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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________________
TO _________________________.
Commission File No. 0-14902
MERIDIAN DIAGNOSTICS, INC.
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Incorporated under 3471 River Hills Drive IRS Employer ID
the Laws of Ohio Cincinnati, Ohio 45244 No. 31-0888197
Phone: (513) 271-3700
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Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES NO
X
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and
will not 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. / /
The aggregate market value of Common Stock held by non-affiliates is
$109,740,000 based on a closing sale price of $12.00 per share on December 13,
1996. As of December 13, 1996, 14,284,140 shares of no par value Common Stock
were issued and outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Annual Report to Shareholders for 1996 furnished to
the Commission pursuant to Rule 14a-3(b) and portions of the Registrant's Proxy
Statement filed with the Commission for its 1996 Annual Meeting are incorporated
by reference in Parts II and III as specified.
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MERIDIAN DIAGNOSTICS, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
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Part I
Item 1 - Business 3
Item 2 - Properties 15
Item 3 - Legal Proceedings 16
Item 4 - Submission of Matters to a Vote of Security Holders 17
Part II
Item 5 - Market for Registrant's Common Equity
and Related Stockholder Matters 17
Item 6 - Selected Financial Data 18
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 8 - Financial Statements and Supplementary Data 18
Item 9 - Disagreements on Accounting and Financial Disclosure 19
Part III
Item 10 - Directors and Executive Officers of the Registrant 19
Item 11 - Executive Compensation 19
Item 12 - Security Ownership of Certain Beneficial Owners
and Management 19
Item 13 - Certain Relationships and Related Transactions 19
Part IV
Item 14 - Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 19
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PART I.
ITEM 1.
BUSINESS
GENERAL
The Company develops, manufactures and markets a diverse line of
disposable diagnostic test kits and related diagnostic products used for the
rapid diagnosis of infectious diseases. To meet market demands, the Company's
products provide accuracy, simplicity, and speed, leading to opportunities for
improvements in diagnosis and reductions in health care costs. All of the
Company's products are used in procedures performed in vitro (outside the body)
and require little or no special instrumentation or equipment.
The Company's product development strategy is to combine existing
technologies with new product designs both through internal product development
and through product acquisitions, licensing or supply arrangements. Internal
product development activities focus on the development or enhancement of
immunodiagnostic technologies and applications to simplify, accelerate or
increase the accuracy of diagnoses of certain infectious diseases. Since 1991,
the Company has also acquired or obtained rights to distribute a number of
products and technologies.
The Company utilizes its resources to serve each of the strategic
domestic and international medical markets it has targeted: hospital networks
and clinical and hospital laboratories; alternate site markets, including
physicians' offices, outpatient clinics, nursing homes and health maintenance
organizations (HMOs); and new markets, including veterinary laboratories, water
treatment facilities and consumer self-testing. The Company markets
approximately 100 products representing five major disease states through a
direct sales force in the U.S. and Italy, supplemented by a network of national
and international distributors. International sales in approximately 50
countries were approximately 26% of total fiscal 1996 sales, with approximately
83% of international sales originating in Western Europe. The majority of the
remaining international sales were from Canada, Mexico and the Pacific Rim.
ACQUISITION STRATEGY
An important facet of the Company's long-term business strategy is the
acquisition, licensing or entrance into supply arrangements to obtain innovative
diagnostic testing technologies, product formats and products that complement
its existing operations and address the needs of the Company's existing and
targeted customer base. Historically, Company management has pursued the
acquisition and licensing of products and technologies that fit the Company's
niche diagnostic test markets, which are characterized by a large number of
users. Examples of this strategy include the acquisitions of the mononucleosis
and infectious disease product lines in fiscal 1993 and 1994 respectively from
Johnson & Johnson for approximately
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$3.4 million each, the June 1996 acquisition of the enteric product line of
Cambridge Biotech Corporation for approximately $6.7 million and numerous
smaller product acquisitions and licensing arrangements. A key component in the
success of the Company's acquisition and licensing of new products and
technologies has been the ability of Company management to respond quickly to
acquisition and licensing opportunities as they arise in the marketplace. The
success of this strategy has also been due in part to management's selective
acquisition and licensing philosophy as well as availability of cash.
June 1996 Acquisition
On June 24, 1996, the Company acquired the enteric product line of
Cambridge Biotech Corporation. The line consists of diagnostic products which
identify Adenovirus, Rotavirus, C. difficile and Lyme disease, all of which are
enzyme immunoassay microtiter formats, similar to the Company's existing Premier
products. This line consists of the branded products Adenoclone, Rotaclone,
Cytoclone and a product for the detection of Lyme disease. Along with the
Company's Meritec and ImmunoCard products, the addition of Rotaclone and
Adenoclone makes the Company an industry leader in the pediatric diarrhea
diagnostic market. Cytoclone is the first direct test available for the
detection of the C. difficile Toxin B. The Lyme disease diagnostic test is a
complementary product offering in the Company's parasitic disease area.
The Company paid Cambridge Biotech Corporation $6,678,000 million in
cash for the acquired enteric product line and related rights and assets, which
purchase price was allocated to: an advance on royalties of $200,000; inventory
valued at $830,000; fixed assets valued at $200,000 and intangibles valued at
$5,448,000. The Company also assumed certain royalty obligations of Cambridge
Biotech Corporation.
The acquired products will be distributed on a direct basis throughout
the United States by the Company's own sales force and through current
distributors internationally, primarily in Germany and Japan. Approximately 65%
of the acquired products are sold in the U.S.
IMMUNODIAGNOSTICS OVERVIEW
In vitro diagnostic testing is the process of analyzing constituents of
blood, urine, stool, other bodily fluids or tissue for the presence of specific
infectious diseases. Immunodiagnostic testing, which is the leading method of in
vitro testing for infectious diseases, tests for antigens and antibodies. When
an infectious disease caused by pathogens, such as bacteria, viruses and fungi,
and their related antigens is present, the body responds by producing an
antibody. The antibody binds specifically with the antigen in a lock-and-key
fashion and initiates a biochemical reaction to attempt to neutralize and
ultimately to eliminate the antigen. The ability of an antibody to bind with a
specific antigen provides the basis for immunodiagnostic testing.
Immunodiagnostic testing detects the presence of specific infectious
diseases through the "visualization," such as color changes or the formation of
visible aggregates, of the biochemical reactions caused by the antigen/antibody.
Most immunodiagnostic tests utilize one of two
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alternative methods to determine the presence of a specific disease in a patient
specimen. In one method, the test employs the antibody to detect directly the
presence of an antigen. Alternatively, certain tests employ the antigen to
detect the presence of an antibody.
MARKET TRENDS
The global market for infectious disease tests continues to expand as
new disease states are identified, new therapies become available and worldwide
standards of living and access to healthcare improve. More importantly, within
this market there is a continuing shift from conventional testing, which
requires highly trained personnel and lengthy turnaround times for test results,
to more technologically advanced testing which can be performed and completed in
minutes or hours by less highly trained personnel.
Technological advances permitting accurate testing to occur outside the
traditional hospital or laboratory setting have also affected the market for
diagnostic products. These technological developments have contributed to the
emergence of alternate site markets, such as physicians' offices, outpatient
clinics, nursing homes and HMOs, as important diagnostic market segments. These
technological advances should also contribute to the development of new markets
for the Company's products, including veterinary laboratories, water treatment
facilities and consumer self-testing in the over-the-counter market.
The increasing pressures to contain total healthcare costs have
accelerated the increased use of diagnostic testing and the market shift to
alternate sites. With rapid and accurate diagnoses of infectious diseases,
physicians can pinpoint appropriate therapies quickly, leading to faster
recovery, shorter hospital stays and less treatment expense. In addition, these
pressures have led to a major consolidation among reference laboratories and the
formation of multi-hospital alliances that have reduced the number of
institutional customers for diagnostic products and resulted in changes in
buying practices. Specifically, multi-year exclusive or primary source marketing
or distribution contracts with institutional customers have become more common,
replacing less formal distribution arrangements of shorter duration and
involving lower product volumes.
STRATEGY
The Company continues to execute its long-term strategy consisting of
the following elements:
- DEVELOPING NEW PRODUCT APPLICATIONS FROM CORE TECHNOLOGIES AND
FORMATS. The Company employs a market-driven product
development strategy to adapt or enhance diagnostic testing
technologies and product formats in response to newly
identified disease states and customer demands for
improvements in product accuracy, simplicity, speed and
cost-efficiency. The Company accomplishes this by monitoring
existing markets, interacting closely with its customers and
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recognizing emerging diseases and therapies. Since 1991, the
Company has developed and introduced 23 internally developed
products.
- ACQUIRING AND LICENSING PRODUCTS AND TECHNOLOGY. The Company
intends to acquire, license or enter into supply arrangements
to obtain innovative diagnostic testing technologies, product
formats and products that complement its existing operations
and address the needs of the Company's existing and targeted
customer base. Management regularly identifies and reviews
opportunities through its broad industry contacts and
recognized position in the industry. Since 1991, the Company
has acquired, licensed or entered into supply arrangements
relating to 33 products, five of which were acquired in June
1996 from Cambridge Biotech Corporation.
- INCREASING INTERNATIONAL SALES. The Company has targeted
international sales as an attractive source of growth. The
Company has made recent investments to develop a major
presence in Italy through its Italian subsidiary, Meridian
Diagnostics Europe s.r.l. ("MDE"), added management to expand
its ability to serve Latin American markets and to strengthen
its distribution channels into the European market. Over the
last four years, the Company's international sales have grown
from $2.1 million in fiscal 1992 to $7.8 million in fiscal
1996 and represented 26% of total consolidated sales in fiscal
1996.
- DEVELOPING PARTNERSHIPS WITH CONSOLIDATED HEALTHCARE
ORGANIZATIONS. The Company seeks to develop strategic
partnerships with the major reference laboratories and other
consolidated healthcare providers. The Company believes it is
in a position to develop partnerships because it is an
integrated manufacturer, has a broad product line, offers
tests in multiple formats, and is willing to invest resources
in building relationships and facilitating open communications
with those large customers. In January 1996, the Company
signed a three-year exclusive agreement with a major hospital
alliance of approximately 350 hospitals for the Company to
provide all parasitology transport products and specific
infectious disease diagnostic products. In April 1996, the
Company signed a three-year, primary source agreement with a
major reference laboratory chain consisting of over 35
laboratories for the supply of certain products for
parasitology, virology and other infectious diseases.
- ENTERING NEW MARKETS. The Company continues to monitor and
identify the emergence of new immunodiagnostic testing
opportunities arising from the discovery of new pathogens or
new linkages between existing pathogens and new diseases. In
April 1995, the Company introduced the first immunodiagnostic
test for toxigenic E. coli, a bacteria found in inadequately
cooked meats as well as many other food products. The Company
plans to apply for approvals to test both animals (United
States Department of Agriculture) and food products
(Association of Analytical Chemists) that may contain this
highly toxic organism.
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In September 1996, the Company began marketing its two tests
for the detection of E. coli bacterial toxins to U.S. food
testing laboratories via an exclusive distribution agreement
with Fisher Scientific Inc. In July 1994, the Company agreed
to provide its Hydrofluor product, the first product that
tests for water-borne parasitic pathogens, specifically
Giardia and Cryptosporidium, for distribution through an
independent supplier to water treatment facilities. The
Company has also entered into an agreement with Johnson &
Johnson to market the Company's rapid diagnostic test for
urinary tract infections to the consumer market, subject to
pre-market approval by the FDA, the timing of which cannot be
predicted.
- ACCESSING ALTERNATE SITE MARKETS FOR DIAGNOSTIC TESTING. The
Company seeks strong licensing/distribution partners having
sales and marketing strengths to enable them to promote more
effectively the Company's products into alternate site
markets. The Company believes that its products are readily
adaptable for use in alternate site markets. In August 1995,
the Company entered into an exclusive licensing agreement with
a third party which through its 90 representatives will
distribute the Company's urinary tract infection product to
the physician office market. The Company continues to evaluate
the suitability of certain of its other products for the
consumer market.
PRODUCTS
The Company has expertise in the development and manufacture of
products based on multiple core diagnostic technologies, each of which enables
the visualization and identification of antigen/antibody reactions for specific
pathogens. As a result, the Company is able to develop and manufacture
diagnostic tests in a variety of formats that satisfy customer needs and
preferences, whether in a hospital, commercial or reference laboratory or
alternate site location. These technologies include enzyme immunoassay,
immunofluorescence, particle agglutination, membrane filtration/concentration,
immunodiffusion, complement fixation and chemical stains.
ENZYME IMMUNOASSAY (EIA). Products incorporating the EIA technology
achieve extremely high levels of accuracy in detecting disease-related antigens
or antibodies through the use of special color-based enzyme-substrate reactions.
The Company utilizes this technology in its multiple test format - Premier --
for large volume users, and in its single test formats - ImmunoCard and Monolert
- -- for single physician users.
IMMUNOFLUORESCENCE. When the microscopic visualization of an
antigen-antibody reaction is necessary or desired, immunofluorescence technology
is frequently utilized. Fluorescing immunochemicals, in the presence of the
target antigen or antibody, can be viewed via a special microscope. The Company
utilizes this technology in its Merifluor products.
PARTICLE AGGLUTINATION. This technology utilizes microparticles (e.g.,
latex, red blood cells) coated with specific antigens or antibodies that form
visible aggregates in the presence of a
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specimen containing the complementary antigen or antibody. This technology is
rapid and economical and is used in the Company's Meritec, MeriStar and Monospot
products.
MEMBRANE FILTRATION/CONCENTRATION. The Company utilizes this technology
to detect infection-causing bacteria present in human urine. These bacteria are
concentrated on a unique filter membrane for detection via the addition of a
special dye solution. This technology is utilized in the Company's proprietary
rapid, single-unit FiltraCheck-UTI test format.
OTHER TECHNOLOGIES. The Company utilizes other technologies that
include immunodiffusion, complement fixation and chemical stains. The Company
also manufactures and markets specimen collection, transportation, preservation
and concentration products, such as Para Pak and Macro-Con.
The Company's product line consists of nearly 100 medical diagnostic
products representing five major disease states. Currently, the most important
product lines from the perspective of sales are Para Pak and related products
and products to diagnose gastrointestinal, viral and respiratory diseases. The
Company's products generally range in list price from $1 per test to $13 per
test. A discussion of Company's key products and their competitive advantage
appears in the following table:
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INFECTIOUS DISEASE CATEGORY KEY PRODUCT(S) PRODUCT APPLICATION
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PARASITIC DISEASES
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- - Giardiasis
- - Cryptosporidiosis Para-Pak, Premier, Meritec, Products for the diagnosis and collection,
- - Amebiasis Para-Pak Ultra, Para-Pak Plus, preservation, transportation and concentration of
- - Lyme Disease Macro-Con parasites.
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GASTROINTESTINAL DISEASES
- - Stomach Ulcers (H. pylori) Premier, ImmunoCard U.S. patients make 20 million annual visits to
their physicians for gastric distress. The H.
pylori bacteria has been associated with more
than 90% of duodenal ulcers and may be related
to cancer of the stomach.
- - Toxigenic E. Coli Premier E. coli is a potentially lethal bacteria that infects
undercooked food and can cause kidney failure.
- - Antibiotic-associated Diarrhea Premier, ImmunoCard, Toxin producing strains of C. difficile can cause
(C.difficile) Meritec, Cytoclone PMC (pseudomembranous colitis) that results in
rapid colon degeneration.
- - Pediatric Diarrhea (Rotavirus, ImmunoCard, Meritec, These viral diseases, which cause rapid
Adenovirus) Rotaclone, Adenoclone dehydration, are transmitted rapidly through
pediatric populations in hospitals, schools and
daycare settings.
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RESPIRATORY DISEASES
- - Pneumonia (Mycoplasma pneumoniae) ImmunoCard, MeriStar Pneumonia is the fifth leading cause of death
worldwide, 20% of which is caused by
Mycoplasma pneumoniae
- - Valley Fever (Coccidioides immitis) Premier, Meritec Fungal pathogens can cause flu-like illness
and/or severe pneumoniae, that are life-
threatening in AIDS and other immuno-
compromised patients.
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UROGENITAL DISEASE
- - Urinary Tract Infection FiltraCheck-UTI In the U.S., 65 million cultures are performed
yearly to detect potential urinary tract infection.
- - Chlamydia Premier, Merifluor Chlamydia is the leading sexually transmitted
disease.
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VIRAL DISEASES
- - Infectious Mononucleosis ImmunoCard, Monolert, Monospot Infectious mononucleosis, a viral disease
common among young adolescents, is
transmitted easily from person-to-person.
- - Herpes simplex Virus (HSVI and Premier Oral Herpes infections affect up to 80% of
HSVII) certain populations. Genital Herpes can be
life-threatening to newborns.
- - Cytomegalovirus Merifluor Cytomegalovirus infections are potentially
deadly in transplant procedures and among
immunocomprised blood recipients.
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COMPETITIVE ADVANTAGE MARKET
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Leading supplier of parasitology diagnostics. In October 1995, introduced two - Hospital Laboratories
new products that resulted in easier processing, safer handling and reduced - Reference Laboratories
processing time of the specimen and lower cost disposal of transport container. - Veterinary Laboratories
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Historically, a physician-performed endoscopy, an extremely uncomfortable and - Hospital Laboratories
expensive procedure, was employed to diagnose gastric distress. The Company's - Reference Laboratories
tests allow accurate, quick diagnoses utilizing patient blood serum. The Company - Veterinary Laboratories
is the only manufacturer to provide testing formats which accommodate both small - State Health Laboratories
and large volume users.
In November 1995, introduced the first and only FDA cleared diagnostic test that
rapidly detects all toxigenic strains of E. coli directly from stool samples.
Previous techniques required a minimum of 24 hours to culture E. coli organisms.
Market leader with a broad range of products.
Offers the clinician quick results which are critical in preventing the spread
of these highly infectious viruses.
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The Company provides the broadest range of diagnostic reagents for detecting - Hospital Laboratories
respiratory diseases. The product is a rapid test providing results in only ten - Reference Laboratories
minutes. The product provides increased accuracy over common diagnostic methods, - State Health Laboratories
allowing for a safer, more effective treatment. - Veterinary Laboratories
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The product allows for rapid screening for the presence of urinary tract - Hospital Laboratories
infection. Therapy can be rapidly administered, often while the patient is still - Reference Laboratories
in the physician's office. - Physicians' Office Laboratories
- Consumer (pending)
Both product formats enable rapid, accurate testing. - Public Health Laboratories
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The Company provides a broad range of innovative technologies including Monolert - Hospital Laboratories
which use synthetic peptides to detect the virus which causes mononucleosis. - Reference Laboratories
- Physicians' Office Laboratories
- Student Health Laboratories
Premier HSV Plus detects both HSVI and HSVII rapidly from a variety of body
sites.
Quickly detects "immediate early antigen" in a rapid, direct fluorescence
format.
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MARKETING AND SALES
The Company's marketing efforts are focused on a continual process of
seeking ways to assist healthcare providers in improving outcomes for patients
exposed to serious infectious diseases. Rapid, accurate diagnosis can mean
faster recovery, shorter hospital stays and less expense, both for the patient
and the healthcare system.
The Company believes that its marketing goals are best served by
forming partnerships with key customers to develop concepts for future products
and technology applications. These partnerships facilitate close customer
interaction, including product strategy sessions.
Marketing utilizes its strong industry contacts, plus key customer
focus sessions, to identify new product and other opportunities. Through the use
of cross-functional teams that include marketing, research and development and
manufacturing personnel, marketing guides the development process to meet
customers' needs with products that are easier to use, require less technical
expertise, and yield faster results--often in minutes or hours rather than days.
Changes in the healthcare delivery system have resulted in major
consolidation among reference laboratories and the formation of multi-hospital
alliances. The Company has structured its marketing, selling and customer
service to anticipate and respond to these changes. This involved the addition
of sales and marketing personnel; the expansion of technical services staff to
support the Company's customers and distribution network through a toll-free
service hotline; and the implementation of major marketing programs to target
key customers.
The Company markets products through direct sales forces, both
domestically and in Italy, and national and international independent
distributors. In the United States, the Company's direct sales force consists of
a director of sales, three regional sales managers, three regional product
specialists and 20 technical sales representatives. Where the Company utilizes
distributors, the Company participates in selling efforts involving key
customers. In Italy, the Company's direct sales force consists of a director of
sales, two product specialists and six technical sales representatives, as well
as an international sales manager who is responsible for all distributor
activities outside of Italy.
The Company's sales and marketing efforts in Europe, North Africa and
the Middle East are managed through MDE's European headquarters in Milan, Italy.
MDE's strategy has been to appoint one or two distributors in each of the
countries in its targeted markets, and to maintain a direct sales organization
within Italy. The Company has approximately 50 independent distributors in
approximately 50 foreign countries. The Company has additional key distributor
relationships in Canada, Latin America and the Pacific Rim, which relationships
are managed directly from the United States.
RESEARCH AND DEVELOPMENT
The Company's research and development activities focus on developing
new and improved diagnostic solutions. Working in conjunction with the marketing
department, the
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Company's research and development department focuses its activities on
enhancements to and new applications for the Company's technologies. Over the
past six years Meridian has developed internally 23 new products. The research
and development department has access to a number of diagnostic technologies,
each of which can be applied to meet new product specifications that marketing
has established. The Company's product development staff are experts in binding
various biological materials to numerous solid phases, including plastics,
membranes, latex beads, immuno-fluorescent dyes and immunogold to develop
testing formats. The Company believes that its proprietary know-how and
technologies in these areas enable it to develop products that have longer
shelf-lives and provide improved performance and quicker test results.
The research and development department initiates the Company's quality
process through its technology transfer mechanism which begins the establishment
of manufacturing standards. By working closely with the manufacturing
department, the same standards can be imposed to ensure consistently
high-quality products. The Company estimates that it takes approximately 18 to
24 months from the conceptualization of a product to its marketing.
The research and development department includes the Vice President of
Research and Development and 15 research scientists. The disciplines represented
in the group include biochemistry, immunology, mycology, bacteriology, virology
and parasitology. In fiscal 1994, fiscal 1995 and fiscal 1996, the Company spent
$1,433,000, $1,432,000 and $1,499,000, respectively, on its research and
development activities.
CUSTOMERS
The principal customers for the Company's products are hospitals,
commercial and reference laboratories, alternate site markets, such as
physicians' offices, outpatient clinics, nursing homes and HMOs, and new
markets, such as veterinary laboratories, water treatment facilities and
consumer self-testing. No end-use customer comprised more than 5% of the
Company's sales in fiscal 1996. Two distributors together accounted for
approximately 38% of the Company's fiscal 1996 sales. However, the Company does
not believe that the loss of either of these distributors would have a material
adverse effect on the Company because of its ability to sell to the end-use
customers served by these distributors through alternative means.
MANUFACTURING
The Company's manufacturing is performed at its Cincinnati, Ohio
facility. All manufacturing operations are regulated by, and in compliance with,
FDA-mandated Good Manufacturing Practices for medical devices. To maintain the
highest quality standards, the Company utilizes both external and internal
quality auditors who routinely evaluate the Company's manufacturing processes.
The Company's immunodiagnostic products require the production of highly
specific and sensitive antigens and antibodies. The Company produces
substantially all of its own requirements including: monoclonal antibodies,
polyclonal antibodies, synthetic peptides, plus a variety of fungal, bacterial
and viral antigens. For the majority of its raw materials acquired from third
parties, the Company has developed dual
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sources. As a result, the Company believes it has access to sufficient raw
materials for its products. The Company believes it has sufficient manufacturing
capacity for anticipated growth.
COMPETITION
The market for diagnostic tests is a multi-billion dollar international
industry which is highly competitive. Many of the Company's competitors are
larger with greater financial, research, manufacturing, and marketing resources.
Important competitive factors of the Company's products include product quality,
price, ease of use, customer service and reputation. In a broader sense,
industry competition is based upon scientific and technological capability,
proprietary know-how, access to adequate capital, the ability to develop and
market products and processes, the ability to attract and retain qualified
personnel and the availability of patent protection. To the extent that the
Company's product lines do not reflect technological advances, the Company's
ability to compete in those product lines could be adversely affected.
Companies competing in the diagnostic test industry generally focus on
a limited number of tests or limited segments of the market. As a result, the
diagnostic test industry is highly fragmented and segmented. Hundreds of
companies in the United States alone supply immunodiagnostic tests. These
companies range from multi-national healthcare companies, for which
immunodiagnostics is one line of business, to small start-up companies. Of
central importance in the industry are mid-sized medical diagnostic specialty
companies, like the Company, that offer multiple, broad product lines and have
the ability to deliver high value new products quickly to the marketplace. Among
the companies with which the Company competes in the marketing of one or more of
its products are Abbott Laboratories Inc., Becton, Dickinson and Company,
Diagnostic Products Corporation, QUIDEL Corporation and the Wampole Laboratories
Division of Carter-Wallace, Inc.
INTELLECTUAL PROPERTY, PATENTS AND LICENSES
The Company typically does not seek patent protection for its products
and instead strives to maintain the confidentiality of its proprietary know-how.
The Company owns or licenses U.S. and foreign patents for 20 of its products.
The patents or licenses thereof for these products were acquired in connection
with the purchase of the products or the licensing of the technology on which
the products are based. In the absence of patent protection, the Company may be
vulnerable to competitors who successfully replicate the Company's production
and manufacturing techniques and processes. The Company's laboratory and
research personnel are required to execute confidentiality agreements designed
to protect the Company's proprietary products.
The Company has no reason to believe that its products and proprietary
rights infringe the proprietary rights of any third parties. There can be no
assurance, however, that third parties will not assert infringement claims in
the future.
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GOVERNMENT REGULATION
FDA REGULATION OF MEDICAL DEVICES. The Company's products are regulated
by the Food & Drug Administration ("FDA") as "devices" pursuant to the Federal
Food, Drug and Cosmetic Act (the "FDCA"). Under the FDCA, medical devices are
classified into one of three classes (i.e., Class I, II or III). Class I and II
devices are not expressly approved by the FDA, but, instead, are "cleared" for
marketing. Class III devices generally must receive "pre-market approval" from
the FDA as to safety and effectiveness.
A 510(k) clearance will be granted if the submitted data establishes
that the proposed device is "substantially equivalent" to an existing Class I or
Class II medical device or to a Class III medical device for which the FDA has
not required pre-market approval. The 510(k) clearance process for
"substantially equivalent" devices allows product sales to be made after the
filing of an application and upon acknowledgment by the FDA, typically within 90
to 120 days after submission. If the FDA requests additional information, the
product cannot be sold until the application has been supplemented and upon
acknowledgment by the FDA within 90 to 120 days of the supplemental application.
If there are no existing FDA-approved products or processes comparable to a
diagnostic product or process, approval by the FDA involves the more lengthy
pre-market approval procedures.
Each of the products currently marketed by the Company has been cleared
by the FDA pursuant to the 510(k) clearance process or is exempt from such
requirements. The Company believes that most, but not all, products under
development will be classified as Class I or II medical devices and will be
eligible for 510(k) clearance. One example of a product in development that is
subject to the FDA's more lengthy pre-market approval process is the adaption of
the Company's rapid diagnostic test for urinary tract infections to the consumer
market.
OTHER MEDICAL DEVICE REGULATION. Sales of the Company's products in
foreign countries are subject to foreign government regulation, the requirements
of which vary substantially from country to country. The time required to obtain
approval by a foreign country may be longer or shorter than that required for
FDA approval, and the requirements may differ. The Company is currently pursuing
approvals for its Premier EHEC and Premier Rotaclone products with the
Paul-Ehrlich Institute in Germany and is supporting a number of foreign product
registrations via its international distributors.
OTHER APPROVALS. The Company intends to seek appropriate certifications
and approvals from the Association of Analytical Chemists and the United States
Department of Agriculture to enable the Company to market an immunodiagnostic
test for toxigenic E. coli in both food products and animals. The Company has no
direct experience in obtaining these certifications and approvals, but the
Company believes the time required and applicable procedures will be similar to
those required for FDA approval. However, there is no assurance that the Company
will receive these certifications and approvals.
14
<PAGE> 15
The Clinical Laboratory Improvement Act of 1988 prohibits laboratories
from performing in vitro tests for the purpose of providing information for the
diagnosis, prevention or treatment of any disease or impairment of, or the
assessment of, the health of human beings unless there is in effect for such
laboratories a certificate issued by the U.S. Department of Health and Human
Services applicable to the category of examination or procedure performed.
The Company is an exempt small quantity generator of hazardous waste
and has a U.S. Environmental Protection Agency identification number. All
hazardous waste is manifested and disposed of properly. The Company is in
compliance with the applicable portions of the Federal and state hazardous waste
regulations and has never been a party to any environmental proceeding.
EMPLOYEES
As of November 15, 1996, the Company had 180 full-time employees,
including 52 in sales, marketing and technical support, 75 in manufacturing, 19
in research and product development and 36 in administration and finance.
Sixty-nine of the Company's employees hold scientific degrees.
The Company maintains a Savings and Investment Plan for its U.S.
employees and has established stock option plans for its officers, directors and
employees.
None of the Company's employees is represented by a labor organization
and the Company is not a party to any collective bargaining agreement. The
Company has never experienced any strike or work stoppage and considers its
relationship with its employees to be excellent.
ITEM 2.
PROPERTIES
The Company's corporate offices, manufacturing facility and research
and development facility are located in two buildings totaling 75,000 square
feet on 4.1 acres of land in a suburb of Cincinnati. These properties are owned
by the Company. The Company believes these facilities are in good condition,
well maintained and suitable for its long-term needs.
The Company completed construction of a new warehouse in October 1994
and additional manufacturing and administrative space in September 1995.
In October 1995, the Company commenced renovation of its former
administrative offices and laboratory manufacturing space. This phase, which
cost approximately $1.6 million, was completed in December 1996.
15
<PAGE> 16
The Company believes its manufacturing and laboratory facilities are in
compliance with all applicable rules and regulations and are maintained in a
manner consistent with FDA- mandated Good Manufacturing Practices.
MDE conducts its operations in a two-story building in the Milan, Italy
area consisting of approximately 18,000 square feet. This facility is owned by
MDE. The Company believes these facilities are in good condition, well
maintained and suitable for MDE's long-term operations.
ITEM 3.
LEGAL PROCEEDINGS
Meridian is a defendant in a civil action filed by Delta Biologicals, s.r.l.
("Delta") against Inova Diagnostics, Inc. ("Inova") and Meridian in the Circuit
Court of the Eleventh Judicial Circuit, Dade County, Florida, Case No. 95-12955,
in June, 1995. In July 1995, this case was removed to the United States District
Court for the Southern District of Florida, Miami Division, and assigned Case
No. 95-1604-CIV.
In its Complaint, Delta, an Italian corporation, alleges that it has a
contract with Inova which grants it an exclusive right to import, market and
sell products manufactured by Inova in Italy, Spain, France and Portugal and
that Inova has breached that contract by entering into a contract with, and
selling products to, Meridian, which, through its subsidiary Meridian
Diagnostics Europe, s.r.l. ("MDE"), is selling some of these same products in
Italy in violation of Delta's claimed exclusive rights. Delta further alleges
that Meridian deliberately and knowingly tortiously interfered in the
contractual relationship between Delta and Inova.
Delta seeks judgment against Meridian of compensatory and punitive
damages in unspecified amounts in excess of $15,000. Since the filing of the
initial complaint, MDE has also been named as a defendant. The allegations and
prayer for damages against MDE are the same as those alleged against Meridian.
Defendants Inova, Meridian and MDE have filed answers denying any liabilities to
Delta, and Inova has filed a counterclaim against Delta seeking a variety of
damages totaling in excess of $400,000.
Meridian and MDE have an agreement with Inova which obligates Inova to
defend and indemnify them against Delta's claims up to a limit of $300,000.
Discovery is at a very early stage and, therefore, management is not able to
opine on the merits or possible outcome of this litigation. Nevertheless, based
upon management's knowledge and the opinion of outside counsel, management
believes that both Meridian and MDE have meritorious defenses and that Inova is
obligated to defend and indemnify them. Accordingly, management believes that
the ultimate resolution of the pending litigation will not have a material
adverse effect on Meridian's financial condition, results of operations or cash
flows.
Management is not aware of any other pending or threatened litigation,
claims or assessments, asserted or unasserted, against Meridian.
16
<PAGE> 17
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1996.
PART II.
ITEM 5.
MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
"Common Stock Information" on page 24 and "Quarterly Financial Data" on
page 9 of the Registrant's Annual Report to Shareholders for 1996 are
incorporated herein by reference. There are currently no restrictions on cash
dividend payments.
The Company follows a cash dividend policy consisting of regular
quarterly dividends and special year-end dividends. The Board has set a targeted
payout ratio of 45% to 55% of annual net earnings. Approximately 30% to 35% of
forecasted annual net earnings is intended to be paid in regular quarterly
dividends with any balance being paid as a year-end special dividend. All or a
portion of the year-end dividend may be paid in stock. The declaration and
amount of dividends are determined by the Board of Directors in its discretion
based upon its evaluation of earnings, cash flow requirements and future
business developments. There is no assurance that dividends will continue.
On January 25, 1996, the Company increased its quarterly dividend rate
from $0.0267 to $0.035 per share. The Company paid a dividend of $0.035 per
share for each quarter of fiscal 1996. On November 18, 1996, the Company paid a
special fiscal 1996 year-end dividend of $0.025 per share payable December 6,
1996 to shareholders of record on November 28, 1996. Also, on November 18, 1996,
the Board approved an increase in the regular quarterly dividend rate from
$0.035 to $0.0425 per share.
The Company paid a $0.02 per share dividend in the first quarter of
fiscal 1995 and a $0.0267 per share dividend for each other quarter of fiscal
1995. In addition, the Company paid a three-for-two stock split on October 2,
1995. On December 1, 1995, the Company also paid a special fiscal 1995 year-end
dividend of $0.025 per share.
17
<PAGE> 18
ITEM 6.
SELECTED FINANCIAL DATA
"Ten Year Summary" on page 23 of the Registrant's Annual Report to
Shareholders for 1996 is incorporated herein by reference. Long-term
obligations, including current maturities, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
$23,163,313 $12,881,086 $15,051,338 $12,811,558 $ 1,807,647
</TABLE>
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" commencing on page 10 of the Registrant's Annual Report
to Shareholders for 1996 is incorporated herein by reference.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
"Quarterly Financial Data" on page 9 of the Registrant's Annual Report
along with the Consolidated Financial Statements of the Registrant shown on
pages 13 through 22 of its Annual Report to Shareholders for 1996, are
incorporated herein by reference:
Consolidated Balance Sheets as of September 30, 1996 and 1995.
Consolidated Statements of Earnings for the years ended September 30,
1996, 1995 and 1994.
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended September 30,
1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
The following schedules are filed herewith:
18
<PAGE> 19
<TABLE>
<CAPTION>
Schedule
No. Description Page
-------- ----------- ----
<S> <C> <C>
Report of Independent Public Accountants. 23
II. Valuation and Qualifying Accounts for the years ended
September 30, 1996, 1995 and 1994. 24
</TABLE>
All other supplemental schedules are omitted due to the absence of
conditions under which they are required or because the information is shown in
the Consolidated Financial Statements or Notes thereto.
ITEM 9.
DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Items 10., 11., 12., and 13. of Part III are incorporated by reference
to the Registrant's Proxy Statement for its 1997 Annual Shareholders' Meeting to
be filed with the Commission pursuant to Regulation 14A.
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) and (2) FINANCIAL STATEMENTS AND SCHEDULES.
All financial statements and schedules required to be filed by Item 8
of this Form and included in this report have been listed previously under Item
8. No additional financial statements or schedules are being filed since the
requirements of paragraph (d) under Item 14 are not applicable to the Company.
(a) (3) EXHIBITS.
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit Filing Status
-------------- ---------------------- -------------
<S> <C> <C>
3.1 Articles of Incorporation, including a
amendments
3.2 Code of Regulations b
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C> <C>
4 Indenture between the Company and Star Bank, c
National Association, as Trustee, relating to the
Company's 7% Convertible Subordinated
Debentures due 2006
10.1 First Refusal Agreement b
10.2 Amendment to the First Refusal Agreement d
10.3 License Agreement dated October 6, 1983 with b
Marion Laboratories, Inc.
10.5 Sublicense Agreement dated June 17, 1993 e
among Johnson & Johnson, the Scripps
Research Institute and the Company
Concerning certain Patent Rights
10.6 Assignment dated June 17, 1993 from Ortho e
Diagnostic Systems Inc. to the Company
concerning certain Patent Rights
10.7 Agreement dated January 24, 1994 between f
Meridian Diagnostics, Inc. and Immulok, Inc.
10.8 Asset Purchase Agreement dated June 24, 1996 g
between Cambridge Biotech Corporation and
Meridian Diagnostics, Inc.
MANAGEMENT COMPENSATORY CONTRACTS:
10.9 Savings and Investment Plan, as amended h
10.10 Savings and Investment Plan Trust i
10.11 1986 Stock Option Plan j
10.12 1990 Directors' Stock Option Plan k
10.13 1994 Directors' Stock Option Plan l
10.14 1996 Stock Option Plan Filed herewith
10.15 Salary Continuation Agreement for John A. m
Kraeutler
11 Statement re Computation of Per Share Filed herewith
Earnings
13 1996 Annual Report to Shareholders Filed herewith (1)
21 Subsidiaries of the Registrant i
23 Consent of Independent Public Accountants Filed herewith
27 Financial Data Schedule Filed herewith
</TABLE>
- ------------
(1) Only portions of the 1996 Annual Report to Shareholders specifically
incorporated by reference in this Form 10-K are filed herewith. A supplemental
paper copy of the 1996 Annual Report to Shareholders has been provided to the
Securities and Exchange Commission for informational purposes only.
20
<PAGE> 21
Incorporated by reference to:
a. Registration Statement No. 333-02613 on Form S-3 filed with the
Securities and Exchange Commission on April 18, 1996.
b. Registration Statement No. 33-6052 filed under the Securities Act of
1933.
c. Registration Statement No. 333-11077 on Form S-3 filed with the
Securities and Exchange Commission on August 29, 1996.
d. The Company's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1992.
e. The Company's Form 8-K filed with the Securities and Exchange
Commission on June 17, 1993.
f. The Company's Forms 8-K filed with the Securities and Exchange
Commission on February 8, 1994 and April 6, 1994.
g. The Company's Form 8-K filed with the Securities and Exchange
Commission on July 2, 1996.
h. The Company's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1994 and to Registration Statement No. 33-65443 on Form
S-8 filed with the Securities and Exchange Commission on December 28,
1995.
i. The Company's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1994.
j. Registration Statement No. 33-89214 on Form S-8 filed with the
Securities and Exchange Commission on April 5, 1995.
k. Registration Statement No. 33-38488 on Form S-8 filed with the
Securities and Exchange Commission on December 28, 1990.
l. Registration Statement No. 33-78868 on Form S-8 filed with the
Securities and Exchange Commission on May 12, 1994.
m. The Company's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1995.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the last quarter of the fiscal
year.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MERIDIAN DIAGNOSTICS, INC.
By: William J. Motto
-------------------------------
Date: December 26, 1996 William J. Motto
Chairman of the Board
of Directors and Chief Executive
Officer (Principal Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
William J. Motto Chairman of the Board of December 26,1996
- ---------------------------- Directors and Chief Executive
William J. Motto Officer (Principal Executive
Officer)
Gerard Blain Vice President, Secretary and December 26,1996
- ---------------------------- Chief Financial Officer
Gerard Blain (Principal Financial Officer and
Principal Accounting Officer)
James A. Buzard Director December 26,1996
- ----------------------------
James A. Buzard
Gary P. Kreider Director December 26,1996
- ----------------------------
Gary P. Kreider
Robert J. Ready Director December 26,1996
- ----------------------------
Robert J. Ready
Jerry L. Ruyan Director December 26, 1996
- ----------------------------
Jerry L. Ruyan
</TABLE>
22
<PAGE> 23
Report of Independent Public Accountants
To Meridian Diagnostics, Inc:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Meridian Diagnostics, Inc. and
subsidiaries' annual report to shareholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated November 7, 1996. Our audit
was made for the purpose of forming an opinion on those statements taken as a
whole. The schedule listed in the accompanying index is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio
November 7, 1996
23
<PAGE> 24
SCHEDULE II
Meridian Diagnostics, Inc.
and Subsidiaries
Valuation and Qualifying Accounts
Years Ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Balance
Balance at Charged to Charged at End
Beginning Costs and to Other of
Description of Period Expenses Accounts Deductions Period
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended September 30, 1996:
- -----------------------------
Allowance for Doubtful Accounts $ 164,136 $ (19,506) $ 6,419 $ (23,036) $ 128,013
Year Ended September 30, 1995:
- -----------------------------
Allowance for Doubtful Accounts $ 113,183 $ 122,526 $ 4,677 $ (76,250) $ 164,136
Year Ended September 30, 1994:
- -----------------------------
Allowance for Doubtful Accounts $ 41,424 $ 74,824 $ 1,523 $ (4,588) $ 113,183
</TABLE>
24
<PAGE> 1
Exhibit 10.14
MERIDIAN DIAGNOSTICS, INC.
1996
STOCK OPTION PLAN
ARTICLE
OBJECTIVES
Meridian Diagnostics, Inc. ("Meridian") has established this
Stock Option Plan effective November 14, 1995 as an incentive to the attraction
and retention of dedicated and loyal employees of outstanding ability, to
stimulate the efforts of such persons in meeting the Company's objectives and to
encourage ownership of the Company's Common Stock by employees.
ARTICLE 2
DEFINITIONS
2.1 For purposes of the Plan the following terms shall have the
definition which is attributed to them, unless another definition is clearly
indicated by a particular usage and context.
A. "Code" means the Internal Revenue Code of 1986.
B. The "Company" means Meridian and any subsidiary of
Meridian, as the term "subsidiary" is defined in Section 424(f) of the
Code.
C. "Date of Exercise" means the date on which the Company has
received a written notice of exercise of an Option, in such form as is
acceptable to the Committee, and full payment of the purchase price.
D. "Date of Grant" means the date on which the Committee makes
an award of an Option.
E. "Eligible Employee" means any individual who performs
services for the Company and is treated as an employee for federal
income tax purposes.
F. "Fair Market Value" means the last sale price reported on
any stock exchange or over-the-counter trading system on which Shares
are trading on the last trading day prior to a specified date or, if no
last sales price is reported, the average of the closing bid and asked
prices for a Share on a specified date. If no sale has been made on the
specified date, then prices on the last preceding day on which any such
sale shall have been made shall be used in determining Fair Market
Value under either method prescribed in the previous sentence.
G. "Incentive Stock Option" shall have the same meaning as
given to that term by Section 422 of the Code.
<PAGE> 2
H. "Nonqualified Stock Option" means any Option granted under
the Plan which is not considered an Incentive Stock Option.
I. "Option" means the right to purchase a stated number of
Shares at a specified price. The option may be granted to an Eligible
Employee subject to the terms of this Plan, and such other conditions
and restrictions as the Committee deems appropriate. Each Option shall
be designated by the Committee to be either an Incentive Stock Option
or a Nonqualified Stock Option.
J. "Option Price" means the purchase price per Share subject
to an Option and shall be fixed by the Committee, but shall not be less
than 100% of the Fair Market Value of a Share on the Date of Grant in
the case of an Incentive Stock Option.
K. "Permanent and Total Disability" shall mean any medically
determinable physical or mental impairment rendering an individual
unable to engage in any substantial gainful activity, which disability
can be expected to result in death or which has lasted or can be
expected to last for a continuous period of not less than 12 months.
L. "Plan" means this 1996 Stock Option Plan as it may be
amended from time to time.
M. "Share" means one share of the Common Stock, no par value,
of the Company.
ARTICLE 3
ADMINISTRATION
3.1 The Plan shall be administered by a committee (the "Committee")
designated by the Board of Directors of the Company. The Committee shall be
comprised solely of three or more directors each of whom shall be (i) a
"disinterested person" as defined under Rule 16b-3 of the Securities and
Exchange Act of 1934 (the "Act") and (ii) an "outside director" to the extent
required by Section 162(m) of the Internal Revenue Code ("Section 162(m)").
Notwithstanding the foregoing, to the extent relevant state law now or hereafter
permits, the Committee may be comprised solely of two or more such directors.
Actions shall be taken by a majority of the Committee.
3.2 Except as specifically limited by the provisions of the Plan, the
Committee in its discretion shall have the authority to:
A. Determine which Eligible Employees shall be granted
Options;
B. Determine the number of Shares which may be subject to each
Option;
C. Determine the Option Price;
D. Determine the term of each Option;
<PAGE> 3
E. Determine whether each Option is an Incentive Stock Option
or Nonqualified Stock Option;
F. Interpret the provisions of the Plan and decide all
questions of fact arising in its application; and
G. Prescribe such rules and procedures for Plan administration
as from time to time it may deem advisable.
3.3 Any action, decision, interpretation or determination by the
Committee with respect to the application or administration of this Plan shall
be final and binding upon all persons, and need not be uniform with respect to
its determination of recipients, amount, timing, form, terms or provisions of
Options.
3.4 No member of the Committee shall be liable for any action or
determination taken or made in good faith with respect to the Plan or any Option
granted hereunder, and to the extent permitted by law, all members shall be
indemnified by the Company for any liability and expenses which may occur
through any claim or cause of action.
ARTICLE 4
SHARES SUBJECT TO PLAN
4.1 The Shares that may be made subject to Options granted under the
Plan shall not exceed 200,000 Shares in the aggregate. Except as provided in
Section 4.2, upon lapse or termination of any Option for any reason without
being completely exercised, the Shares which were subject to such Option may
again be subject to other Options.
4.2 The maximum number of Shares with respect to which options may be
granted to any employee during each fiscal year of the Company is 50,000 Shares.
If an Option is canceled, it continues to be counted against the maximum number
of Shares for which Options may be granted to an employee. If an Option is
repriced, the transaction is treated as a cancellation of the Option and a grant
of a new Option.
ARTICLE 5
GRANTING OF OPTIONS
Subject to the terms and conditions of the Plan, the Committee may,
from time to time prior to November 14, 2005, grant Options to Eligible
Employees on such terms and conditions as the Committee may determine. More than
one Option may be granted to the same Eligible Employee.
ARTICLE 6
TERMS OF OPTIONS
6.1 Subject to specific provisions relating to Incentive Stock Options
set forth in Article 9, each Option shall be for a term of from one to ten years
from the Date of Grant and may not be exercised during the first twelve months
of the term of said Option. Commencing on the first anniversary of the Date of
Grant of an Option, the Option may be exercised for 25% of the total Shares
covered by the Option with an additional
<PAGE> 4
25% of the total Shares covered by the Option becoming exercisable on each
succeeding anniversary until the Option is exercisable to its full extent. This
right of exercise shall be cumulative and shall be exercisable in whole or in
part. The Committee in its sole discretion may permit particular holders of
Options to exercise an Option to a greater extent than provided herein. The
Committee may establish a different exercise schedule and impose other
conditions upon exercise for any particular Option or groups of Options.
6.2 The holder of an Option must remain continuously in the service of
the Company as an employee for a period of at least twelve months. Nothing
contained in this Plan or in any Option granted pursuant to it shall confer upon
any employee any right to continue in the employ of the Company or to interfere
in any way with the right of the Company to terminate employment at any time. So
long as a holder of an Option shall continue to be an employee of the Company,
the Option shall not be affected by any change of the employee's duties or
position.
ARTICLE 7
EXERCISE OF OPTIONS
Any person entitled to exercise an Option in whole or in part, may do
so by delivering a written notice of exercise to the Company, attention
Corporate Secretary, at its principal office. The written notice shall specify
the number of Shares for which an Option is being exercised and the grant date
of the option being exercised and shall be accompanied by full payment of the
Option Price for the Shares being purchased.
ARTICLE 8
PAYMENT OF OPTION PRICE
8.1 Payment of the Option Price may be made in cash, by the tender of
Shares, or both. Shares tendered shall be valued at their Fair Market Value on
the date of tender.
8.2 Payment through tender of Shares may be made by instruction from
the Optionee to the Company to withhold from the Shares issuable upon exercise
that number which have a Fair Market Value on the date of tender equal to the
exercise price for the Option or portion thereof being exercised.
ARTICLE 9
INCENTIVE STOCK OPTIONS AND NONQUALIFIED STOCK OPTIONS
9.1 The Committee in its discretion may designate whether an Option is
to be considered an Incentive Stock Option or a Nonqualified Stock Option. The
Committee may grant both an Incentive Stock Option and a Nonqualified Stock
Option to the same individual. However, where both an Incentive Stock Option and
a Nonqualified Stock Option are awarded at one time, such Options shall be
deemed to have been awarded in separate grants, shall be clearly identified, and
in no event will the exercise of one such Option affect the right to exercise
the other such Option.
9.2 Any option designated by the Committee as an Incentive Stock Option
will be subject to the general provisions applicable to all Options granted
under the Plan. In addition, the Incentive Stock Option shall be subject to the
following specific provisions:
<PAGE> 5
A. At the time the Incentive Stock Option is granted, if the
Eligible Employee owns, directly or indirectly, stock representing more
than 10% of (i) the total combined voting power of all classes of stock
of the Company, or (ii) a corporation that owns 50% or more of the
total combined voting power of all classes of stock of the Company,
then:
(i) The Option Price must equal at least 110% of the
Fair Market Value on the Date of Grant; and
(ii) The term of the Option shall not be greater than
five years from the Date of Grant.
B. The aggregate Fair Market Value of Shares (determined at
the Date of Grant) with respect to which Incentive Stock Options are
exercisable by an Eligible Employee for the first time during any
calendar year under this Plan or any other plan maintained by the
Company shall not exceed $100,000.
9.3 If any Option is not granted, exercised, or held pursuant to the
provisions noted immediately above, it will be considered to be a Nonqualified
Stock Option to the extent that the grant is in conflict with these
restrictions.
ARTICLE 10
TRANSFERABILITY OF OPTION
During the lifetime of an Eligible Employee to whom an Option has been
granted, such Option is not transferable voluntarily or by operation of law and
may be exercised only by such individual. Upon the death of an Eligible Employee
to whom an Option has been granted, the Option may be transferred to the
beneficiaries or heirs of the holder of the Option by will or by the laws of
descent and distribution.
ARTICLE 11
TERMINATION OF OPTIONS
11.1 An Option will terminate as follows:
A. Upon exercise or expiration by its terms.
B. Except as provided in Subsection 11.1.C, upon termination
of employment for reasons other than cause, the then-exercisable
portion of any Option will terminate on the 60th day after the date of
termination. The portion not then exercisable will terminate on the
date of termination of employment. For purposes of the Plan, a leave of
absence approved by the Company shall not be deemed to be termination
of employment.
C. If an Eligible Employee holding an Option dies or becomes
subject to a Permanent and Total Disability while employed by the
Company, or within 60 days after termination of employment, for reasons
other than cause, such Option may be exercised, to the extent
exercisable on the date of death, Permanent and Total Disability or
termination of employment, at any time within one year after the date
the employment of such Eligible
<PAGE> 6
Employee terminated, by the estate or guardian of such person or by
those persons to whom the Option may have been transferred by will or
by the laws of descent and distribution.
D. Options shall terminate immediately if employment is
terminated for cause. Cause is defined as including, but not limited
to, theft of or intentional damage to Company property, intentional
harm to the Company's reputation, material breach of the optionee's
duty of fidelity to the Company, the use of illegal drugs, the
commission of a criminal act, willful violation of Company policy, or
trading in securities of the Company for personal gain based on
knowledge of the Company's activities or results when such information
is not available to the general public.
E. If an Eligible Employee holding an Option violates any
terms of any written employment or noncompetition agreement between the
Company and the Eligible Employee, all existing options held by such
Employee will terminate. In addition, if at the time of such violation
the Employee has exercised Options but has not received certificates
for the shares to be issued, the Company may void the Option and its
exercise. Any such actions by the Company shall be in addition to any
other rights or remedies available to the Company in such
circumstances.
11.2 Except as provided in Article 12 hereof, in no event will the
continuation of the term of an Option beyond the date of termination of
employment allow the Eligible Employee, or his beneficiaries or heirs, to accrue
additional rights under the Plan, or to purchase more Shares through the
exercise of an Option than could have been purchased on the day that employment
was terminated. In addition, notwithstanding anything contained herein, no
option may be exercised in any event after the expiration of ten years from the
date of grant of such option.
ARTICLE 12
ADJUSTMENTS TO SHARES AND OPTION PRICE
12.1 In the event of changes in the outstanding Common Stock of the
Company as a result of stock dividends, splitups, recapitalizations,
combinations of Shares or exchanges of Shares, the number and class of Shares
for all purposes covered by the Plan and number and class of Shares and price
per Share for each Option and each outstanding Option covered by the Plan shall
be correspondingly adjusted by the Committee.
12.2 The Committee shall make appropriate adjustments in the Option
Price to reflect any spin-off of assets, extraordinary dividends or other
distributions to shareholders.
12.3 In the event of the dissolution or liquidation of the Company or
any merger, consolidation, exchange or other transaction in which the Company is
not the surviving corporation or in which the outstanding Shares of the Company
are converted into cash, other securities or other property, each outstanding
Option shall terminate as of a date fixed by the Committee provided that not
less than 20 days' written notice of the date of expiration shall be given to
each holder of an Option and each such holder shall have the right during such
period following notice to exercise the Option as to all or any part of the
Shares for which it is exercisable at the time of such notice. The Committee, in
its sole discretion, may provide that Options in such circumstances may be
exercised to an extent greater than the number of shares for which they were
exercisable at the time of such a notice.
<PAGE> 7
12.4 All outstanding Options shall become immediately exercisable in
full if a change in control of the Company occurs. For purposes of this
Agreement, a "change in control of the Company" shall be deemed to have occurred
if (a) any "person," as such term is used in Sections 13(d) and 14(d) of the
Act, other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Company becomes the "beneficial owner," as defined
in Rule 13d-3 under the Act, directly or indirectly, of securities of the
Company representing 30% or more of the combined voting power of the Company's
then outstanding securities; or (b) during any period of one year (not including
any period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board of Directors and any new director
whose election by the Board or nomination for election by the Company's
shareholders was approved by a vote of at least two-thirds (2/3) of the
Directors then still in office who either were Directors at the beginning of the
period or whose election or nomination for election was previously so approved,
cease for any reason to constitute a majority thereof.
ARTICLE 13
OPTION AGREEMENTS
13.1 All Options granted under the Plan shall be evidenced by a written
agreement in such form or forms as the Committee in its sole discretion may
determine.
13.2 Each optionee, by acceptance of an Option under this Plan, shall
be deemed to have consented to be bound, on the optionee's own behalf and on
behalf of the optionee's heirs, assigns and legal representatives, by all terms
and conditions of this Plan.
ARTICLE 14
AMENDMENT OR DISCONTINUANCE OF PLAN
14.1 The Board of Directors of the Company may at any time amend,
suspend, or discontinue the Plan; provided, however, that no amendments by the
Board of Directors of the Company shall, without further approval of the
shareholders of the Company:
A. Change the definition of Eligible Employees;
B. Except as provided in Articles 4 and 12 hereof, increase
the number of Shares which may be subject to Options granted under the
Plan.
C. Cause the Plan or any Option granted under the Plan to fail
to (i) be excluded from the $1 million deduction limitation imposed by
Section 162(m) of the Code, or (ii) qualify as an "Incentive Stock
Option" as defined by Section 422 of the Code.
14.2 No amendment or discontinuance of the Plan shall alter or impair
any Option granted under the Plan without the consent of the holder thereof.
<PAGE> 8
ARTICLE 15
EFFECTIVE DATE
This Plan shall become effective as of November 14, 1995, having been
adopted by the Board of Directors of the Company on such date subject to
approval by the affirmative vote of the holders of a majority of the shares of
Capital Stock of the Company voting on the issue, and all Options granted prior
to such approval are expressly conditioned upon such approval being received. If
shareholder approval is not received, within 12 months of the effective date,
Options granted pursuant to this Plan shall be null and void.
ARTICLE 16
MISCELLANEOUS
16.1 Nothing contained in this Plan or in any action taken by the Board
of Directors or shareholders of the Company shall constitute the granting of an
Option. An Option shall be granted only at such time as a written Option shall
have been executed and delivered to the respective employee and the employee
shall have executed an agreement respecting the Option in conformance with the
provisions of the Plan.
16.2 Certificates for Shares purchased through exercise of Options will
be issued in regular course after exercise of the Option and payment therefor as
called for by the terms of the Option but in no event shall the Company be
obligated to issue certificates more often than once each quarter of each fiscal
year. No persons holding an Option or entitled to exercise an Option granted
under this Plan shall have any rights or privileges of a shareholder of the
Company with respect to any Shares issuable upon exercise of such Option until
certificates representing such Shares shall have been issued and delivered. No
Shares shall be issued and delivered upon exercise of an Option unless and until
the Company, in the opinion of its counsel, has complied with all applicable
registration requirements of the Securities Act of 1933 and any applicable state
securities laws and with any applicable listing requirements of any national
securities exchange on which the Company securities may then be listed as well
as any other requirements of law.
16.3 This Plan shall continue in effect until the expiration of all
Options granted under the Plan unless terminated earlier in accordance with
Article 14; provided, however, that it shall otherwise terminate ten years after
the Effective Date.
<PAGE> 1
Exhibit 11
Meridian Diagnostics, Inc.
and Subsidiaries
Computation of Earnings Per Common Share
For the Periods Ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Weighted Avg. Number of Earnings Per
Common Shares Outstanding Net Income Common Share Use
------------------------- ---------- ------------ ---
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1996:
Shares Outstanding October 1, 1995 12,924,814 $ -- $ --
Weighted average shares issued during
the period (1,353,764 shares) 1,247,169 -- --
Net Income -- 5,292,175 --
----------- -------------- --------
14,171,983 $ 5,292,175 $ 0.3734
Effect of outstanding stock options
(777,586 shares) 495,105 -- --
----------- -------------- --------
Primary Earnings Per Common Share 14,667,088 $ 5,292,175 $ 0.3608 $ 0.36
=======
Effect of 1993 convertible debentures 90,566 26,824 --
----------- -------------- --------
14,757,654 $ 5,318,999 $ 0.3604
Additional effect of stock options at
year-end stock price 2,619 -- --
----------- -------------- --------
Fully Diluted Earnings Per Common Share 14,760,273 $ 5,318,999 $ 0.3604
----------- -------------- --------
Effect of 1996 convertible debentures 13,618 9,645 --
----------- -------------- --------
14,773,891 5,328,644 $ 0.3607
=========== ============== ========
YEAR ENDED SEPTEMBER 30, 1995:
Shares Outstanding October 1, 1994 12,292,935 $ -- $ --
Weighted average shares issued during the
period (638,237 shares) 66,237 -- --
Weighted average shares redeemed for cash
as a result of stock dividend (398 shares) (320) -- --
Treasury shares repurchased (6,291 shares) (4,100) -- --
Net Income -- 3,524,111 --
----------- -------------- --------
Primary Earnings Per Common Share 12,354,752 $ 3,524,111 $ 0.2852 $ 0.29
=======
Effect of outstanding stock options which is
less than 3% and not required to be disclosed
in financial statements (663,553 shares) 318,872 -- --
----------- -------------- --------
12,673,624 $ 3,524,111 $ 0.2781
Effect of convertible debentures 1,832,891 489,760 --
----------- -------------- --------
14,506,515 $ 4,013,871 $ 0.2767
Additional effect of stock options at year-end
stock price 35,088 -- --
----------- -------------- --------
Fully Diluted Earnings Per Common Share 14,541,603 $ 4,013,871 $ 0.2760 $ 0.28
=========== ============== ======== =======
YEAR ENDED SEPTEMBER 30, 1994:
Shares Outstanding October 1, 1993 12,264,060 $ -- $ --
Weighted average shares issued during fiscal
1994 (28,875 shares) 13,332 -- --
Net Income -- 2,441,121 --
---------- -------------- --------
Primary Earnings Per Common Share 12,277,392 $ 2,441,121 $ 0.1988 $ 0.20
=======
Effect of outstanding stock options which is
less than 3% and not required to be disclosed in
financial statements (339,451 shares) 243,450 -- --
---------- -------------- --------
Fully Diluted Earnings Per Common Share 12,520,842 $ 2,441,121 $ 0.1950
========== ============== ========
</TABLE>
<PAGE> 1
Exhibit 13
Meridian Diagnostics, Inc.'s
1996 Annual Report
<PAGE> 2
QUARTERLY FINANCIAL DATA
Unaudited (Amounts in thousands, except for per share data)
<TABLE>
<CAPTION>
For the Quarter Ended in Fiscal 1996 December 31 March 31 June 30 September 30
- ------------------------------------ ----------- -------- ------- ------------
<S> <C> <C> <C> <C>
Net sales $5,522 $7,255 $7,559 $9,055
Gross profit 3,774 5,003 5,362 6,285
Net earnings 629 1,355 1,499 1,809
Primary earnings per common share* .05 .10 .11 .12
Cash dividends per common share** .05 .04 .04 .04
</TABLE>
**Includes special 1995 year-end cash dividend of $0.025 per share
<TABLE>
<CAPTION>
For the Quarter Ended in Fiscal 1995 December 31 March 31 June 30 September 30
- ------------------------------------ ----------- -------- ------- ------------
<S> <C> <C> <C> <C>
Net sales $5,106 $6,469 $6,782 $6,753
Gross profit 3,397 4,355 4,525 4,824
Net earnings 430 945 985 1,164
Primary earnings per common share* .04 .08 .08 .09
Cash dividends per common share .02 .02 .03 .03
</TABLE>
*The sum of the primary earnings per common share may not equal the annual
earnings per share due to interim quarter rounding.
9
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales increased $4,281,000 or 17%, to $29,391,000 in fiscal 1996.
This increase stems primarily from strong unit volume growth in the Premier,
Para-Pak and ImmunoCard lines coupled with the acquisition of the enteric
product line from Cambridge Biotech Corporation on June 24, 1996. In the Premier
and ImmunoCard formats, this growth continues to be attributable to those
products used for identification of Toxin A, H. pylori, EHEC, Mycoplasma and
Rotavirus. In Para-Pak, the growth is attributable to the core parasitology
transport format, Para-Pak Ultra introduced last fall and Para-Pak Plus. In
addition, the Inova line of products, licensed for Italy last year, added over
$472,000 of sales volume for the year. The products acquired from Cambridge at
the end of the third quarter contributed $1,096,000 of sales in fiscal 1996.
OEM sales, consisting of products sold primarily to Johnson & Johnson,
Carter-Wallace, Inc. and Becton, Dickinson and Company, were down for the twelve
months ended September 30, 1996 by $190,000, largely a result of the timing of
orders of Epstein-Barr Virus products from Johnson & Johnson and declining sales
of strep latex to Becton, Dickinson and Company. This decline was partially
offset by increased sales of mononucleosis latex and FiltraCheck-UTI(R) to
Carter Wallace, Inc. and to Biostar, respectively.
Other decreases for fiscal 1996 included the mononucleosis line, down
about 8% due to the wind-down of production of the MONOSPOT(R) product
previously supplied by ODSI, and the transition to the Company- produced, new
mononucleosis latex products; decreased chlamydia sales; and the impact of a
one-time sale of bulk giardia and cryptosporidium in Germany in fiscal 1995.
Following is a summary of the increase in sales broken down by volume,
price and currency:
Twelve Months Ended
September 30, 1996 vs. September 30, 1995
<TABLE>
<CAPTION>
$ Change % Change
-------- --------
<S> <C> <C>
Volume $3,873,000 15.3%
Price 145,000 0.6
Currency 263,000 1.1
---------- ----
Total $4,281,000 17.0%
========== ====
</TABLE>
European sales increased from $5,101,000 to $6,456,000, or 27%, for the
twelve month period principally from volume growth in the Premier line, the
Inova line licensed for Italy in fiscal 1995, ImmunoCard and Para-Pak formats.
Currency contributed $263,000, or about 5% of the growth, as a result of the
stronger lira versus the dollar.
<PAGE> 4
The increase in sales broken down by volume, price and currency for
European sales is summarized below:
Twelve Months Ended
September 30, 1996 vs. September 30, 1995
<TABLE>
<CAPTION>
$ Change % Change
-------- --------
<S> <C> <C>
Volume $ 1,156,000 22.6%
Price (64,000) (1.3)
Currency 263,000 5.2
----------- ----
Total $ 1,355,000 26.5%
=========== ====
</TABLE>
Gross profit increased $3,323,000, or 19%, to $20,424,000 for fiscal
1996 from $17,101,000 in fiscal 1995. As a percentage of sales, gross profit
increased to 69.5% in fiscal 1996 from 68.1% in fiscal 1995. This improvement is
the result of a favorable product mix, driven largely by growth in excess of 35%
in the ImmunoCard line, the decrease in lower margin OEM sales, favorable
year-end inventory variances, the impact of the 15% increase in volume and
significant reductions in scrap and depreciation expenses. This improvement is
particularly noteworthy considering the higher costs associated with the enteric
product line acquisition from Cambridge. In addition to the amortization of
certain acquisition costs, the acquisition includes a one-year inventory
purchase agreement at a negotiated cost expected to be higher than the Company's
cost of manufacturing when the purchased product line is fully integrated into
the Company's manufacturing facilities in Cincinnati during the third fiscal
quarter of fiscal 1997. The gross profit percentage for fiscal 1997 is expected
to decline modestly because of these higher Cambridge-related costs.
Total operating expenses increased $1,384,000 or 13% for the twelve
months ended September 30, 1996, compared to the prior year. Total operating
expenses were 40.5% of net sales for fiscal 1996, down 1.4 percentage points
from the prior year. Research and development expenses increased $67,000 or 5%
for the twelve month period. Higher personnel costs associated with initial
development work on the Premier EHEC in food and agricultural applications plus
development of the H. pylori antigen in stool were offset in part by lower
clinical trial and contract research expenses. Selling and marketing expenses
increased $762,000 or 15% for the twelve months. Increases were attributable to
personnel costs in the U.S. associated with the addition of a third sales
region, amortization of certain Cambridge acquisition costs and higher
depreciation expense associated with the new U.S. headquarters and refurbished
facilities in Cincinnati. In Europe, expenses were up primarily from the impact
of the stronger lira versus the dollar. General and administrative expenses
increased $556,000 or 14% for the twelve month period. Personnel costs in the
U.S. and in Europe, outside
10
<PAGE> 5
services associated with expanded computer information systems, facility
expenses related to the new administrative headquarters, the impact of exchange
rates from the stronger lira, higher international travel and the one-time state
filing fee for the increase in the number of authorized shares of common stock
are the primary reasons for the increase.
Operating income, as a result of the above, increased $1,938,000 or 29%
compared to the sales increase of 17% for the 1996 twelve month period versus
last year. As a percent of sales, operating income improved almost three
percentage points to 29.0% for fiscal 1996 versus 26.2% for fiscal 1995.
Other income (net) increased $995,000 for the period ended September
30, 1996. Interest expense (net) declined $689,000 for the twelve month period
primarily due to the reduction in interest expense as a result of the November
30, 1995 conversion of the 7 1/4% Convertible Subordinated Debentures issued by
the Company in 1993. Interest expense will increase in fiscal 1997 from the
issuance of $20 million of 7% Convertible Subordinated Debentures on September
27, 1996. Also included in the twelve month period was a gain of $150,000 from
payment of a fully reserved note related to a March 1994 Agreement, wherein the
Company sold to VAI Diagnostics, Inc. tissue culture products acquired in
January 1994 from an affiliate of ODSI, and a gain of $100,000 from the sale of
the Meritec(TM) Campy product to Integrated Diagnostics, Inc. Gains/losses in
foreign exchange for the twelve month period were not material. The cumulative
foreign currency translation adjustment increased by $98,000 during the twelve
month period as a result of the Lira strengthening against the U.S. dollar.
The Company's effective tax rate decreased for the year to 40.5% in
fiscal 1996 compared to 40.9% in fiscal 1995.
Net earnings increased $1,768,000, or 50% to $5,292,000 for the twelve
months ended September 30, 1996 compared to $3,524,000 in the prior year, and
improved 4 percentage points to 18.0% of sales in fiscal 1996 versus 14.0% in
fiscal 1995. The corresponding increase in primary earnings per share from $.29
in fiscal 1995 to $.36 in fiscal 1996 is approximately 24%. The lower growth
rate in earnings per share results from the increase in outstanding shares in
fiscal 1996 associated with the first quarter conversion of the 7 1/4%
convertible subordinated debentures issued by the Company in 1993 plus the
effect of outstanding stock options which is greater than 3%.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales increased $3,233,000, or 15%, to $25,110,000 in fiscal 1995
from $21,877,000 in fiscal 1994. This increase was primarily from unit volume
growth in the Premier, ImmunoCard, Merifluor(R) and mononucleosis lines plus OEM
sales of Epstein-Barr Virus. The major growth areas are in those tests used for
identification of infectious diseases such as C. difficile, Toxin A,
mononucleosis, Mycoplasma and Herpes simplex virus. Of the increase of
$3,233,000, $1,112,000, or 34%, was attributable to the full year sales of the
infectious disease product line acquired in January 1994 from an affiliate of
ODSI.
The increase in sales of $3,233,000 was more than accounted for by
volume of $3,271,000, or 15%, offset marginally by price decreases of $38,000
with no impact from currency translation. European sales increased $1,175,000,
or 30%, to $5,102,000 from $3,927,000 as a result of continued strong unit
growth in the Premier line, up 45% (Toxin A, H. pylori and EHEC -- introduced
during the second quarter); the mononucleosis line, up 21%; ImmunoCard, which
almost tripled largely from new products (Mycoplasma, mononucleosis, Rotavirus
and H. pylori); and Merifluor, up 81%. The increase in net sales was accounted
for by volume, $951,000, or 24%, and price, $223,000, or 6%. The effect of
currency translations was negligible.
<PAGE> 6
Gross profit increased $2,742,000, 19%, to $17,101,000 for fiscal 1995
from $14,359,000 in fiscal 1994. As a percentage of sales, gross profit
increased to 68.1% in fiscal 1995 from 65.6% in fiscal 1994. This improvement
was due primarily to the transfer and in-house manufacture of the product lines
acquired from ODSI in June 1993 and January 1994, which prior to October 1994
were purchased under a supply agreement with ODSI. Fiscal 1994 costs also
included integration of the ODSI infectious disease product line into Meridian's
manufacturing facilities in Cincinnati. Other factors contributing to the
improvement included continued favorable efficiency and volume variances from
the sales increase, the new warehouse facilities, and the reduction in factory
overhead including decreased rent expense from the new on-site warehouse, lower
insurance and employee benefit expense, plus a reduction in travel.
Operating expenses increased $980,000, or 10%, to $10,525,000 for
fiscal 1995 from $9,545,000 in fiscal 1994, but declined as a percentage of
sales from 43.6% in fiscal 1994 to 41.9% in fiscal 1995. Research and
development expenses were marginally lower than the prior year, and decreased
from $1,433,000 in fiscal 1994 to $1,432,000 in fiscal 1995. Selling and
marketing expenses increased $481,000, or 10%, versus fiscal 1994, mainly from
higher personnel costs in the U.S. and Europe, higher convention, meeting,
sample and promotion expenses associated with new product introductions and the
full year impact of the infectious disease product line acquired from ODSI.
General and administrative expenses increased $499,000, or 15%, due to increased
personnel costs in the U.S.
11
<PAGE> 7
and Europe stemming from the higher level of business, an increase in
depreciation from the expanded office facilities plus the full year impact of
depreciation from assets acquired from ODSI and a general increase in the
provision for doubtful accounts to reflect added coverage given the increasing
sales level.
Operating income increased $1,762,000, or 37%, to $6,576,000 in fiscal
1995 from $4,814,000 in fiscal 1994 primarily due to the factors described
above. As a percent of sales, operating income improved to 26.2% in fiscal 1995
compared to 22.0% in fiscal 1994.
Other expenses decreased $214,000, or 26%, to $616,000 compared to
$831,000 in fiscal 1994. This decrease was more than accounted for from higher
investment income stemming from an improvement in interest rates compared to
fiscal 1994 plus commission income related to the sale of certain tissue culture
products acquired from ODSI and sold to VAI Diagnostics, Inc. in March 1994.
Gains/losses in foreign exchange were not material in either fiscal year. The
cumulative foreign currency translation adjustment changed by $32,000 during the
year as a result of strengthening of the U.S. dollar against the lira during the
period.
The Company's effective tax rate increased for the year as a result of
a higher proportion of income from the Company's European subsidiary in Italy,
which is taxed at a significantly higher rate than the U.S. domestic rate. The
effective tax rate was 40.9% in fiscal 1995 compared to 38.7% for the prior
year.
LIQUIDITY AND CAPITAL RESOURCES
On June 24, 1996, the Company acquired the enteric product line of
Cambridge Biotech Corporation for approximately $6,678,000. The price has been
allocated as follows: an advance on royalties of $200,000; inventory valued at
$830,000; fixed assets valued at $200,000 and intangibles valued at $5,448,000.
This acquisition was funded through liquidation of a portion of the Company's
short-term investments.
At September 30, 1996, the Company had cash and cash equivalents of
$5,648,000, short-term investments of $14,094,000 and working capital of
$29,656,000. Trade accounts receivable increased $2,723,000, or 42%, primarily
as a result of the significant increase in the fourth fiscal quarter sales of
over 34%, including European sales which were up 27% for the twelve month period
versus the prior year and up 29% for the quarter. Inventories increased
$1,219,000 or 40% largely as a result of the acquisition of the enteric product
line of Cambridge Biotech Corporation.
Net cash flow provided by operating activities was $4,927,000 for the
twelve month period ended September 30, 1996, up $2,071,000, or 73%, from the
prior year period. This increase resulted primarily from the increase in net
earnings and the increase in depreciation of property, plant and equipment.
On October 10, 1995, the Company called for redemption of the then
outstanding $7.4 million of its 7 1/4% Convertible Subordinated Debentures due
in 2001. Of the originally issued $11,500,000 principal amount, $113,000 was
redeemed for cash on November 30, 1995. The balance was converted into Common
Stock at $5.97 per share.
Capital expenditures for the twelve months ended September 30, 1996
were $1,245,000, a decrease of $1,227,000 from the prior year period. The lower
expenditures reflect the completion of construction of additional manufacturing
and administrative space in September 1995. In October 1995, renovation of the
former administrative offices and laboratory manufacturing space commenced. This
phase, which is projected to cost $1,600,000 is expected to be completed by
December 1996. The Company's anticipated total capital expenditures for fiscal
1997 are $1,700,000.
<PAGE> 8
Over $13.7 million of cash was provided by financing activities in
fiscal 1996, principally the result of the issuance of $20 million of 7%
Convertible Subordinated Debentures issued on September 27, 1996 and due in
2006. The Debentures are convertible into Common Stock at $16.09 per share.
Prior to September 1, 1999, the Debentures may be redeemed if the closing sales
price of the Common Stock equals or exceeds 140% of the then current conversion
price for at least 20 trading days within 30 consecutive trading days ending not
more than five trading days prior to the date of the notice of redemption. On
April 16, 1996, the Company paid off the outstanding balance of its mortgage
loans, reducing long-term debt by $2,418,000.
On November 18, 1996, the Board of Directors declared the regular cash
dividend of $0.035 per share and a special year-end cash dividend of $0.025 per
share payable December 6, 1996 to shareholders of record on November 28, 1996.
The Board of Directors also announced its intention to increase the regular
annual dividend rate for fiscal 1996 of $0.14 to $0.17 per share for fiscal
1997, representing over a 21% increase in the annual cash dividend rate. Total
dividends paid during fiscal 1996, including a special fiscal 1995 year-end
dividend paid on December 1, 1995 of $354,000, were $2,230,000 compared to
$1,225,000 paid in fiscal 1995.
Net cash flow from operations is expected to continue to fund working
capital requirements for the foreseeable future. Currently, the Company has an
unused $10,000,000 line of credit with a commercial bank and cash and cash
equivalents and short-term investments of approximately $19,743,000.
12
<PAGE> 9
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Meridian Diagnostics, Inc. and Subsidiaries
As of September 30 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $5,648,225 $8,918,637
Short-term investments (Notes 1 and 2) 14,094,299 --
Accounts receivable, less allowance of $128,000 in 1996 and $164,000 in 1995 for
doubtful accounts 9,206,498 6,482,999
Inventories (Notes 1 and 3) 4,251,531 3,032,655
Prepaid expenses and other 189,433 165,553
Deferred tax assets 402,125 324,910
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 33,792,111 18,924,754
- ----------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT (NOTE 1):
Land 277,691 269,217
Buildings and improvements 5,864,008 6,162,668
Machinery, equipment and furniture 6,322,071 5,525,455
Construction in progress 1,061,002 --
- ----------------------------------------------------------------------------------------------------------------------
13,524,772 11,957,340
- ----------------------------------------------------------------------------------------------------------------------
Less--accumulated depreciation and amortization 5,171,388 4,816,905
- ----------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 8,353,384 7,140,435
- ----------------------------------------------------------------------------------------------------------------------
OTHER ASSETS (NOTES 1 AND 4):
Long-term receivable and other 573,710 168,892
Deferred Royalties 278,027 74,762
Deferred tax assets 109,503 87,879
Deferred debenture offering costs, net of accumulated amortization of
$1,500 in 1996 and $133,357 in 1995 1,260,543 395,731
Covenants not to compete, and consulting agreements, net of accumulated
amortization of $2,381,064 in 1996 and $1,827,718 in 1995 3,139,530 2,432,876
License agreements, net of accumulated amortization of
$829,987 in 1996 and $772,433 in 1995 305,125 362,680
Patents, tradenames and distributorships, net of accumulated amortization
of $707,474 in 1996 and $475,762 in 1995 3,417,517 1,837,238
Other intangible assets, net of accumulated amortization of
$154,469 in 1996 and $85,570 in 1995 2,086,531 545,430
Cost in excess of net assets acquired, net of accumulated amortization of
$675,553 in 1996 and $458,482 in 1995 3,153,441 2,598,511
- ----------------------------------------------------------------------------------------------------------------------
Total other assets 14,323,927 8,503,999
- ----------------------------------------------------------------------------------------------------------------------
Total assets $56,469,422 $34,569,188
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations (Note 5) $258,663 $381,932
Current portion of capital lease obligations (Note 5) 139,019 63,561
Accounts payable 990,249 689,869
Accrued payroll and payroll taxes 850,722 723,946
Other accrued expenses 1,065,417 937,348
Income taxes payable 831,723 458,707
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,135,793 3,255,363
- ----------------------------------------------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS (NOTE 5) 22,148,012 12,285,668
- ----------------------------------------------------------------------------------------------------------------------
CAPITAL LEASE OBLIGATIONS (NOTE 5) 617,619 149,925
- ----------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (NOTE 7):
Preferred stock, no par value, 1,000,000 shares authorized; none issued -- --
Common stock, no par value, 50,000,000 shares authorized, 14,278,578
and 12,924,814 shares issued and outstanding, respectively, stated at 2,386,153 1,487,159
Additional paid-in capital 20,526,337 13,895,901
Retained earnings 6,809,830 3,747,930
Cumulative foreign currency translation adjustment (154,322) (252,758)
- ----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 29,567,998 18,878,232
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $56,469,422 $34,569,188
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
</TABLE>
13
<PAGE> 10
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
For the Years Ended September 30, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $29,390,861 $25,109,711 $21,876,773
COST OF SALES 8,966,965 8,008,529 7,518,179
- ------------------------------------------------------------------------------------------------------------------
Gross profit 20,423,896 17,101,182 14,358,594
- ------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Research and development 1,499,334 1,432,315 1,432,928
Selling and marketing 5,990,390 5,228,717 4,747,398
General and administrative 4,420,067 3,864,294 3,364,584
- -----------------------------------------------------------------------------------------------------------------
Total operating expenses 11,909,791 10,525,326 9,544,910
- ------------------------------------------------------------------------------------------------------------------
Operating income 8,514,105 6,575,856 4,813,684
OTHER INCOME (EXPENSE):
Licensing and related fees 44,638 102,698 --
Interest income 379,582 435,686 253,644
Interest expense (389,721) (1,134,844) (1,092,345)
Other, net 344,580 (19,470) 8,420
- ------------------------------------------------------------------------------------------------------------------
Total other income (expense) 379,079 (615,930) (830,281)
- ------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 8,893,184 5,959,926 3,983,403
INCOME TAXES (NOTE 6) 3,601,009 2,435,815 1,542,282
- ------------------------------------------------------------------------------------------------------------------
Net earnings $ 5,292,175 $ 3,524,111 $ 2,441,121
- ------------------------------------------------------------------------------------------------------------------
PRIMARY WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 14,667,088 12,354,752 12,277,392
- ------------------------------------------------------------------------------------------------------------------
PRIMARY EARNINGS PER COMMON SHARE $.36 $.29 $.20
- ------------------------------------------------------------------------------------------------------------------
FULLY DILUTED WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING N/A 14,541,603 N/A
- ------------------------------------------------------------------------------------------------------------------
FULLY DILUTED EARNINGS PER COMMON SHARE N/A $.28 N/A
- ------------------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
14
<PAGE> 11
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
Meridian Diagnostics, Inc. and Subsidiaries
<CAPTION>
Number of Cumulative
Common Foreign
Shares Issued Additional Currency
and Common Paid-In Retained Translation
Outstanding Stock Capital Earnings Adjustment Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1993 7,937,903 $1,007,017 $ 9,379,669 $1,480,107 $(249,781) $11,617,012
Net earnings --- --- --- 2,441,121 --- 2,441,121
Cash dividends paid --
$.08 per share as adjusted --- --- --- (908,209) --- (908,209)
Exercise of stock options 18,689 12,638 39,988 --- --- 52,626
3% stock dividend 238,698 159,928 1,404,355 (1,564,283) --- ---
Foreign currency translation
adjustment --- --- --- --- 29,422 29,422
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1994 8,195,290 1,179,583 10,824,012 1,448,736 (220,359) 13,231,972
Net earnings --- --- --- 3,524,111 --- 3,524,111
Fractional shares (570) (293) (3,049) --- --- (3,342)
Cash dividends paid --
$.10 per share as adjusted --- --- --- (1,224,917) --- (1,224,917)
Exercise of stock options 42,849 14,961 34,131 --- --- 49,092
3 for 2 stock split 4,097,645 --- --- --- --- ---
Debenture conversions (Note 5) 589,600 292,908 3,040,807 --- --- 3,333,715
Foreign currency translation
adjustment --- --- --- --- (32,399) (32,399)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1995 12,924,814 1,487,159 13,895,901 3,747,930 (252,758) 18,878,232
Net earnings --- --- --- 5,292,175 --- 5,292,175
Cash dividends paid --
$.16 per share --- --- --- (2,230,275) --- (2,230,275)
Exercise of stock options 36,052 15,767 104,160 --- --- 119,927
Debenture conversions (Note 5) 1,317,712 883,227 6,526,276 --- --- 7,409,503
Foreign currency translation
adjustment --- --- --- --- 98,436 98,436
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1996 14,278,578 $2,386,153 $20,526,337 $6,809,830 $(154,322) $29,567,998
- ---------------------------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
15
<PAGE> 12
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Meridian Diagnostics, Inc. and Subsidiaries
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
For the Years Ended September 30, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 5,292,175 $3,524,111 $2,441,121
Non-cash items--
Depreciation and amortization of property, plant and equipment 1,031,915 863,436 703,190
Amortization of intangible assets 1,146,813 1,147,987 1,009,950
Deferred interest expense 163,527 154,950 94,978
Deferred income taxes (98,838) (70,019) (263,977)
Changes in current assets excluding cash
and short-term investments (3,136,255) (1,611,612) (1,865,471)
Changes in current liabilities excluding
current portion of long-term obligations 928,242 (1,150,277) 2,305,066
Long-term receivable and payable (400,432) (2,470) --
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,927,147 2,856,106 4,424,857
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant, and equipment acquired, net (1,245,144) (2,472,177) (1,426,485)
Purchase of short-term investments (14,094,299) -- --
Product line acquisitions--
Inventory and equipment (1,030,000) -- (571,446)
Advance royalties paid (200,000) -- --
Covenants not to compete (1,260,000) -- (1,100,000)
Patents, tradenames, customer lists and other (3,416,000) -- (1,375,000)
Cost in excess of net assets acquired (660,000) -- (346,434)
Proceeds from sale of product line -- -- 500,000
Acquisition of license agreements -- -- (55,898)
Advance royalties paid (37,500) -- (25,000)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (21,942,943) (2,472,177) (4,400,263)
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of subordinated debentures,
net of offering costs 18,754,497 -- --
Proceeds from other long-term obligations 56,039 1,284,005 634,970
Repayment of long-term obligations (2,932,116) (388,246) (462,339)
Dividends paid (2,230,275) (1,224,917) (908,209)
Proceeds from issuance of common stock 53,133 45,750 52,626
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 13,701,278 (283,408) (682,952)
- -----------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 44,106 (13,867) 14,749
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS (3,270,412) 86,654 (643,609)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,918,637 8,831,983 9,475,592
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,648,225 $8,918,637 $8,831,983
- -----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for--
Income taxes $ 3,109,538 $2,882,336 $1,034,000
Interest 148,715 883,356 852,265
Capitalized lease obligations 650,940 259,240 --
Estimated contingent consideration related to
product line acquisitions (Notes 4 and 5) 112,000 -- 1,972,000
Conversion of debentures to common stock, net of
amortization of deferred debenture offering costs
of $457,000 and $186,000, respectively (Note 5) 7,409,503 3,333,715 --
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
16
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION -- The consolidated financial
statements include the accounts of Meridian Diagnostics, Inc. and its
subsidiaries, Omega Technologies, Inc., Meridian Diagnostics Europe s.r.l.
("MDE") and Meridian Diagnostics International, Inc. (collectively, "Meridian"
or the "Company"). All significant intercompany accounts and transactions have
been eliminated in consolidation.
(b) SHORT-TERM INVESTMENTS -- The Company adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (Statement 115), in 1995. In accordance with
Statement 115, prior years' financial statements have not been restated to
reflect the change in accounting method. There was no cumulative effect as a
result of adopting Statement 115 in 1995.
Debt securities for which the Company does not have the intent or
ability to hold to maturity are classified as available for sale, along with any
equity securities. At September 30, 1995, the Company's investments in debt and
equity securities were classified as cash and cash equivalents due to their
short-term nature. The estimated fair value of cash investments approximates
cost, and therefore, there are no unrealized gains or losses as of September 30,
1996 or 1995.
(c) INVENTORIES -- Inventories are stated at the lower of cost,
determined on a first-in, first-out basis, or market.
(d) PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are
stated at cost. Upon retirement or other disposition of property, plant and
equipment, the cost and related accumulated depreciation and amortization are
removed from the accounts and the resulting gain or loss is reflected in
earnings. Maintenance and repairs are expensed as incurred. Depreciation and
amortization are computed on the straight-line method in amounts sufficient to
write-off the cost over the estimated useful lives as follows:
Buildings and improvements -- 5 to 33 years
Machinery, equipment and furniture -- 3 to 10 years
(e) INTANGIBLE ASSETS -- Intangible assets are stated at cost less
accumulated amortization and are being amortized on a straight line basis over
their estimated useful lives:
Covenants not to compete -- 5 to 10 years
License agreements -- 10 to 15 years
Patents, tradenames and distributorships -- 1 to 15 years
Cost in excess of net assets acquired and other intangible
assets -- 15 years
Deferred debenture offering costs -- 10 years
Subsequent to their acquisition, the Company continually evaluates
whether subsequent events and circumstances have occurred that indicate the
remaining estimated useful lives of intangible assets may warrant revision or
that the remaining balances of these assets may not be recoverable. When factors
indicate that an intangible asset should be evaluated for possible impairment,
the Company uses an estimate of the related product line's cash flows over the
remaining life of the asset in measuring whether the asset is recoverable.
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 121 (Statement 121) on
"Accounting for the Impairment of Long-lived Assets and
<PAGE> 14
for Long-lived Assets to be Disposed Of." Statement 121 is required to be
applied prospectively for assets to be held and used. Statement 121 also
establishes accounting standards for long-lived assets that are to be disposed.
The initial application of Statement 121 to assets held for disposal is required
to be reported as the cumulative effect of a change in accounting principle. The
Company is required to adopt Statement 121 no later than fiscal 1997. The
Company will adopt Statement 121 in fiscal 1997 and, based on current
circumstances, does not believe the effect of adoption will have a material
effect on its financial position or results of operations.
(f) INCOME TAXES -- The provision for income taxes includes federal,
foreign, state and local income taxes currently payable and those deferred
because of temporary differences between income for financial reporting and
income for tax purposes. Research and experimentation credits are reflected as a
reduction in income taxes when realized.
Effective October 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". The
cumulative effect of this change, as well as the effect of this new standard on
income taxes expense for the year ended September 30, 1994, and for each of the
quarters in the period then ended, was not material.
(g) EARNINGS PER COMMON SHARE -- Primary earnings per common share are
based on the weighted average number of common shares outstanding during the
year plus any dilutive common stock equivalents. Outstanding stock options,
which are the only common stock equivalent, resulted in per share dilution of
approximately $.01 for fiscal 1996. Fully diluted earnings per share were
dilutive for fiscal 1995 only and included the impact of assuming the
convertible subordinated debentures were converted, net of the impact of pro
forma, after tax interest expense.
On September 12, 1995, the Company's Board of Directors
declared a three-for-two stock split to shareholders of record on September 22,
1995. On November 16, 1994, the Company's Board of Directors declared a 3% stock
dividend. On December 1, 1993, the Company's Board of Directors declared a 3%
stock dividend. All data with respect to earnings per share, dividends per share
and weighted average number of shares outstanding has been retroactively
adjusted to reflect the stock splits and stock dividends.
(h) RESEARCH AND DEVELOPMENT COSTS -- Research and development costs
are charged to earnings as incurred.
(i) REVENUE RECOGNITION -- Revenue is recognized from sales when a
product is shipped. Income from licensing agreements is recognized as earned and
as stipulated by the respective agreements.
(j) ADVERTISING -- The Company expenses the cost of advertising as
incurred. Expenditures for advertising in 1996, 1995 and 1994 were approximately
$28,000, $31,000 and $59,000, respectively.
17
<PAGE> 15
(k) USE OF ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(l) TRANSLATION OF FOREIGN CURRENCY -- Assets and liabilities of
foreign operations are translated using year-end exchange rates and revenues and
expenses are translated using exchange rates prevailing during the year, with
gains or losses resulting from translation included in a separate component of
shareholders' equity. Gains and losses resulting from transactions in foreign
currencies were immaterial.
(m) SEGMENT DATA AND MAJOR CUSTOMERS -- The Company was formed in June
1976 and functions as a research, development, manufacturing, marketing and
sales organization with primary emphasis in the field of diagnostic tests for
infectious diseases. The Company grants credit under normal terms to its
customers, primarily to hospitals, commercial laboratories and distributors in
the United States and Europe.
A summary of the Company's international operations is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $7,783,000 $5,811,000 $4,609,000
Operating Profit 1,938,000 1,189,000 801,000
Pre-tax income 2,031,000 1,198,000 773,000
Identifiable assets 5,705,000 4,732,000 4,112,000
Accounts receivable 3,707,000 2,687,000 2,262,000
</TABLE>
Consolidated sales in thousands of dollars to individual customers
constituting 10% or more of net sales were as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Customer A $7,534 (26%) $6,033 (24%) $5,042 (23%)
Customer B 3,436 (12%) 2,569 (10%) 2,073 (9%)
</TABLE>
(n) RECLASSIFICATIONS -- Certain reclassifications have been made to
the 1995 financial statements to conform with the current year presentation.
(2) CASH AND SHORT-TERM INVESTMENTS
Cash and cash equivalents (with original maturities of less than 3
months) and short-term investments (with original maturities of less than 6
months) are comprised of the following:
<PAGE> 16
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents Short-Term Investments
- --------------------------------------------------------------------------------------------------------------------
September 30, 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and money market funds $4,164,944 $1,559,586 $ --- $ --
Commercial paper 989,207 4,159,051 8,613,940 --
Corporate and municipal put bonds 494,074 3,200,000 5,480,359 --
- --------------------------------------------------------------------------------------------------------------------
$5,648,225 $8,918,637 $14,094,299 $ --
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1996 and 1995, the market value of the Company's
investments approximated cost.
(3) INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
September 30, 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $1,223,438 $1,165,319
Work-in-process 966,437 626,077
Finished goods 2,061,656 1,241,259
- -----------------------------------------------------------------------------------------------------
$4,251,531 $3,032,655
- -----------------------------------------------------------------------------------------------------
</TABLE>
(4) PRODUCT AND LICENSE AGREEMENT ACQUISITIONS
(a) PRODUCT LINES -- In June 1996, the Company acquired the enteric
product line of Cambridge Biotech Corporation, comprised of products used to
identify Adenovirus, Rotavirus, C. difficle and Lyme disease. The Company also
acquired inventory, equipment, certain license rights, customer lists, a
non-competition agreement, a supply agreement and technical information for the
manufacture of the products.
The purchase included $6,351,000 in cash paid to Cambridge,
$215,000 of expenses and $112,000 of accrued royalties for a total purchase
price of $6,678,000. As additional consideration, the Company agreed to pay
Cambridge a royalty of 2% on product sales over a five year period beginning
June 24, 1996. Included in the $6,351,000 payment is an advanced payment of
$200,000 on such royalties. The remaining estimated royalty has been accrued at
its present value of $112,000.
In January 1994, the Company acquired a product line from an
affiliate of Ortho Diagnostic Systems, Inc. ("ODSI"), a subsidiary of Johnson &
Johnson, comprised of products used primarily for the detection of certain
infectious diseases including Chlamydia, Herpes and various viral respiratory
infections. The Company also acquired inventory, equipment, certain license
rights, a trademark, customer lists, a non-competition agreement and technical
information for the manufacture of the products.
The purchase included $3,300,000 in cash paid to ODSI and
$82,000 of expenses. As additional consideration, Meridian will pay ODSI up to
6% of product sales made during the nine-year period beginning in January 1995.
The Company has recorded the estimated present value of this additional
consideration (Note 5).
<PAGE> 17
In a separate agreement dated March 14, 1994, the Company sold
to VAI Diagnostics, Inc. certain tissue culture products and assets acquired in
January 1994 from the affiliate
18
<PAGE> 18
of ODSI mentioned above. The $650,000 proceeds consisted of cash of $500,000,
which was paid upon execution of the agreement, and $150,000 in an unsecured
promissory note due in mid-1997 which was fully reserved. No gain or loss was
recognized on this transaction. This note was paid in May 1996 and the full
amount was recognized as a gain.
(b) LICENSE AGREEMENTS--The Company has entered into various license
agreements, twenty-three of which are active. The more significant ones are
listed below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Date Licensor/Product Term Cost
Acquired
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
June 1996 Massachusetts Institute of 12/11/2004 Assigned by licensor as part of
Technology/ monoclonal Cambridge acquisition
antibodies against adenoviruses
-----------------------------------------------------------------------------------------------------
Virginia Tech Intellectual 09/12/2002 Assigned by licensor as part of
Properties, Inc./ Cambridge acquisition
C. difficile
-----------------------------------------------------------------------------------------------------
University of Massachusetts/ extended yearly based Assigned by licensor as part of
Rotavirus on mutual agreement Cambridge acquisition
-----------------------------------------------------------------------------------------------------
University of Massachusetts/ terminates 06/16/2000 Assigned by licensor as part of
Adenovirus 40/41 unless extended yearly Cambridge acquisition
based on mutual
agreement
- ----------------------------------------------------------------------------------------------------------------------
October New England Medical Center fifteen years $81,000 of which $25,000 to be
1993 Hospital; offset against future royalties
E. coli test
- ----------------------------------------------------------------------------------------------------------------------
January Tacoma Trading Company/ ten years $80,000
1993 parasitology concentration and
transport system
- ----------------------------------------------------------------------------------------------------------------------
January The Scripps Research Institute 12/2012 Assigned by licensor as part of ODSI
1993 Monolert acquisition
- ----------------------------------------------------------------------------------------------------------------------
July 1991 Texas BioResource Corp./ five years, option to $100,000 to be offset against future
bacterial urinary tract infection extend for two royalties, option to purchase 25,062
test additional five-year shares of common stock which vests
terms at the end of the agreement
- ----------------------------------------------------------------------------------------------------------------------
April 1991 Disease Detection International, ten years, option to $442,000
Inc./rapid tests for the detection extend for two
of strep throat, pregnancy, additional ten-year
Toxoplasma, Rubella, terms
Cytomegalovirus and Herpes
- ----------------------------------------------------------------------------------------------------------------------
March 1987 University of Arizona Veterinary ten years $4,000
June 1989 Science Department/monocolonal
antibodies for Giardia lamblia
cyst and monocolonal antibodies
for Cryptosporidium parvum
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 19
(5) LONG-TERM OBLIGATIONS, BANK CREDIT ARRANGEMENTS AND COMMITMENTS
(a) LONG-TERM OBLIGATIONS -- Long-term obligations are comprised of
the following at:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
September 30, 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Convertible Subordinated Debentures, unsecured, 7% annual interest payable semi-
annually on March 1 and September 1, principal due September 1, 2006 $20,000,000 $ --
Convertible Subordinated Debentures, unsecured, 71/4% annual interest payable semi-
annually on March 1 and September 1, principal due September 1, 2001 -- 7,980,000
Domestic bank notes payable, secured by real estate and accounts receivable:
Interest at 5.5% payable in monthly installments of $16,276 with a balloon
payment of $32,552 in March 1996 -- 113,932
Interest at prime + 1/2% (9.25% at September 30, 1995), payable in monthly
installments of $6,250 with a balloon payment of $375,000 in March 1997 -- 481,250
Construction loan, interest at 7%, twenty-year amortization mortgage note,
payable in monthly installments of $14,878 beginning August 1996 and a
balloon payment of $1,478,357 due July 2003 -- 1,918,975
Estimated contingent consideration payable to ODSI, discounted at 7.25%,
payable in quarterly variable installments, based on 6% percent of certain
product sales, from 1995 to 2004 2,202,750 2,163,244
Estimated contingent consideration payable to Cambridge, discounted at 8%,
payable in quarterly variable installments, based on 2% of Cambridge-acquired
product sales from June 1996 to June 2001 98,844 --
Other 105,081 10,199
- ----------------------------------------------------------------------------------------------------------------------
Less-current portion 22,406,675 12,667,600
258,663 381,932
- ----------------------------------------------------------------------------------------------------------------------
$22,148,012 $12,285,668
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
The 7 1/4% Convertible Debentures were called for redemption
on October 10, 1995. Holders of the Debentures had the option of converting
their Debentures into shares of Meridian Diagnostics' common stock prior to the
redemption date of November 30, 1995, at a conversion price of $5.97 per share
or, upon delivery of the Debentures, receiving cash. The Debentures not
converted were redeemed at 105% of their face amount plus accrued interest. Of
the originally issued $11,500,000 principal amount, $113,000 was redeemed for
cash. The balance was converted at the conversion price of $5.97 per share,
equivalent to a conversion rate of 167.5 shares per each $1,000 principal amount
of Debentures. Through September 30, 1995, $3,520,000 of Debentures were
converted to common stock net of $186,000 of deferred debenture offering costs,
which were charged to additional paid-in capital. As of November 30, 1995, the
balance, net of the $113,000 redeemed, of $7,867,000 of Debentures were
converted to common stock net of $457,000 of deferred debenture offering and
other related costs, which were charged to additional paid-in-capital.
As part of a bank credit arrangement the Company has a
$10,000,000 line of credit which expires on May 27, 1997 and calls for interest
at prime floating or the LIBOR rate plus 2.75%. There were no borrowings
outstanding on the line of credit at September 30, 1996. In connection with the
bank credit arrangement, the Company has agreed, among other things, to meet
certain financial ratio requirements and to limit additional indebtedness.
Maturities on the above long-term obligations are as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------
1997 $ 258,663
1998 363,259
1999 330,270
2000 253,460
2001 299,561
Thereafter 20,901,462
- --------------------------------------------------------------
$22,406,675
- --------------------------------------------------------------
</TABLE>
The fair market value of the Company's debt approximates book
value.
(b) CAPITAL LEASE OBLIGATIONS--At September 30, 1996, the Company has
equipment leases with cost and related accumulated depreciation of $913,000 and
$227,000, respectively, under capital leases expiring in various years through
2004. Amortization of assets under capital leases is included in depreciation
expense.
The future minimum annual rentals under the capital leases at September
30, 1996 are as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------
1997 $190,706
1998 139,934
1999 139,934
2000 138,874
2001 124,164
Thereafter 220,014
- -------------------------------------------------------------------------
Subtotal $953,626
Less: portion of payments representing interest (196,988)
- -------------------------------------------------------------------------
Present value of lease payments $756,638
Less: current portion 139,019
- -------------------------------------------------------------------------
$617,619
- -------------------------------------------------------------------------
</TABLE>
<PAGE> 21
(c) COMMITMENTS--The Company has royalty agreements with various
parties which require the Company to pay a specified percentage of the sales of
certain products (1% to 10%). Royalty expenses for the years ended September 30,
1996, 1995 and 1994 were approximately $500,000, $408,000 and $357,000
respectively.
(6) INCOME TAXES
The provision for income taxes includes the following components:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Years Ended September 30, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Currently payable $2,514,903 $1,866,090 $1,337,356
Temporary differences--
Tax depreciation
greater (less)
than book
depreciation 3,063 (26,842) (6,800)
State franchise taxes (31,461) (14,335) (26,520)
Currently
nondeductible
expenses (15,818) (13,720) (42,745)
Intangible asset
amortization (167,940) (155,693) (134,627)
Other, net 208,579 117,224 (5,100)
- -----------------------------------------------------------------------------------------------------------------------
2,511,326 1,772,724 1,121,564
State and local 332,715 240,662 201,000
Foreign 756,968 422,429 219,718
- -----------------------------------------------------------------------------------------------------------------------
Total provision
for income
taxes $3,601,009 $2,435,815 $1,542,282
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 22
The following is a reconciliation between the statutory federal income
tax rate and the effective rate derived by dividing the provision for income
taxes by earnings before income taxes.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
Years Ended September 30, Amount Rate Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed provision for income
taxes at statutory rate $3,023,682 34% $2,026,375 34% $1,354,357 34%
Increase/(decrease) in taxes resulting from--
State and local income taxes,
net of federal income tax effect 219,592 2.5 158,837 2.7 132,660 3.3
Foreign taxes 265,793 3.0 154,399 2.6 64,703 1.6
Tax exempt income (30,165) (0.3) (38,003) (.6) (14,022) (.4)
Foreign Sales Corporation benefit (75,305) (0.8) (34,250) (.6) (18,333) (.4)
Officers' life insurance 29,194 0.3 22,384 .4 --- ---
Other, net 168,218 1.8 146,073 2.4 22,917 .6
- -----------------------------------------------------------------------------------------------------------------------------
Actual provision for income taxes $3,601,009 40.5% $2,435,815 40.9% $1,542,282 38.7%
=============================================================================================================================
</TABLE>
The components of the net deferred tax assets were as follows at:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
September 30, 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
State income taxes $113,523 $67,966
Currently nondeductible expenses 144,109 126,663
Intangible asset amortization 507,071 321,843
Other 149,962 135,455
- -----------------------------------------------------------------------------------------------------------------------
Total $914,665 $651,927
=======================================================================================================================
Deferred tax liabilities:
Depreciation (39,471) (27,295)
Other (363,566) (211,843)
- -----------------------------------------------------------------------------------------------------------------------
Total $(403,037) $(239,138)
- -----------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $511,628 $412,789
=======================================================================================================================
</TABLE>
No valuation allowances were recorded against deferred tax assets or deferred
tax liabilities at September 30, 1996 or 1995.
(7) EMPLOYEE BENEFITS
(a) SAVINGS AND INVESTMENT PLAN--The Company has a profit sharing and
retirement savings plan covering substantially all full-time employees. Profit
sharing contributions to the plan, which are discretionary, are determined by
the Board of Directors. The plan permits participants to contribute to the plan
through salary reduction. Under the terms of the plan, the Company will match up
to 3% of an employee's contributions.
<PAGE> 23
Discretionary and matching contributions by the Company to the plan amounted to
approximately $269,000, $273,000, and $270,000, during 1996, 1995 and 1994,
respectively.
(b) STOCK OPTIONS--At September 30, 1996, 1,641,235 of the authorized
but unissued common shares of the Company were reserved for issuance to
directors, executives, employees and consultants for stock options. Of the
reserved shares, 810,594 were subject to options outstanding at September 30,
1996. Options may be granted at exercise prices from 95% to 110% of the market
value of the underlying common stock on the date of grant and become exercisable
on vesting schedules established at the time of grant. All options contain
provisions restricting their transferability and limiting their exercise in the
event of termination of employment or the disability or death of the optionee.
Options may be granted both as incentive stock options designed to provide
certain tax benefits under the Internal Revenue Code and as nonqualified options
without such tax benefits.
21
<PAGE> 24
Transactions involving the stock options are shown in the table below:
<TABLE>
<CAPTION>
Years Ended September
30, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning
of period (from $1.05
to $7.57 per share) 773,663 659,715 518,580
Granted (from $8.50 to
$15.68 per share) 85,451 189,188 185,422
Expired or canceled (6,102) (17,817) (8,950)
Exercised* (42,418) (57,423) (35,337)
- -----------------------------------------------------------------------------------------------------------------------
Outstanding at end of
period (from $1.05 to
$15.68 per share) 810,594 773,663 659,715
- -----------------------------------------------------------------------------------------------------------------------
Exercisable at end of
period (from $1.05
to $7.57 per share) 495,754 353,541 227,136
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
*Includes 6,538 shares surrendered in conjunction with the exercise of stock
options in 1996 and 14,574 in 1995.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 (Statement 123) "Accounting for Stock Based Compensation"
establishing financial accounting and reporting standards for stock-based
employee compensation plans. Statement 123 encourages the use of the fair value
based method to measure compensation cost for stock-based employee compensation
plans; however, it also continues to allow the intrinsic value based method of
accounting as prescribed by APB Opinion No. 25, which is currently used by the
Company. If the intrinsic value based method continues to be used, Statement 123
requires pro forma disclosures of net income and earnings per share, as if the
fair value based method of accounting had been applied. The fair value based
method requires that compensation cost be measured at the grant date based upon
the value of the award and recognized over the service period, which is normally
the vesting period. The Company intends to adopt Statement 123 in fiscal 1997 by
making the required footnote disclosures only. Therefore, the adoption of this
Statement is not expected to have a material effect on the Company's financial
position or results of operations.
(c) OTHER BENEFITS--the Company does not provide postretirement or
postemployment benefits to its employees.
<PAGE> 25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Meridian Diagnostics, Inc.:
We have audited the accompanying consolidated balance sheets of
MERIDIAN DIAGNOSTICS, INC. and subsidiaries as of September 30, 1996 and 1995,
and the related consolidated statements of earnings, shareholders' equity, and
cash flows for each of the three years in the period ended September 30, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the financial statements referred to above present
fairly, in all material respects, the financial position of Meridian
Diagnostics, Inc. and subsidiaries as of September 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio
November 7, 1996
22
<PAGE> 26
TEN YEAR SUMMARY
<TABLE>
(Dollars in thousands except per share data and number of employees)
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
<CAPTION>
Selected Financial And Operating Data For the Years Ended September 30,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $29,391 $25,110 $21,877 $16,171 $14,003 $11,085 $8,478 $6,213 $5,647 $5,195
Cost of Sales 8,967 8,009 7,518 5,098 4,582 3,973 3,467 2,590 2,271 1,948
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Margin 20,424 17,101 14,359 11,073 9,421 7,112 5,011 3,623 3,376 3,247
Percent of Sales 69.49% 68.10% 65.64% 68.47% 67.28% 64.16% 59.11% 58.31% 59.78% 62.50%
Operating Expenses
Research &
Development 1,499 1,432 1,433 1,165 1,157 1,102 908 844 982 788
Sales & Marketing 5,991 5,229 4,747 3,716 3,166 2,564 1,649 1,240 1,145 922
General &
Administrative 4,420 3,864 3,365 2,667 2,482 2,090 1,637 1,407 1,341 1,358
- ----------------------------------------------------------------------------------------------------------------------------------
Total Operating
Expenses 11,910 10,525 9,545 7,548 6,805 5,756 4,194 3,491 3,468 3,068
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Income 8,514 6,576 4,814 3,525 2,616 1,356 817 132 (92) 179
Percent of Sales 28.97% 26.19% 22.00% 21.80% 18.68% 12.23% 9.64% 2.12% -1.63% 3.45%
Other Income
Licensing &
Related Fees 45 103 0 55 55 55 55 55 55 55
Interest Income 379 436 254 57 50 144 210 303 269 281
Interest Expense (390) (1,135) (1,092) (179) (89) (10) (15) (21) (26) (33)
Cost of Withdrawn
Stock Offering 0 0 0 (405) 0 0 0 0 0 0
Other, Net 345 (20) 8 48 (27) (21) 16 (4) (1) 89
- ----------------------------------------------------------------------------------------------------------------------------------
Total Other
Income (Expense) 379 (616) (830) (424) (11) 168 266 333 297 392
- ----------------------------------------------------------------------------------------------------------------------------------
Minority Interest in
Earnings of Subsidiary 0 0 0 0 0 (7) (7) 0 0 0
Earnings Before
Income Taxes 8,893 5,960 3,984 3,101 2,605 1,517 1,076 465 205 571
Income Taxes 3,601 2,436 1,543 1,212 952 559 391 148 10 104
- ----------------------------------------------------------------------------------------------------------------------------------
Net Earnings $5,292 $3,524 $2,441 $1,889 $1,653 $958 $685 $317 $195 $467
- ----------------------------------------------------------------------------------------------------------------------------------
Percent of Sales 18.01% 14.03% 11.16% 11.68% 11.80% 8.64% 8.08% 5.10% 3.45% 8.99%
Cash Dividends
Declared & Paid per
Common Share* $0.16 $0.10 $0.08 $0.06 $0.05 $0.05 -- -- -- --
Primary Weighted
Average Number of
Common Shares
Outstanding* 14,667 12,355 12,227 12,264 12,222 12,129 12,031 12,031 12,031 12,031
Primary Earnings Per
Common Share* $0.36 $0.29 $0.20 $0.15 $0.13 $0.08 $0.06 $0.03 $0.02 $0.04
Fully Diluted Weighted
Average Number of
Common Shares
Outstanding* N/A 14,542 N/A N/A N/A N/A N/A N/A N/A N/A
Fully Diluted Earnings
Per Common Share* N/A $0.28 N/A N/A N/A N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets $56,469 $34,569 $32,329 $26,247 $14,099 $10,997 $10,555 $9,397 $8,969 $9,205
Cash & Marketable
Securities 19,743 8,919 8,832 9,476 1,810 1,590 2,704 4,198 3,628 4,915
Capital Expenditures 1,245 2,472 1,426 718 1,999 934 165 153 855 1,134
Net Working Capital 29,656 15,670 13,000 13,759 5,164 4,046 4,452 5,373 4,683 5,346
Shareholders' Equity 29,568 18,878 13,232 11,617 10,676 9,519 8,998 8,313 7,996 7,801
Return on Beginning
Shareholders' Equity 28.03% 26.63% 21.01% 17.69% 17.37% 10.65% 8.24% 3.96% 2.50% 6.37%
Year-End Stock Price 13.38 8.08 5.18 5.50 6.13 2.49 0.97 1.35 2.05 1.75
Number of Employees 173 156 138 125 115 105 100 94 97 86
Sales per Employee 170 161 159 129 122 106 85 66 58 60
Net Income per Employee 31 23 18 15 14 9 7 3 2 5
*As adjusted for stock splits and stock dividends
</TABLE>
23
<PAGE> 27
COMMON STOCK INFORMATION
NASDAQ National Market System Symbol: "KITS"
Approximate number of record holders: 885
The following table sets forth by calendar quarter the high and low sales prices
of the Common Stock on the NASDAQ National Market System, as adjusted for stock
dividends and stock splits.
<TABLE>
<CAPTION>
Years Ended September 30, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
Quarter ended: High Low High Low
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31 12 1/4 7 3/4 5 1/8 4 3/8
March 31 11 3/8 9 1/8 6 1/2 4 5/8
June 30 15 1/2 8 7/8 7 3/8 5 5/8
September 30 15 3/8 10 1/2 9 1/2 6
</TABLE>
24
<PAGE> 1
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of our
reports included in and incorporated by reference in this Form 10-K, into the
Company's previously filed Registration Statements File No.'s 33-38488,
33-78868, 33-89214 and 33-65443.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio
December 26, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 5,648,225
<SECURITIES> 14,094,299
<RECEIVABLES> 9,334,498
<ALLOWANCES> 128,000
<INVENTORY> 4,251,531
<CURRENT-ASSETS> 33,792,111
<PP&E> 13,524,772
<DEPRECIATION> 5,171,388
<TOTAL-ASSETS> 56,469,422
<CURRENT-LIABILITIES> 4,135,793
<BONDS> 22,765,631
0
0
<COMMON> 2,386,153
<OTHER-SE> 27,181,845
<TOTAL-LIABILITY-AND-EQUITY> 56,469,422
<SALES> 29,390,861
<TOTAL-REVENUES> 29,390,861
<CGS> 8,966,965
<TOTAL-COSTS> 8,966,965
<OTHER-EXPENSES> 11,909,791
<LOSS-PROVISION> 11,162
<INTEREST-EXPENSE> 389,721
<INCOME-PRETAX> 8,893,184
<INCOME-TAX> 3,601,009
<INCOME-CONTINUING> 5,292,175
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,292,175
<EPS-PRIMARY> .36
<EPS-DILUTED> 0
</TABLE>
