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, 1999
[ ] 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, 1999, there were 5,929,279 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, 1999 and May 31, 1999
Consolidated statements of income - Three months ended August 31,
1999 and 1998.
Consolidated statements of stockholders' equity - Three months ended
August 31, 1999 and 1998.
Consolidated statements of cash flows - Three months ended August
31, 1999 and 1998.
Notes to consolidated financial statements - August 31, 1999.
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
PART I. FINANCIAL INFORMATION
ITEM 1. Interim Financial Statements
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
NEOGEN CORPORATION AND SUBSIDIARIES
August 31 May 31
1999 1999
-------------------------
ASSETS
CURRENT ASSETS
Cash $ 1,107,825 $ 1,062,811
Marketable securities 9,851,589 9,603,844
Net accounts receivable 3,470,603 3,295,536
Inventories - note E 4,193,995 4,360,580
Other current assets 1,064,854 960,745
----------- -----------
TOTAL CURRENT ASSETS 19,688,866 19,283,516
NET PROPERTY AND EQUIPMENT 2,228,762 2,147,941
INTANGIBLE AND OTHER ASSETS
Goodwill, net of accumulated amortization 3,150,063 3,199,802
Other assets, net of accumulated amortization 1,470,301 1,476,879
----------- -----------
$26,537,992 $26,108,138
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current maturities
of long-term notes payable $ 48,672 $ 48,672
Accounts payable 668,091 842,429
Accrued compensation and benefits 568,541 606,689
Other accrued liabilities 277,587 430,828
----------- -----------
TOTAL CURRENT LIABILITIES 1,562,891 1,928,618
LONG-TERM NOTES PAYABLE 113,552 125,720
OTHER LONG-TERM LIABILITIES 267,982 267,982
STOCKHOLDERS' EQUITY- NOTE D
Common stock:
Par value $.16 per share,
10,000,000 shares authorized,
5,929,279 shares issued at
August 31, 1999; 5,929,279
shares issued at May 31, 1999 948,685 948,685
Additional paid-in capital 22,235,726 22,235,726
Retained-earnings 1,409,156 601,407
----------- -----------
24,593,567 23,785,818
----------- -----------
$26,537,992 $26,108,138
=========== ===========
<FN>
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NEOGEN CORPORATION AND SUBSIDIARIES
Three Months Ended August 31
1999 1998
--------------------------
REVENUES
Sales $ 5,340,301 $ 5,716,555
EXPENSES
Cost of goods sold 2,260,823 2,216,385
Sales and marketing 1,357,722 1,453,400
General and administrative 710,573 879,519
Research and development 333,324 398,239
----------- -----------
4,662,442 4,947,543
----------- -----------
INCOME FROM OPERATIONS 677,859 769,012
OTHER INCOME (EXPENSE)
Interest income 132,513 132,537
Interest expense (3,201) (4,478)
Other 76,578 3,250
----------- -----------
205,890 131,309
----------- -----------
INCOME BEFORE INCOME TAXES 883,749 900,321
INCOME TAXES 76,000 83,300
----------- -----------
NET INCOME $ 807,749 817,021
=========== ===========
BASIC EARNINGS PER SHARE (NOTE B) $ 0.14 $ 0.13
=========== ===========
DILUTED EARNINGS PER SHARE (NOTE B) $ 0.14 $ 0.13
=========== ===========
<FN>
See notes to consolidated financial statements.
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, 1999 5,929,279 $ 948,685 $ 22,235,726 $ 601,407
Net income for the
three months ended
August 31, 1999 807,749
------------ ------------ ------------ ------------
Balance at August 31, 1999 5,929,279 $ 948,685 $ 22,235,726 $ 1,409,156
============ ============ ============ ============
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 (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)
============ ============ ============ ============
<FN>
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NEOGEN CORPORATION AND SUBSIDIARIES
Three Months Ended
August 31
1999 1998
-----------------------
OPERATING ACTIVITIES:
Net income $ 807,749 $ 817,021
Adjustments to reconcile net income
to net cash provided from
operating activities:
Depreciation and amortization 223,923 214,707
Changes in operating assets and
liabilities:
Accounts receivable (175,067) (459,095)
Inventories 166,585 (431,435)
Other current assets (104,109) 11,763
Accounts payable (174,338) 173,218
Other accrued expenses (191,388) 163,687
---------- ----------
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 553,355 489,866
INVESTING ACTIVITIES:
Sales of marketable securities 7,561,186 9,279,022
Purchases of marketable securities (7,808,931) (8,386,234)
Purchases of property and equipment
and other assets (248,428) (300,100)
Acquisitions -- (600,000)
---------- ----------
NET CASH USED IN
INVESTING ACTIVITIES (496,173) (7,312)
FINANCING ACTIVITIES:
Payments on long-term borrowings (12,168) (12,168)
Net payments for repurchase
of common stock -- (350,505)
Net proceeds from issuance
of common stock -- 65,612
---------- ----------
NET CASH USED IN
FINANCING ACTIVITIES (12,168) (297,061)
---------- ----------
INCREASE IN CASH 45,014 185,493
Cash at beginning of period 1,062,811 719,877
---------- ----------
CASH AT END OF PERIOD $1,107,825 $ 905,370
========== ==========
<FN>
See notes to consolidated financial statements.
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, 1999 are not necessarily indicative of the results to
be expected for the fiscal year ending May 31, 2000. For more complete
financial information, these consolidated financial statements should be read
in conjunction with the May 31, 1999 audited consolidated financial
statements and the notes thereto included in the Company's annual report on
Form 10-K for the year ended May 31, 1999.
NOTE B - EARNINGS PER SHARE
Earnings per share is calculated according to 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
1999 1998
---- ----
Numerator for Basic and Diluted
Earnings per Share
Net Income $ 807,749 $ 817,021
========== ==========
Denominator
Denominator for basic earnings per share-
Weighted average shares 5,929,279 6,220,470
Effect of Dilutive Securities
Stock options and warrants 30,101 60,952
---------- ----------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed conversions 5,959,380 6,281,422
========== ==========
Basic Earnings per Share $ 0.14 $ 0.13
========== ==========
Diluted Earnings per Share $ 0.14 $ 0.13
========== ==========
NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", was
issued in June 1998. SFAS 133, effective in fiscal 2002, is not expected to
have a material impact on the consolidated financial statements.
NOTE D - 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 August 31, 1999, the Company had
purchased 314,700 shares in negotiated and open market transactions. 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 - 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:
August 31, 1999 May 31, 1999
--------------- ------------
Raw Material $1,953,478 $1,809,725
Work-In-Process 756,536 755,225
Finished Goods 1,483,981 1,795,630
---------- ----------
$4,193,995 $4,360,580
========== ==========
NOTE F - 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, food allergens, 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. Prior year segment information
has been restated to conform to the 1999 presentation.
Segment information for the three months ended August 31, 1999 and 1998 was
as follows:
Corporate
Food Animal and
Safety Safety Eliminations(1) Total
- ------------------------------------------------------------------------------------------------------
1999
Net sales from external customers $ 2,650,959 $ 2,689,342 $ -- $ 5,340,301
Operating income (loss) 602,498 259,726 (184,366) 677,859
Total assets 6,980,842 9,788,791 9,768,359 26,537,992
=========== =========== =========== ===========
1998
Net sales from external customers $ 2,866,437 $ 2,850,118 $ -- $ 5,716,555
Operating income (loss) 542,170 500,553 (273,711) 769,012
Total assets 6,841,165 10,790,070 8,638,272 26,269,507
=========== =========== =========== ===========
<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.
ITEM 2.
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 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.
Three Months Ended August 31, 1999 Compared to Three Months Ended August 31,
1998.
Total sales for the quarter ended August 31, 1999 declined $376,000 or 7%
compared to the same quarter in 1998. Sales of products dedicated to food
safety were down $214,000 and sales of animal safety products declined
$162,000.
The decline in food safety sales was influenced by several factors. Sales of
test kits to detect harmful bacteria such as E. coli O157:H7 and salmonella
continued their strong growth trend with sales up $212,000 in the first
quarter. Sales of products used for the detection of food allergens also
increased $37,000. The sales growth in these two areas was more than offset
by sales declines in two other areas. In the fourth quarter of last fiscal
year, the Company sold its human clinical product line. As a result, there
were no human clinical product sales in the first quarter this year compared
to $139,000 in sales of human clinical products during the same quarter last
year. In addition, sales of diagnostic tests for the detection of mycotoxins
declined $313,000 compared to the prior year primarily as a result of
decreased sales for aflatoxin and vomitoxin test kits. Sales of diagnostic
tests for the detection of naturally occurring mycotoxins 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 these kits to
detect harmful mycotoxins.
The decline in sales of animal safety products is primarily due to lower
sales for two products. In the fourth quarter of last fiscal year, the
supplier of a biological product marketed under the Triple Crown product line
closed its operations. Accordingly, the Company had no supply, and therefore,
no sales of this product in the first quarter compared to $101,000 in sales
during the first quarter last year. The Company has identified another
supplier and believes it will be able to start selling this product before
the end of November 1999. Sales of the Company's vaccine to prevent type B
botulism in horses declined $67,000 in the quarter, also due exclusively to a
shortage in product availability. The Company is currently preparing to
produce BotVax(TM) B in its USDA-approved Tampa, Florida, manufacturing
facilities and expects to have this product in inventory and available for
sale before the end of November 1999.
Cost of goods sold increased $44,000 compared to last year due primarily to
increases in several overhead categories including cost associated with
reduction in inventory levels. As a percentage of
sales, cost of goods sold was higher than the prior year due partially to the
overall mix of products sold and partially due to lower absorption of labor
and overheard costs related to veterinary instruments. The Company expects
cost of goods sold to approximate 42% of sales in the current fiscal year as
compared to 43% for last fiscal year.
Sales and marketing expenses decreased $96,000 in the first quarter. Of this
amount, $38,000 was due to the elimination of sales activities directly
related to the human clinical product line sold in the fourth quarter of last
fiscal year. In addition, commissions and royalties decreased $65,000 due to
lower overall sales. The Company is in the process of adding sales and
marketing personnel to expand sales activities both domestically and
internationally for its food safety and animal safety products.
General and administrative expenses for the first quarter declined $169,000
compared to the prior year. Due to consolidation of facilities in the fourth
quarter of last fiscal year, the Company recognized savings of approximately
$50,000 in the first quarter in the areas of salary, fringe and amortization
expense. In addition, legal and professional fees decreased $113,000 and are
expected to be lower in the current fiscal year than last fiscal year.
However, management can not predict whether future quarterly decreases in
legal and professional fees will be as large as experienced in the first
quarter.
Management believes that the Company is not involved in any material adverse
legal proceedings. However, Neogen is a party in lawsuits as discussed in
Part II, ITEM 1. LEGAL PROCEEDINGS in this form 10-Q. Management intends to
vigorously pursue this litigation and can not predict the outcome of these
lawsuits.
The decline in research and development expense of $65,000 is due entirely to
lower salary and fringe cost. Management believes research and development is
critical to the Company's future and is currently seeking scientists to
support current research projects as well as expand research efforts
pertaining to new food and animal safety products. First quarter research and
development expenses were 6% compared to the Company's annual budget of 7%.
Other income increased $75,000 because the Company's share of royalties paid
to an affiliated partnership was higher in the first quarter than the prior
year.
The Company's effective tax rate was approximately 9% in the first quarter
due to the availability of tax credit carryforwards which were used to offset
federal income taxes. In future quarters, management expects its effective
tax rate will approximate the federal statutory rate of 34% since the Company
has no more net operating loss or tax credit carryforwards.
Financial Condition and Liquidity
At August 31, 1999, the Company had $10,959,000 in cash and marketable
securities, working capital of $18,150,000 and stockholders' equity of
$24,594,000. In addition, the Company has bank lines of credit totaling
$10,000,000 with nothing borrowed against these lines as of August 31, 1999.
Cash and marketable securities increased $293,000 during the first quarter
with $553,000 of cash generated by operations partially offset by $248,000 of
cash expended for property and equipment and other assets.
Accounts receivable were $175,000 higher at August 31, 1999 than at May 31
due primarily to significant increases in sales of food and animal safety
products during the last 30 days of the quarter. Inventories declined
$167,000 at August 31, 1999 compared to May 31. This decrease was due to a
planned reduction in inventory levels of raw material and finished goods
associated with food safety diagnostic products for the detection of
microorganisms.
Other current assets were higher at August 31 due to increases in several
categories including interest receivable, prepaid taxes and prepaid
professional fees. Accounts payable decreased $174,000 between May 31 and
August 31 due primarily to the timing of month-end cutoffs and scheduled
payment dates for trade payables. Accrued expenses were $191,000 lower at
August 31 as a result of decreases in accruals for a number of areas
including bonuses, royalties and taxes.
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 $248,000 in the first quarter for additions to property,
equipment and other assets. At August 31, 1999, 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.
Management believes that the Company's existing cash and marketable
securities at August 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. In addition, the Company surveyed key customers and
vendors regarding their strategies to achieve year 2000 compliance. 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.
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 from materially
the Company's expectations as a result of numerous factors, including the
possibility of incorrect assumptions, cooperation of third parties and other
unforeseen circumstances that could have a materially adverse effect on the
Company's financial results.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 1996, the company initiated a lawsuit in the U.S. District Court
for the Western District of Michigan, Southern Division against Arthur J.
Trickey and Arthur M. Trickey ("Mr. Trickey"). This litigation involved a
dispute over a letter of intent the Company entered into with Mr. Trickey to
distribute certain products Mr. Trickey alleged he had developed. Mr. Trickey
filed a counterclaim alleging a common law right to the disputed trademark.
In November 1998, the Company won this lawsuit but does not expect to collect
any significant damages. Mr. Trickey has appealed the verdict to the United
States Sixth Circuit Court of Appeals on an in pro per basis. The District
Court denied Mr. Trickey's request for preparation of the trial transcript at
public expense on the grounds that the appeal would be frivolous, and this
denial was upheld by the Court of Appeals. Mr. Trickey is proceeding with the
appeal without a transcript and without legal counsel.
In April 1999, Ecolab, Inc. ("Ecolab") filed a lawsuit against Biotrace
Incorporated ("Biotrace") and Neogen Corporation in the Second Judicial
District of District Court in the State of Minnesota alleging that Neogen
distributed Biotrace's products to Ecolab customers in violation of an
agreement between Ecolab and Biotrace. This suit was settled in September
without any material impact on Neogen's operations.
The Company continues to vigorously pursue a lawsuit against Vicam, L.P.,
Vicam Management Corporation and Jack L. Radlo ("Vicam") filed in the U.S.
District Court for the Middle District of Florida in August 1996. The Company
is suing to recover damages incurred in the character of lost sales caused by
Vicam's publication of the false allegation that a Neogen product violates
two patents licensed to Vicam. In February 1999, a hearing was held for the
purpose of providing evidence concerning the patent issues of the case. The
judge who presided over this hearing ruled that polyclonal antibodies of the
type used in Neogen's product are substantially different from monoclonal
antibodies of the type used in Vicam's product. Management believes this
decision significantly impacts Vicam's counterclaim of patent infringement.
The amount of the Company's damages (lost sales) should it prevail has not
yet been quantified. If Vicam were to prevail, the Company believes that its
damages would be relatively insignificant since the Company's sales of this
product have not been material.
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, 1999.
The Company did not file any reports on Form 8-K in the quarterly period
ended August 31, 1999.
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
10/13/99 /s/ James L. Herbert
- -------- --------------------
Date James L. Herbert
President
10/13/99 /s/ Lon M. Bohannon
- -------- -------------------
Date Lon M. Bohannon
Vice President - Chief Financial Officer
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION
----------- -----------
27 FINANCIAL DATA SCHEDULE