U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(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, 1999
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 registrant in its charter)
MICHIGAN 38-2367843
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
620 LESHER PLACE, LANSING, MICHIGAN 48912
(Address of principal executive offices) (Zip Code)
517/372-9200
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $ .16 PAR VALUE
(Title of class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers in
response to Item 405 of Regulation S-K 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-K or any amendment to this Form 10-K (__)
The issuer's revenue for its most recent fiscal year was $22,179,008
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of May 31, 1999 was $ 36,358,917 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 9, 1999, registrant had outstanding 5,929,279 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 7, 1999 ANNUAL MEETING OF SHAREHOLDERS IS INCORPORATED BY
REFERENCE INTO PART III OF THIS FORM 10-K.
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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 food
safety segment consists primarily of diagnostic test kits and related
products marketed to food producers and processors to aid in the detection of
foodborne bacteria, natural toxins, food allergens, drug residues, pesticide
residues, plant disease infections and levels of general sanitation. The
diagnostic test kits are generally less expensive, easier to use and provide
greater accuracy and speed than many of the conventional diagnostic methods
currently in use. The majority of the tests are disposable, single-use,
immunoassay products that rely on Neogen's proprietary antibodies to produce
rapid and accurate test results.
The Company's animal safety segment is primarily engaged in the
production and marketing of products dedicated to animal health. These
products include more than 250 different veterinary instruments used to
administer precise amounts of antibiotics and vaccines helping to reduce drug
residues in meat and milk supplies. This 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 the treatment of equine respiratory infections and a line of premium
health care products.
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 businesses and forming strategic alliances.
The Company was formed as a Michigan corporation in June 1981 and
actual operations began in 1982. The Company's principal executive offices
are located at 620 Lesher Place, Lansing, Michigan 48912-1595 and its
telephone number is (517) 372-9200.
Recent Developments
Government Regulations
Federal regulations concerning food safety and food adulteration
have had a favorable impact on sales of several of the Company's food safety
products. Regulations issued by the U.S. Department of Agriculture and the
U.S. Food and Drug Administration governing federally inspected meat, poultry
and seafood processing plants require implementation of a Hazard Analysis and
Critical Control Points (HACCP) program. HACCP is a prevention-oriented
system that requires plants to identify critical control points along their
production lines and ensure that practices at those points minimize or
prevent the likelihood of bacterial contamination or growth. As HACCP plans
continue to be implemented and refined, Neogen expects facility environmental
testing, product contact surface testing and end-product testing to increase,
resulting in higher sales for several of the Company's diagnostic test kits.
Sale of Human Clinical Product Line (See Note 4 of the Notes to Consolidated
Financial Statements)
In April 1999, the Company sold its AMPCOR human clinical product
line for approximately $500,000. The sale allows management to focus
resources on growth opportunities in the Company's primary business segments
of food and animal safety. Sales of human clinical products were not material
to the consolidated sales of the Company.
In conjunction with the sale of the AMPCOR human clinical product
line, the Company announced in May 1999 that it was closing its manufacturing
operations for diagnostic test kits to detect microorganisms in Bridgeport,
New Jersey. The Company expects to realize ongoing cost savings in excess of
$200,000 annually by consolidating manufacturing operations into its Lansing,
Michigan facility.
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Share Repurchase Program (See Note 12 of the Notes to Consolidated Financial
Statements)
In January 1999, the Company announced that its Board of Directors
increased its authorization to repurchase Neogen common stock from the
previously authorized 200,000 shares to 500,000 shares. The Board and
Neogen's management continues to believe that the Company's shares are
undervalued from time to time by the market. As of August 9, 1999, the
Company had repurchased approximately 315,000 shares in open market and
negotiated transactions. However, there is no guarantee as to the exact
number of shares that may be repurchased under this program.
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
that expand its core business. Since 1982, the Company has made several such
acquisitions. The information below summarizes recent acquisitions.
BotVax(TM) B
In August 1998, the Company purchased seed cultures, inventories,
manufacturing protocols and USDA license to manufacture Type B equine
botulism vaccine (BotVax B) from BioPort Corporation of Lansing, Michigan.
The inventories and technology were transferred to the Company's Tampa,
Florida facility where BotVax B will be produced for sale to the professional
equine market. Prior to obtaining the manufacturing rights to BotVax B,
Neogen marketed this product under terms of a distribution agreement with the
Michigan Department of Public Health. The rights to BotVax B was among the
items purchased by BioPort from the Michigan Department of Public Health in
August, 1998. The Company acquired the manufacturing rights to BotVax B
primarily to improve gross margins and ensure availability of future supplies
of inventory. (See note 3 of the Notes to Consolidated Financial Statements).
Triple Crown(TM)
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 $2,350,000 and $1,930,000 in sales in the
fiscal years ended May 31, 1999 and 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
Vetoquinol S.A. of France. 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 $1,200,000 and $570,000 of sales
during fiscal years ended May 31, 1999 and 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's strategy to
achieve this objective includes the following:
o Increased Sales of Existing Products. The Company will
continue to expand its product offerings 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;
pharmacologic research; and private and public laboratories.
o Introduction of New Products. The Company has a continued
commitment to research and development programs, and has invested
approximately 8% of revenues in this area over the past three 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.
o Expansion of International Sales. The Company believes that
the demand outside the United States for food and animal safety
products is at least equal to demand in the country. 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 markets where there is a growing need
for products such as those manufactured by the Company.
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o 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. Management believes 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, food allergens, drug residues, foodborne bacteria, pesticide
residues, disease infections and levels of general sanitation. The Company
also markets a complete line of veterinary instruments and a line of premium
equine health care products devoted to animal safety. 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
products. 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, food allergens,
pesticides and foodborne bacteria. The Company generally defines this market
as products as they 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 processed in the United States each year.
The principal concern for meat, poultry and egg safety is contamination by
foodborne bacteria.
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 E. coli O157:H7, Salmonella, Listeria bacteria, 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 HACCP regulations began in January 1997 for all meat
and poultry plants in the United States according to an adoption schedule
that will continue through January 2000. These new regulations mandate
certain bacteria testing by all inspected plants, and the programs encourage
the use of a number of other rapid tests, such as those produced by the
Company.
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Seafood Processors
Seafood is known to cause foodborne illnesses as a result of both
natural toxins and bacteria. In December 1995, the United States 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 implementing quality control procedures that 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 manufactures 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 health care products that are sold to
the professional equine market. The Company's line of diagnostic tests to
detect drugs of abuse in racing animals are sold virtually throughout the
world. Most animal racing jurisdictions perform post-race tests on horses and
greyhounds to make certain the animals' performance was not altered 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.
Pharmacologic Research
The Company sells a limited number of products used by the
pharmaceutical research industry. Since these products can be manufactured in
the same facilities as used to produce the Company's test kits, utilizing the
same equipment and personnel, the Company has continued to support this
market activity.
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 this market.
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
Food Safety
The Company has developed and markets a number of food safety
diagnostic test kits. Generally characterized as immunoassay products that
rely on the Company's proprietary antibodies capable of detecting specific
residues at the parts per billion levels. Generally, the test kits are
faster, less expensive, require less laboratory equipment and less technical
capabilities than conventional testing methods.
The Company's food safety test kits aimed at the detection of
harmful foodborne bacteria 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, and E. coli O157:H7 and Company
scientists are developing test kits for other harmful bacteria. Through a
marketing arrangement with Biotrace International PLC, the Company
distributes the Uni-Lite XCEL(R), an instrument used to detect general
sanitation levels. The Company also has marketing rights from Orion
Diagnostica to distribute four different tests for microbiological
contamination, including yeast and fungi.
The Company's Veratox(R), and Agri-Screen(R) diagnostic tests are
used by the food industry to detect levels of naturally-occurring toxins.
These products include both qualitative and quantitative tests for aflatoxin,
vomitoxin, T-2 toxin, zearalenone, ochratoxin, histamine and fumonisin. 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 sulfite levels do not
exceed federal regulatory levels.
The Company also markets qualitative and quantitative tests to
detect minute levels of food allergens under the trade names Veratox and
Alert. Currently, tests are available for peanut and egg residues, two of the
most common of all food allergies.
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.
Sales of food safety products accounted for approximately 45%, 46%
and 56%, of the Company's total revenues for fiscal years 1999, 1998 and 1997
respectively.
Animal Safety
The Company markets 69 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 BotVax 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 produces and markets EqStim(R), and ImmunoRegulin(R),
biologic products used as immunostimulants to help fight off infections in
horses and dogs.
Through its wholly owned subsidiary Ideal Instruments, Inc.
("Ideal"), the Company markets a complete line of veterinary instruments and
animal health delivery systems. Ideal offers approximately 250 different
products, over half of which are instruments used to deliver animal health
products, such as antibiotics and vaccines. Most of the remaining instruments
are used in obstetrics and surgery. Included among these products is a line
of disposable syringes and needles presently custom manufactured, and
imported by Ideal.
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The veterinary instruments product line is designed to provide
better control of animal health products, thereby reducing the likelihood of
antibiotic and pharmaceutical residues contaminating meat or milk products.
At the same time, the use of quality, high precision delivery instruments
helps producers improve efficiency.
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 K-Gold, the Company sells reagents used by
diagnostic test kit manufacturers.
In fiscal years ended May 31, 1999, 1998 and 1997, sales of animal
safety products as a percentage of total revenues were 55%, 54% and 44%
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 20
individuals in its research and development department, including
immunologists, chemists, engineers and microbiologists. Research and
development expenditures were approximately $1.6 million, $1.4 million and
$1.3 million, representing 7%, 8% and 9%, of total revenues in fiscal 1999,
1998 and 1997, respectively. The Company currently intends to maintain its
research and development expenditures at approximately 7%-8% 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 releases. The Company believes
its research strategy has enabled it to produce better products, faster and
more cost effectively than if the research, development and testing were done
exclusively by Company employees in Company facilities.
Other Collaboration Efforts
Portions of certain technologies utilized in some products marketed
by the Company were acquired from or developed in collaboration with
affiliated partnerships, independent scientists, governmental units,
universities, and other third parties. The Company has entered into
agreements with these parties which provide for the payment of royalties
based upon sales of products which utilize the pertinent technology. For
fiscal 1999, 1998 and 1997, royalty payments under these agreements amounted
to $780,000, $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 products.
During the fiscal year ended May 31, 1999, 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 fiscal 1999 accounted
for 22% of the Company's consolidated revenues. (See Note 11 of the Notes to
the Company's Consolidated Financial Statements). No single distributor or
customer accounted for more than 10% of the Company's revenues in any of the
past three years.
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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. Approximately 71 employees, or 34% of the Company's
total workforce, 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; feed and agriculture; meat,
poultry and eggs; fruits and vegetables; retail food services; private
laboratories; and seafood.
Animal Safety Products. 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
sales force who sell directly to equine veterinarians and also work through
established distributors selling to this market. The Company also has a sales
force specifically dedicated to marketing its veterinary instruments through
a network of domestic and international distributors.
International Sales. Virtually all of the Company's sales to
customers outside of the United States and Canada are handled by
distributors, who typically market the Company's products, as well as other
products that are used by the same customer base. The Company is expanding
distribution channels in South and Central America, 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 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 food and animal safety products. In many cases, the Company has
developed unique antibodies capable of detecting residues at minute levels.
The supply of these antibodies, and the proprietary techniques utilized for
their development, may 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 BotVax B, EqStim and Immuno-Regulin. On a combined bases,
sales for these products amounted to approximately 11% of total sales in
fiscal year 1999. 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 laboratories.
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Manufacturing
The Company manufactures its products in Lansing, Michigan,
Lexington, Kentucky, Schiller Park, Illinois and Tampa, Florida. There are
currently 94 full-time employees assigned to manufacturing in these four
locations. All locations generally operate on a one-shift basis, but could be
increased to a two-shift basis. The Company believes it could increase the
current output of its primary product lines by more than 50% 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 veterinary instruments, is a complete metal working
operation with equipment to process 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
the 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 facilities for inventory and distribution to customers. The
Company's BoxVax B vaccine is also produced in the Tampa facility, utilizing
Type B botulism seed cultures and a traditional fermentation process.
Manufacturing diagnostic tests for natural toxins, microorganisms,
food allergens, pesticides and plant disease diagnostic tests takes place 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's
backlog of unshipped orders at any given time is not significant.
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 believes that it maintains inventory levels and sells
its products under terms and conditions that are normal for companies against
which it competes. 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 owns two separate buildings located in Lansing,
Michigan. A 26,000 square foot building located at 620 Lesher Place was
purchased on a 10-year land contract in 1985. All of the Company's corporate
administrative offices, along with sales and marketing offices and research
facilities for food safety are maintained in this building. In 1998, Neogen
purchased for $200,000 cash a 14,000 square foot brick building located at
600 Lesher Place. The Company has renovated this building and uses it
primarily for production of food safety diagnostic test kits. The Company
also owns a facility comprising 1,100 square feet within one block of the
existing corporate headquarters used for various administrative functions
including temporary office space and records storage.
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.
Animal safety sales and marketing, and the Company's operations
focused on the professional equine market are located in 23,000 square feet
of leased space in a three-story building at 628 Winchester in Lexington,
Kentucky. The Company entered into a five-year, non-cancelable operating
lease for the space effective July 1, 1993. Effective July 1, 1999, the lease
was amended to extend the term of the lease to June 30, 2001 and to provide
for annual lease payments, including all utilities, of $102,000.
The Company leases 5,200 square feet at 5910 Breckenridge Center
Parkway in Tampa, Florida where the manufacturing of two animal safety
products takes place. This USDA-approved facility is subject to a three-year
non-cancelable operating lease that expires on September 30, 2001. The lease
provides for annual payments of $31,422 in year one increasing 4% in years
two and three along with payments for operating expenses and property taxes
estimated to be $13,625 annually subject to increases based on actual costs
incurred.
-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 involved a
dispute over a letter of intent the Company entered into with Mr. Trickey to
distribute certain products Mr. Trickey alleged he had developed. Mr. Tricky
filed a counterclaim alleging a common law right to the disputed trademark.
In November 1998, the Company won this lawsuit but does not expect to collect
any significant damages. Mr. Tricky has appealed the verdict to the United
States Sixth Circuit Court of Appeals on an in pro per basis. The District
Court denied Mr. Trickey's request for preparation of the trial transcript at
public expense on the grounds that the appeal would be frivolous, and this
denial was upheld by the Court of Appeals. Mr. Trickey is proceeding with the
appeal without a transcript and without legal counsel.
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. In February 1999, Neogen entered into a
negotiated settlement of this lawsuit. The terms of the settlement did not
have any material impact on the Company's operations.
In April 1999, Ecolab, Inc. ("Ecolab") filed a lawsuit against
Biotrace Incorporated ("Biotrace") and Neogen Corporation in the Second
Judicial District of District Court in the State of Minnesota. The suit
involves a dispute concerning a 1998 Independent Distributor Agreement
("Agreement") between Ecolab and Biotrace and alleges that Neogen is
distributing Biotrace's products to Ecolab customers in violation of the
Agreement. The court denied Ecolab's request for a temporary restraining
order and management believes that Ecolab's suit against Neogen is without
merit. Biotrace has announced that Ecolab and Biotrace have mutually decided
to not renew the Agreement, which expires in September 30, 1999, and that
Neogen will continue to distribute Biotrace products after that date. The
Company hopes to settle this lawsuit under terms that would not have any
material impact on operations.
The Company continues to vigorously pursue a lawsuit against Vicam,
L.P., Vicam Management Corporation and Jack L. Radlo ("Vicam") filed in the
U.S. District Court for the Middle District of Florida in August 1996. The
Company is suing to recover damages incurred in the character of lost sales
caused by Vicam's publication of the false allegation that a Neogen product
violates two patents licensed to Vicam. In February 1999, a hearing was held
for the purpose of providing evidence concerning the patent issues of the
case. The judge who presided over this hearing ruled that polyclonal
antibodies of the type used in Neogen's product are substantially different
from monoclonal antibodies of the type used in Vicam's product. Management
believes this decision significantly impacts Vicam's counterclaim of patent
infringement. The amount of the Company's damages (lost sales) should it
prevail has not yet been quantified. If Vicam were to prevail, the Company
believes that its damages would be relatively insignificant since the
Company's sales of this product have not been material.
-11-
<PAGE>
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.
High Low
---- ---
Fiscal Year Ended May 31, 1999
First Quarter .......................... 9.13 6.00
Second Quarter ......................... 7.94 5.75
Third Quarter .......................... 9.25 6.63
Fourth Quarter ......................... 7.94 5.63
Fiscal Year Ended 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
As of July 31, 1999, there were approximately 525 stockholders of
record of Common Stock, which the Company believes represents a total of
approximately 6,000 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.
-12-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the fiscal periods indicated,
selected consolidated financial data derived from the Company's audited
Consolidated Financial Statements for each of the fiscal years ended May 31,
1995 through 1999. This information should be read in conjunction with the
Consolidated Financial Statements, related notes and other financial
information included hearin.
<TABLE>
<CAPTION>
Years Ended May 31
-------------------------------------------------------
1995(1) 1996(1) 1997(1) 1998(1) 1999(1)
------- ------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Food Safety Sales $ 5,711 $ 6,321 $ 8,605 $ 8,419 $ 10,069
Animal Safety Sales 6,015 6,169 6,654 10,069 12,110
-------- -------- -------- -------- --------
Total Sales 11,726 12,490 15,259 18,488 22,179
Cost of Sales 5,152 5,484 6,201 7,960 9,477
Sales and Marketing 3,284 3,539 4,197 4,910 5,311
General and Administrative 1,524 1,774 2,230 2,716 3,207
Research and Development 1,136 1,238 1,320 1,424 1,640
Restructuring Charges -- 695 -- -- --
-------- -------- -------- -------- --------
Operating Income (Loss) 630 (240) 1,311 1,478 2,544
Other Income 73 3 564 897 104
-------- -------- -------- -------- --------
Net Income (Loss) Before Tax 703 (237) 1,875 2,375 2,648
Provision for Income Taxes (24) (7) (63) (127) (393)
-------- -------- -------- -------- --------
Net Income $ 679 $ (244) $ 1,812 $ 2,248 $ 2,255
======== ======== ======== ======== ========
Net Income Per Share (diluted) $ 0.15 $ (0.05) $ 0.32 $ 0.35 $ 0.37
======== ======== ======== ======== ========
Common Shares
Outstanding (diluted) 4,675 4,514 5,649 6,397 6,141
<CAPTION>
May 31
-------------------------------------------------------
1995(1) 1996(1) 1997(1) 1998(1) 1999(1)
------- ------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and Marketable Securities $ 2,238 $ 2,183 $ 13,044 $ 10,589 $ 10,667
Working Capital 5,789 5,235 17,265 17,192 17,355
Total Assets 11,539 11,531 23,148 25,413 26,108
Long-Term Debt 351 279 208 174 126
Stockholders' Equity 8,836 8,858 21,013 23,609 23,786
<FN>
(1) The periods presented are not comparable due to a restructuring charge
in fiscal year 1996, secondary offering of public stock in fiscal year
1997, sale of product line, closing of manufacturing facilities and
change in effective federal income tax rate in fiscal year 1999 and
several acquisitions. (See Notes to Consolidated Financial Statements).
</TABLE>
ITEM 7. 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.
The words "anticipate", "believe", "potential", "expect", and
similar expressions used herein are intended to identify forward-looking
statements. Forward-looking statements involve certain risks and
uncertainties. Various factors, including competition, recruitment 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,
impact of the year 2000 issue 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.
-13-
<PAGE>
Results of Operations
<TABLE>
<CAPTION>
REVENUES (Dollars in Thousands) 1999 Increase 1998 Increase(Decrease) 1997
- ------------------------------- ---- -------- ---- ------------------ ----
<S> <C> <C> <C> <C> <C>
Product Sales:
Food Safety $10,069 20% $ 8,419 (2%) $ 8,605
Animal Safety 12,110 20% 10,069 51% 6,654
------- -- ------- -- -------
TOTAL REVENUES $22,179 20% $18,488 21% $15,259
======= == ======= == =======
</TABLE>
The 20% increase in 1999 sales of food safety products was primarily
due to increases in sales in two areas. Large sections of the southern United
States suffered from hot, dry weather conditions during the 1998 summer
months, which promoted mold growth in corn and other commodity crops. Sales
of test kits to detect aflatoxin, a harmful residue from molds that
proliferate in hot, dry weather conditions, increased $623,000 during 1999.
Sales of test kits to detect harmful bacteria increased $874,000 in 1999 due
to strong international demand and because of higher sales to meat processors
concerned about well-publicized E. coli and Listeria outbreaks in hamburger,
hot dogs and luncheon meats.
In 1998, food safety sales declined by 2%. Sales of diagnostic test
kits sold to the meat and poultry market for the detection of harmful
bacteria increased by $693,000. However, sales of test kits to detect
vomitoxin declined by $725,000. Sales of diagnostic tests for the detection
of harmful naturally-occurring toxins, such as vomitoxin and aflatoxin, are
influenced by the uncertainty of weather conditions, which impacts growing
conditions differently each year. Accordingly, it is not uncommon for the
Company to experience significant year to year fluctuations in sales of test
kits to detect naturally-occurring toxins.
Animal safety sales increased 20% in 1999 and 51% in 1998. The
acquisitions of Vetoquinol USA, Inc. effective December 30, 1997 and Triple
Crown, effective July 1, 1997 contributed $1,052,000 and $2,499,000 in
increased sales in 1999 and 1998, respectively. Other products experiencing
increased demand in 1999 included the Company's vaccine to prevent Type B
botulism in horses ($455,000) and sales of OEM products such as specialty
needles and syringes used to inject spices and marinades into meat and
poultry ($698,000). In 1998, the Company experienced increased sales of
approximately $538,000 across virtually all product lines sold to the
professional equine market and a $330,000 increase in sales of the
aforementioned OEM products.
<TABLE>
<CAPTION>
COST OF GOODS SOLD (Dollars in Thousands) 1999 Increase 1998 Increase 1997
- ----------------------------------------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C>
Cost of Goods Sold $9,477 19% $7,960 28% $6,201
------ -- ------ -- ------
</TABLE>
Costs of goods sold increased 19% in 1999 and 28% in 1998
principally due to the overall increase in product sales. Expressed as a
percent of sales, cost of goods sold was 43%, 43% and 41% in 1999, 1998, and
1997 respectively. The percentages for 1999 and 1998 are higher than 1997 due
exclusively to a higher mix of animal safety sales in 1999 and 1998 compared
to 1997.
<TABLE>
<CAPTION>
OPERATING EXPENSES (Dollars in Thousands) 1999 Increase 1998 Increase 1997
- ----------------------------------------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C>
Sales and Marketing $5,311 8% $4,910 17% $4,197
General Administrative 3,207 18% 2,716 22% 2,230
Research and Development 1,640 15% 1,425 8% 1,320
------ -- ------ -- ------
</TABLE>
Many sales and marketing expense categories increased in 1999 and
1998 including salaries, fringe, royalties, commissions, trade shows and
technical service. The increase in 1999 compared to 1998 is the direct result
of expanding sales activities both domestically and internationally to gain
wider distribution of products dedicated to food and animal safety. The
Company expects to continue to expand its sales and marketing efforts in the
future.
The increase from 1997 to 1998 was primarily due to higher costs,
including the acquisitions of Vetoquinol, USA, Inc., and Triple Crown,
associated with marketing products to the professional equine market.
The 1999 increase in general and administrative expense is due to
two factors. Increases in sales volume and overall business activity resulted
in a need for additional administrative staff. The increase in staff, along
with higher accruals for bonuses due to improved operating performance,
resulted in $208,000 of higher salary and fringe expense. In addition, legal
and professional fees increased $259,000 compared to 1998.
-14-
The majority of the increase in general and administrative expense
in fiscal 1998 was 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 research efforts
and manufacturing protocols for diagnostic tests to detect harmful bacteria.
In addition, legal and professional fees increased $202,000 compared to 1997.
Management believes that the Company is not involved in any material
adverse legal proceedings. However, Neogen is a party in lawsuits as
discussed in ITEM 3. LEGAL PROCEEDINGS in this Form 10-K. 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 2000 in pursuing this litigation.
The Company expects general and administrative expenses to decline
in fiscal year 2000 partially as a result of consolidating certain
administrative functions and partially because management believes that legal
fees will be lower in 2000 than 1999.
Research expenses increased in 1999 and 1998 due primarily to
increased staffing levels. Management believes research and development is
critical to the Company's future and expects to continue to expand efforts
for research products pertaining to food and animal safety products.
<TABLE>
<CAPTION>
OTHER INCOME (Dollars in Thousands) 1999 Decrease 1998 Increase 1997
- ----------------------------------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C>
Other Income $104 88% $897 59% $564
---- -- ---- -- ----
</TABLE>
Other income declined significantly in 1999. This was primarily due
to the loss on sale of the Company's human clinical product line and related
fourth quarter charge for closure of a manufacturing facility, which totaled
approximately $629,000. (See Note 4 of Notes to Consolidated Financial
Statements). In addition, interest income decreased during 1999 due to lower
rates and lower average investment balances.
Other income was $333,000 higher in 1998 compared to 1997. During
fiscal 1997, 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 resulted in higher interest income.
Also, the Company's share of royalties, paid to an affiliated partnership,
increased significantly in 1998.
<TABLE>
<CAPTION>
NET INCOME and INCOME PER SHARE (Dollars in Thousands) 1999 Increase 1998 Increase 1997
- ------------------------------------------------------ ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C>
Net Income $2,255 -- $2,248 24% $1,812
Net Income Per Share - Diluted $ 0.37 $ 0.35 $ 0.32
------ -- ------ -- ------
</TABLE>
During 1999, the Company's operating income increased by $1,066,000
or 72% as a direct result of the 20% overall increase in product sales. This
substantial increase in operating income was offset by much lower other
income in 1999 and by a significant increase in federal income taxes.
Neogen's effective federal tax rate has historically been
insignificant because the Company had net operating loss carry forwards
("NOLs") available to offset taxable income. During fiscal year 1999 the
Company utilized its remaining NOLs. As a result, the Company's effective tax
rate increased significantly in 1999 compared to 1998 and management expects
the effective federal tax rate will also increase in fiscal year 2000.
The increase in 1998 net income and net income per share over 1997
was due primarily to the increase in sales of animal safety products,
including acquisitions, along with the increase in other income.
Financial Condition and Liquidity
At May 31, 1999 the Company had $10,667,000 in cash and marketable
securities, working capital of $17,355,000 and stockholders' equity of
$23,786,000. In addition, the Company has bank lines of credit totaling
$10,000,000 with nothing borrowed against these lines as of May 31, 1999.
Cash and marketable securities increased $78,000 during fiscal 1999.
Cash provided from operations, which totaled $3,682,000, was offset by the
aggregate of the acquisition of certain assets of BioPort Corporation for
$600,000, the use of $2,169,000 for the purchase of 314,700 of shares of the
Company's common stock (see Notes 3 and 12 of the Notes to Consolidated
Financial Statements) and $888,000 expended for property, equipment and other
assets.
-15-
<PAGE>
During 1999, the Company initiated programs focused on reducing
investment in accounts receivable and inventories. As a result, accounts
receivable were up only 7% while inventories declined 4% at May 31, 1999
despite a significant increase in sales and production volume.
The significant increase in prepaid expenses and other current
assets is the result of $375,000 in prepaid federal income taxes and a
$76,000 short-term note receivable obtained as part of the Company's sale of
its human clinical product line.
The decrease in goodwill at May 31, 1999 from May 31, 1998 is
principally due to $621,000 of goodwill written off as part of with the sale
of the Company's human clinical product line (see Note 4 of Notes to
Consolidated Financial Statements).
The substantial increase in other non-current assets is partially
due to a $400,000 note receivable obtained in conjunction with the
aforementioned sale of the human clinical product line and partially due to
the acquisition of certain assets of BioPort Corporation.
Accounts payable increased $264,000 during fiscal year 1999 due
primarily to $255,000 in payables due to a new vendor for instruments and
tests used by the Company's food safety customers to detect levels of general
sanitation. Other accrued liabilities at May 31, 1999 were $227,000 higher
than May 31, 1998 due principally to higher royalties payable that were paid
after year-end and accruals pertaining to the closing of the Company's New
Jersey manufacturing facilities (See Note 4 of the Notes to Consolidated
Financial Statements).
Effective July 1, 1997, the Company acquired substantially all of
the assets of Triple Crown Pharmaceuticals, a division of W.J. Bartus, Inc.
of Ft. Pierce, Florida. The initial purchase price consisted of a cash
payment of approximately $1,400,000 paid in July 1997. A second and final
cash payment of $500,000 is due provided the seller meets certain conditions
of the asset purchase agreement by July 3, 2000.
The Company did not borrow any additional funds during fiscal 1999
and made scheduled payments totaling $49,000 on long-term debt. At May 31,
1999 the Company had no material commitments for capital expenditures.
Inflation and changing prices have not had and are not expected to have a
material effect on the Company's operations.
Neogen has been profitable for 24 of its last 25 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, 1999, 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 began addressing the year 2000 issue in the first half
of calendar year 1998. An inventory and assessment of the Company's hardware
and software computer systems was conducted including an analysis of
accounting, office and security systems along with a review of manufacturing
and laboratory equipment. In addition, the Company surveyed key customers and
vendors regarding their strategies to achieve year 2000 compliance.
As a result of this assessment, the Company determined that the
financial software used at its subsidiary where veterinary instruments are
manufactured was not year 2000 compliant. Programming changes to correct this
problem were completed and tested in July 1999. Accordingly, the Company be-
lieves that its financial and manufacturing systems are year 2000 compliant.
The Company is currently in the process of developing contingency
plans to prepare for potential year 2000 problems that might occur due to
unforeseen factors including incorrect assumptions, changes in available
information or failure of third parties to adequately address the year 2000
issue. These contingency plans may include purchasing and redeployment to
various locations of additional materials and supplies, preservation of
perishable biological products and antibodies in the event of electrical
power interruptions, and processing of customer orders and vendor invoices
manually.
The Company expects that the total cost of changes necessary to
comply with year 2000 will not exceed $50,000 including costs already
incurred to date. However, the Company is basing this cost estimate, and its
belief that it is currently year 2000 compliant, on presently available
information and assumptions about future events. Actual results could differ
from materially the Company's expectations as a result of numerous factors,
including the possibility of incorrect assumptions, cooperation of third
parties and other unforeseen circumstances that could have a materially
adverse effect on the Company's financial results.
-16-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NEOGEN CORPORATION
AND SUBSIDIARIES
CONTENTS
Page
Number
------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 18
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets 19-20
Statements of Income 21
Statements of Stockholders' Equity 22
Statements of Cash Flows 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24-33
-17-
<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, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended May 31, 1999. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended May 31, 1999 in conformity with generally accepted accounting
principles.
BDO SEIDMAN, LLP
Troy, Michigan
July 16, 1999
-18-
<PAGE>
Neogen Corporation and Subsidiaries
Consolidated Balance Sheets
- ------------------------------------------------------------------------------
May 31, 1999 1998
- ------- ---- ----
Assets (Note 5)
Current Assets
Cash $ 1,062,811 $ 719,877
Marketable securities (Note 2) 9,603,844 9,868,862
Accounts receivable, less allowance for
doubtful accounts of $166,000 and $227,000 3,295,536 3,088,858
Inventories 4,360,580 4,474,030
Prepaid expenses and other current assets 960,745 441,319
----------- -----------
Total Current Assets 19,283,516 18,592,946
----------- -----------
Property and Equipment
Land and improvements 79,263 49,263
Buildings and improvements 786,066 499,146
Machinery and equipment 4,331,297 4,356,271
Furniture and fixtures 375,983 376,157
----------- -----------
5,572,609 5,280,837
Less accumulated depreciation 3,424,668 3,395,786
----------- -----------
Net Property and Equipment 2,147,941 1,885,051
----------- -----------
Intangible and Other Assets
Goodwill, net of accumulated amortization
of $511,106 and $456,943 (Note 3) 3,199,802 4,023,235
Other assets, net of accumulated amortization
of $544,600 and $544,603 (Notes 3 and 4) 1,476,879 911,410
----------- -----------
Total Intangible and Other Assets 4,676,681 4,934,645
----------- -----------
$26,108,138 $25,412,642
=========== ===========
See accompanying notes to consolidated financial statements.
-19-
<PAGE>
Neogen Corporation and Subsidiaries
Consolidated Balance Sheets
- ------------------------------------------------------------------------------
May 31, 1999 1998
- ------- ---- ----
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 842,429 $ 578,814
Accruals
Compensation and benefits 606,689 569,121
Other 430,828 203,895
Current maturities of long-term debt (Note 5) 48,672 48,672
----------- -----------
Total Current Liabilities 1,928,618 1,400,502
Long-Term Debt, less current maturities (Note 5) 125,720 174,392
Other Long-Term Liabilities 267,982 228,411
----------- -----------
Total Liabilities 2,322,320 1,803,305
----------- -----------
Commitments (Notes 3, 9 and 10)
Stockholders' Equity (Notes 6, 7 and 12)
Common stock, $.16 par value,
shares authorized 10,000,000; issued
and outstanding 5,929,279 and 6,208,179 948,685 993,309
Additional paid-in capital 22,235,726 24,269,549
Retained earnings (deficit) 601,407 (1,653,521)
----------- -----------
Total Stockholders' Equity 23,785,818 23,609,337
----------- -----------
$26,108,138 $25,412,642
=========== ===========
See accompanying notes to consolidated financial statements.
-20-
<PAGE>
Neogen Corporation and Subsidiaries
Consolidated Statements of Income
- ------------------------------------------------------------------------------
Year Ended May 31, 1999 1998 1997
- ----------------- ---- ---- ----
Net Sales $22,179,008 $18,488,389 $15,259,423
----------- ----------- -----------
Operating Expenses
Cost of goods sold 9,476,873 7,959,655 6,201,301
Sales and marketing 5,311,494 4,909,997 4,197,283
General and administrative 3,206,969 2,715,738 2,230,438
Research and development 1,639,600 1,424,583 1,319,732
----------- ----------- -----------
19,634,936 17,009,973 13,948,754
----------- ----------- -----------
Operating Income 2,544,072 1,478,416 1,310,669
----------- ----------- -----------
Other Income (Expense)
Interest income 493,430 605,990 449,331
Interest expense (15,945) (22,581) (66,851)
Loss on sale of product
line (Note 4) (628,839) -- --
Other 255,210 313,548 181,552
----------- ----------- -----------
103,856 896,957 564,032
----------- ----------- -----------
Income Before Taxes On Income 2,647,928 2,375,373 1,874,701
Taxes On Income (Note 8) 393,000 127,000 63,200
----------- ----------- -----------
Net Income $ 2,254,928 $ 2,248,373 $ 1,811,501
----------- ----------- -----------
Basic Earnings Per Share $ 0.37 $ 0.36 $ 0.33
Diluted Earnings Per Share $ 0.37 $ 0.35 $ 0.32
=========== =========== ===========
See accompanying notes to consolidated financial statements.
-21-
<PAGE>
<TABLE>
<CAPTION>
Neogen Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years Ended May 31, 1999, 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 6) 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)
Exercise of options 35,800 5,728 84,810 --
Repurchase of common stock (Note 12) (314,700) (50,352) (2,118,633) --
Net income for the year -- -- -- 2,254,928
--------- -------- ----------- -----------
Balance, May 31, 1999 5,929,279 $948,685 $22,235,726 $ 601,407
========= ======== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
Neogen Corporation and Subsidiaries
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------------------------
Year Ended May 31, 1999 1998 1997
- ------------------ ---- ---- ----
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 2,254,928 $ 2,248,373 $ 1,811,501
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 873,071 715,681 624,113
Loss on sale of product line 628,839 -- --
Loss (gain) on sale of equipment 5,815 8,843 (1,520)
Changes in operating assets and liabilities
Accounts receivable (311,541) (622,662) (380,980)
Inventories 342,794 (449,877) (241,529)
Prepaid expenses and other current assets (442,881) (81,947) (34,555)
Accounts payable 263,615 (264,171) 345,483
Accrued liabilities 67,121 (89,450) 186,006
------------ ------------ ------------
Net Cash Provided By Operating Activities 3,681,761 1,464,790 2,308,519
------------ ------------ ------------
Cash Flows From Investing Activities
Proceeds from marketable securities 25,388,316 25,575,582 11,886,003
Purchases of marketable securities (25,123,298) (23,119,531) (22,653,875)
Proceeds from sale of equipment 11,625 20,975 7,206
Purchases of property, equipment and other assets (888,351) (645,681) (630,760)
Acquisitions (600,000) (3,587,033) (53,122)
------------ ------------ ------------
Net Cash Used In Investing Activities (1,211,708) (1,755,688) (11,444,548)
------------ ------------ ------------
Cash Flows From Financing Activities
Net proceeds from issuance of common shares 90,538 347,764 10,343,995
Repurchase of common stock (2,168,985) -- --
Payments on long-term borrowings (48,672) (55,853) (71,148)
Net payments on notes payable - banks -- -- (1,043,946)
------------ ------------ ------------
Net Cash Provided By (Used In) Financing Activities (2,127,119) 291,911 9,228,901
------------ ------------ ------------
Net Increase in Cash 342,934 1,013 92,872
Cash, at beginning of year 719,877 718,864 625,992
------------ ------------ ------------
Cash, at end of year $ 1,062,811 $ 719,877 $ 718,864
============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
-23-
<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 two 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
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of (1) 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
mycotoxins, 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.
-24-
<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:
1999 1998
---- ----
Raw material $1,809,725 $2,003,124
Work-in-process 755,225 837,679
Finished goods 1,795,630 1,633,227
---------- ----------
$4,360,580 $4,474,030
========== ==========
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 $542,024,
$469,324 and $389,582 in 1999, 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 business conditions
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.
-25-
<PAGE>
Neogen Corporation and Subsidiaries
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
Earnings Per Share
Earnings per share is calculated according to Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings Per Share" which requires
companies to present basic and diluted earnings per share. Basic earnings per
share is based on the weighted average number of common shares outstanding
during the year. Diluted earnings per share is based in the weighted average
number of common shares and dilutive potential common shares outstanding
during the year. The Company's dilutive potential common shares outstanding
during the year result entirely from dilutive stock options and warrants. The
following table presents the earnings per share calculations:
For the Year Ended May 31, 1999 1998 1997
- -------------------------- ---- ---- ----
Numerator for Basic and Diluted
Earnings Per Share
Net income $2,254,928 2,248,373 $1,811,501
========== ========= ==========
Denominator
Denominator for basic earnings per
share - weighted average shares 6,099,129 6,176,995 5,512,633
Effect of Dilutive Securities
Stock options and warrants 41,734 219,860 135,871
---------- --------- ----------
Dilutive Potential Common Stock
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
conversions 6,140,863 6,396,855 5,648,504
========== ========= ==========
Basic Earnings Per Share 0.37 0.36 0.33
========== ========= ==========
Diluted Earnings Per Share 0.37 0.35 0.32
========== ========= ==========
Options to purchase 441,100, 33,400 and 128,500 shares of common
stock at prices ranging from $7.13 to $13.25, $11.31 to $13.25 and $7.50 to
$9.25 in 1999, 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.
Segment Information
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise",
replacing the "industry segment" approach with the "management" approach. The
management approach designates the internal organization that is used by
management for making decisions and assessing performance as the source of
the Company's reportable segments. SFAS No. 131 also requires disclosures
about products and services, geographical areas, and major customers. The
adoption of SFAS No. 131 did not affect results of operations or financial
position but did affect the disclosure of segment information (see Note 11).
Recent Accounting Pronouncements
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. SOP
98-5, effective in fiscal 2000, and SFAS 133, effective in fiscal 2002, are
not expected to have a material impact on the consolidated financial
statements.
-26-
<PAGE>
Neogen Corporation and Subsidiaries
Notes to 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, 1999 and 1998.
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:
1999 1998
---- ----
Corporate Debt Securities $9,341,730 $7,770,996
Certificates of Deposit -- 1,099,653
U.S. Treasury and Agency Securities 262,114 998,213
---------- ----------
$9,603,844 $9,868,862
========== ==========
3. Acquisitions
In August 1998, the Company purchased certain inventory and
technology from BioPort Corporation of Lansing, Michigan. The purchase price
consisted of a single cash payment of $600,000. The Company allocated
$400,000 of the purchase price to finished goods and bulk toxoid inventories
of Type B equine botulism vaccine ("BotVax B"). The remainder of the purchase
price was allocated to other assets and consisted primarily of Types A, B,
and C botulism seed cultures, manufacturing protocols, quality control
procedures and USDA license to manufacture BotVax B.
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. A
second and final payment of $500,000 is due provided the seller meets certain
conditions of the asset purchase agreement by July 3, 2000. The payment, if
required, will be recorded as additional goodwill and amortized over the
remaining amortization period.
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 continues 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 period ending December 31, 1999.
4. Sale of Product Line
In the fourth quarter of fiscal 1999, the Company sold its AMPCOR
human clinical product line and related assets in exchange for notes
receivable of approximately $500,000. In connection with the asset sale, the
Company announced that is was closing the AMPCOR facility located in
Bridgeport, New Jersey and moving its remaining AMPCOR manufacturing
operations for diagnostic test kits to detect microorganisms to the Company's
headquarters in Lansing, Michigan. As a result of the asset sale and related
facility closure, the Company recorded a loss of $628,839. Included in the
loss was approximately $200,000 related to lease obligations, employee
severance costs and other expenses incurred to close the facility. Sales of
human clinical products were not material to the consolidated sales of the
Company in 1999, 1998 and 1997.
The notes receivable are unsecured and consist of a $400,000
long-term note and a short-term note totaling approximately $100,000. The
long-term note bears interest at 7% and requires interest-only payments
through April 2000 followed by monthly installments of $9,579 through April
2004.
-27-
<PAGE>
Neogen Corporation and Subsidiaries
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
5. 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, 1999 and 1998, there were no borrowings outstanding. These
arrangements bear interest at rates ranging from the prime rate less .50% to
the prime rate (the prime rate was 7.75% at May 31, 1999), 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, 1999 and 1998.
Long-term debt consisted of the following:
1999 1998
---- ----
Term note payable to bank $174,392 $223,064
Less current maturities 48,672 48,672
-------- --------
Total Long-Term Debt $125,720 $174,392
======== ========
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: 2000 - $48,672; 2001 - $48,672;
2002 - $48,672; and 2003 - $28,376.
6. Public Stock Offering
On October 22, 1996, the Company sold to the public 1,500,000 shares
of common stock at a price of $7.50 per share. The net proceeds to the
Company after deducting underwriting commissions and other expenses of the
offering were approximately $10,201,000.
7. Stock Options and Stock Warrants
The Company 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, 1999,
options have been granted with three to five year vesting schedules and
option terms of five to ten years. A total of 210,000 shares were available
for future grants under the Plans.
-28-
<PAGE>
Neogen Corporation and Subsidiaries
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
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:
1999 1998 1997
---- ---- ----
Net Income
As reported $ 2,254,928 $2,248,373 $1,811,501
Pro forma 1,917,963 1,921,062 1,571,757
Earnings Per Share
As reported:
Basic 0.37 0.36 0.33
Diluted 0.37 0.35 0.32
Pro forma:
Basic 0.31 0.31 0.29
Diluted 0.31 0.30 0.28
==== ==== ====
The following is a summary of the Plans' activity:
Weighted Average
Shares Exercise Price
------ ----------------
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
Granted 161,500 7.05
Exercised (35,800) 2.71
Forfeited (52,900) 7.47
------- ----
Outstanding at May 31, 1999
(265,518 exercisable) 599,700 $7.25
======= =====
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 1999, 1998 and 1997, respectively:
dividend yield of 0% for the three years: expected volatility of 52.0%, 55.0%
and 68.0%; risk free interest rates of 5.2%, 6.0% and 6.5%; and expected
lives of four years for 1999 and 1998 and 6.5 years for 1997.
The weighted-average grant date fair value of options granted in
1999, 1998 and 1997 was $3.24, $4.32 and $4.38, respectively.
-29-
<PAGE>
Neogen Corporation and Subsidiaries
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
The following is a summary of stock options outstanding at May 31,
1999:
Options Outstanding Options Exercisable
-------------------------------- -------------------
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Number Life (Years) Price Number Price
------ ------------ -------- ------- --------
$ 1.88 - 2.75 20,000 2.4 $ 2.32 20,000 $ 2.32
2.87 - 2.87 6,000 1.7 2.87 6,000 2.87
4.63 - 6.88 132,600 3.5 6.03 86,000 5.84
7.13 - 9.25 407,700 4.3 7.54 142,381 7.60
11.31 - 13.25 33,400 6.3 12.31 11,137 12.31
------- --- ------ ------- ------
599,700 4.1 $ 7.25 265,518 $ 6.72
======= === ====== ======= ======
The weighted-average exercise price of the 209,544 shares which were
exercisable at May 31, 1998 and 219,077 shares which were exercisable at
May 31, 1997 was $5.69 and $4.52, respectively.
The following table summarizes warrant activity for the years ended
May 31, 1999, 1998 and 1997. All warrants are exercisable for unregistered
common stock of the Company and expire in 2000.
Warrant
Shares Price
------- ---------------
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
Warrants exercised during the year -- --
Warrants expiring during the year -- --
------- ---------------
Outstanding Warrants at May 31, 1999 43,265 $ 4.82
======= ===============
8. Taxes On Income
Income taxes are calculated using the liability method specified by
SFAS No. 109 "Accounting for Income Taxes."
The provision for taxes on income consisted of the following:
1999 1998 1997
---- ---- ----
Current:
Federal $367,000 $ 41,000 $ 37,200
State 26,000 86,000 26,000
Deferred -- -- --
-------- -------- --------
Taxes on Income $393,000 $127,000 $ 63,200
======== ======== ========
At May 31, 1999, the Company has approximately $232,000 of tax
credit carryforwards, the majority of which expire between 2009 and 2018.
-30-
<PAGE>
Neogen Corporation and Subsidiaries
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
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, 1999 and 1998 are as follows:
1999 1998
---- ----
Deferred tax liabilities:
Property and equipment $ 165,000 $ 147,000
Losses of affiliated partnerships 44,000 45,000
--------- ---------
Total Deferred Tax Liabilities 209,000 192,000
--------- ---------
Deferred tax assets:
Tax credit carryforwards 232,000 373,000
Inventory 78,000 114,000
Net operating loss carryforwards -- 228,000
Other 211,000 176,000
--------- ---------
521,000 891,000
--------- ---------
Valuation Allowance for Deferred Tax Assets (312,000) (699,000)
Net Deferred Tax Assets 209,000 192,000
--------- ---------
Net Deferred Tax $ -- $ --
========= =========
The reconciliation of income taxes computed at the U.S. federal
statutory tax rates to income tax expense for the years ended May 31, 1999,
1998 and 1997 is as follows:
1999 1998 1997
---- ---- ----
Tax at U.S. statutory rates $ 900,000 $ 808,000 $ 637,000
Adjustment of valuation allowance (387,000) (634,000) (665,000)
Alternative minimum tax -- 41,000 37,200
Other (120,000) (88,000) 54,000
--------- --------- ---------
Taxes on Income $ 393,000 $ 127,000 $ 63,200
========= ========= =========
9. Commitments
The Company has agreements with related research limited
partnerships and unrelated third parties which provide for the payment of
royalties on the sale of certain products. Royalty expense, primarily to
related research limited partnerships, under the terms of these agreements
for 1999, 1998 and 1997 was $780,000, $713,000 and $771,000, respectively.
The Company leases office and manufacturing facilities under
noncancelable operating leases. Rent expense for 1999, 1998 and 1997 was
$302,000, $282,000 and $215,000, respectively. Future minimum rental payments
for these leases are as follows: 2000 - $281,000; 2001 - $179,000; and 2002 -
$42,000.
-31-
Neogen Corporation and Subsidiaries
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
10. Defined Contribution Benefit Plan
The Company maintains a defined contribution 401(k) benefit plan
covering substantially all employees. Employees are permitted to defer up to
15% of compensation, with the Company matching 100% of the first 3% deferred
and 50% of the next 2% deferred. The Company's expense under this plan was
$117,000, $73,000 and $54,000 for the years ended May 31, 1999, 1998 and
1997, respectively.
11. Segment Information
The Company has two reportable segments: Food safety and Animal
Safety. The Food Safety segment produces and markets diagnostic test kits and
related products used by food producers and processors to detect harmful
natural toxins, drug residues, foodborne bacteria, pesticide residues,
disease infections and levels of general sanitation. The Animal Safety
segment is primarily engaged in the production and marketing of products
dedicated to animal health, including 250 different veterinary instruments
and a complete line of consumable products marketed to veterinarians and
distributors serving the professional equine industry.
These segments are managed separately because they represent
strategic business units that offer different products and require different
marketing strategies. The Company evaluates performance based on total sales
and operating income of the respective segments. The accounting policies of
the segments are the same as those described in Note 1, Summary of Accounting
Policies. Prior year segment information has been restated to conform to the
1999 presentation.
Segment information for the year ended May 31, 1999, 1998 and 1997
was as follows:
<TABLE>
<CAPTION>
Corporate
Food Animal and
Safety Safety Eliminations(1) Total
------ ------ --------------- -----
1999
<S> <C> <C> <C> <C>
Net sales from external customers 10,069,469 $12,109,539 $ -- $22,179,008
Operating income 1,513,369 1,754,234 (723,531) 2,544,072
Depreciation and amortization 372,766 500,305 -- 873,071
Interest income 2,350 253 490,827 493,430
Loss on sale of product line (628,839) -- -- (628,839)
Income taxes 213,042 297,415 (117,457) 393,000
Total assets 6,444,122 9,767,902 9,896,114 26,108,138
Expenditures for long-lives assets 546,358 341,993 -- 888,351
---------- ----------- ---------- -----------
1998
Net sales from external customers 8,418,957 $10,069,432 $ -- $18,488,389
Operating income 1,276,400 1,013,892 (811,876) 1,478,416
Depreciation and amortization 349,304 366,377 -- 715,681
Interest income 35 396 605,559 605,990
Income taxes 251,190 155,554 (279,744) 127,000
Total assets 5,611,458 10,055,351 9,745,833 25,412,642
Expenditures for long-lives assets 311,997 333,684 -- 645,681
---------- ----------- ---------- -----------
</TABLE>
-32-
<TABLE>
<CAPTION>
Neogen Corporation and Subsidiaries
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
Corporate
Food Animal and
Safety Safety Eliminations(1) Total
------ ------ --------------- -----
1997
<S> <C> <C> <C> <C>
Net sales from external customers $ 8,605,180 $ 6,654,243 $ -- $ 15,259,423
Operating income 1,632,069 271,740 (593,140) 1,310,669
Depreciation and amortization 373,782 250,331 -- 624,113
Interest income 922 1,405 447,004 449,331
Income taxes 282,803 8,052 (227,655) 63,200
Total assets 5,347,789 5,550,481 12,250,203 23,148,473
Expenditures for long-lives assets 344,330 286,430 -- 630,760
<FN>
(1) Includes corporate assets, consisting of marketable securities, and
overhead expenses not allocated to specific business segments. Also
includes the elimination of intersegment transactions and minority
interests.
</TABLE>
The Company has no long-lived assets outside of the United States
and no significant foreign operations. Export sales amounted to $4,913,782 or
22% of consolidated sales in 1999, $4,039,571 or 22% 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. The
Company does not have sales to any single foreign country or any single
customer exceeding 10% of consolidated sales.
12. Stock Repurchase
The Company's Board of Directors have authorized the purchase of up
to 500,000 shares of the Company's common stock. As of May 31, 1999, the
Company had purchased 314,700 shares in negotiated and open market
transactions for a total price, including commissions, of approximately
$2,169,000. Shares purchased under this buy-back program will be retired and
used to satisfy future issuance of common stock upon the exercise of
outstanding stock options and warrants.
13. Supplemental Disclosure of Cash Flows Information
Cash paid for income taxes totaled $749,000, $64,700, and $10,000 in
1999, 1998 and 1997, respectively. Cash paid for interest totaled $15,945,
$22,581 and $66,851 in 1999, 1998 and 1997, respectively.
Non-cash Investing Activities
In fiscal 1999, the Company sold its AMPCOR human clinical products
line and related assets in exchange for notes receivable of approximately
$500,000.
-33-
ITEM 9. 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 10. 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 several 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.
<TABLE>
<CAPTION>
Year Joined
Name Position with the Company the Company
---- ------------------------- -----------
<S> <C> <C>
James L. Herbert President, Chief Executive Officer, Director 1982
G. Bruce Papesh Secretary, Director 1993
Lon M. Bohannon Vice President, Chief Financial Officer, Director 1985
Brinton M. Miller, Ph.D 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
David A. Wall Vice President, Diagnostic Manufacturing 1998
Anthony E. Maltese Manager, Corporate Development 1999
</TABLE>
There are no family relationships among officers. Information
concerning the executive officers of the Company follows:
James L. Herbert, age 59, 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 52, was elected to the Board of Directors in
October 1993 and was elected Secretary in October 1994. Since 1987, Mr.
Papesh has served as President of Dart, Papesh & Co., an investment
consulting and financial services firm. Mr. Papesh also serves on the Board
of Directors of Immucor, Inc., a publicly traded immunodiagnostics company
that manufactures and markets products for the human clinical blood bank
industry.
Dr. Brinton M. Miller, age 72, 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.
Lon M. Bohannon, age 46, 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.
-34-
<PAGE>
Gerald S. Traynor, age 64, 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 34, 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 VP/CFO and then became President, the position she held at the time Neogen
acquired the business.
Edward L. Bradley, age 39, 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 50, 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 62, became Neogen's Vice President for
Research and Development in March 1998 after having spent 26 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, Dr. 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 positions at Pharmacia & Upjohn included senior
scientist in drug metabolism research and senior scientist for strategic
information analysis and competitive intelligence.
David A. Wall, age 51, joined Neogen Corporation in October 1998 as
Vice President and General Manager of Ampcor Diagnostics Incorporated. In May
1999, he assumed his current position as Vice President of Diagnostic Manu-
facturing and Quality Control. Before joining Neogen, he served as Manager
of the immunodiagnostics operations for REMEL, Inc. in Augusta, GA, a position
he held since 1992. Prior to that, Mr. Wall served as founder, President and
Chairman of the Board for Medical Diagnostic Technologies Inc. also in
Augusta. Earlier, Mr. Wall served as Laboratory Director for Zeus Scientific,
Inc. in Raritan, NJ, and in the early 1980's participated in the development
of the first commercially available test for Legionnaire's Disease.
Anthony E. Maltese, age 56, joined Neogen on June 1, 1999 as Manager
of Corporate Development. Prior to joining Neogen, Mr. Maltese served as Vice
President of Business Development for Creatogen Biosciences, GmbH of
Angsburg, Germany. From 1990 to 1998, he worked in production and special
project management positions for REMEL, Inc. including Manager of Business
Development. Prior to REMEL, Mr. Maltese spent 20 years at Difco
Laboratories, where he served in several management positions in the areas of
purchasing, technical sales support, production and research.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference
to the Company's Proxy Statement.
ITEM 12. 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 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Jack C. Parnell, a Company Director, is a governmental relations
advisor to 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.
-35-
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE 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) Schedule II - Valuation and Qualifying Accounts.
(c) No reports on Form 8-K were filed by the Company during the fiscal
quarter ended May 31, 1999.
-36-
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 23, 1999
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 23, 1999
- -------------------- Officer, Director (Principal
James L. Herbert Executive Officer)
/s/ Lon M. Bohannon Vice President of Administration August 23, 1999
- -------------------- 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
* Secretary and Director
- --------------------
Leonard E. Heller, Ph.D.
* Director
- --------------------
Jack C. Parnell
* Director
- --------------------
Thomas H. Reed
*By: /s/ James L. Herbert
--------------------- August 23, 1999
James L. Herbert,
Attorney-in-fact
James L. Herbert, President
Chief Executive Officer
Dated: August 23, 1999
-37-
Neogen Corporation
Annual Report on Form 10-K
Year Ended May 31, 1999
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3 (a) (5) 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) (7) Neogen/Vetoquinol U.S.A., Inc. Asset Purchase Agreement
dated December 31, 1997
10 (c) (7) Neogen 1997 Stock Option Plan
10 (d) Tenner Incorporated/AMPCOR Diagnostics, Inc. Asset Purchase
Agreement dated April 28, 1999
10 (e) (5) Neogen Corporation/United States Department of Agriculture
License Agreement, dated June 29, 1994
10 (f) (3) 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) Neogen/BioPort Corporation Product Purchase Agreement dated
May 22, 1998
10 (i) (7) Lease Agreement for Florida Manufacturing facilities
10 (j) (2) Amended and Restated Incentive Stock Option Plan II and
Sample Individual Incentive Stock Option agreement
10 (k) (4) Neogen/International Diagnostic Systems Asset Purchase
Agreement, dated June 27, 1995
10 (l) (3) ELISA Technologies Lease Agreement for space at 628 East
Third Street, Lexington, Kentucky, dated May 19, 1993
10 (m) Amendment to ELISA Technologies Lease Agreement
10 (n) (5) Neogen Corporation/Kahn, Soares and Conway contract
10 (o) (7) NBD Bank Loan Documents
10 (p) (7) Comerica Bank Loan Documents
10 (q) (6) Neogen Corporation/W.J. Bartus, Inc. Asset Purchase
Agreement, dated July 3, 1997
10 (r) (6) Neogen Corporation/Orion Diagnostica Distribution Agreement
10 (s) (6) Neogen Corporation/Oxoid Distribution Agreement
13 Annual Report to Shareholders for the Year Ended May 31,
1999 (to be deemed filed only to the extent required by
the instructions to exhibits for reports on Form 10-K)
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, 1992.
(3) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-KSB for the year ended May 31, 1993.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-KSB for the year ended May 31, 1995.
(5) 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.
(6) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-KSB for the year ended May 31, 1997.
(7) Incorporated by reference to the exhibit filed with Registrant's Annual
Report on Form 10-KSB for the year ended May 31, 1998.
-38-
Neogen Corporation and Subsidiaries
Schedule II
Valuation and Qualifying Accounts
Balance Charged To Balance
at Beginning Costs and at End
Description of Year Expenses Write-Offs of Year
- ----------- ------------ ---------- ---------- -------
Allowance for
Doubtful Accounts:
Year Ended May 31:
1999 227,000 6,000 67,000 166,000
1998 320,000 (11,000) 82,000 227,000
1997 185,000 170,000 35,000 320,000
------- ------- ------ -------
Asset Purchase Agreement
This Asset Purchase Agreement is made on April ______, 1999, between
AMPCOR DIAGNOSTICS, INCORPORATED, a Michigan corporation whose address is 620
Lesher Place, Lansing, Michigan 48912 ("the Seller"), and TENNER
INCORPORATED, a New Jersey corporation, whose address is 400 Ford Rd.
Denville, New Jersey, 07834 ("the Buyer") ("the Agreement").
Recitals
A. Seller is engaged in the human clinical diagnostic business and
manufactures and/or sells these products to aid in the detection of certain
diseases and pregnancy (the "Business"). The products which are the subject
matter of this Asset Purchase Agreement are listed on Exhibit i attached
hereto and the said exhibit further indicates whether each product is
manufactured by AMPCOR or purchased from others for resale. (All of the said
individual products are hereinafter collectively referred to as the
"Products").
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. A Sorvall RC-3 centrifuge and
rotor, all unique glassware used in the production of the RPR product line,
and an Oyster Bay pump used in the manufacture of clinical diagnostic
products (Exhibit 1.a).
(b) Intangible Property. All of the intangible property of
Seller related to the clinical 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 and all Regulatory approvals and filings related thereto, including
correspondence regarding such approvals and the files related to the approval
processes (including, by way of illustration, but not limitation, all FDA
510-k's), all as listed on attached Exhibit 1.b. Seller shall assign any and
all rights of Seller to the properties and processes listed
on Exhibit 1.b., but Seller does not warrant that the assignment will be
recognized by the appropriate governmental agency.
(c) Additional Assets. The name "AMPCOR," and the goodwill
associated therewith throughout the world, formulas, designs, production,
sales, data, technical specifications, files, business records, customer
lists, any and all 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 listed on attached Exhibit 1.d. ("the Receivables");
(e) Inventories. All inventories, including, but not
limited to, merchandise, materials, component parts, manufacturing supplies
and work in process, currently offered as part of the Products listed on
attached Exhibit 1.e. ("Inventories"). Seller represents and warrants that
the amount of each Product, on hand as of Closing Date, shall be in the
minimum quantity set forth on Exhibit 1.c. Seller further represents that
certain raw materials and packaging goods, as set forth on Exhibit i.e.,
shall have the respective quantity on hand as 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 Products ("Contract Rights") listed on attached Exhibit 1.f.
A complete list of all such contract rights, irrespective of the
assignability thereof, is attached and listed on Exhibit 1.f.
(g) Excluded Assets. The Purchased Assets do not include
any other assets of the Seller not specifically described herein. Seller
represents that, to the best of its knowledge and belief there are no other
assets or intangible property necessary or needed in order for Buyer to be
able to manufacture and sell the Products.
-2-
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.
(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. Nothing contained
in this Subparagraph 2 (b) shall be deemed to relieve Seller of
responsibility in respect of any representation or warranty otherwise made in
this Asset Purchase Agreement to or for the benefit of the Buyer.
(c) Additional Assumed Liabilities. Notwithstanding the
provisions of Subparagraph 2(a) above to the contrary, and as an express
exception thereto, Buyer shall assume, perform and discharge Seller's
liability, existing as of the Closing Date, with respect to all duties and
obligations of Seller with respect to the distribution and sales agreements
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,
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 payment of Four Hundred Thousand
Dollars ($400,000.00) for the Purchased Assets, except Receivables ("Main
Price"). The Main Price shall be paid by a non-negotiable note in the amount
of Four Hundred Thousand Dollars ($400,000.00) in the same form as Exhibit
3.a.
(b) Buyer shall purchase from Seller the Receivables for
Ninety Percent (90%) of their face value as shown in Exhibit 1.c. by
executing a note in Seller's favor in the same form as Exhibit 3.a. except
the Note shall bear no interest and shall be payable in full on the one
hundred twentieth day after Closing
-3-
("Receivable Note"). 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 between Closing and Post Closing is less than the
amount of Receivables, Seller shall credit Buyer's Note ninety percent of
this amount. Buyer shall concurrently transfer to Seller any uncollected
Receivables.
(c) 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.c. This allocation shall be conclusive and binding
on the Buyer and Seller for all purposes, including the reporting and
disclosure requirements of the Code.
4. The Closing. The parties agree that the effective date of
Closing shall be as of the close of business on the 30th day of April, 1999.
All assets, liabilities and income generated after April 30, 1999 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., the Note, the Receivable Note, 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:
(a) Organization and Qualification. Seller is validly
existing and in good standing under the laws of the State of Michigan. Seller
has the requisite corporate power and authority to own all of the Purchased
Assets and to carry on
-4-
the Business as it is now being conducted. Seller represents to the best of
its knowledge and belief it is duly licensed and qualified to conduct
business with respect to all governmental agencies and states wherein or with
whom it is so required to be licensed or qualified to do business.
(b) No Violation. 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) 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.
(d) 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 defect,
either latent or patent, in the condition of the Machinery and Equipment or
for any direct or consequential damages therefrom.
(e) Receivables. The list of Receivables attached as
Exhibit 1.d is a complete and accurate list of all the Receivables as of
April 30, 1999. 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.
(f) Inventories. The Inventories are recorded at the lower
of cost or market. No Inventories have been consigned to others.
(g) Contracts. Exhibit 1.f. 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
-5-
copies of all such documents evidencing the Contract Rights have been
delivered by Seller to Buyer.
(h) 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.
(i) Authorization. The execution and delivery of this
Agreement and the transactions contemplated hereby have been duly authorized
by 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.
(j) No royalties or licensing fees required in respect of
Products: Seller represents that it is not required to pay any royalty,
licensing fee or other payment to any other person or entity for the use of
the Intangible Property of Seller listed on Exhibit 1.b., or in connection
with the sales of the Products as defined herein.
(k) Seller represents that its ownership of the Intangible
Property as listed on Exhibit 1.b., and the Additional Assets (as herein
defined) and the Products are owned free and clear of any intellectual
property claims by any other person or persons, and that no such claim has
ever been asserted against Seller's ownership of the Intangible Property, the
Additional Assets, or the Products, since Seller's acquisition of said assets
pursuant to a certain asset purchase agreement dated August 1, 1994, by and
between Ampcor, Inc., and Seller.
(l) Seller represents that the inventory to be delivered by
Seller on Closing Date shall be in the minimum quantities listed on Exhibit
1.b., and that all such inventory and the inventory manufactured by Seller,
shall be of good quality, fully merchantable and shall have been made in
accordance with the formula comprising the Intangible Property.
(m) Disclosure to Best of Seller's Knowledge. No
representation or warranty by Seller contained in this Agreement or any
statement or document furnished or to be furnished pursuant hereto contains
or will contain any untrue statement of a material fact, or omits or will
omit to state any material fact required to make the statements herein or
therein contained, taken as a whole, not misleading or necessary in order to
provide Buyer with adequate information as to the Products, the Intangible
Assets and Additional Assets (financial or otherwise). Seller has disclosed
to Buyer all material adverse facts known to it relating to the
-6-
Products, and Seller is not aware of any circumstances or activities
undertaken by former employees which might depreciate the value of the
Products, Intangible Assets or the Additional Assets.
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 New Jersey.
(b) Authorization. The execution and delivery of this
Agreement and the transactions contemplated hereby have been duly authorized
by the Board of Directors of Buyer and on the Closing Date all of the
necessary corporate action to authorize the execution and delivery of this
Agreement and the purchase hereby will have been taken.
(c) No Violation. The execution and delivery of this
Agreement by the Buyer and the consummation of the transactions contemplated
hereby will not violate any law, order or regulation of any governmental
authority, or corporate charter or bylaws of Buyer or constitute a default
under any judgment, order or decree of any court or governmental agency or
instrumentality, or conflict with or constitute a breach or default under any
agreement to which Buyer is a party or by which it is bound.
(d) Brokerage. Buyer has not made a commitment for a
brokerage, finders or similar fees in connection with the transactions
contemplated by this Agreement.
(e) Binding Effect. The Agreement and all related documents
have been duly executed, made and delivered by Buyer, as appropriate, and
constitute a legal, valid and binding obligation of Buyer enforceable against
Buyer in accordance with their respective terms, subject to the laws of
general application affecting creditors' rights.
(f) Representations and Warranties True and Correct. The
representations and warranties contained herein do not include any untrue
statement or material fact nor omit to state a material fact required to be
stated
-7-
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) 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.
(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) Related Documents. All of the related documents are
executed at or prior to closing, including the Title Transfer Documents.
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, the Note, and the Receivable Note 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) 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.
-8-
(e) Guarantee of Principals. Thomas L. Britten and Joseph
D. Turner shall provide to Seller copies of their individual personal
financial statements and shall execute the Guarantee Agreement attached as
Exhibit 8.e.
9. Indemnification.
(a) Procedure for Indemnity. All of the Seller's warranties
shall expire on the third anniversary after Closing. 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 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.
(b) Limit of Liability. Anything in Section 9 to the
contrary notwithstanding, Seller's maximum amount of Indemnifiable Damages
shall be limited to $500,000. 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 hundred twentieth day after the
Closing Date
-9-
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, Buyer shall assign funds received from a
customer first to the oldest invoice of the customer for sales before the
date of Closing unless instructed differently.
11. 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.
12. 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.
13. Applicable Law. This Agreement and its validity, construction
and performance shall be governed in all respects by the laws of the State of
Michigan.
14. 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 the parties hereto.
15. 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.
16. 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).
17. Assignability. This Agreement may not be assigned by Buyer
without the prior written consent of Seller.
18. Benefit. This Agreement shall be binding upon and inure to the
benefit of Buyer and Seller and their successors and permitted assigns.
19. 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.
-10-
20. 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.
21. 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.
22. Venue. The parties agree that any action arising out of this
Agreement shall be brought in the court of appropriate jurisdiction in Ingham
County, Michigan or U.S. District Court for the Western District in Lansing
Michigan. The parties consent to jurisdiction and waive all claims of
improper venue and forum non conveniens.
23. 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.
24. Announcements. Seller and the Buyer will issue a joint press
release in the form attached hereto as Exhibit 9, and Seller shall,
concurrent with Closing, sign a letter of introduction of Buyer in the form
attached hereto as Exhibit 10.
25. Bulk Sale. Seller shall hold harmless Buyer from any tax claim,
or tax liability incurred by Buyer as a result of Seller's failure to comply
with any tax bulk sale act, or sales tax bulk sale act. Seller shall further
hold harmless Buyer from any liability, claim, cost or expense, including
legal fees, if any, incurred as a result of Seller's failure to comply with
any bulk sale act or sales tax bulk sale act in any state having jurisdiction
over the within transaction.
26. Change of Name. At the request of the Buyer, Seller shall
execute a certificate of amendment of Seller's Certificate of Incorporation
whereby the name of the Seller will be changed from AMPCOR Diagnostics, Inc.,
to another name which shall be significantly different to minimize any
confusion or to permit the filing by the Buyer of certificate and trade names
using the name "AMPCOR". Notwithstanding the proceeding sentence of this
Paragraph 26, it is agreed and understood that the Buyer will not make a
request for change of name pursuant to this Paragraph 26 unless, in the
Buyer's discretion, reasonably exercised, Sellers continued use of the name
Ampcor Diagnostics, Inc., interferes with either (i) Seller's ability to
enjoy the assets acquired from Ampcor Diagnostics, Inc., or (ii) the filing
of as trade name or corporate certificates in connection with the name
"AMPCOR," or any derivative thereof.
-11-
27. Seller's Additional Undertakings:
(a) For a period of three years following Closing Date,
Seller agrees upon receipt of notice from Buyer, to take all reasonable
action to assist the Buyer in enforcing Buyer's rights as Seller's successor
to the Intangible Property listed in Exhibit 1.b., and the Additional Assets
(as herein defined).
(b) For a period of three years following Closing Date,
Seller agrees if another individual shall assert claims against the
Intangible Property or the Additional Assets or if a former employee of
Seller shall attempt to sell, divulge or otherwise convey confidential
information about the Products and/or the Intangible Property to third
parties not privy to this Asset Purchase Agreement, to take all appropriate
actions reasonably requested by Seller.
28. Post Closing.
(a) Disposition of sales leads post closing and
non-competition undertaking by Seller, Seller agrees, after the Closing Date,
that it shall refer all sales leads for the Products to Buyer.
(b) In order to protect the interests of the Buyer in the
Products, the Intangible Assets as set forth on Exhibit 1.b., and the
Additional Assets (as herein defined) Seller agrees that is shall not compete
with the Buyer in the sale of the Products or any clinical diagnostic test
kits similar to the Products for a period of four years following the Closing
Date; provided however that this undertaking shall be null and void in the
event that the Buyer breeches in the payment of any provision of asset
purchase agreement and schedules.
29. Dispute Resolution.
(a) Demand for Arbitration. Except regarding a claim for
fraud, or rescission of the Agreement, 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 24, 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
-12-
from the greater Lansing, Michigan, area if Buyer made the demand for
arbitration or from the greater Newark, New Jersey, area if Seller made the
demand for arbitration. 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 Lansing, Michigan, if Buyer
made the demand for arbitration or in Newark, New Jersey, if Seller made the
demand for arbitration.
(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.
The parties have caused this Agreement to be executed as of the date
and year first above written.
Seller: Buyer:
Ampcor Diagnostic, Inc. Tenner, Incorporated
By: /s/ James L. Herbert By: /s/ Thomas L. Britten
-------------------- ---------------------
James L. Herbert, President Its: Thomas L. Britten, Pres.
------------------------
-13-
EXHIBITS LIST
Exhibit (i) Products Subject to Sale
Exhibit 1.a. Machinery and Equipment
Exhibit 1.b. Intangible Property
Exhibit 1.d. Accounts Receivables
Exhibit 1.e. Inventories
Exhibit 1.f. Contract Rights
Exhibit 3.a. Promissory Notes
Exhibit 3.c. Certificate of Allocation
Exhibit 4.a.1. Warranty Bill of Sale
Exhibit 4.a.2. Assignment of Contracts
Exhibit 8.e. Guarantee of Principals
Exhibit 9. Press Release - Paragraph 24
Exhibit 10. Introduction Letter - Paragraph 24
-14-
BioPort Corporation
12717 Three Sisters Road
Potomac, MD 20854
(301) 983-1133
==============================================================================
May 22, 1998
James L. Herbert
620 Lesher Place
Lansing, Michigan 48912-1509
RE: Purchase of Product
Dear Jim:
BioPort Corporation (`BioPort") agrees to sell to Neogen
Corporation ("Neogen") the finished goods and bulk toxoid inventories (to be
converted at no cost to finished goods) of Type B equine botulism vaccine
("Inventory") and portions of master or working seed for Types A, B, and C
cultures, including the Outline of Production as amended May 23, 1995,
records dealing with the original seed cultures, production of seed cultures,
preparation of serials, production of final product, and potency and quality
control procedures for the manufacture of Types A, B and C veterinary
botulism vaccines ("Technology") for a single payment of $600,000. As a part
of the consideration, management of BioPort will use all reasonable efforts
to help Neogen transfer the USDA license to a facility chosen by Neogen. This
agreement is subject to BioPort's or its successor's entering into an asset
purchase agreement ("APA") with the State of Michigan to purchase the
Inventory and the Technology and the closing thereunder. The parties shall
negotiate in good faith a definitive Inventory and Technology Purchase
Agreement upon terms to be mutually agreed to (The "Definitive Agreement"),
and failing such Definitive Agreement, this agreement shall be fully
enforceable. The $600,000 consideration will be deposited in an escrow
account with an independent escrow agent upon BioPort's execution of the APA.
This agreement includes the following provisions:
o The Technology and the Inventory shall be sold to Neogen
free and clear of liens, claims, security interests,
mortgages, pledges, claims, or encumbrances of any kind
whatsoever. The Inventory and Technology shall be sold
to Neogen pursuant to a Warranty Bill of Sale.
o The closing shall occur simultaneously with the closing
under the APA.
<PAGE>
James L. Herbert
May 22, 1998
Page 2
o The parties agree to indemnify and hold each other harmless
from and against any and all loss or damages by reason of
breach of any of the agreed upon representations and
BioPort shall agree to indemnify Neogen in connection with
any lack of clear title or encumbrances against the
Inventory or the Technology. The indemnification shall
include accountant's and attorney fees. The warrantees and
representations shall survive the closing for an agreed
upon period of time.
o BioPort agrees not to compete and not to solicit for a ten
year period in any endeavor both individually and jointly,
directly or indirectly, in the control or ownership of any
business or activity in the United States engaged in the
manufacture of equine botulism vaccine. Neogen does
similarly agree not to compete in the human botulism
vaccine market.
o This agreement and its validity, construction and
performance shall be governed in all respects by the laws
of the State of Michigan. The parties agree that any action
shall be brought in the court of appropriate jurisdiction
in Ingham County, Michigan or U.S. District Court for the
Western District located in Lansing, Michigan. The parties
consent to jurisdiction and waive all claims of improper
venture.
Very truly yours,
BioPort Corporation
AGREED: /s/ Fuad El-Hibri
----------------------------
Fuad El-Hibri
Chairman of the Board
/s/ James L. Herbert /s/ Robert C. Myers
- ----------------------- ----------------------------
James L. Herbert Robert C. Myers
President Chief Operation Officer
/s/ Robert C. van Ravensway
----------------------------
Robert C. van Ravensway
Secretary
LEASE ADDENDUM AND EXTENSION
This lease Addendum and Extension is entered into by and between
Madison Sales Co. No. 2, Inc., Lessor and Neogen Corporation, d/b/a Elisa
Technologies, Lessee
WHEREAS, the parties hereto are parties to a certain Lease
Agreement dated May 19, 1993 (copy of which is attached hereto as Exhibit A),
as amended by letter agreement dated August 25, 1997 and September 2, 1997
(copy of which is attached as Exhibit B), by virtue of a certain assignment
of lease dated April 9, 1998 (copy of which is attached hereto as Exhibit C);
and
WHEREAS, the parties hereto wish to extend the term of said lease
and modify and add to certain provisions contained therein, as set forth
hereinbelow; and
WHEREAS, the parties acknowledge that is to the mutual benefit of
themselves to enter into this modification and extension of lease agreement,
for and in consideration of which the parties hereto hereby agree as follows:
1. Section 2.03 is hereby amended by adding the following language:
The third floor of the premises, consisting of approximately 6,600 square
feet, shall be remodeled, the cost of which shall be the sole responsibility
of Lessee, which cost shall be considered a part of the rent paid by Lessee
in addition to the amount of rent set forth hereinbelow in section 3.01. The
remodeling of the third floor of the premises shall include the installation
of approximately 6,600 square feet of acoustic ceiling three 5 ton air
conditioning and heating; units; insulation of the existing roof, totaling
approximately 6,600 square feet; construction of seven offices, one
conference room, two bathrooms and one utility room; carpeting and vinyl
flooring throughout totaling approximately, 6,600 square feet; updated
electrical service and wiring for telephone and communications; and window
dressings for 33 windows, all pursuant to a drawing accepted and agreed to by
the parties hereto.
2. Section 2.04 (B) Term: The term of this lease shall expire on August 31,
2001.
In the event that Lessee remains in possession of the premises subsequent to
August 31,
<PAGE>
2001, this lease shall continue, on a month to month basis, pursuant to the
same terms and conditions set forth in Exhibits A, B, and C.
3. Section 3.01 Amount of Rent: Effective September 1, 1999, and for the
remainder of the lease, Lessee shall pay to Lessor the sum of $8,500.00 per
month and shall pay the cost of remodeling, as set forth in Sect. 2.03,
above.
4. Section 4.03 is hereby adding the following language: The alterations and
remodeling as set forth hereinabove are hereby authorized by Lessor.
Except as herinabove set forth, all terms and conditions of the
aforesaid Lease Agreement, letter agreement and Assignment of Lease shall
remain in full force and effect.
Madison Sales Co. No. 2, Inc., Lessor Neogen Corporation
d/b/a Elisa Technologies, Lessee
By: /s/ Jerry Lavton /s/ Terry Juricic
----------------------- ----------------------------------
Jerry Lavton, President Vice President and General Manager
By: /s/ Jennifer Layton By:
----------------------- ------------------------------
Jennifer Layton, Secretary Title:
----------------------------
STATE OF KY
COUNT OF FAYETTE
The foregoing was subscribed and acknowledged before me by Terri
Juricic, the Vice President and General Manager of Neogen Corporation, d/b/a
Elisa Technologies on this 17th day of June, 1999.
My commission expires: 1-11-2002.
/s/ Lester L. Hill
-----------------------------------------
Notary Public, State of Kentucky at Large
STATE OF
--------------------------
COUNTRY OF
-------------------------
The forgoing was subscribed and acknowledged before me by
__________________________________, the ______________________________ of
Neogen Corporation, d/b/a Elisa Technologies on this _________ day of
_________, 1999.
My commission expires: ______________________.
Notary Public, State of Kentucky at Large
STATE OF KENTUCKY
COUNTRY OF MADISON
The foregoing was subscribed and acknowledged before me by Jerry
Layton, President and Jennifer Layton, Secretary of Madison Sales Co. No. 2
Inc., to be the free act and deed of said corporation on this 28th day of
July, 1999. My commission expires: 03-31-00
- -----------------------------------------
Notary Public, State of Kentucky at Large
PREPARED BY:
BURNAM, THOMPSON, WELDON,
SIMONS AND DUNLAP, P.S.C.
Bank One Building
116 West Main Street, Suite 2A
P.O. Box 726
Richmond, KY 40476-0726
(606) 623-5205; Fax (606)623-7394
By:
Financial Highlights
<TABLE>
<CAPTION>
Dollars in Thousands, Except Per Share Amounts
Years Ended May 31, 1995 1996 1997 1998 1999
- ------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operations:
Total Revenues $11,726 $12,490 $15,259 $18,488 $22,179
Food Safety Sales 5,711 6,321 8,605 8,419 10,069
Animal Safety Sales 6,015 6,169 6,654 10,069 12,110
Operating Income 630 455(1) 1,311 1,478 2,544
Net Income 679 451(1) 1,812 2,248 2,255
Net Income Per Share .15 .10(1) .32 .35 .37
Average Shares Outstanding (in thousands) 4,675 4,514 5,649 6,397 6,141
<FN>
(1) Excludes one-time restructuring charges of $695 or $.15 per share
</TABLE>
Total Revenues
Operating Income
<TABLE>
<CAPTION>
May 31, 1995 1996 1997 1998 1999
- ------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Financial Strength:
Cash and Marketable Securities $ 2,238 $ 2,183 $13,044 $10,589 $10,667
Working Capital 5,789 5,235 17,265 17,192 17,355
Total Assets 11,539 11,531 23,148 25,413 26,108
Long-Term Debt 351 279 208 174 126
Stockholders' Equity 8,836 8,858 21,013 23,609 23,786
</TABLE>
To our Stockholders,
Employees and Friends
Neogen had a great year in fiscal 1999 due to our great solutions for great
opportunities. With another record-breaking year for both sales and earnings,
Neogen can now boast of quarterly revenue increases as compared to the prior
year in 32 of the past 34 quarters.
Compounded Growth Continues
Neogen's total revenues for FY `99 were approximately $22.2 million, a 20%
increase over FY `98--and the third straight year of a 20% or more revenue
increase. Neogen's earnings were approximately $2.26 million or $0.37 per
share, as compared to $0.35 for the prior year. The Company can now claim a
string of 25 consecutive profitable quarters from operations.
Not A Comparable Year
The earnings record was remarkable in light of a substantially higher tax
rate compared to previous years, and a fourth quarter charge the Company
incurred when it sold its human clinical product line and closed its New
Jersey manufacturing facility. Due to a higher effective federal tax rate,
income taxes for FY '99 increased more than 200% from FY `98.
We believe the best measure of the Company's performance is a comparison of
operating incomes. Income from operations was up 72% to approximately $2.5
million this year, as compared to last year's $1.5 million.
Balance Sheet Powerful
At year end, Neogen had $10.7 million in cash and marketable securities. In
addition, the Company has bank lines of credit totaling $10 million, with
nothing borrowed against these lines.
During the year, Neogen generated cash flow from operations of approximately
$3.7 million as compared to a cash flow in the prior year of approximately
$1.5 million. This is due, in part, to management's effort to control working
capital. Accounts receivable showed only a single digit increase and
inventory levels were actually below the prior year end, despite the 20%
increase in revenues. Some of the changes made in FY `99 should help this
continued performance improvement. As an example, the consolidation of our
diagnostic manufacturing operations in Lansing should generate savings in
excess of $200,000 annually.
[picture omitted]
James L. Herbert,
President and CEO
Stock Buyback Continues
During the fiscal year, Neogen implemented a stock buyback program. Our board
and management continue to believe there is no fundamental reason the stock
price has not reflected the Company's performance. At year end, approximately
315,000 of the 500,000 shares authorized for the program have been
repurchased.
The Company's strategy of using available cash and borrowing power for
synergistic acquisitions continues. However, as we continued to generate cash
and were not successful in finding good acquisition fits, we felt the
repurchase program provided the best opportunity for shareholders.
Why Has The Stock Price Stagnated?
During the year, Neogen's stock drifted down from a high of over $9.00 to
about $7.00. How do we account for this given the three year compound annual
growth rate of 21%, the compound annual operating profit increase of 42%, and
the string of quarterly revenue increases over the past eight years?
In advising on financial reporting years ago, Henry Ford said, "Don't
complain and don't explain." Perhaps we can violate that rule a bit with a
little explanation. We feel several factors were at work that brought about
this lack of market attention.
Over the past year, Neogen lost the financial research coverage and
significant retail market support from three of the four investment banking
firms that had followed Neogen. This was not because of disinterest, but
because the firms were acquired or merged, and their strategic focuses
shifted.
The marketplace shifted its attention to the unusually high stock prices of
large cap firms, leaving all the small cap companies, including Neogen, with
less attention. This rise and fall of small caps as the "darlings of the
marketplace" seems to run in cycles, and we are now in a down cycle. When it
returns, Neogen will be well positioned.
We also believe that the market has penalized Neogen's stock price due to our
large cash reserves that have not been used for acquisitions. Other than the
small acquisition of a product line, management didn't find good
opportunities in FY 1999. We continue to believe acquisitions should be
synergistic to our corporate mission, have attractive growth rates, and be
available at sensible valuations. Opportunities fitting our criteria have
begun to appear recently.
News of litigation may have also hurt our stock price. The year's legal
expense was substantially higher than what we have encountered in our
previous 16-year history. In fact, the increased cost of litigation as
compared to FY 1998 amounted to approximately $0.04 per share on an after tax
basis. Management believes that there is only one remaining case of any
significance. Though this case has been difficult to predict, it should be
concluded before our next fiscal year end.
Cash Flow from Operations
(in thousands)
[graphic omitted]
Food Safety Opportunities Even Greater
Though our markets provided good growth opportunities in FY 1999, those
opportunities could be even greater in the year ahead. For the Food Safety
Division, the marketplace is providing even more pressure on the food
processor to bear the responsibility of safer food. The growth in
away-from-home eating, the rapidity with which food moves from the farm gate
to the dinner plate, increasing government regulation, and better clinical
record keeping related to foodborne illness, are almost certain to cause this
trend to continue.
International Growth Continues
Approximately 22% of Neogen's FY '99 total revenues were international sales,
with both the Company's Food Safety and Animal Safety divisions seeing growth
in sales outside the U.S. This is especially noteworthy considering the
economic downturns a number of Asian and Latin American countries have
experienced. International demand for Neogen's products is increasing as
countries seek safer products for themselves, and as a result of the
requirements placed on products shipped internationally.
Animal Safety Grows
The opportunities for Animal Safety growth are also encouraging. In the past
year, Animal Safety revenues moved upward to approximately 55% of total
Neogen revenues. As a demand for animal botulism vaccine grew in FY `99,
Neogen acquired the technology and manufacturing rights to this vaccine that
had been custom manufactured for Neogen's distribution. This move will
improve gross margins and ensure a supply of vaccine to match the market's
growth. The market expansion and Neogen's competitive gains in the
professional equine market made major contributions to both revenue and
profits in the past year. We believe this trend will continue into the new
year.
Continued market growth, new product introductions and competitive gains,
along with strong acquisitions, should make FY 2000 an even greater one for
Neogen.
James L. Herbert
President
Great year. Great opportunities.
Great solutions.
The past year provided numerous examples of escalating opportunity for
solution-minded Neogen. While people worldwide enjoy an unprecedented supply
of safe food, and feed and companion animals experience an unparalleled level
of quality care, outcries for even safer food and better care for animals
have intensified.
Neogen is well positioned to help satisfy those demands. What follows are
recent worldwide events and circumstances that illustrate the ever-increasing
need for the solutions Neogen can provide.
Death and illness linked to Listeria-contaminated ready-to-eat meat and
poultry products leads to recall of more than 65 million pounds of meat, and
government action; U.S. Centers for Disease Control study finds deadly
foodborne E. coli infections rise sharply in 1998.
Neogen's REVEAL(R) line of rapid tests to detect dangerous bacteria such as
E. coli O157:H7, Salmonella and Listeria dovetails neatly with the food
industry and government's movement to quickly identify and destroy
contaminated product before it can reach the consumer.
Food Safety Sales
(in thousands)
[Graphic Omitted]
<PAGE>
Gone are the days when consumers took the time to thoroughly cook meat
products, or wash fruits and vegetables to eliminate any potentially
dangerous bacteria. Microwave cooking, and ready-to-eat meals are now
household staples.
Gone are the days when food processors could wait a week for conventional
laboratory methods to determine if a product is contaminated. Modern shipping
allows product to be distributed anywhere in the world within 48 hours.
The trend toward ready-to-eat meals has shifted even more of the
responsibility for safe food to food processors. In response, processors are
seeking rapid, easy-to-use and inexpensive bacterial testing
methods--Neogen's strength. Neogen's REVEAL for E. coli O157:H7 is the
quickest on the market at 8 hours. Neogen researchers continue to work on
making the test, and all the Company's testing products, even quicker and
easier to use.
Neogen's foodborne bacteria tests are used by food processors around the
world, including 29 of the largest U.S. meat processors.
This year U.S. government regulators continued requiring compliance of the
Hazard Analysis and Critical Control Points (HACCP) program by adding an
additional 3,000 meat and poultry processing facilities to the program; HACCP
compliance inspections of seafood processing facilities continue to expand;
other processing industries, like the fruit and vegetable industry, begin
using HACCP guidelines.
HACCP, and other similar programs, rely on verifiable, recordable measurement
of safe environmental, processing and handling practices. It's not good
enough any more to just try hard to clean food processing equipment and
environments. They must be clean. Microscopically clean.
Neogen's tests include HACCP-mandated Salmonella and generic E. coli tests
for the meat and poultry industry, and the top-of-the-line adenosine
triphosphate (ATP) testing system, Uni-Lite(R) XCEL. If ATP, a substance
found in all living cells, is found after a sanitation cleaning crew has
finished in an area, it's an indicator that the crew has not been thorough
enough.
Similarly, Neogen's tests for histamine allow regulators and processors to
quickly determine if some types of seafood, including tuna, have been handled
properly. Histamine, produced when fish begins bacterial breakdown, causes
scombroid poisoning in humans.
The Council for Agricultural Science and Technology
estimates foodborne illness at up to 33 million
cases per year resulting in about 9,000 deaths in
[Picture Omitted] the U.S. alone. Neogen expects a significant portion
of the $500 million food and environmental testing
market to shift from conventional expensive and
time-consuming methods to rapid and inexpensive test
systems such as Reveal for E. coli O157:H7, the
fastest such test on the market.
<PAGE>
Large recalls of Halloween candy because of the presence of unlabeled peanut
residues, and canned pasta meals due to unlabeled egg residues, are but a
sample of numerous recent recalls to protect food allergic consumers.
In cooperation with the University of Nebraska's Food Allergy Research and
Resource Program, Neogen has developed, manufactures and markets rapid tests
for peanut and egg residues.
Neogen's Veratox(R) and Alert(R) test kits for peanut and egg allergens help
food processors quickly and easily determine if allergenic residues exist in
the production environment, or in a finished product.
An estimated 1 to 2 percent of adults, and 5 to 8 percent of children, are
sensitive in some degree to food allergens. More than 4 million people in the
United States alone are known to have a food allergy, with allergies to
peanuts and eggs being among the most prevalent. Even tiny amounts of these
contaminants can cause serious implications resulting in hospitalization, and
in extreme cases, even death.
Allergen contamination occurs when residues get into another food processed
on shared equipment. Although processors clean equipment to avoid
contamination, Neogen's tests are the first to give a highly sensitive and
reliable method to confirm the elimination of food allergens in a timely
manner.
A rapid test for casein, a protein in milk, is in the final stages of
development, and tests for other common food allergens are being developed.
A total of 556 recalls of food were ordered in 1998. Food allergen related
problems were responsible for 117 of the recalls.
[Picture Omitted]
Food allergen monitoring can be included as part of
a processor's HACCP plan, or more commonly, as a
part of a sanitation standard operating procedure in
(Picture Omitted) the HACCP prerequisite program. Since allergens may
be classified as adulterants by the FDA, it is
imperative to have an allergen prevention plan in
place.
<PAGE>
In 1998, an extremely hot and dry growing season in the Southern United
States caused much of the region's corn crop to be contaminated with
aflatoxin; cool, wet weather in the upper midwest during the flowering stage
of barley lead to the appearance of vomitoxin, and ultimately, to potential
quality problems in beer.
Neogen's Veratox and Agri-Screen(R) line of tests for the six different
naturally-occurring toxins in grain, such as aflatoxin and vomitoxin, are
market leaders.
Much of Neogen's early success was built on its ability to set the standard
in the development, manufacturing and marketing of products that quickly and
accurately detect natural toxins in grain. That tradition continues.
The Company's test for aflatoxin, a known carcinogen, is used exclusively by
the Federal Grain Inspection Service to test all corn leaving U.S. ports.
Thousands of manufacturers who use grains in their products also rely upon
Neogen's tests. Neogen's popular Veratox for Vomitoxin test was recently
improved by cutting the time necessary to complete the test by 50%. This is a
significant improvement to help speed up grain handling by testing
laboratories and grain elevators during the harvest season.
Since mycotoxins survive the brewing process,
Neogen's products for the detection of mycotoxins [Picture Omitted]
help brewers ensure both safety from possible
carcinogens and a consistent flavor.
The intentional poisoning of rice in Japan leads to numerous illnesses and
deaths; Japanese government calls for stringent testing program.
The Japanese government solicited help to find a quick test to detect
pesticide poisons, and Neogen made the government aware of its Agri-Screen
Ticket(R) Pesticide Detector. Problem solved. Neogen entered into an
agreement to ship thousands of Ticket test kits to Japan to help safeguard
the nation's population from tainted rice.
The sale to Japan is one of many recent success stories of Neogen's
International Sales Department as the group aggressively expands its
international coverage. International sales accounted for approximately 22%
of Neogen's revenues last year.
Neogen's pesticide residue test, Agri-Screen Ticket,
detects organophosphates such as methyl parathion, [Picture Omitted]
thiophosphates and carbamates in a quick and easy to
use format.
<PAGE>
Dog food found to be contaminated with aflatoxin leads to the deaths of
numerous dogs, and the recall of thousands of pounds of product. Other
natural toxins continue to pose health risks to animals and consumers.
When a major dog food manufacturer identified aflatoxin as the contaminant in
its product, Neogen was immediately called in to establish and train
employees on a stepped-up testing program. Problem solved.
Other natural toxins, including vomitoxin,
fumonisin, zearalenone, ochratoxin and T-2 toxin [Picture Omitted]
continue to concern feed processors. Horses are
extremely sensitive to low amounts of fumonisin, Neogen's beloved
which can cause rapid and fatal brain damage. ad mascot.
Vomitoxin in grain causes hogs to refuse to eat the
feed. The ingestion of zearalenone-contaminated feed
or grain by livestock can cause a wide variety of
reproductive problems.
Perhaps an even bigger concern is that natural toxins ingested by animals can
make their way to the dinner table. One type of aflatoxin is especially
dangerous to humans, even in minute quantities, when it is found in cow's
milk.
Neogen's full line of natural toxin testing products easily and accurately
alert food and feed producers of contamination concerns before the toxins can
do their damage, from inside the farm gate to the dinner plate.
EqStim Immunostimulant enhances the immune response
providing rapid recovery from bacterial and viral [Picture Omitted]
respiratory infections.
The increasing demands on performance horses opens a wide market for products
that deliver shortened equine recovery times.
Neogen's acquisition of the ImmunoVet(R) immunostimulants, products that
stimulate an animal's natural production of antibodies to bacteria and virus
infections, has proven a valuable addition to the Company's equine veterinary
product line.
Neogen's EqStim(R) Immunostimulant has become one of the Company's
largest-selling single products as it gains even wider acceptance and use in
the veterinary community. EqStim is used in combination with conventional
therapy in the treatment of equine respiratory disease complex and has
repeatedly shown, in clinical trials and use in the field, to be effective in
increasing the rate of recovery.
If adapted for food animals, immunostimulants can lessen drug use, and reduce
the possibility of drug residues in meat and milk products.
Animal Safety Sales
(in thousands)
[Graphic Omitted)]
<PAGE>
Concern about botulism infections in animals increases and demand for
Neogen's vaccine for equine botulism expands, especially in Scandinavian
countries; EPM continues to be a major concern of horse owners and
veterinarians.
Until recently, the equine botulism vaccine, BotVax(TM) B, was custom
manufactured for Neogen. Neogen acquired the sole rights to the vaccine and
expanded its Tampa, Florida, manufacturing facility to take over production
of this vaccine. The move will improve gross margins and ensure a continuous
supply of BotVax B to the Company's growing customer base.
Equine botulism is a rapidly progressive, neuroparalytic disease that is 90%
fatal. The disease, also known as Shaker Foal Syndrome when it infects
newborn foals, causes respiratory paralysis and death, generally within 72
hours.
The disease is caused by the bacteria Clostridium botulinum, which is found
in wide regions throughout the world. Adult horses become infected when they
ingest contaminated hay, or through contact with the bacteria on an open
wound.
Equine protozoal myeloencephalitis (EPM) is an infection of the central
nervous system of horses. EPM is caused by horses eating feed contaminated
with sporocysts of Sarocystis neurona, an organism transmitted by the
opossum.
Most EPM-infected horses recover if the disease is diagnosed early and
treated appropriately. Neogen's EPM testing service provides veterinarians
with a quick, accurate result.
The toxins produced by Clostridium botulinum are
some of the most potent known. Treatment is
extremely expensive, though death usually occurs [Picture Omitted]
before it can be instituted. Prevention, however, is
simple and inexpensive with the USDA approved
vaccine, BotVax B.
With the growing pressure on diagnostic test producers to produce quicker
results, researchers have increased their demand for products that can
improve test kit speed and accuracy.
Neogen's K-Blue Substrate(R) has gained a worldwide customer base because of
its ease of use and performance.
Many of Neogen's 150 diagnostic test kits, whether used to help keep food or
animals safe, rely on a simple color change to indicate the presence of a
target substance. All the user needs to do is observe the color of the wells
to know if the target substance is present.
Neogen produces K-Blue Substrate for the Company's own test kits, but the
product's superior convenience and performance has gained it a large and
growing market with researchers and other diagnostic kit manufacturers.
This past year's great opportunities, and Neogen's great solutions to the
opportunities led to a great year for the Company.
Neogen believes the company of tomorrow is the one that can conquer today's
opportunities. Neogen has proven itself in the past, and continually prepares
to conquer tomorrow's opportunities.
[Picture Omitted]
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.
The words "anticipate", "believe", "potential", "expect", and similar
expressions used herein are intended to identify forward-looking statements.
Forward-looking statements involve certain risks and uncertainties. Various
factors, including competition, recruitment 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, impact of the year 2000 issue 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>
Increase
REVENUES (Dollars in Thousands) 1999 Increase 1998 (Decrease) 1997
- ------------------------------- ---- -------- ---- ---------- ----
<S> <C> <C> <C> <C> <C>
Product Sales:
Food Safety $10,069 20% $ 8,419 (2%) $ 8,605
Animal Safety 12,110 20% 10,069 51% 6,654
------- -- ------- -- -------
TOTAL REVENUES $22,179 20% $18,488 21% $15,259
======= == ======= == =======
</TABLE>
The 20% increase in 1999 sales of food safety products was primarily due to
increases in sales in two areas. Large sections of the southern United States
suffered from hot, dry weather conditions during the 1998 summer months,
which promoted mold growth in corn and other commodity crops. Sales of test
kits to detect aflatoxin, a harmful residue from molds that proliferate in
hot, dry weather conditions, increased $623,000 during 1999. Sales of test
kits to detect harmful bacteria increased $874,000 in 1999 due to strong
international demand and because of higher sales to meat processors concerned
about well-publicized E. coli and Listeria outbreaks in hamburger, hot dogs
and luncheon meats.
In 1998, food safety sales declined by 2%. Sales of diagnostic test kits sold
to the meat and poultry market for the detection of harmful bacteria
increased by $693,000. However, sales of test kits to detect vomitoxin
declined by $725,000. Sales of diagnostic tests for the detection of harmful
naturally-occurring toxins, such as vomitoxin and aflatoxin, are influenced
by the uncertainty of weather conditions, which impacts growing conditions
differently each year. Accordingly, it is not uncommon for the Company to
experience significant year to year fluctuations in sales of test kits to
detect naturally-occurring toxins.
Animal safety sales increased 20% in 1999 and 51% in 1998. The acquisitions
of Vetoquinol USA, Inc. effective December 30, 1997 and Triple Crown,
effective July 1, 1997 contributed $1,052,000 and $2,499,000 in increased
sales in 1999 and 1998, respectively. Other products experiencing increased
demand in 1999 included the Company's vaccine to prevent Type B botulism in
horses ($455,000) and sales of OEM products such as specialty needles and
syringes used to inject spices and marinades into meat and poultry
($698,000). In 1998, the Company experienced increased sales of approximately
$538,000 across virtually all product lines sold to the professional equine
market and a $330,000 increase in sales of the aforementioned OEM products.
COST OF GOODS SOLD
(Dollars in Thousands) 1999 Increase 1998 Increase 1997
- ---------------------- ---- -------- ---- -------- ----
Cost of Goods Sold $9,477 19% $7,960 28% $6,201
Costs of goods sold increased 19% in 1999 and 28% in 1998 principally due to
the overall increase in product sales. Expressed as a percent of sales, cost
of goods sold was 43%, 43% and 41% in 1999, 1998, and 1997 respectively. The
percentages for 1999 and 1998 are higher than 1997 due exclusively to a
higher mix of animal safety sales in 1999 and 1998 compared to 1997.
OPERATING EXPENSES
(Dollars in Thousands) 1999 Increase 1998 Increase 1997
- ---------------------- ---- -------- ---- -------- ----
Sales and Marketing $5,311 8% $4,910 17% $4,197
General Administrative 3,207 18% 2,716 22% 2,230
Research and Development 1,640 15% 1,425 8% 1,320
Many sales and marketing expense categories increased in 1999 and 1998
including salaries, fringe, royalties, commissions, trade shows and technical
service. The increase in 1999 compared to 1998 is the direct result of
expanding sales activities both domestically and internationally to gain
wider distribution of products dedicated to food and animal safety. The
Company expects to continue to expand its sales and marketing efforts in the
future.
The increase from 1997 to 1998 was primarily due to higher costs, including
the acquisitions of Vetoquinol, USA, Inc., and Triple Crown, associated with
marketing products to the professional equine market.
The 1999 increase in general and administrative expense is due to two
factors. Increases in sales volume and overall business activity resulted in
a need for additional administrative staff. The increase in staff, along with
higher accruals for bonuses due to improved operating performance, resulted
in $208,000 of higher salary and fringe expense. In addition, legal and
professional fees increased $259,000 compared to 1998.
The majority of the increase in general and administrative expense in fiscal
1998 was 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 research efforts and manufacturing
protocols for diagnostic tests to detect harmful bacteria. In addition, legal
and professional fees increased $202,000 compared to 1997.
Management believes that the Company is not involved in any material adverse
legal proceedings. However, Neogen is a party in lawsuits as discussed in
ITEM 3. LEGAL PROCEEDINGS in the Company's Form 10-K for the year ended
<PAGE>
May 31, 1999. 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 2000
in pursuing this litigation.
The Company expects general and administrative expenses to decline in fiscal
year 2000 partially as a result of consolidating certain administrative
functions and partially because management believes that legal fees will be
lower in 2000 than 1999.
Research expenses increased in 1999 and 1998 due primarily to increased
staffing levels. Management believes research and development is critical to
the Company's future and expects to continue to expand efforts for research
products pertaining to food and animal safety products.
OTHER INCOME
(Dollars in Thousands) 1999 Decrease 1998 Increase 1997
- ---------------------- ---- -------- ---- -------- ----
Other Income $104 88% $897 59% $564
Other income declined significantly in 1999. This was primarily due to the
loss on sale of the Company's human clinical product line and related fourth
quarter charge for closure of a manufacturing facility, which totaled
approximately $629,000. (See Note 4 of Notes to Consolidated Financial
Statements). In addition, interest income decreased during 1999 due to lower
rates and lower average investment balances.
Other income was $333,000 higher in 1998 compared to 1997. During fiscal
1997, 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 resulted in higher interest income. Also, the
Company's share of royalties, paid to an affiliated partnership, increased
significantly in 1998.
NET INCOME and INCOME PER SHARE
(Dollars in Thousands) 1999 Increase 1998 Increase 1997
- ---------------------- ---- -------- ---- -------- ----
Net Income $2,255 -- $2,248 24% $1,812
Net Income Per Share - Diluted $ 0.37 $ 0.35 $ 0.32
During 1999, the Company's operating income increased by $1,066,000 or 72% as
a direct result of the 20% overall increase in product sales. This
substantial increase in operating income was offset by much lower other
income in 1999 and by a significant increase in federal income taxes.
Neogen's effective federal tax rate has historically been insignificant
because the Company had net operating loss carry forwards ("NOLs") available
to offset taxable income. During fiscal year 1999 the Company utilized its
remaining NOLs. As a result, the Company's effective tax rate increased
significantly in 1999 compared to 1998 and management expects the effective
federal tax rate will also increase in fiscal year 2000.
The increase in 1998 net income and net income per share over 1997 was due
primarily to the increase in sales of animal safety products, including
acquisitions, along with the increase in other income.
<PAGE>
Financial Condition and Liquidity
At May 31, 1999 the Company had $10,667,000 in cash and marketable
securities, working capital of $17,355,00 and stockholders' equity of
$23,786,000. In addition, the Company has bank lines of credit totaling
$10,000,000 with nothing borrowed against these lines as of May 31, 1999.
Cash and marketable securities increased $78,000 during fiscal 1999. Cash
provided from operations, which totaled $3,682,000, was offset by the
aggregate of the acquisition of certain assets of BioPort Corporation for
$600,000, the use of $2,169,000 for the purchase of 314,700 of shares of the
Company's common stock (see Notes 3 and 12 of the Notes to Consolidated
Financial Statements) and $888,000 expended for property, equipment and other
assets.
During 1999, the Company initiated programs focused on reducing investment in
accounts receivable and inventories. As a result, accounts receivable were up
only 7% while inventories declined 4% at May 31, 1999 despite a significant
increase in sales and production volume.
The significant increase in prepaid expenses and other current assets is the
result of $375,000 in prepaid federal income taxes and a $76,000 short-term
note receivable obtained as part of the Company's sale of its human clinical
product line (see Note 4 of the Notes to Consolidated Financial Statements).
The decrease in goodwill at May 31, 1999 from May 31, 1998 is principally due
to $621,000 of goodwill written off as part of the sale of the Company's
human clinical product line (see Note 4 of Notes to Consolidated Financial
Statements).
The substantial increase in other non-current assets is partially due to a
$400,000 note receivable obtained in conjunction with the aforementioned sale
of the human clinical product line and partially due to the acquisition of
certain assets of BioPort Corporation.
Accounts payable increased $264,000 during fiscal year 1999 due primarily to
$255,000 in payables due to a new vendor for instruments and tests used by
the Company's food safety customers to detect levels of general sanitation.
Other accrued liabilities at May 31, 1999 were $227,000 higher than May 31,
1998 due principally to higher royalties payable that were paid after
year-end and accruals pertaining to the closing of the Company's New Jersey
manufacturing facilities (See Note 4 of the Notes to Consolidated Financial
Statements).
Effective July 1, 1997, the Company acquired substantially all of the assets
of Triple Crown Pharmaceuticals, a division of W.J. Bartus, Inc. of Ft.
Pierce, Florida. The initial purchase price consisted of a cash payment of
approximately $1,400,000 paid in July 1997. A second and final cash payment
of $500,000 is due provided the seller meets certain conditions of the asset
purchase agreement by July 3, 2000.
The Company did not borrow any additional funds during fiscal 1999 and made
scheduled payments totaling $49,000 on long-term debt. At May 31, 1999 the
Company had no material commitments for capital expenditures. Inflation and
changing prices have not had and are not expected to have a material effect
on the Company's operations.
Neogen has been profitable for 24 of its last 25 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, 1999,
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.
<PAGE>
Year 2000
The Company began addressing the year 2000 issue in the first half of
calendar year 1998. An inventory and assessment of the Company's hardware and
software computer systems was conducted including an analysis of accounting,
office and security systems along with a review of manufacturing and
laboratory equipment. In addition, the Company surveyed key customers and
vendors regarding their strategies to achieve year 2000 compliance.
As a result of this assessment, the Company determined that the financial
software used at its subsidiary where veterinary instruments are manufactured
was not year 2000 compliant. Programming changes to correct this problem were
completed and tested in July 1999. Accordingly, the Company believes that its
financial and manufacturing systems are year 2000 compliant.
The Company is currently in the process of developing contingency plans to
prepare for potential year 2000 problems that might occur due to unforeseen
factors including incorrect assumptions, changes in available information or
failure of third parties to adequately address the year 2000 issue. These
contingency plans may include purchasing and redeployment to various
locations of additional materials and supplies, preservation of perishable
biological products and antibodies in the event of electrical power
interruptions, and processing of customer orders and vendor invoices
manually.
The Company expects that the total cost of changes necessary to comply with
year 2000 will not exceed $50,000 including costs already incurred to date.
However, the Company is basing this cost estimate, and its belief that it is
currently year 2000 compliant, on presently available information and
assumptions about future events. Actual results could differ materially from
the Company's expectations as a result of numerous factors, including the
possibility of incorrect assumptions, cooperation of third parties and other
unforeseen circumstances that could have a materially adverse effect on the
Company's financial results.
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, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for
each of the three years in the period ended May 31, 1999. 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the
period ended May 31, 1999 in conformity with generally accepted accounting
principles.
BDO SEIDMAN, LLP
Troy, Michigan
July 16, 1999
<PAGE>
Neogen Corporation and Subsidiaries
Consolidated Balance Sheets
May 31, 1999 1998
- ------- ---- ----
Assets (Note 5)
Current Assets
Cash $ 1,062,811 $ 719,877
Marketable securities (Note 2) 9,603,844 9,868,862
Accounts receivable, less allowance for
doubtful accounts of $166,000 and $227,000 3,295,536 3,088,858
Inventories 4,360,580 4,474,030
Prepaid expenses and other current assets 960,745 441,319
----------- -----------
Total Current Assets 19,283,516 18,592,946
----------- -----------
Property and Equipment
Land and improvements 79,263 49,263
Buildings and improvements 786,066 499,146
Machinery and equipment 4,331,297 4,356,271
Furniture and fixtures 375,983 376,157
----------- -----------
5,572,609 5,280,837
Less accumulated depreciation 3,424,668 3,395,786
----------- -----------
Net Property and Equipment 2,147,941 1,885,051
----------- -----------
Intangible and Other Assets
Goodwill, net of accumulated amortization
of $511,106 and $456,943 (Note 3) 3,199,802 4,023,235
Other assets, net of accumulated amortization
of $544,600 and $544,603 (Notes 3 and 4) 1,476,879 911,410
----------- -----------
Total Intangible and Other Assets 4,676,681 4,934,645
----------- -----------
$26,108,138 $25,412,642
=========== ===========
See accompanying notes to consolidated financial statements
May 31, 1999 1998
- ------- ---- ----
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 842,429 $ 578,814
Accruals
Compensation and benefits 606,689 569,121
Other 430,828 203,895
Current maturities of long-term debt (Note 5) 48,672 48,672
----------- -----------
Total Current Liabilities 1,928,618 1,400,502
Long-Term Debt, less current maturities (Note 5) 125,720 174,392
Other Long-Term Liabilities 267,982 228,411
----------- -----------
Total Liabilities 2,322,320 1,803,305
----------- -----------
Commitments (Notes 3, 9 and 10)
Stockholders' Equity (Notes 6, 7 and 12)
Common stock, $.16 par value, shares
authorized 10,000,000; issued and
outstanding 5,929,279 and 6,208,179 948,685 993,309
Additional paid-in capital 22,235,726 24,269,549
Retained earnings (deficit) 601,407 (1,653,521)
----------- -----------
Total Stockholders' Equity 23,785,818 23,609,337
----------- -----------
$26,108,138 $25,412,642
----------- -----------
See accompanying notes to consolidated financial statements.
Neogen Corporation and Subsidiaries
Consolidated Statements of Income
Year Ended May 31, 1999 1998 1997
- ------------------ ---- ---- ----
Net Sales $22,179,008 $18,488,389 $15,259,423
----------- ----------- -----------
Operating Expenses
Cost of goods sold 9,476,873 7,959,655 6,201,301
Sales and marketing 5,311,494 4,909,997 4,197,283
General and administrative 3,206,969 2,715,738 2,230,438
Research and development 1,639,600 1,424,583 1,319,732
----------- ----------- -----------
19,634,936 17,009,973 13,948,754
----------- ----------- -----------
Operating Income 2,544,072 1,478,416 1,310,669
----------- ----------- -----------
Other Income (Expense)
Interest income 493,430 605,990 449,331
Interest expense (15,945) (22,581) (66,851)
Loss on sale of product
line (Note 4) (628,839) -- --
Other 255,210 313,548 181,552
----------- ----------- -----------
103,856 896,957 564,032
----------- ----------- -----------
Income Before Taxes On Income 2,647,928 2,375,373 1,874,701
Taxes On Income (Note 8) 393,000 127,000 63,200
----------- ----------- -----------
Net Income $ 2,254,928 $ 2,248,373 $ 1,811,501
----------- ----------- -----------
Basic Earnings Per Share $ .37 $ .36 $ .33
Diluted Earnings Per Share $ .37 $ .35 $ .32
=========== =========== ===========
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
Neogen Corporation and Subsidiaries
Consolidated Statements of
Stockholders' Equity
Years Ended May 31, 1999, 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 6) 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)
Exercise of options 35,800 5,728 84,810 --
Repurchase of common stock (Note 12) (314,700) (50,352) (2,118,633) --
Net income for the year -- -- -- 2,254,928
--------- -------- ----------- -----------
Balance, May 31, 1999 5,929,279 $948,685 $22,235,726 $ 601,407
========= ======== =========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Neogen Corporation and Subsidiaries
Consolidated Statements of
Cash Flows
Year Ended May 31, 1999 1998 1997
- ------------------ ---- ---- ----
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 2,254,928 $ 2,248,373 $ 1,811,501
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 873,071 715,681 624,113
Loss on sale of product line 628,839 -- --
Loss (gain) on sale of equipment 5,815 8,843 (1,520)
Changes in operating assets and liabilities
Accounts receivable (311,541) (622,662) (380,980)
Inventories 342,794 (449,877) (241,529)
Prepaid expenses and other current assets (442,881) (81,947) (34,555)
Accounts payable 263,615 (264,171) 345,483
Accrued liabilities 67,121 (89,450) 186,006
------------ ------------ ------------
Net Cash Provided By Operating Activities 3,681,761 1,464,790 2,308,519
------------ ------------ ------------
Cash Flows From Investing Activities
Proceeds from marketable securities 25,388,316 25,575,582 11,886,003
Purchases of marketable securities (25,123,298) (23,119,531) (22,653,875)
Proceeds from sale of equipment 11,625 20,975 7,206
Purchases of property, equipment and other assets (888,351) (645,681) (630,760)
Acquisitions (600,000) (3,587,033) (53,122)
------------ ------------ ------------
Net Cash Used In Investing Activities (1,211,708) (1,755,688) (11,444,548)
------------ ------------ ------------
Cash Flows From Financing Activities
Net proceeds from issuance of common shares 90,538 347,764 10,343,995
Repurchase of common stock (2,168,985) -- --
Payments on long-term borrowings (48,672) (55,853) (71,148)
Net payments on notes payable - banks -- -- (1,043,946)
------------ ------------ ------------
Net Cash Provided By (Used In) Financing Activities (2,127,119) 291,911 9,228,901
------------ ------------ ------------
Net Increase in Cash 342,934 1,013 92,872
Cash, at beginning of year 719,877 718,864 625,992
------------ ------------ ------------
Cash, at end of year $ 1,062,811 $ 719,877 $ 718,864
------------ ------------ ------------
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<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 two 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
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of (1) 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 mycotoxins,
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.
<PAGE>
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:
1999 1998
---- ----
Raw material $1,809,725 $2,003,124
Work-in-process 755,225 837,679
Finished goods 1,795,630 1,633,227
---------- ----------
$4,360,580 $4,474,030
========== ==========
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 $542,024, $469,324 and
$389,582 in 1999, 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 business conditions 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
Earnings per share is calculated according to Statement of Financial
Accounting Standards ("SFAS") No. 128 - "Earnings Per Share" which requires
companies to present basic and diluted earnings per share. Basic earnings per
share is based on the weighted average number of common shares outstanding
during the year. Diluted earnings per share is based in the weighted average
number of common shares and dilutive potential common shares outstanding
during the year.
<PAGE>
The Company's dilutive potential common shares outstanding during the year
result entirely from dilutive stock options and warrants. The following table
presents the earnings per share calculations:
For the Year Ended May 31, 1999 1998 1997
- -------------------------- ---- ---- ----
Numerator for Basic and Diluted
Earnings Per Share
Net income $2,254,928 $2,248,373 $1,811,501
---------- ---------- ----------
Denominator
Denominator for basic earnings per
share - weighted average shares 6,099,129 6,176,995 5,512,633
---------- ---------- ----------
Effect of Dilutive Securities
Stock options and warrants 41,734 219,860 135,871
---------- ---------- ----------
Dilutive Potential Common Stock
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
conversions 6,140,863 6,396,855 5,648,504
---------- ---------- ----------
Basic Earnings Per Share $ 0.37 $ 0.36 $ 0.33
---------- ---------- ----------
Diluted Earnings Per Share $ 0.37 $ 0.35 $ 0.32
---------- ---------- ----------
Options to purchase 441,100, 33,400 and 128,500 shares of common stock at
prices ranging from $7.13 to $13.25, $11.31 to $13.25 and $7.50 to $9.25 in
1999, 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.
Segment Information
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise",
replacing the "industry segment" approach with the "management" approach. The
management approach designates the internal organization that is used by
management for making decisions and assessing performance as the source of
the Company's reportable segments. SFAS No. 131 also requires disclosures
about products and services, geographical areas, and major customers. The
adoption of SFAS No. 131 did not affect results of operations or financial
position but did affect the disclosure of segment information (see Note 11).
Recent Accounting Pronouncements
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. SOP
98-5, effective in fiscal 2000, and SFAS 133, effective in fiscal 2002, are
not expected to have a material impact on the consolidated financial
statements.
<PAGE>
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, 1999 and 1998.
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:
1999 1998
---- ----
Corporate Debt Securities $9,341,730 $7,770,996
Certificates of Deposit -- 1,099,653
U.S. Treasury and Agency Securities 262,114 998,213
---------- ----------
$9,603,844 $9,868,862
---------- ----------
3. Acquisitions
In August 1998, the Company purchased certain inventory and technology from
BioPort Corporation of Lansing, Michigan. The purchase price consisted of a
single cash payment of $600,000. The Company allocated $400,000 of the
purchase price to finished goods and bulk toxoid inventories of Type B equine
botulism vaccine ("BotVax B"). The remainder of the purchase price was
allocated to other assets and consisted primarily of Types A, B, and C
botulism seed cultures, manufacturing protocols, quality control procedures
and USDA license to manufacture BotVax B.
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. A second and
final payment of $500,000 is due provided the seller meets certain conditions
of the asset purchase agreement by July 3, 2000. The payment, if required,
will be recorded as additional goodwill and amortized over the remaining
amortization period.
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 continues 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
period ending December 31, 1999.
4. Sale of Product Line
In the fourth quarter of fiscal 1999, the Company sold its AMPCOR human
clinical product line and related assets in exchange for notes receivable of
approximately $500,000. In connection with the asset sale, the Company
announced that is was
<PAGE>
closing the AMPCOR facility located in Bridgeport, New Jersey and moving its
remaining AMPCOR manufacturing operations for diagnostic test kits to detect
microorganisms to the Company's headquarters in Lansing, Michigan. As a
result of the asset sale and related facility closure, the Company recorded a
loss of $628,839. Included in the loss was approximately $200,000 related to
lease obligations, employee severance costs and other expenses incurred to
close the facility. Sales of human clinical products were not material to the
consolidated sales of the Company in 1999, 1998 and 1997.
The notes receivable are unsecured and consist of a $400,000 long-term note
and a short-term note totaling approximately $100,000. The long-term note
bears interest at 7% and requires interest-only payments through April 2000
followed by monthly installments of $9,579 through April 2004.
5. 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, 1999 and 1998, there were no borrowings outstanding. These
arrangements bear interest at rates ranging from the prime rate less .50% to
the prime rate (the prime rate was 7.75% at May 31, 1999), 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, 1999 and 1998.
Long-term debt consisted of the following:
1999 1998
---- ----
Term note payable to bank $174,392 $223,064
Less current maturities 48,672 48,672
-------- --------
Total Long-Term Debt $125,720 $174,392
======== ========
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: 2000 - $48,672; 2001 - $48,672; 2002 -
$48,672; and 2003 - $28,376.
6. Public Stock Offering
On October 22, 1996, the Company sold to the public 1,500,000 shares of
common stock at a price of $7.50 per share. The net proceeds to the Company
after deducting underwriting commissions and other expenses of the offering
were approximately $10,201,000.
<PAGE>
7. 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, 1999,
options have been granted with three to five year vesting schedules and
option terms of five to ten years. A total of 210,000 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:
1999 1998 1997
---- ---- ----
Net Income
As reported $2,254,928 $2,248,373 $1,811,501
Pro forma 1,917,963 1,921,062 1,571,757
Earnings Per Share
As reported:
Basic 0.37 0.36 0.33
Diluted 0.37 0.35 0.32
Pro forma:
Basic 0.31 0.31 0.29
Diluted 0.31 0.30 0.28
---------- ---------- ----------
The following is a summary of the Plans' activity:
Weighted Average
Shares Exercise Price
-------- ----------------
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
Granted 161,500 7.05
Exercised (35,800) 2.71
Forfeited (52,900) 7.47
-------- -----
Outstanding at May 31, 1999 (265,518 exercisable) 599,700 $7.25
-------- -----
<PAGE>
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 1999, 1998 and 1997, respectively: dividend yield
of 0% for the three years: expected volatility of 52.0%, 55.0% and 68.0%;
risk free interest rates of 5.2%, 6.0% and 6.5%; and expected lives of four
years for 1999 and 1998 and 6.5 years for 1997.
The weighted-average grant date fair value of options granted in 1999, 1998
and 1997 was $3.24, $4.32 and $4.38, respectively.
The following is a summary of stock options outstanding at May 31, 1999:
Options Outstanding Options Exercisable
------------------------------- ----------------------
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise Number
Number Life (Years) Price Number Price
------- ---------- -------- -------- ---------
$ 1.88 - 2.75 20,000 2.4 $ 2.32 20,000 $ 2.32
2.87 - 2.87 6,000 1.7 2.87 6,000 2.87
4.63 - 6.88 132,600 3.5 6.03 86,000 5.84
7.13 - 9.25 407,700 4.3 7.54 142,381 7.60
11.31 - 13.25 33,400 6.3 12.31 11,137 12.31
------- ----- ------ ------- -------
599,700 4.1 $ 7.25 265,518 $ 6.72
======= ===== ====== ======= =======
The weighted-average exercise price of the 209,544 shares which were
exercisable at May 31, 1998 and 219,077 shares which were exercisable at
May 31, 1997 was $5.69 and $4.52, respectively.
The following table summarizes warrant activity for the years ended May 31,
1999, 1998 and 1997. All warrants are exercisable for unregistered common
stock of the Company and expire in 2000.
Warrant
Shares Price
------ -------------
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
Warrants exercised during the year -- --
Warrants expiring during the year -- --
------- -------
Outstanding Warrants at May 31, 1999 43,265 $ 4.82
======= ====
<PAGE>
8. Taxes On Income
Income taxes are calculated using the liability method specified by SFAS No.
109 "Accounting for Income Taxes."
The provision for taxes on income consisted of the following:
1999 1998 1997
Current:
Federal $367,000 $ 41,000 $ 37,200
State 26,000 86,000 26,000
Deferred -- -- --
-------- -------- --------
Taxes on Income $393,000 $127,000 $ 63,200
======== ======== ========
At May 31, 1999, the Company has approximately $232,000 of tax credit
carryforwards, the majority of which expire between 2009 and 2018.
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,
1999 and 1998 are as follows:
1999 1998
---- ----
Deferred tax liabilities:
Property and equipment $ 165,000 $ 147,000
Losses of affiliated partnerships 44,000 45,000
--------- ---------
Total Deferred Tax Liabilities 209,000 192,000
========= =========
Deferred tax assets:
Tax credit carryforwards 232,000 373,000
Inventory 78,000 114,000
Net operating loss carryforwards -- 228,000
Other 211,000 176,000
--------- ---------
521,000 891,000
Valuation Allowance for Deferred Tax Assets (312,000) (699,000)
--------- ---------
Net Deferred Tax Assets 209,000 192,000
--------- ---------
Net Deferred Tax $ -- $ --
========= =========
<PAGE>
The reconciliation of income taxes computed at the U.S. federal statutory tax
rates to income tax expense for the years ended May 31,1999, 1998 and 1997 is
as follows:
1999 1998 1997
---- ---- ----
Tax at U.S. statutory rates $ 900,000 $ 808,000 $ 637,000
Adjustment of valuation allowance (387,000) (634,000) (665,000)
Alternative minimum tax -- 41,000 37,200
Other (120,000) (88,000) 54,000
--------- --------- ---------
Taxes on Income $ 393,000 $ 127,000 $ 63,200
========= ========= =========
9. Commitments
The Company has agreements with related research limited partnerships and
unrelated third parties which provide for the payment of royalties on the
sale of certain products. Royalty expense, primarily to related research
limited partnerships, under the terms of these agreements for 1999, 1998 and
1997 was $780,000, $713,000 and $771,000, respectively.
The Company leases office and manufacturing facilities under noncancelable
operating leases. Rent expense for 1999, 1998 and 1997 was $302,000, $282,000
and $215,000, respectively. Future minimum rental payments for these leases
are as follows: 2000 - $281,000; 2001 - $179,000; and 2002 - $42,000.
10. Defined Contribution Benefit Plan
The Company maintains a defined contribution 401(k) benefit plan covering
substantially all employees. Employees are permitted to defer up to 15% of
compensation, with the Company matching 100% of the first 3% deferred and 50%
of the next 2% deferred. The Company's expense under this plan was $117,000,
$73,000 and $54,000 for the years ended May 31, 1999, 1998 and 1997,
respectively.
11. Segment Information
The Company has two reportable segments: Food safety and Animal Safety. The
Food Safety segment produces and markets diagnostic test kits and related
products used by food producers and processors to detect harmful natural
toxins, drug residues, foodborne bacteria, pesticide residues, disease
infections and levels of general sanitation. The Animal Safety segment is
primarily engaged in the production and marketing of products dedicated to
animal health, including 250 different veterinary instruments and a complete
line of consumable products marketed to veterinarians and distributors
serving the professional equine industry.
These segments are managed separately because they represent strategic
business units that offer different products and require different marketing
strategies. The Company evaluates performance based on total sales and
operating income of the respective segments. The accounting policies of the
segments are the same as those described in Note 1, Summary of Accounting
Policies. Prior year segment information has been restated to conform to the
1999 presentation.
<PAGE>
Segment information for the years ended May 31, 1999, 1998 and 1997 was as
follows:
<TABLE>
<CAPTION>
Corporate
Food Animal and
Safety Safety Eliminations(1) Total
------ ------ --------------- -----
1999
<S> <C> <C> <C> <C>
Net sales from external customers $10,069,469 $12,109,539 $ -- $22,179,008
Operating income 1,513,369 1,754,234 (723,531) 2,544,072
Depreciation and amortization 372,766 500,305 -- 873,071
Interest income 2,350 253 490,827 493,430
Loss on sale of product line (628,839) -- -- (628,839)
Income taxes 213,042 297,415 (117,457) 393,000
Total assets 6,444,122 9,767,902 9,896,114 26,108,138
Expenditures for long-lived assets 546,358 341,993 -- 888,351
1998
Net sales from external
customers $ 8,418,957 $10,069,432 $ -- $18,488,389
Operating income 1,276,400 1,013,892 (811,876) 1,478,416
Depreciation and amortization 349,304 366,377 -- 715,681
Interest income 35 396 605,559 605,990
Income taxes 251,190 155,554 (279,744) 127,000
Total assets 5,611,458 10,055,351 9,745,833 25,412,642
Expenditures for long-
lived assets 311,997 333,684 -- 645,681
1997
Net sales from external
customers $ 8,605,180 $ 6,654,243 $ -- $15,259,423
Operating income 1,632,069 271,740 (593,140) 1,310,669
Depreciation and amortization 373,782 250,331 -- 624,113
Interest income 922 1,405 447,004 449,331
Income taxes 282,803 8,052 (227,655) 63,200
----------- ----------- ----------- -----------
Total assets 5,347,789 5,550,481 12,250,203 23,148,473
Expenditures for long-
lived assets 344,330 286,430 -- 630,760
=========== =========== =========== ===========
<FN>
(1) Includes corporate assets, consisting of marketable securities, and
overhead expenses not allocated to specific business segments. Also includes
the elimination of intersegment transactions and minority interests.
</TABLE>
<PAGE>
The Company has no long-lived assets outside of the United States and no
significant foreign operations. Export sales amounted to $4,913,782 or 22% of
consolidated sales in 1999, $4,039,571 or 22% 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. The Company does
not have sales to any single foreign country or any single customer exceeding
10% of consolidated sales.
12. Stock Repurchase
The Company's Board of Directors has authorized the purchase of up to 500,000
shares of the Company's common stock. As of May 31, 1999, the Company had
purchased 314,700 shares in negotiated and open market transactions for a
total price, including commissions, of approximately $2,169,000. Shares
purchased under this buy-back program will be retired and used to satisfy
future issuance of common stock upon the exercise of outstanding stock
options and warrants.
13. Supplemental Disclosure of Cash Flows Information
Cash paid for income taxes totaled $749,000, $64,700, and $10,000 in 1999,
1998 and 1997, respectively. Cash paid for interest totaled $15,945, $22,581
and $66,851 in 1999, 1998 and 1997, respectively.
Non-Cash Investing Activities
In fiscal 1999, the Company sold its AMPCOR human clinical products line and
related assets in exchange for notes receivable of approximately $500,000.
<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
David A Wall
Vice President
Diagnostic Manufacturing
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 President
Michigan State University
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-K
Copies of Form 10-K 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 7, 1999
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, 1999, there
were approximately 6,000 holders of the Company's common stock.
<TABLE>
<CAPTION>
Year Ended Fiscal Quarter High Low
- ---------- -------------- ---- ---
<S> <C> <C> <C>
May 31, 1999 First Quarter $ 9.13 $ 6.00
Second Quarter $ 7.94 $ 5.75
Third Quarter $ 9.25 $ 6.63
Fourth Quarter $ 7.94 $ 5.63
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
</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 reports
dated July 16, 1999, relating to the consolidated financial statements and
schedule of Neogen Corporation and subsidiaries, appearing in the Company's
Annual Report on Form 10-K for the year ended May 31, 1999.
BDO SEIDMAN, LLP
Troy, Michigan
August 27, 1999
Report of Independent Certified Public Accountants
The audits referred to in our report dated July 16, 1999 relating to the
consolidated financial statements of Neogen Corporation, which is contained
in Item 8 of this Form 10-K included the audit of the financial statement
schedule listed in the accompanying index. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statement schedule based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Troy, Michigan
July 16, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE NEOGEN CORPORATION FORM 10-K FOR
THE YEAR ENDED MAY 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-K
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 1,062,811
<SECURITIES> 9,603,844
<RECEIVABLES> 3,461,536
<ALLOWANCES> 166,000
<INVENTORY> 4,360,580
<CURRENT-ASSETS> 19,283,516
<PP&E> 5,572,609
<DEPRECIATION> 3,424,668
<TOTAL-ASSETS> 26,108,138
<CURRENT-LIABILITIES> 1,928,618
<BONDS> 0
0
0
<COMMON> 948,685
<OTHER-SE> 22,837,133
<TOTAL-LIABILITY-AND-EQUITY> 26,108,138
<SALES> 22,179,008
<TOTAL-REVENUES> 18,488,389
<CGS> 9,476,873
<TOTAL-COSTS> 19,634,936
<OTHER-EXPENSES> (119,801)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,945
<INCOME-PRETAX> 2,647,928
<INCOME-TAX> 393,000
<INCOME-CONTINUING> 2,254,928
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,254,928
<EPS-BASIC> 0.37
<EPS-DILUTED> 0.37
</TABLE>
