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 November 30, 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 January 1, 2000, there were 5,909,410 outstanding shares of common stock. INDEX NEOGEN CORPORATION AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Interim Financial Statements (unaudited) Consolidated balance sheets - November 30, 1999 and May 31, 1999 Consolidated statements of income - Three months ended November 30, 1999 and 1998; six months ended November 30, 1999 and 1998. Consolidated statements of stockholders' equity - Six months ended November 30, 1999 and 1998. Consolidated statements of cash flows - Six months ended November 30, 1999 and 1998. Notes to consolidated financial statements - November 30, 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 (unaudited) <TABLE> <CAPTION> CONSOLIDATED BALANCE SHEETS (UNAUDITED) NEOGEN CORPORATION AND SUBSIDIARIES November 30 May 31 1999 1999 -------------------------- <S> <C> <C> ASSETS CURRENT ASSETS Cash $ 724,115 $ 1,062,811 Marketable securities 10,860,912 9,603,844 Accounts receivable 3,558,587 3,295,536 Inventories 4,513,392 4,360,580 Other current assets 654,622 960,745 ----------- ----------- TOTAL CURRENT ASSETS 20,311,628 19,283,516 PROPERTY AND EQUIPMENT net of accumulated depreciation 2,357,526 2,147,941 INTANGIBLE AND OTHER ASSETS Goodwill, net of accumulated amortization 3,100,325 3,199,802 Other assets, net of accumulated amortization 1,393,692 1,476,879 ----------- ----------- $27,163,171 $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 908,549 842,429 Accrued compensation and benefits 573,565 606,689 Other accrued liabilities 45,564 430,828 ----------- ----------- TOTAL CURRENT LIABILITIES 1,576,350 1,928,618 LONG-TERM NOTES PAYABLE 101,384 125,720 OTHER LONG-TERM LIABILITIES 267,982 267,982 STOCKHOLDERS' EQUITY Common stock: Par value $.16 per share, 10,000,000 shares authorized, 5,994,210 shares issued at November 30, 1999; 5,929,279 shares issued at May 31, 1999 959,074 948,685 Additional paid-in capital 22,510,712 22,235,726 Retained earnings 1,747,669 601,407 ----------- ----------- 25,217,455 23,785,818 ----------- ----------- $27,163,171 $26,108,138 =========== =========== <FN> See notes to consolidated financial statements. </TABLE> <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) NEOGEN CORPORATION AND SUBSIDIARIES Three Months Ended November 30 Six Months Ended November 30 1999 1998 1999 1998 ------------------------------ ---------------------------- <S> <C> <C> <C> <C> SALES $ 5,425,178 $ 5,920,765 $ 10,765,479 $ 11,637,320 COST OF GOODS SOLD 2,453,387 2,611,486 4,714,210 4,827,871 ------------ ------------ ------------ ------------ GROSS MARGIN 2,971,791 3,309,279 6,051,269 6,809,449 EXPENSES Sales and marketing 1,475,930 1,275,073 2,833,652 2,728,473 General and administrative 813,277 841,704 1,523,850 1,721,223 Research and development 424,793 423,699 758,117 821,938 ------------ ------------ ------------ ------------ 2,714,000 2,540,476 5,115,619 5,271,634 ------------ ------------ ------------ ------------ OPERATING INCOME 257,791 768,803 935,650 1,537,815 Other Income (expense) Interest income 147,442 118,609 279,955 251,146 Interest expense (3,115) (4,127) (6,316) (8,605) Other 75,395 165,252 151,973 168,502 ------------ ------------ ------------ ------------ 219,722 279,734 425,612 411,043 ------------ ------------ ------------ ------------ INCOME BEFORE TAX 477,513 1,048,537 1,361,262 1,948,858 Income tax 139,000 382,200 215,000 465,500 ------------ ------------ ------------ ------------ NET INCOME $ 338,513 $ 666,337 $ 1,146,262 $ 1,483,358 ============ ============ ============ ============ NET INCOME PER SHARE Basic $ 0.06 $ 0.11 $ 0.19 $ 0.24 ============ ============ ============ ============ Diluted $ 0.06 $ 0.11 $ 0.19 $ 0.24 ============ ============ ============ ============ <FN> See notes to consolidated financial statements. </TABLE> <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) NEOGEN CORPORATION AND SUBSIDIARIES Common Stock ---------------------------- Additional Retained Number Paid-In Earnings of Shares Amount Capital (Deficit) ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Balance at June 1, 1999 5,929,279 $ 948,685 $ 22,235,726 $ 601,407 Exercise of options and warrants 64,931 10,389 274,986 Net income for the six months ended November 30, 1999 1,146,262 ------------ ------------ ------------ ------------ Balance at November 30, 1999 5,994,210 $ 959,074 $ 22,510,712 $ 1,747,669 ============ ============ ============ ============ Balance at June 1, 1998 6,208,179 $ 993,309 $ 24,269,549 $ (1,653,521) Exercise of warrants 35,000 5,600 79,476 Repurchase of shares (106,000) (16,960) (707,964) Net income for the six months ended November 30, 1998 1,483,358 ------------ ------------ ------------ ------------ Balance at November 30, 1998 6,137,179 $ 981,949 $ 23,641,061 $ (170,163) ============ ============ ============ ============ <FN> See notes to consolidated financial statements. </TABLE> <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NEOGEN CORPORATION AND SUBSIDIARIES Six Months Ended November 30 1999 1998 ----------------------------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 1,146,262 $ 1,483,358 Adjustments to reconcile net income to net cash provided from (used in) operating activities: Depreciation and amortization 446,733 444,776 Changes in operating assets and liabilities: Accounts receivable (263,051) (619,473) Inventories (152,812) (380,996) Other current assets 306,123 (139,031) Accounts payable 66,120 432,255 Other accrued expenses (418,388) 203,440 ------------ ------------ NET CASH PROVIDED FROM OPERATING ACTIVITIES 1,130,987 1,424,329 INVESTING ACTIVITIES Purchases of property and equipment and other assets (473,654) (480,877) Acquisitions (600,000) Purchases of marketable securities (17,594,553) (15,487,555) Proceeds from sale of marketable securities 16,337,485 15,973,166 ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (1,730,722) (595,266) FINANCING ACTIVITIES Payments on long-term borrowings (24,336) (24,336) Net payments for repurchase of common stock (724,927) Net proceeds from issuance of common stock 285,375 85,079 ------------ ------------ NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES 261,039 (664,184) ------------ ------------ INCREASE (DECREASE) IN CASH (338,696) 164,879 Cash at beginning of period 1,062,811 719,877 ------------ ------------ CASH AT END OF PERIOD $ 724,115 $ 884,756 ============ ============ <FN> See notes to consolidated financial statements. </TABLE> 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 six months ended November 30, 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 The following table presents the earnings per share calculations. <TABLE> <CAPTION> Three Months Ended Six Months Ended November 30 November 30 1999 1998 1999 1998 ----------------------- ----------------------- <S> <C> <C> <C> <C> Numerator for Basic and Diluted Earnings Per Share Net Income $ 338,513 $ 666,337 $1,146,262 $1,483,358 ========== ========== ========== ========== Denominator Denominator for basic earnings per share- Weighted average shares 5,962,848 6,158,866 5,945,972 6,189,838 Effect of dilutive securities stock options and warrants 23,581 33,285 27,294 42,401 ---------- ---------- ---------- ---------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversion 5,986,429 6,192,151 5,973,266 6,232,239 ========== ========== ========== ========== Basic Earnings per Share $ 0.06 $ 0.11 $ 0.19 $ 0.24 ========== ========== ========== ========== Diluted Earnings per Share $ 0.06 $ 0.11 $ 0.19 $ 0.24 ========== ========== ========== ========== </TABLE> NOTE C - 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 December 31, 1999, the Company had purchased 399,500 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 D - 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: November 30, 1999 May 31, 1999 ----------------- ------------ Raw Material $1,519,175 $1,809,725 Work-In-Process 775,576 755,225 Finished Goods 2,218,641 1,795,630 ========== ========== $4,513,392 $4,360,580 ========== ========== NOTE E - 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. Segment information for the three months ended November 30, 1999 and 1998 was as follows: <TABLE> <CAPTION> Corporate Food Animal and Safety Safety Eliminations (1) Total - ---------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> 1999 Net sales to external customers $ 2,870,712 $ 2,554,466 $ $ 5,425,178 Operating income 394,651 90,027 (226,887) 257,791 Total assets 6,330,189 10,055,300 10,777,682 27,163,171 ----------- ----------- ------------ ----------- 1998 Net sales to external customers $ 2,555,524 $ 3,365,241 $ $ 5,920,765 Operating income 454,706 459,676 (145,579) 768,803 Total assets 7,025,742 10,554,452 9,045,449 26,625,643 ----------- ----------- ------------ ----------- </TABLE> Segment information for the six months ended November 30, 1999 and 1998 was as follows: <TABLE> <CAPTION> Corporate Food Animal and Safety Safety Eliminations (1) Total - ---------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> 1999 Net sales to external customers $ 5,521,671 $ 5,243,808 $ $10,765,479 Operating income 997,149 349,753 (411,252) 935,650 Total assets 6,330,189 10,055,300 10,777,682 27,163,171 ----------- ----------- ----------- ----------- 1998 Net sales to external customers $ 5,421,961 $ 6,215,359 $ $11,637,320 Operating income 996,876 960,229 (419,290) 1,537,815 Total assets 7,025,742 10,554,452 9,045,449 26,625,643 ----------- ----------- ----------- ----------- <FN> (1) Includes corporate assets, consisting of marketable securities, and overhead expenses not allocated to specific business segments. Also includes the elimination of intersegment transactions and minority interests. </TABLE> 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. Three Months Ended November 30, 1999 Compared to Three Months Ended November 30, 1998. Total sales for the quarter ended November 30, 1999 declined $500,000, or 8%, compared to the same quarter in the prior year. Sales of products dedicated to food safety were up $300,000, or 12%, and sales of animal safety products declined $800,000, or 24%. The increase 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 over $450,000 in the second quarter. Sales of products used for the detection of food allergens also increased over $50,000. The sales growth in these two areas offset 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 second quarter this year compared to $130,000 in sales of human clinical products during the same quarter last year. Sales of diagnostic tests for the detection of mycotoxins declined $70,000 compared to the prior year primarily as a result of decreased sales for aflatoxin 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. Sales of the Company's vaccine to prevent type B botulism in horses declined $350,000 in the quarter, due exclusively to a shortage in product availability. The Company is currently producing and, effective in early January 2000, obtained a conditional license to ship BotVax(TM) B from its USDA-approved Tampa, Florida, manufacturing facilities. Additionally, a customer for specialty needles used to inject unique marinades into meats has encountered financial difficulties and is no longer purchasing product from the Company. Sales of this product decreased over $550,000 as a result of this single customer. The Company continues to sell this product to other similar customers but it will take some time to increase sales of this specific product to previous levels. Cost of goods sold decreased $160,000 compared to last year. As a percentage of sales, cost of goods sold was higher than the prior year due partially to the overall mix of product sold and partially due to lower absorption of labor and overhead costs related to veterinary instruments. Sales and marketing expenses increased $200,000 in the second quarter as the Company is in the process of adding sales and marketing personnel to expand sales activities both domestically and internationally. General and administrative expenses, and research and development expenses during the quarter are comparable to the second quarter of the prior year. Management believes research and development is critical to the Company's future. Second quarter research and development expenses were 8% of sales compared to the Company's annual budget of 7%. Other income decreased $60,000 because the Company's share of royalties paid to an affiliated partnership was lower in the second quarter than in the second quarter of the prior year. The Company's effective tax rate was approximately 29% in the second quarter due to the availability of tax credit carryforwards, which were used to offset federal income taxes. Six Months Ended November 30, 1999 Compared to Six Months Ended November 30, 1998. Total sales for the six months ended November 30, 1999 declined $875,000, or 7%, compared to the same period of the prior year. Sales of products dedicated to food safety were up $100,000, or 2% and sales of animal safety products declined $975,000, or 16%. The increase in food safety sales was affected by a number of 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 $650,000. Sales of products used for the detection of food allergens also increased $100,000. The sales growth in these two areas offset 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 six months this year compared to $270,000 in sales of human clinical products during the same period last year. Sales of diagnostic tests for the detection of mycotoxins declined $380,000 compared to the prior year primarily as a result of decreased sales for aflatoxin and vomitoxin test kits. It is not uncommon for the Company to experience significant year to year fluctuations in sales of these kits. The decline in sales of animal safety products is primarily due to lower sales for two products. Sales of the Company's vaccine to prevent type B botulism in horses declined $400,000, due exclusively to a shortage in product availability. As discussed previously in this 10-Q, the Company is currently producing and, effective in early January 2000 began shipping this product to customers. Additionally, a customer for specialty needles used to introduce unique marinades into meats has encountered financial difficulty and is no longer purchasing product from the Company. Sales of this product decreased over $700,000 as a result of this single customer. Cost of goods sold decreased $100,000 compared to last year. As a percentage of sales, cost of goods sold was higher than the prior year due to the overall mix of products sold. Sales and marketing expenses increased $100,000 in the period of six months ended November 30, 1999. The Company is in the process of adding sales and marketing personnel to expand sales activities both domestically and internationally. General and administrative expenses declined $200,000 compared to the prior year. Although savings were achieved in a number of areas, legal and professional fees decreased in excess of $150,000. 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 cannot 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. Research and development expenses through November 30, 1999 were 7%, which is comparable to the Company's annual budget of 7%. The Company's effective tax rate was approximately 16% in the six months ended November 30, 1999 due to the availability of tax credit carryforwards, which were used to offset federal income taxes. Financial Condition and Liquidity At November 30, 1999, the Company had $11,600,000 in cash and marketable securities, working capital of $18,700,000 and stockholders' equity of $25,200,000. In addition, the Company has unused bank lines of credit totaling $10,000,000. Cash and marketable securities increased $900,000 during the six months ended November 30, 1999, with $1,100,000 of cash generated by operations. At November 30, 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. Although cash and marketable securities are generally considered adequate, management believes that these resources 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 its future capital needs. 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. 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. 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 November 30, 1999. The Company did not file any reports on Form 8-K in the quarterly period ended November 30, 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 1/13/2000 /s/ James L. Herbert ----------------- -------------------------------- Date James L. Herbert President 1/13/2000 /s/ Richard R. Current ----------------- -------------------------------- Date Richard R. Current Vice President - Chief Financial Officer EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ----------- ----------- 27 FINANCIAL DATA SCHEDULE /TEXT>