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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For fiscal year ended May 31, 2002
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OR
[_] 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: 0-17988
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NEOGEN CORPORATION
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(Name of registrant as specified in its charter)
MICHIGAN 38-2367843
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
620 LESHER PLACE, LANSING, MICHIGAN 48912
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(Address of principal executive offices) (Zip Code)
517/372-9200
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(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $ .16 PAR VALUE
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. Yes X No
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Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K ( )
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The aggregate market value of the voting stock held by non-affiliates of
the registrant as of May 31, 2002 was $81,000,000 based on the closing price as
reported by the NASDAQ National Market.
As of July 31, 2002, registrant had 6,139,177 outstanding shares.
DOCUMENTS INCORPORATED BY REFERENCE
THE REGISTRANT'S DEFINITIVE PROXY 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.
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PART I
ITEM 1. BUSINESS
General
Neogen Corporation develops, manufactures, and markets a diverse line of
products dedicated to food and animal safety. The Company's food safety segment
consists primarily of diagnostic test kits and related products, including
dehydrated culture media, marketed to food producers and processors to aid in
the detection of foodborne bacteria, natural toxins, food allergens, genetic
modifications, ruminant by-products, drug residues, pesticide residues, plant
disease infections and levels of general sanitation. The diagnostic test kits
are generally less expensive, easier to use and provide greater accuracy and
speed than many of the conventional diagnostic methods currently in use. The
majority of the tests are disposable, single-use, immunoassay products that rely
on Neogen's proprietary antibodies to produce rapid and accurate test results.
The Company's animal safety segment is primarily engaged in the production
and marketing of products dedicated to animal health. These products include
more than 250 different veterinary instruments; including needles and syringes
used to administer precise amounts of antibiotics and vaccines helping to reduce
drug residues in meat and milk supplies. This segment also includes a line of
consumable products marketed primarily to veterinarians and distributors serving
the animal health 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 care
products.
Management's vision is for the Company 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 Company was formed as a Michigan corporation in June 1981 and actual
operations began in 1982. The Company'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 safety and food adulteration have had a
favorable impact on sales of several of the Company's food safety products.
Regulations issued by the U.S. Department of Agriculture and the U.S. Food and
Drug Administration governing federally inspected meat, poultry and seafood
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, resulting in higher sales
for several of the Company's diagnostic test kits.
Acquisitions and Divestitures
A part of Management's growth strategy for the Company has been to acquire
products and businesses that provide access to technology or products that
expand its core business. Since 1982, the Company has made several such
acquisitions. The information below summarizes recent transactions. (See Note 4
to Consolidated Financial Statements.)
On August 1, 2001, the Company acquired the assets of Gene-Trak Systems, a
company involved in the manufacture and sales 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.
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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. The products have been merged into
the Company's Animal Safety Division. Sales of Squire products in 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., 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 for dehydrated culture media. It also
provided products that can be supplied to many of the Company's current Food
Safety customers. Sales of Acumedia totaled $3,500,000 in fiscal 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 to food and animal safety. 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 products such as those 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 detecting natural
toxins, food allergens, drug residues, foodborne bacteria, pesticide residues,
disease infections and levels of general sanitation. 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 one 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
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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's food safety test kits aimed at the detection of harmful
foodborne bacteria are marketed under the Company's trade names Reveal(R),
Gene-Trak(R), ISO-Grid(TM), and Alert(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 developing test
kits for other harmful bacteria. Through a marketing arrangement with Biotrace
International PLC, the Company 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 residues of a large number of plant
pesticides. The seafood industry uses the Company's Alert for Sulfites to make
certain sulfite levels do not exceed federal regulatory levels.
The Company also markets qualitative and quantitative tests to detect
minute levels of food allergens under the trade names Veratox and Alert.
Currently, tests are available for milk, peanut and egg residues, three of the
most common of all food allergies.
Marketed under the brand name Agri-Screen(R), in 2002 Neogen developed the
first rapid tests to detect ruminant by-products in animal feed ingredients. The
tests are designed for use by feed mills, beef, dairy and sheep producers, and
regulatory agencies, in an effort to prevent the spread of BSE (a.k.a. "mad cow"
disease).
Marketed under the trade name Alert, the Company has several diagnostic
tests that are used to detect plant diseases. These quick tests identify the
presence of pythium, phytophthora, rhizoctonia, xanthamonas, and sclerotina. The
kits are used as an early detection device, and as a tool to limit fungicide
applications.
Following its acquisition of Acumedia Manufacturers, Inc. in February 2000,
the Company significantly expanded its presence in the dehydrated culture media
market. Standard and special formulation dry culture media products are marketed
to petri plate producers, laboratories, and other users on a world-wide basis
using direct sales, distributors and the food safety sales organization.
Sales of food safety products accounted for approximately 49%, 48% and 49%
of the Company's total revenues for fiscal years ended May 31, 2002, 2001 and
2000 respectively. (See Note 11 to Consolidated Financial Statements.)
Animal Safety
The Company markets 70 high sensitivity immunoassay tests for up to 200
drugs of abuse in animals and residues in meat. These include tests for narcotic
analgesics, stimulants, depressants, tranquilizers, anesthetics, steroids and
diuretics. Neogen also provides a testing service for equine veterinarians to
detect EPM that affects the central nervous system of horses, and can be fatal.
In addition, the Company markets BotVax B, the only USDA approved vaccine for
the prevention of Type B botulism in horses, and a line of approximately 70
premium health care products sold to the animal health market. Neogen also
produces and markets EqStim(R) and ImmunoRegulin(R), biologic products used as
immunostimulants to help fight infections in horses and dogs.
Through its wholly owned subsidiary Ideal Instruments, Inc., the Company
markets a complete line of veterinary instruments and animal health delivery
systems. Ideal offers approximately 250 different products, over 100 of which
are instruments used to deliver animal health products, such as antibiotics and
vaccines. Most of the remaining instruments are used in obstetrics and surgery.
Included among these products is a line of disposable syringes and needles
presently custom manufactured, and imported by Ideal.
The veterinary instruments product line is designed to provide better
control of animal health products, thereby reducing the likelihood of antibiotic
and pharmaceutical residues contaminating meat or milk products. At the same
time, the use of quality, high precision delivery instruments helps producers
improve efficiency.
The Company also has several products used for the detection of
biologically-active substances in humans by researchers and pharmaceutical
companies for biomedical research purposes. These tests are used to detect
cyclic nucleotides, hormones, leukotrienes, prostaglandins and steroids. Under
the trademarks K-Blue and K-Gold, the Company sells reagents used by diagnostic
test kit manufacturers.
In fiscal years ended May 31, 2002, 2001 and 2000, sales of animal safety
products as a percentage of total revenues were 51%, 52% and 51%, respectively.
(See Note 11 to Consolidated Financial Statements.)
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Research and Development
Management maintains a strong commitment to the Company's research and
development. The Company's product development efforts are focused on the
enhancement of existing product lines and in development of new products based
on the Company's existing technologies. The Company employs 20 individuals in
its research and development department, including immunologists, chemists,
engineers and microbiologists. Research and development expenditures were
approximately $2.3 million, $1.8 million and $1.6 million, representing 5%, 5%
and 7%, of total revenues in fiscal 2002, 2001 and 2000, respectively.
Management currently intends to maintain its research and development
expenditures at approximately 5% to 6% of total revenues.
The Company has ongoing development projects for new immunoassay diagnostic
tests for the food safety, animal safety and pharamacologics markets, as well as
engineering projects for new and improved veterinary instruments. Management
expects that these products will be available for marketing in fiscal years 2003
to 2005.
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 Efforts
Portions of certain technologies utilized in some products marketed by the
Company 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 parties
which provide for the payment of royalties based upon sales of products which
utilize the pertinent technology. For fiscal 2002, 2001 and 2000, royalty
expense under these agreements amounted to $1,215,000, $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.
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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 Approvals
Patents and trademarks are applied for whenever appropriate. Since its
inception, the Company 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 Company 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. In addition, patent litigation
is not uncommon. Accordingly, there can be no assurance that the Company's
existing patents will be sufficient to protect completely the Company's
proprietary rights.
The Company 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 kept in secure facilities and stored in more than one
location to circumvent their 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 several products requiring regulatory approval
including BotVax B, EqStim and Immuno Regulin. On a combined base, sales for
these products amounted to approximately 5% of total sales in fiscal year 2002.
The Company's general strategy is to select technical and proprietary products
that do not require mandatory approval to be marketed.
The Company does utilize 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 use of Company products in their
laboratories.
Manufacturing
The Company manufactures its products in Lansing, Michigan; Lexington,
Kentucky; Schiller Park, Illinois; Baltimore, Maryland; and Tampa, Florida.
There are currently approximately 105 full-time employees assigned to
manufacturing in these five 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 with minimal amounts of
additional capital equipment.
Manufacturing diagnostic tests for natural toxins, microorganisms, food
allergens, pesticides and plant disease diagnostic tests takes place in Lansing,
Michigan. Proprietary monoclonal and polyclonal antibodies for the Company's
diagnostic kits are produced on a regular schedule in the Company's immunology
laboratories in Lansing. Other reagents are similarly prepared by the chemistry
group. These component parts are then transferred to another building, where
final kit assembly and quality assurance are conducted, and shipping takes
place.
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.
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The Company's Schiller Park, Illinois, facility distributes veterinary
instruments that are 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 direct 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) and
ImmunoRegulin(R). 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. The
Company's BoxVax B vaccine is also produced in the Tampa facility, utilizing
Type B botulism seed cultures and a traditional fermentation process.
The Company purchases component parts and raw materials from over 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's backlog
of unshipped orders at any given time is not significant.
Competition
Management knows of no competitor that is pursuing its fundamental strategy
of developing a full line of products, ranging from disposable tests and
dehydrated culture media to veterinary instruments for a large number of food
safety and animal safety concerns. However, the Company does have competitors
for each of its primary product lines. The Company competes with a large number
of companies ranging from very small businesses to divisions of large companies.
Many of these firms 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 the Company's product line, the effectiveness of its
sales and customer service organizations and pricing are also components in its
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 Regulation
A significant portion of the Company'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 affect revenues.
The Company's development and manufacturing processes involve the use of
certain hazardous material, chemicals and compounds. Management believes that
the Company's safety features for handling and disposing of such commodities
comply with the standards prescribed by local, state and federal regulations.
The Company'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.
Employees
Currently, the Company employs approximately 265 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.
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Insurance
The Company maintains insurance in amounts and types that Management
believes to be reasonable in its industry.
ITEM 2. PROPERTIES
The Company owns six separate buildings located in Lansing, Michigan. A
26,000 square foot brick building located at 620 Lesher Place is used for the
Company's corporate administrative offices, along with sales and marketing
offices and research facilities for food safety. A 14,000 square foot brick
building located at 600 Lesher Place is currently used primarily for production
of food safety diagnostic test kits. Two adjacent buildings, located at 703 and
720 Shiawassee, total 30,000 square feet and are to be used for manufacturing
food safety products. The Company also owns two facilities comprising 2,500
square feet within one block of the existing corporate headquarters used for
various 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.
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 current lease, which calls for annual lease payments of $114,000,
expires December 31, 2003. 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.
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 requiring annual payments of $65,600
through 2006 and $68,000 in 2007.
Dehydrated culture media manufacturing takes place in a FDA licensed
facility. The operations are located in 12,600 square feet of leased space at
9601 Pulaski Park Drive, Baltimore, Maryland. The five-year lease, effective
July 1, 1998, was assumed as part of the acquisition of Acumedia by the Company.
The lease provides for annual payments beginning at $75,600 and increasing to
$81,412 in the last year of the lease.
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- cancelable lease through
September 2004. Rent for the 12 month period ended September 2002 is $51,400.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Company is involved in certain legal
proceedings, none of which, in the opinion of the management is material to the
financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
-10-
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on the NASDAQ National Market under the
symbol "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
As of July 31, 2002, there were approximately 500 stockholders of record of
Common Stock, which the Company believes represents a total of approximately
6,000 beneficial holders. The Company 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 periods presented are not comparable due to the change in the effective
income tax rate in fiscal year 1998 to 2001, the litigation settlement in
2001 and several acquisitions (see notes to Consolidated Financial
Statements).
-12-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information in this Management's Discussion and Analysis of Financial
Condition and Results of Operations contains both historical financial
information and forward-looking statements. Neogen Corporation management does
not provide forecasts of future financial performance. While management is
optimistic about the Company's long-term prospects, historical financial
information may not be indicative of future financial results.
The words "anticipate", "believe", "potential", "expect", and similar
expressions used herein are intended to identify forward-looking statements.
Forward-looking statements involve certain risks and uncertainties. Various
factors, including competition, recruitment and dependence on key employees,
impact of weather on agriculture and food production, identification and
integration of acquisitions, research and development risks, patent and trade
secret protection, government deregulation and other risks detailed from time to
time in the Company's reports on file at the Securities and Exchange Commission
may cause actual results to differ materially from those contained in the
forward-looking statements.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based on the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and judgements that affect the reported
amounts of assets, liabilities, revenues, and expenses and related disclosure of
contingent assets and liabilities. Management believes the critical accounting
policies and areas that require the most significant judgements and estimates to
be used in the preparation of the consolidated financial statements are revenue
recognition, allowance for doubtful accounts, inventory valuation, and the
assessment of the possible impairment of Goodwill and other intangible assets.
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' 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 its inventory for estimated obsolescence equal to the
cost of the inventory. Product obsolescence may be caused by shelf-life
expiration, discontinuance of a product line, replacement products in the
marketplace or other competitive situations.
Goodwill and Intangible Assets
Management assesses goodwill and 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 underperformance relative to expected historical or
projected future operating results.
--Significant changes in the use of acquired assets or strategy of the
Company.
--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's current business model. Any impairment identified in this computation
is given current recognition in any unissued financial statements.
Results of Operations
REVENUES (Dollars in Thousands)
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 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 the prior 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 year (QA Life Sciences and Gene-Trak) were $2,100,000.
In 2001, sales of food safety products increased 44% due to a full year of sales
of Acumedia, which was purchased in February 2000 and therefore 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 to the relative absence of weather conditions
that promote the occurrence of mold in commodity crops.
Animal safety division sales increased 15% in 2002. The Triple Crown product
line sales increased 34% during the year, with sales of the Company's animal
wound care products showing an increase of 41%. The Company'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
Cost of goods sold 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 49% in 2002, 49% in 2001 and 46%
in 2000.
Food safety gross margins were 59%, 57% and 60% in 2002, 2001 and 2000,
respectively. Changes in margins between the periods related principally to
product mix with manufactured test kits generally having higher margins than
products which are purchased on the outside for resale. Additionally margins for
food safety products have continued to benefit from increased fixed asset
coverage as revenue increases have outpaced increased expenditures for fixed
costs.
Animal safety gross margins were 43%, 45% and 47% in 2002, 2001 and 2000,
respectively. The fiscal year 2001 acquisitions of AmVet and Squire provided
products that are sold through distributors and have lower margins and lower
cost of distribution as well as lesser requirements for research and development
expenditures.
-14-
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
Many sales and marketing expense categories increased in 2002 and 2001 including
salaries, fringes, royalties, commissions, trade shows and travel. The increases
in 2002 and 2001 compared to 2000 are reflective of the continued expansion of
and investment in sales activities and support for the Company's distribution
channels both domestically and internationally. As a percentage of sales, sales
and marketing expense remained at 22% of revenues. Management plans to continue
to expand the Company's sales and marketing efforts in the future, but does not
expect related expenses to increase as a percentage of sales.
The increase in general and administrative expense in 2002 was the result of
additional expenses such as accounting and overall supervision necessary to
service the Company's higher levels of operations. As a percentage of revenues
general and administrative expense decreased to 10% from 12% in 2001. These
costs are much more fixed in nature than many other Company costs. 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.
Management believes that research and development is critical to the Company's
future and expects to continue to incur expenses at approximately the current
percentage of revenue. Certain of the Company's products such as those of
Acumedia, AmVet, Triple Crown and Squire require relatively less research and
development expenditures. Management expects that research and development
expenditures as a percentage of revenues from sales of 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, the Company's operating income increased by approximately
$1,200,000 to 13% of revenues following an increase of $1,900,000 to 12% of
revenues in 2001. These increases came principally from increases in sales of
existing and newly acquired products while not incurring comparable increases in
rates of expenditures for support of those sales.
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
Other income decreased in 2002 principally from the effect of the decrease in
interest earning assets which were used for the Gene-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-
TAXES ON INCOME (Dollars in Thousands)
2002 Increase 2001 Increase 2000
- -------------------------------------------------------------------------------
Taxes on Income $2,015 19% $1,700 40% $1,210
Federal and state taxes on income increased in each of the years as a result of
greater levels of income before taxes on income. As a percentage of income
before taxes on income (the tax rate), the category increased from 28% in 2000
to 35% in 2001 and decreased to 34% in 2002. Following the final recognition of
loss carryovers in 2000, the tax rate approximates the statutory tax rates and
is expected to continue at that level in the future.
NET INCOME AND NET INCOME PER SHARE
(Dollars 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 Condition and Liquidity
On May 31, 2002, the Company had $6,353,000 in cash and marketable securities,
working capital of $19,285,000 and stockholders' equity of $35,546,000. In
addition bank lines of $10,000,000 were available to, if necessary, support
ongoing operations or acquisitions.
Cash and marketable securities decreased $829,000 during fiscal 2002. Cash
provided from operations of $3,396,000 was offset by the acquisition of
Gene-Trak Systems for $3,647,000, and $1,717,000 for the purchases or property,
equipment and other assets.
Accounts receivable increased $436,000 or 7% when compared to May 31, 2001. This
resulted from increased sales during the year, offset by a reduction in days
sales outstanding from 60 days at May 31, 2001 to 51 days at May 31, 2002
following increased collection efforts instituted during the year.
Inventory levels increased 25% during the year to service increased sales to
customers of 18% for the year. Decisions were made to increase inventory levels
in the Company's Lexington, Kentucky animal safety operation and at Acumedia to
assure continued high levels of product availability.
Increases in property and equipment resulted from normal purchases during the
year together with $593,000 paid for a new manufacturing facility adjacent to
the Company's current Lansing facilities. Upon completion, the total investment
in this facility is expected to be approximately $1.0 million.
Goodwill increases result from the goodwill acquired in the acquisitions of QA
Life Sciences and Gene-Trak in July and August 2001, respectively.
The increase in current liabilities is due to the normal variation of the timing
of payments at year-end.
Other than a term loan, which was paid in May of 2002, the Company had no
borrowed funds during 2002 or 2001. At May 31, 2002, the Company had no material
commitments for capital expenditures other than the completion of the
manufacturing facility discussed above. Inflation and changing prices have not
had and are not expected to have a material effect on the Company's operations.
Neogen has been profitable from operations for its last 37 quarters and has
generated positive cash flow from operations during the period. Management
believes, however, that the Company's cash and marketable securities may not be
sufficient to meet the Company's cash requirements to commercialize products
currently under development or its plans to acquire additional technology and
products that fit within the Company's mission statement. Accordingly, the
Company may be required to issue equity securities or enter into other financing
arrangements for a portion of the Company's future capital needs.
In management's opinion, the Company is not involved in any material adverse
legal proceedings.
-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 changes in the amortization periods or residual values
were determined to be necessary. Management performed an assessment of whether
there was an indication that goodwill was impaired. This review was completed
with no indication of impairment 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, did not have 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 will have a material effect on the Company's results of
operations or financial position.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company'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-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NEOGEN 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
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 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 1,473,000
As 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