) of ______, respectively,
bearing interest and payable as set forth in the Term Note(s)
executed concurrently (referred to in this agreement both
singularly and together with any other promissory notes
referenced in this Section 1 as the "Notes"). The proceeds of
the Term Loans shall be used for the following purpose:
______.
1
<PAGE>
2.0 Conditions Precedent.
2.1 Conditions Precedent to Initial Extension of Credit. Before
the first extension of credit under this agreement, whether
by disbursement of a loan, issuance of a letter of credit, or
otherwise, the Borrower shall deliver to the Bank, in form
and substance satisfactory to the Bank:
A. Loan Documents. The Notes, and if applicable, the letter
of credit applications, the security agreement,
financing statements, mortgage, guaranties,
subordination agreements and any other loan documents
which the Bank may reasonably require to give effect to
the transactions described by this agreement;
B. Evidence of Due Organization and Good Standing. Evidence
satisfactory to the Bank of the due organization and
good standing of the Borrower and every other business
entity that is a party to this agreement or any other
loan document required by this agreement; and
C. Evidence of Authority to Enter into Loan Documents.
Evidence satisfactory to the Bank that (i) each party to
this agreement or any other loan document required by
this agreement is authorized to enter into the
transactions described by this agreement and the other
loan documents, and (ii) the person signing on behalf of
each party is authorized to do so.
2.2 Conditions Precedent to Each Extension of Credit. Before any
extension of credit under this agreement, whether by
disbursement of a loan, issuance of a letter of credit, or
otherwise, the following conditions shall have been
satisfied:
A. Representations. The Representations contained in this
agreement shall be true on and as of the date of the
extension of credit;
B. No Event of Acceleration. No event of acceleration shall
have occurred and be continuing or would result from the
extension of credit;
C. Continued Satisfaction. The Bank shall have remained
satisfied with the Borrower's managerial and financial
status;
D. Additional Approvals, Opinions, and Documents. The Bank
shall have received such other approvals, opinions and
documents as it may reasonably request.
3.0 Borrowing Base/Annual Pay Down.
1 Borrowing Base. Notwithstanding any other provision of this
agreement, the aggregate principal amount outstanding at any
one time under Facility B shall not exceed the lesser of the
Borrowing Base or $1,000,000.00. Borrowing Base means:
A. 80% of the Borrower's domestic trade accounts receivable
in which the Bank has a perfected, first priority
security interest, excluding accounts more than 90 days
past due from the date of invoice, accounts subject to
offset or defense, government, bonded, affiliate, and
accounts otherwise unacceptable to the Bank, plus 50% of
foreign trade accounts receivable backed by commercial
letters of credit acceptable to Bank, plus
B. Inventory of the Borrower in which the Bank has a
perfected first priority security interest, valued at
the lower of cost or market but not exceeding
$700,000.00 in the aggregate, as follows:
(1) 50% of raw material inventory; and (2) 50% of
work-in-process inventory; and (3) 50% of finished goods
inventory, plus
4.0 Fees and Expenses.
4.1 Fees. Upon execution of this agreement, or as set forth
below, the Borrower shall pay the Bank the following fees,
all of which the Borrower acknowledges have been earned by
the Bank: ___________.
2
<PAGE>
4.2 Out-of-Pocket Expenses. The Borrower shall reimburse the Bank
for its out-of-pocket expenses and reasonable attorney's fees
(including the fees of in-house counsel) allocated to the
Credit Facilities.
5.0 Security.
5.1 Payment of the borrowings under the Credit Facilities shall
be secured by a first security interest and/or real estate
mortgage, as the case may be, covering the following property
and all its additions, substitutions, increments, proceeds
and products, whether now owned or later acquired
("Collateral"):
[X] A. Accounts Receivable. All of the Borrower's accounts,
chattel paper, general intangibles, instruments, and
documents (as those terms are defined in the Michigan
Uniform Commercial Code), rights to refunds of taxes
paid at any time to any governmental entity, and any
letters of credit and drafts under them given in support
of the foregoing, wherever located. The Borrower shall
deliver to the Bank executed security agreements and
financing statements in form and substance satisfactory
to the Bank.
[X] B. Inventory. All of the Borrower's inventory, wherever
located. The Borrower shall deliver to the Bank executed
security agreements and financing statements in form and
substance satisfactory to the Bank.
[X] C. Equipment. All of the Borrower's equipment, wherever
located. The Borrower shall deliver to the Bank executed
security agreements and financing statements in form and
substance satisfactory to the Bank.
5.2 No forbearance or extension of time granted any subsequent
owner of the Collateral shall release the Borrower from
liability.
5.3 Additional Collateral/Setoff. To further secure payment of
the borrowings under the Credit Facilities and all of the
Borrower's other liabilities to the Bank, the Borrower grants
to the Bank a continuing security interest in: (i) all
securities and other property of the Borrower in the custody,
possession or control of the Bank (other than property held
by the Bank solely in a fiduciary capacity) and (ii) all
balances of deposit accounts of the Borrower with the Bank.
The Bank shall have the right at any time to apply its own
debt or liability to the Borrower, or to any other party
liable for payment of the borrowings under the Credit
Facilities, in whole or partial payment of such borrowings or
other present or future liabilities, without any requirement
of mutual maturity.
5.4 Cross Lien. Any of the Borrower's other property in which the
Bank has a security interest to secure payment of any other
debt, whether absolute, contingent, direct or indirect,
including the Borrower's guaranties of the debts of others,
shall also secure payment of and be part of the Collateral
for the Credit Facilities.
[X] 6.0 Guaranties. Payment of the Borrower's liabilities under the
Credit Facilities shall be guaranteed by Neogen Corporation, by
execution of the Bank's form of guaranty agreement. The liability
of the guarantors, if more than one, shall be joint and several.
[X] 7.0 Subordination. The Credit Facilities shall be supported by the
subordination of debt owing from the Borrower to Neogen
Corporation, including without limitation debt owing in the amount
of $1,000,000.00, in manner and by agreement satisfactory to the
Bank.
8.0 Affirmative Covenants. So long as any debt remains outstanding
under the Credit Facilities, the Borrower, and each of its
subsidiaries, if any, shall:
8.1 Insurance. Maintain insurance with financially sound and
reputable insurers covering its properties and business
against those casualties and contingencies and in the types
and amounts as shall be in accordance with sound business and
industry practices.
<PAGE>
8.2 Existence. Maintain its existence and business operations as
presently in effect in accordance with all applicable laws
and regulations, pay its debts and obligations when due under
normal terms, and pay on or before their due date, all taxes,
assessments, fees and other governmental monetary
obligations, except as they may be contested in good faith if
they have been properly reflected on its books and, at the
Bank's request, adequate funds or security has been pledged
to insure payment
3
<PAGE>
8.3 Financial Records. Maintain proper books and records of
account, in accordance with generally accepted accounting
principles where applicable, and consistent with financial
statements previously submitted to the Bank. The Bank retains
the right to inspect the Collateral and business records
related to it at such times and at such intervals as the Bank
may reasonably require.
8.4 Notice. Give prompt notice to the Bank of the occurrence of
(i) any Event of Acceleration, and (ii) any other
development, financial or otherwise, which would affect the
Borrower's business, properties or affairs in a materially
adverse manner.
8.5 Collateral Audits. Permit the Bank or its agents to perform
audits of the Collateral. The Borrower shall compensate the
Bank for such audits in accordance with the Bank's schedule
of fees as amended from time to time.
8.6 Management. Maintain _____ as ____.
8.7 Financial Reports. Furnish to the Bank whatever information,
books, and records the Bank may reasonably request, including
at a minimum: If the Borrower has subsidiaries, all financial
statements required will be provided on a consolidated and on
a separate basis.
[X] A. Within 20 days after each quarterly period, a balance
sheet as of the end of that period and statements of
income, cash flows, and retained earnings from the
beginning of that fiscal year to the end of that period,
certified as correct by one of its authorized agents.
[X] B. Within 120 days after, and as of the end of, each of
its fiscal years, a detailed financial statement
including a balance sheet and statements of income,
retained earnings, and cash flows.
[X] C. Within 20 days after and as of the end of each calendar
quarter, the following lists, each certified as correct
by one of its authorized agents: [X] (1) a list of
accounts receivable, aged from date of invoice; [ ] (2)
a list of accounts payable, aged from date of receipt;
[X] (3) a list of inventory, valued at the lower of cost
or market.
D. Within ___ days after and as of the end of each calendar
year, the signed personal financial statement of ____.
E Within five (5) days after filing, a signed copy of the
annual tax return, with exhibits, of _____.
F Within 120 days after, and as of the end of, each of its
fiscal years, a detailed audit of Neogen Corporation
certified by an independent certified public accountant
of recognized standing.
9.0 Negative Covenants.
9.1 Definitions. As used in this agreement, the following terms
shall have the following respective meanings:
A. "Subordinated Debt" means debt subordinated to the Bank
in manner and by agreement satisfactory to the Bank.
B. "Tangible Net Worth" means total assets less intangible
assets, total liabilities, and all sums owing from
stockholders, members, or partners, as the case may be,
and from officers, managers, and directors. Intangible
assets include goodwill, patents, copyrights, mailing
lists, catalogs, trademarks, bond discount and
underwriting expenses, organization expenses, and all
other intangibles.
9.2 Unless otherwise noted, the financial requirements set forth
in this section shall be computed in accordance with
generally accepted accounting principles applied on a basis
consistent with financial statements previously submitted by
the Borrower to the Bank.
9.3 Without the written consent of the Bank, so long as any debt
remains outstanding under the Credit Facilities, the Borrower
shall not: (where appropriate, covenants apply on a
consolidated basis)
4
A. Dividends. Acquire or retire any of its shares of
capital stock, or declare or pay dividends or make any
other distributions upon any of its shares of capital
stock or percentage ownership interests, except
dividends payable in its capital stock and dividends
payable to "Subchapter S" corporation shareholders and
distributions payable to LLC members in amounts
sufficient to pay the shareholders' or members' income
tax obligations related to the Borrower's taxable
income.
B. Sale of Shares. Issue, sell or otherwise dispose of any
shares of its capital stock or other securities, or
rights, warrants or options to purchase or acquire any
such shares or securities.
C. Debt. Incur, or permit to remain outstanding, debt for
borrowed money or installment obligations, except debt
reflected in the latest financial statement of the
Borrower furnished to the Bank prior to execution of
this agreement and not to be paid with proceeds of
borrowings under the Credit Facilities. For purposes of
this covenant, the sale of any accounts receivable shall
be deemed the incurring of debt for borrowed money.
D. Guaranties. Guarantee or otherwise become or remain
secondarily liable on the undertaking of another, except
for endorsement of drafts for deposit and collection in
the ordinary course of business.
E. Liens. Create or permit to exist any lien on any of its
property, real or personal, except: existing liens known
to the Bank; liens to the Bank; liens incurred in the
ordinary course of business securing current
nondelinquent liabilities for taxes, worker's
compensation, unemployment insurance, social security
and pension liabilities; and liens for taxes being
contested in good faith.
F. Advances and Investments. Purchase or acquire any
securities of, or make any loans or advances to, or
investments in, any person, firm or corporation, except
obligations of the United States Government, open market
commercial paper rated one of the top two ratings by a
rating agency of recognized standing, or certificates of
deposit in insured financial institutions.
G. Use of Proceeds. Use, or permit any proceeds of the
Credit Facilities to be used, directly or indirectly,
for the purpose of "purchasing or carrying any margin
stock" within the meaning of Federal Reserve Board
Regulation U. At the Bank's request, the Borrower shall
furnish to the Bank a completed Federal Reserve Board
Form U-1.
H. Working Capital. Permit the difference between its
current assets [less all sums owing from stockholders,
member or partners, as the case may be, and officers,
managers and directors] and current liabilities [plus
all sums (other than Subordinated Debt) owing to
stockholders, members or partners, as the case may be,
and officers, managers and directors] to be less than
$_____.
I. Tangible Net Worth [Plus Subordinated Debt]. Permit its
Tangible Net Worth [plus Subordinated Debt] to be less
than $875,000.00.
J. Current Ratio. Permit the ratio of its current assets to
its current liabilities to be less than ____ to 1.00.
K. Leverage Ratio. Permit the ratio of its total liabilities
to its Tangible Net Worth [plus Subordinated Debt] to
exceed _____ to 1.00.
L. Fixed Assets. Expend for, contract for, lease, rent, or
otherwise acquire fixed assets, if the expense to the
Borrower and all subsidiaries, if any, shall exceed $_____
in the aggregate in any one fiscal year.
M. Leases. Contract for or assume in any manner lease
obligations if the aggregate of all payments shall
exceed $ in any one fiscal year.
N. Compensation. Pay, or award compensation of any kind, in
any one fiscal year, to exceeding ___________
<PAGE>
10.0 Representations by Borrower. Each Borrower represents that: (a)
the execution and delivery of this agreement and the Notes and the
performance of the obligations they impose do not violate any law,
conflict with any agreement by which the Borrower is bound, or
require the consent or approval of any governmental authority or
other third party; (b) this agreement and the Notes are valid and
binding agreements, enforceable in accordance with their terms;
and (c) all balance sheets, profit and loss statements, and other
financial statements furnished to the Bank are accurate and fairly
5
<PAGE>
reflect the financial condition of the organizations and persons
to which they apply on their effective dates, including contingent
liabilities of every type, which financial condition has not
changed materially and adversely since those dates. Each Borrower,
if other than a natural person, further represents that: (a) it is
duly organized, existing and in good standing under the laws of
the jurisdiction under which it was organized; and (b) the
execution and delivery of this agreement and the Notes and the
performance of the obligations they impose (i) are within its
powers; (ii) have been duly authorized by all necessary action of
its governing body; and (iii) do not contravene the terms of its
articles of incorporation or organization, its bylaws, or any
partnership, operating or other agreement governing its affairs.
11.0 Acceleration.
11.1 Events of Acceleration. If any of the following events
occurs, the Credit Facilities shall terminate and all
borrowings under them shall be due immediately, without
notice, at the Bank's option, whether or not the Bank has
made demand.
A. The Borrower or any guarantor of any of the Credit
Facilities or the Notes ("Guarantor") fails to pay
when due any amount payable under the Credit
Facilities or under any agreement or instrument
evidencing debt to any creditor;
B. The Borrower or any Guarantor (a) fails to observe or
perform any other term of this agreement or the
Notes; (b) makes any materially incorrect or
misleading representation, warranty, or certificate
to the Bank; (c) makes any materially incorrect or
misleading representation in any financial statement
or other information delivered to the Bank; or (d)
defaults under the terms of any agreement or
instrument relating to any debt for borrowed money
(other than borrowings under the Credit Facilities)
such that the creditor declares the debt due before
its maturity;
C. There is a default under the terms of any loan
agreement, mortgage, security agreement or any other
document executed as part of the Credit Facilities,
or any guaranty of the borrowings under the Credit
Facilities becomes unenforceable in whole or in part,
or any Guarantor fails to promptly perform under its
guaranty;
D. A "reportable event" (as defined in the Employee
Retirement Income Security Act of 1974 as amended)
occurs that would permit the Pension Benefit Guaranty
Corporation to terminate any employee benefit plan of
the Borrower or any affiliate of the Borrower;
E. The Borrower or any Guarantor becomes insolvent or
unable to pay its debts as they become due;
F. The Borrower or any Guarantor (a) makes an assignment
for the benefit of creditors; (b) consents to the
appointment of a custodian, receiver or trustee for
it or for a substantial part of its assets; or (c)
commences any proceeding under any bankruptcy,
reorganization, liquidation or similar laws of any
jurisdiction;
G. A custodian, receiver or trustee is appointed for the
Borrower or any Guarantor or for a substantial part
of its assets without its consent and is not removed
within 60 days after such appointment;
H. Proceedings are commenced against the Borrower or any
Guarantor under any bankruptcy, reorganization,
liquidation, or similar laws of any jurisdiction, and
such proceedings remain undismissed for 60 days after
commencement; or the Borrower or Guarantor consents
to the commencement of such proceedings;
I. Any judgment is entered against the Borrower or any
Guarantor, or any attachment, levy or garnishment
is issued against any property of the Borrower or any
Guarantor;
J. The Borrower or any Guarantor dies;
K. The Borrower or any Guarantor, without the Bank's
written consent, (a) is dissolved, (b) merges or
consolidates with any third party, (c) leases, sells
or otherwise conveys a material part of its assets or
business outside the ordinary course of business, (d)
leases, purchases, or otherwise acquires a material
part of the assets of any other corporation or
business entity, except in the ordinary course of
business, or (e) agrees to do any of the foregoing,
(notwithstanding the foregoing, any subsidiary may
merge or consolidate with any other subsidiary, or
with the Borrower, so long as the Borrower is the
survivor);
L. The loan-to-value ratio of any pledged securities at
any time exceeds ___%, and such excess continues for
five (5) days after notice from the Bank to the
Borrower;
M. There is a substantial change in the existing or
prospective financial condition of the Borrower or
any Guarantor which the Bank in good faith determines
to be materially adverse; or
N The Bank in good faith shall deem itself insecure.
6
<PAGE>
11.2 Remedies. If the borrowings under the Credit Facilities are
not paid at maturity, whether by demand, acceleration or
otherwise, the Bank shall have all of the rights and
remedies provided by any law or agreement. Any requirement
of reasonable notice shall be met if the Bank sends the
notice to the Borrower at least seven (7) days prior to the
date of sale, disposition or other event giving rise to the
required notice. The Bank is authorized to cause all or any
part of the Collateral to be transferred to or registered
in its name or in the name of any other person, firm or
corporation, with or without designation of the capacity of
such nominee. The Borrower shall be liable for any
deficiency remaining after disposition of any Collateral.
The Borrower is liable to the Bank for all reasonable costs
and expenses of every kind incurred in the making or
collection of the Credit Facilities, including, without
limitation, reasonable attorney's fees and court costs
(whether attributable to the Bank's in-house or outside
counsel). These costs and expenses shall include, without
limitation, any costs or expenses incurred by the Bank in
any bankruptcy, reorganization, insolvency or other similar
proceeding.
12.0 Miscellaneous.
12.1 Notice from one party to another relating to this agreement
shall be deemed effective if made in writing (including
telecommunications) and delivered to the recipient's
address, telex number or fax number set forth under its
name below by any of the following means: (a) hand
delivery, (b) registered or certified mail, postage
prepaid, with return receipt requested, (c) first class or
express mail, postage prepaid, (d) Federal Express, or like
overnight courier service or (e) fax, telex or other wire
transmission with request for assurance of receipt in a
manner typical with respect to communication of that type.
Notice made in accordance with this section shall be deemed
delivered upon receipt if delivered by hand or wire
transmission, 3 business days after mailing if mailed by
first class, registered or certified mail, or one business
day after mailing or deposit with an overnight courier
service if delivered by express mail or overnight courier.
12.2 No delay on the part of the Bank in the exercise of any
right or remedy shall operate as a waiver. No single or
partial exercise by the Bank of any right or remedy shall
preclude any other future exercise of it or the exercise of
any other right or remedy. No waiver or indulgence by the
Bank of any default shall be effective unless in writing
and signed by the Bank, nor shall a waiver on one occasion
be construed as a bar to or waiver of that right on any
future occasion.
12.3 This agreement, the Notes, and any related loan documents
embody the entire agreement and understanding between the
Borrower and the Bank and supersede all prior agreements
and understandings relating to their subject matter. If any
one or more of the obligations of the Borrower under this
agreement or the Notes shall be invalid, illegal or
unenforceable in any jurisdiction, the validity, legality
and enforceability of the remaining obligations of the
Borrower shall not in any way be affected or impaired, and
such validity, illegality or unenforceability in one
jurisdiction shall not affect the validity, legality or
enforceability of the obligations of the Borrower under
this agreement or the Notes in any other jurisdiction.
12.4 The Borrower, if more than one, shall be jointly and
severally liable.
12.5 This agreement is delivered in the State of Michigan and
governed by Michigan law. This agreement is binding on the
Borrower and its successors, and shall inure to the benefit
of the Bank, its successors and assigns.
12.6 Section headings are for convenience of reference only and
shall not affect the interpretation of this agreement.
13.0 Waiver of Jury Trial. The Bank and the Borrower knowingly and
voluntarily waive any right either of them have to a trial by jury
in any proceeding (whether sounding in contract or tort) which is
in any way connected with this or any related agreement, or the
relationship established under them. This provision may only be
modified in a written instrument executed by the Bank and the
Borrower.
<PAGE>
Executed by the parties on: January 13, 1998.
Borrower:
NBD Bank Ideal Instruments, Inc.
By:_________________________________ By:______________________________
Thomas E. Grabitz, Vice President James L. Herbert, President/CEO
By:______________________________
Lon M. Bohannon, Treasurer
Address for Notices: Address for Notices:
620 South Capitol Avenue 620 Lesher Place
Lansing, MI 48933 Lansing, MI 48912-1509
Fax/Telex No. (517) 487-1029 Fax/Telex No. (517) 372-2006
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March ___, 1998
Mr. James L. Herbert, President
Neogen Corporation
620 Lesher Place
Lansing, Michigan 48912
Dear Jim:
We are pleased to confirm that Comerica Bank (the "Bank") is willing
to provide the Loans, as defined herein, to Neogen Corporation (the
"Borrower"), upon and subject to the terms and conditions of this Letter
Agreement ("Letter Agreement"), its execution and the execution of the Notes,
as defined herein, in the forms attached hereto. As to the Loans, the Bank
and the Borrower agree as follows:
1. THE LOANS
1.1. The Working Capital Loans. Subject to the terms and
conditions of this Letter Agreement, the Bank agrees to make Loans to the
Borrower on a demand basis, for the purposes of providing Borrower with
working Capital ("Working Capital Loans"), in such amount as the Borrower
shall request pursuant to Section 2.2 of this Letter Agreement at any time
from the date of this Letter Agreement until September 1, 1999 (the "Working
Capital Loan Termination Date"), up to an aggregate principal amount
outstanding at any time not to exceed the lesser of One Million Five Hundred
Thousand Dollars ($1,500,000) (the "Working Capital Loan Commitment Amount");
provided that each date in which a disbursement is made (a "Disbursement
Date") under this Letter Agreement must be a Business Day (as defined in the
Working Capital Note).
1.2. The Corporate Acquisitions Revolving Loans. Subject to
the terms and conditions of this Letter Agreement, the Bank agrees to make
Loans to the Borrower on a revolving basis, for the purposes of providing
Borrower with funds for corporate acquisitions ("Corporate Acquisition
Revolving Loans"), in such amount as the Borrower shall request pursuant to
Section 2.2 of this Letter Agreement at any time from the date of this Letter
Agreement until December 1, 1999 (the "Corporate Acquisition Revolving Loan
Termination Date"), up to an aggregate principal amount outstanding at any
time not to exceed the lesser of Seven Million Five Hundred Thousand Dollars
($7,500,000) (the "Corporate Acquisition Loan Commitment Amount"); provided
that each date in which a disbursement is made (a "Disbursement Date") under
this Letter Agreement must be a Business Day (as defined in the Corporate
Acquisition Revolving Note).
1.3. The Loans; Termination Dates; Commitment Amount. The
Working Capital Loans and the Corporate Acquisition Revolving Loans are
collectively referred to herein as the "Loans". The Working Capital Loan
Termination Date and the Corporate Acquisition Revolving Loan Termination
Date are collectively referred to herein as the "Termination Date". The
Working Capital Commitment Amount and the Corporate Acquisition Loan
Commitment Amount are collectively referred to herein as the "Commitment
Amount".
1.4. Other Borrower Obligations. All loans, advances,
indebtedness, obligations and liabilities of the Borrower to the Bank under
this Letter Agreement, together with all other indebtedness, obligations,
guarantees and liabilities whatsoever of the Borrower to the Bank, whether
matured or unmatured, liquidated or unliquidated, direct or indirect,
absolute or contingent, joint or several, due or to become due, now existing
or hereafter arising shall be included in the term "Loans."
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1.5. The Notes. The Working Capital Loans shall be evidenced
by a promissory note in the form of Exhibit A attached hereto and made a part
hereof (the "Working Capital Note"). The Corporate Acquisition Revolving
Loans shall be evidenced by a promissory note in the form of Exhibit B
attached hereto and made a part hereof (the "Corporate Acquisition Revolving
Note"). The Working Capital Note and the Corporate Acquisition Revolving Note
are referred to as the "Notes".
1.6. Interest. The principal balance from time to time
outstanding under the Notes shall bear interest as set forth in the Notes.
1.7. Payments. The principal and accrued interest of the Notes
shall be payable as set forth in the Notes.
2. CONDITIONS AND BORROWING PROCEDURES
2.1. Conditions. As a condition precedent to the Loans, the
Borrower agrees to furnish to the Bank, prior to the Borrowing hereunder, in
form satisfactory to the Bank the executed Letter Agreement and the Notes.
2.2. Borrowing Procedures.
2.2.1. Notice. The Borrower shall give the Bank notice
of the Borrower's desire for a Loan as set forth in the Notes.
2.2.2. Bank Obligations. The Bank agrees to make the
Loans on the Disbursement Date established by notice to the Bank from
the Borrower conforming to the requirements of Section 2.2.1 by
crediting the deposit account of the Borrower with the Bank in the
amount of such Loan; provided, however, that the Bank shall not be
obligated if:
2.2.2.1. Any of the conditions precedent set
forth in Section 2.1 of this Letter Agreement shall not have
been satisfied or waived by the Bank, or
2.2.2.2. Such proposed Loan would cause the
aggregate unpaid principal amount of the Loans outstanding
under an applicable Note to exceed the Commitment Amount under
that Note, on a Disbursement Date.
3. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants and such representations and
warranties shall be deemed to be continuing representations and warranties
during the entire life of this Letter Agreement:
3.1. Corporate Existence and Power. The Borrower is a
corporation duly organized and existing in good standing under the laws of
the State of Michigan; the Borrower is in good standing in each jurisdiction
in which it is required to be qualified to do business; execution, delivery
and performance of this Letter Agreement and other documents and instruments
required under this Letter Agreement, and the issuance of the Notes by the
Borrower are within its corporate powers, have been duly authorized, are not
in contravention of law or the terms of the Borrower's Articles of
Incorporation or Bylaws, and do not require the consent or approval of any
governmental body, agency or authority; and this Letter Agreement and other
documents and instruments required under this Letter Agreement and the Notes,
when issued and delivered, will be valid and binding in accordance with their
terms.
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3.2. Authorization and Approvals. The execution, delivery and
performance of this Letter Agreement and any other documents and instruments
required under this Letter Agreement, and the issuance of the Notes by the
Borrower are not in contravention of the unwaived terms of any indenture,
agreement or undertaking to which the Borrower is a party or by which it is
bound.
3.3. Actions, Suits or Proceedings. No litigation or other
proceeding before any court or administrative agency is pending, or to the
knowledge of the officers of the Borrower is threatened against the Borrower,
the outcome of which could materially impair the Borrower's financial
condition or the ability of the Borrower to carry on its business.
3.4. Financial Statements. The financial statements of the
Borrower previously furnished Bank are, to the best of the Borrower's
knowledge, complete and correct and fairly present the financial condition of
the Borrower; since said date there has been no material adverse change in
the financial condition of the Borrower; the Borrower does not have any
material contingent obligations (including any liability for taxes) not
disclosed by or reserved against in said financial statements and at the
present time there are no material unrealized or anticipated losses from any
present commitment of the Borrower.
3.5. Taxes. All tax returns and tax reports of the Borrower
required by law to be filed have been duly filed or extensions obtained, and
all taxes, assessments and other governmental charges or levies (other than
those presently payable without penalty and those currently being contested
in good faith for which adequate reserves have been established) upon the
Borrower (or any of its properties) which are due and payable have been paid.
The charges, accruals and reserves on the books of the Borrower in respect of
the Federal income tax for all periods are adequate in the opinion of the
Borrower.
3.6. Compliance with Laws. The Borrower is, in the conduct of
its business, in compliance in all material respects with all federal, state
or local laws, statutes, ordinances and regulations applicable to it, the
enforcement of which, if the Borrower were not in compliance, would
materially adversely affect its business or the value of its property or
assets. The Borrower has all approvals, authorizations, consents, licenses,
orders and other permits of all governmental agencies and authorities,
whether federal, state or local, required to permit the operation of its
business as presently conducted, except such approvals, authorizations,
consents, licenses, orders and other permits with respect to which the
failure to have can be cured without having a material adverse effect on the
operation of such business.
3.7. No Representation. No representation or warranty by the
Borrower in this Letter Agreement, nor any statement or certificate
(including financial statements) furnished or to be furnished to Bank
pursuant hereto contains or will contain any materially untrue statement of
any material fact or omits or will omit to state a material fact necessary to
make such representation, warranty, statement or certificate not misleading;
provided, however, as to any financial statements of the Sellers, this
representation and warranty is made based solely on the best knowledge of the
Borrower.
3.8. Environmental Laws. The Borrower is not a party to any
litigation or administrative proceeding, nor so far as is known by the
Borrower is any litigation or administrative proceeding threatened against
the Borrower, which in either case (a) asserts or alleges that the Borrower
violated any applicable environmental laws ("Environmental Laws"), (b)
asserts or alleges that the Borrower is required to clean up, remove, or take
remedial or other response action due to the disposal, depositing, discharge,
leaking or other release of any hazardous substances or materials, (c)
asserts or alleges that the Borrower is required to pay all or a portion of
the cost of any past, present, or future
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cleanup, removal or remedial or other response action which arises out of or
is related to the disposal, depositing, discharge, leaking or other release
of any hazardous substances or materials by the Borrower. To the best
knowledge of the Borrower, there are no conditions existing currently which
would subject the Borrower to damages, penalties, injunction relief or
cleanup costs under any applicable Environmental Laws or which require or are
likely to require cleanup, removal, remedial action or other response
pursuant to applicable Environmental Laws by the Borrower. The Borrower is
not subject to any judgment, decree, order or citation related to or arising
out of applicable Environmental Laws and to the best knowledge of the
Borrower, the Borrower has not been named or listed as a potentially
responsible party by any governmental body or agency in a matter arising
under any applicable Environmental Laws. The Borrower has all permits,
licenses and approvals required under applicable Environmental Laws.
4. AFFIRMATIVE COVENANTS
On a continuing basis from the date of this Letter Agreement until
the later of the Termination Date or when the Loans are paid in full and the
Borrower has performed all of its other obligations hereunder, the Borrower
covenants and agrees that it will:
4.1. Preservation of Corporate Existence, Etc. Preserve and
maintain its (and subsidiaries) corporate existence and such of its rights
(charter and statutory) and privileges as are material to its business and
operations; qualify and remain qualified as a foreign corporation in each
jurisdiction in which such qualification is material to its business and
operations or the ownership of its properties; and maintain in effect all
material licenses necessary to the conduct of its business.
4.2. Compliance with Laws, Etc. Comply, and cause each of its
subsidiaries to comply, in all material respects with all applicable laws,
including Environmental Laws, rules, regulations and orders of any
governmental authority, noncompliance with which could materially and
adversely affect the financial condition or operations of the Borrower.
4.3. Maintenance of Insurance. Maintain adequate insurance
with responsible insurance companies or associations against fire and other
casualties customarily insured against by concerns engaged in business the
same or similar to the Borrower, including workmen's compensation insurance,
public liability and product liability insurance.
4.4. Inspection Rights. At any reasonable time and from time
to time, permit the Bank or any agents or representatives thereof to examine
and make copies of and abstracts from the records and books of account of,
and visit the properties of, the Borrower (except to the extent prohibited by
applicable confidentiality or privacy laws, regulations or agreements), any
of its subsidiaries, and to discuss the affairs, finances and accounts of the
Borrower and any of its subsidiaries with any of their respective officers
and directors.
4.5. Keeping of Books. Keep, and cause each of its
subsidiaries, to keep, proper books of record and account, in which full and
correct entries shall be made of all financial transactions and the assets
and business of the Borrower and each of its subsidiaries, so as to permit
the Borrower to present financial statements prepared in accordance with
generally accepted accounting principles consistently applied ("GAAP").
4.6. Reporting Requirements. Furnish to the Bank the
following:
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4.6.1. Annual Financial Statements. Furnish to the Bank, in
form and reporting basis satisfactory to the Bank, not later than ninety (90)
days after the close of each fiscal year of the Borrower, beginning with the
most recently concluded fiscal year of the Borrower, financial statements of
the Borrower on a consolidated and consolidating basis containing the balance
sheet of the Borrower as of the close of each such fiscal year, statements of
income and retained earnings and a statement of cash flows for each such
fiscal year, and such other comments and financial details as are usually
included in similar reports. Such reports shall be prepared on an audited
basis for the Borrower's fiscal year, in accordance with GAAP by independent
certified public accountants of recognized standing selected by the Borrower
and acceptable to the Bank. For each fiscal year such reports shall contain
unqualified opinions of the independent certified public accountants as to
the fairness of the statements contained therein.
4.6.2. Quarterly Financial Statements. Furnish to the Bank not
later than forty-five (45) days after the close of each quarter of each
fiscal year of the Borrower, beginning with the most recently concluded
quarter, financial statements on a consolidated and consolidating basis
containing the balance sheet of the Borrower as of the end of each such
period, statements of income and retained earnings of the Borrower for the
portion of the fiscal year up to the end of such period, and such other
comments and financial details as are usually included in similar reports.
These statements shall be prepared on the same accounting basis as the
statements required in Section 5.6(a) of this Letter Agreement and shall be
in such detail as the Bank may reasonably require, and the accuracy of the
statements shall be certified by the chief executive or financial officer of
the Borrower.
4.6.3. Adverse Events. Promptly inform the Bank of the
occurrence of any Event of Default or Default, or of any other occurrence
which has or could reasonably be expected to have a materially adverse effect
upon the Borrower's business, properties, or financial condition or upon the
Borrower's ability to comply with its obligations hereunder.
4.6.4. Other Information As Requested. Promptly furnish to the
Bank the Borrowers Annual 10K Reports and Quarterly 10Q Reports and such
other information regarding the operations, business affairs and financial
condition of the Borrower and its subsidiaries as the Bank may reasonably
request from time to time and permit the Bank, its employees, attorneys and
agents, to inspect all of the books, records and properties of the Borrower
at any reasonable time.
4.7. ERISA. At all times meet and cause each of the Borrower's
subsidiaries to meet the minimum funding requirements of ERISA with respect
to the Borrower's and its subsidiaries' employee benefit plans subject to
ERISA; as soon as possible and in any event within thirty (30) days after the
Borrower knows or has reason to know (i) of the occurrence of any event which
would constitute a reportable event under ERISA, or (ii) that the PBGC or the
Borrower (or any subsidiary) has instituted or will institute proceedings to
terminate an employee pension plan, deliver to the Bank a certificate of the
chief financial officer of the Borrower setting forth details as to such
reportable event and the action which the Borrower (or such subsidiary)
proposes to take with respect thereto, together with a copy of any notice of
such reportable event which may be required to be filed with the PBGC, or any
intent to institute such proceedings, or any notice to the PBGC that the plan
is to be terminated, as the case may be, and for all purposes hereof, the
Borrower (and each subsidiary) shall be deemed to have knowledge of all facts
attributable to the plan administrator; and furnish to the Bank a copy of the
annual return (including all schedules and attachments) for each plan not
later than ten (10) days after such report has been filed with the Internal
Revenue Service.
4.8. Taxes. Pay promptly and within the time that they can be
paid without interest or penalty, all taxes, assessments and similar imposts
and charges of every kind and nature lawfully levied,
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assessed or imposed upon the Borrower and/or its property, except to the
extent being contested in good faith and, if requested by the Bank, bonded in
a manner satisfactory to the Bank.
4.9. Maintain Tangible Net Worth. On a consolidated basis,
Borrower shall maintain a Tangible Net Worth for Borrower of not less than
Fifteen Million Dollars ($15,000,000). "Tangible Net Worth" shall mean, as of
any applicable date of determination, the excess of (i) the net book value of
all assets of Borrower (other than patents, patent rights, trademarks, trade
names, franchises, copyrights, licenses, goodwill, and similar intangible
assets) after all appropriate deductions (including, without limitation,
reserves for doubtful receivables, obsolescence, depreciation and
amortization), all as determined in accordance with GAAP, over (ii) all items
of indebtedness, obligation or liability of Borrower, whether matured or
unmatured, liquidated or unliquidated, direct or indirect, absolute or
contingent, joint or several, that should be classified as liabilities in
accordance with GAAP ("Debt").
4.10. Maintain Net Current Assets. On a consolidated basis,
Borrower shall maintain Net Current Assets of not less than Eight Million
Dollars ($8,000,000). "Net Current Assets" shall mean Borrower's Current
Assets less Current Liabilities. "Current Assets" shall mean all cash,
non-affiliated customer receivables, United States government securities and
inventories. "Current Liabilities shall mean all items of Debt that should be
classified as current in accordance with GAAP.
4.11. Maintain Consolidated Funded Debt to EBITDA. On a
Consolidated Basis, Borrower shall maintain the ratio of Funded Debt to
earnings before interest, taxes, depreciation and amortization (determined on
a rolling twelve (12) month basis) ("EBITDA") of not more than 4.5 to 1.0.
"Funded Debt" shall mean, as of any applicable date of determination, that
portion of Debt which consists of (a) indebtedness for borrowed money,
including indebtedness for borrowed money which is evidenced by notes, bonds,
debentures or other similar instruments or (b) obligations under installment
sales contracts or capital leases, less cash and cash equivalents of Borrower
as of the applicable date.
5. NEGATIVE COVENANTS
On a continuing basis from the date of this Letter Agreement until
the later of the Termination Date or when the Loans are paid in full and the
Borrower has performed all of its other obligations hereunder, the Borrower
covenants and agrees that it will not, and will not permit any Subsidiary to:
5.1. Dividends. Declare or pay any dividends on, or make any
other distribution (whether by reduction of capital or otherwise) with
respect to any shares of its capital stock, except for dividends from a
subsidiary to the Borrower.
5.2. Stock Issuance. Issue any additional shares of its
capital stock, or any warrant except existing warrants previously disclosed
to the Bank, right or option relating thereto or any security convertible
into any of the foregoing, except shares of Borrower's capital stock issued
under Neogen's Stock Option Plan II and any successor plans thereto.
5.3. Stock Acquisition. Purchase, redeem, retire or otherwise
acquire any of the shares of its capital stock in excess of One Hundred
Thousand (100,000) shares per year, or make any commitment to do so.
5.4. Liens and Encumbrances. Create, incur, assume or suffer
to exist any mortgage, pledge, encumbrance, security interest, lien or charge
of any kind (including any charge upon property purchased under a conditional
sales or other title retaining agreement) upon any of its property or assets
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whether now owned or hereafter acquired, except for amounts which in the
aggregate do not exceed One Hundred Thousand Dollars ($100,000) per fiscal
year.
5.5. Indebtedness. Incur, create, assume or permit to exist
any indebtedness direct or contingent, or liability on book account or
otherwise for borrowed money, or any other indebtedness or liability
evidenced by notes, bonds, debentures or similar obligations, except for (a)
trade indebtedness incurred in the ordinary course of the Borrower's
business, (b) indebtedness to the Bank, (c) indebtedness subordinated to the
prior payment in full of its indebtedness to the Bank, upon terms and
conditions approved in writing in advance by the Bank, (d) existing
indebtedness to Ampcor Diagnostics, Inc., and (e) indebtedness which in the
aggregate does not exceed One Hundred Thousand Dollars ($100,000) per fiscal
year.
5.6. Extension of Credit. Make loans, advances or extensions
of credit or guarantee or otherwise in any way become or be responsible for
obligations of any other person or entity ("Person") in excess of Fifty
Thousand Dollars ($50,000) at any one time, except for (a) sales on open
account and otherwise in the ordinary course of business and (b) the
endorsement of negotiable instruments by the Borrower in the ordinary course
of business for collection.
5.7. Guarantee Obligations. Except for guarantees in favor of
the Bank, guarantee or otherwise, directly or indirectly, in any way be or
become responsible for obligations of any other Person, whether by agreement
to purchase the indebtedness of any other Person, agreement for the
furnishing of funds to any other Person through the furnishing of goods,
supplies or services, by way of stock purchase, capital contribution, advance
or loan, for the purpose of paying or discharging (or causing the payment or
discharge of) the indebtedness of any other Person, or otherwise, except for
the endorsement of negotiable instruments by the Borrower in the ordinary
course of business for deposit or collection.
5.8. Subordinate Indebtedness. Subordinate any indebtedness
due to it from a Person to indebtedness of other creditors of such Person.
5.9. Property Transfer, Merger or Lease-Back. (i) Sell, lease,
transfer or otherwise dispose of properties and assets having an aggregate
book value of more than Fifty Thousand Dollars ($50,000) except in the
ordinary course of business or as otherwise permitted hereunder (ii)
consolidate with or merge into any corporation, or permit another corporation
to merge into it, or acquire all or substantially all the properties or
assets of any other Person or (iii) enter into any arrangement, with any
Person whereby, directly or indirectly, the Borrower or any of its
subsidiaries shall sell or transfer all or any substantial portion of its
property, real or personal, which is used and useful in its business, whether
now owned or hereafter acquired, and thereafter rent or lease such property
or other property usable for substantially the same purpose or purposes as
the property being sold or transferred; provided, however, that a
wholly-owned subsidiary may be merged into, or consolidated with, the
Borrower or another wholly-owned subsidiary and such wholly-owned subsidiary
may sell, lease or transfer all or a substantial part of its assets to the
Borrower or another wholly-owned subsidiary, the Borrower may acquire all or
substantially all of the properties and assets of the subsidiary so to be
merged into, or consolidated with, it or so to be sold, leased or transferred
to it.
5.10. Acquire Securities. Purchase or hold beneficially any
stock or other securities of, or make nay investment or acquire any interest
whatsoever in, any other Person, except for the common stock of Borrower's
subsidiaries, existing or hereafter acquired, and except for certificates of
deposit with maturities of two years or less of United States commercial
banks with capital surplus and undivided profits in excess of $100,000,000
and direct obligations of the United States Government maturing within two
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years from the date of acquisition thereof and investment grade commercial
paper and investment grade fixed-income securities (e.g. corporate bonds).
5.11. Acquired Fixed Assets. Acquire or expend for, or commit
itself to acquire or expend for fixed assets by lease, purchase or otherwise
in the aggregate amount that exceeds the combined amounts of annual
depreciation and amortization, as defined by GAAP and as accounted for in the
financial statements of Borrower submitted to the Bank, in any fiscal year.
5.12. Pension Plans. Allow any fact, condition or event to
occur or exist with respect to an employee pension and/or profit sharing plan
of the Borrower, or its subsidiaries, which might constitute grounds for
termination of such plan by the PBGC or for the appointment by a United
States District Court of a trustee to administer any such plan.
5.13. Misrepresentation. Furnish the Bank with any certificate
or other document that contains any untrue statement of a material fact or
omits to state a material fact necessary to make such certificate or document
not misleading in light of the circumstances under which it was furnished.
5.14. Margin Stock. Apply any of the proceeds of a Loan to the
purchase or carrying of any "margin stock" within the meaning of Regulation U
of the Board of Governors of the Federal Reserve System, or any regulations,
interpretations or rulings thereunder.
60 EVENTS OF DEFAULT
6.1. Events of Default. Upon occurrence of any of the
following events of default ("Events of Default") then, or at any time
thereafter, unless such default is remedied, Bank may give notice to the
Borrower declaring all outstanding indebtedness hereunder and under the Notes
to be due and payable, whereupon all indebtedness then outstanding hereunder
and under the Notes shall immediately become due and payable without further
notice and demand:
6.1.1. failure to pay, when due, any principal or
interest under the Notes or any taxes, insurance or other amount payable by
the Borrower under this Letter Agreement or if the Borrower, any of its
Subsidiaries, or the Guarantor shall fail to pay, when due, any indebtedness,
obligation or liability whatsoever of the Borrower, any of its Subsidiaries,
or the Guarantor to the Bank;
6.1.2. default in observance or performance of any of
the other conditions, covenants or agreements of the Borrower herein set
forth, and continuance thereof for thirty (30) days after notice to the
Borrower by Bank;
6.1.3. any representation or warranty made by the
Borrower herein or in any instrument submitted pursuant hereto proves untrue
in any material respect;
6.1.4. default by the Borrower or any of its
subsidiaries in the due payment of any of their indebtedness or obligations
(direct or contingent) or in the observance or performance of any term,
covenant or condition in any agreement or instrument evidencing, securing or
relating to such indebtedness or obligations, and such default shall be
continued for a period sufficient to permit acceleration of the indebtedness;
6.1.5. the entry against the Borrower or any of its
subsidiaries of one or more judgments or decrees involving an aggregate
liability of One Hundred Thousand Dollars ($100,000) or
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more, which has or have become non-appealable and shall remain undischarged,
unsatisfied by insurance and unstayed for more than twenty (20) days, whether
or not consecutive; or the issuance and levy of a writ of attachment or
garnishment against the property of the Borrower or any of its subsidiaries
in an action claiming Two Hundred Fifty Thousand Dollars ($250,000) or more,
and which is not released or appealed and bonded in a manner satisfactory to
the Bank;
6.2. Business Suspension, Bankruptcy, Etc. If a creditors'
committee shall have been appointed for the business of the Borrower; or if
the Borrower shall have made a general assignment for the benefit of
creditors or shall have been adjudicated bankrupt, or shall have filed a
voluntary petition in bankruptcy or for reorganization or to effect a plan or
arrangement with creditors; or shall file an answer to a creditor's petition
or other petition filed against it, admitting the material allegations
thereof for an adjudication in bankruptcy or for reorganization; or shall
have applied for or permitted the appointment of a receiver, or trustee or
custodian for any of its property or assets; or such receiver, trustee or
custodian shall have been appointed for any of its property or assets
(otherwise than upon application or consent of the Borrower) and such
receiver, trustee or custodian so appointed shall not have been discharged
within sixty (60) days after the date of his appointment or if an order shall
be entered and shall not be dismissed or stayed within sixty (60) days from
its entry, approving any petition for reorganization of the Borrower, then
the Notes and all indebtedness then outstanding hereunder shall automatically
become immediately due and payable.
70 MISCELLANEOUS
7.1. Successors and Assigns. This Letter Agreement shall be
binding upon and shall inure to the benefit of the Borrower and Bank and
their respective successors and assigns.
7.2. Waiver. No delay or failure of Bank in exercising any
right, power or privilege hereunder shall affect such right, power or
privilege, nor shall any single or partial exercise thereof preclude any
further exercise thereof, or the exercise of any other power, right or
privilege. The rights of Bank under this Letter Agreement are cumulative and
not exclusive of any right or remedies which Bank would otherwise have.
7.3. Accounting Principles. Where the character or amount of
any asset or liability or item of income or expense is required to be
determined or any consolidated or other accounting computation is required to
be made for the purposes of this Letter Agreement, it shall be done in
accordance with GAAP.
7.4. Notices. All notices and communications provided for
herein or in any document contemplated hereby or required by law to be given
shall be in writing (unless expressly provided to the contrary) and, if
personally delivered, effective when delivered at the address below or, in
the case of mailing, effective two (2) days after sending by first class
mail, postage prepaid, addressed as follows: (a) If to the Borrower, to: 620
Lesher Place, Lansing, Michigan 48912, and (b) if to the Bank, to: MC 7834,
101 N. Washington Square, Lansing, Michigan 48933-1606 or to such other
address as a party shall have designated to the other in writing in
accordance with this section. The giving of at least five (5) days' notice
before the Bank shall take any action described in any notice shall
conclusively be deemed reasonable for all purposes; provided, that this shall
not be deemed to require the Bank to give five days' notice or any notice if
not specifically required in this Letter Agreement.
7.5. Costs and Expenses. The Borrower shall pay all closing
costs and expenses, including, by way of description and not limitation,
reasonable outside attorney fees incurred by Bank in
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<PAGE>
connection with the commitment, consummation and closing of this Letter
Agreement. All of said amounts required to be paid by the Borrower may, at
Bank's option, be charged by Bank as an advance against the proceeds of the
Notes. All costs, including attorney fees and auditor fees, incurred by Bank
in reviewing, revising, protecting or enforcing any of its rights against the
Borrower or defending Bank from any claims or liabilities by any party or
otherwise incurred by Bank in connection with an event of default or the
enforcement of this Letter Agreement or the related documents shall also be
paid by the Borrower.
7.6. Effective Date. This Letter Agreement shall become
effective upon the execution hereof by Bank and the Borrower.
7.7. Amendments. No amendments or waiver of any provision of
this Letter Agreement nor consent to any departure by the Borrower therefrom
shall in any event be effective unless the same shall be in writing and
signed by the Bank, and then such amendment, waiver or consent shall be
effective only in the specific instance and for the specific purpose for
which given. No amendment, waiver or consent with respect to any provision of
this Letter Agreement shall affect any other provision of this Letter
Agreement.
7.8. Governing Law. THIS LETTER AGREEMENT AND THE NOTES HAVE
BEEN DELIVERED AT LANSING, MICHIGAN, AND SHALL BE GOVERNED BY AND CONSTRUED
AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MICHIGAN. Whenever
possible each provision of this Letter Agreement shall be interpreted in such
manner as to be effective and valid under applicable law, but if any
provision of this Letter Agreement shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Letter Agreement.
7.9. Waiver of Jury Trial. THE BORROWER AND BANK ACKNOWLEDGE
THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE
WAIVED, EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO
CONSULT) WITH COUNSEL OF ITS CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR
MUTUAL BENEFIT WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION
REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS
LETTER AGREEMENT, THE LOANS EVIDENCED BY THE NOTES OR THE NOTES.
COMERICA BANK
By__________________________________
Its_________________________________
Receipt of the foregoing Letter Agreement is hereby acknowledged and all
terms and conditions set forth therein are hereby accepted and agreed.
NEOGEN CORPORATION
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<PAGE>
By__________________________________
Its_________________________________
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<PAGE>
Exhibits
Exhibit A - Working Capital Note
Exhibit B - Corporate Acquisition Revolving Note
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<PAGE>
EXHIBIT A
WORKING CAPITAL NOTE
(Eurodollar)
TAX I.D. NO.: 38-______________
$1,500,000 Lansing, Michigan
March ____, 1998
FOR VALUE RECEIVED, the undersigned promises to pay to the order of
COMERICA BANK (the "Bank") at any office of the Bank, on Demand, the
principal sum or so much of the principal sum of One Million Five Hundred
Thousand Dollars ($1,500,000) as may from time to time have been advanced and
be outstanding under that certain Letter Agreement dated March ____, 1998,
between the undersigned and the Bank (the "Letter Agreement") plus all
accrued but unpaid interest thereon.
This Note is a Master Note under which sums may or must be repaid
from time to time and under which new advances are to be made by the Bank
pursuant to the terms and conditions of the Letter Agreement, and the books
and records of the Bank shall constitute the best evidence of the amount of
indebtedness at any time owing hereunder.
The entire indebtedness outstanding hereunder from time to time shall
bear interest at the Applicable Interest Rate, as elected by Borrower from
time to time, or as otherwise determined under the terms and conditions of
this Note. Interest shall be payable on the first day of each month
commencing April 1, 1998, and on the last day of any Applicable Interest
Period (each an "Interest Payment Date").
Interest accruing at the Prime Rate shall be computed on the basis of
a 360 day year and shall be assessed for the actual number of days elapsed,
and in such computation, effect shall be given to any change in the Prime
Rate as a result of any change in the Prime Rate on the date of each such
change.
Interest accruing at the Eurodollar Rate shall be computed on the
basis of a 360 day year and shall be assessed for the actual number of days
elapsed from the first day of the Applicable Interest Period applicable
thereto, but not including the last day thereof.
The amount from time to time outstanding under this Note, the
Applicable Interest Rate, the Applicable Interest Period, and the amount and
date of any repayment shall be noted on Bank's books and records, which shall
be conclusive evidence thereof, absent manifest error; provided, however, any
failure by Bank to make any such notation, or any error in any such notation,
shall not relieve Borrower of its obligations to repay Bank all principal,
all accrued and unpaid interest thereon, and all other amounts payable by
Borrower to Bank under or pursuant to this Note in accordance with the terms
hereof.
Interest Rate Election. The Borrower may elect to have the Applicable
Interest Rate be the Eurodollar Rate by giving the Bank verbal notice (a
"Notice of Interest Rate Election") of each such election not later than 1:00
p.m. Lansing, Michigan time two (2) Business Days before each Eurodollar Rate
Loan is to be made, specifying:
(a) the date when such election shall be effective (which
shall be a Business Day);
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(b) the Specified Principal;
(c) the Applicable Interest Rate; and
(d) the Applicable Interest Period.
If the Borrower fails to make such election, the Applicable Interest
Rate shall be the Prime Rate.
Subsequent Elections as to Borrowing. The Borrower may elect to (a)
continue a Eurodollar Rate Loan or a portion thereof, as a Eurodollar Rate
Loan, or (b) convert a Eurodollar Rate Loan or a portion thereof, to a Prime
Rate Loan, or (c) elect to convert a Prime Rate Loan, or a portion thereof,
to a Eurodollar Rate Loan, in each case by giving verbal notice thereof to
the Bank not later than 1:00 p.m. Lansing time (i) two (2) Business Days
prior to the date any such continuation of or conversion to a Eurodollar Rate
Loan is to be effective and (ii) one (1) Business Day prior to the date any
such continuation of or conversion to a Prime Rate Loan to be effective,
provided that an outstanding Eurodollar Rate Loan may only be converted on
the last day of the Applicable Interest Period with respect thereto, and
provided further, if a continuation of a Loan, or a conversion of a Loan to,
a Eurodollar Rate Loan is requested, such notice shall also specify the
Applicable Interest Period for such continuation or conversion. If the
Borrower shall not timely deliver a Notice of Interest Rate Election with
respect to an outstanding Eurodollar Rate Loan, the Borrower shall be deemed
to have elected to convert such Eurodollar Rate Loan to a Prime Rate Loan on
the last day of the then current Applicable Interest Period. If requested by
the Bank, the Borrower shall confirm any verbal notice hereunder in writing.
Maximum Amount of Loans. The sum of the aggregate principal amount of
all Loans shall not at any time exceed the Working Capital Loan Commitment
Amount.
Limitations of Requests and Elections. Notwithstanding any other
provision of this Note to the contrary, if, upon receiving a request for a
Eurodollar Rate Loan, a request for a continuation of a Eurodollar Rate Loan
as a Eurodollar Rate Loan or a request for a conversion to a Eurodollar Rate
Loan, (a) deposits in dollars for periods comparable to the Eurodollar
Interest Period elected by the Borrower are not available to the Bank in the
relevant interbank secondary market, or (b) the Eurodollar Rate will not
adequately and fairly reflect the cost to the Bank of making, funding or
maintaining the related Eurodollar Rate Loan, or (c) by reason of national or
international financial, political or economic conditions or by reason of any
applicable law, treaty, rule or regulation (whether domestic or foreign) now
or hereafter in effect, or the interpretation or administration thereof by
any governmental authority charged with the interpretation or administration
thereof, or compliance by the Bank with any guideline, request or directive
of such authority (whether or not having the force of law), including without
limitation exchange controls, it is impracticable, unlawful or impossible for
the Bank (i) to make or fund Eurodollar Rate Loans or (ii) to maintain
outstanding such Eurodollar Rate Loan, or (iii) to convert a Loan to a
Eurodollar Rate Loan, then the Borrower shall not be entitled, so long as
such circumstances continue, to request a Eurodollar Rate Loan or a
continuation of or conversion to a Eurodollar Rate Loan. In the event that
such circumstances no longer exist, the Bank shall again consider requests
for Eurodollar Rate Loans, and requests for continuations of and conversions
to Eurodollar Rate Loans.
Maximum Amount of Interest Rate Elections. Except for (a) Borrowings
and conversions thereof which exhaust the entire remaining amount of the
Working Capital Loan Commitment, and (b) payments required pursuant hereto,
each Borrowing and each continuation or conversion thereof and each repayment
thereof shall be in a minimum amount of Five Hundred Thousand Dollars
($500,000.00) and in integral
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multiples of One Hundred Thousand Dollars ($100,000.00). No more than three
(3) Eurodollar Interest Periods shall be permitted to exist at any one time.
Optional Prepayments of Principal. The Borrower may, at any time,
upon notice to the Bank, pay all or part of the Loan outstanding bearing
interest at the Prime Rate without penalty, premium or other charge. The
Borrower may not prepay any portion of the Loan as to which an election for,
a continuation of or a conversion to a Eurodollar Rate is pending, and any
Eurodollar Rate Loan may only be paid on the last day of the Applicable
Interest Period with respect thereto, unless, in addition to any other
amounts required to be paid, the Borrower also pays the Bank the Prepayment
Amount. All notices of prepayment that are delivered to the Bank by the
Borrower pursuant to this section shall be delivered by 1:00 p.m. Lansing
time on the relevant Business Day or if delivered at a later time shall be
deemed to have been delivered as of the next Business Day. A notice of
prepayment with respect to a Eurodollar Rate Loan shall not be revocable by
the Borrower after delivery to the Bank.
Mandatory Payments of Loans. The Borrower shall pay to the Bank, the
amount, if any, by which the aggregate unpaid principal amount of all Loans
from time to time exceeds the Working Capital Commitment Amount, together
with all interest accrued and unpaid on the amount of such excess. Such
payment shall be immediately due and owing without notice or demand upon the
occurrence of any such excess. Mandatory payments under this Section shall be
applied first to Prime Rate Loans.
Interest Payments. The Borrower shall pay interest to the Bank on
the unpaid principal amount of the Loan, for the period commencing on the
date hereof until the Loan is paid in full, on each Interest Payment Date and
at maturity (whether at stated maturity, by demand, by acceleration or
otherwise), and thereafter on demand, at the Applicable Interest Rate.
Notwithstanding the foregoing, the Borrower shall pay interest on demand at
the Overdue Rate on the outstanding principal amount of the Loan and any
other amount payable by the Borrower hereunder (other than interest) which is
not paid in full when due (whether at stated maturity, by demand, by
acceleration or otherwise) for the period commencing on the due date thereof
until the same is paid in full.
No Set Off or Deduction. All payments of principal and interest and
other amounts payable by the Borrower hereunder shall be made by the Borrower
without set off or counterclaim, and free and clear of, and without deduction
or with holding for, or on account of, any present or future taxes, levies,
imposts, duties, fees, assessments, or other charges of whatever nature,
imposed by any governmental authority, or by any department, agency or other
political subdivision or taxing authority.
Additional Costs. (a) In the event that the adoption of, or any
change in or in the interpretation by any governmental authority of, any
applicable law, treaty, rule or regulation (whether domestic or foreign), or
compliance by the Bank with any guideline, request or directive of any
governmental authority that is promulgated, made, issued, or changed (whether
or not having the force of law), shall (i) change the basis of taxation of
payments to the Bank of any amounts payable by the Borrower under this Note
(other than taxes imposed on the overall net income of the Bank), or (ii)
shall impose, modify or deemed applicable any reserve, special deposit or
similar requirement against assets of, deposits with or for the account of,
or credit extended by the Bank, or (iii) shall impose any other condition
with respect hereto, and the result of any of the foregoing is to increase
the cost to the Bank, of making, funding or maintaining any Eurodollar Rate
Loan or to reduce the amount of any sum receivable by the Bank, thereon, then
the Borrower shall pay to the Bank from time to time, upon request by the
Bank, additional amounts sufficient to compensate the Bank, for such
increased cost or reduced sum receivable to the extent, in the case of any
Eurodollar Rate Loan, the Bank is not compensated therefor in the computation
of the interest rate applicable to such Eurodollar Rate Loan or pursuant to
subsection (b) of this Section. A statement as to
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<PAGE>
the amount of such increased cost or reduced sum receivable and reason
therefor, prepared in good faith and in reasonable detail by the Bank, and
submitted by the Bank, to the Borrower, shall be conclusive and binding for
all purposes absent material error.
(b) In the event that any applicable law, rule, regulation, or
guideline now in effect relating to capital adequacy, or that the adoption
of, or any change in or in the interpretation by any governmental authority
of any applicable law, treaty, rule or regulation (whether domestic or
foreign), or that compliance by the Bank with any guideline, request or
directive of any governmental authority (whether or not having the force of
law) relating to capital adequacy, or that is promulgated, made, issued, or
changed including any risk-based capital guidelines, affects or would affect
the amount of capital required or expected to be maintained by the Bank (or
any corporation controlling the Bank) and the Bank determines that the amount
of such capital required or expected to be maintained is increased by or
based upon the existence of the Bank's obligations hereunder and such
increase has the effect of reducing the rate of return on the Bank's (or such
controlling corporation's) capital as a consequence of such obligations
hereunder to a level below that which the Bank (or such controlling
corporation) could have achieved but for such circumstances (taking into
consideration its policies with respect to capital adequacy) by an amount
deemed by the Bank to be material, then the Borrower shall pay to the Bank,
from time to time, upon request by the Bank additional amounts sufficient to
compensate the Bank (or such controlling corporation) for any increase in the
amount of capital and reduced rate of return which the Bank reasonably
determines to be allocable to the existence of the Bank's obligations
hereunder. A statement as to the amount of such compensation and reason
therefor, prepared in good faith and in reasonable detail by the Bank, as the
case maybe, and submitted by the Bank to the Borrower, shall be conclusive
and binding for all purposes absent material error.
Illegality and Impossibility. In the event that the adoption of, or
any change in or in the interpretation by any governmental authority of, any
applicable law, treaty, rule or regulation (whether domestic or foreign), or
compliance by the Bank with any guideline, request or directive of any
governmental authority that is promulgated, made, issued, or changed (whether
or not having the force of law), including without limitation exchange
controls, shall make it unlawful or impossible for the Bank to maintain any
Eurodollar Rate Loan under this Note, the Borrower shall upon receipt of
notice thereof from the Bank, repay in full the then outstanding principal
amount of each Eurodollar Rate Loan so affected, together with all accrued
interest thereon to the date of payment, (a) on the last day of the then
current Eurodollar Interest Period applicable to such Loan if the Bank may
lawfully continue to maintain such Loan to such day, or (b) immediately if
the Bank may not continue to maintain such Loan to such day.
Funding Losses. If the Borrower makes any payment of principal on a
Eurodollar Rate Loan on any day other than the last day of the Applicable
Interest Period, or if the Borrower fails to make any payment of principal or
interest in respect of a Eurodollar Rate Loan when due, the Borrower shall,
in addition to any amounts that may be payable pursuant hereto, pay to the
Bank the Prepayment Amount on demand. A statement as to the Prepayment Amount
as of the Prepayment Date, prepared in good faith and in reasonable detail by
the Bank and submitted by the Bank to the Borrower, shall be conclusive and
binding for all purposes in the absence of material error.
Regulation D Compensation. If the Eurocurrency liabilities (as
defined in and pursuant to Regulation D of the Board of Governors of the
Federal Reserve System, as amended or modified from time to time) of the Bank
is a positive number, the Bank may require the Borrower to pay to the extent
not already provided for in the definition of Eurodollar Rate,
contemporaneously with each payment of interest on the Eurodollar Rate Loans,
additional interest on the related Eurodollar Rate Loan of the Bank at a rate
per annum equal to the excess of (a)(i) the applicable Eurodollar Rate
expressed as a decimal, divided by
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(ii) one minus the maximum rate (expressed as a decimal) at which the Bank is
required to maintain reserves on Eurocurrency liabilities or, if such
regulation or definition is modified, and as long as the Bank is required to
maintain reserves against a category of liabilities which includes deposits
in Dollars or includes a category of assets which includes loans in Dollars,
the rate at which such reserves are required to be maintained on such
category, over (b) the rate specified in clause (a)(i). If the Bank wishes to
require payment of such additional interest, it shall so notify the Borrower
of such requirement either on or before the Effective Date or at least three
(3) Business Days prior to the first Eurodollar Interest Period to which such
requirement shall apply, which notice shall indicate the place where such
additional interest shall be payable to the Bank. In the event the Bank shall
have given notice to the Borrower pursuant to the foregoing sentence,
thereafter the Borrower shall pay to the Bank at the place indicated in such
notice the additional interest due under this paragraph on all Eurodollar
Rate Loans made by the Bank thereafter, until the Bank notifies the Borrower
that it no longer wishes to require the payment of the additional interest
under this paragraph, and all such additional interest shall be payable on
the Interest Payment Date with respect thereto.
If an Event of Default (as defined in the Letter Agreement) occurs
and is not cured within the time, if any, provided for by the Letter
Agreement, the Bank may exercise any one or more of the rights and remedies
granted by the Letter Agreement or any document contemplated thereby or given
to a secured party under applicable law, including without limit the right to
accelerate this Note and any other Indebtedness (as defined in the Letter
Agreement), and may set off against the principal of and interest on this
Note or against any other Indebtedness (i) any amount owing by the Bank to
the undersigned, (ii) any property of the undersigned at any time in the
possession of the Bank or any affiliate of the Bank and (iii) any amount in
any deposit or other account (including without limit an account evidenced by
a certificate of deposit) of the undersigned with the Bank or any affiliate
of the Bank.
In the event that and so long as any Event of Default shall have
occurred and be continuing, the indebtedness outstanding under this Note
shall bear interest at the Overdue Rate.
The Undersigned and all accommodation parties, guarantors and
indorsers (i) waive presentment, demand, protest and notice of dishonor, (ii)
agree that no extension or indulgence to the undersigned or release or
non-enforcement of any security, whether with or without notice, shall affect
the obligations of any accommodation party, guarantor or indorser, and (iii)
agree to reimburse the holder of this Note for any and all costs and expenses
incurred in collecting or attempting to collect any and all principal and
interest under this Note (including, but not limited to, court costs and
reasonable attorney fees, whether in-house or outside counsel is used and
whether such costs and expenses are incurred in formal or informal collection
actions, federal bankruptcy proceedings, appellate proceedings, probate
proceedings, or otherwise). This Note shall be governed by and construed in
accordance with the laws of the State of Michigan.
For the purposes of this Note the following terms will have the
following meanings:
"Applicable Interest Period" shall mean the Eurodollar Interest
Period then in effect.
"Applicable Interest Rate" shall mean the Eurodollar Rate or the
Prime Rate then in effect.
"Applicable Margin" shall mean, the applicable percentage per annum,
as determined by reference to the following table:
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<TABLE>
<CAPTION>
Prime Eurodollar
Margin Margin
------ ----------
<S> <C>
minus .50% 2.25%
</TABLE>
"Business Day" shall mean a day other than a Saturday, Sunday or
other day on which any bank is not open to the public for carrying on
substantially all of its banking functions, and if the applicable Business
Day relates to a Eurodollar Rate Loan or request therefor, a day which is
also a day on which dealings in dollar deposits are carried out in the London
interbank market.
"Eurodollar Interest Period" shall mean a period of at least seven
(7) days but not more than ninety (90) days, as selected by Borrower pursuant
to the terms of this Note, commencing on the day a Eurodollar-based Advance
is made, provided that any Interest Period which would otherwise end on a day
which is not a Business Day shall be extended to the next succeeding Business
Day.
"Eurodollar Lending Office" shall mean such branch of Bank, domestic
or foreign, as it may hereafter designate as its Eurodollar Lending Office.
"Eurodollar Rate" shall mean, with respect to any Eurodollar Rate
Loan and the related Eurodollar Interest Period, the per annum rate that is
equal to the sum of:
(a) the Applicable Margin, plus
(b) the quotient of:
(i) the per annum interest rate at which the Bank's
Eurodollar Lending Office offers deposits to prime
banks in the eurodollar market in an amount comparable
to the relevant Eurodollar Rate Loan and for a period
equal to the relevant Eurodollar Interest Period at or
about 11:00 a.m. (Lansing, Michigan time) (or as soon
thereafter as practical) two (2) Business Days prior to
the first day of such Eurodollar Interest Period;
divided by
(ii) a percentage equal to 100% minus the maximum rate on
such date at which the Bank is required to maintain
reserves on "Eurocurrency Liabilities" as defined in
and pursuant to Regulation D of the Board of Governors
of the Federal Reserve System or, if such regulation or
definition is modified, and as long as the Bank is
required to maintain reserves against a category of
liabilities which includes eurodollar deposits or
includes a category of assets which includes Eurodollar
Rate Loans, the rate at which such reserves are
required to be maintained on such category.
"Eurodollar Rate Loan" shall mean the Specified Principal which bears
interest from time to time at the Eurodollar Rate.
"Federal Funds Rate" shall mean, for any day, the average of the
rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, as published
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by the Federal Reserve Bank of New York for such day, or, if such rate is not
so published for any day, the average of the quotations for such rates
received by the Bank from three federal funds brokers of recognized standing
selected by the Bank in its discretion from time to time as the opening
federal funds rate paid or payable by the Bank in its regional federal funds
market for overnight borrowings from other banks.
"Loan" shall mean the loan made pursuant to this Note. Any such Loan
or portion thereof may also be denominated as a Prime Rate Loan or a
Eurodollar Rate Loan, and such Prime Rate Loans and Eurodollar Loans are
referred to herein as "types" of Loans.
"Overdue Rate" shall mean (a) in respect of the principal of any
Eurodollar Rate Loan, a rate per annum that is equal to the sum of three
percent (3%) per annum plus the per annum rate in effect thereon until the
end of the Applicable Interest Period and, thereafter, a rate per annum that
is equal to the sum of three percent (3%) per annum plus the Prime Rate, and
(b) in respect of the principal of any Prime Rate Loan, and other amounts
payable by the Borrower hereunder (other than interest or amounts described
in clause (a) above), a per annum rate that is equal to the sum of three
percent (3%) per annum plus the Prime Rate.
"Prepayment Amount" shall mean the sum of: (i) Five Hundred Dollars
($500), plus (ii) the amount of principal which the Borrower has elected to
prepay or the amount of principal which the Bank has required the Borrower to
prepay because of acceleration, as the case may be (the "Prepaid Principal
Amount"), (iii) interest accruing on the Prepaid Principal Amount up to, but
not including, the Prepayment Date, and (iv) the present value, discounted at
the Reinvestment Rates (as defined below), of the positive amount by which
(A) the interest the Bank would have earned had the Prepaid Principal Amount
been paid at the end of the current Applicable Interest Period exceeds (B)
the interest the Bank would earn by reinvesting the Prepaid Principal Amount
at the Reinvestment Rates.
"Prepayment Date" shall mean the date on which the Borrower prepays
any principal of a Eurodollar Rate.
"Prime Rate" shall mean the per annum rate that is equal to the
Applicable Margin plus the greater of (i) the per annum rate of interest
announced from time to time by the Bank as its "prime rate", which rate may
not necessarily be the lowest rate charged by the Bank to any of its
customers, or (ii) the Federal Funds Rate plus one half percent (1/2%) per
annum. The Prime Rate shall change simultaneously with any change in such
"prime rate" or such Federal Funds Rate, if applicable.
"Prime Rate Loan" shall mean the Specified Principal which bears
interest at the Prime Rate.
"Reinvestment Rates" shall mean the per annum rates of interest equal
to one-half percent (1/2%) above the rates of interest reasonably determined
by the Bank to be in effect not more than seven (7) days prior to the
Prepayment Date in the secondary market for United States Treasury
Obligations in amount(s) and with maturity(ies) which correspond (as closely
as possible) to the principal installment amount(s) and the payment date(s)
against which the Prepaid Principal Amount will be applied.
"Specified Principal" shall mean that amount of the principal of the
Loan outstanding that bears interest at the Eurodollar Rate.
Borrower agrees to make all payments to Bank of any and all amounts
due and owing by Borrower to Bank hereunder on the date provided for such
payment, in United States Dollars in immediately available
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funds at any office of Bank in the State of Michigan or such other address as
Bank may notify Borrower in writing.
No delay or failure of Bank in exercising any right, power or
privilege hereunder shall affect such right, power or privilege, nor shall
any single or partial exercise thereof preclude any further exercise thereof,
or the exercise of any other power, right or privilege. The rights of Bank
under this Note are cumulative and not exclusive of any right or remedies
which Bank would otherwise have, whether by other instruments or by law.
This Note shall bind the Borrower, and the Borrower's respective
successors and assigns.
THE BORROWER AND THE BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY
IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER
CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR
CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY
RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE
OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS NOTE.
This Note has been deemed to have been delivered at Lansing,
Michigan, and shall be governed by and construed and enforced in accordance
with the laws of the State of Michigan. Whenever possible each provision of
this Note shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Note shall be prohibited
by or invalid under applicable law, such provision shall be ineffective to
the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Note.
NEOGEN CORPORATION
By:________________________________
Its:_______________________________
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EXHIBIT B
CORPORATE ACQUISITION REVOLVING NOTE
(Eurodollar)
TAX I.D. NO.: 38-______________
$7,500,000 Lansing, Michigan
March ____, 1998
FOR VALUE RECEIVED, the undersigned promises to pay to the order of
COMERICA BANK (the "Bank") at any office of the Bank, on the Termination
Date, the principal sum or so much of the principal sum of Seven Million Five
Hundred Thousand Dollars ($7,500,000) as may from time to time have been
advanced and be outstanding under that certain Letter Agreement dated March
____, 1998, between the undersigned and the Bank (the "Letter Agreement")
plus all accrued but unpaid interest thereon.
This Note is a Master Note under which sums may or must be repaid
from time to time and under which new advances are to be made by the Bank
pursuant to the terms and conditions of the Letter Agreement, and the books
and records of the Bank shall constitute the best evidence of the amount of
indebtedness at any time owing hereunder.
The entire indebtedness outstanding hereunder from time to time shall
bear interest at the Applicable Interest Rate, as elected by Borrower from
time to time, or as otherwise determined under the terms and conditions of
this Note. Interest shall be payable on the first day of each month
commencing April 1, 1998, and on the last day of any Applicable Interest
Period (each an "Interest Payment Date").
Interest accruing at the Prime Rate shall be computed on the basis of
a 360 day year and shall be assessed for the actual number of days elapsed,
and in such computation, effect shall be given to any change in the Prime
Rate as a result of any change in the Prime Rate on the date of each such
change.
Interest accruing at the Eurodollar Rate shall be computed on the
basis of a 360 day year and shall be assessed for the actual number of days
elapsed from the first day of the Applicable Interest Period applicable
thereto, but not including the last day thereof.
The amount from time to time outstanding under this Note, the
Applicable Interest Rate, the Applicable Interest Period, and the amount and
date of any repayment shall be noted on Bank's books and records, which shall
be conclusive evidence thereof, absent manifest error; provided, however, any
failure by Bank to make any such notation, or any error in any such notation,
shall not relieve Borrower of its obligations to repay Bank all principal,
all accrued and unpaid interest thereon, and all other amounts payable by
Borrower to Bank under or pursuant to this Note in accordance with the terms
hereof.
Interest Rate Election. The Borrower may elect to have the Applicable
Interest Rate be the Eurodollar Rate by giving the Bank verbal notice (a
"Notice of Interest Rate Election") of each such election not later than 1:00
p.m. Lansing, Michigan time two (2) Business Days before each Eurodollar Rate
Loan is to be made, specifying:
B-1
<PAGE>
(a) the date when such election shall be effective (which
shall be a Business Day);
(b) the Specified Principal;
(c) the Applicable Interest Rate; and
(d) the Applicable Interest Period.
If the Borrower fails to make such election, the Applicable Interest
Rate shall be the Prime Rate.
Subsequent Elections as to Borrowing. The Borrower may elect to (a)
continue a Eurodollar Rate Loan or a portion thereof, as a Eurodollar Rate
Loan, or (b) convert a Eurodollar Rate Loan or a portion thereof, to a Prime
Rate Loan, or (c) elect to convert a Prime Rate Loan, or a portion thereof,
to a Eurodollar Rate Loan, in each case by giving verbal notice thereof to
the Bank not later than 1:00 p.m. Lansing time (i) two (2) Business Days
prior to the date any such continuation of or conversion to a Eurodollar Rate
Loan is to be effective and (ii) one (1) Business Day prior to the date any
such continuation of or conversion to a Prime Rate Loan to be effective,
provided that an outstanding Eurodollar Rate Loan may only be converted on
the last day of the Applicable Interest Period with respect thereto, and
provided further, if a continuation of a Loan, or a conversion of a Loan to,
a Eurodollar Rate Loan is requested, such notice shall also specify the
Applicable Interest Period for such continuation or conversion. If the
Borrower shall not timely deliver a Notice of Interest Rate Election with
respect to an outstanding Eurodollar Rate Loan, the Borrower shall be deemed
to have elected to convert such Eurodollar Rate Loan to a Prime Rate Loan on
the last day of the then current Applicable Interest Period. If requested by
the Bank, the Borrower shall confirm any verbal notice hereunder in writing.
Maximum Amount of Revolving Loans. The sum of the aggregate principal
amount of all Revolving Loans shall not at any time exceed the Corporate
Acquisition Loan Commitment Amount.
Limitations of Requests and Elections. Notwithstanding any other
provision of this Note to the contrary, if, upon receiving a request for a
Eurodollar Rate Loan, a request for a continuation of a Eurodollar Rate Loan
as a Eurodollar Rate Loan or a request for a conversion to a Eurodollar Rate
Loan, (a) deposits in dollars for periods comparable to the Eurodollar
Interest Period elected by the Borrower are not available to the Bank in the
relevant interbank secondary market, or (b) the Eurodollar Rate will not
adequately and fairly reflect the cost to the Bank of making, funding or
maintaining the related Eurodollar Rate Loan, or (c) by reason of national or
international financial, political or economic conditions or by reason of any
applicable law, treaty, rule or regulation (whether domestic or foreign) now
or hereafter in effect, or the interpretation or administration thereof by
any governmental authority charged with the interpretation or administration
thereof, or compliance by the Bank with any guideline, request or directive
of such authority (whether or not having the force of law), including without
limitation exchange controls, it is impracticable, unlawful or impossible for
the Bank (i) to make or fund Eurodollar Rate Loans or (ii) to maintain
outstanding such Eurodollar Rate Loan, or (iii) to convert a Loan to a
Eurodollar Rate Loan, then the Borrower shall not be entitled, so long as
such circumstances continue, to request a Eurodollar Rate Loan or a
continuation of or conversion to a Eurodollar Rate Loan. In the event that
such circumstances no longer exist, the Bank shall again consider requests
for Eurodollar Rate Loans, and requests for continuations of and conversions
to Eurodollar Rate Loans.
Maximum Amount of Interest Rate Elections. Except for (a) Borrowings
and conversions thereof which exhaust the entire remaining amount of the
Corporate Acquisition Revolving Loan Commitment,
B-2
<PAGE>
and (b) payments required pursuant hereto, each Borrowing and each
continuation or conversion thereof and each repayment thereof shall be in a
minimum amount of Five Hundred Thousand Dollars ($500,000.00) and in integral
multiples of One Hundred Thousand Dollars ($100,000.00). No more than three
(3) Eurodollar Interest Periods shall be permitted to exist at any one time.
Optional Prepayments of Principal. The Borrower may, at any time,
upon notice to the Bank, pay all or part of the Loan outstanding bearing
interest at the Prime Rate without penalty, premium or other charge. The
Borrower may not prepay any portion of the Loan as to which an election for,
a continuation of or a conversion to a Eurodollar Rate is pending, and any
Eurodollar Rate Loan may only be paid on the last day of the Applicable
Interest Period with respect thereto, unless, in addition to any other
amounts required to be paid, the Borrower also pays the Bank the Prepayment
Amount. All notices of prepayment that are delivered to the Bank by the
Borrower pursuant to this section shall be delivered by 1:00 p.m. Lansing
time on the relevant Business Day or if delivered at a later time shall be
deemed to have been delivered as of the next Business Day. A notice of
prepayment with respect to a Eurodollar Rate Loan shall not be revocable by
the Borrower after delivery to the Bank.
Mandatory Payments of Revolving Loans. The Borrower shall pay to the
Bank, the amount, if any, by which the aggregate unpaid principal amount of
all Revolving Loans from time to time exceeds the Corporate Acquisition Loan
Commitment Amount, together with all interest accrued and unpaid on the
amount of such excess. Such payment shall be immediately due and owing
without notice or demand upon the occurrence of any such excess. Mandatory
payments under this Section shall be applied first to Prime Rate Loans.
Interest Payments. The Borrower shall pay interest to the Bank on
the unpaid principal amount of the Loan, for the period commencing on the
date hereof until the Loan is paid in full, on each Interest Payment Date and
at maturity (whether at stated maturity, by demand, by acceleration or
otherwise), and thereafter on demand, at the Applicable Interest Rate.
Notwithstanding the foregoing, the Borrower shall pay interest on demand at
the Overdue Rate on the outstanding principal amount of the Loan and any
other amount payable by the Borrower hereunder (other than interest) which is
not paid in full when due (whether at stated maturity, by demand, by
acceleration or otherwise) for the period commencing on the due date thereof
until the same is paid in full.
No Set Off or Deduction. All payments of principal and interest and
other amounts payable by the Borrower hereunder shall be made by the Borrower
without set off or counterclaim, and free and clear of, and without deduction
or with holding for, or on account of, any present or future taxes, levies,
imposts, duties, fees, assessments, or other charges of whatever nature,
imposed by any governmental authority, or by any department, agency or other
political subdivision or taxing authority.
Additional Costs. (a) In the event that the adoption of, or any
change in or in the interpretation by any governmental authority of, any
applicable law, treaty, rule or regulation (whether domestic or foreign), or
compliance by the Bank with any guideline, request or directive of any
governmental authority that is promulgated, made, issued, or changed (whether
or not having the force of law), shall (i) change the basis of taxation of
payments to the Bank of any amounts payable by the Borrower under this Note
(other than taxes imposed on the overall net income of the Bank), or (ii)
shall impose, modify or deemed applicable any reserve, special deposit or
similar requirement against assets of, deposits with or for the account of,
or credit extended by the Bank, or (iii) shall impose any other condition
with respect hereto, and the result of any of the foregoing is to increase
the cost to the Bank, of making, funding or maintaining any Eurodollar Rate
Loan or to reduce the amount of any sum receivable by the Bank, thereon, then
the Borrower shall pay to the Bank from time to time, upon request by the
Bank, additional amounts sufficient to compensate the Bank, for such
increased cost or reduced sum receivable to the extent, in the case of any
B-3
<PAGE>
Eurodollar Rate Loan, the Bank is not compensated therefor in the computation
of the interest rate applicable to such Eurodollar Rate Loan or pursuant to
subsection (b) of this Section. A statement as to the amount of such
increased cost or reduced sum receivable and reason therefor, prepared in
good faith and in reasonable detail by the Bank, and submitted by the Bank,
to the Borrower, shall be conclusive and binding for all purposes absent
material error.
(b) In the event that any applicable law, rule, regulation, or
guideline now in effect relating to capital adequacy, or that the adoption
of, or any change in or in the interpretation by any governmental authority
of any applicable law, treaty, rule or regulation (whether domestic or
foreign), or that compliance by the Bank with any guideline, request or
directive of any governmental authority (whether or not having the force of
law) relating to capital adequacy, or that is promulgated, made, issued, or
changed including any risk-based capital guidelines, affects or would affect
the amount of capital required or expected to be maintained by the Bank (or
any corporation controlling the Bank) and the Bank determines that the amount
of such capital required or expected to be maintained is increased by or
based upon the existence of the Bank's obligations hereunder and such
increase has the effect of reducing the rate of return on the Bank's (or such
controlling corporation's) capital as a consequence of such obligations
hereunder to a level below that which the Bank (or such controlling
corporation) could have achieved but for such circumstances (taking into
consideration its policies with respect to capital adequacy) by an amount
deemed by the Bank to be material, then the Borrower shall pay to the Bank,
from time to time, upon request by the Bank additional amounts sufficient to
compensate the Bank (or such controlling corporation) for any increase in the
amount of capital and reduced rate of return which the Bank reasonably
determines to be allocable to the existence of the Bank's obligations
hereunder. A statement as to the amount of such compensation and reason
therefor, prepared in good faith and in reasonable detail by the Bank, as the
case maybe, and submitted by the Bank to the Borrower, shall be conclusive
and binding for all purposes absent material error.
Illegality and Impossibility. In the event that the adoption of, or
any change in or in the interpretation by any governmental authority of, any
applicable law, treaty, rule or regulation (whether domestic or foreign), or
compliance by the Bank with any guideline, request or directive of any
governmental authority that is promulgated, made, issued, or changed (whether
or not having the force of law), including without limitation exchange
controls, shall make it unlawful or impossible for the Bank to maintain any
Eurodollar Rate Loan under this Note, the Borrower shall upon receipt of
notice thereof from the Bank, repay in full the then outstanding principal
amount of each Eurodollar Rate Loan so affected, together with all accrued
interest thereon to the date of payment, (a) on the last day of the then
current Eurodollar Interest Period applicable to such Loan if the Bank may
lawfully continue to maintain such Loan to such day, or (b) immediately if
the Bank may not continue to maintain such Loan to such day.
Funding Losses. If the Borrower makes any payment of principal on a
Eurodollar Rate Loan on any day other than the last day of the Applicable
Interest Period, or if the Borrower fails to make any payment of principal or
interest in respect of a Eurodollar Rate Loan when due, the Borrower shall,
in addition to any amounts that may be payable pursuant hereto, pay to the
Bank the Prepayment Amount on demand. A statement as to the Prepayment Amount
as of the Prepayment Date, prepared in good faith and in reasonable detail by
the Bank and submitted by the Bank to the Borrower, shall be conclusive and
binding for all purposes in the absence of material error.
Regulation D Compensation. If the Eurocurrency liabilities (as
defined in and pursuant to Regulation D of the Board of Governors of the
Federal Reserve System, as amended or modified from time to time) of the Bank
is a positive number, the Bank may require the Borrower to pay to the extent
not already provided for in the definition of Eurodollar Rate,
contemporaneously with each payment of interest
B-4
<PAGE>
on the Eurodollar Rate Loans, additional interest on the related Eurodollar
Rate Loan of the Bank at a rate per annum equal to the excess of (a)(i) the
applicable Eurodollar Rate expressed as a decimal, divided by (ii) one minus
the maximum rate (expressed as a decimal) at which the Bank is required to
maintain reserves on Eurocurrency liabilities or, if such regulation or
definition is modified, and as long as the Bank is required to maintain
reserves against a category of liabilities which includes deposits in Dollars
or includes a category of assets which includes loans in Dollars, the rate at
which such reserves are required to be maintained on such category, over (b)
the rate specified in clause (a)(i). If the Bank wishes to require payment of
such additional interest, it shall so notify the Borrower of such requirement
either on or before the Effective Date or at least three (3) Business Days
prior to the first Eurodollar Interest Period to which such requirement shall
apply, which notice shall indicate the place where such additional interest
shall be payable to the Bank. In the event the Bank shall have given notice
to the Borrower pursuant to the foregoing sentence, thereafter the Borrower
shall pay to the Bank at the place indicated in such notice the additional
interest due under this paragraph on all Eurodollar Rate Loans made by the
Bank thereafter, until the Bank notifies the Borrower that it no longer
wishes to require the payment of the additional interest under this
paragraph, and all such additional interest shall be payable on the Interest
Payment Date with respect thereto.
If an Event of Default (as defined in the Letter Agreement) occurs
and is not cured within the time, if any, provided for by the Letter
Agreement, the Bank may exercise any one or more of the rights and remedies
granted by the Letter Agreement or any document contemplated thereby or given
to a secured party under applicable law, including without limit the right to
accelerate this Note and any other Indebtedness (as defined in the Letter
Agreement), and may set off against the principal of and interest on this
Note or against any other Indebtedness (i) any amount owing by the Bank to
the undersigned, (ii) any property of the undersigned at any time in the
possession of the Bank or any affiliate of the Bank and (iii) any amount in
any deposit or other account (including without limit an account evidenced by
a certificate of deposit) of the undersigned with the Bank or any affiliate
of the Bank.
In the event that and so long as any Event of Default shall have
occurred and be continuing, the indebtedness outstanding under this Note
shall bear interest at the Overdue Rate.
The Undersigned and all accommodation parties, guarantors and
indorsers (i) waive presentment, demand, protest and notice of dishonor, (ii)
agree that no extension or indulgence to the undersigned or release or
non-enforcement of any security, whether with or without notice, shall affect
the obligations of any accommodation party, guarantor or indorser, and (iii)
agree to reimburse the holder of this Note for any and all costs and expenses
incurred in collecting or attempting to collect any and all principal and
interest under this Note (including, but not limited to, court costs and
reasonable attorney fees, whether in-house or outside counsel is used and
whether such costs and expenses are incurred in formal or informal collection
actions, federal bankruptcy proceedings, appellate proceedings, probate
proceedings, or otherwise). This Note shall be governed by and construed in
accordance with the laws of the State of Michigan.
For the purposes of this Note the following terms will have the
following meanings:
"Applicable Interest Period" shall mean the Eurodollar Interest
Period then in effect.
"Applicable Interest Rate" shall mean the Eurodollar Rate or the
Prime Rate then in effect.
B-5
<PAGE>
"Applicable Margin" shall mean, the applicable percentage per annum,
as determined by reference to the following table:
<TABLE>
<CAPTION>
Prime Eurodollar
Margin Margin
------ ----------
<S> <C>
less .50% 2.25%
</TABLE>
"Business Day" shall mean a day other than a Saturday, Sunday or
other day on which any bank is not open to the public for carrying on
substantially all of its banking functions, and if the applicable Business
Day relates to a Eurodollar Rate Loan or request therefor, a day which is
also a day on which dealings in dollar deposits are carried out in the London
interbank market.
"Eurodollar Interest Period" shall mean a period of at least seven
(7) days but not more than ninety (90) days, as selected by Borrower pursuant
to the terms of this Note, commencing on the day a Eurodollar-based Advance
is made, provided that any Interest Period which would otherwise end on a day
which is not a Business Day shall be extended to the next succeeding Business
Day.
"Eurodollar Lending Office" shall mean such branch of Bank, domestic
or foreign, as it may hereafter designate as its Eurodollar Lending Office.
"Eurodollar Rate" shall mean, with respect to any Eurodollar Rate
Loan and the related Eurodollar Interest Period, the per annum rate that is
equal to the sum of:
(a) the Applicable Margin, plus
(b) the quotient of:
(i) the per annum interest rate at which the Bank's
Eurodollar Lending Office offers deposits to prime
banks in the eurodollar market in an amount comparable
to the relevant Eurodollar Rate Loan and for a period
equal to the relevant Eurodollar Interest Period at or
about 11:00 a.m. (Lansing, Michigan time) (or as soon
thereafter as practical) two (2) Business Days prior to
the first day of such Eurodollar Interest Period;
divided by
(ii) a percentage equal to 100% minus the maximum rate on
such date at which the Bank is required to maintain
reserves on "Eurocurrency Liabilities" as defined in
and pursuant to Regulation D of the Board of Governors
of the Federal Reserve System or, if such regulation or
definition is modified, and as long as the Bank is
required to maintain reserves against a category of
liabilities which includes eurodollar deposits or
includes a category of assets which includes Eurodollar
Rate Loans, the rate at which such reserves are
required to be maintained on such category.
"Eurodollar Rate Loan" shall mean the Specified Principal which bears
interest from time to time at the Eurodollar Rate.
B-6
<PAGE>
"Federal Funds Rate" shall mean, for any day, the average of the
rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, as published by the Federal
Reserve Bank of New York for such day, or, if such rate is not so published
for any day, the average of the quotations for such rates received by the
Bank from three federal funds brokers of recognized standing selected by the
Bank in its discretion from time to time as the opening federal funds rate
paid or payable by the Bank in its regional federal funds market for
overnight borrowings from other banks.
"Loan" shall mean the loan made pursuant to this Note. Any such Loan
or portion thereof may also be denominated as a Prime Rate Loan or a
Eurodollar Rate Loan, and such Prime Rate Loans and Eurodollar Loans are
referred to herein as "types" of Loans.
"Overdue Rate" shall mean (a) in respect of the principal of any
Eurodollar Rate Loan, a rate per annum that is equal to the sum of three
percent (3%) per annum plus the per annum rate in effect thereon until the
end of the Applicable Interest Period and, thereafter, a rate per annum that
is equal to the sum of three percent (3%) per annum plus the Prime Rate, and
(b) in respect of the principal of any Prime Rate Loan, and other amounts
payable by the Borrower hereunder (other than interest or amounts described
in clause (a) above), a per annum rate that is equal to the sum of three
percent (3%) per annum plus the Prime Rate.
"Prepayment Amount" shall mean the sum of: (i) Five Hundred Dollars
($500), plus (ii) the amount of principal which the Borrower has elected to
prepay or the amount of principal which the Bank has required the Borrower to
prepay because of acceleration, as the case may be (the "Prepaid Principal
Amount"), (iii) interest accruing on the Prepaid Principal Amount up to, but
not including, the Prepayment Date, and (iv) the present value, discounted at
the Reinvestment Rates (as defined below), of the positive amount by which
(A) the interest the Bank would have earned had the Prepaid Principal Amount
been paid at the end of the current Applicable Interest Period exceeds (B)
the interest the Bank would earn by reinvesting the Prepaid Principal Amount
at the Reinvestment Rates.
"Prepayment Date" shall mean the date on which the Borrower prepays
any principal of a Eurodollar Rate.
"Prime Rate" shall mean the per annum rate that is equal to the
Applicable Margin plus the greater of (i) the per annum rate of interest
announced from time to time by the Bank as its "prime rate", which rate may
not necessarily be the lowest rate charged by the Bank to any of its
customers, or (ii) the Federal Funds Rate plus one half percent (1/2%) per
annum. The Prime Rate shall change simultaneously with any change in such
"prime rate" or such Federal Funds Rate, if applicable.
"Prime Rate Loan" shall mean the Specified Principal which bears
interest at the Prime Rate.
"Reinvestment Rates" shall mean the per annum rates of interest equal
to one-half percent (1/2%) above the rates of interest reasonably determined
by the Bank to be in effect not more than seven (7) days prior to the
Prepayment Date in the secondary market for United States Treasury
Obligations in amount(s) and with maturity(ies) which correspond (as closely
as possible) to the principal installment amount(s) and the payment date(s)
against which the Prepaid Principal Amount will be applied.
"Specified Principal" shall mean that amount of the principal of the
Loan outstanding that bears interest at the Eurodollar Rate.
B-7
<PAGE>
Borrower agrees to make all payments to Bank of any and all amounts
due and owing by Borrower to Bank hereunder on the date provided for such
payment, in United States Dollars in immediately available funds at any
office of Bank in the State of Michigan or such other address as Bank may
notify Borrower in writing.
No delay or failure of Bank in exercising any right, power or
privilege hereunder shall affect such right, power or privilege, nor shall
any single or partial exercise thereof preclude any further exercise thereof,
or the exercise of any other power, right or privilege. The rights of Bank
under this Note are cumulative and not exclusive of any right or remedies
which Bank would otherwise have, whether by other instruments or by law.
This Note shall bind the Borrower, and the Borrower's respective
successors and assigns.
THE BORROWER AND THE BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY
IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER
CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR
CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY
RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE
OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS NOTE.
This Note has been deemed to have been delivered at Detroit,
Michigan, and shall be governed by and construed and enforced in accordance
with the laws of the State of Michigan. Whenever possible each provision of
this Note shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Note shall be prohibited
by or invalid under applicable law, such provision shall be ineffective to
the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Note.
NEOGEN CORPORATION
By:________________________________
Its:_______________________________
B-8
<TABLE>
<CAPTION>
Financial Highlights
Dollars in Thousands, Except Per Share Amounts
Years Ended May 31, 1993 1994 1995 1996 1997 1998
- ------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operations:
Total Revenues $ 7,629 $10,735 $11,726 $12,490 $15,259 $18,488
Diagnostic Product Sales 3,250 6,660 7,330 8,759 11,906 14,994
International Sales 1,772 2,233 2,851 2,580 3,771 4,040
Net Income (Loss) (539) 856 679 452(1) 1,812 2,248
Net Income (Loss) Per Share (.13) .19 .15 .10(1) .32 .35
Average Shares Outstanding 4,041 4,521 4,675 4,514 5,649 6,397
<FN>
(1) Excludes one-time restructuring charges of $695 or $.15 per share.
</TABLE>
Total Revenues
Stockholders' Equity
[graghic omitted]
Total Revenues
[graphic omitted]
<TABLE>
<CAPTION>
Financial Strength:
Years Ended May 31, 1993 1994 1995 1996 1997 1998
- ------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Cash and Investments $ 1,718 $ 3,007 $ 2,238 $ 2,183 $13,044 $10,589
Working Capital 4,454 5,452 5,789 5,235 17,265 17,192
Total Assets 7,304 9,133 11,539 11,531 23,148 25,413
Long-Term Debt 111 15 351 279 208 174
Stockholders' Equity 6,069 7,653 8,836 8,858 21,013 23,609
</TABLE>
1
<PAGE>
To our
Stockholders,
Employees
and Friends:
The 1998 fiscal year was another record-breaking year for sales and earnings
for Neogen. The Company can now boast of quarterly revenue increases, as
compared to the prior year, in 28 of the past 30 quarters.
Worldwide food safety concerns are beginning to be addressed through the
implementation of new food safety regulations. Concerns about animal safety
increased as food safety programs began to focus back inside the farm gate.
The consolidation of meat and milk production in the U.S. continued as herd
sizes increased but producer numbers decreased.
Financial Performance Solid
Neogen's total revenues for the year were approximately $18.5 million, a 21%
increase as compared to fiscal year 1997. At the bottom line, we reported
record profits of approximately $2.2 million, or $.35 per share. Last year
the Company reported profits of approximately $1.8 million, or $.32 per
share. The Company can now claim a string of 21 consecutive profitable
quarters from operations.
Balance Sheet Strengthens
At year end, the Company had approximately $10.6 million in cash and
marketable securities. In addition, Neogen has bank lines of credit totaling
$10 million, with nothing borrowed against these lines. Stockholders' equity
grew to approximately $23.6 million as compared to $21 million at the
beginning of the year.
New Markets Grow
Neogen focuses its marketing strategy on distinct market segments. The
Company's sales into most of these segments grew during the past year. Our
diagnostic sales to the meat and poultry industry jumped by 93% in fiscal '98
on the heels of a 100% increase in the prior year. Diagnostic sales to the
fruit and vegetable industry were up approximately 80% for the year, and the
fledgling seafood marketing effort began to build momentum.
International sales of food diagnostic products were higher than the prior
year, in spite of weakened currency valuations as compared to the U.S. dollar
in numerous Asian and Latin American markets.
Strong performances in most of the Company's food safety diagnostic areas
were overshadowed by a 14% decrease in sales to the grain, nut and spice
industry. This decrease of approximately $650,000 also had a heavy impact on
the company's overall bottom line.
The quality of the grain crop in the U.S., and most major producing
countries, was unusually good during the 1997 growing season. As a result,
there was much less pressure to test for naturally-occurring toxins than in
normal years. During the prior fiscal year, sales to this market increased
40% because of a poor quality wheat crop in some states.
Revenues of Neogen's Lexington, Kentucky, division, which consists primarily
of sales to the professional equine market, doubled in fiscal 1998. Although
these results were aided by two acquisitions during the year, the base
business at the Lexington division also showed good growth.
Revenues at the Company's Ideal Instruments operation recorded a 4% increase
in sales for the year as a result of the new operating strategy announced
last year.
Two New Acquisitions
In July, we acquired the assets of the Triple Crown Company of Fort Pierce,
Florida. This company had a long and valuable reputation in the manufacture
and marketing of pharmaceutical products for the professional equine market.
Since many of their customers were already Neogen customers, we were able to
merge the products into our existing Lexington marketing and manufacturing
operations.
In December, Neogen acquired ImmunoVet operations from Vetoquinol S.A. of
France. This gave Neogen its first U. S. Department of Agriculture-inspected
biologics production facility. We have maintained the inspected facility in
Tampa, Florida, but have merged all other activities with our Lexington
operations.
New Products Introduced
Several new products were introduced during the year -- all of them finding
demand from our current customer base. Early in the year the Company released
a new test for Listeria. The test detects the presence of this bacteria in
food and on surfaces in food processing plants. As one of the four major
foodborne bacterial concerns, this test should continue to bring increased
revenues to the Company.
The Company also introduced three new food safety products that are of
primary interest to the seafood industry. One of these products is a rapid
and inexpensive test for measurement of possible
2
<PAGE>
sulfite residues in shrimp. Neogen's new quantitative test for the detection
of histamine in fish was introduced at mid-year. As the FDA steps up its
regulation of the seafood industry, this test is expected to find widespread
use.
At year end, the Company completed its work on a diagnostic test for the
detection of Vibrio, a bacteria of concern in shellfish and shrimp. The
market debut of this product occurred as Vibrio-contaminated oysters from
Galveston Bay sickened about three hundred people in five states.
During the year, the Company also introduced a test for the detection of
generic E. coli. Revenues from this test are expected to grow as more food
processors use the test as a general indicator of plant sanitation.
Neogen's research and engineering activities also yielded several new
specialty needles at our Ideal Instruments division, as well as new
diagnostic tests for the detection of drugs of abuse in animals.
Neogen has continued to make a significant investment in R & D programs for
new product development. Total R & D spending now equates to approximately 8%
of total revenues. Ten R & D and research projects now underway should result
in several new products in the year ahead.
Diagnostic
Product
Sales
(in thousands)
[graphic omitted]
Operating Expenses Flat
Sales, marketing, general and administrative expenses were approximately the
same percentage of revenues as last year. One of the reasons the expenses
were not reduced was legal costs related to two lawsuits. Though the outcomes
of the lawsuits are not expected to have any material impact on the Company's
operations, the extra legal expenses provided a negative impact to the bottom
line of approximately $.03 per share. Neogen is the plaintiff in both
lawsuits relating to intellectual property. While the outcome of a lawsuit is
never predictable, management believes it should prevail in both.
New Marketing Structure
At the beginning of fiscal year 1999, the Company's 60-person sales and
marketing organization was divided into Food Safety and Animal Safety groups.
We've asked two of our best senior managers to manage these new areas. We
continue to believe that one of the best ways to add value for our
shareholders is to build our industry's strongest sales and marketing
program.
Though separate, there is a definite synergy between the two groups as food
safety moves back inside the farm gate. We believe significant industry
emphasis will be placed on animal safety to make certain that meat and milk
are safe before they leave the farm.
Growth Strategy Focus
Neogen will continue to focus on implementation of its four-pronged approach
to growth in the year ahead. We believe we're poised to take advantage of
market opportunities.
First, we'll grow revenues through increased sales of current products. The
number of meat and poultry plants required to implement the new USDA HACCP
plan will jump from 300 to 3,300 in January, 1999. Implementation of the FDA
mandatory HACCP plan for the seafood industry should intensify. New
regulatory guidelines, which are expected soon for the fruit juice, and fresh
fruit and vegetable industries, should also increase the
demand for testing.
Our second strategy is to continue to introduce products that we can market
to our same customer base. The new products expected to be released this year
also fit this strategy.
Our third growth strategy is to continue to improve distribution in our
international markets. With only 22% of our current sales going to
international customers, there should be opportunity for strong growth in
this area during the new year.
Our fourth strategy is to continue to grow through acquisitions. Cash and
unused bank lines of credit give us in excess of $20 million to pursue this
strategy. Though management is committed to make acquisitions, we will do so
only in areas that are complementary to our existing business, that we know
how to manage, and that can be purchased at the right price.
Neogen believes our 1999 fiscal year will be an exciting one. We're adding
new customers, introducing new products, strengthening our international
distribution, and actively pursuing acquisitions.
[photo omitted]
/s/ James L. Herbert,
- ---------------------------
James L. Herbert, President
3
<PAGE>
Each year at Neogen's Open House for brokers, analysts and shareholders,
Company officials receive numerous questions concerning Neogen's current
operations, and its vision for the future. What follows are a number of those
frequently-asked questions, and the responses of Company officials, for the
benefit of all existing and potential shareholders.
What is Neogen's strategy for growth?
Neogen's goal is to become the dominant developer, manufacturer and marketer
of products dedicated to food and animal safety.
The Company will work aggressively toward that goal utilizing an approach
focused in four areas.
o Sales revenue from existing products will be grown through continued
expansion of markets and Neogen's improved positioning for competitive gains
within those markets.
o The Company will introduce new products and sell them to Neogen's existing
customer base.
o The Company will expand its penetration into the international market,
which Neogen believes is even bigger than the domestic market.
o Neogen will continue to pursue the acquisition of complementary businesses
that fit its overall mission.
[graphic omitted]
Total
Revenues
(in thousands)
[graphic omitted
Neogen's 140 diagnostic test kit products help ensure food's safety -- from
inside the farm gate to the dinner plate.
4
<PAGE>
Are there marketing
synergies between food safety and animal safety?
Neogen views food and animal safety as an unbroken continuum. Placing safe
meat on a dinner plate depends on safe handling practices by the consumer,
processor and animal producer; getting safe food animals to the processor
depends on prudent veterinary practices and contamination-free animal feed;
safe animal feed depends on effective monitoring and testing protocols.
Clearly, ensuring that food on a plate is as safe as possible requires the
food industry to look back inside the farm gate.
Will food safety continue to be a concern?
Changing lifestyles and a globalization of the food supply has led to
dramatic changes in how food is processed and prepared. Ready-to-eat and
microwave-warmed, but not cooked, foods are replacing in-home prepared and
cooked foods. Modern shipping allows for foodstuffs to be shipped from and to
all points of the globe. One infected worker can now contaminate food
destined for thousands of consumers across a wide geographic area. Add to the
equation the emergence of new pathogens, and the potential for foodborne
illness ever grows.
How do Neogen's rapid tests fit into the issue of food safety?
Neogen's rapid and accurate test kits are more critical than ever. When
lettuce-borne E. coli from California can sicken 61 people in Illinois,
Connecticut and New York (and kill a 3-year-old), the need for quick,
accurate tests is tragically evident. Foodborne pathogens must now be rapidly
identified and isolated before they can enter the mass distribution system.
Just how big is the food safety problem?
Estimates of foodborne illness vary greatly among experts because of the
large, unknown number of cases that are unreported and not treated by the
medical community. One of the most respected, and cited, organizations
concerned with food safety is the Council for Agricultural Science and
Technology. It estimates foodborne illnesses in the U.S. alone at up to 33
million a year, and deaths as a result of foodborne-related illnesses at
about 9,000 per year in the U.S.
[graphic omitted]
The FDA estimates 48,000 people in the U.S. get sick each year by drinking
contaminated fruit juices.
5
<PAGE>
How big is the food safety diagnostic test market?
Independent surveys indicate the market should exceed $500 million annually
within the next few years. Based on Neogen's estimates, the Company believes
it has in excess of 80,000 potential customers.
How does Neogen market its food safety products?
Neogen believes the best way to reach markets and build market share is to
build customer "intimacy". Our objective is to develop strong relationships
with existing and potential customers. Furthermore, Neogen sales personnel
are expected to develop expertise in our customers' businesses. By doing so,
we become indispensable to our customers and put Neogen in a much better
position to help solve our customers' problems.
What are Neogen's food safety markets?
Neogen's Food Safety customer base is divided into eight segments: Feed &
Agriculture; Meat, Poultry & Egg; Grain, Nut & Spice; Fruit & Vegetable;
Laboratories; Food Service; Seafood; and International.
What food safety solutions does Neogen provide for these markets?
Neogen provides rapid, accurate screening tests to these markets for
naturally-occurring toxins such as aflatoxin, vomitoxin and histamine;
foodborne bacteria such as E. coli O157:H7 and Salmonella; food allergens
such as peanut components; and general sanitation testing needs. The wide
range of Neogen testing products provides food producers and processors with
an easy, one-stop shopping opportunity.
How are the new
government regulations likely to impact Neogen's sales to the meat and
poultry industry?
The phasing-in of the USDA's Hazard Analysis Critical Control Point (HACCP)
Final Rule in the past year meant 312 of the nation's largest meat and
poultry processing plants were required to implement new regulations which
requires some testing. Within the next two years, about 6,000 additional, mid
size and smaller meat and poultry processors will be required to meet the
HACCP regulations.
Potential Food Safety Customers by
Market Segment
<TABLE>
<S> <C>
Grain, Nut & Spice 20,845
Seafood 1,161
Fruit & Vegetable 8,931
Food Service 36,212
Feed & Agriculture 8,298
International Distributors 307
Meat, Poultry & Egg 11,719
Labs 1,451
</TABLE>
6
<PAGE>
Will regulations affect other food industries served by Neogen?
The seafood, and fruit and vegetable industries are also responding to
increasing governmental action. New HACCP regulations, in place since
December, will likely require seafood processors to test for the presence of
sulfites in shrimp and histamine in some fish species -- tests now available
from Neogen.
Fruit and vegetable producers are also anticipating issuance of FDA
guidelines. One FDA proposal would require fruit and vegetable juice
processors to gradually implement their own antibacterial HACCP plans. That
proposal is in response to a FDA estimate of 48,000 people being sickened
yearly by drinking untreated juices contaminated by such bacteria as
Salmonella and E. coli.
Won't the development of such technologies as irradiation and ozone treatment
render Neogen's bacterial tests obsolete?
The opposite should happen. Companies that install expensive equipment to
kill bacteria will still need a rapid, easy test to ensure the equipment is
working properly. Also, companies that don't test now will have a stronger
incentive to do so if technology exists to kill any bacteria that may be
present.
What new products has or will Neogen develop for the food safety markets?
In the past fiscal year, Neogen released its test for Listeria; a rapid test
to detect generic E. coli and total coliforms; a test to detect sulfites in
shrimp; and a quantitative histamine test.
Recently, Neogen released a test to detect Vibrio parahaemolyticus. This
bacteria sickened more than 300 people in a summer 1998 outbreak. V.
parahaemolyticus is responsible for the majority of foodborne gastroenteritis
where the consumption of fish products contributes significantly to the diet,
such as in the Far East.
Also released was a rapid test to detect peanut components in products not
labeled for peanuts. The peanut allergen product is seen as a major step to
protect those sensitive to the allergen, estimated at 1.3 million in the U.S.
alone. Neogen is also pursuing the development of tests for other allergens
of widespread concern, such as eggs and milk.
Another new Neogen food safety product detects Salmonella enteritidis,
primarily an egg-borne bacteria. S. enteritidis is now the leading cause of
gastroenteritis in the U. S.
[graphic omitted]
Neogen's Alert(R) for Sulfites, Veratox(R) for Chloramphenicol and Reveal(R)
for Vibrio test kits help ensure the safety of shrimp.
7
<PAGE>
How does Neogen define the term "animal safety"?
The term refers to the safety of food animals destined to enter the food
supply while they remain on farms and ranches, as well as products and
services for companion animals including the professional equine market.
What products does Neogen have that are dedicated to animal safety?
Neogen is the largest producer of diagnostic kits for detection of drugs in
animals. Neogen's test for the steroid clenbuterol, for example, can detect
the unscrupulous use of the steroid to bulk up the animal before it can enter
the food supply, and endanger human health.
Neogen's Ideal Instruments subsidiary provides precise veterinary drug
delivery instruments to help minimize drug residues that might otherwise find
their way into meat and milk supplies.
Neogen also markets a complete line of diagnostic and premium health care
products for the professional equine market. Included in these products are
nearly 70 test kits to detect drugs of abuse in horses; a vaccine for Type B
botulism that poses a deadly threat to horses; a line of health care products
for the professional equine practitioner and a group of topical horse
products.
Were the acquisitions Neogen made during the past fiscal
year related to animal safety?
Neogen made two strong acquisitions that have expanded the Company's product
offerings to existing animal safety customers. Neogen bought Triple Crown
Pharmaceuticals, and its equine veterinarian product line, and certain assets
of Vetoquinol U.S.A., Inc. The principal product involved in the Vetoquinol
purchase was EqStim(R), a biologic used by equine veterinarians to stimulate
a horse's immune system.
Both of these acquisitions have been merged into Neogen's existing operations
in Lexington. More importantly, they started contributing positive sales and
profits immediately.
How does Neogen plan to grow its animal safety presence in the next year?
Like food safety, Neogen has organized its animal safety sales and marketing
according to specific, definable market segments. Our goal is to achieve more
sales to existing animal safety customers, and to build a firm foundation for
rapid future growth in existing markets.
8
<PAGE>
[graphic omitted]
Neogen's vaccines and precise drug delivery instruments help keep animals
safe.
[graphic omitted]
Animal
Safety
Sales
(in thousands)
What are Neogen's animal safety markets?
They are: laboratories that use diagnostic tests to detect drugs of abuse in
animals; veterinarians; veterinary supply distributors; over-the-counter
distributors; OEM and specialty product distributors; and international
distributors.
Can Neogen expand the market for veterinary instruments?
Neogen is overcoming the cyclical sales of veterinary instruments by finding
new, related markets for its manufacturing capability. For example, specialty
needles manufactured by Neogen are used to deliver marinades, seasonings and
curing preparations for meat-related industries.
Needles from Ideal Instruments are also being used in a unique application to
vaccinate chicks before they hatch. The practice results in less trauma to
the chicks, which leads to lower mortality rates.
How large are the markets for animal safety?
Management believes the combined markets for animal safety products is in
excess of $1 billion dollars and is growing. The Company estimates there are
in excess of two million customers for these products.
Neogen's primary focus is on the food animal and professional equine portion
of this market.
Can animal safety have an influence on food safety?
Reducing stress on food animals and improving the methods of administering
vaccines and drugs has a big effect on the safety of meat and milk. Animals
under stress have a greater tendency to harbor bacterial infections that will
survive to become foodborne bacteria. Poor quality veterinary instruments
give rise to hidden abscesses in muscles and broken needles left in hams and
roasts.
[graphic omitted]
The development of new markets for its syringes and needles has kept Neogen's
subsidiary, Ideal Instruments -- a 68-year-old company -- growing.
Dedicated to Food and Animal Safety
9
<PAGE>
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.
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.
Results of Operations
<TABLE>
<CAPTION>
REVENUES
(Dollars in Thousands) 1998 Increase 1997
- ---------------------- ---- -------- ----
<S> <C> <C> <C>
Product Sales:
Diagnostic Products $14,994 26% $11,906
Veterinary Instruments 3,494 4% 3,353
------- -- -------
Total Revenues $18,488 21% $15,259
======= == =======
</TABLE>
The strong growth in diagnostic product sales was due to several factors. The
acquisitions of Vetoquinol U.S.A., Inc., effective December 30, 1997 and
Triple Crown, effective July 1, 1997 accounted for $2,499,000 in increased
sales. Greater demand for test kits and other products sold to the
professional equine market contributed $538,000 in higher sales while sales
of test kits and reagents for pharmacologics were up $145,000. Diagnostic
test kits sold to the meat and poultry market for the detection of
microorganisms such as E. coli 0157:H7 and Salmonella increased $644,000, or
93%, in 1998 compared to 1997.
Offsetting these increases in diagnostic product sales was a $725,000 or 22%
decline in sales of test kits used for the detection of vomitoxin. Sales of
diagnostic tests for the detection of mycotoxins, including vomitoxin, are
influenced by the uncertainty of weather which impacts growing conditions for
grains, nuts and spices. Management discussed its belief that sales of
vomitoxin test kits would likely decline in the current fiscal year in the
Company's 10-KSB for the year ended May 31, 1997.
The increase in veterinary instrument sales was primarily the result of sales
to a new customer of specialty syringes and needles used to inject marinades
and spices into various red and white meats.
<TABLE>
<CAPTION>
COST OF GOODS SOLD
(Dollars in Thousands) 1998 Increase 1997
- ---------------------- ---- -------- ----
<S> <C> <C> <C>
Cost of Goods Sold $7,960 28% $6,201
</TABLE>
Costs of goods sold increased $1,759,000 in fiscal year 1998, mostly as a
result of the overall increase in product sales. In addition, raw material
expense increased substantially due to a change in sales mix. Sales of
products sold to the professional equine market, which carry a higher
material cost, increased significantly while sales of diagnostic test kits to
detect vomitoxin, which have a much lower material cost, declined. Management
expects raw material cost to continue to run higher, both in dollars and as a
percent of sales, in the fiscal year ending May 31, 1999.
<TABLE>
<CAPTION>
OPERATING EXPENSES
(Dollars in Thousands) 1998 Increase 1997
- ---------------------- ---- -------- ----
<S> <C> <C> <C>
Sales and Marketing $4,910 17% $4,197
General and Administrative 2,716 22% 2,230
Research and Development 1,425 8% 1,320
</TABLE>
The increase in sales and marketing expense for the year is primarily due to
higher costs, including the acquisitions of Triple Crown and Vetoquinol,
U.S.A., Inc., associated with marketing products to the professional equine
market. Salaries, fringe, recruiting, relocation, commissions, royalties,
travel, advertising and promotions all showed increases compared to the prior
year, which in total amounted to $583,000.
The majority of the increase in general and administrative expense in fiscal
1998 is the result of higher cost in two categories. Consulting expense was
$178,000 higher due primarily to contract services associated with a new
computer installation, increased consulting pertaining to manufacturing and
approvals for professional equine products, and also because of management
consulting pertaining to the Company's Ampcor Diagnostic, Inc. subsidiary.
In addition, legal and professional fees increased $202,000 compared to the
prior year. Management believes that the Company is not involved in any
material adverse legal proceedings. However, Neogen is a party in several
lawsuits as discussed in Item 3. Legal Proceedings in the Company's Form
10-KSB for the year ended May 31, 1998. Management intends to vigorously
pursue this litigation and cannot predict the outcome of these lawsuits.
Furthermore, the Company has no way to predict the level of expenses that may
be incurred in fiscal year 1999 in pursuing this litigation.
10
<PAGE>
<TABLE>
<CAPTION>
OTHER INCOME
(Dollars in Thousands) 1998 Increase 1997
- ---------------------- ---- -------- ----
<S> <C> <C> <C>
Other Income $897 59% $564
</TABLE>
Other income was $333,000 higher than last year. In October 1996, the Company
completed a public offering of common stock. A portion of the proceeds 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 have resulted in higher interest income. In addition, the
Company's share of royalties, paid to an affiliated partnership, increased
significantly compared to the prior year.
<TABLE>
<CAPTION>
NET INCOME and INCOME PER SHARE
(Dollars in Thousands,
Except Per Share Amounts) 1998 Increase 1997
- ------------------------ ---- -------- ----
<S> <C> <C> <C>
Net Income $ 2,248 24% $1,812
Net Income Per Share Diluted $ .35 $ .32
</TABLE>
The increase in net income and net income per share is the direct result of
the increase in sales of diagnostic products, including acquisitions, along
with the increase in other income.
Neogen's effective federal tax rate has been insignificant because the
Company has had net operating loss carryforwards available to offset taxable
income. Upon utilization of its remaining net operating loss carryforwards,
Neogen's effective federal tax rate will increase significantly.
Financial Condition and Liquidity
At May 31, 1998 the Company had $10,589,000 in cash and marketable
securities, working capital of $17,192,00 and stockholders' equity of
$23,609,000. In addition, the Company has bank lines of credit totaling
$10,000,000 with nothing borrowed against these lines as of May 31, 1998.
Cash and marketable securities decreased $2,455,000 during fiscal year 1998
as a result of the acquisitions of certain assets of W.J. Bartus, Inc. and
Vetoquinol U.S.A., Inc..
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 1997. A second and final cash payment
of up to $500,000 will be paid in fiscal year 1999 provided the seller meets
certain conditions of the asset purchase agreement. Effective December 30,
1997 the Company acquired certain assets of Vetoquinol, U.S.A., Inc. located
in Tampa, Florida. The initial purchase price consisted of a cash payment of
approximately $2,035,000 paid at closing and a second cash payment of
approximately $153,000 paid in April 1998.
Accounts receivable were higher at May 31, 1998 than May 31, 1997 partially
as a result of the aforementioned acquisitions and partially because of
higher sales volume during the last quarter of fiscal 1998 compared to the
last quarter of fiscal 1997. Inventories were higher at May 31, 1998 as a
result of the acquisitions, to support increases in sales of professional
equine products and in anticipation of future increases in sales volume.
The increase in goodwill and other non-current assets at May 31, 1998
compared to May 31, 1997 was due to the previously discussed acquisitions.
Accounts payable decreased $264,000 partially due to lower trade payables for
inventory at May 31, 1998 and also due to the timing of year-end cut-offs and
scheduled payment dates for trade payables.
The Company did not borrow any additional funds during fiscal year 1998 and
made scheduled payments on long-term debt totaling $56,000. Neogen expended
approximately $646,000 during 1998 for additions to property, equipment and
other assets. At May 31, 1998 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 twenty of its last twenty-one 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, 1998, along with its available bank lines of credit and cash expected to
be generated from future operations, will be sufficient to fund activities
for the foreseeable future. However, existing cash and marketable securities
may not be sufficient to meet the Company's 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.
Year 2000
The company believes that its financial and manufacturing systems are year
2000 compliant with the exception of the financial software used at its Ideal
Instruments subsidiary. The Company plans on implementing software changes by
November 30, 1998 at the Ideal Instruments subsidiary to ensure year 2000
compliance. The Company does not expect implementation of these changes to
have a material impact on its results of operation. The Company's operations
with respect to the year 2000 may also be affected by other entities with
whom it transacts business. The Company is currently unable to determine the
potential impact, if any, that could result from such entities' failure to
adequately address this issue.
11
<PAGE>
Dedicated to Food and Animal Safety
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, 1998 and 1997, and the related
consolidated statements of income, 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, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ BDO Seidman, LLP
- --------------------
BDO SEIDMAN, LLP
Troy, Michigan
July 16, 1998
12
<PAGE>
<TABLE>
<CAPTION>
Neogen Corporation and Subsidiaries
Consolidated Statements of Income
Year Ended May 31, 1998 1997
- ------------------ ---- ----
<S> <C> <C>
Net Sales $ 18,488,389 $ 15,259,423
------------ ------------
Operating Expenses
Cost of goods sold 7,959,655 6,201,301
Sales and marketing 4,909,997 4,197,283
General and administrative 2,715,738 2,230,438
Research and development 1,424,583 1,319,732
------------ ------------
17,009,973 13,948,754
============ ============
Operating Income 1,478,416 1,310,669
------------ ------------
Other Income (Expense)
Interest income 605,990 449,331
Interest expense (22,581) (66,851)
Other 313,548 181,552
------------ ------------
896,957 564,032
------------ ------------
Income Before Taxes On Income 2,375,373 1,874,701
Taxes On Income (Note 8) 127,000 63,200
------------ ------------
Net Income $ 2,248,373 $ 1,811,501
============ ============
Basic Earnings Per Share (Note 1) $ .36 $ .33
Diluted Earnings Per Share (Note 1) $ .35 $ .32
============ =============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Neogen Corporation and Subsidiaries
Consolidated Balance Sheets
May 31, 1998 1997
- ------- ---- ----
<S> <C> <C>
Assets (Note 4)
Current Assets
Cash $ 719,877 $ 718,864
Marketable securities (Note 2) 9,868,862 12,324,913
Accounts receivable, less
allowance for doubtful accounts
of $227,000 and $320,000 3,088,858 2,024,161
Inventories (Note 1) 4,474,030 3,620,200
Prepaid expenses and other
current assets 441,319 353,437
----------- -----------
Total Current Assets 18,592,946 19,041,575
----------- -----------
Property and Equipment
Land and improvements 49,263 33,882
Buildings and improvements 499,146 463,814
Machinery and equipment 4,356,271 3,707,027
Furniture and fixtures 376,157 325,019
----------- -----------
5,280,837 4,529,742
Less accumulated depreciation 3,395,786 2,965,190
----------- -----------
Net Property and Equipment 1,885,051 1,564,552
----------- -----------
Intangible and Other Assets
Goodwill, net of accumulated
amortization of $456,943 and
$297,520 (Note 3) 4,023,235 2,012,195
Other assets, net of accumulated
amortization of $544,603 and
$457,669 911,410 530,151
----------- -----------
Total Intangible and Other Assets 4,934,645 2,542,346
----------- -----------
$25,412,642 $23,148,473
=========== ===========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Neogen Corporation and Subsidiaries
Consolidated Balance Sheets - (continued)
May 31, 1998 1997
- ------- ---- ----
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 578,814 $ 842,985
Accruals
Compensation and benefits 569,121 607,052
Other 203,895 255,414
Current maturities of long-term
debt (Note 4) 48,672 71,147
------------ ------------
Total Current Liabilities 1,400,502 1,776,598
Long-Term Debt, less current
maturities (Note 4) 174,392 207,770
Other Long-Term Liabilities 228,411 150,905
------------ ------------
Total Liabilities 1,803,305 2,135,273
------------ ------------
Commitments (Notes 3, 7 and 9)
Stockholders' Equity (Notes 5 and 6)
Common stock, $.16 par value, shares
authorized 10,000,000; issued and
outstanding 6,208,179 and 6,110,608 993,309 977,697
Additional paid-in capital 24,269,549 23,937,397
Retained earnings (deficit) (1,653,521) (3,901,894)
------------ ------------
Total Stockholders' Equity 23,609,337 21,013,200
------------ ------------
$ 25,412,642 $ 23,148,473
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Neogen Corporation and Subsidiaries
Consolidated Statements of
Stockholders' Equity
Common Stock Additional Retained
------------------- Paid-In Earnings
Shares Amount Capital (Deficit)
------ ------ ---------- ---------
<S> <C> <C> <C> <C>
Balance, June 1, 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 (Note 5) 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)
Exercise of options 97,100 15,536 329,958 --
Exercise of warrants 471 76 2,194 --
Net income for the year -- -- -- 48,373
--------- ----------- ----------- -----------
Balance, May 31, 1998 6,208,179 $ 993,309 $24,269,549 $(1,653,521)
========= =========== =========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Neogen Corporation
Neogen Corporation and Subsidiaries
Consolidated Statements of
Cash Flows
Year Ended May 31, 1998 1997
- ------------------ ---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 2,248,373 $ 1,811,501
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and amortization 715,681 624,113
Loss (gain) on sale of equipment 8,843 (1,520)
Changes in operating assets and liabilities
Accounts receivable (622,662) (380,980)
Inventories (449,877) (241,529)
Prepaid expenses and other current assets (81,947) (34,555)
Accounts payable (264,171) 345,483
Accrued liabilities (89,450) 186,006
------------ ------------
Net Cash Provided By Operating Activities 1,464,790 2,308,519
------------ ------------
Cash Flows From Investing Activities
Sales of marketable securities 25,575,582 11,886,003
Purchases of marketable securities (23,119,531) (22,653,875)
Proceeds from sale of equipment 20,975 7,206
Purchases of property, equipment and other assets (645,681) (630,760)
Acquisitions of businesses (3,587,033) (53,122)
------------ ------------
Net Cash Used In Investing Activities (1,755,688) (11,444,548)
------------ ------------
Cash Flows From Financing Activities
Net proceeds from issuance of common shares 347,764 10,343,995
Payments on long-term borrowings (55,853) (71,148)
Net payments on notes payable - banks -- (1,043,946)
------------ ------------
Net Cash Provided By Financing Activities 291,911 9,228,901
------------ ------------
Net Increase in Cash 1,013 92,872
Cash, at beginning of year 718,864 625,992
------------ ------------
Cash, at end of year $ 719,877 $ 718,864
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
17
<PAGE>
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 dedicated to food and animal safety. 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,
contribute a significant portion of the Company's revenues and profits. 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.
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:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Raw material $2,003,124 $1,507,216
Work-in-process 837,679 852,789
Finished goods 1,633,227 1,260,195
---------- ----------
$4,474,030 $3,620,200
========== ==========
</TABLE>
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 $469,324 and $389,582 in
1998 and 1997, 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.
18
<PAGE>
Neogen Corporation and Subsidiaries
Notes to Consolidated Financial Statements
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 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.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS
No. 128 replaced the previously reported primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
necessary, restated to conform to the SFAS No. 128 requirements. The
following table presents the earnings per share calculations:
<TABLE>
<CAPTION>
For the Year Ended May 31, 1998 1997
- -------------------------- ---- ----
<S> <C> <C>
Numerator for Basic and Diluted
Earnings Per Share
Net income $2,248,373 $1,811,501
---------- ----------
Denominator
Denominator for basic earnings
per share - weighted average
shares 6,176,995 5,512,633
Effect of Dilutive Securities
Stock options and warrants 219,860 135,871
---------- ----------
Dilutive Potential Common Stock
Denominator for diluted earnings
per share adjusted weighted
average shares and assumed
conversions 6,396,855 5,648,504
========== ==========
<CAPTION>
For the Year Ended May 31, 1998 1997
- -------------------------- ---- ----
<S> <C> <C>
Basic Earnings Per Share .36 .33
Diluted Earnings Per Share .35 .32
========== ==========
</TABLE>
Options to purchase 33,400 and 128,500 shares of common stock at prices
ranging from $11.31 to $13.25 and $7.50 to $9.25 in 1998 and 1997
respectively, were outstanding, but were not included in the computation of
diluted earnings per share because the option's exercise price was greater
than the average market price of the common shares.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", and SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." These statements are
effective for financial periods beginning after December 15, 1997 and require
comparative information for earlier years to be restated. Management has not
determined the impact, if any, these statements may have on future financial
statement disclosures.
Statement of Position (SOP) 98-5, "Reporting on the Cost of Start-Up
Activities", was issued in April 1998 and SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", was issued in June 1998.
These statements are effective in fiscal 2000 and are not
expected to have a material impact on the
consolidated financial statements.
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, 1998 and 1997.
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>
1998 1997
---- ----
<S> <C> <C>
Corporate Debt Securities $ 7,770,996 $10,674,812
Certificates of Deposit 1,099,653 500,000
U.S. Treasury and
Agency Securities 998,213 1,150,101
----------- -----------
$ 9,868,862 $12,324,913
=========== ===========
19
<PAGE>
Neogen Corporation and Subsidiaries
Notes to Consolidated Financial Statements
3. Acquisitions
Effective July 1, 1997, Neogen acquired certain assets of Triple Crown, a
division of W.J. Bartus, Inc. of Fort Pierce, Florida. The acquisition was
accounted for by the purchase method and all acquired assets, consisting of
inventory, fixed assets and 20 related products were moved to the Company's
Lexington, Kentucky division.
The initial purchase price consisted of a cash payment of approximately
$1,400,000, resulting in goodwill of approximately $900,000. Additional
consideration in the amount of approximately $500,000 is expected to be paid
in fiscal 1999 based upon the seller meeting certain conditions of the asset
purchase agreement.
Effective December 30, 1997, Neogen acquired certain assets of Vetoquinol,
U.S.A., Inc. located in Tampa, Florida. The acquisition was accounted for by
the purchase method. Neogen plans to continue to operate the production
facility in Tampa and has relocated all sales and administrative functions to
the Company's Lexington, Kentucky facility.
The purchase price consisted of initial consideration of approximately
$2,035,000 in cash paid at closing. A second cash payment of approximately
$153,000 was paid in April 1998. The cumulative purchase price resulted in
goodwill of approximately $1,250,000. Additional consideration not to exceed
$200,000 may be paid based upon operating performance for the twelve month
periods ending December 31, 1998 and 1999.
Pro forma results of operations are not presented as the effect of the
acquisitions was not material to the consolidated results of operations of
the Company for the year ended May 31, 1998.
4. Notes Payable and Long-Term Debt
The Company and its subsidiaries have available working capital
lines-of-credit and borrowing arrangements with banks totalling $2,500,000.
At May 31, 1998 and 1997, there were no borrowings outstanding. These
arrangements bear interest from the prime rate less 0.50% to the prime rate
plus 0.75% (the prime rate was 8.50% at May 31, 1998), and are collateralized
by substantially all assets of the Company and its subsidiaries.
In addition, the Company maintains an unsecured acquisition line-of-credit in
the amount of $7,500,000 at the prime rate less 0.50%. There were no
borrowings on this line-of-credit at May 31, 1998.
Long-term debt consisted of the following:
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Term note payable to bank $223,064 $238,092
Installment note payable -- 40,825
-------- --------
223,064 278,917
Less current maturities 48,672 71,147
-------- --------
Total Long-Term Debt $174,392 $207,770
======== ========
</TABLE>
The term note is payable in sixty monthly installments of $4,056 plus
interest at the prime rate less 0.50% and is collateralized by substantially
all the assets of Neogen and 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:
1999 - $48,672; 2000 - $48,672; 2001 - $48,672; 2002 - $48,672; and
2003 - $28,376
5. 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.
6. Stock Options and Stock Warrants
The Company maintains Stock Option Plans (the Plans) 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 number of shares
authorized for issuance under the Plans is 1,459,375. At May 31, 1998,
options have been granted with three to five year vesting schedules and
option terms of five to ten years. A total of 366,600 shares were available
for future grants under the Plans.
The Company applies Accounting Principles Board Opinion No. 25 in accounting
for its stock option plans. Accordingly, no compensation
20
<PAGE>
Neogen Corporation and Subsidiaries
Notes to Consolidated Financial Statements
cost has been recognized for the Plans. 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 and earnings per share would have been the following pro forma
amounts:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net Income
As reported $ 2,248,373 $ 1,811,501
Pro forma 1,921,062 1,571,757
Earnings Per Share
As reported: Basic .36 .33
Diluted .35 .32
Pro forma:
Basic .31 .29
Diluted .30 .28
=========== ===========
</TABLE>
The following is a summary of the Plans' activity:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------ ----------------
<S> <C> <C>
Outstanding at June 1, 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
Granted 145,000 9.08
Exercised (97,100) 3.56
Forfeited (10,700) 6.94
------- --------
Outstanding at May 31, 1998
(209,544 exercisable) 526,900 $ 7.03
======= ========
</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 1998 and 1997, respectively: dividend yield of 0%
for both years: expected volatility of 55.0% and 68.0%; risk free interest
rates of 6.0% and 6.5%; and expected lives of four years for 1998 and from
five to ten years for 1997.
The weighted-average grant date fair value of options granted in 1998 and
1997 was $4.32 and $4.38, respectively.
The following is a summary of stock options outstanding at May 31,1998:
Options Outstanding
<TABLE>
<CAPTION>
Weighted
Average Weighted
Remaining Average
Contractual Exercise
Price Range Number Life (Years) Price
----------- ------ ------------ --------
<C> <C> <C> <C>
$1.88 - 2.75 52,300 1.8 $ 2.29
2.87 - 2.87 6,000 2.7 2.87
4.63 - 6.88 119,100 3.4 6.03
7.13 - 9.25 316,100 4.4 7.71
11.31 - 13.25 33,400 7.3 12.31
526,900 4.1 $ 7.03
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
Weighted
Average
Price Range Number Price
- ----------- ------ --------
<C> <C> <C> <C>
$ 1.88 - 2.75 42,200 $2.25
2.87 - 2.87 6,000 2.87
4.63 - 6.88 73,568 5.71
7.13 - 9.25 87,776 7.53
11.31 - 13.25 -- --
------- -----
209,544 $5.69
======= =====
</TABLE>
The weighted-average exercise price of the 219,077 shares which were
exercisable at May 31, 1997, was $4.52.
The following table summarizes warrant activity for the years ended May 31,
1998 and 1997. All warrants are exercisable for unregistered common stock of
the Company and expire in 2000.
<PAGE>
- -----------------------------------------------------------------------------
Neogen Corporation and Subsidiaries
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warrant
Shares Price
------ -----
<S> <C> <C>
Outstanding Warrants
at June 1, 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
Warrants exercised during the year (471) 4.82
Warrants expiring during the year (4,856) 4.82
------ --------------
Outstanding Warrants
at May 31, 1998 43,265 $ 4.82
------ --------------
</TABLE>
7. 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 1998 and 1997
was $713,000 and $771,000, respectively.
The Company leases office and manufacturing facilities under noncancelable
operating leases. Rent expense for 1998 and 1997 was $282,000 and $215,000,
respectively. Future minimum rental payments for these leases are as follows:
1999 - $277,000; 2000 - $141,000; and 2001 - $30,000.
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, 1998, the Company has net operating loss carryforwards of
approximately $670,000 for income tax purposes which expire between 2002 and
2008. In addition, the Company has approximately $370,000 of tax credit
carryforwards, the majority of which expire between 1999 and 2010.
Approximately $90,000 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,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Deferred tax liabilities: 1998 1997
---- ----
<S> <C> <C>
Property and equipment $ 147,000 $ 126,000
Losses of affiliated partnerships 45,000 54,000
----------- -----------
Total Deferred Tax Liabilities 192,000 180,000
Deferred tax assets:
Net operating loss carryforwards 228,000 748,000
Tax credit carryforwards 373,000 285,000
Inventory 114,000 233,000
Other 176,000 247,000
----------- -----------
891,000 1,513,000
Valuation Allowance for
Deferred Tax Assets (699,000) (1,333,000)
Net Deferred Tax Assets 192,000 180,000
----------- -----------
Net Deferred Tax $ -- $ --
</TABLE>
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. 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, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Tax at U.S. statutory rates $ 808,000 $ 637,000
Adjustment of valuation allowance (634,000) (665,000)
Alternative minimum tax 40,000 35,000
State income taxes, net of tax effect 57,000 17,000
Tax credit carryforwards (88,000) (35,000)
Other (56,000) 74,200
--------- ---------
Taxes on Income $ 127,000 $ 63,200
</TABLE>
22
<PAGE>
- -----------------------------------------------------------------------------
Neogen Corporation and Subsidiaries
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------------------
Notes to Consolidated Financial Statements
9. 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 60% (40% in fiscal 1997) of the first
5% deferred. The Company's expense under this plan was $72,292 and $53,752
for the years ended May 31, 1998 and 1997, respectively.
10. 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,
microorganisms and a line of consumable products marketed to the professional
equine industry. 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.
The veterinary instrument segment includes veterinary instruments to provide
more precise and accurate delivery of animal health products.
The following table summarizes Neogen's industry segment information:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues
Diagnostic products $ 14,994,411 $ 11,906,000
Veterinary instruments 3,493,978 3,353,423
------------ ------------
$ 18,488,389 $ 15,259,423
============ ============
Operating Income (Loss)
Diagnostic products $ 1,710,204 $ 1,502,614
Veterinary instruments (231,788) (191,945)
------------ ------------
$ 1,478,416 $ 1,310,669
============ ============
Identifiable Assets
Diagnostic products $ 12,682,961 $ 8,091,565
Veterinary instruments 2,860,819 2,731,995
Corporate 9,868,862 12,324,913
------------ ------------
$ 25,412,642 $ 23,148,473
============ ============
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Depreciation and Amortization Expense
Diagnostic products $584,457 $509,460
Veterinary instruments 131,224 114,653
-------- --------
$715,681 $624,113
======== ========
Capital Expenditures
Diagnostic products $351,923 $417,192
Veterinary instruments 224,154 210,040
-------- --------
$576,077 $627,232
======== ========
</TABLE>
Neogen has no significant foreign operations. Export sales amounted to
$4,039,571 or 22% of consolidated sales in 1998 and $3,771,168 or 25% in
1997, 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.
11. Supplemental Disclosure of
Cash Flow Information
<TABLE>
<CAPTION>
1998 1997
---- ----
Cash Paid During the Year For
<S> <C> <C>
Interest $22,793 $67,906
Taxes on income 53,071 24,741
------- -------
23
<PAGE>
Officers
James L. Herbert
President
Chief Executive Officer
Lon M. Bohannon
Vice President
Chief Financial Officer
Edward L. Bradley
Vice President
Food Safety Sales & Marketing
Terri A. Juricic
Vice President
Animal Safety Sales & Marketing
Joseph M. Madden, Ph.D.
Vice President
Scientific Affairs
Brinton M. Miller, Ph.D.
Senior Vice President
Paul S. Satoh, Ph.D.
Vice President
Research & Development
Gerald S. Traynor
Vice President
Instrument Development & Manufacturing
Scientific Review Council
John E. Cantlon, Ph.D.
Chairman
Former Vice President for Research
& Graduate Studies
Michigan State University
Perry J. Gehring, DVM, Ph.D.
Former Vice President
Research and Development
Dow Elanco
Robert Hollingworth, Ph.D.
Director
Pesticide Research Center
Michigan State University
Gavin Meerdink, DVM
Head, Veterinary Toxicology
College of Veterinary Medicine
University of Illinois
N. Edward Tolbert, Ph.D.
Professor of Biochemistry
Michigan State University
Member, National Academy
of Sciences
Larry Borchert, Ph.D.
Former Director of Quality Control
Oscar Mayer Foods Corp.
Directors
Herbert D. Doan
Chairman of the Board
Former President & CEO
Dow Chemical Company
James L. Herbert
President & CEO
Neogen Corporation
G. Bruce Papesh
Secretary of the Board
President
Dart, Papesh & Co.
Robert M. Book
President, Agrivista, Inc.
Former Vice President
Elanco Products Company
Gordon E. Guyer, Ph.D.
Former Director
Michigan Department of Agriculture
Leonard Heller, Ph.D.
Independent Investor
and Consultant
Jack C. Parnell
Governmental Relations Advisor
Kahn, Soares & Conway
Former Deputy Secretary,
U.S. Dept. of Agriculture
Thomas H. Reed
Vice President
Southern States Co-op Inc.
Lon M. Bohannon
Vice President & Chief Financial Officer
Neogen Corporation
Legal Counsel
Fraser, Trebilcock, Davis & Foster, P.C.
1000 Michigan National Tower
Lansing, MI 48933
Independent Auditors
BDO Seidman, LLP
755 West Big Beaver, Suite 1900
Troy, MI 48084-0178
Form 10-KSB
Copies of Form 10-KSB will be provided
upon request without charge to persons directing
their request to:
Neogen Corporation,
Attention: Corporate Secretary
620 Lesher Place
Lansing, MI 48912
Stock Transfer Agent and Registrar
American Stock Transfer & Trust Co.
40 Wall Street
New York, NY 10005
Annual Meeting
9:00 a.m.
October 8, 1998
University Club of Michigan State University
3435 Forest Road
Lansing, MI 48909
Stock Profile Activity
The Company's common stock is traded in the over-the-counter market and
quoted in the NASDAQ National Market System under the symbol NEOG. Price
ranges reported are based on inter-dealer sale quotations, as reported by
NASDAQ, without adjustments for markups, markdowns, or commissions typically
paid by retail investors, and may not represent actual transactions. No cash
dividends have ever been paid, and the Company does not currently anticipate
paying cash dividends in the foreseeable future. As of July 31, 1998, there
were approximately 9,000 holders of the Company's common stock.
</TABLE>
<TABLE>
<CAPTION>
Year Ended Fiscal Quarter High Low
- ---------- -------------- ---- ---
<S> <C> <C> <C>
May 31, 1998 First Quarter $ 12.25 $ 7.00
Second Quarter $ 14.88 $10.00
Third Quarter $ 14.00 $ 9.88
Fourth Quarter $ 12.25 $ 8.00
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>
Neogen Corporation
SUBSIDIARES OF THE REGISTRANT EXHIBIT 21
NEOGEN CORPORATION AND SUBSIDIARIES
May 31, 1998
<TABLE>
<CAPTION>
PERCENTAGE
OWNED
STATE BY NEOGEN
INCORPORATED CORPORATION
------------ -----------
<S> <C> <C>
Neogen Research Corporation II Michigan 90%
Neogen Research Corporation IV Michigan 100%
Ideal Instruments, Inc. Michigan 100%
AMPCOR Diagnostics, Inc. Michigan 100%
</TABLE>
All of the subsidiaries listed above are included in the consolidated
financial statements of Neogen Corporation.
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 16, 1998, 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, 1998.
BDO SEIDMAN, LLP
Troy, Michigan
August 20, 1998
<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, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 719,877
<SECURITIES> 9,868,862
<RECEIVABLES> 3,315,858
<ALLOWANCES> 227,000
<INVENTORY> 4,474,030
<CURRENT-ASSETS> 18,592,946
<PP&E> 5,280,837
<DEPRECIATION> 3,395,786
<TOTAL-ASSETS> 25,412,642
<CURRENT-LIABILITIES> 1,400,502
<BONDS> 0
0
0
<COMMON> 993,309
<OTHER-SE> 22,616,028
<TOTAL-LIABILITY-AND-EQUITY> 25,412,642
<SALES> 18,488,389
<TOTAL-REVENUES> 18,488,389
<CGS> 7,959,655
<TOTAL-COSTS> 17,009,973
<OTHER-EXPENSES> (919,538)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,581
<INCOME-PRETAX> 2,375,373
<INCOME-TAX> 127,000
<INCOME-CONTINUING> 2,248,373
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,248,373
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.35
</TABLE>
