U. S.UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DCWASHINGTON, D.C. 20549
FORM 10-K
(Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For
fiscal year endedthe Fiscal Year Ended May 31,2002 ------------ OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 19342003
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For
the transition period from ___________ to ___________. Commission File Number:The Transition Period FromTo.COMMISSION FILE NUMBER 0-17988
-------NEOGEN CORPORATION
------------------ (Name(Exact name of registrant as specified in its charter)
MICHIGAN 38-2367843 - -------------------------------------------------------------- ---------------------- (State(State or other jurisdiction of incorporation or organization) (I.R.S.(I.R.S. Employer Identification No.) 620 LESHER PLACE, LANSING, MICHIGAN 48912 ----------------------------------- ------- (Address of principal executive offices) (Zip Code)incorporation or organization) 517/372-9200 ------------ (Registrant's620 Lesher Place
Lansing, Michigan 48912
(Address of principal executive offices including zip code)
517-372-9200
(Registrant’s telephone
number) Securities registered pursuant to Sectionnumber, including area code)SECURITIES REGISTERED PURSUANT TO SECTION 12(b)
of the Act:OF THE ACT: NONE---- Securities registered pursuant to SectionSECURITIES REGISTERED PURSUANT TO SECTION 12(g)
of the Act:OF THE ACT:COMMON STOCK,
$ .16 PAR VALUE ----------------------------- (Title$0.16 par value per share(Title of
class) CheckClass)Indicate by check mark whether the
issuerregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepastpreceding 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. YesXx No---¨Indicate by check mark if disclosure of delinquent filers
in responsepursuant to Item 405 of Regulation S-K is not containedin this form,herein, andno disclosurewill not be contained, to the best ofregistrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form10-K ( ) --- The10-K.¨Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yesx No¨
Based on the closing sale price on May 31, 2003, the aggregate market value of the voting stock held by non-affiliates of the registrant
aswas $89,508,635. For these purposes, the registrant considers its Directors and executive officers to be its only affiliates.The number of
May 31, 2002shares outstanding of the registrant’s Common Stock was$81,000,000 based6,215,342 onthe closing price as reported by the NASDAQ National Market. As ofJuly 31,2002, registrant had 6,139,177 outstanding shares.2003.DOCUMENTS INCORPORATED BY REFERENCE
THE REGISTRANT'S DEFINITIVE PROXYThe Registrant’s definitive proxy statement to be prepared pursuant to regulation 14a and filed in connection with solicitation of proxies for its October 2, 2003 annual meeting of shareholders is incorporated by reference into part III of this Form 10-K.
PART I
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PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
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PART III
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
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LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
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Subsidiaries
Consent of independent auditors—Ernst & Young LLP
Consent of independent auditors—Deloitte & Touche LLP
Section 302 Certification of Chief Executive Officer
Section 302 Certification of Chief Financial Officer
CAUTIONARY STATEMENT
TO BE PREPARED PURSUANT TO REGULATION 14A AND FILED IN CONNECTION WITH SOLICITATION OF PROXIES FOR ITS OCTOBER 9, 2002 ANNUAL MEETING OF SHAREHOLDERS IS INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K. -1-REGARDING FORWARD-LOOKING INFORMATION Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are made throughout this Annual Report on Form 10-K, including statements relating to management’s expectations regarding new product introductions; the adequacy of the Company’s sources for certain components, raw materials and finished products; and the Company’s ability to utilize certain inventory. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause Neogen Corporation’s results to differ materially from those indicated by such forward-looking statements, including those detailed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” and “- Future Operating Results.”
In addition, any forward-looking statements represent management’s views only as of the day this Annual Report on Form 10-K was first filed with the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While management may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change.
PART I
Neogen Corporation and subsidiary (Neogen or the Company) develops, manufactures, and markets a diverse line of products dedicated to food and animal safety. The
Company'sCompany’s food safety segment consists primarily of diagnostic test kits andrelatedcomplementary productsincluding(e.g., dehydrated culturemedia,media) marketed to food producers and processors toaiddetect dangerous and/or unintended substances inthe detection offood and animal feed, such as foodbornebacteria,pathogens, natural toxins, food allergens, genetic modifications, ruminant by-products, drug residues, pesticide residuesplant disease infectionsandlevels ofgeneralsanitation.sanitation concerns. The diagnostic test kits are generally less expensive, easier to use and provide greater accuracy and speed thanmany of theconventional diagnosticmethods currently in use.methods. The majority of the tests are disposable, single-use, immunoassay products that rely onNeogen'sthe Company’s proprietary antibodies to produce rapid and accurate test results. TheCompany'sCompany’s expanding line of food safety products also includes gene-probes and bioluminescence-based diagnostic technologies.Neogen’s animal safety segment is primarily engaged in the
productiondevelopment, manufacture and marketing of pharmaceuticals, vaccines, veterinary instruments, topicals and diagnostic productsdedicated tofor the worldwide animalhealth. Thesesafety market. The majority of these consumable productsinclude more than 250 different veterinary instruments; including needlesare marketed through a network of national andsyringes used to administer precise amountsinternational distributors, as well as a number ofantibioticslarge farm supply retail chains in the United States andvaccines helping to reduce drug residuesCanada. The Company’s USDA-licensed facility inmeatTampa, Fla., produces immunostimulant products for horses andmilk supplies. This segment also includes adogs, and its unique equine botulism vaccine. The Company’s line ofconsumabledrug detection productsmarketed primarily to veterinariansare sold worldwide for the detection of abused anddistributors serving thetherapeutic drugs in animals and animalhealth industry. These products include grooming aids, a USDA-approved vaccine to prevent botulism in horses, a biologic used in the treatment of equine respiratory infections and a line of premium health careproducts.Management'sManagement’s vision is for
the CompanyNeogen to become a world leader in development and marketing of products dedicated to food and animal safety. To meet this vision, a growth strategy consisting of the following elements has been developed: (i) increasing sales of existing products; (ii) introducing new products and product lines; (iii) expanding international sales; and (iv) acquiring businesses and forming strategic alliances.The CompanyWhile the elements of the strategy are stated in order of importance over the long term, management understands and believes that strategic acquisitions will provide the best opportunity for more rapid growth in the short term. For that reason, an active acquisition program is maintained and financial and other resources are retained to capitalize on opportunities as they arise.Neogen Corporation was formed as a Michigan corporation in June 1981 and actual operations began in 1982. The
Company'sCompany’s principal executive offices are located at 620 Lesher Place, Lansing, Michigan 48912-1595 and its telephone number is (517) 372-9200.Recent Developments Government Regulations Federal regulations concerning food safetyNeogen’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
food adulteration have had a favorable impact on salesamendments to those reports are available free ofseveral ofcharge via our Internet website (www.neogen.com) as soon as reasonably practicable after such information is filed with, or furnished to, theCompany's food safety products. Regulations issued by the U.S. Department of AgricultureUnited States Securities andthe U.S.Exchange Commission.Trademarks and registered trademarks Neogen markets its products under include:Corporate: Neogen®, Neogen flask®;Food Safety: Acumedia®and
Drug Administration governing federally inspected meat, poultrylogo®, Agri-Scan®, Agri-Screen®, Agri-Screen Ticket®, Alert®, EnviroCaster®, Gene-Trak®, ISO-GRID™, Reveal®, Revive®, Veratox®;Animal Safety: AluShield™, AmVet®, BottomHoof™, BotVax®, Calf Eze™, D3 Needles™, Dr. Frank’s®, ElectroJac®, ELISA Technologies®, EqStim®, EquiMax™, Gnat-Away™, GNatural™, Gold Nugget® andseafood processing plants require implementation of a Hazard Analysis and Critical Control Points (HACCP) program. HACCP is a prevention-oriented system that requires plants to identify critical control points along their production lines and ensure that practices at those points minimize or prevent the likelihood of bacterial contamination or growth. As HACCP plans continue to be implemented and refined, Management expects facility environmental testing, product contact surface testing and end-product testing to increase, resultinglogo®, Gold Wrap™, Ideal®, ImmunoRegulin®, ImmunoVet®, Injecto-Stik™, Insight®, Iso-Prine™, K-Blue®, K-Gold®, MegaShot™, Mini-Shot®, MycAseptic®, NeedleGard®, Paddock & Pasture®, PanaKare™, Poridon®, Pro-Pistol™, Pyril-Pam®, RenaKare™, Shine N’ Glo™, Spec-Tuss™, Squire®, Stam-N-Aid™, Stress-Dex®, TCA Paint™, ThrushCrusher™, TopHoof™, Tri-Hist®, Tri-Seal™, Triple Block™, Triple Cast™, Triple Crown™, Triple Heat™, Tri-Soxsuprine™, UriKare™, Vita-15™.PRODUCTS
Neogen operates in
higher sales for several of the Company's diagnostic test kits. Acquisitions and Divestitures A part of Management's growth strategytwo primary business areas: products for theCompany has beendetection of pathogens, natural toxins and other unwanted substances in food products, the Food Safety segment, and products dedicated toacquire products and businesses that provide access to technology or products that expand its core business. Since 1982,animal health, theCompany has made several such acquisitions. The information below summarizes recent transactions. (SeeAnimal Safety segment. See Note410 to Consolidated FinancialStatements.) On August 1, 2001,Statements for financial information about theCompany acquired the assets of Gene-Trak Systems, a company involved in the manufactureCompany’s business segments andsales of foodborne pathogen detection products based on DNA technology. Sales of Gene-Trak products were $1,500,000 in the ten months following the acquisition. In July 2001, the Company acquired 100% of the common stock of QA Life Sciences, Inc. of San Diego, California. QA manufactured and marketed diagnostic devices to the food and beverage industry. QA sales were $600,000 in the eleven months following the acquisition. -2-In September 2000, the Company purchased certain assets of Squire Laboratories, Inc. in Revere, Massachusetts. Squire manufactured and marketed a number of products sold in the equine market.international operations.FOOD SAFETY SEGMENT
The products
have been merged into the Company's Animal Safety Division. SalesofSquireNeogen’s food safety segment consist primarily of diagnostic test kits and complementary productsin the nine months following the acquisition totaled $600,000. On June 2, 2000, the Company purchased substantially all of the assets of AmVet Pharmaceuticals of Yaphank, New York. AmVet owned formulas for 25 different veterinary products under approximately 40 labels, the majority of which were sold under the AmVet name. The products acquired were merged into the Company's Animal Safety Division. Sales of AmVet products in fiscal year 2001 totaled $4,600,000. On February 17, 2000, the Company purchased 100% of the outstanding stock of Acumedia Manufacturers, Inc.(e.g.,with principal offices in Baltimore, Maryland. Acumedia, an internationally recognized producer of culture media, was a wholly owned subsidiary of IDEXX Laboratories, Inc. This acquisition gave the Company an entree to the $300 million world market fordehydrated culturemedia. It also provided products that can be suppliedmedia) marketed tomany of the Company's current Food Safety customers. Sales of Acumedia totaled $3,500,000food producers and processors to detect dangerous and/or unintended substances infiscal year 2001, and $900,000 in fiscal year 2000. Share Repurchase Program (See Note 12 to Consolidated Financial Statements) In 2002, the Board of Directors increased its authorization to repurchase Neogen common stock to 1,000,000 shares. As of July 31, 2002, the Company had repurchased approximately 655,000 shares in open market and negotiated transactions. However, there is no guarantee as to whether any additional shares may be purchased under this program. Business Strategy Management's vision is for the Company to become a worldwide leader in offering products dedicated tofood and animalsafety. The strategy to achieve this objective includes the following: . Increased Sales of Existing Products. Expansion of product offerings in multiple market segments including:feed,and agriculture producers; veterinarians; grain, nut and spice processors; meat, poultry and egg processors; seafood processors; animal producers; fruit and vegetable producers/processors; food service providers; pharmacological research; and private and public laboratories. . Introduction of New Products. Continued commitment to research and development programs. The Company has invested 5.3% to 6.8% of revenues in this area over the past three years. Management plans to continue to leverage the Company's own internal research and development efforts through strategic relationships with other organizations and important government contracts and grants. The majority of the Company's new product development is focused on expanding disposable product offerings to the Company's current markets. . Expansion of International Sales. Management believes that the demand outside the United States for food and animal safety products is at least equal to demand in this country. The Company will continue to emphasize international sales as an important factor in its growth. Distribution channels are being developed to take advantage of markets where there is a growing need for productssuch asthose manufactured by the Company. . Acquisitions and Strategic Alliances. In the past, the Company has expanded its product offerings and technology base through several acquisitions. It also seeks to expand its products through licensing and distribution agreements. Management plans to continue to aggressively pursue strategic acquisitions, and licensing and distribution agreements to enhance its position in its existing markets, and believes it is more cost effective to use these strategies rather than to rely solely on internal development of new products. -3-Industry Overview Due to growing concern related to food and animal safety, animal producers, food producers, processors, pharmaceutical and chemical companies, research institutions, and regulatory agencies are all experiencing increased pressures to find more efficient testing and monitoring programs. Management's strategy is based on its belief that there will be a continued increase in demand for effective tools to better manage the use of biological products and to detect harmful residues and microorganisms when present in food, animal feeds, and the environment, and believes that demand for products to ensure safety in food will continue to grow. Industry consulting groups have estimated the total market for testing of food and environmental safety will be in the range of $600 million within the next several years. They estimate that a significant portion of this potential market is represented by firms not testing and tests that are not currently being conducted. Another significant portion of the market is represented by older, traditional methods utilizing laborious microbiological techniques, or time consuming and expensive, chemical analysis. Management believes that a significant portion of this market potential will shift to rapid, easy to use and inexpensive test systems, such as those produced by the Company. The total market for animal safety products is much larger than that of food safety, however, the portion of that market for which the Company has product offerings is estimated to be $300 million. Company Markets Management has focused its strategy on the food safety and animal safety markets. The Company is marketing and developing several types of diagnostic tests to aid each of the individual food market areas in detectingfoodborne pathogens, natural toxins, food allergens, genetic modifications, ruminant by-products, drug residues,foodborne bacteria,pesticide residuesdisease infectionsandlevels ofgeneralsanitation. The Company also markets a complete line of veterinary instruments and a line of premium equine health care products devoted to animal safety. The Company's products are sold into definable market segments: Milling and Grain Industries Corn, wheat, barley, oats, milo, rice, oil seeds and various other minor grain products become the principal ingredient for a multitude of food products. A large variety of nuts, along with spices, chocolate, coffee and tea, are also universally consumed. The safety of these ingredients is a significant source of concern for snack food producers, pasta manufacturers, flour millers, animal feed processors, bakeries, baby food producers, brewers, distillers and cereal manufacturers, just to name a few of those whose livelihood depends upon the abundance of safe ingredients. The Company's diagnostic tests are used throughout these industries to monitor for the presence of harmful natural toxins, food allergens, pesticides and foodborne bacteria. The Company generally defines this market as products as they leave the farm gate until they reach the consumer's plate. Management believes it is the leader in the sale of disposable diagnostic tests to the milling and grain industries and has a larger selection of products available to these industries than any of its competitors. Meat, Poultry and Egg Processors According to the U.S. Department of Agriculture, there are between 100 and 125 million cattle, hogs and lambs slaughtered in the U.S. each year and over 800 million chickens processed in the United States each year. The principal concern for meat, poultry and egg safety is contamination by foodborne bacteria. Management believes that the meat and poultry group offers onesanitation concerns.Most of the
best opportunities currently to contribute to the Company's growth. The Company offers tests for E. coli O157:H7, Salmonella, Campylobacter, and Listeria bacteria, and several tests to determine the general level of plant sanitation. Seafood Processors Seafood is known to cause foodborne illnesses as a result of both natural toxins and bacteria. The United States Food and Drug Administration has established mandatory inspection programs for the seafood industry in the U.S. The Company's tests for this market include a general sanitation rapid test, as well as tests used to detect the presence of Salmonella, Listeria, sulfites and histamine, which can result in serious illness or death. A significant portion of the world's seafood supply now comes from aquaculture production rather than -4-wild harvest. These producers and processors must also be concerned about the possibilities of pesticide contamination from runoff water into their production areas and residues of drugs that may have been used to ensure fish health during the production process. Animal Producers The animal production industry promotes food safety even while the animal is inside the farm gate. The Company manufactures and markets 250 different products that are used to administer animal health. The Company also markets a vaccine, immunostimulant, specialized testing service, and a line of premium health care products that are sold to the professional animal health market. The Company's line of diagnostic tests to detect drugs of abuse in racing animals is sold virtually throughout the world. Most animal racing jurisdictions perform post-race tests on horses and greyhounds to make certain the animals' performance was not altered by some drug. Fruit and Vegetable Producers/Processors As with animals, significant portions of food safety begin inside the farm gate where plant production takes place. The Company manufactures and markets a group of diagnostic tests that are used by fruit and vegetable producers, as well as greenhouse and ornamental plant producers, to detect the presence of certain infectious diseases. These diseases affect crop production and can play a major role in the quality and safety of the final food products. This industry's testing arises from the potential presence of harmful residues that might affect the safety of its products. The residues that require rapid and inexpensive test kits include foodborne bacteria, natural toxins, and pesticides. Several of the Company's products meet these industry needs and others are being developed. Pharmacological Research The Company sells a limited number of products used by the pharmaceutical research industry. Since these products can be manufactured in the same facilities as used to produce the Company's test kits, utilizing the same equipment and personnel, the Company has continued to support this market activity. As a part of its immunoassay diagnostics test development programs, the Company has discovered methods to manufacture unique, stable enzymes used in test color development. The Company now markets these products to research laboratories and other commercial diagnostic kit manufacturers around the world. Private and Public Laboratories Private laboratories purchase diagnostic tests from the Company to provide testing services to most of the market areas indicated in this section. These private laboratories perform tests for firms which do not wish to do their own testing internally. Public laboratories generally use the Company's test for regulatory purposes. As an example, the U.S. Department of Agriculture uses several of the Company's natural toxin test kits to determine the quality and safety of grain products. The Company's test kit for the detection of E. coli O157:H7 is used by the Food Safety Inspection Service to monitor for the presence of these harmful bacteria in a number of laboratory locations. The Company's bacteria tests are used by government animal pathology labs to aid in determining causes of animal health problems. Products Food Safety The Company has developed and markets a number of food safety diagnostic test kits generally characterized as immunoassay products that rely on the Company's proprietary antibodies. Generally, the test kits are faster, less expensive, require less laboratory equipment and less technical capabilities than conventional testing methods. -5-The Company'sNeogen’s food safety test kitsaimed atuse immunoassay technology to rapidly detect target substances. The Company’s ability to produce superior antibodies, thedetection of harmful foodborne bacteria are marketed under the Company's trade names Reveal(R), Gene-Trak(R), ISO-Grid(TM),most sensitive andAlert(R). Current tests in these simple formats are used to detect the presence of Salmonella, Salmonella enteritidis, Listeria, and E. coli O157:H7, and Campylobacter. Company scientists are developingspecific available, sets its products apart from immunoassay test kits produced and sold by other companies. The Company’s test kits are available in microwell formats, which allow forother harmful bacteria. Through a marketing arrangement with Biotrace International PLC,theCompany distributes the Uni-Lite(R) XCEL, an instrument used to monitor general sanitation levels. The Company also has marketing rights from Orion Diagnostica to distribute three different tests for microbiological contamination, including yeast and fungi. The Company's Veratox(R) and Agri-Screen(R) diagnostic tests are used by the food industry to detect levels of naturally-occurring toxins. These products include both qualitative and quantitative tests for aflatoxin, DON, T-2 toxin, zearalenone, ochratoxin, histamine and fumonisin. The Company's Agri-Screen Ticket(R) test is used to detect harmful residuesrapid processing of a large number ofplant pesticides.samples and automated procedures, and lateral flow devices that provide distinct visual results. Each test kit uses antibody-coated test devices and chemical reagents to produce a color change to indicate a positive or negative result for the presence of a target substance in a test sample. Theseafood industry usessimplicity of theCompany's Alert for Sulfitestests, similar in technology to home pregnancy tests, makecertain sulfite levels do not exceed federal regulatory levels. The Company also markets qualitative and quantitative teststhem accessible todetect minuteall levels of foodallergens underproducers, processors and handlers with minimal equipment and training.Neogen’s test kits are used to detect potential hazards in food and animal feed by testers ranging from small hometown grain elevators to the
trade names Veratoxlargest, best-known food andAlert. Currently, testsfeed processors in the world, and numerous regulatory agencies. Every year since 1994, the USDA’s Federal Grain Inspection Service has awarded the Company a contract for the exclusive use of its quantitative test for aflatoxin (a toxic mold by-product) in grain commodities. Similarly, the USDA’s Food Safety Inspection Service has renewed its contract every year since 1994 to use the Company’s rapid test forE. coli O157:H7 to assist in screening the nation’s beef supply for the deadly bacterium.Meat and poultry processors, seafood processors, fruit and vegetable producers and many other market segments are
available for milk, peanut and egg residues, threethe primary users of themost commonNeogen’s Reveal® and Alert® tests for foodborne bacteria, includingE. coli O157:H7,Salmonella,Listeriaand Campylobacter. Grain producers and processors of all types and sizes use the Company’s Veratox® and Agri-Screen® tests for mycotoxins, including aflatoxin, deoxynivalenol, fumonisin, ochratoxin, zearalenone and T-2 toxin, to help ensure product safety and quality. The world’s largest producers of cookies, crackers, candy, ice cream, and many other foods, use the Company’s market-best Veratox® and Alert® testing products for foodallergies. Marketed underallergens to protect their food-allergenic customers from thebrand name Agri-Screen(R), in 2002inadvertent contamination of products with food allergens, such as peanut, milk, egg and almond residues.Neogen developed the first rapid
testsimmunoassay test kits to detect ruminant by-products in animal feedingredients.ingredients and finished feed. The Agri-Screen®testsarewere designedfor use by feed mills, beef, dairyto help prevent ruminants (cattle, sheep andsheep producers, and regulatory agencies,goats) from being fed rendered materials containing ruminant by-products in an effort to prevent the spread of BSE (a.k.a."mad cow", “mad cow” disease). Marketed underfrom animal to animal. The Company’s specialty products for thetrade name Alert,seafood market include tests for histamine, a highly allergenic substance that occurs when certain species of fish begin to decay; chloramphenicol, a banned antibiotic in most of theCompany has several diagnosticworld, but still used by some shrimp farmers to improve the yield of their product; and sulfites, an effective but potentially allergenic shrimp preservative.Neogen also offers other test methods and products to complement its immunoassay tests. The Company’s line of Gene-Trak® assays utilize DNA probe hybridization technology to create exceptionally sensitive and specific tests
that are usedto detectplant diseases. These quick tests identifyfoodborne bacteria. Instead of using antibodies as in an immunoassay to “capture” a target pathogen that may be present in a sample, thepresenceGene-Trak technology uses a portion ofpythium, phytophthora, rhizoctonia, xanthamonas,the target pathogen’s unique ribosomal RNA (rRNA) sequence to bind to complementary rRNA strands of the pathogen in a sample. The result is a test with the ease andsclerotina. The kits are used as an early detection device,speed of a rapid test method, but the specificity of a time-consuming conventional laboratory method (specificity is a test’s ability to distinguish between a target pathogen, andasatool to limit fungicide applications. Following its acquisition ofclosely-related but innocuous bacterium).Neogen’s Acumedia
Manufacturers, Inc. in February 2000, the Company significantly expanded its presence in the® subsidiary offers dehydrated culture mediamarket. Standardfor varied purposes, including traditional bacterial testing, andspecial formulation drygrowing beneficial bacteria, such as cultures for sausages and beer. The Company’s customers for dehydrated culture mediaproducts are marketed to petri plate producers,also include commercial and research laboratories andother users onproducers of pharmaceuticals, cosmetics and veterinary vaccines.Neogen markets rapid sanitation test for adenosine triphosphate (ATP), a
world-wide basis using direct sales, distributorschemical found in all living cells, uses bioluminescence to quickly (in less than 10 seconds) determine if a food contact surface has been sanitized completely prior to reuse. When ATP comes into contact with the firefly reagent luciferin luciferase contained in the test device, a reaction takes place that produces light. The more light, the more present ATP and the greater the need for more thorough sanitation. The Company’s wide-ranging customer base for its ATP sanitation testing products in the United States includes foodsafety sales organization. Sales of food safety productsand beverage processors and the foodservice industry.Revenues from Neogen’s Food Safety Division accounted for
approximately 49%54.8%,48%49.2%, and49%47.9% of theCompany'sCompany’s total revenues for fiscal years ended May 31, 2003, 2002 and 2001, respectively.ANIMAL SAFETY SEGMENT
Neogen’s animal safety segment is primarily engaged in the development, manufacture and
2000 respectively. (See Note 11marketing of pharmaceuticals, vaccines, veterinary instruments, topicals and diagnostic products toConsolidated Financial Statements.) Animal Safetythe worldwide animal safety market.Neogen’s AmVet® product line provides innovative, value-added, high quality products to the veterinary market. Top AmVet products include PanaKare™, a digestive aid that serves as a replacement therapy where digestion of protein, carbohydrate and fat is inadequate due to exocrine pancreatic insufficiency; Natural Vitamin E-AD, which aids in the prevention and treatment of vitamin deficiencies in swine, cattle and sheep; and RenaKare™, a supplement for potassium deficiency in cats and dogs. The
Company markets 70 high sensitivity immunoassay tests for up to 200 drugsCompany’s Triple Crown™ line has been synonymous with quality equine veterinary care since 1971. Products sold under the Triple Crown brand include Vita-15™ and Liver 7, which are used in the treatment and prevention ofabusenutritional deficiencies inanimals and residues in meat. These include tests for narcotic analgesics, stimulants, depressants, tranquilizers, anesthetics, steroids and diuretics. Neogen also provides ahorses.Neogen’s in-house equine protozoal myeloencephalitis (EPM) testing service offers veterinarians accurate, timely results for
equine veterinarians to detect EPMearly diagnosis of the disease thataffects thecan devastate a horse’s central nervoussystemsystem. In addition, the Company’s BotVax® B vaccine has successfully protected hundreds of thousands of horses andcan be fatal. In addition, the Company markets BotVaxfoals against type B botulism, commonly known as Shaker Foal Syndrome. The Company’s product is the onlyUSDA approvedUSDA-approved vaccine for the prevention of Type B botulism inhorses,horses.Years of research and many thousands of doses have proven Neogen’s EqStim® immunostimulant to be safe and effective as a
lineveterinarian-administered adjunct to conventional treatment ofapproximately 70 premium health care products soldequine bacterial and viral respiratory infections. The Company’s ImmunoRegulin® product uses similar immunostimulant technology to aid in theanimal health market. Neogen also produces and markets EqStim(R) and ImmunoRegulin(R), biologic products used as immunostimulants to help fight infectionstreatment of pyoderma (a bacterial skin inflammation) inhorses anddogs.Through its
wholly ownedwholly-owned subsidiary Ideal Instruments, Inc.,the CompanyNeogen markets a complete line of veterinary instruments and animal health delivery systems. Ideal offers approximately 250 different products,over 100many of which areinstrumentsused to deliver animal health products, such as antibiotics and vaccines.MostIdeal’s new D3 Needles™ are three times stronger than conventional veterinary needles, and are uniquely detectable by common meat processing facility metal detectors—a big market advantage in the safety-conscious beef and swine industries.Animal safety products offered by Neogen to the retail over-the-counter market include many of the
remainingIdeal brand veterinary instrumentsare usedand products sold under the Squire® and Gold Nugget® brands. Squire products include Stress-Dex®, the No. 1 oral electrolyte for performance horses for more than 30 years, and Fura-Zone, for the prevention and treatment of surface bacterial infections inobstetricswounds, burns andsurgery. Included among thesecutaneous ulcers. Gold Nugget OTC productsisinclude GNatural™ Spray, to protect horses from biting insects, and Poridon®, a pour-on insecticide for horses.Neogen’s line of
disposable syringes80 drug detection immunoassay test kits are sold worldwide for the detection of approximately 200 abused andneedles presently custom manufactured,therapeutic drugs in racing animals, such as horses, greyhounds andimported by Ideal.camels, as well as fortesting fair animals and drug residues in meat and meat products. The
veterinary instruments producttest kits are also used for human forensic toxicology drug screening applications. This lineis designed to provide better control of animal health products, thereby reducing the likelihood of antibioticincludes tests for narcotics, analgesics, stimulants, depressants, tranquilizers, anesthetics, steroids andpharmaceutical residues contaminating meat or milk products. At the same time, the use of quality, high precision delivery instruments helps producers improve efficiency. The Companydiuretics.Neogen also has several products used by researchers for the detection of biologically-active
substances in humans by researchers and pharmaceutical companiessubstances. These products include tests forbiomedical research purposes. These tests are used to detectcyclic nucleotides, hormones, leukotrienes, prostaglandins and steroids.UnderMarketed under the trademarks of K-Blue and K-Gold,the Company sells reagents used byNeogen offers certain test kit components it uses in its own testing products to other diagnostic test kit manufacturers.InRevenues from Neogen’s Animal Safety Division accounted for 45.2%, 50.8%, and 52.1% of the Company’s total revenues for fiscal years ended May 31, 2003, 2002 and 2001 respectively.
GENERAL SALES AND MARKETING
Neogen’s domestic sales efforts are organized by market segments, rather than by products or geography. During the fiscal year that ended May 31, 2003, the Company had more than 5,000 customers for its products. Since many of these customers are distributors, and
2000, sales ofcertain animal safety products are offered to the general retail market, the total number of end users of the Company’s products is considerably larger. A total of 93 employees are assigned to sales and marketing functions within the Company. No single distributor or customer accounted for 10% or more of the Company’s revenues in any of the past three years.FOOD SAFETY SALES AND MARKETING
To reach each customer and prospect with expertise and experience, Neogen has a staff of specialized food safety sales representatives assigned to specific markets. This staff sells Company products directly to end users, and also handles many technical support issues that arise with customers.
Neogen’s food safety markets are comprised of: feed and agriculture, including grain elevators, feed mills, pet food manufacturers, grain inspection companies and the USDA’s Grain Inspection, Packers and Stockyards Administration (GIPSA); meat and poultry, including meat and poultry processors, producers of ready-to-eat meat and poultry products, and the USDA’s Food Safety Inspection Service (FSIS); milling and grocery, including flour millers, malters, bakeries, candy and confection manufacturers, manufacturers of prepared meals, nuts, spices, cookies, crackers and other snack foods; fruits and vegetables, including growers and processors of juice and packaged fresh cut grocery items; seafood, including harvesters and processors of a wide variety of seafood products; dairy and beverage, including milk processors and soft drink bottlers; and Acumedia dehydrated culture media, including commercial and research laboratories and producers of pharmaceuticals, cosmetics and veterinary vaccines.
ANIMAL SAFETY SALES AND MARKETING
Neogen markets pharmaceuticals, vaccines, supplements, topicals, veterinary instruments and diagnostic products to the professional veterinary market. Neogen’s sales force services equine veterinarians directly and supports the efforts of a network of domestic and international distributors who service the companion (horses, dogs and cats) and food animal markets. Neogen supports its distribution channels through training, field support, promotions and technical service.
To reach the vast over-the-counter marketplace with its animal health products, Neogen works with a network of professional distributors and retailers to supply animal owners with premium-quality, yet affordable products. This network includes traditional two-step distributors, retailers and catalogers. The Company’s retail presence for certain of its veterinary care products now includes approximately 430 stores in the United States-based Tractor Supply Company (TSC) farm supply retail chain, 30 Canadian TSC locations, and the 116-store Orschlen’s retail chain with locations throughout the Midwestern United States.
Neogen uses its own sales representatives to market its tests for the detection of abused and therapeutic drugs in racing and food animals to laboratories and through distributors worldwide. Similarly, the Company’s own sales
staff markets its Life Sciences testing products and diagnostic testing components to independent researchers and diagnostic test kit manufacturers.
INTERNATIONAL SALES AND MARKETING
Internationally, Neogen uses its own sales managers to work closely with and coordinate the efforts of a network of more than 100 distributors in 65 countries. The distributors provide local training and technical support, perform market research, and promote Company products around the world.
Neogen’s March 2003 acquisition of Adgen Ltd., a private company based in Ayr, Scotland, provides the Company better access to the European Union, and allows it to better serve its network of customers and distributors throughout the EU. Prior to the acquisition, Adgen had been a major distributor of Neogen products in Europe, as well as a
percentageproducer and marketer of its own agricultural diagnostic testing products. Adding Adgen’s experienced research and development team will be a strong asset to Neogen as it works toward developing the next generation of food safety diagnostic testing products, especially products tailored to meet certain unique requirements of the European market.In 2002, Neogen opened an office in Shanghai, China, to better serve the expanding food safety market, as well as more closely manage its Chinese animal safety manufacturing. The principal purpose of the Chinese personnel will be to manage the local distributors who have been appointed by the Company to introduce the Company’s products in the Chinese market.
Revenues from Neogen’s international sales have accounted for 21%, 23%, and 21% of the Company’s total revenues
were 51%, 52%for fiscal years ended May 31, 2003, 2002 and51%,2001, respectively.(See Note 11Risks associated with foreign operations include the need for additional regulatory approvals, possible disruptions of product delivery, the differing product needs of foreign customers, difficulties in building and managing foreign operations, fluctuations in the value of foreign currencies, import/export duties and quotas, and unexpected regulatory, economic or political changes in foreign markets. The level of foreign activities does not currently require hedging to
Consolidated Financial Statements.) -6-Research and Developmentreduce the effect of currency fluctuations.RESEARCH AND DEVELOPMENT
Management maintains a strong commitment to
the Company'sNeogen’s research anddevelopment.development activities. TheCompany'sCompany’s product development efforts are focused on the enhancement of existing product lines and in development of new productsbased on the Company's existing technologies.that fit its business strategy. The Company employs2028 individuals, in its research and development department, including immunologists, chemists, engineers and microbiologists. Research and development expenditures were approximately $2.9 million, $2.3 million and $1.8 million,and $1.6 million,representing5%6%, 5% and7%5%, of total revenues in fiscal 2003, 20022001and2000,2001, respectively. Management currently intends to maintainitsthe Company’s research and development expenditures at approximately 5% to 6% of total revenues.The CompanyNeogen has ongoing development projects for new immunoassay diagnostic tests for the food safety, animal safety and
pharamacologicspharmacologics markets, as well as engineering projects for new and improved veterinary instruments. Management expects that these products will be available for marketing in fiscal years20032004 to2005. Collaboration with Academic Institutions Since its inception, the Company has occasionally collaborated with universities and researchers in the development of products, and the field testing of products prior to their market releases. Management believes that this research strategy can efficiently complement research, development and testing activities performed by Company employees at Company facilities. Other Collaboration Efforts2006.Portions of certain technologies utilized in some products marketed by
the CompanyNeogen were acquired from or developed in collaboration with affiliated partnerships, independent scientists, governmental units, universities and other third parties. The Company has entered into agreements with these partieswhichthat provide for the payment of royalties based upon sales of productswhichthat utilize the pertinent technology. For fiscal 2003, 20022001and2000,2001, royalty expense under these agreements amounted to $1,523,822, $1,215,000 and $987,000,and $752,000,respectively.Sales and Marketing The Company's sales efforts are organized according to market segments rather than by product or geographic orientation. The Company's sales and technical service organizations understand their customers' businesses and are knowledgeable on how the Company's various products can be used within those industries. Close relationships built with individual customers also help in the identification of new products. During the fiscal year ended May 31, 2002, the Company had more than 5,000 customers for its products. Since many of these customers are distributors, the total number of end users of the Company's products is considerably larger. Sales to international markets in fiscal 2002 accounted for 21% of the Company's consolidated revenues. (See Note 11 to Consolidated Financial Statements.) No single distributor or customer accounted for more than 10% of the Company's revenues in any of the past three years. The Company markets, sells and services its products in more than 100 countries through its own sales force, as well as through distributors in certain geographic areas. Approximately 85 employees, or 32% of the Company's total workforce, are engaged in these sales and marketing activities. The Company operates its sales and distribution organization differently for given markets and products as summarized below: Food Safety Products. The Company has separately organized sales forces that focus on the key industries in the food area. This group handles both sales and technical services of the Company's disposable test kits. In the U.S. these products are sold directly to end-users. Sales organizations are maintained for: milling and grocery; feed and agriculture; meat and poultry; fruits and vegetables; food service; laboratories; seafood; dairy and beverage; and dehydrated culture media. -7-Animal Safety Products. The Company maintains separately organized sales forces that focus on the professional animal health and veterinary instruments. Products for the professional animal health market are handled by a sales force who sell directly to veterinarians and also work through established distributors selling to this market. The Company also has a sales force specifically dedicated to marketing its veterinary instruments through a network of domestic and international distributors. International Sales. The Company's sales to customers outside of the United States and Canada are generally handled by distributors, who typically market the Company's products, as well as other products that are used by the same customer base. Management believes that the company is well represented in most markets worldwide. A sales and distribution office is maintained in Shanghai, China, to serve both food safety and animal safety customers. It is believed that the Chinese market is poised to grow at a greater rate than other world markets. Proprietary Protection and ApprovalsPROPRIETARY PROTECTION AND APPROVALS
Patents and trademarks are applied for whenever appropriate. Since its inception,
the CompanyNeogen has acquired and received more than 50 patents and trademarks, and has several pending patents and trademarks. The patents expire at various times over the next 20 years.Management believes that
the CompanyNeogen has adequate protection as to proprietary rights for its products. However, it is aware that substantial research has taken place at universities, governmental agencies and other companies throughout the world and that numerous patent applications have been filed and that numerous patents have been issued. To the extent some of the Company’s products may now, or in the future, embody technologies protected by patents, copyrights or trade secrets of others, licenses to use such technologies may need to be obtained in order to continue to sell the products. These licenses may not be available on commercially reasonable terms. Failure to obtain any such licenses may delay or prevent the sale of certain new or existing products. In addition, patent litigation is not uncommon. Accordingly, there can be no assurance that theCompany'sCompany’s existing patents will be sufficient to completely protectcompletely the Company'sits proprietary rights.The CompanyNeogen uses trade secrets as proprietary protection in numerous of its food and animal safety products. In many cases, the Company has developed unique antibodies capable of detecting microorganisms and residues at minute levels. The supply of these antibodies, and the proprietary techniques utilized for their development, may offer better protection than the filing of patents. Such proprietary reagents are
keptmaintained in secure facilities and stored in more than one location tocircumvent theirreduce exposure to complete destruction by natural disaster or other means.One of the major areas affecting the success of biotechnology development involves the time, costs and uncertainty surrounding regulatory approvals. Currently,
the Company has severalNeogen products requiring regulatory approvalincludinginclude BotVax B, EqStim andImmuno Regulin. On a combined base, sales for these products amounted to approximately 5% of total sales in fiscal year 2002.ImmunoRegulin. TheCompany'sCompany’s general strategy is to select technical and proprietary products that do not require mandatory approval to be marketed.The Company does utilizeIn China nine of the Company’s immunoassay based test kits are listed in the GB, or National Standard. Listings of these products are expected to give enhanced sales potential into Government and other laboratories in China.Neogen utilizes third party validations on many of its disposable test kits as a marketing tool to provide its customers with the proper assurances. These include validation by the Association of Official Analytical Chemists, independently administered third-party, multi-laboratory collaborative studies and approvals by the U.S. Federal Grain Inspection Service and the U.S. Food Safety Inspection Service for the use of Company products in their
laboratories. Manufacturing The Companyoperations.PRODUCTION AND SUPPLY
Neogen manufactures its products in Lansing, Michigan; Lexington, Kentucky; Schiller Park, Illinois; Baltimore, Maryland; Tampa, Florida; and
Tampa, Florida.Ayr, Scotland. There are currently approximately105106 full-time employees assigned to manufacturing in thesefivesix locations. All locations generally operate on a one-shift basis, but could be increased to a two-shift basis. Management believes it could increase the current output of its primary product lines by more than 50% using the current space available withminimal amountsa minimum of additional capital equipment.Manufacturing diagnostic tests for natural toxins,
microorganisms,pathogens, foodallergens,allergen and pesticidesand plant disease diagnostic teststakes place in Lansing, Michigan. Proprietary monoclonal and polyclonal antibodies for theCompany'sNeogen’s diagnostic kits are produced on a regular schedule in theCompany'sCompany’s immunologylaboratories in Lansing.laboratories. Other reagents are similarly prepared by the chemistry group.These component parts are then transferred to another building, where finalFinal kit assembly,andquality assuranceare conducted,and shippingtakes place.are completed in a nearby dedicated manufacturing facility.Manufacture of pharmacological diagnostic test kits, test kits for drug residues and of animal health products takes place in Lexington, Kentucky. In general, manufacturing operations including blending preparation of other reagents, quality assurance, final kit assembly and packaging are performed by Neogen personnel. Certain animal health products are toll manufactured by third party vendors.
-8-The Company'sNeogen’s Schiller Park, Illinois, facility distributes veterinary instruments that are purchased as finished parts and require no additional procedures prior to sale and other instruments assembled in the facility from parts produced by local or international suppliers.
Some instruments are purchased as finished parts and require no additional procedures prior to sale.The Baltimore, Maryland, facility is a FDA-approved manufacturing plant devoted to the production of dehydrated culture media products. Products are blended following strict formulations or custom blended to customer specification and shipped
directdirectly to customers from the Baltimore facility.The Tampa, Florida, facility is an USDA-approved manufacturing plant devoted to the production of the biologic products
EqStim(R)EqStim® andImmunoRegulin(R)ImmunoRegulin®.P.acnes seed cultures are added to media and then subjected to several stages of further processing resulting in a product that is filled and packaged within the Tampa facility.Final product is then shipped to Neogen's Lexington facilities for inventory and distribution to customers.TheCompany'sCompany’s BoxVax B vaccine is also produced in the Tampa facility, utilizing Type B botulism seed cultures and a traditional fermentation process.The CompanyAll completed product is then shipped to Neogen’s Lexington facilities for inventory and distribution to customers.Neogen purchases component parts and raw materials from
overmore than 200 suppliers. Though many of these supplies are purchased from a single source in order to achieve the greatest volume discounts, the Company believes it has identified acceptable alternative suppliers for all of its components and raw materials.Shipments of products are generally accomplished within a 48-hour turnaround time. As a result of this quick response time,
the Company'sNeogen’s backlog of unshipped orders at any given time is not significant.Competition ManagementCOMPETITION
Although competitors vary in individual markets, management knows of no competitor that is pursuing
itsthe Neogen’s fundamental strategy of developing a full line of products, ranging from disposable tests and dehydrated culture media to veterinary pharmaceuticals and veterinary instruments for a large number of food safety and animal safety concerns.However, the Company does have competitors forFor each of itsprimary product lines. Theindividual products, the Companycompetes with a large number offaces intense competition from companies ranging fromverysmall businesses to divisions of large international companies.ManySome of thesefirmsorganizations have substantially greater financial resources than the Company.Academic institutions and other public and private research organizations are also conducting research activities and may commercialize products on their own or through joint ventures. The existence of competing products or procedures that may be developed in future years may adversely affect the marketability of the products developed by the Company. Management believes that it maintains inventory levels and sells its products under terms and conditions that are normal for companies against which the Company competes.The Company competes primarily on the basis of ease of use, speed, accuracy, and other similar performance characteristics of its products. The breadth of theCompany'sCompany’s product line, the effectiveness of its sales and customer service organizations and pricing are also components initsmanagement’s competitive plan. Management is not aware of any factors within its product lines that place the Company in a negative competitive position relative to its competitors.Governmental RegulationFuture competition may become even more intense, including the development of changing technologies, which could affect the marketability of the Neogen’s products. The Company’s competitive position also will depend on management’s ability to develop proprietary products, attract and retain qualified scientific and other personnel, develop and implement production and marketing plans and obtain patent protection and adequate capital resources.
FOOD SAFETY
Neogen’s Food Safety Division has strong distribution of its products using Company employees domestically and from an active and aggressive distributor group outside of North America. With one of the largest professional sales organizations in the industry, management believes that it maintains a general competitive advantage as sales personnel are in a position to be with customers and prospects more frequently than those of its competitors. Additionally, as an agriculturally based company, Neogen has what is believed to be a unique insight into the food industry as opposed to its clinically based competition.
Competition for pathogen detection products includes traditional methods and antibody and genetic based platforms. Neogen’s product offerings compete across the entire spectrum of methods. Competition for natural toxins and allergen detection products include instrumentation and antibody based tests. Generally, the Company’s products fall within the non-instrument category. While for these and other food safety products the Company’s offerings will not always compete on all platforms in all markets, the products that are offered provide tests that can be well utilized by most customers to meet their testing needs.
Besides its strong product offerings and its superior distribution, the Company focuses its competitive advantage in the areas of customer service and speed and ease of use of its products. Additionally, by aggressively maintaining itself as a low cost producer, Neogen assures that it can be competitive with new market entrants that may choose a low pricing strategy in an attempt to gain market share.
ANIMAL SAFETY
Neogen’s Animal Safety Division faces no one competitor across the products and markets it serves. In the racing industry market, the Company holds the position of dominant market share, facing only one other significant company in the marketplace. In the Life Sciences market, the Company competes against a few other diagnostic and reagent companies but none with the same breadth of product offering.
In the veterinary market, Neogen markets BotVax B, the only USDA approved vaccine for the prevention of botulism Type B in horses. The Company competes on other key products through differentiated product performance and superior customer and technical support. With some of its products, the Company provides a generic drug solution as a lower cost alternative and offers a private label option for its distributors.
Neogen competes in the retail market by providing solutions to common retail problems – stock outs, wasted floor space, and inconsistent brand identity. The Company offers plan-o-grams and reordering systems to maximize turns and profitability for its customers.
GOVERNMENT REGULATION
A significant portion of the
Company'sNeogen’s products and revenues are affected by the regulations of various domestic and foreign government agencies, including the U.S. Department of Agriculture and the U.S. Food and Drug Administration. Changes in these regulations could affectrevenues. The Company'srevenues and/or costs or production and distribution.Neogen’s development and manufacturing processes involve the use of certain hazardous material, chemicals and compounds. Management believes that the
Company'sCompany’s safety features for handling and disposing of such commodities comply with the standards prescribed by local, state and federal regulations. TheCompany'sCompany’s cost to comply with these regulations is not significant and the Company has no reason to believe that any such future legislation or rules would be materially adverse to its business.EmployeesEMPLOYEES
Currently, the Company employs approximately
265280 full-time persons. None of the employees are covered by collective bargaining agreements. There have been no work stoppages or slow downs due to labor-related problems. Management believes that its relationship with its employees is good. All employees having access to proprietary information have executed confidentially agreements with the Company.-9-Insurance The Company maintains insurance in amounts and types that Management believes to be reasonable in its industry.ITEM 2. PROPERTIES
The CompanyNeogen owns six separate buildings located in Lansing, Michigan. A 26,000 square foot
brickbuilding located at 620 Lesher Placeis used for the Company'sincludes senior corporate administrative offices,along withfood safety sales and marketing offices and researchfacilities for food safety.facilities. A14,00012,000 square footbrickbuilding located at 600 Lesher Place iscurrentlyusedprimarilyforproduction of food safety diagnostic test kits.corporate accounting, human resources, and communications functions. Two adjacent buildings, located nearby at 703 and 720 Shiawassee, total30,00025,000 square feet and are to be used formanufacturingmanufacture of food safety products.The Company also owns two facilities comprisingRemaining buildings in Lansing, with a total of 2,500 square feet,within one block of the existing corporate headquarters usedare held out forvarious administrative functions including temporary office space and records storage. Veterinary instrument manufacturing operations are housed in a 34,000 square foot building located at 9355 West Byron Street in Schiller Park, Illinois. The Company entered into a three-year, non-cancelable operating lease for this property effective January 1, 2001. The lease agreement provides for annual lease payments of $144,600 for the 2002 calendar year with an annual increase of approximately 4% for the 2003 calendar year. Upon expiration of the lease of this facility, Management believes it can renegotiate a lease on the current facility or relocate to a comparable facility with lease terms similar to those currently enjoyed. No significant disruption of operations would be expected in the event of a move to an alternative facility.rental pending future expansion.Animal safety sales and marketing and research are located in 23,000 square feet of leased space in a three-story building at 628 Winchester in Lexington, Kentucky. The
currentlease agreement on this property, whichcallsexpires December 31, 2003, provides forannualmonthly lease payments of$114,000, expires December 31, 2003.$9,500. Upon expiration of the lease,of thismanagement believes that a move to a larger facilityManagement believes it can renegotiate a lease onin the general vicinity of the current facilityor relocatewill be necessary. It is expected that the square foot cost for a different facility will be higher. At the current time no estimate of additional costs that may be incurred related toa comparablethese facilitywith lease terms similar to those currently enjoyed.changes is available. No significant disruption of operationswould beis expected inthe event ofa moveto an alternativefrom the current facility.Animal Safety manufacturing takes place in 16,000 square feet of leased space at 2040 Creative Drive in Lexington, Kentucky. The lease covering the space is a non-cancelable operating lease through December 31, 2007 currently requiring
annualmonthly payments of$65,600 through 2006 and $68,000 in 2007.$6,059.Dehydrated culture media manufacturing takes place in a FDA licensed facility. The operations are located in
12,60014,400 square feet of leased space at 9601 Pulaski Park Drive, Baltimore, Maryland. Thefive-yearlease,effective July 1, 1998, was assumed as partwhich expires January 15, 2004, provides for monthly payments of $6,784. Upon expiration of theacquisitionlease on this facility, management believes it can renegotiate a lease on the current facility or relocate to a comparable facility with materially similar lease terms. No significant disruption ofAcumedia byoperations would be expected in theCompany.event of a move to an alternate facility.Veterinary instrument manufacturing operations are housed in a 34,000 square foot building located at 9355 West Byron Street in Schiller Park, Illinois. The lease agreement, which expires December 31, 2003, provides for
annualmonthly lease paymentsbeginning at $75,600 and increasingof $12,550. Upon expiration of the lease on this facility, management believes it can renegotiate a lease on the current facility or relocate to$81,412a comparable facility with materially similar lease terms. No significant disruption of operations would be expected in thelast yearevent ofthe lease.a move to an alternate facility.The Company leases 5,200 square feet at 5910 Breckenridge Center Parkway in Tampa, Florida where the manufacturing of three animal safety products takes place. This USDA-approved facility is subject to a
non- cancelablenon-cancelable lease through September 2004.Rent forThe current rental rate is $5,237 monthly.Adgen Ltd. operations take place in 12,948 square feet in the
12 month period ended September 2002Cunningham Building at Auchincruive Ayrshire Scotland (on the campus of The Scottish Agricultural College at Ayr). The lease agreement on this property expires May 31, 2018, however, Adgen may terminate the lease after 5 years or 10 years from inception with a payment of 6 months or 3 months rent, respectively. The current rental rate is$51,400.£34,650 annually increasing to £63,000 in year five (all plus value added tax).These properties are in good condition, well maintained, and generally suitable and adequate to carry on the Company’s business.
Neogen is subject to certain legal proceedings in the normal course of business
the Company is involved in certain legal proceedings, none of which,that, in the opinion ofthemanagement,iswill not have a materialto theeffect on its future results of operations or financialstatements.position.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None -10-No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
TheNeogen Common Stock is traded on the NASDAQ National Market under the symbol
"NEOG"“NEOG”. The following table sets for, the fiscal periods indicated, the high and low sales prices for the Common Stock as reported on the NASDAQ National Market.
High Low ---- ---Fiscal Year Ended May 31, 2002 First Quarter ........................................ $ 18.65 $ 11.76 Second Quarter ........................................ 25.21 10.05 Third Quarter ........................................ 21.50 12.85 Fourth Quarter ........................................ 17.63 13.78 Fiscal Year Ended May 31, 2001 First Quarter ........................................ $ 7.13 $ 5.50 Second Quarter ........................................ 10.38 6.13 Third Quarter ........................................ 13.44 7.13 Fourth Quarter ........................................ 15.00 8.75
High Low Fiscal Year Ended May 31, 2003
First Quarter
$ 15.38 $ 10.99 Second Quarter
14.50 11.15 Third Quarter
15.52 12.25 Fourth Quarter
16.92 11.50 Fiscal Year Ended May 31, 2002
First Quarter
$ 18.65 $ 11.76 Second Quarter
25.21 10.05 Third Quarter
21.50 12.85 Fourth Quarter
17.63 13.78 As of July 31,
2002,2003, there were approximately 500 stockholders of record of Common Stockwhich the Companythat management believes represents a total of approximately 6,000 beneficial holders.The CompanyNeogen has never paid any cash dividends on its Common Stock and does not anticipate paying any cash dividends in the foreseeable future.-11-ITEM 6. SELECTED FINANCIAL DATA
Years Ended May 31(1) --------------------- 1998 1999 2000 2001 2002 ---- ---- ---- ---- ----Income Statement Data: (In thousands, except per share data) Food Safety Sales $ 8,419 $ 10,069 $ 11,634 $ 16,717 $ 20,213 Animal Safety Sales 10,069 12,110 11,878 18,178 20,884 -------- -------- --------- -------- --------- Total Sales 18,488 22,179 23,512 34,895 41,097 Cost of Sales 7,960 9,477 10,860 17,157 20,196 Sales and Marketing 4,910 5,311 6,102 7,596 8,971 General and Administrative 2,716 3,207 2,587 4,039 4,178 Research and Development 1,424 1,640 1,600 1,838 2,252 -------- -------- --------- -------- --------- Operating Income 1,478 2,544 2,363 4,265 5,500 Other Income Litigation Settlement --- --- 1,100 --- --- Interest and Other 897 104 821 605 460 -------- -------- --------- -------- --------- Income Before Tax 2,375 2,648 4,284 4,870 5,960 Provision for Income Taxes 127 393 1,210 1,700 2,015 -------- -------- --------- -------- --------- Net Income $ 2,248 $ 2,255 $ 3,074 $ 3,170 $ 3,945 ======== ======== ========= ======== ========= Net Income Per Share (basic) $ 0.36 $ 0.37 $ 0.52 $ 0.55 $ .66 Net Income Per Share (diluted) $ 0.35 $ 0.37 $ 0.52 $ 0.54 $ .62 Common Shares Outstanding (diluted) 6,397 6,141 5,922 5,916 6,378
May 31(1) --------- 1998 1999 2000 2001 2002 ---- ---- ---- ---- ----Balance Sheet Data: (In thousands) Cash and Marketable Securities $ 10,589 $ 10,667 $ 10,670 $ 7,182 $ 6,353 Working Capital 17,192 17,355 18,265 18,244 19,285 Total Assets 25,413 26,108 29,529 33,022 39,904 Long-Term Debt 174 126 77 28 --- Stockholders' Equity 23,609 23,786 25,804 29,337 35,546(1)The
periodsfollowing tables sets forth selected consolidated financial data of Neogen for each of the five years ended May 31, 2003. The selected consolidated financial data presentedare not comparable due tobelow have been derived from thechangeCompany’s consolidated financial statements. These financial data should be read in conjunction with theeffective income tax rateconsolidated financial statements, related notes and other financial information appearing elsewhere infiscal year 1998 to 2001, the litigation settlement in 2001 and several acquisitions (see notes to Consolidated Financial Statements). -12-this Form 10-K.
Years Ended May 31 1999 2000 2001 2002 2003 (In thousands, except share and per share data) Income Statement Data:
Food Safety Sales
$ 10,069 $ 11,634 $ 16,717 $ 20,213 $ 25,496 Animal Safety Sales
12,110 11,878 18,178 20,884 20,992 Total Sales
22,179 23,512 34,895 41,097 46,488 Cost of Sales
9,477 10,860 17,157 20,196 21,763 Sales and Marketing
5,311 6,102 7,596 8,971 10,880 General and Administrative
3,207 2,587 4,039 4,178 4,146 Research and Development
1,640 1,600 1,838 2,252 2,914 Operating Income
2,544 2,363 4,265 5,500 6,785 Other Income
Litigation Settlement
— 1,100 — — — Interest and Other
104 821 605 460 488 Income Before Tax
2,648 4,284 4,870 5,960 7,273 Provision for Income Taxes
393 1,210 1,700 2,015 2,486 Net Income
$ 2,255 $ 3,074 $ 3,170 $ 3,945 $ 4,787 Net Income per Share (basic)
$ 0.37 $ 0.52 $ 0.55 $ 0.66 $ 0.78 Net Income per Share (diluted)
$ 0.37 $ 0.52 $ 0.54 $ 0.62 $ 0.75 Common Shares Outstanding (diluted)
6,141 5,922 5,916 6,378 6,388 May 31 1999 2000 2001 2002 2003 (In thousands) Balance Sheet Data:
Cash and Marketable Securities
$ 10,667 $ 10,670 $ 7,182 $ 6,353 $ 8,897 Working Capital
17,355 18,265 18,244 19,285 22,208 Total Assets
26,108 29,529 33,022 40,270 48,036 Long-Term Debt
126 77 28 — — Stockholders’ Equity
23,786 25,804 29,337 35,546 41,402 ITEM 7.
MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe information in this
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations contains both historical financial information and forward-looking statements. Neogen Corporation management does not provide forecasts of future financial performance. While management is optimistic about theCompany'sCompany’s long-term prospects, historical financial information may not be indicative of future financial results.The words
"anticipate"“anticipate”,"believe"“believe”,"potential"“potential”,"expect",“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 deregulation and other risks detailed from time to time in theCompany'sCompany’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.Critical Accounting PoliciesCRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and
Estimates Management's Discussionanalysis of the Company’s financial condition andAnalysisresults ofFinancial Condition and Results of Operations isoperations are based on theCompany'sconsolidated financial statementswhichthat have been prepared in accordance with accounting principles generally accepted in the UnitedStates of America.States. The preparation of these financial statements requires that managementtomake estimates andjudgementsjudgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.Management believesOn an ongoing basis, management evaluates the estimates, including those related to bad debts, inventories, intangible assets, income taxes, contingencies and litigation. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.The following critical accounting policies
and areas that require the mostreflect management’s more significantjudgementsjudgments and estimatesto beused in the preparation of the consolidated financialstatements are revenue recognition, allowance for doubtful accounts, inventory valuation, and the assessment of the possible impairment of Goodwill and other intangible assets.statements.Revenue Recognition
Revenue from sales of products is recognized at the time title of goods passes to the buyer and the buyer assumes the risks and rewards of ownership. This is generally at the time of shipment. Where right of return exists, allowances are made at the time of sale to reflect expected returns based on historical experience.
Allowance for Doubtful Accounts
Allowances for doubtful accounts are maintained based on historical payment patterns, aging of accounts receivable and actual write-off history.Management attempts to minimize credit risk by reviewing
customers'customers’ credit history before extending credit and by monitoring credit exposure on a regular basis. An allowance for possible losses on accounts receivable is established based upon factors surrounding the credit risk of specific customers, historical trends and other information.Inventory
Valuation The Company writes down itsObsolete inventory
for estimated obsolescence equal to the cost of the inventory.is written off as it is identified. Product obsolescence may be caused by shelf-life expiration, discontinuance of a product line, replacement products in the marketplace or other competitive situations.GoodwillValuation of Long-lived and Intangible Assets and Goodwill
Management assesses goodwill and other non-amortizable intangible assets for possible impairment on no less often than an annual basis. In the event of changes in circumstances which indicate the carrying value of these assets may not be recoverable, this assessment may take place at any time. Factors that could cause an impairment review to take place would include:
--Significant—Significant underperformance relative to expected historical or projected future operating results.
--Significant—Significant changes in the use of acquired assets or strategy of the Company.
--Significant—Significant negative industry or economic trends.
When management determines that the carrying value of intangible assets may not be recoverable based on the existence of one or more of the above indicators of impairment, the carrying value is compared to a value determined based on projected discounted cash flows using a discount rate commensurate with the risk inherent in the
-13-Company'sCompany’s current business model. Any impairment identified in this computation is given current recognition in any unissued financial statements.ResultsRESULTS OF OPERATIONS
REVENUES
2003 Increase 2002 Increase 2001 (dollars in thousands) Net Sales: Food Safety Products
$ 25,496 26 % $ 20,213 21 % $ 16,717 Animal Safety Products
20,992 1 % 20,884 15 % 18,178 Total Net Sales
$ 46,488 13 % $ 41,097 18 % $ 34,895 The Food Safety segment consists of
Operations REVENUES (Dollarsthe food safety division of Neogen Corporation (Neogen Lansing), Acumedia Manufacturers Inc. and Adgen Ltd. In the year ended May 31, 2003, Food Safety sales increased 26%. Each of the Neogen Lansing product groups contributed to the increase, with a 17% increase coming from sales of tests to detect pathogens and general sanitation testing products, a 36% increase coming from sales of products to detect natural toxins and a 41% increase inThousands)sales of allergen detection products. An outbreak of aflatoxin in the midwest in 2002 contributed to the sharp increase in sales of natural toxin detection products. Growth in sales of detection products for several other natural toxins was strong as awareness of the need to test for these toxins has increased. Continued market growth aided in the growth of sales of pathogen test products during the year. Although growth of general sanitation products has slowed, management still believes that ultimately this market has large potential. The Company is experiencing competition in several of its pathogen markets but nonetheless has continued to maintain its market share. The growth in allergen detection products is fueled by public and producer recognition of this food safety problem. Sales of products from, the Company’s dehydrated culture media manufacturing subsidiary increased 15% due to continued market penetration into Food Safety markets and the addition of other traditional markets. The Company acquired Adgen, Ltd. as of February 28, 2003. Additional 2003 sales as a result of this acquisition were approximately $200,000.
2002 Increase 2001 Increase 2000 ------------------------------------------------------------------Net Sales: Food Safety Products $ 20,213 21% $ 16,717 44% $ 11,634 Animal Safety Products 20,884 15% 18,178 53% 11,878 ------------------------------------------------------------------ Total Net Sales $ 41,097 18% $ 34,895 48% $ 23,512 -----------------------------------------------------------------The 21% increase in
food safetyFood Safety product sales during 2002 was paced by increases in the Milling and Grocery, Feed and Agriculture, and Laboratory marketing segments of 38%, 26% and 50%, respectively.These segments' customers were interested in the products of Gene-Trak which was acquired during the year.Revenues from products used for the detection of microbial organisms in food and for tests of general cleanliness increased 40% from theprior2001 year with the introduction of new products from the Gene-Trak and QA Life Sciences acquisitions and from continued market penetration. Products for the detection of allergenic substances showed a revenue increase of 59% as the Company continues to benefit from its leadership in this market and the high level of customer acceptance of the products. Revenues from businesses acquired during the 2002 year (QA Life Sciences and Gene-Trak) were $2,100,000.In 2001,The Animal Safety segment consists of the Animal Safety division of Neogen Corporation (Neogen Lexington) and Ideal Instruments. Overall sales for the Animal Safety segment in 2003 were approximately the same level as in the prior year. Sales of Neogen Lexington products increased by 5% and sales of
food safetyIdeal products decreased by 10%. Double digit sales percentage increases were experienced in all Neogen Lexington product lines except for Triple Crown, which decreased by 14%. Competition in certain of the products that comprise the Triple Crown line increased44% due todramatically during the year. While the management has taken initiatives that it believes may help in reversing the Triple Crown sales trends, there is no assurance that these changes will achieve the goals. Sales of Ideal products decreased 20% for over-the-counter instruments. This decrease resulted primarily from the prior year being inclusive of afull year of sales of Acumedia, which was purchased in February 2000large initial stocking order for Tractor Supply Company’s 413 United States stores andtherefore only reported a partial year of sales in 2000, and from increases in sales of microbial and cleanliness tests. In both 2001 and 2002, sales of products marketed to detect mycotoxins in grains had modest increases in sales due toanother initial stocking order for Ideal’s detectable D3 needles for therelative absence of weather conditions that promote the occurrence of mold in commodity crops.swine industry.The Animal
safety divisionSafety segment sales increased 15% in 2002. The Triple Crown product line sales increased 34% during the year, with sales of theCompany'sanimal wound care products showing an increase of 41%. TheCompany'sCompany’s new stronger and detectable needle and the new relationship with Tractor Supply Company contributed significantly to a 70% increase in sales of veterinary instruments. These increases were offset by a 50% decrease in sales of industrial needles and other OEM products. General economic conditions are believed to be the principal cause of this decline in revenue.In 2001, animal safety division sales increased 53%. These increases were in part related to the Company's early fiscal 2001 acquisitions of AmVet Pharmaceuticals and Squire Laboratories that added $4.0 million to 2001 revenue. Other revenue increases came from the effect of Neogen's distribution which added over $1.0 million of sales to the revenues of AmVet and Squire in the equivalent period prior to the acquisitions, and from Triple Crown product sales that increased over $700,000.COST OF GOODS SOLD
(Dollars in Thousands) 2002 Increase 2001 Increase 2000 ---------------------------------------------------------- Cost of Goods Sold $ 20,196 18% $ 17,157 58% $ 10,860
2003 Increase 2002 Increase 2001 (dollars in thousands) Cost of Goods Sold
$ 21,763 8 % $ 20,196 18 % $ 17,157 Cost of goods sold increased 8% in 2003, compared to a 13% increase in revenues, and increased 18% in 2002, compared to an 18%
increase in revenues and 58% in 2001 compared to a 48%increase in revenues. Expressed as a percentage of revenues, cost of goods sold was 47% in 2003 and 49% in 200249% in 2001and46% in 2000.2001.Food safety gross margins were
59%60%, 59% and 57% in 2003, 2002 and60% in 2002,2001,and 2000,respectively.ChangesChange in margins between the periods relatedprincipallyto effective cost controls and changes in product mixwithas more manufactured test kitsgenerally havingwith higher margins were sold in 2003 than lower margin productswhichthat are purchasedon thefrom outside suppliers for resale. Additionally, margins for food safety products have continued to benefit fromincreasedthe ability to spread fixedasset coverage as revenue increases have outpaced increased expenditures for fixed costs.overhead cost over a higher sales volume.Animal safety gross margins were
43%45%, 43% and 45% in 2003, 2002 and47%2001, respectively. Margin increases in this division came as the result of product mix changes and more effective purchasing of raw material and purchased finished products. The decrease in gross margins in 20022001 and 2000, respectively. The fiscal year 2001 acquisitions of AmVet and Squire providedresulted principally from changes in product mix as sales increases came proportionally from productsthat are sold through distributors and havewith lowermargins and lower cost of distribution as well as lesser requirements for research and development expenditures. -14-gross margins. OPERATING EXPENSES
(Dollars in Thousands)
2002 Increase 2001 Increase 2000 -------------------------------------------------------Operating Expenses: Sales and Marketing $ 8,971 18% $ 7,596 24% $ 6,102 General and Administrative 4,178 3% 4,039 56% 2,587 Research and Development 2,252 23% 1,838 15% 1,600
2003 Increase
(Decrease)
2002 Increase 2001 (dollars in thousands) Operating Expenses:
Sales and Marketing
$ 10,880 21 % $ 8,971 18 % $ 7,596 General and Administrative
4,146 (1 %) 4,178 3 % 4,039 Research and Development
2,914 29 % 2,252 23 % 1,838 Many sales and marketing expense categories increased in
20022003 and20012002 including salaries, fringes, royalties, commissions, trade shows and travel. The increases in20022003 and20012002 compared to20002001 are reflective of the continued expansion of and investment in sales activities and support for theCompany'sCompany’s distribution channels both domestically and internationally. As a percentage of sales, sales and marketing expenseremained at 22%increased to 23% of revenues. Management plans to continue to expand theCompany'sCompany’s sales and marketing efforts in the future, but does not expect related expenses to increase materially as a percentage of sales.The
increaseslight decrease in general and administrative expense in20022003 was the result ofadditional expenses such as accounting and overall supervision necessarymanagement efforts toservice the Company's higher levels of operations.control costs in this area. As a percentage of revenues, general and administrative expense decreased to 9% from 10%from 12%in2001.2002. Thesecosts areexpenses tend to be much more fixed in nature than many other Companycosts. The increase in this category in 2001 as compared to fiscal 2000 was in part related to a credit related to the settlement of litigation which was included in this category in the year 2000 and to the costs related to the Company's revenue growth of nearly 50% in 2001.expenses.Management believes that research and development is critical to the
Company'sCompany’s future and expects to continue to incur expenses at approximately the current percentage of revenue. Certain of theCompany's productsCompany’s product lines such as those ofAcumedia,AmVet, Triple Crown and Squire require relatively less research and development expenditures. Management expects that research and development expenditures as a percentage of revenuesfrom salesof other products such as food safety test kits, drug detection and certain veterinary instruments and needles, will be between 8% and 10% annually.During fiscal
2002,2003, theCompany'sCompany’s operating income increased byapproximately $1,200,000$1,285,000 to13%15% of revenues following an increase of$1,900,000$1,235,000 to12%13% of revenues in2001.2002. These increases came principally from increases insales of existing and newly acquired products while not incurring comparablegross margins in addition to lesser increases inrates of expenditures for support of those sales.operating expenses.OTHER INCOME
(Dollars in Thousands)
2002 (Decrease) 2001 (Decrease) 2000 -------------------------------------------------------Other Income: Litigation Settlement $ - $ - $1,100 Interest and Other 460 (24%) 605 (26%) 821 ----- ------- ------ Total $ 460 $ 605 $1,921
2003 Increase 2002 (Decrease) 2001 (dollars in thousands) Other Income—Interest and Other
$ 488 6 % $ 460 (24 %) $ 605 Other income
decreasedincreased in20022003 principally from the effect of additional royalty income from related limited partnerships as the result of additional sales of natural toxin products. These royalties expire in fiscal 2004. At that time the revenue will cease, but likewise the amounts presently paid the partnerships and recorded as sales and marketing expense will also cease. The interest income component of other income decreased in 2003 and 2002 as a result of the decrease in interestearning assets which were used forrates during theGene-Trak acquisition and from lower rates of interest. Other income decreased in 2001 principally due to the absence of the effect of the litigation settlement that was a significant factor in the increase of this category in 2000. Additionally, 2001 was affected because the Company had less interest earning assets following the cash purchases of Amvet and Squire and lower rates of interest in the second half of 2001. -15-periods. FEDERAL AND STATE INCOME TAXES
ON INCOME (Dollars in Thousands) 2002 Increase 2001 Increase 2000 - ------------------------------------------------------------------------------- Taxes on Income $2,015 19% $1,700 40% $1,210
2003 Increase 2002 Increase 2001 (dollars in thousands) Federal and State Income Taxes
$ 2,486 23 % $ 2,015 19 % $ 1,700 Federal and state income taxes
on incomeincreased in each of the yearsas a result offrom greater levels of income beforetaxes on income. As a percentage ofincomebefore taxes on income (thetaxes. The combined effective taxrate), the category increasedrate decreased from28% in 2000 to35% in 2001and decreasedto 34% in2002. Following the final recognition of loss carryovers in 2000, the tax rate approximates the statutory tax rates2002 and 2003 and is expected to continue atthatthis general level in the future.NET INCOME AND
NET INCOME PER SHARE
(Dollars
2003 Increase 2002 Increase 2001 (dollars in thousands—except per share data) Net Income
$ 4,787 21 % $ 3,945 24 % $ 3,170 Net Income Per Share—Basic
$ 0.78 $ 0.66 $ 0.55 Net Income Per Share—Diluted
$ 0.75 $ 0.62 $ 0.54 FUTURE OPERATING RESULTS
Neogen Corporation’s future operating results involve a number of risks and uncertainties. Actual events or results may differ materially from those discussed in
Thousands-Except Per Share Data)
2002 Increase 2001 Increase 2000 -----------------------------------------------------Net Income $ 3,945 24% $ 3,170 3% $ 3,074 Net Income Per Share - Basic $ 0.66 $ 0.55 $ 0.52 Net Income Per Share - Diluted $ 0.62 $ 0.54 $ 0.52-16-Financial Conditionthis report. Factors that could cause or contribute to such differences include, but are not limited to, the factors discussed below as well as those discussed elsewhere in this report. Management’s ability to grow the business in the future depends upon its ability to successfully implement various strategies, including:developing, manufacturing andLiquiditymarketing new products with new features and capabilities;expanding the Company’s markets by fostering increased use of Company products by customers;strengthening sales and marketing activities in geographies outside of the U.S.;developing and implementing new technology development strategies; andidentifying and completing acquisitions that enhance existing businesses or create new business areas.FINANCIAL CONDITION AND LIQUIDITY
On May 31,
2002,2003, the Company had$6,353,000$8,897,000 in cash and marketable securities, working capital of$19,285,000$22,208,000 andstockholders'stockholders’ equity of$35,546,000.$41,402,000. In addition bank lines of $10,000,000 were available to, if necessary, support ongoing operations or acquisitions.Cash and marketable securities
decreased $829,000increased $2,544,000 duringfiscal 2002.2003. Cash provided from operations of$3,396,000$6,701,000 was offset by the acquisition ofGene-Trak SystemsAdgen Ltd. for$3,647,000,$1,850,000, and$1,717,000$2,461,000 for the purchasesorof property, equipment and other noncurrent assets.Accounts receivable increased
$436,000$1,037,000 or7%16% when compared to May 31,2001.2002. This resulted from increased sales during the yearoffset by a reductionalong with an increase in days sales outstanding from60 days at May 31, 2001 to51 days at May 31, 2002following increased collection efforts instituted duringto 56 days at May 31, 2003. The increase in days outstanding related to theyear.timing of payments from certain customers and is not expected to continue into 2004.Inventory levels increased
25% during the year13% ($1,157,000) in 2003 as compared toservice2002 as a result of increased sales to customers of18% for the year. Decisions were made to increase13%. The Company maintains sufficient levels of inventorylevels in the Company's Lexington, Kentucky animal safety operation and at Acumediato assurecontinued high levelsthat customer demands can be met on a timely basis.Purchases of
product availability. Increases in propertylong-lived assets totaled $2,461,000 andequipmentresulted from normal purchases during the year together with$593,000$600,000 paidforto renovate a new manufacturing facility in a building purchased in the prior year adjacent tothe
Company'sCompany’s current Lansing facilities. Upon completion the total investment in this facility is expected to be approximately$1.0 million. Goodwill increases$1,300,000.Net goodwill and non-amortizable intangible assets increased by $2,036,000 in 2003 primarily as a result
fromof the goodwill acquired in theacquisitionsacquisition ofQA Life Sciences and Gene-Trak in July and August 2001, respectively. The increase in current liabilities is due to the normal variationAdgen Ltd as ofthe timing of payments at year-end.February 28, 2003.Other than a term loan, which was paid in May
of2002, the Company had no borrowed funds during20022003 or2001.2002. At May 31,2002,2003, the Company had no material commitments for capitalexpenditures other than the completion of the manufacturing facility discussed above.expenditures. Inflation and changing prices have not had and are not expected to have a material effect on theCompany'sCompany’s operations.Neogen has been profitable from operations for its last
3741 quarters and has generated positive cash flow from operations during the period. Management believes, however, that theCompany'sCompany’s cash and marketable securities may not be sufficient to meet theCompany'sCompany’s cash requirements to commercialize products currently under development or its plans to acquire additional technology and products that fit within theCompany'sCompany’s mission statement. Accordingly, the Company may be required to issue equity securities or enter into other financing arrangements for a portion of theCompany'sCompany’s future capital needs.In management's opinion, theThe Company is
not involved in any material adversesubject to certain legalproceedings. -17-New Accounting Standards 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 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 2 to the financial statements. No changesproceedings in theamortization periods or residual values were determined to be necessary. Management performed an assessmentnormal course ofwhether there was an indicationbusiness that,goodwill was impaired. This review was completed with no indicationin the opinion ofimpairment of goodwill identified. 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, didmanagement, will nothave a significant impact on the financial position or results of operations of the Company. Effective July 1, 2002, the Company will adopt SFAS Statement 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS Statement 144 supersedes SFAS Statement 121 as well as certain provisions of APB 30. The main objective of SFAS Statement 144 is to clarify certain provisions of SFAS Statement 121 relating to impairment of long-lived assets. SFAS Statement 144 also includes more stringent requirements for classifying assets available for disposal and expands the scope of activities that will require discontinued operations reporting. Management does not expect that the impact of adopting SFAS Statement 144 willhave a material effect onthe Company'sits results of operations or financial position.NEW ACCOUNTING PRONOUNCEMENTS
See discussion of New Accounting Pronouncements in Note 1 to Consolidated Financial Statements.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company'sNeogen is subject to market risk exposures of varying correlations and volatilities with regard to interest rate and foreign exchange rate risks.
Neogen’s exposure to market risk for changes in interest rates relates to its portfolio of marketable securities. The Company has not had significant borrowings. Interest rate risk is managed by investing in high-quality issuers and seeking to avoid principal loss of invested funds by limiting default risk and market risk. Default risk is managed by investing in only high-credit-quality securities and by responding appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity.
-18-Because Neogen markets and sells its products throughout the world, it could be significantly affected by weak economic conditions in foreign markets that could reduce demand for its products.
Neogen has assets, liabilities and operations outside of the United States that are located primarily in Ayr, Scotland where the function currency is the British Pound. The Company’s investment in its foreign subsidiary is considered long-term. Accordingly, the Company does not hedge its net investment or engage in other foreign currency hedging activities due to the insignificance of these balances to the Company as a whole.
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARYSUPPLEMENTAL DATANEOGEN CORPORATION AND SUBSIDIARIES CONTENTS INDEPENDENT AUDITORS' REPORTS 20-21 CONSOLIDATED FINANCIAL STATEMENTS Balance Sheets 22-23 Statements of Income 24 Statements of Stockholders' Equity 25 Statements of Cash Flows 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 27-45 -19-INDEPENDENT AUDITORS' REPORT 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, 2002 and 2001, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibilityThe response to this item is
to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Neogen Corporation and subsidiaries as of May 31, 2002 and 2001, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP July 26, 2002 Detroit, Michigan -20-Report of Independent Certified Public Accountants To the Board of Directors Neogen Corporation Lansing, Michigan We have audited the accompanying consolidated statements of income, stockholders' equity, and cash flows of Neogen Corporation and Subsidiaries for the year ended May 31, 2000. We have also audited the schedule listed in Item 14 (b) for the year ended May 31, 2000. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Neogen Corporation and Subsidiaries for the year ended May 31, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein. BDO Seidman, LLP Troy, Michigan July 14, 2000 -21-Neogen Corporation and Subsidiaries Consolidated Balance Sheets - --------------------------------------------------------------------------------
May 31, 2002 2001 - --------------------------------------------------------------------------------------------Assets Current Assets Cash $ 2,012,000 $ 848,000 Marketable securities (Note 3) 4,341,000 6,334,000 Accounts receivable, less allowance of $537,000 and $467,000 6,462,000 6,026,000 Inventories 8,683,000 6,974,000 Prepaid expenses and other current assets 1,751,000 1,397,000 - ------------------------------------------------------------------------------------------- Total Current Assets 23,249,000 21,579,000 Property and Equipment Land and improvements 233,000 97,000 Buildings and improvements 2,187,000 1,482,000 Machinery and equipment 6,160,000 5,591,000 Furniture and fixtures 493,000 472,000 - ------------------------------------------------------------------------------------------- 9,073,000 7,642,000 Less accumulated depreciation 5,332,000 4,921,000 - ------------------------------------------------------------------------------------------- Net Property and Equipment 3,741,000 2,721,000 Goodwill and Other Assets Goodwill 11,214,000 7,076,000 Other assets, net of accumulated amortization of $690,000 and $836,000 1,700,000 1,646,000 - ------------------------------------------------------------------------------------------- Total Goodwill and Other Assets 12,914,000 8,722,000 - ------------------------------------------------------------------------------------------- $39,904,000 $33,022,000 ===========================================================================================-22-Neogen Corporation and Subsidiaries Consolidated Balance Sheets - --------------------------------------------------------------------------------
May 31, 2002 2001 - ---------------------------------------------------------------------------------------------Liabilities and Stockholders' Equity Current Liabilities Accounts payable $ 2,329,000 $ 1,207,000 Accruals Compensation and benefits 1,103,000 878,000 Income taxes 230,000 1,036,000 Other 302,000 165,000 Current maturities of long-term debt (Note 6) - 49,000 - --------------------------------------------------------------------------------------------- Total Current Liabilities 3,964,000 3,335,000 Long-Term Debt, less current maturities (Note 6) - 28,000 Other Long-Term Liabilities 394,000 322,000 - --------------------------------------------------------------------------------------------- Total Liabilities 4,358,000 3,685,000 Commitments and Contingencies (Note 9) Stockholders' Equity (Notes 7 and 12) Preferred stock, $1.00 par value, shares authorized 100,000, none issued and outstanding - - Common stock, $.16 par value, shares authorized 20,000,000; 6,108,468 and 5,823,520 issued and outstanding 977,000 932,000 Additional paid-in capital 23,779,000 21,560,000 Retained earnings 10,790,000 6,845,000 - --------------------------------------------------------------------------------------------- Total Stockholders' Equity 35,546,000 29,337,000 - --------------------------------------------------------------------------------------------- $39,904,000 $33,022,000 =============================================================================================See accompanying notes to consolidated financial statements. -23-Neogen Corporation and Subsidiaries Consolidated Statements of Income - --------------------------------------------------------------------------------
Year Ended May 31, 2002 2001 2000 - ----------------------------------------------------------------------------------------------------Net Sales $ 41,097,000 $ 34,895,000 $ 23,512,000 Cost of Goods Sold 20,196,000 17,157,000 10,860,000 - ---------------------------------------------------------------------------------------------------- Gross Margin 20,901,000 17,738,000 12,652,000 Operating Expenses Sales and marketing 8,971,000 7,596,000 6,102,000 General and administrative (Note 5) 4,178,000 4,039,000 2,587,000 Research and development 2,252,000 1,838,000 1,600,000 - ---------------------------------------------------------------------------------------------------- 15,401,000 13,473,000 10,289,000 - ---------------------------------------------------------------------------------------------------- Operating Income 5,500,000 4,265,000 2,363,000 Other Income (Expense) Interest income 132,000 376,000 561,000 Interest expense (3,000) (32,000) (12,000) Litigation settlement (Note 5) - - 1,100,000 Royalty and other 331,000 261,000 272,000 - ---------------------------------------------------------------------------------------------------- 460,000 605,000 1,921,000 - ---------------------------------------------------------------------------------------------------- Income Before Taxes On Income 5,960,000 4,870,000 4,284,000 Taxes On Income (Note 8) 2,015,000 1,700,000 1,210,000 - ---------------------------------------------------------------------------------------------------- Net Income $ 3,945,000 $ 3,170,000 $ 3,074,000 ==================================================================================================== Basic Earnings Per Share $ .66 $ .55 $ .52 Diluted Earnings Per Share $ .62 $ .54 $ .52 ====================================================================================================See accompanying notes to consolidated financial statements. -24-Neogen Corporation and Subsidiaries Consolidated Statements of Stockholders' Equity Years Ended May 31, 2002, 2001 and 2000 - --------------------------------------------------------------------------------
Additional Common Stock Paid-In Retained ------------------------- Shares Amount Capital Earnings - ----------------------------------------------------------------------------------------------------------Balance, May 31, 1999 5,929,279 $ 949,000 $ 22,236,000 $ 601,000 Exercise of options and warrants 64,931 10,000 259,000 - Repurchase of common stock (Note 12) (221,023) (35,000) (1,290,000) - Net income for the year - - - 3,074,000 - ---------------------------------------------------------------------------------------------------------- Balance, May 31, 2000 5,773,187 924,000 21,205,000 3,675,000 Exercise of options 141,600 23,000 913,000 - Repurchase of common stock (Note 12) (91,267) (15,000) (558,000) - Net income for the year - - - 3,170,000 - ---------------------------------------------------------------------------------------------------------- Balance, May 31, 2001 5,823,520 932,000 21,560,000 6,845,000 Exercise of options and warrants 218,948 34,000 1,437,000 - Repurchase of common stock (Note 12) (28,000) (4,000) (311,000) - Acquisitions 94,000 15,000 1,093,000 - Net income for the year 3,945,000 - ---------------------------------------------------------------------------------------------------------- Balance, May 31, 2002 6,108,468 $ 977,000 $ 23,779,000 $ 10,790,000 ==========================================================================================================See accompanying notes to consolidated financial statements. -25-Neogen Corporation and Subsidiaries Consolidated Statements of Cash Flows - --------------------------------------------------------------------------------
Year Ended May 31, 2002 2001 2000 - ---------------------------------------------------------------------------------------------------Cash Flows From Operating Activities Net income $ 3,945,000 $ 3,170,000 $ 3,074,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 1,071,000 1,302,000 946,000 Changes in operating assets and liabilities, net of acquisitions Accounts receivable (128,000) (568,000) (736,000) Inventories (1,579,000) (1,120,000) 143,000 Prepaid expenses and other current assets (354,000) (735,000) 299,000 Accounts payable 885,000 (536,000) 850,000 Accruals and other current liabilities (444,000) 983,000 100,000 - --------------------------------------------------------------------------------------------------- Net Cash Provided By Operating Activities 3,396,000 2,496,000 4,676,000 Cash Flows From Investing Activities Proceeds from marketable securities 30,173,000 10,399,000 31,415,000 Purchases of marketable securities (28,180,000) (8,262,000) (30,283,000) Purchases of property, equipment and other assets (1,717,000) (1,099,000) (920,000) Acquisitions (3,587,000) (4,748,000) (2,648,000) - --------------------------------------------------------------------------------------------------- Net Cash (Used In) Investing Activities (3,311,000) (3,710,000) (2,436,000) Cash Flows From Financing Activities Net proceeds from issuance of common stock 1,471,000 936,000 269,000 Repurchase of common stock (315,000) (573,000) (1,325,000) Payments on long-term borrowings (77,000) (499,000) (49,000) - --------------------------------------------------------------------------------------------------- Net Cash Provided By (Used In) Financing Activities 1,079,000 (136,000) (1,105,000) - --------------------------------------------------------------------------------------------------- Net Increase (Decrease) In Cash 1,164,000 (1,350,000) 1,135,000 Cash, at beginning of year 848,000 2,198,000 1,063,000 - --------------------------------------------------------------------------------------------------- Cash, at end of year $ 2,012,000 $ 848,000 $ 2,198,000 ===================================================================================================See accompanying notes to consolidated financial statements. -26-Neogen Corporation and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 1. Summary of Nature of Operations Accounting Policies 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 and food safety testing. Basis of Consolidation The consolidated financial statements include the accounts of Neogen Corporation, Ideal Instruments, Inc. (Ideal), Acumedia Manufacturers, Inc. (Acumedia), Neogen Properties, L.L.C. and two majority owned companies which are general partners for research limited partnerships. The investments in and income from research 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 accounting principles generally accepted in the United States of America 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. Concentrations of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. Management attempts to minimize credit risk by reviewing customers' credit history before extending credit and by monitoring credit exposure on a regular basis. An allowance for possible losses on accounts receivable is established based upon factors surrounding the credit risk of specific customers, historical trends and other information. -27-Neogen Corporation and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Fair Values of Financial Instruments The carrying amounts of accounts receivable, accounts payable, accrued expenses, and current maturities of long-term debt approximate fair value because of the short maturity of these items. 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: 2002 2001 ------------------------------------------------- Raw materials $ 2,969,000 $ 1,832,000 Work-in-process 589,000 885,000 Finished goods 5,125,000 4,257,000 ------------------------------------------------- $ 8,683,000 $ 6,974,000 ================================================= -28-Neogen Corporation and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Derivative Instruments and Hedging Activities Statement of Financial Accounting Standards 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 has not had 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. 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 ten to thirty years for buildings and improvements and three to ten years for furniture, machinery and equipment. Depreciation expense was $895,000, $767,000, and $657,000, in 2002, 2001 and 2000, respectively. Goodwill and Intangible Assets Goodwill represents the excess of acquisition costs over the estimated fair value of net assets acquired. Until May 31, 2001, goodwill was amortized on a straight-line basis over periods ranging from fifteen to twenty-five years. Other intangible assets, consisting primarily of covenants not to compete, licenses and patents, are recorded at fair value at the date of acquisition. Assets with a finite life are amortized on a straight-line basis over periods ranging from five to seventeen years. During July 2001, SFAS 142, "Goodwill and Other Intangible Assets" was issued by the Financial Accounting Standards Board. Under SFAS 142, goodwill amortization ceases upon adoption of the new standard. The rules also require an initial goodwill impairment assessment in the year of adoption and an annual impairment test thereafter. The Company adopted this Statement effective June 1, 2001. As required, reviews of possible impairment were performed and no charges therefore were determined to be necessary. -29-Neogen Corporation and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Long-lived Assets Management 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. Impairment is evaluated on the basis of undiscounted future cash flows from operations before interest for the remaining useful life of the assets. If necessary, impairment will be measured based on the difference between discounted future cash flows and the net book value of the related 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 Revenue from sales of products is recognized at the time title of goods passes to the buyer and the buyer assumes the risks and rewards of ownership. This is generally at the time of shipment. Where right of return exists, allowances are made at the time of sale to reflect expected returns based on historical experience. Research and Development Research and development expenditures are charged to operations as incurred. Limited Partnership Royalty Income and Expense Royalty income from related research limited partnerships (included as a component of other income) was $266,000 in 2002, $264,000 in 2001 and $243,000 in 2000. Royalty expense paid to related research limited partnerships (included as a component of sales and marketing expense) was $589,000 in 2002, $587,000 in 2001 and $540,000 in 2000. -30-Neogen Corporation and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 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 on 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, 2002 2001 2000 ---------------------------------------------------------------------------Numerator for Basic and Diluted Earnings Per Share Net income $ 3,945,000 $ 3,170,000 $3,074,000 =========================================================================== Denominator Denominator for basic earnings per share - weighted average shares 5,999,311 5,731,712 5,905,623 Effect of Dilutive Securities Stock options and warrants 378,381 184,254 16,859 --------------------------------------------------------------------------- Dilutive Potential Common Stock Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 6,377,692 5,915,966 5,922,482 =========================================================================== Basic Earnings Per Share $ .66 $ .55 $ .52 =========================================================================== Diluted Earnings Per Share $ .62 $ .54 $ .52 ===========================================================================Options to purchase 35,400, and 616,200 shares of common stock at prices ranging from $9.25 to $13.25, and $6.50 to $13.25 in 2001 and 2000, respectively, were outstanding, but were excluded from the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares. In 2002, no options were excluded as no option price exceeded the average market price of the common shares. -31-Neogen Corporation and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 2. Change in The Company has adopted Financial Accounting Accounting for Standards Board SFAS 142 "Goodwill and Other Goodwill and Other Intangible Assets" effective June 1, 2001. Intangible Assets Under the provisions of the Statement, goodwill is no longer amortized but instead is reviewed for impairment at least annually. 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. This review was completed with no indication of impairment of goodwill identified. 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:
Gross Carrying Amount May 31, 2001 Reclassifications June 1, 2001 ----------------------------------------------------------Goodwill $ 8,123,000 $ (900,000) $ 7,223,000 Intangible assets with indefinite lives 415,000 415,000 Intangible assets with finite lives 1,019,000 1,019,000 Other assets 2,482,000 (1,913,000) 569,000 ---------------------------------------------------------- $ 10,605,000 $ (1,379,000) $ 9,226,000 ==========================================================Accumulated Amortization May 31, 2001 Reclassifications June 1, 2001 ----------------------------------------------------------Goodwill $ 1,047,000 $ (1,047,000) $ - Intangible assets with indefinite lives - - - Intangible assets with finite lives - 504,000 504,000 Other assets 836,000 (836,000) - ---------------------------------------------------------- $ 1,883,000 $ (1,379,000) $ 504,000 ==========================================================-32-Neogen Corporation and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- The allocation of goodwill and other intangible assets June 1, 2001 and May 31, 2002 is as follows:
Balance Balance June 1, May 31, 2001 Additions Deletions 2002 ------------------------------------------------------------Goodwill: Food Safety $ 718,000 $ 3,499,000 $ - $ 4,217,000 Animal Safety 6,505,000 492,000 - 6,997,000 ------------------------------------------------------------ Total 7,223,000 3,991,000 - 11,214,000 Licenses and intangible assets with indefinite lives 415,000 - - 415,000 Intangible assets with finite lives: - Licenses 305,000 404,000 - 709,000 Covenants not to compete 355,000 60,000 - 415,000 Patents 351,000 - 3,000 348,000 Other 8,000 - 7,000 1,000 ------------------------------------------------------------ 1,019,000 464,000 10,000 1,473,000As provided by SFAS 142, the results of operations for the year ended May 31, 2001 and 2000 have not been restated. If the statement had been adopted as of June 1, 1999, the effect would have resulted in the reduction in amortization of $545,000 in the year ended May 31, 2001, and $290,000 in the year ended May 31, 2000. Net income would have been increased by $355,000 ($.06 basic and fully diluted) in 2001 and $190,000 ($.03 basic and fully diluted) in 2000. Estimated fiscal year amortization expense is as follows: 2003-$144,000; 2004-$139,000; 2005-$119,000; 2006-$80,000 and 2007-$53,000. 3. Marketable Securities The Company currently invests only in 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, 2002 and 2001. Additionally, since investments are short-term and are generally allowed to mature, realized gains and losses for both years have been minimal. At May 31, 2002 and 2001, marketable securities consisted of corporate debt securities. -33-Neogen Corporation and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 4. Acquisitions On February 17, 2000, Neogen Corporation purchased 100% of the common stock of Acumedia with principal offices in Baltimore, Maryland. Acumedia is an internationally recognized producer of culture media. The acquisition was accounted for using the purchase method. Consideration for the purchase, including direct acquisition related expenses, was $3,098,000, which included cash payments and a one year 7% promissory note of $450,000. The purchase price was allocated $1,943,000 to current assets, $414,000 to property and equipment, and $1,191,000 to intangible assets, primarily goodwill. Unaudited pro forma financial information for the year ended May 31, 2000, as if the acquisition of Acumedia had taken place on June 1, 1999 is as follows: --------------------------------------------------- Revenues $ 26,081,000 Net income 2,901,000 --------------------------------------------------- Basic and Diluted Earnings Per Share $ .49 --------------------------------------------------- These unaudited pro forma results have been prepared for comparative purposes only and include certain adjustments, such as additional amortization expense as a result of goodwill and the related effect on income tax expense. They do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the date indicated, or that may result in the future. On June 2, 2000, the Company acquired substantially all of the assets of AmVet Pharmaceuticals, a distributor of animal health products. The acquisition was accounted for using the purchase method. The purchase price, subject to certain post closing adjustments, was $3,715,000 paid in cash, plus additional payments in July 2001, resulting from the post closing adjustments for the payment of $170,000 and 32,388 shares of the Company's common stock. The value of the post closing common stock consideration was discounted by 10% to allow for the one year trading restriction thereon. The initial purchase price was allocated $909,000 to current assets, $10,000 to property and equipment and $2,796,000 to intangible assets, primarily goodwill. Sales of AmVet products were approximately $4,600,000 in the year ended May 31, 2001. -34-Neogen Corporation and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- On September 1, 2000, the Company acquired certain assets of Squire Laboratories, a manufacturer and distributor of animal health products. The acquisition was accounted for using the purchase method. The purchase price was $1,033,000 paid in cash, and was allocated $133,000 to current assets, $127,000 to property and equipment and $773,000 to intangible assets, primarily goodwill. Sales of Squire products approximated $600,000 over the 9 months following the acquisition. Following the acquisitions, the assets of AmVet and Squire were moved to the Company's facility in Lexington, Kentucky, and combined with the Company's Animal Safety Division. In a purchase transaction on June 30, 2001, the Company acquired all of the stock of QA Life Sciences, a San Diego, California, company in the foodborne bacteria testing market. The purchase price, subject to certain post closing adjustments, was 61,000 shares of Neogen stock. The value of the consideration was discounted by 10% to allow for the one year trading restriction thereon. Allocation of the consideration was $129,000 to current assets, $150,000 to property and equipment and $487,000 to intangible assets, primarily goodwill. A secondary payment of $45,000 was made in July 2002. Sales of products in the 11 months after the acquisition were $590,000. Immediately following the acquisition the operations of QA Life Sciences were moved to the Company's facilities in Baltimore, Maryland, and Lansing, Michigan, where they were combined with the Food Safety Division. On August 1, 2001, the Company acquired,submitted in acash transaction, the assetsseparate section ofGene-Trak Systems, a company involved in the manufacture and sales of foodborne pathogen detection products based on DNA probe technology. The acquisition was accounted for as a purchase with assets allocated $378,000 to current assets, $125,000 to property and equipment and $3,144,000 to intangible assets, primarily goodwill. The operations of Gene-Trak Systems were moved to Lansing, Michigan, and combined with the Food Safety Division. Sales of Gene-Trak products in the 10 months following the acquisition were $1,534,000. -35-Neogen Corporation and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 5. Litigation Settlement In the fourth quarter of fiscal 2000, the Company reached a settlement with Vicam L.P., Vicam Management Corporation, and Jack C. Radlo ("Vicam") on all claims against Vicam not previously settled. The settlement included reimbursement of $900,000 to Neogen for legal and professional fees and expenses, and $1,100,000 to settle all claims. The reimbursement of legal and professional fees and expenses was netted against general and administrative expenses in fiscal 2000, which included approximately $750,000 of such expenses. 6. Notes Payable and The Company and its subsidiaries have available Long-Term Debt working capital lines-of-credit and borrowing arrangements with banks totaling $2,500,000. There were no borrowings under these lines in the two-year period ended May 31, 2002. These arrangements bear interest at rates from prime (4 3/4% at May 31, 2002) to prime less 1/2% and are collateralized by all of the 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 prime less 1/2%. There were no borrowings underthisline in the two-year period ended May 31, 2002. Long-term debt at May 31, 2001 consisted of a term note, which was paid in May 2002. Terms of financing arrangements include, among other provisions, the requirements to maintain certain financial criteria and restricts the payment of dividends. -36-Neogen Corporation and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 7. Stock Options and Stock The Company maintains stock option plans (the Warrants 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 2,459,375. At May 31, 2002, options have been granted with three to five year vesting schedules and option terms of five to ten years. A total of 682,200 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 123, the Company's net income and earnings per share would have been $3,029,000 ($.59 basic and $.55 fully diluted) in 2002, $2,797,000 ($.49 basic and $.47 fully diluted) in 2001 and $2,627,000 ($.44 basic and fully diluted) in 2000. 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 2002, 2001 and 2000, respectively: dividend yield of 0%; expected volatility of 58.0%, 61.0% and 51.0%; risk free interest rates of 4.2%, 6.1%, and 5.7%; and expected lives of four years. -37-Neogen Corporation and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- The weighted-average grant date fair value of options granted in 2002, 2001 and 2000 was $6.29, $2.70 and $2.97, respectively. The following is a summary of the Plans' activity:
Weighted Average Shares Exercise Price ==================================================================Outstanding at May 31, 1999 (265,518 exercisable) 599,700 $ 7.25 Granted 198,500 6.44 Exercised (21,666) 3.55 Forfeited (70,500) 6.80 Outstanding at May 31, 2000 (295,182 exercisable) 706,034 7.18 Granted 216,000 6.31 Exercised (141,600) 6.67 Forfeited (1,900) 7.29 Outstanding at May 31, 2001 (286,777 exercisable) 778,534 7.03 Granted 254,700 13.20 Exercised (209,288) 7.41 Forfeited (25,400) 9.03 ------------------------------------------------------------------ Outstanding at May 31, 2002 (230,779 exercisable) 798,546 $ 8.86 ==================================================================-38-Neogen Corporation and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- The following is a summary of stock options outstanding at May 31, 2002:
Options Outstanding Options Exercisable ------------------------------------- ----------------------- Average Weighted Weighted Range of Remaining Average Average Exercise Contractual Exercise Exercise Price Number Life (Years) Price Number Price --------------------------------------------------------------------------------$ 4.63 - 6.88 378,826 3.7 $ 6.36 105,848 $ 6.34 7.13 - 9.25 152,744 3.0 7.47 103,555 7.47 11.31 - 13.90 266,976 5.8 13.20 21,376 12.56 -------------------------------------------------------------------------------- $ 4.63 - 13.90 798,546 4.2 $ 8.86 230,779 $ 7.42 ================================================================================The weighted-average exercise price of the 286,777 shares which were exercisable at May 31, 2001 and 295,182 shares which were exercisable at May 31, 2000 was $7.75 and $7.37, respectively. The following table summarizes warrant activity. All warrants are exercisable for unregistered common stock of the Company and expire through 2011.
Warrant Shares Price --------------------------------------------------------------------------------Outstanding Warrants at May 31, 1999 43,265 $ 4.82 Warrants exercised during the year (43,265) 4.82 Warrants granted during the year 8,000 6.25 -------------------------------------------------------------------------------- Outstanding Warrants at May 31, 2000 8,000 6.25 Warrants exercised during the year - - Warrants granted during the year 21,000 6.44 -------------------------------------------------------------------------------- Outstanding Warrants at May 31, 2001 29,000 6.39 Warrants exercised during the year (26,000) 6.29 Warrants granted during the year 14,000 11.71 -------------------------------------------------------------------------------- Outstanding Warrants at May 31, 2002 17,000 $ 10.93 ================================================================================-39-Noegen Corporation and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 8. Taxes On Income The provision for taxes on income consisted of the following:
2002 2001 2000 ---------------------------------------------------------------------Current: Federal $ 2,223,000 $ 1,905,100 $ 1,180,000 State 192,000 177,400 30,000 Deferred (400,000) (382,500) - --------------------------------------------------------------------- Taxes on Income $ 2,015,000 $ 1,700,000 $ 1,210,000 =====================================================================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, 2002 and 2001 are as follows:
2002 2001 ---------------------------------------------------------------------Deferred tax liabilities: Depreciation and amortization $ 179,000 $ 98,000 Losses of affiliated partnerships - 15,000 --------------------------------------------------------------------- Total Deferred Tax Liabilities 179,000 113,000 Deferred tax assets: Inventory and accounts receivable 597,000 444,000 Accruals 363,000 51,500 --------------------------------------------------------------------- Total Deferred Tax Assets 960,000 495,500 --------------------------------------------------------------------- Net Deferred Tax Assets $ 781,000 $ 382,500 =====================================================================-40-Noegen Corporation and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- The reconciliation of income taxes computed at the U.S. federal statutory tax rates to income tax expense for the years ended May 31, 2002, 2001 and 2000 is as follows:
2002 2001 2000 -----------------------------------------------------------------------------Tax at U.S. statutory rates $ 2,026,000 $ 1,656,000 $ 1,456,000 Adjustment of valuation allowance - (278,000) (34,000) Prior year adjustments - 208,000 (171,000) Tax credits and other (138,000) - (60,000) Provision for State Income Tax 127,000 114,000 19,000 ----------------------------------------------------------------------------- Taxes on Income $ 2,015,000 $ 1,700,000 $ 1,210,000 =============================================================================9. Commitments and The Company has agreements with related research Contingencies 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 2002, 2001 and 2000 was $1,215,000, $987,000 and $752,000, respectively. The Company leases office and manufacturing facilities under noncancelable operating leases. Rent expense for 2002, 2001 and 2000 was $502,000, $392,000 and $298,000, respectively. Future minimum rental payments for these leases are as follows: 2003 - $455,000, 2004 - $227,000, 2005 - $66,000, 2006 - $67,000, 2007 $68,000, 2008 and thereafter $40,000. The Company is involved in certain legal proceedings, none of which, in the opinion of management, is material to the financial statements. -41-Neogen Corporation and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 10. Defined Contribution The Company maintains a defined contribution 401(k) Benefit Plan benefit plan 15% of covering substantially all employees. Employees are permitted to defer up to 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 $278,000, $200,000 and $152,000 for the years ended May 31, 2002, 2001 and 2000, 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, 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 animal health product distributors. 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. -42-Neogen Corporation and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Segment information for the years ended May 31, 2002, 2001, and 2000 was as follows:
Food Animal Corporate and Safety Safety Eliminations(1) Total ---------------------------------------------------------------------------------------------------2002 Net sales to external customers $ 20,213,000 $ 20,884,000 $ - $ 41,097,000 Operating income 3,755,000 2,571,000 (826,000) 5,500,000 Depreciation and amortization 621,000 450,000 - 1,071,000 Interest income - - 132,000 132,000 Income taxes 1,277,000 874,000 (136,000) 2,015,000 Total assets 16,519,000 18,263,000 5,122,000 39,904,000 Expenditures for long-lived assets 817,000 900,000 - 1,717,000 =================================================================================================== 2001 Net sales to external customers $ 16,717,000 $ 18,178,000 $ - $ 34,895,000 Operating income 2,369,000 2,594,000 (698,000) 4,265,000 Depreciation and amortization 566,000 736,000 - 1,302,000 Interest income - - 376,000 376,000 Income taxes 806,000 882,000 12,000 1,700,000 Total assets 10,106,000 16,199,000 6,717,000 33,022,000 Expenditures for long-lived assets 569,000 530,000 - 1,099,000 =================================================================================================== 2000 Net sales to external customers $ 11,634,000 $ 11,878,000 $ - $ 23,512,000 Operating income 1,593,000 1,364,000 (594,000) 2,363,000 Depreciation and amortization 428,000 518,000 - 946,000 Litigation settlement - - 1,100,000 1,100,000 Interest income - 2,000 559,000 561,000 Income taxes 451,000 328,000 431,000 1,210,000 Total assets 10,758,000 10,383,000 8,388,000 29,529,000 Expenditures for long-lived assets 395,000 525,000 - 920,000 ===================================================================================================(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. -43-Neogen Corporation and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- The Company has no significant long-lived assets outside of the United States and no significant foreign operations. Sales to customers outside the United States amounted to $8,743,000 or 21% of consolidated sales in 2002, $8,100,000 or 23% in 2001 and $4,800,000 or 20% in 2000, respectively, and were derived primarily in the geographic areas of South and Central America, Canada, Asia and Europe. 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 1,000,000 shares of the Company's common stock. As of May 31, 2002, the Company had purchased 654,990 shares in negotiated and open market transactions for a total price, including commissions, of approximately $4,382,000. Shares purchased under this buy-back program are retired. 13. Supplemental Disclosure Cash paid for income taxes totaled $2,890,000, of Cash Flows $1,507,000, and $681,000 in 2002, 2001 and 2000, Information respectively. Cash paid for interest totaled $3,000, $32,000 and $12,000 in 2002, 2001 and 2000, respectively. Non-Cash Investing and Financing Activities: In February 2000, the Company acquired Acumedia for cash and a $450,000 note payable. In June 2001, QA Life Sciences was acquired for 61,000 shares of Neogen common stock. In July 2001, 32,388 shares were issued in connection with secondary payment obligations to the former owners of AmVet Pharmaceuticals. -44-Neogen Corporation and Subsidiaries Notes to Consolidated Financial Statements - --------------------------------------------------------------------------------
14. Summary of Fiscal Quarter Ended ----------------------------------------------------- Quarterly Data August November February May (Unaudited) 2001 2001 2002 2002 -------------------------------------------------------------------------------- (Dollars in thousands, except per share data)Net sales $ 9,732 $10,699 $ 9,655 $ 11,011 Gross margin 4,892 5,673 4,617 5,719 Net income 862 1,145 826 1,112 Basic earnings per share .14 .19 .13 .18 Diluted earnings per share .14 .18 .13 .17 Market price of common stock High $ 18.65 $ 25.21 $ 21.50 $ 17.63 Low 11.76 10.05 12.85 13.78 ================================================================================
Fiscal Quarter Ended ----------------------------------------------------- August November February May 2000 2000 2001 2001 -------------------------------------------------------------------------------- (Dollars in thousands, except per share data)Net sales $ 8,214 $ 9,009 $ 8,601 $ 9,161 Gross margin 3,996 4,544 4,352 4,846 Net income 672 860 714 924 Basic earnings per share .12 .15 .12 .16 Diluted earnings per share .12 .15 .12 .15 Market price of common stock High $ 7.13 $ 10.38 $ 13.44 $ 15.00 Low 5.50 6.13 7.13 8.75 ================================================================================-45-report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III Changes InIndependent Public Accountants
On January 16, 2003, Neogen dismissed Deloitte & Touche, LLP (D&T) as its independent auditor. The Audit Committee of the Company’s Board of Directors recommended the change of auditors and
Audit Committeethe change was approved by the Company’s Board ofNeogen Corporation (the "Company") approved the terminationDirectors.The reports of
the Company's relationship with BDO Seidman, LLP ("BDO") as its independent accountants and auditors of record effective April 23, 2001. In connection with the audits of the Company'sD&T on Neogen’s financial statements foreach ofthethreefiscal years ended1998, 1999,May 31, 2002 and20002001 did not contain an adverse opinion or disclaimer of opinion andfor unauditedwere not qualified or modified as to uncertainty, audit scope or accounting principles. During the Company’s two most recent fiscal years, and subsequent interimperiodperiods throughApril 23, 2001,January 16, 2003, there were no disagreementsor reportable eventswithBDOD&T on anymattersmatter of accounting principles orpractices,practice financial statement disclosure, or auditing scopeandor procedures, which disagreements, if not resolved to the satisfaction ofBDO,D&T, would have causedBDOit to make reference tothe mattersuch disagreements in itsreport. BDO's reportreports, nor were there any reportable events as defined in Regulation S-K Item 304(a)(1)(v).Following review of proposals from several accounting firms, effective January 16, 2003 Neogen engaged Ernst & Young LLP (E&Y) as its independent auditor. During the Company’s two most recent fiscal years and subsequent interim periods before engaging E&Y, the Company did not consult E&Y regarding the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on the
Company'sCompany’s financial statements,foror any matter that was either the subject ofthe past two years was not adverse, nor did it disclaim opinion nor was it modifieda disagreement, or of a reportable event asto uncertainties, audit scope, or accounting principles. On April 24, 2001, Deloitte & Touche ("Deloitte") of Detroit Michigan was engaged as the Company's independent auditors for the fiscal year ending May 31, 2001. Disagreements With Accountants On Accounting And Financial Disclosuredefined in Regulation S-K Item 304(a)(1)(v).There were no disagreements or reportable events with
DeloitteE&Y following its appointment.Other Information Required By Part III Certain information required by Part III has been omitted fromITEM 9.A. CONTROLS AND PROCEDURES
Within the 90-day period preceding the date of this
Report since the Company will file a definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the endreport, an evaluation of thefiscal year covered by this Report,effectiveness of the design andcertainoperation of Neogen’s disclosure controls and procedures was carried out under the supervision and with the participation of the Company’s Chief Executive and Chief Financial Officers. Based on that evaluation, the certifying officers concluded that the Company’s disclosure controls and procedures are effective to bring to the attention of the Company’s management the relevant informationincluded therein is incorporated herein by reference.necessary to permit an assessment of the need to disclose material developments and risks pertaining to the Company’s business in its periodic filings with the Securities and Exchange Commission. There have been no significant changes to the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation.PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning
the Company'sNeogen’s directors and executive officers required by this Item is incorporated by reference to theCompany'sCompany’s Proxy Statement to be filed within 120 days of May 31,2002.2003.OFFICERS AND OTHER KEY INDIVIDUALS OF THE REGISTRANT
The officers of
the CompanyNeogen are elected by and serve at the discretion of the Board of Directors. The Board of Directors has also named a Scientific Review Council to serve at the pleasure of the Board. The Scientific Review Council meets several times annually to review the research progress of the Company and to recommend or approve new research and product development activities of the Company. The names and occupations of theCompany'sCompany’s officers and other key individuals are set forth below.
Year JoinedName
Position with the Company
Year Joined
the Company---- ------------------------- -----------Lon M. Bohannon
Vice President, Chief Operating Officer, Director 1985 Edward L. Bradley
Vice President 19941995 Richard R. Current
Vice President, Chief Financial Officer 20001999 James L. Herbert
President, Chief Executive Officer, Director 1982 Joseph M. Madden, Ph.D.
Vice President, Scientific Affairs 1997 Anthony E. Maltese
Vice President, Corporate Development 20001999 Terri A. Morrical
Vice President 1992 Mark A. Mozola
Vice President, Research & Development 2001 Jack C. Parnell
Chairman, Director 1993 Thomas H. Reed
Secretary, Director 1995 Gerald S. Traynor Vice President 1990Paul S. Satoh, Ph.D.
Vice President, Basic and Exploratory Research 1998 -46-There are no family relationships among officers. Information concerning the executive officers of
the CompanyNeogen follows:Lon M. Bohannon, age
49,50, joined the Company in October 1985 as Vice President of Finance, was promoted to Chief Financial Officer in June 1987, was promoted to Vice President Administration and Chief Financial Officer in November 1994, was elected to the Board of Directors in October 1996, and was named Chief Operating Officer in September 1999. He is responsible for all Company operations except research, finance, and corporate development. A CPA, he was Administrative Controller for Federal Forge, Inc., a metal forging and stamping firm, from March 1980 until October 1985, and a member of the public accounting firm of Ernst & Young LLP from June 1975 to March 1980.Edward L. Bradley, age
42,43, joined Neogen in February 1995 as Vice President of Sales and Marketing for AMPCOR Diagnostics, Inc. In June 1996, he was made a Vice President of Neogen Corporation. Currently, Mr. Bradley is responsible for all sales and marketing activities focused on food safety products on a worldwide basis. From 1988 to 1995, Mr. Bradley served in several sales and marketing capacities for Mallinckrodt Animal Health, including the position of National Sales Manager responsible for 40 employees in its Food Animal Products Division. Prior to joining Mallinckrodt, he held several sales and marketing positions for Stauffer Chemical Company.Richard R. Current, age
57,59, joined the Company in November 1999 as Vice President and Chief Financial Officer. Prior to joining Neogen, Mr. Current served as Executive Vice President and Chief Financial Officer of Integral Vision, Inc. from 1994 to 1999 and as Vice President and Chief Financial Officer of the Shane Group, Inc., a privately held company from 1991 to 1994. Mr. Current was associated with the public accounting firm of Ernst & Young LLP for 24 years and served as Managing Partner of the Lansing, Michigan office from 1986 to 1991.James L. Herbert, age
62,63, has been President, Chief Executive Officer, and a director of the Company since he joined Neogen in June, 1982. From 1999 to 2001 he was Chairman of theCompany'sCompany’s Board. He previously held the position of Corporate Vice President of DeKalb Ag Research, a major agricultural genetics and energy company. He has management experience in animal biologics, specialized chemical research, medical instruments, aquaculture, animal nutrition, and poultry and livestock breeding and production.Dr. Joseph M. Madden, age
53,54, joined Neogen in December 1997 as Vice President of Scientific Affairs after retiring from the Food and Drug Administration as its Microbiology Strategic Manager. He joined the FDA in 1978 and spent his first 10 years as a research microbiologist for the agency. Dr. Madden has served on numerous committees on food safety, including his current appointment to the National Advisory Committee on Microbiological Criteria for Foods. He is regarded by regulatory agencies and the food industry as being one of thenation'snation’s top experts on both scientific and regulatory issues relating to food safety.Anthony E. Maltese, age
58,59, joined Neogen on June 1, 1999 as Manager of Corporate Development. He was promoted to Vice President in October, 2000. Prior to joining Neogen, Mr. Maltese served as Vice President of Business Development for Creatogen Biosciences, GmbH of Angsburg, Germany. From 1990 to 1998, he worked in production and special project management positions for REMEL, Inc. including Manager of Business Development. Prior to REMEL, Mr. Maltese spent 20 years at Difco Laboratories, where he served in several management positions in the areas of purchasing, technical sales support, production and research.Terri A. Morrical, age
37,38, joined Neogen Corporation on September 1, 1992 as part of theCompany'sCompany’s acquisition of WTT, Incorporated. She currently serves as Vice President and General Manager of theCompany'sCompany’s Lexington division and is responsible for all sales pertaining to animal safety.Mrs.Ms. Morrical graduated from Miami University in 1986. From 1986 to 1991, she was Controller for Freeze Point Cold Storage Systems and concurrently served in the same capacity for Powercore, Inc. In 1990, she joined WTT, Incorporated as VP/CFO and then became President, the position she held at the time Neogen acquired the business.Mark A. Mozola, Ph.D., age
47,48, becameNeogen'sNeogen’s Vice President of Research and Development in 2001 following theCompany'sCompany’s acquisition of GENE-TRAK Systems. He served in various technical and managerial positions at GENE-TRAK Systems for 16 years, most recently as General Manager. He has also served as a Laboratory Director for Silliker Laboratories. Dr.Mozola'sMozola’s particular technical expertise is in the area of development of modern, rapid methods for the detection of foodborne pathogens.Jack C. Parnell, age
67,68, was elected to the Board of Directors in October 1993 and as Chairman in October, 2001. Since 1991, he has held the position of Governmental Relations Advisor with the law firm of Kahn, Soares and Conway. In 1989, Mr. Parnell was appointed by President Bush to serve as Deputy Secretary for the U.S. Department of Agriculture. From 1983 to 1989, he served in three different senior governmental positions for the State of California, including Secretary for the California Department of Food and Agriculture from 1987 to 1989. The firm of Kahn, Soares and Conway currently acts as theCompany'sCompany’s government relations advisor.Thomas H. Reed, age
57,58, was elected to the Board of Directors in October 1995 and was elected Secretary in October 1999. Mr. Reed is group Vice President of Packerland Packing Company. Prior to assuming that position he was Vice President of MLE Marketing, a division of Southern States Cooperative, Inc., and prior to assuming that position, he served as President and Chief Financial Officer for Michigan Livestock Exchange. Mr. Reed is a former member of the Board of Directors of the National Livestock Producers Association and is a former chairman of the Michigan State University Board of Trustees.-47-Dr. Paul S. Satoh, age
65,66, becameNeogen'sNeogen’s Vice President for Research and Development in March 1998 after having spent 26 years as a senior scientist, specialist in information analysis and competitive Intelligence and research manager in the Diagnostic Group at Pharmacia & Upjohn Inc.Dr. SatohHe joined Neogen after serving nearly six years onthe Company'sNeogen’s Scientific Review Council as an immunology specialist.At Upjohn,Dr. Satoh also taught immunopharmacology at the University of Michigan in Ann Arbor while on sabbatical leave from The Upjohn Company. He is an adjunct professor at the National Food Safety andgeneral studies in chemistry and social issues in biologyToxicology Center atWesternMichiganUniversity. His most recent positions at Pharmacia & Upjohn included senior scientist in drug metabolism research and senior scientist for strategic information analysis and competitive intelligence. Gerald S. Traynor, age 67, joined Neogen in July 1990 as General Manager for Ideal Instruments, Inc.State University since 1998. Hewas promoted tois currently Vice Presidentof Instrument Developmentfor Basic andManufacturing in January 1991 with responsibility for the Company's veterinary instrument and electronic instrument manufacturing operations. He was Vice President of Manufacturing for Martin Yale Industries for three years before joining Neogen and filled the same position for The Hedman Company from 1983-1987. Earlier, he served 16 years in various manufacturing management positions at ITT.Exploratory Research since September 2001.ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Company'sNeogen’s Proxy Statement to be filed within 120 days of May 31,2002.2003.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the Company'sNeogen’s Proxy Statement to be filed within 120 days of May 31,2002, with the exception of the table below.2003.
- ------------------------------------------------------------------------------------------------------------------------------------ (a) (b) (c) Number of securities to be Weighted-average exercise Number of securities issued upon exercise of price of outstanding options, remaining available for outstanding options, warrants warrants and rights. future issuance under equity Plan category and rights. compensation plans (excluding securities reflected in column (a)). - ------------------------------------------------------------------------------------------------------------------------------------Equity compensation plans approved by security holders 798,546 $8.86 682,200 - ------------------------------------------------------------------------------------------------------------------------------------ Equity compensation plans not approved by security holders - - - - ------------------------------------------------------------------------------------------------------------------------------------ Total 798,546 $8.86 682,200 - ------------------------------------------------------------------------------------------------------------------------------------ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Jack C. Parnell, Chairman of the Board of Directors, is a governmental relations advisor to the law firm of Kahn, Soares & Conway. Kahn, Soares & Conway has been retained by
the CompanyNeogen to represent it in governmental relations matters. The Company pays Kahn, Soares & Conway a monthly fee of $1,750 for ten hours of consulting. The agreement with Kahn, Soares & Conway is terminable by either party at the end of any month.ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
During the year ended May 31, 2003, Ernst & Young billed Neogen for its services as follows:
Audit Fees: The fees for the 2003 audit of Neogen’s consolidated financial statements and review of the third quarter unaudited financial statements were $74,833.
Financial Information System Design and Implementation Fees: None
Other Accounting Services: The fees for consulting on accounting and auditing matters were $4,710.
Non-audit Services: The fees for advice on tax matters were $750.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) (1) and (2). The
following documents are filedresponse to this portion of ITEM 15 is submitted as apartseparate section of thisReport: (1) Exhibits.report.(a) (3). The Exhibits listed on the accompanying Index to Exhibits immediately following the signatures are filed as part of, or incorporated by reference into, this
Report.report.(b)
Schedule II - Valuation and Qualifying Accounts. Schedules are not filed because there is no respective financial statement caption, full disclosure is provided in the financial statements and related footnotes or the test is not met. (c) Reports.Reports on Form 8-K.No reports on Form 8-K were filed duringDuring theperiodsperiod March 1,20022003 to May 31,2002. -48-2003 a Form 8-K was filed disclosing the acquisition of Adgen Ltd. of Ayr, Scotland as of March 1, 2003. Pursuant to the requirements of Section 13 or 15(d) 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 /s/ James L. Herbert /s/ Richard R. Current ----------------------------- ---------------------------------- James L. Herbert, President Richard R. Current, Vice President Chief Executive Officer Chief Financial Officer
NEOGEN CORPORATION /s/ James L. Herbert
/s/ Richard R. Current
James L. Herbert, President
Chief Executive Officer
Richard R. Current, Vice President
Chief Financial Officer
Dated: August
28, 200227, 2003Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
- --------- ----- -----/s//s/ James L. Herbert
James L. Herbert
President, Chief Executive Officer,
August 28, 2002 - -----------------------------------Director (Principal Executive Officer)James L. Herbert /s/August 27, 2003 /s/ Lon M. Bohannon
Lon M. Bohannon
Vice President and Chief Operating Officer
August 28, 2002 - ----------------------------------- Lon M. Bohannon27, 2003*
Thomas H. Reed
Secretary and Director
- ----------------------------------- Thomas H. Reed*
Director - -----------------------------------Herbert D. Doan
Director
*
Director - -----------------------------------Robert M. Book
Director
*
Director - -----------------------------------Gordon E. Guyer, Ph.D.
Director
*
Director - -----------------------------------G. Bruce Papesh
Director
*
Director - -----------------------------------Leonard E. Heller, Ph.D.
Director
*
Jack C. Parnell
Chairman, Board of Directors
- ----------------------------------- Jack C. Parnell *By: /s/*By:/s/ James L. Herbert
------------------------------ August 28, 2002James L. Herbert, Attorney-in-fact
August 27, 2003 -49-Neogen Corporation
Annual Report on Form 10-K
Year Ended May 31,
20022003EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION 3 (a) (1) Articles of Incorporation, as restated. 3 (a) (1) By-Laws, as amended. 10 (a) (2) Neogen Research Limited Partnership II/Neogen Corporation Agreement for the Sale of Patent Rights and Related Know How, dated October 14, 1988. 10 (c) (6) Neogen 1997 Stock Option Plan. 10 (d) (7) Tenner Incorporated/AMPCOR Diagnostics, Inc. Asset Purchase Agreement, dated April 28, 1999. 10 (e) (5) Neogen Corporation/United States Department of Agriculture License Agreement, dated June 29, 1994. 10 (g) (2) Neogen Research Limited Partnership II First Amended and Restated Partnership Agreement, dated December 30, 1985. 10 (h) (7) Neogen/BioPort Corporation Product Purchase Agreement dated May 22, 1998. 10 (j) (3) Amended and Restated Incentive Stock Option Plan II and Sample Individual Incentive Stock Option Agreement. 10 (k) (4) Neogen/International Diagnostic Systems Asset Purchase Agreement, dated June 27, 1995. 10 (o) (6) NBD Bank Loan Documents. 10 (p) (6) Comerica Bank Loan Documents. 10 (t) (1) Stock Purchase Agreement between Registrant and IDEXX Laboratories, Inc., dated February 17, 2000. 10 (v) (8) Neogen/AmVet Asset Purchase Agreement, dated June 2, 2000. 10 (x) (8) Amendment to Neogen Stock Option Plan. 10 (y) (9) Asset Purchase Agreement Between Registrant and Squire Laboratories, Inc. dated September 1, 2000. 10 (z) (10) Asset Purchase Agreement Between Registrant and Vysis, Inc., Gene-Trak Systems Industrial Diagnostics Corporation Dated August 4, 2001. 21 List of Subsidiaries. 23 Independent Auditors Consents. 24 Power of Attorney (included on Signature Page). 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. (1) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q dated February 29, 2000. (2) Incorporated by reference to the exhibit filed with the Registrant's Registration Statement on Form S-18 (No. 33-29844C) filed July 17, 1989 and amended on August 17, 1989 and August 22, 1989, which Registration became effective August 30, 1989. (3) Incorporated by reference to the exhibit filed with the Registrant's
EXHIBIT NO. DESCRIPTION
3(a)
(1) Articles of Incorporation, as restated. 3(a)
(1) By-Laws, as amended. 10(a)
(2) Neogen Research Limited Partnership II/Neogen Corporation Agreement for the sale of Patent Rights and Related Know How, dated October 14, 1988. 10(c)
(6) Neogen 1997 Stock Option Plan. 10(d)
(7) Tenner Incorporated/AMPCOR Diagnostics, Inc. Asset Purchase Agreement, dated April 28, 1999. 10(e)
(5) Neogen Corporation/United States Department of Agriculture License Agreement, dated June 29, 1994. 10(g)
(2) Neogen Research Limited Partnership II First Amended and Restated Partnership Agreement, dated December 30, 1985. 10(h)
(7) Neogen/BioPort Corporation Product Purchase Agreement dated May 22, 1998. 10(j)
(3) Amended and Restated Incentive Stock Option Plan II and Sample Individual Incentive Stock Option Agreement. 10(k)
(4) Neogen/International Diagnostic Systems Asset Purchase Agreement, dated June 27, 1995. 10(o)
(6) NBD Bank Loan Documents. 10(p)
(6) Comerica Bank Loan Documents. 10(t)
(1) Stock Purchase Agreement between Registrant and IDEXX Laboratories, Inc., dated February 17, 2000. 10(v)
(8) Neogen/AmVet Asset Purchase Agreement, dated June 2, 2000. 10(x)
(8) Amendment to Neogen Stock Option Plan. 10(y)
(9) Asset Purchase Agreement Between Registrant and Squire Laboratories, Inc. dated September 1, 2000. 10(z)
(10) Asset Purchase Agreement Between Registrant and Vysis, Inc., Gene-Trak Systems Industrial Diagnostics Corporation Dated August 4, 2001. 10(aa)
(11) Neogen Corporation 2002 Employee Stock Purchase Plan Agreement 10(ab)
(12) Neogen Corporation 401(K) Retirement Savings Plan Agreement 16
(13) Letter from Deloitte & Touche, LLP regarding change in certifying accountant. 21 Subsidiaries of the Registrant. 23 (a) Consent of Ernst & Young LLP. 23 (b) Consent of Deloitte & Touche LLP 24 Power of Attorney (included on Signature Page). 31.1 Section 302 Certification of Chief Executive Officer, filed herewith.
31.2
Section 302 Certification of Chief Financial Officer, filed herewith. 32
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.
(1) Incorporated by reference to the exhibit filed with the Registrant’s Quarterly Report on Form 10-Q dated February 29, 2000.
(2) Incorporated by reference to the exhibit filed with the Registrant’s Registration Statement on Form S-18 (No. 33-29844C) filed July 17, 1989 and amended on August 17, 1989 and August 22, 1989, which Registration became effective August 30, 1989.
(3) Incorporated by reference to the exhibit filed with the Registrant’s Annual Report on Form 10-K for the year ended May 31, 1992.
(4) Incorporated by reference to the exhibit filed with the Registrant’s Annual Report on Form 10-KSB for the year ended May 31, 1995.
(5) Incorporated by reference to the exhibit filed with the Registrant’s Registration Statement on Form S-2 (No. 333-12193) filed September 17, 1996 and amended on October 18, 1996, which Registration became effective October 22, 1996.
(6) Incorporated by reference to the exhibit filed with the Registrant’s Annual Report on Form 10-KSB for the year ended May 31, 1998.
(7) Incorporated by reference to the exhibit filed with the Registrant’s Annual Report on Form 10-K for the year ended May 31, 1999.
(8) Incorporated by reference to the exhibit filed with the Registrant’s Annual Report on Form 10-K for the year ended May 31, 2000.
(9) Incorporated by reference to the exhibit filed with the Registrant’s Report on Form 10-Q dated August 31, 2000.
(10) Incorporated by reference to the exhibit filed with the Registrant’s Report on Form 10-Q dated October 12, 2001.
(11) Incorporated by reference to the exhibit filed with the Registrant’s Registration Statement on Form S-8 (No. 333-101638) filed December 4, 2002.
(12) Incorporated by reference to the exhibit filed with the Registrant’s Registration Statement on Form S-8 (No. 333-101639) filed December 4, 2002.
(13) Incorporated by reference to the exhibit filed with the Registrants Report on Form 8-K/A dated January 16, 2003. ANNUAL REPORT ON FORM 10-K
ITEM 15 (a)(1) AND (2)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED MAY 31, 2003
NEOGEN CORPORATION
LANSING, MICHIGAN
10-K—ITEM 15(a)(1) AND (2)
NEOGEN CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Neogen Corporation and subsidiaries are included in ITEM 8:
Reports of Independent Auditors
Consolidated Balance Sheets—May 31, 2003 and 2002
Consolidated Statements of Income—Years ended May 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows—Years ended May 31, 2003, 2002 and 2001
Notes to consolidated financial statements
The following consolidated financial statement schedule of Neogen Corporation and subsidiaries is included in Item 15(a) (2):
Schedule II—Valuation and qualifying accounts and reserves
All other schedules for which provision is made in the applicable accounting regulation of the United States Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
Report of Independent Auditors—Ernst & Young LLP
Board of Directors and Stockholders
Neogen Corporation
We have audited the accompanying consolidated balance sheet of Neogen Corporation and subsidiaries as of May 31, 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended. Our audits also included the financial statement schedule for 2003 listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Neogen Corporation and subsidiaries at May 31, 2003, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule for 2003, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Grand Rapids, Michigan
July 18, 2003
Report of Independent Auditors—Deloitte & Touche LLP
To the Board of Directors
Neogen Corporation
Lansing, Michigan
We have audited the accompanying consolidated balance sheet of Neogen Corporation and subsidiaries as of May 31, 2002, and the related consolidated statements of income, stockholders’ equity, and cash flows for the years ended May 31, 2002 and 2001. Our audits also included the financial statement schedule for the years ended May 31, 2002 and 2001 listed in the Index at Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, such 2002 and 2001 consolidated financial statements present fairly, in all material respects, the financial position of the Company as of May 31, 2002, and the results of their operations and their cash flows for the years ended May 31, 2002 and 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule for the years ended May 31, 2002 and 2001 when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Detroit, Michigan
July 26, 2002
Neogen Corporation and Subsidiaries
Consolidated Balance Sheets
May 31, 2003 2002 Assets
Current Assets
Cash
$ 1,061,000 $ 2,012,000 Marketable securities
7,836,000 4,341,000 Accounts receivable, less allowance of $611,000 and $537,000
7,499,000 6,462,000 Inventories
9,840,000 8,683,000 Deferred income taxes
694,000 1,147,000 Prepaid expenses and other current assets
1,041,000 970,000 Total Current Assets
27,971,000 23,615,000 Property and Equipment
Land and improvements
279,000 233,000 Buildings and improvements
2,833,000 2,187,000 Machinery and equipment
7,117,000 6,160,000 Furniture and fixtures
540,000 493,000 10,769,000 9,073,000 Less accumulated depreciation
6,129,000 5,332,000 Net Property and Equipment
4,640,000 3,741,000 Other Assets
Goodwill and other non-amortizable intangible assets
13,665,000 11,629,000 Other non-current assets, net of accumulated amortization of $860,000 and $691,000
1,760,000 1,285,000 Total Other Assets
15,425,000 12,914,000 $ 48,036,000 $ 40,270,000 Neogen Corporation and Subsidiaries
Consolidated Balance Sheets
May 31, 2003 2002 Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable
$ 3,273,000 $ 2,329,000 Accruals
Compensation and benefits
1,201,000 1,103,000 Federal income taxes
342,000 230,000 Other
947,000 302,000 Total Current Liabilities
5,763,000 3,964,000 Deferred Income Taxes
405,000 366,000 Other Long-Term Liabilities
466,000 394,000 Total Liabilities
6,634,000 4,724,000 Stockholders’ Equity
Preferred stock, $1.00 par value—shares authorized 100,000; none issued and outstanding
— — Common stock, $0.16 par value—shares authorized 20,000,000; 6,200,486 and 6,108,468 shares issued and outstanding
992,000 977,000 Additional paid-in capital
24,830,000 23,779,000 Accumulated other comprehensive income
3,000 — Retained earnings
15,577,000 10,790,000 Total Stockholders’ Equity
41,402,000 35,546,000 $ 48,036,000 $ 40,270,000 See accompanying notes to consolidated financial statements.
Neogen Corporation and Subsidiaries
Consolidated Statements of Income
Year Ended May 31, 2003 2002 2001 Net Sales
$ 46,488,000 $ 41,097,000 $ 34,895,000 Cost of Goods Sold
21,763,000 20,196,000 17,157,000 Gross Margin
24,725,000 20,901,000 17,738,000 Operating Expenses
Sales and marketing
10,880,000 8,971,000 7,596,000 General and administrative
4,146,000 4,178,000 4,039,000 Research and development
2,914,000 2,252,000 1,838,000 17,940,000 15,401,000 13,473,000 Operating Income
6,785,000 5,500,000 4,265,000 Other Income (Expense)
Interest income
98,000 132,000 376,000 Interest expense
— (3,000 ) (32,000 ) Royalty and other
390,000 331,000 261,000 488,000 460,000 605,000 Income Before Income Taxes
7,273,000 5,960,000 4,870,000 Income Taxes
2,486,000 2,015,000 1,700,000 Net Income
$ 4,787,000 $ 3,945,000 $ 3,170,000 Net Income Per Share
Basic
$ .78 $ .66 $ .55 Diluted
$ .75 $ .62 $ .54 See accompanying notes to consolidated financial statements.
Neogen Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity
Common Stock Additional
Paid-in
CapitalAccumulated
Other
Comprehensive
Income
Retained
EarningsTotal
Stockholders’
Equity
Shares
Amount Balance, June 1, 2000
5,773,187 $ 924,000 $ 21,205,000 $ — $ 3,675,000 $ 25,804,000 Exercise of options
141,600 23,000 913,000 — — 936,000 Repurchase of common stock
(91,267 ) (15,000 ) (558,000 ) — — (573,000 ) Net income for 2001
3,170,000 3,170,000 Balance, May 31, 2001
5,823,520 932,000 21,560,000 — 6,845,000 29,337,000 Exercise of options, including $64,000 income tax benefit
218,948 34,000 1,437,000 — — 1,471,000 Repurchase of common stock
(28,000 ) (4,000 ) (311,000 ) — — (315,000 ) Business acquisition
94,000 15,000 1,093,000 — — 1,108,000 Net income for 2002
3,945,000 3,945,000 Balance, May 31, 2002
6,108,468 977,000 23,779,000 — 10,790,000 35,546,000 Exercise of options, including
$571,000 income tax benefit
102,128 17,000 1,266,000 — — 1,283,000 Repurchase of common stock
(41,750 ) (7,000 ) (551,000 ) — — (558,000 ) Business acquisition
31,640 5,000 336,000 — — 341,000 Comprehensive income:
Net income for 2003
— 4,787,000 4,787,000 Foreign currency translation adjustments
$ 3,000 — 3,000 Total comprehensive income
4,790,000 Balance, May 31, 2003
6,200,486 $ 992,000 $ 24,830,000 $ 3,000 $ 15,577,000 $ 41,402,000 See accompanying notes to consolidated financial statements.
Neogen Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended May 31, 2003 2002 2001 Cash Flows From Operating Activities
Net income
$ 4,787,000 $ 3,945,000 $ 3,170,000 Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization
1,136,000 1,071,000 1,302,000 Deferred income taxes (credit)
420,000 (400,000 ) (382,000 ) Income tax benefit of stock plan transactions
571,000 64,000 — Changes in operating assets and liabilities, net of business acquisitions:
Accounts receivable
(755,000 ) (128,000 ) (568,000 ) Inventories
(1,055,000 ) (1,579,000 ) (1,120,000 ) Prepaid expenses and other current assets
70,000 46,000 (353,000 ) Accounts payable
752,000 885,000 (536,000 ) Accruals
775,000 (444,000 ) 983,000 Net Cash Provided By Operating Activities
6,701,000 3,460,000 2,496,000 Cash Flows From Investing Activities
Proceeds from sales of marketable securities
41,184,000 30,173,000 10,399,000 Purchases of marketable securities
(44,679,000 ) (28,180,000 ) (8,262,000 ) Purchases of property, equipment and other noncurrent assets
(2,461,000 ) (1,717,000 ) (1,099,000 ) Business acquisitions, net of cash acquired
(1,850,000 ) (3,587,000 ) (4,748,000 ) Net Cash Used In Investing Activities
(7,806,000 ) (3,311,000 ) (3,710,000 ) Cash Flows From Financing Activities
Net proceeds from issuance of common stock
712,000 1,407,000 936,000 Repurchase of common stock
(558,000 ) (315,000 ) (573,000 ) Payments on long-term borrowings
— (77,000 ) (499,000 ) Net Cash Provided By (Used In) Financing Activities
154,000 1,015,000 (136,000 ) Net Increase (Decrease) In Cash
(951,000 ) 1,164,000 (1,350,000 ) Cash, at beginning of year
2,012,000 848,000 2,198,000 Cash, at end of year
$ 1,061,000 $ 2,012,000 $ 848,000 Supplemental Cash Flow Information
Income taxes paid, net of refunds
$ 1,050,000 $ 2,890,000 $ 1,507,000 Interest paid
— 3,000 32,000 See accompanying 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 safety testing and animal health applications.
Basis of Consolidation
The consolidated financial statements include the accounts of Neogen Corporation, Ideal Instruments, Inc., Acumedia Manufacturers, Inc., Adgen Ltd., Neogen Properties, L.L.C. and two majority owned companies that are general partners in research limited partnerships. The investments in and income from research 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 accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
Comprehensive Income
Comprehensive income represents net income and any revenues, expenses, gains and losses that, under accounting principles generally accepted in the United States, are excluded from net income and recognized directly as a component of stockholders’ equity. At May 31, 2003, accumulated other comprehensive income consists of foreign currency translation adjustments.
Accounts Receivable and Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. Management attempts to minimize credit risk by reviewing customers’ credit history before extending credit and by monitoring credit exposure on a regular basis. An allowance for possible losses on accounts receivable is established based upon factors surrounding the credit risk of specific customers, historical trends and other information. Collateral or other security is generally not required for accounts receivable. No single customer accounted for more than 10% of accounts receivable at May 31, 2003 and 2002.
Fair Values of Financial Instruments
The carrying amounts of marketable securities, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short maturity and payment periods associated with these items.
Marketable Securities
All marketable securities are classified as available-for-sale and are used to support current operations or to take advantage of short-term 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 within the consolidated statements of income.
Inventories
Inventories are stated at the lower of cost, determined on the first-in, first-out method, or market. The components of inventories were as follows:
May 31, 2003 2002 Raw materials
$ 3,231,000 $ 2,969,000 Work-in-process
422,000 589,000 Finished goods
6,187,000 5,125,000 $ 9,840,000 $ 8,683,000 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, which is generally seven to thirty-nine years for buildings and improvements and three to five years for furniture, machinery and equipment. Depreciation expense was $969,000, $895,000 and $767,000, in 2003, 2002 and 2001, respectively.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over fair value of tangible net assets of acquired businesses after amounts allocated to other intangible assets. Other intangible assets include trademarks, trade names and patents, that are amortized on a straight-line basis over five to twenty years. The Company reviews the carrying amounts of goodwill and other non-amortizable intangible assets annually to determine if such assets may be impaired. If the carrying amounts of these assets are not recoverable based upon a discounted cash flow analysis, such assets are reduced by the estimated shortfall of fair value to recorded value.
Long-lived Assets
Management 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. Impairment is evaluated on the basis of undiscounted future cash flows from operations before interest for the remaining useful life of the assets. If present, impairment is measured based on the difference between fair value and the net book value of the related assets. Any long-lived assets held for disposal are reported at the lower of these net book values or fair value less estimated costs of disposal.
Stock Options
The Company follows Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees, in accounting for its stock option plans. Under Opinion No. 25, no compensation expense is recognized because the exercise price of the Company’s stock options equals the market price of underlying stock on the date of grant. Had compensation expense for the Company’s stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with Statement of Financial Accounting Standards (SFAS) No. 123,Accounting for Stock-Based Compensation, the Company’s net income and net income per share would have been as follows:
Year ended May 31, 2003 2002 2001 Net income
As reported
$ 4,787,000 $ 3,945,000 $ 3,170,000 Deduct-compensation expense based on fair value method
(706,000 ) (916,000 ) (373,000 ) Pro forma
$ 4,081,000 $ 3,029,000 $ 2,797,000 Basic net income per share
As reported
$ .78 $ .66 $ .55 Pro forma
$ .67 $ .59 $ .49 Diluted net income per share
As reported
$ .75 $ .62 $ .54 Pro forma
$ .65 $ .55 $ .47 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 2003, 2002 and 2001, respectively: dividend yield of 0%; expected volatility of 54.0%, 58.0% and 61.0%; risk free interest rates of 2.7%, 4.2% and 6.1%; and expected lives of four years.
Revenue Recognition
Revenue from sales of products is recognized at the time title of goods passes to the buyer and the buyer assumes the risks and rewards of ownership which is generally at the time of shipment. Where right of return exists, allowances are made at the time of sale to reflect expected returns based on historical experience.
Research and Development
Research and development expenditures are charged to operations as incurred.
Limited Partnership Royalty Income and Expense
Royalty income from related research limited partnerships (included as a component of other income) was $348,000 in 2003, $266,000 in 2002 and $264,000 in 2001. Royalty expense paid to related research limited partnerships (included as a component of sales and marketing expense) was $777,000 in 2003, $589,000 in 2002 and $587,000 in 2001. The agreement governing royalty expense paid to limited partnerships will expire in October 2003. At that time, substantially all royalty expense and limited partnership income will cease.
Income Taxes
The Company accounts for income taxes using the liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax expense (credit) represents the change in net deferred income tax assets and liabilities during the year, after considering deferred income taxes provided as part of the purchase price allocation associated with business acquisitions.
Advertising Costs
Advertising costs are expensed as incurred and totaled $196,000 in 2003, $165,000 in 2002 and $153,000 in 2001.
New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46),Consolidation of Variable Interest Entities This new rule requires that companies consolidate a variable interest entity if the company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The provisions of FIN 46 apply as of May 31, 2003 to variable interest entities acquired before February 1, 2003 and immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after January 31, 2003. FIN 46 is not expected to have a material effect on the Company’s consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and requires an issuer to classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those financial instruments were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is not expected to have a material effect on the Company’s financial statements.
Net Income Per Share
Basic net income per share is based on the weighted average number of common shares outstanding during each year. Diluted earnings per share is based on the weighted average number of common shares and dilutive potential common shares outstanding. The Company’s dilutive potential common shares outstanding during the years result entirely from dilutive stock options and warrants. The following table presents the net income per share calculations:
Year ended May 31, 2003 2002 2001 Numerator for basic and diluted net income per share
Net income
$ 4,787,000 $ 3,945,000 $ 3,170,000 Denominator
Denominator for basic net income per share weighted average shares
6,125,571 5,999,311 5,731,712 Effect of dilutive stock options and warrants
262,675 378,381 184,254 Denominator for diluted net income per share
6,388,246 6,377,692 5,915,966 Net income per share
Basic
$ .78 $ .66 $ .55 Diluted
$ .75 $ .62 $ .54 Options to purchase 35,400 shares of common stock at prices ranging from $9.25 to $13.25 in 2001 were outstanding, but were excluded from the computation of diluted net income per share because the options’ exercise prices were greater than the average market price of the common shares for the period and, therefore, were anti-dilutive. In 2002 and 2003, no options were excluded as option prices did not exceed the average market price of the common shares.
Reclassifications
Certain prior year amounts have been reclassified to conform with the presentation used in 2003.
2. Goodwill and Other Intangible Assets
As of June 1, 2001, the Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 prohibits the amortization of goodwill and intangible assets with indefinite lives and requires that the Company evaluate these intangibles for impairment on an annual basis. Management has completed the required annual impairment tests of goodwill and intangible assets with indefinite lives as proscribed by SFAS No. 142 and determined that recorded amounts were not impaired and that no write-down was necessary.
The following table summarizes goodwill and other non-amortizable intangible assets by business segment:
Food Safety Animal Safety Balance, June 1, 2001
$ 749,000 $ 6,889,000 Goodwill acquired
3,499,000 492,000 Balance, May 31, 2002
4,248,000 7,381,000 Goodwill acquired
2,002,000 — Non-amortizable intangible assets acquired
34,000 — Balance, May 31, 2003
$ 6,284,000 $ 7,381,000 Other amortizable intangible assets consisted of the following and are included in other noncurrent assets within the consolidated balance sheets:
Gross
Carrying
Amount
Less
Accumulated
Amortization
Net
Carrying
Amount
Licenses
$ 709,000 $ 164,000 $ 545,000 Covenants not to compete
415,000 241,000 174,000 Patents
348,000 285,000 63,000 Other
1,000 1,000 — Balance, May 31, 2002
$ 1,473,000 $ 691,000 $ 782,000 Licenses
$ 1,081,000 $ 229,000 $ 852,000 Covenants not to compete
450,000 310,000 140,000 Patents
427,000 320,000 107,000 Other
181,000 1,000 180,000 Balance, May 31, 2003
$ 2,139,000 $ 860,000 $ 1,279,000 Amortization expense for other intangibles totaled $167,000 in 2003, $176,000 in 2002 and $174,000 in 2001. The estimated amortization expense for each of the five succeeding years is as follows: 2004—$165,000; 2005—$133,000; 2006—$93,000;
2007—$75,000; and 2008—$65,000.Application of the non-amortization provisions of SFAS No. 142 in 2001 would have increased net income by $240,000 ($.04 per diluted share).
3. Marketable Securities
The Company currently invests only in high quality, short-term investments with maturity dates of less than one year that are classified as available-for-sale. As such, there were no significant differences between amortized cost and estimated fair market value at May 31, 2003 and 2002. Additionally, since investments are short-term and are carried to maturity, there were no realized gains and losses in 2003, 2002 and 2001. At May 31, 2003 and 2002, marketable securities consisted of corporate debt securities.
4. Business Acquisitions
On June 2, 2000, the Company acquired substantially all of the assets of AmVet Pharmaceuticals, a distributor of animal health products. The acquisition was accounted for using the purchase method. The purchase price, subject to certain post closing adjustments, was $3,715,000 paid in cash, plus additional payments in July 2001, resulting from the post closing adjustments for the payment of $170,000 and 32,388 shares of the Company’s common stock. The value of the post closing common stock consideration was discounted by 10% to allow for the one year trading restriction thereon. The initial purchase price was allocated $909,000 to current assets, $10,000 to property and equipment and $2,796,000 to intangible assets, primarily goodwill. Sales of AmVet products were approximately $4,600,000 in the year ended May 31,
1992. (4) Incorporated by reference2001.On September 1, 2000, the Company acquired certain assets of Squire Laboratories, a manufacturer and distributor of animal health products. The acquisition was accounted for using the purchase method. The purchase price was $1,033,000 paid in cash, and was allocated $133,000 to current assets, $127,000 to property and equipment and $773,000 to intangible assets, primarily goodwill. Sales of Squire products approximated $600,000 in 2001 following the acquisition.
Following the acquisitions, the assets of Amvet and Squire were moved to the
exhibit filedCompany’s facility in Lexington, Kentucky and combined with theRegistrant's Annual ReportCompany’s Animal Safety Division.In a purchase transaction on
Form 10-KSBJune 30, 2001, the Company acquired all of the stock of QA Life Sciences, a San Diego California company in the foodborne bacteria testing market. The purchase price, subject to certain post closing adjustments, was 61,000 shares of the Company’s common stock. The value of the consideration was discounted by 10% to allow for the one year trading restriction thereon. Allocation of the consideration was $129,000 to current assets, $150,000 to property and equipment and $487,000 to intangible assets, primarily goodwill. A secondary payment of $45,000 was made in July 2002 in the form of common stock. Sales of products after the acquisition in 2002 were $590,000. Immediately following the acquisition, the operations of QA Life Sciences were moved to the Company’s facilities in Baltimore, Maryland and Lansing, Michigan where they were combined with the Food Safety Division.On August 1, 2001, the Company acquired, in a cash transaction, the assets of Gene-Trak Systems, a company involved in the manufacture and sale of foodborne pathogen detection products based on DNA probe technology. The acquisition was accounted for as a purchase with assets allocated $378,000 to current assets, $125,000 to property and equipment and $3,144,000 to intangible assets, primarily goodwill. The operations of Gene-Trak Systems were moved to Lansing Michigan, and combined with the Food Safety Division. Sales of Gene-Trak products in 2002 following the acquisition were $1,534,000.
As of February 28, 2003, the Company acquired the outstanding common stock of Adgen Ltd. of Ayr, Scotland, a company involved in the manufacture and sale of diagnostic test kits for the detection of plant diseases and the distribution of food safety diagnostic test kits. Consideration was net cash of $1,850,000 and 32,000 shares of common stock with a fair value of $341,000. Additionally, the Company is obligated to pay contingent consideration based on future revenue levels. The acquisition was accounted for as a purchase with assets allocated $525,000 to current assets, $49,000 to property and equipment, $359,000 in current liabilities and $1,976,000 to intangible assets, primarily goodwill. In 2003, sales of $200,000 were attributable to the Adgen acquisition. Adgen continues to be located in Ayr, Scotland.
Proforma net income for 2003 and 2002 would not have differed significantly from amounts reported had the related acquisitions in those years been completed as of June 1, 2001.
5. Credit Facilities
The Company and its subsidiaries have available working capital lines-of-credit and borrowing arrangements with banks totaling $2,500,000. There were no borrowings under these lines in the two-year period ended May 31, 2003. These arrangements provide for interest at rates at prime (4.25% at May 31, 2003) less ½% and are collateralized by all of the assets of the Company.
In addition, the Company maintains an unsecured acquisition line-of-credit in the amount of $7,500,000 at prime less ½%. There were no borrowings under this line in the two-year period ended May 31, 2003.
Terms of financing arrangements include, among other provisions, requirements to maintain certain financial criteria and restricts the payment of dividends.
6. Equity Compensation Plans
Qualified and non-qualified options to purchase shares of common stock may be granted to directors, officers and employees of the Company at an exercise price of not less than the fair market value of the stock on the date of grant under the terms of the Company’s stock option plans. The number of shares authorized for issuance under the plans is 2,459,375. At May 31, 2003, options have been granted with three to five year vesting schedules and option terms of five to ten years.
The following is a summary of stock option plan activity:
Shares Weighted-Average
Exercise PriceOutstanding at June 1, 2000 (295,182 exercisable)
706,034 $ 7.18 Granted
216,000 6.31 Exercised
(141,600 ) 6.67 Forfeited
(1,900 ) 7.29 Outstanding at May 31, 2001 (286,777 exercisable)
778,534 7.03 Granted
254,700 13.20 Exercised
(209,288 ) 7.41 Forfeited
(25,400 ) 9.03 Outstanding at May 31, 2002 (230,779 exercisable)
798,546 8.86 Granted
258,500 12.23 Exercised
(102,272 ) 7.03 Forfeited
(24,100 ) 9.99 Outstanding at May 31, 2003 (290,286 exercisable)
930,674 $ 9.96 Shares available for grant under stock option plans were 447,800, 682,200 and 911,500 at May 31, 2003, 2002 and 2001. The weighted-average grant date fair value of options granted in 2003, 2002 and 2001 was $5.41, $6.29 and $2.97, respectively.
The following is a summary of stock options outstanding at May 31, 2003:
Options Outstanding Options Exercisable Range of Exercise Price
Number Average
Remaining
Contractual
Life (Years)
Weighted-
Average
Exercise
Price
Number Weighted-
Average
Exercise
Price
$ 6.06 – 8.12
419,498 2.8 $ 6.60 222,059 $ 6.76 9.25 – 13.45
493,176 4.6 12.68 62,233 13.06 13.90 – 13.90
18,000 8.3 13.90 5,994 13.90 $ 6.06 – 13.90
930,674 3.9 $ 9.96 290,286 $ 8.26 The weighted-average exercise price of shares that were exercisable at May 31, 2002 and 2001 was $7.75 and $7.37, respectively.
The following table summarizes warrant activity. All warrants are exercisable for unregistered common stock of the Company and expire through 2012.
Shares Weighted-
Average
Exercise
PriceOutstanding warrants at June 1, 2000
8,000 $ 6.25 Warrants exercised during the year
— — Warrants granted during the year
21,000 6.44 Outstanding warrants at May 31, 2001
29,000 6.39 Warrants exercised during the year
(26,000 ) 6.29 Warrants granted during the year
14,000 11.71 Outstanding warrants at May 31, 2002
17,000 10.93 Warrants exercised during the year
(1,000 ) 6.88 Warrants granted during the year
13,500 11.90 Outstanding warrants at May 31, 2003
29,500 $ 11.51 In October 2002, the shareholders approved the adoption of the 2002 Employee Stock Purchase Plan. Common stock totaling 100,000 shares is reserved for issuance under the terms of the plan. The plan gives eligible employees the option to purchase common stock (total purchases in any year are limited to 10% of compensation) at 95% of the lower of the market value of the stock at the beginning or end of each participation period. There were no employee purchases in fiscal 2003.
7. Income Taxes
The provision for income taxes consisted of the following:
Year ended May 31, 2003 2002 2001 Current:
Federal
$ 1,745,000 $ 2,223,000 $ 1,905,000 State
321,000 192,000 177,000 Deferred (credit)
420,000 (400,000 ) (382,000 ) $ 2,486,000 $ 2,015,000 $ 1,700,000 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 income tax liabilities and assets are as follows:
May 31, 2003 2002 Deferred income tax liabilities:
Depreciation and amortization
$ 570,000 $ 179,000 Deferred income tax assets
Inventories and accounts receivable
655,000 597,000 Accruals
204,000 363,000 Total deferred income tax assets
859,000 960,000 Net deferred income tax assets
$ 289,000 $ 781,000 The reconciliation of income taxes computed at the U.S. federal statutory tax rate to income tax expense is as follows:
Year ended May 31, 2003 2002 2001 Tax at U.S. statutory rates
$ 2,473,000 $ 2,026,000 $ 1,656,000 Adjustment of valuation allowance
— — (278,000 ) Prior year adjustments
— — 208,000 Tax credits and other
(199,000 ) (138,000 ) — Provisions for state income taxes, net of federal benefit
212,000 127,000 114,000 $ 2,486,000 $ 2,015,000 $ 1,700,000
8. Commitments and Contingencies 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, including amounts paid to related research limited partnerships, under the terms of these agreements for 2003, 2002 and 2001 was $1,524,000, $1,215,000 and $987,000 respectively.
The Company leases office and manufacturing facilities under noncancelable operating leases. Rent expense for 2003, 2002 and 2001 was $527,000, $502,000 and $392,000, respectively. Future minimum rental payments for these leases over the next five years are as follows: 2004—$369,000; 2005—$148,000; 2006—$147,000; 2007—$158,000; and 2008 $140,000.
The Company is subject to certain legal proceedings in the normal course of business that, in the opinion of management, will not have a material effect on its future results of operations or financial position.
9. 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 $291,000, $278,000 and $200,000 in 2003, 2002 and 2001, respectively.
10. 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, foodborne bacteria, allergens and levels of general sanitation. The Animal Safety segment is primarily engaged in the production and marketing of products dedicated to animal health, including a complete line of consumable products marketed to veterinarians and animal health product distributors.
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.
Segment information is as follows:
Food Safety Animal
Safety
Corporate and
Eliminations (1)
Total 2003
Net sales to external customers
$ 25,496,000 $ 20,992,000 $ — $ 46,488,000 Operating income
4,864,000 2,542,000 (621,000 ) 6,785,000 Depreciation and amortization
661,000 475,000 — 1,136,000 Interest income
— — 98,000 98,000 Income taxes
1,654,000 864,000 (32,000 ) 2,486,000 Total assets
21,216,000 18,804,000 8,016,000 48,036,000 Expenditures for long-lived assets
2,250,000 211,000 — 2,461,000 2002
Net sales to external customers
$ 20,213,000 $ 20,884,000 $ — $ 41,097,000 Operating income
3,755,000 2,571,000 (826,000 ) 5,500,000 Depreciation and amortization
621,000 450,000 — 1,071,000 Interest income
— — 132,000 132,000 Income taxes
1,277,000 874,000 (136,000 ) 2,015,000 Total assets
16,519,000 18,263,000 5,488,000 40,270,000 Expenditures for long-lived assets
817,000 900,000 — 1,717,000 2001
Net sales to external customers
$ 16,717,000 $ 18,178,000 $ — $ 34,895,000 Operating income
2,369,000 2,594,000 (698,000 ) 4,265,000 Depreciation and amortization
566,000 736,000 — 1,302,000 Interest income
— — 376,000 376,000 Income taxes
806,000 882,000 12,000 1,700,000 Total assets
10,106,000 16,199,000 6,717,000 33,022,000 Expenditures for long-lived assets
569,000 530,000 — 1,099,000 (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.
Sales to customers outside the United States amounted to $9,609,000 or 21% of consolidated sales in 2003, $8,743,000 or 21% in 2002 and $8,100,000 or 23% in 2001 and were derived primarily in the geographic areas of South and Central America, Canada, Asia and Europe. The Company does not have sales to any single foreign country or customer exceeding 10% of consolidated net sales.
11. 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 May 31, 2003, 696,740 shares had been purchased in negotiated and open market transactions for a total price, including commissions, of approximately $4,940,000. Shares purchased under this buy-back program were retired.
12. Summary of Quarterly Data (Unaudited)
Quarter Ended August
2002
November
2002
February
2003
May
2003
(Dollars in thousands, except per share data) Net sales
$ 10,897 $ 12,273 $ 11,102 $ 12,216 Gross margin
5,817 6,708 5,741 6,459 Net income
1,075 1,401 1,030 1,281 Basic net income per share
.18 .23 .17 .21 Diluted net income per share
.17 .22 .16 .20
Quarter Ended August
2001
November
2001
February
2002
May
2002
(Dollars in thousands, except per share data) Net sales
$ 9,732 $ 10,699 $ 9,655 $ 11,011 Gross margin
4,892 5,673 4,617 5,719 Net income
862 1,145 826 1,112 Basic net income per share
.14 .19 .13 .18 Diluted net income per share
.14 .18 .13 .17 Quarterly net income per share is based on weighted-average shares outstanding and potentially dilutive stock options and warrants for the specific period, and as a result, will not necessarily aggregate to total net income per share as computed for the year
ended May 31, 1995. (5) Incorporated by reference toas disclosed in theexhibit filed with the Registrant's Registration Statement on Form S-2 (No. 333-12193) filed September 17, 1996 and amended on October 18, 1996, which Registration became effective October 22, 1996. (6) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-KSB for the year ended May 31, 1998. (7) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended May 31, 1999. (8) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended May 31, 2000. (9) Incorporated by reference to the exhibit filed with the Registrant's Report on Form 10-Q dated August 31, 2000. (10) Incorporated by reference to the exhibit filed with the Registrant's report on Form 10-Q dated October 12, 2001. -50-consolidated statements of income. Neogen Corporation and Subsidiaries
Schedule II
Valuation and Qualifying Accounts
Balance at
Beginningof Year
Charged to
Costs and
Expenses
Acquisition Write-Offs Balance
at End
of Year
Valuation Allowance for Accounts Receivable:
Year Ended May 31:
2003
$ 537,000 $ 170,000 $ 11,000 (1) $ 107,000 $ 611,000 2002
467,000 173,000 55,000 (2) 158,000 537,000 2001
361,000 223,000 100,000 (3) 217,000 467,000
Balance Charged To Balance at Beginning Costs(1) Acquisition of Adgen Ltd. as of February 28, 2003.
(2) Acquisition of Gene-Trak Systems as of August 1, 2001.
(3) Acquisition of AmVet Pharmaceuticals on June 1, 2000.
Balance at
Beginningof Year
Charged to
Costs and
Expenses
Acquisition Write-Offs Balance
at End
of Year
Valuation Allowance for Inventories:
Year Ended May 31:
2003
$ 633,000 $ 77,000 — $ 38,000 $ 672,000 2002
532,000 54,000 $ 70,000 (1) 23,000 633,000 2001
403,000 79,000 50,000 (2) — 532,000
(1) Acquisition of QA Life Sciences as of June 30, 2001 and at End DescriptionGene-Trak Systems as ofYear ExpensesAugust 1, 2001.
(2) Acquisition Write-OffsofYear - -------------------------------------------------------------------------------------------------------Allowance for Doubtful Accounts: Year Ended May 31: 2002 $ 467,000 $ 173,000 $ 55,000(1) $ 158,000 $ 537,000 2001 361,000 223,000 100,000(2) 217,000 467,000 2000 166,000 162,000 90,000(3) 57,000 361,000 - -------------------------------------------------------------------------------------------------------AmVet Pharmaceuticals on June 1, 2000.(1) Acquisition of Gene-Trak Systems as of August 1, 2001. (2) Acquisition of AmVet Pharmaceuticals on June 1, 2000. (3) Acquisition of Acumedia Manufacturers on February 17, 2000. -51-