10-Q 1 d10q.txt QUARTERLY REPORT 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, 2001 [_] 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 (I.R.S. Employer corporation 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, 2001, there were 5,911,000 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, 2001 and May 31, 2001 Consolidated Statements of Operations - Three months ended August 31, 2001 and 2000 Consolidated Statements of Stockholders' Equity - Three months ended August 31, 2001 Consolidated Statements of Cash Flows - Three months ended August 31, 2001 and 2000 Notes to Interim Consolidated Financial Statements - August 31, 2001 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION -------- ----------------- Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES ---------- -2- PART I. FINANCIAL INFORMATION ITEM 1. Interim Financial Statements CONSOLIDATED BALANCE SHEETS (UNAUDITED) NEOGEN CORPORATION AND SUBSIDIARIES
August 31 May 31 2001 2001 ----------- ----------- ASSETS CURRENT ASSETS Cash $ 699,000 $ 848,000 Marketable securities 3,579,000 6,334,000 Accounts receivable, net 6,112,000 6,026,000 Inventories 6,759,000 6,974,000 Other current assets 1,268,000 1,397,000 ----------- ----------- TOTAL CURRENT ASSETS 18,417,000 21,579,000 PROPERTY AND EQUIPMENT, NET 3,167,000 2,721,000 INTANGIBLE AND OTHER ASSETS - NOTE B Goodwill 11,419,000 7,223,000 Other intangible assets, net 1,258,000 930,000 Other assets 578,000 569,000 ----------- ----------- 13,255,000 8,722,000 ----------- ----------- $34,839,000 $33,022,000 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1,693,000 $ 1,207,000 Other accrued liabilities 1,324,000 2,079,000 Current maturities of long-term notes payable 49,000 49,000 ----------- ----------- TOTAL CURRENT LIABILITIES 3,066,000 3,335,000 LONG-TERM NOTES PAYABLE 16,000 28,000 OTHER LONG-TERM LIABILITIES 322,000 322,000 STOCKHOLDERS' EQUITY Common stock: Par value $.16 per share, 20,000,000 950,000 932,000 shares authorized, 5,937,608 shares issued and outstanding at August 31, 2001; 5,823,520 shares issued and outstanding at May 31, 2001 Additional paid-in capital 22,778,000 21,560,000 Retained earnings 7,707,000 6,845,000 ----------- ----------- 31,435,000 29,337,000 ----------- ----------- $34,839,000 $33,022,000 =========== ===========
See notes to interim consolidated financial statements -3- CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) NEOGEN CORPORATION AND SUBSIDIARIES
Three Months Ended August 31 2001 2000 ---------------------------- NET SALES $ 9,732,000 $ 8,124,000 Cost of goods sold 4,840,000 4,128,000 ----------- ----------- GROSS MARGIN 4,892,000 3,996,000 OPERATING EXPENSES Sales and marketing 2,147,000 1,847,000 General and administrative 998,000 928,000 Research and development 512,000 419,000 ----------- ----------- 3,657,000 3,194,000 ----------- ----------- OPERATING INCOME 1,235,000 802,000 OTHER INCOME Interest income 53,000 111,000 Interest expense (1,000) (10,000) Other 76,000 69,000 ----------- ----------- 128,000 170,000 ----------- ----------- INCOME BEFORE TAXES ON INCOME 1,363,000 972,000 TAXES ON INCOME 501,000 300,000 ----------- ----------- NET INCOME $ 862,000 $ 672,000 =========== =========== NET INCOME PER SHARE: Basic $ 0.14 $ 0.12 =========== =========== Diluted $ 0.14 $ 0.12 =========== ===========
See notes to interim consolidated financial statements. -4- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) NEOGEN CORPORATION AND SUBSIDIARIES
Common Stock ------------------------ Additional Number Paid-In Retained of Shares Amount Capital Earnings ----------- ----------- ----------- ----------- Balance at June 1, 2001 5,823,520 $ 932,000 $21,560,000 $ 6,845,000 Exercise of options and warrants 20,600 3,000 Acquisitions 93,488 15,000 125,000 1,093,000 Net income for the three months ended August 31, 2001 862,000 ----------- ----------- ----------- ----------- Balance at August 31, 2001 5,937,608 $ 950,000 $22,778,000 $ 7,707,000 =========== =========== =========== ===========
See notes to interim consolidated financial statements. -5- CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NEOGEN CORPORATION AND SUBSIDIARIES
Three Months Ended August 31 2001 2000 ---------------------------- OPERATING ACTIVITIES: Net income $ 862,000 $ 672,000 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 269,000 332,000 Changes in operating assets and Liabilities, net of acquisitions: Accounts receivable 223,000 (494,000) Inventories 344,000 6,000 Other current assets 129,000 (175,000) Accounts payable 249,000 132,000 Other accrued expenses (754,000) (439,000) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,322,000 34,000 INVESTING ACTIVITIES: Sales of marketable securities 8,142,000 3,212,000 Purchases of marketable securities (5,386,000) (87,000) Purchases of property and equipment and other assets (756,000) (298,000) Acquisitions (3,587,000) (3,334,000) ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (1,587,000) (517,000) FINANCING ACTIVITIES: Payments on long-term borrowings (12,000) (12,000) Net proceeds from the issuance of common stock 128,000 -- Repurchase of common stock -- (544,000) ----------- ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 116,000 (556,000) ----------- ----------- DECREASE IN CASH (149,000) (1,029,000) Cash at beginning of period 848,000 2,198,000 ----------- ----------- CASH AT END OF PERIOD $ 699,000 $ 1,169,000 =========== ===========
See notes to interim consolidated financial statements. -6- NOTES TO INTERIM 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, 2001 are not necessarily indicative of the results to be expected for the fiscal year ending May 31, 2002. For more complete financial information, these consolidated financial statements should be read in conjunction with the May 31, 2001 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, 2001. NOTE B - CHANGE IN ACCOUNTING FOR GOODWILL ------------------------------------------ The Company has adopted Financial Accounting Standards Board SFAS 142 "Goodwill and other intangible assets" effective June 1, 2001. Under the provisions of the Statement, goodwill is no longer amortized but instead is reviewed for impairment at least annually. In connection with the adoption of the Statement, Management is required to perform an impairment assessment within six months of adoption. As of August 31, 2001 the Company had not yet completed the goodwill impairment review, and therefore has made no determination of any impairment charges that could result from adoption of this statement. A reconciliation of the allocation of intangible assets as reported at May 31, 2001 and at June 1, 2001, following the adoption of SFAS 142, is as follows:
May 31, 2001 Reclassifications June 1, 2001 Gross Gross Gross Carrying Accumulated Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization Amount Amortization ----------- ------------ ----------- ------------ ----------- ------------ Goodwill $ 8,123,000 $ 1,047,000 $ 280,000 $ 133,000 $ 8,403,000 $1,180,000 Intangible assets with indefinite lives 614,000 199,000 614,000 199,000 Intangible assets with finite lives 1,019,000 504,000 1,019,000 504,000 Other assets 2,482,000 836,000 (1,913,000) (836,000) 569,000 -- ----------- --------------- ----------- ---------- ----------- ---------- $10,605,000 $ 1,883,000 $ -- $ -- $10,605,000 $1,883,000 =========== =========== =========== ========== =========== ==========
-7- The allocation of assets following SFAS 142 as of June 1, 2001 and August 31, 2001 is summarized in the following table:
June 1, 2001 August 31, 2001 Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization ---------- ------------ ----------- ------------ Goodwill: Food Safety $ 841,000 $ 123,000 $ 4,364,000 $ 123,000 Animal Safety 7,562,000 1,057,000 8,235,000 1,057,000 ---------- ---------- ----------- ---------- Total 8,403,000 1,180,000 12,599,000 1,180,000 Intangible assets with indefinite lives 614,000 199,000 614,000 199,000 Intangible assets with finite lives: Licenses 305,000 69,000 633,000 102,000 Covenants not to compete 355,000 171,000 415,000 186,000 Patents 351,000 263,000 351,000 265,000 Other 8,000 1,000 8,000 1,000 ---------- ---------- ----------- ---------- 1,019,000 504,000 1,407,000 550,000
As provided by SFAS 142, the results of operations of the quarter ended August 31, 2000 have not been restated. If the statement had been adopted as of June 1, 2000, the effect would have resulted in the reduction in amortization of $92,000; net income of $733,000 and net income per share of $.13 (basic and diluted). Estimated fiscal year amortization expense is as follow: 2002-$144,000; 2003-$139,000; 2004-$119,000; 2005-$80,000 and 2006-$53,000. NOTE C - CHANGE IN ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ------------------------------------------------------------------------------- SFAS 133, as amended by SFAS 137 and SFAS 138, established accounting and reporting standards for derivative instruments and for hedging activities. The Company adopted SFAS 133 as amended, effective June 1, 2001. The adoption of SFAS 133 will not have a significant impact on the financial position or results of operations of the company because the Company currently has no derivative instruments or hedging activities. -8- NOTE D - EARNINGS PER SHARE --------------------------- The following table summarizes the calculation of earnings per share:
Three months Ended August 31 2001 2000 ---------- ---------- Basic and Diluted - Earnings per Share Numerator - Net Income $ 862,000 $ 672,000 ========== ========== Denominator: For basic earnings per share- Weighted average shares 5,950,000 5,731,000 Effect of dilutive securities- Stock options and warrants 322,000 10,000 ---------- ---------- For diluted earnings per share - adjusted weighted average shares and assumed conversions 6,272,000 5,741,000 ========== ========== Basic Earnings per Share $ 0.14 $ 0.12 ========== ========== Diluted Earnings per Share $ 0.14 $ 0.12 ========== ==========
NOTE E - STOCK REPURCHASE ------------------------- The Company's board of directors has authorized the purchase of up to 1,000,000 shares of the Company's Common Stock. As of August 31, 2001, the Company had purchased 626,990 shares (none in the quarter ended August 31, 2001) 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 F - 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, 2001 May 31, 2001 --------------- ------------ Raw Material $2,076,000 $1,832,000 Work-In-Process 864,000 885,000 Finished Goods 3,819,000 4,257,000 ---------- ---------- $6,759,000 $6,974,000 ========== ========== -9- NOTE G - 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 animal care 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. Segment information for the three months ended August 31, 2001 and 2000 was as follows:
Food Animal Corporate and Safety Safety Eliminations (1) Total -------------------------------------------------------------------------------------------------------- 2001 Net sales from external customers $ 4,949,000 $ 4,783,000 $ -- $ 9,732,000 Operating income (loss) 906,000 545,000 (216,000) 1,235,000 Total assets 14,647,000 16,230,000 3,962,000 34,839,000 -------------------------------------------------------------------------------------------------------- 2000 Net sales from external customers $ 4,389,000 $ 3,735,000 $ -- $ 8,124,000 Operating income (loss) 692,000 289,000 (179,000) 802,000 Total assets 10,431,000 13,179,000 5,327,000 28,937,000 --------------------------------------------------------------------------------------------------------
(1) Includes corporate assets, consisting principally of marketable securities, and overhead expenses not allocated to specific business segments. Also includes the elimination of intersegment transactions and minority interests. NOTE H - ACQUISITIONS --------------------- As of June 30, 2001, the Company purchased 100% of the common stock of QA Life Sciences. QA has a product line directed toward testing of food and water. The purchase price, subject to certain post closing adjustments, was 58,000 shares of Neogen stock with provision for payment of up to an additional 3,100 issued shares of Neogen stock based on post closing collections of accounts receivable and an additional $200,000 based on achievement of specific levels of post closing revenues. The accounts receivable secondary payment requirements were met and required share payment was made as of August 31, 2001. The purchase price and acquisition costs were allocated $129,000 to current assets, $150,000 to the property and equipment and $487,000 to intangible assets. Revenues of QA Life Sciences in the 12 months prior to the acquisition were less than $1,000,000. -10- As of August 1, 2001, the Company purchased for cash substantially all of the assets of Gene-Trak Systems from Vysis, Inc. Gene-Trak has a product line for tests of specific bacteria in food. The purchase price and acquisition costs were allocated $378,000 to current assets, $125,000 to property and equipment and $3,144,000 to intangible assets. Revenues of Gene-Trak in the 12 months prior to the acquisition were approximately $3,000,000. During the quarter, final determination was made of amounts due as secondary payments to the former owners of AmVet Pharmaceuticals. To satisfy these obligations, 32,388 shares of Neogen stock valued at $416,000 were issued and cash payments of $133,000 were made. These transactions were accounted for as purchases under the provision of SFAS 141. Results of operations are included in the consolidated financial statements beginning with the date of the acquisition. Common Stock was valued at the closing price on the date of the transaction after allowance for restriction related to the shares tendered. NOTE I - LEGAL PROCEEDINGS -------------------------- The Company is involved in certain legal proceedings, none of which, in the opinion of Management is material to the financial statements. NOTE J - SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION ---------------------------------------------------------- Cash paid for income taxes totaled $1,200,000 and $876,000 in the first quarter of 2002 and 2001, respectively. Cash paid for interest totaled $1,000 and $11,000 in 2002 and 2001, respectively. 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 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. -11- Accounting Changes ------------------ In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 142 "Goodwill and Other Intangible Assets." As allowed under the Standard, the Company has adopted SFAS 142 as of June 1, 2001. SFAS 142 requires goodwill and intangible assets with indefinite useful lives to no longer be amortized, but instead be tested for impairment at least annually. With the adoption of SFAS 142, Management reviewed classifications, useful lives, and residual lives of all acquired intangible assets. Following this review, changes in classification were made as described in Note B. No changes in the amortization periods or residual values were determined to be necessary. SFAS 142 provides a six-month transitional period from the effective date of adoption for Management to perform an assessment of whether there is an indication that goodwill is impaired. To the extent that an indication of impairment exists, Management must perform a second test to measure the amount of impairment. The second test must be performed as soon as possible, but no later than the end of the year. Any impairment measured as of the date of adoption will be recognized as of the cumulative effect of a change in accounting principle, Management has not determined whether there is any indication that goodwill is impaired or estimated the amount of any potential impairment. Additionally, the Company adopted the provisions of SFAS 133, as amended, as of June 1, 2001. This statement, which establishes accounting and reporting standards for derivative instruments and for hedging activities, will not have a significant impact on the financial position or results of operations of the Company. -12- Three Months Ended August 31, 2001 Compared to Three Months Ended August 31, ---------------------------------------------------------------------------- 2000. ----- Total sales for the quarter ended August 31, 2001 increased $1,608,000 or 19.8% compared to the same quarter in 2000. Sales of products dedicated to food safety were up 12.8% and sales of animal safety products were up 28.1%. The increase in food safety sales came from increases in sales of test kits to detect harmful bacteria, such as E. coli O157:H7, Salmonella and Listeria, that increased 23% compared to the prior year as the Company continues to add sales in this growing market. Additionally, sales of test kits for allergens were up 51%. The increase in animal safety sales came from a $380,000 increase in sales of the Triple Crown product line and a $350,000 increase in sales of botulism B products. Botulism B sales were particularly low in 2000 as a result of supply problems at that time. Triple Crown sales increases came principally from the Company's products for wound management which have been a focus product for the past year and have shown consistently high levels of growth. Revenues of QA Life Sciences and Gene-Trak Systems that were acquired during the quarter represented less than 4% of total revenues for the quarter. Gross margins increased from 49.2% in 2000 to 50.3% in 2001. This change in margins resulted principally from the effect of changes in product sales mix. Sales and marketing expenses increased $300,000 or 16.2% from the first quarter on 2000. These expenses rose in relation to sales increases, however, sales and marketing costs as a percentage of sales decreased from 22.7% to 22.1%. General and administrative expenses increased $70,000 or 7.5% from the 2000 quarter. As a percentage of revenue these costs decreased from 11.4% to 10.3%. The increase in dollar costs consisted principally of personnel additions and similar costs necessary to provide administrative functions for the significantly greater level of sales, net of the effect on amortization following adoption of SFAS 142 as of June 1, 2001. Research and development expenses increased 22.2% from the 2000 quarter. As a percentage of revenues, research and development expenses increased from 5.2% to 5.3%. The absolute dollar amount of research and development expense increased $93,000 from the amount incurred in the comparable quarter of the prior year. Management intends to maintain research and development expenditures for product lines that require such expenditures at 8% to 10% of revenues. Interest income decreased in the 2001 quarter as a result of the reduction in invested balances following the purchase of QA Life Sciences and Gene-Trak Systems and decrease in rates. The federal and state tax rate in the first quarter of 2001 increased to 36.8% of income before taxes on income from 30.9% in the prior year. The tax provision in the prior year was favorably affected by certain tax credits carried forward from earlier years. No further credit carryovers are available. These increases were offset by a reduction in amortization expense for intangible assets of $92,000 as the result of the adoption of SFAS 142 as of June 1, 2001. -13- Financial Condition and Liquidity --------------------------------- At August 31, 2001, the Company had $4,278,000 in cash and marketable securities, working capital of $15,351,000 and stockholders' equity of $31,435,000. In addition, the Company has bank lines of credit totaling $10,000,000 with no borrowings against these lines. Cash and marketable securities decreased during the first quarter with cash provided by operating activities offset by $4,300,000 of cash expended for acquisitions, including Gene-Trak Systems, and property and equipment. Inclusive of the effect of acquisitions, accounts receivable increased $86,000 and inventories decreased $215,000 at August 31, 2001 compared to May 31. This resulted from continued strong management of these assets despite the effect of the acquisitions and the increase in the level of operations. The decrease in current liabilities result from timing of payments, principally those related to federal income taxes. At August 31, 2001, 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, 2001, 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. -14- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ----------------- The Company is involved in certain legal proceedings, none of which, in the opinion of the management is material to the financial statements. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibit Index ------------- Exhibit 10.1 - Asset Purchase Agreement between registrant and Vysis, Inc. dated August 4, 2001. (b) Reports on Form 8-K Filed in Quarterly Period Ended August 31, 2001. -------------------------------------------------------------------- The Company filed a report on August 10, 2001 on Form 8-K reporting the acquisition of Gene-Trak Systems. -15- 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 10/12/01 /s/ James L. Herbert ---------------- ----------------------------------- Date James L. Herbert President 10/12/01 /s/ Richard R. Current ----------------- ----------------------------------- Date Richard R. Current Vice President & Chief Financial Officer -16- EXHIBIT INDEX ------------- EXHIBIT NO. DESCRIPTION ----------- ----------- 10.1 ASSET PURCHASE AGREEMENT BETWEEN REGISTRANT AND VYSIS, INC. DATED AUGUST 4, 2001. -17-