UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
August 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the Transition Period From
_______________ to _______________
Commission file number 0-17988
NEOGEN CORPORATION
(Exact name of Registrant as specified in its charter)
Michigan 38-2367843
(State or other jurisdiction of corporation (I.R.S. Employer
or organization) Identification No.)
620 Lesher Place
Lansing, Michigan 48912
(517) 372-9200
(Address of principal executive offices)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No/ /
As of October 1, 1998, there were 6,160,979 outstanding shares
of Common Stock.
INDEX
NEOGEN CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. Interim Financial Statements (unaudited)
Consolidated balance sheets - August 31, 1998 and May 31, 1998
Consolidated statements of income - Three months ended August
31, 1998 and 1997.
Consolidated statements of stockholders' equity - Three months
ended August 31, 1998 and 1997.
Consolidated statements of cash flows - Three months ended August
31, 1998 and 1997.
Notes to consolidated financial statements - August 31, 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
PART I. FINANCIAL INFORMATION
ITEM 1. Interim Financial Statements
3
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
NEOGEN CORPORATION AND SUBSIDIARIES
August 31 May 31
1998 1998
-------------------------------
ASSETS
CURRENT ASSETS
Cash $ 905,370 $ 719,877
Marketable Securities 8,976,074 9,868,862
Net accounts receivable 3,547,953 3,088,858
Inventories - note C 5,305,465 4,474,030
Other current assets 429,556 441,319
------------ ------------
TOTAL CURRENT ASSETS 19,164,418 18,592,946
NET PROPERTY AND EQUIPMENT 2,046,142 1,885,051
INTANGIBLE AND OTHER ASSETS
Goodwill, net of accumulated amortization 3,968,572 4,023,235
Other assets, net of accumulated amortization - note C 1,090,375 911,410
------------ ------------
$ 26,269,507 $ 25,412,642
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current maturities
of long-term notes payable $ 48,672 $ 48,672
Accounts payable 752,032 578,814
Accrued compensation and benefits 595,820 569,121
Other accrued liabilities 340,883 203,895
------------ ------------
TOTAL CURRENT LIABILITIES 1,737,407 1,400,502
LONG-TERM NOTES PAYABLE 162,224 174,392
OTHER LONG-TERM LIABILITIES 228,411 228,411
STOCKHOLDERS' EQUITY- NOTE D Common stock:
Par value $.16 per share, 10,000,000 shares
authorized, 6,182,079 shares
issued at August 31, 1998; 6,208,179
shares issued at May 31, 1998 989,133 993,309
Additional paid in capital 23,988,832 24,269,549
Retained-earnings deficit (836,500) (1,653,521)
------------ ------------
24,141,465 23,609,337
------------ ------------
$ 26,269,507 $ 25,412,642
============ ============
<FN>
See notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NEOGEN CORPORATION AND SUBSIDIARIES
Three Months Ended
August 31
1998 1997
-----------------------------
REVENUES
Sales $ 5,716,555 $ 4,427,082
EXPENSES
Cost of goods sold 2,216,385 1,942,394
Sales and marketing 1,453,400 1,167,568
General and administrative 879,519 586,178
Research and development 398,239 294,261
----------- -----------
4,947,543 3,990,401
----------- -----------
INCOME FROM OPERATIONS 769,012 436,681
OTHER INCOME (EXPENSE)
Interest income 132,537 165,622
Interest expense (4,478) (6,454)
Other 3,250 54,446
----------- -----------
131,309 213,614
----------- -----------
INCOME BEFORE INCOME TAXES 900,321 650,295
INCOME TAXES 83,300 19,700
----------- -----------
NET INCOME $ 817,021 $ 630,595
=========== ===========
BASIC EARNINGS PER SHARE (NOTE B) $ 0.13 $ 0.10
=========== ===========
DILUTED EARNINGS PER SHARE (NOTE B) $ 0.13 $ 0.10
=========== ===========
<FN>
See notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
NEOGEN CORPORATION AND SUBSIDIARIES
Common Stock
--------------------------- Additional Retained-
Number Paid-In Earnings
of Shares Amount Capital Deficit
------------ ------------ -------------- -------------
Balance at June 1, 1998 6,208,179 $ 993,309 $ 24,269,549 $ (1,653,521)
Exercise of options 23,900 3,824 61,788
Repurchase of shares - note D (50,000) (8,000) (342,505)
Net income for the
three months ended
August 31,1998 817,021
------------ ------------ -------------- -------------
Balance at August 31, 1998 6,182,079 $ 989,133 $ 23,988,832 $ (836,500)
============ ============ ============== =============
Balance at June 1, 1997 6,110,608 $ 977,697 $ 23,937,397 $ (3,901,894)
Exercise of options 39,600 6,336 100,838
Net income for the
three months ended
August 31,1997 630,595
------------ ------------ -------------- -------------
Balance at August 31, 1997 6,150,208 $ 984,033 $ 24,038,235 $ (3,271,299)
============ ============ ============== =============
<FN>
See notes to consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NEOGEN CORPORATION AND SUBSIDIARIES
Three Months Ended August 31
1998 1997
-----------------------------
OPERATING ACTIVITIES:
Net income $ 817,021 $ 630,595
Adjustments to reconcile net
income to net cash provided
from operating activities:
Depreciation and amortization 214,707 157,063
Changes in operating assets and
liabilities:
Accounts receivable (459,095) (321,253)
Inventories (431,435) (72,817)
Other current assets 11,763 5,967
Accounts payable 173,218 (120,866)
Accrued expenses 163,687 46,583
----------- -----------
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 489,866 325,272
INVESTING ACTIVITIES:
Sales of marketable securities 9,279,022 6,049,958
Purchases of marketable securities (8,386,234) (4,328,801)
Purchases of property and equipment
and other assets (300,100) (273,080)
Acquisitions - note C (600,000) (1,398,632)
----------- -----------
NET CASH PROVIDED FROM
(USED IN) INVESTING ACTIVITIES (7,312) 49,445
FINANCING ACTIVITIES:
Payments on long-term borrowings (12,168) (2,211)
Net payments for repurchase
of common stock - note D (350,505) 0
Net proceeds from issuance
of common stock 65,612 107,174
----------- -----------
NET CASH PROVIDED FROM
(USED IN) FINANCING ACTIVITIES (297,061) 104,963
----------- -----------
INCREASE IN CASH 185,493 479,680
Cash at beginning of period 719,877 718,864
----------- -----------
CASH AT END OF PERIOD $ 905,370 $ 1,198,544
=========== ===========
<FN>
See notes to consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NEOGEN CORPORATION AND SUBSIDIARIES
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a
fair presentation have been included. The results of operations for the three
months ended August 31, 1998 are not necessarily indicative of the results to
be expected for the fiscal year ending May 31, 1999. For more complete
financial information, these consolidated financial statements should be read
in conjunction with the May 31, 1998 audited consolidated financial
statements and the notes thereto included in the Company's annual report on
Form 10-KSB for the year ended May 31, 1998.
NOTE B - EARNINGS PER SHARE
During the year ended May 31, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". The
following table presents the earnings per share calculations in conformance
with SFAS No. 128
Three months
Ended August 31
1998 1997
---- ----
Numerator for Basic and Diluted
Earnings Per Share
Net Income $ 817,021 $ 630,595
========== ==========
Denominator
Denominator for basic earning per share -
Weighted average shares 6,220,470 6,120,671
Effect of Dilutive Securities
Stock options and warrants 60,952 214,144
---------- ----------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed conversion 6,281,422 6,334,815
========== ==========
Basic Earnings per Share $ 0.13 $ 0.10
========== ==========
Diluted Earnings per Share $ 0.13 $ 0.10
========== ==========
8
NOTE C - 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 ("Bot Tox - 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 Bot Tox - B.
NOTE D - STOCK REPURCHASE
In August, the Company announced that its board of directors had authorized
the purchase of up to 250,000 shares of the Company's common stock. On August
21, the Company purchased 50,000 shares in a single negotiated transaction
for a total price, including commissions, of approximately $350,000.
Subsequent to August 31, the Company purchased 31,500 shares in nine separate
open market trades at a total price, including commissions, of approximately
$202,000. 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.
NOTE E - COMPREHENSIVE INCOME
Effective June 1, 1998, the Company adopted the Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income. Adoption of this statement did not have any
material effect on the financial statements of the Company.
9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Three Months Ended August 31, 1998 Compared to Three Months Ended August 31,
1997.
Total sales for the quarter ended August 31, 1998 increased $1,290,000 or 29%
compared to the same quarter in 1997. Sales of products dedicated to animal
safety increased $764,000 or 43% and sales of food safety diagnostic products
were up $475,000 or 21%. Miscellaneous other sales increased $51,000.
The increase in sales of animal safety products was due to several factors.
The acquisitions of certain assets of W.J. Bartus, Inc. and Vetoquinol,
U.S.A., which occurred in the prior fiscal year, contributed $613,000 in
increased sales during the first quarter compared to the same quarter last
year. Greater demand for products sold to the professional equine market
resulted in an increase of $76,000. First quarter sales of specialty needles
and other OEM veterinary instruments were $95,000 or 45% higher than the
prior year.
The increase in 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 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 $301,000 or 86% during the first quarter.
Although testing for aflatoxin will likely continue to run higher than the
prior year, management does not believe testing will continue at the same
levels as experienced in the first quarter. Sales of diagnostic tests to
detect microorganisms such as E. coli O157:H7 and Salmonella also increased
in the first quarter with sales up $251,000 or 78% compared to last year.
Cost of goods sold increased $274,000 in the first quarter as a direct result
of the overall increase in product sales. Volume efficiencies and better
utilization of manufacturing facilities caused cost of goods sold to decline
to 39% of sales compared to 44% in the same quarter last year.
Sales and marketing expenses increased $286,000 or 24% in the first quarter
compared to last year. Virtually all sales and marketing expense categories
were higher than the prior year including salaries, fringe, travel,
royalties, commissions, advertising and promotions. The Company is expanding
its sales activities both domestically and internationally to gain wider
distribution of its products dedicated to food and animal safety.
10
The $293,000 increase in general and administrative expense is primarily the
result of 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 $121,000 of higher personnel related expense in the
first quarter. In addition, legal and professional fees increased $128,000
during the quarter compared to the same period last year. Management believes
that the Company is not involved in any material adverse legal proceedings.
However, Neogen is a party in several lawsuits as discussed in Item 3, Legal
Proceedings, in the Company's Form 10-KSB for the year ended May 31, 1998.
Management intends to vigorously pursue this litigation and cannot predict
the outcome of these lawsuits. Furthermore, the Company has no way to predict
the level of expenses that may be incurred in fiscal year 1999 in pursuing
this litigation.
The $104,000 increase in research and development expense is the result of
higher salaries and fringe benefits due to increased staffing levels.
Management believes research and development is critical to the Company's
future and continues to expand efforts in terms of ongoing research projects
pertaining to food and animal safety products. First quarter research and
development expenses were 7% of total sales compared to the Company's annual
budget of 8%.
Other income declined by $82,000 in the first quarter. Interest income was
lower due exclusively to lower cash balances available to invest in
marketable securities. In addition, the Company's share of royalties paid to
an affiliated partnership was less in the first quarter than the prior year.
Neogen's effective federal tax rate has been insignificant because the
Company has had net operating loss carry forwards ("NOL's") available to
offset taxable income. During the first quarter the Company utilized its
remaining NOL's resulting in an increase in its effective federal tax rate.
Furthermore, the Company's effective federal tax rate will increase
significantly for the second, third and fourth quarters of the current fiscal
year.
The substantial increase in net income for the quarter compared to last year
is the direct result of the significant increase in sales volume which led to
substantially higher gross margins and operating profit.
11
Financial Condition and Liquidity
At August 31, 1998, the Company had $9,881,000 in cash and marketable
securities, working capital of $17,427,000 and stockholder's equity of
$24,141,000. In addition, the Company has bank lines of credit totaling
$10,000,000 with nothing borrowed against these lines as of August 31, 1998.
Cash and marketable securities decreased $707,000 during the first quarter
primarily as a result of the acquisition of certain assets of BioPort
Corporation for $600,000 and the use of $350,000 for the purchase of 50,000
shares of the Company's common stock (see Notes C and D of the Notes to
Unaudited Consolidated Financial Statements).
Accounts receivable were $459,000 higher at August 31, 1998 than at May 31
due primarily to significant increases in sales of food and animal safety
products during the last 45 days of the quarter. Inventories increased
$831,000 at August 31, 1998 compared to May 31. Of this amount, $400,000 was
due to inventories purchased from BioPort Corporation. The remaining increase
was due to higher production levels of veterinary instruments and an increase
in professional equine finished good products in anticipation of future
increases in sales volume.
The increase in other non-current assets at August 31, 1998 compared to May
31, 1998 was due to the acquisition of certain assets of BioPort Corporation.
Accounts payable increased $173,000 between May 31 and August 31 due
primarily to the timing of month-end cutoffs and scheduled payment dates for
trade payables and because of greater payables associated with higher levels
of inventory. Accrued expenses were $164,000 higher at August 31 as a result
of increases in accruals for a number of areas including bonuses and
royalties.
The Company did not borrow any additional funds during the first quarter and
made scheduled payments totaling $12,000 on long-term debt. Neogen expended
approximately $300,000 in the first quarter for additions to property,
equipment and other assets. At August 31, 1998, the Company had no material
commitments for capital expenditures. Inflation and changing prices are not
expected to have a material effect on the Company's operations.
Neogen has been profitable for 21 of its last 22 quarters and has generated
positive cash flows from operations during this period. Management believes
that the Company's existing cash and marketable securities at August 31,
1998, along with its available bank lines of credit and cash expected to be
generated from future operations, will be sufficient to fund activities for
the foreseeable future. However, existing cash and marketable securities may
not be sufficient to meet the Company's cash requirements to commercialize
products currently under development or its plans to acquire additional
technology and products that fit within the Company's mission statement.
Accordingly, the Company may be required to issue equity securities or enter
into other financing arrangements for a portion of the Company's future
capital needs.
Year 2000
The Company believes that its financial and manufacturing systems are year
2000 compliant with the exception of the financial software used at its Ideal
Instruments subsidiary. The Company plans on implementing software changes by
November 30, 1998 at the Ideal Instruments subsidiary to ensure year 2000
compliance. The Company does not expect implementation of these changes to
have a material impact on its results of operation. The Company's operations
with respect to the year 2000 may also be affected by other entities with
whom it transacts business. The Company is currently unable to determine the
potential impact, if any, that could result from such entities' failure to
adequately address this issue.
12
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Exhibit 4 - Instruments defining the rights of security holders -
incorporated by reference from Exhibit 3 (a) (2) of the Second Amendment to
the Form S-18 Registration Statement filed on August 22, 1989.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K Filed in Quarterly Period Ended August 31, 1998.
The Company did not file any reports on Form 8-K in the quarterly ended
August 31, 1998.
13
SIGNATURES
Pursuant to the requirements 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
October 13, 1998 /s/ James L. Herbert
- ------------------- ---------------------------------
Date James L. Herbert
President
October 13, 1998 /s/ Lon M. Bohannon
- ------------------- ----------------------------------
Date Lon M. Bohannon
Vice President - Chief Financial Officer
14
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 FINANCIAL DATA SCHEDULE
15