Financial Highlights
Dollars in Thousands, Except Per Share Amounts
Years Ended May 31, 1995 1996 1997 1998 1999
- ------------------- ---- ---- ---- ---- ----
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
Total Revenues
Operating Income
May 31, 1995 1996 1997 1998 1999
- ------- ---- ---- ---- ---- ----
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
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]
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.
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.
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.
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)]
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
Increase
REVENUES (Dollars in Thousands) 1999 Increase 1998 (Decrease) 1997
- ------------------------------- ---- -------- ---- ---------- ----
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
======= == ======= == =======
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
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.
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.
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
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.
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)
------ ------ --------- ---------
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.
Neogen Corporation and Subsidiaries
Consolidated Statements of
Cash Flows
Year Ended May 31, 1999 1998 1997
- ------------------ ---- ---- ----
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.
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.
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.
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.
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.
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.
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.
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
======= ====
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 $ -- $ --
========= =========
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.
Segment information for the years ended May 31, 1999, 1998 and 1997 was as
follows:
Corporate
Food Animal and
Safety Safety Eliminations(1) Total
------ ------ --------------- -----
1999
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.
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.
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.
Year Ended Fiscal Quarter High Low
- ---------- -------------- ---- ---
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
Neogen Corporation